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BUSINESS ENVIRONMENT & LAW

By Bernard Bara, S.J. What is Business Law? The term business commercial and mercantile are synonymous. - Day-to-day actions between individuals, or between individuals and Govt. or local bodies involving one or the other form of obligation is a business transaction. - Business Law is a branch of General Law. Laws as such are inter-related. Hence, Business Law relates to industry, trade, and commerce; hence includes laws on contracts, sale of goods, partnership, negotiable instruments, companies, cooperative societies, etc. Scope : (In the past Original the Indian Contract Act,1872. ) (1). General Principles (Basic Principles) of Contract; (2). Sales of Goods Act; (3) Contracts of Indemnity and Guarantee; (4) Contracts of Bailment and Pledge; (5) Contracts of Agency; (6) Partnership Act. ............At Present (in 1930) : The scope of Indian Contract Act has been restricted. The Sale of Goods Act was repealed in 1930; and the Partnership Act was repealed in 1932. Introduction: How did this law come into existence? Prior to the enactment of Acts concerning Mercantile laws, business activities were regulated by personal laws of the parties or English common law was applied indiscriminately to Indian natives, Hindus and Muslims. Originally, rights of the Hindus were regulated by their own laws; and of the Mohamedans by their own Mohamedan laws. Where the parties were both, Hindus and Mohamedans, then the law of the Defendant applied. And where neither Hindu nor Mohamedan laws applied, English Common Laws were applied. Gradually, need for the enactment of general law regulating the contract arose, and the Indian Contract Act, 1872 was enacted. The Indian Contract Act incorporates/borrows many features of English Common Law. It is not an extensive law on business. Business essentially is a contract between buyer and seller, trader and producers. Many Acts are enacted to cover all the fields of business and everywhere some kind of contract is involved. Sales of Goods Act, Partnership Act, The Negotiable Instrument Act, Transfer of Property Act, Insurance Act, all involve some kind of contract. The Indian Contract Act does not cover all these business Acts. Therefore, this Act is not exhaustive, nor intensive.

Importance : The Law of Contract is the most important branch of business law. It affects everybody. Our life is full of contracts by way of agreements.

In commercial life and in ordinary life promises are made. Some of the promises are legally binding and some are morally binding. Those promises or agreements which are legally binding are contracts, and not legally binding are not contracts. Ex. A promises B that on Sunday he (A) will come to play cricket with him. Morally bound, but not legally. No compensation can be claimed. Law of Contract deals with promises given for some value which may be adequate or not adequate. This value is called consideration. Law of Contract regulates the contract. Parties to contract must be competent to contract. Agreement/promise between the parties must be legally enforceable. Law of contract provides for remedies to the aggrieved parties when breach of contract takes place. Law of Contract thus deals with agreements which create obligation. CHAPTER 1. Agreements and Contracts (SS. 2) Agreement : Every promise and every set of promises, forming the consideration for each other, is an agreement. (K.R.Bulchandani) - An agreement is a promise to do or not to do something. Promise : a proposal when accepted becomes a promise. Mere promise by two parties would not constitute an agreement. Agreement is a set of reciprocal promises. What is reciprocal promise? The promise where there is consideration for each other is called reciprocal promise. Both promisor and promisee promiss to perform their part or reciprocal promises, this becomes an agreement. Kinds of Agreements Valid Agreement : is one which is enforceable by law. Void Agreement : not enforceable by law. No legal effect; does not give rise to any rights and obligations. Ex. Agreement made by an incompetent person, ( a minor). Consideration or object is unlawful (promise to give drugs). Voidable Agreement : is one which can be enforceable by law at the option of one or more of the parties thereto. A voidable agreement is valid so long as it is not avoided by the party entitled to do so. If he does not avoid, the agreement would be a binding contract. Ex. Agreement by coercion, under influence, fraud or misrepresentation. If not avoided by the party where consent is caused by coercion, fraud, etc., the agreement becomes a valid and binding contract.

Unforceable Agreement : is valid in law, but is incapable of proof because of some technical defect. Ex. Promissory Note, not stamped or insufficiently stamped. It is valid and acceptable by law, but cannot be enforced because of the defect. Illegal Agreement : Which is against the law and punishable and opposed to public morals. Nothing is recoverable under the illegal agreement. Every illegal agreement is void; but every void agreement (=not enforceable by law) is not necessary illegal. Contract An agreement which is enforceable by law is a contract. An agreement which creates an obligation is a contract. When an agreement which compels another to do something or not to do something is a contract. Agreement may not be so enforceable; but a contract has to be enforceable. Creation of obligation on the part of the parties to an agreement to perform their liabilities makes the agreement enforceable. In a contract a promise is supported by consideration, that if there is a breach either a claim for specific performance or damages would lie. Def. by Anson : A contract is an agreement enforceable by law, made between two or more persons by which rights are acquired by one or more to the acts done or forborne on the part of the other or others. It is that form of agreement which directly contemplates and creates an obligation. Every contract is an agreement; but every agreement is not a contract. Agreement is a wider concept than Contract. Only such an agreement which is enforceable by law is a contract. Every promise or set of promises, forming the consideration, but may not be enforceable by law, is only an agreement. Kinds of Contract Contracts can be classified on the basis of (A) Validity, (B) Formation, (C) Performance. (A) Classification on the basis of Validity : 1. Valid Contract : is an agreement which is binding and enforceable at the Court of law. Agreement becomes a contract when all the essentials of a valid contract as laid down in Section 10 are fulfilled. Ex. A offers to sell his house to B for Rs.5 Lakhs. B agrees to buy it for that price. Both A and B are capable to enter into a contract. It is a valid contract. 2. Void Contract : A contract which is not enforceable by law is a void contract. No rights accrue thereunder. A contract may originally be valid when entered into, but subsequently due to change in the events or circumstances, it may become void. Events did not take place. Ex. Party may be cancelled. Or circumstances changed. Transferred before the party took place.

- Actually there cannot be a void contract because when the contract is void, it is no contract at all. The right expression should be void agreement and not void contract. 3. Voidable contract : An agreement which is enforceable by law at the option of one or more of the parties thereto, (aggrieved party) but not at the option of the other or others, (Makers/Offerers) is a voidable contract. A Contract is voidable when one of the parties to the contract has not exercised his free consent, and it would be open to the party whose consent was not free consent to avoid the contract if he so desires. All voidable contracts are those which are induced by coercion, undue influence, fraud, misrepresentation or mistake. Such a contract becomes voidable at the option of aggrieved party only and not at the option of the other (first) party. All agreements which are enforceable at the option of any one of the parties, and other party has no such option, are known as voidable contracts. A voidable contract is an agreement that is binding and enforceable, but because of the lack of one or more of the essentials of a valid contract, it may be repudiated. A voidable contract is voidable from the beginning. The party refusing the contract is entitled to get damages for any loss suffered on account of making that contract. But in case he has received some benefit under the contract, he must restore such benefit. Ex. A at knife forces B to sell his car for Rs.2000.00. B accepts it due to fear. The contract is voidable at the option of B, whose consent was obtained by coercion. Damages : Loading, shifting, reaching, etc. 4. Unenforceable contract : is a valid contract in law or in itself, but it cannot be enforced because either there is no proof like in social contract, where there is absence of written document which is incapable of proof or there is some technical defect, like absence of proper stamp. Such contracts cannot be enforced by the Courts until the defect is rectified. Ex. A borrowed Rs.10,000 from B and made a Promisory Note on which only Rs.2.Stamp is pasted. It is unenforceable because of the technical defect, i.e. Under stamped. 5. Illegal contract : A contract which is prohibited by law or otherwise against the policy of law. Ex. A contract to commit dacoity. (B) On the Basis of Formation 1. Express Contract : When the contract is made by word, either spoken or written; where the proposal and acceptance is made by words. 2. Implied Contract : Where the contract is created by conduct or act and not by words. Here the promise is implied. Ex. If some one sits in an auto and travels; he will surely pay some fare. 3. Quasi- Contracts : in which there is no intention of any party to make a contract, but the law imposes a contract. In such a contract the rights and obligations arise not by any agreement, but by operation of law. Ex. A found some goods on the road. He is bound to find the owner and return the goods. Due to situation a legal relation is created between A and the owner of the goods.

( C) On the basis of Performance 1. Executed Contract : When both parties have performed their obligation. Ex. A cash sale. 2. Executory contract : When both the parties have not yet performed their obligation. Ex. An agreement to build a house in six months. (future action). When one party has completed his obligation while the other party has yet to complete it, the contract may be partly executed and partly executory. 3. Unilateral contract : In which one party fulfils his obligation at the time of formation or before it. Ex. A railway ticket. Buyer has done his part of obligation, and waiting for the train. Railway is yet to perform. 4. Bilateral contract : Where both the parties promise to perform their obligation in the future. These are similar to Executory contracts; hence, they are also called as Contracts with Executory consideration. Distinction between Agreement and Contract 1. Agreement may be legal or illegal 1. Only legal agreements can be converted into contract. 2. All agreements are not contracts. 2. All contracts are agreements. 3. Agreements may or may not be 3. All contracts are enforceable by law. enforceable. 4. Offer and acceptance constitute an 4. Agreement and enforceability together agreement. constitute a contract.

ESSENTIAL ELEMENTS OF A CONTRACT SECTION 10 of Indian Contract Act speaks of a VALID CONTRACT : 1. Proposal/Offer and Acceptance Proposal means an offer. When one person expresses to another person his willingness to do or abstain from doing something with a view to obtaining the assent of the other party to such act or abstinence, one is called to make a proposal. The person doing the proposal is called the promisor or offerer. This is the very first step in an agreement and contract. Therefore, the offer and proposal has 2 parts : (i) A promise by the offerer to do or to abstain from doing something; and (ii) A request to the offeree for something in return for his offer. The offerer is not bound by his promise unless, until accepted unconditionally by the offeree. The acceptance should also be communicated to the offerer. The offer must be definite and unconditional. Ex. A offered to sell B something for Rs.5000. Here something is not clear, therefore, not valid. 2. Lawful consideration with a lawful object There is intention to create legal relationship. This is another important qualification of a valid contract. Lawful relationship arises when the parties know that if any one of

them fails to fulfil his part of the promise, he would be liable for the failure of the contract by the court. Normally, all the business and commercial agreements have intention to create legal relationship. On the other hand, social, religious and domestic agreements do not create legal relationship. Ex. A agrees to sell his car to B for Rs.1 lakh. B accepts it. A valid agreement and contract. Ex. A promised to go for cinema with B; but didnt go. No legal enforcement. An agreement has to be supported by lawful consideration. Consideration means something in return, in cash or in kind. Without consideration a promise cannot be enforceable by law. Ex. (1) A promises B to sell his car for Rs.10 lakhs. Rs.10 lakhs is to be paid by B, which is a lawful consideration. (2) X promises B to get a job for Rs.50,000. This is unlawful, therefore, void agreement. 3. Competent Parties : Capacity of Parties to a contract : Competent to contract means parties should be able to understand the contract and the effect. The following are deemed to be competent to contract ( SS 11) :(a) a major ( not minor) according to law. (b) Who has a sound mind, not lunatic idiot or drunkard. (c) Who is not disqualified from contracting to any law to which he is subject. A Foreigner is disqualified. 4. Free consent : Mere consent is not enough. Consent of the parties must be free, not obtained by coercion, undue influence, fraud, misrepresentation or mistake. The parties must be ad diem, which means both the parties must agree upon the same thing in the same sense. 5. Not expressly declared void : SS. 24 to 30 expressly declare certain agreements to be void by law. Ex. Wagering agreements, restraint of trade, restraint of legal proceedings. 6. Legal formalities : Writing and Registration: oral and written agreements, both are equally enforceable. But in certain cases, the Contract Act has specified that the agreement must be in writing or it must be registered, otherwise it shall not be enforceable. In such situations the agreement must fulfil the necessary formalities of writing, registration, stamping, attestation, witness, etc. Ex. Insurance, mortgage and lease agreements. 7. Possibility of Performance : The terms of agreements must be such that they are possible to be performed. The law does not compel to do what is impossible. Ex. If A promised B to make him immortal, this agreement is void because it is impossible to be performed.

CHAPTER - II PROPOSAL OR OFFER Section 2 (a) of the Act defines a proposal or offer as under : When one person signifies to another his willingness to do or to abstain from doing anything with a view to obtaining the assent of the other to do such act or abstinence, he is said to make a proposal. In order to constitute a contract, a person should offer to do something. This offer must be sufficiently communicated to the person for whom he intends to do something with a view to obtaining his assent to it. The person who makes such an offer or proposal is called the offerer or proposer or promisor. The person who accepts is called the offeree or Promisee. Ex. A offers to sell his house to B for Rs.2 lakhs. B agrees to pay Rs.2 lakhs for that house. Here A is called the offerer and B is called the offeree or Promisee. Types of Offer 1,Express Offer : An offer which is made by words, spoken or written, is known as a express offer. Ex. P says to Q I want to sell my house for 2 lakhs is an express offer. 2. Implied Offer : An offer which is not made by words, spoken or written, but is inferred from the conduct of a person or circumstances of particular case, is called an implied offer. Ex. If a coolie picks up your luggage at the railway station to carry it to the taxi stand, it is an implied offer. If you dont object to his conduct, it means you have accepted the offer. 3. Specific Offer: When an offer is made to a particular person or body of persons, it is called specific offer. A specific offer can be accepted only by the person or persons to whom it is made. 4. General Offer : An offer made to public in general or to the world at large is called a general offer. Ex. Ads to give reward for finding lost articles or stolen property are general offers, because they can be accepted by any one who read the Ads and perform accordingly. ESSENTIAALS OF A VALID OFFER 1. Offer must be capable of creating legal relationship It is necessary that the agreement must have an express or tacit reference to the legal relations between the parties. There must be a common intention of the parties to enter into legal obligations. The purpose to enter into an agreement is to make it enforceable at the court of law. If the offer has not been made with this intention it will not become contract even if it is accepted by the party to whom it is made. A mere promise without creating any legal relation does not constitute a contract. Ex. A invited B for dinner. B failed to come. A filed a suit against B for the price of nonconsumed food. It was held that As suit was dismissed because the invitation by A was not intended to create legal relations.

2. Offer must be certain, definite and not vague : It is essential that the proposal must be certain so that the rights and obligations of the parties can be fixed. A vague offer does not convey what it exactly means. Unless all the terms of the offer are clear, there is no binding agreement. Ex. A purchased a horse from B and promised that if the horse was lucky to him, he would give him Rs.1000 more. Such a promise is vague and cannot be enforced by law because how the horse will be lucky is not clear. 3. The offer must be communicated to the offeree : An offer is complete only when it is communicated to the person to whom it is made. The offer can be accepted only when the offeree knows about it. Ex. A sent his servant D to find his missing son. D ignorant of the reward announced after he left, brought the son back and claimed the reward. His claim was dismissed on the ground that he did not know the reward and it was not a binding contract. 4. Offer must be made with a view to obtain the consent of the other party : An offer to do or not to do anything must be made with a view to obtain the consent of the other party. Mere expression of intention or inquiry is not enough. 5. Offer should not impose an obligation to communicate non-acceptance: An offerer cannot say that if the non-acceptance is not communicated before certain dates, it will be presumed that it has been accepted. Ex. A offers his car to B for Rs.2 lakhs and says if you do not reply within 3 days, I shall presume you have accepted the offer. It is not a valid offer. 6. Offer may be conditional : But the condition must be clearly communicated. If the condition is not accepted, the offer lapses. If then offer contains certain conditions and the proposer has done what was reasonably necessary to give notice to the acceptor, the person accepting the offer is presumed to have accepted it with conditions. Ex. A could not read, took a ticket of the railways. On the front of the ticket was printed for conditions see back. One of the conditions was that the railways would not be liable for personal injuries to passengers. A was injured by a railway accident. It was held that A was bound by the condition and could not recover any damages. 7. The words used must apply to definite persons to create legal relations : The offer must be made to a definite person. 8. The proposer cannot dictate terms to the acceptor. LAPSE AND REVOCATION OF AN OFFER SS 6 describes the modes in which an offer lapses. (1) By notice : An offer lapses when a notice of revocation has been given any time before its acceptance is complete as against the offer. (2) By failure to accept/fulfil conditions precedent : An offer lapses if it is accepted without fulfilling the conditions of the offer. Ex. A offers to sell his car to B for Rs.2 lacs, if B joins Lions Club within a week. B fails to join; hence the offer stands revoked. (3) By lapse of time : If it is not accepted within the period prescribed in the offer, it lapses. If no time is prescribed, the offer lapses by expiry of reasonable time.

(4) By rejection of offer by the offeree : Once the offer is rejected it cannot be revived subsequently. (5) By subsequent illegality or destruction of subject matter of the offer : An offer lapses if it becomes illegal or the subject matter is destroyed before its acceptance by the offeree. Ex. A offers to sell 10 bags of wheat to B for Rs.5000; before it is accepted a law is passed that no individual can sell wheat. (6) By death or insanity : The offer lapses by death or insanity of the offerer provided that the offeree comes to know about it before acceptance. Nothing can be claimed from the heirs. (7) By counter offer : An offer lapses if a counter offer is made to it. (8) By not being accepted as per prescribed mode : If the offer has not been accepted as per the prescribed or usual mode and the offerer gives notice to the offeree within a reasonable time, the offer will stand lapsed. If the offerer keeps quiet, he is deemed to have accepted the acceptance. Difference between offer and counter offer If an offer is accepted with some modification, it is called counter offer. In such cases the original offer is automatically terminated and therefore, that cannot be accepted subsequently. The effect of counter offer is to reject the original offer. Ex. X offered to B to sell his car for Rs.80,000. Y said that he is ready to buy it for Rs.50,000. In such a case the original offer of X is automatically terminated. Now it depends upon X whether he is ready to sell his car to Y or not. Distinction between offer and invitation to offer : In an offer the person making the offer or proposal intends to bind himself by the same when it is accepted by the other. In an invitation the person intends to do some further act before he binds himself or becomes bound by it. Price-lists, catalogues, advertisements, window displays, tender, etc., are invitations to an offer by which the person reserves the right to accept or to do some further act to be bound by it. He proposes certain terms on which he is willing to negotiate. He invites others to make an offer. Ex. A advertises to sell his house. B, C and D offer to purchase the house at certain price. A refuses to accept all the offers. A can do so, as the advertisement issued by A is not an offer, but an invitation to offer. It is actually B, C and D who actually offer and it is for A to accept the same or not. CHAPTER - III ACCEPTANCE Definition [SS 2 (b)] : When the person to whom the proposal is made, signifies his assent thereto, the proposal is said to have been accepted. After acceptance the proposal becomes a promise. Unless and until an offer is accepted, it does not create any legal rights or obligations. The person making the proposal is called the promisor and the one who accepts is called the promisee. Acceptance can be made only by the party to whom the offer is made. If it is made to a particular person, it must be accepted by the same person and not by anyone on his behalf.

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Acceptance means giving consent to the offer. It is an expression by the offeree of his willingness to be bound by the terms of the offer. Who can accept? In general, an offer can be accepted only by the person or persons to whom it is made. 1. In case of specific offer : An offer given to a definite person or specific group of persons can be accepted only by that definite person or that specific group of persons to whom it has been offered and none else. 2. In case of general offer : An offer made to the world at large or public in general can be accepted by any person having knowledge of the offer by fulfilling the terms of the offer. Ex. A advertises to pay a reward of Rs.100 to anyone who would bring back his lost dog. Offer is made to anyone and all. ESSENTIALS OF A VALID ACCEPTANCE An acceptance to be valid and legally binding must satisfy the following conditions : 1. Acceptance must be absolute and unconditional : The acceptance is valid only if it is unconditional and unqualified. A qualified and conditional acceptance is no acceptance in the eyes of law. Conditional acceptance will be taken as counter offer and will reject the original offer. Further, the offer must be accepted in full. If only a part of it is accepted, such acceptance is qualified and will not be valid. The acceptance must be free from any reservation, variation and condition. Ex. (1) A offered to sell his house to B for Rs.50,000. B replied that he will pay in 10 instalments of Rs.5000 each. It is not acceptance because B has added condition of instalment. (2) X offered to sell his T.V. and Scooter for Rs.20,000. Y accepted to purchase only the scooter for Rs.12,000. It is not a valid acceptance because only a part of offer is accepted. 2. Acceptance must be communicated to the offerer : Acceptance is complete and effective only when it has been communicated to the offerer. If the offeree remains silent and does nothing to show that he has accepted the offer, no contract will be formed. A mere mental acceptance not evidenced by words or conduct is no acceptance. Thus, where a person accepts an offer but fails to post the letter of acceptance, there is no acceptance. 3. Acceptance must be given by the party to whom the offer is made : An acceptance is valid only if given by the person to whom the offer is made or by his authorized agent, and not by an unauthorized agent. If it is a general offer, then anyone who has a knowledge about the offer, may give his acceptance. 4. Acceptance must be in the prescribed manner : If the offerer has prescribed a particular mode of acceptance, it must be accepted in that manner. If no such mode is prescribed, it must be accepted in some reasonable manner. Reasonable manner means a manner which is generally followed in a trade or business. If the acceptance is not made in the prescribe manner, the offerer may, within a reasonable time, insist that the acceptance must be made in the prescribed manner. If the offerer does not insist so, it is assumed that he has no objection on the manner of acceptance.

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Ex. X wrote a letter to Y - : I offer to sell my house for Rs.2 lakhs. If you are willing to have it, write your acceptance to Z by registered letter. Instead of writing to Z, Y sent an agent to Z for acceptance. It was held that it was not a valid acceptance. 5. Acceptance must be made within a reasonable time : Acceptance must be made within the time allowed by offerer and if no time is specified, it must be made within a reasonable time. What is reasonable time will depend upon the circumstances. Ex. A person applied for shares of a company and the company accepted it after 6 months. It was held that it was not made in reasonable time (within 6 months) and so there was no contract. 6. Acceptance must be made after communication of the offer : It is a simple rule that nobody can accept what is not communicated to him. An acceptance without offer is not a valid acceptance. Ex. A company allotted shares to Z who has not applied for them. He subsequently applied for shares without knowledge of previous allotment. The allotment of shares is not binding on him because the company cannot accept what is not offered/Z had not applied. Allotment of shares previous to the application was invalid. 7. Silence cannot be a mode of acceptance : Silence of offeree cannot be taken as a mode of acceptance. Ex. A offered his car to B for Rs.1 lakh and said that if you dont reply, I shall assume that you have accepted my offer. Even if B does not reply, there cannot be a contract. 8. Acceptance must be made before the offer lapses or is revoked : After the offer lapses or is revoked , it cannot be accepted as there is nothing to be accepted. It should be noted that once an offer has lapsed, it lapses forever, unless it is revived again by the offerer. CHAPTER IV. Consideration [SS 2(d)] Definition : when at the desire of the promisor, the promisee or any other person (i) has done or abstained from doing or (ii) does or abstains from doing, or (iii) promises to do or to abstain from doing something, such act or abstinence or promise is called a consideration for the promise. When a promise is made in exchange for something in return, the something in return is called consideration. Pollack : Consideration is the price for which the promise of the other is bought and the promise thus given for value is enforceable. Justice Patterson : Consideration means something is of some value in the eye of law moving from the plaintiff; it may be some detriment to the plaintiff or some benefit to the defendant. Every contract consists of two parts, promise and consideration for the promise. Promises are often made in return for a promise. Ex. A buyer purchases goods for a price. Price for the promise is consideration here. Promise for a promise in return is consideration.

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The basis of consideration is that of reciprocity. A promisee would be able to enforce the promise only if he has given or promised to give or unless the promisor has obtained or has been promised something in exchange of it. The rule therefore, is no consideration, no contract. A person may promise to do or not to do something, for example, he may refrain or forbear from doing something, it would be consideration in either respect. Forbearing to exercise existing and enforceable rights is a good consideration. Ex. Where a wife forbears to sue her husband for maintenance allowance on her husband agreeing to pay her monthly allowance by way of maintenance, the contract is supported by consideration. Forbearance to sue, therefore, is a good consideration. Performance of legal duty is no consideration for a promise. Where the plaintiff was served with a summons requiring him to give evidence before a Court of law, and the defendant issued a promissory note promising to pay a sum of money for his trouble. It was held that as the attendance of plaintiff and giving evidence are performance of legal duty, the promissory note was void, and as such there was no consideration. A promise to or refrain from doing something in return of the benefits so received, or the loss, damage or inconvenience so caused, is regarded in law as consideration for the promise. Such a return need not be only a benefit, but it may even be a loss, damage or inconvenience caused. ESSENTIALS OF A VALID CONSIDERATION 1. Consideration must move at the desire of the promisor : The act of forbearance must be done at the desire of the promisor. If it is done at the instance of a third party or without the desire of the promisor, it is not a consideration. Act must be done voluntarily at the desire of the promisor. Ex.: If A does any act without the desire of B or without B offering, it will not amount to consideration. There should be a proposal for an acceptance to follow and then, when the other person does something in consequence of such a proposal, acceptance would be valid and such an act or forbearance of doing or not doing something will be consideration. Consideration need not be to the benefit of the promisor. Even if an act done at the promisors desire is of no personal benefit to him, yet it will form a good consideration. Benefit may go to the third party. Ex. B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment. The contract between A and C is a contract of guarantee and perfectly valid though the benefit which A confers in return of Cs guarantee is conferred not on C but on B in the shape of sale of goods on credit. As promise to deliver the goods is the consideration for Cs promise of guarantee. 2. Consideration may move from the promisee or any other person : It is not necessary that consideration should move from the promisee alone but it may move from third party if he is a party to the contract.

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Ex. A certain lady, A, gifted her property to her daughter with the condition that the daughter should pay an annuity to As brother B. However the daughter failed to keep her promise and the brother sued the daughter to claim the annuity and it was held. 3. Consideration may be past, present or future : Past consideration : When something is done before the date of agreement at the desire of the promisor, it is called past consideration. Ex. A finds Bs son. B promises to pay A Rs.10,000. Promise by B to pay is a subsequent promise to the act of A already done, a consideration already performed. When a person has already done something or has already forborne something, and then comes a promise, it is called a past consideration because the subsequent promise is not supported by any subsequent consideration. A past consideration therefore, is something done, forborne or suffered or promised before the making of the agreement. It must be noted that past consideration is good consideration only if it is given by the promisee at the desire of the promisor. Ex. A teaches the son of B at Bs request in the month of January, and in February B promises to pay A, a sum of Rs.200 for his services. The services of A will be past consideration. Present or executed consideration : When consideration is given simultaneously with promise, i.e. at the time of the promise, it is said to be present consideration. Ex. In a cash sale, consideration is present or executed. Future or Executory consideration : When consideration from one party to the other is to pass subsequently to the making of the contract, it is future or executory consideration. Ex. A promises to deliver certain goods to P after a week. P promises to pay the price after a fortnight. The promise of A is supported by the promise of P. Consideration in this case is future or executory. 4. Consideration need not be adequate : Consideration is something in return which need not be equal to the value of something given. According to law, presence of consideration is sufficient. For example, if the market price of a scooter is Rs. 40,000, and Mr. A is ready to sell it only for Rs. 20,000 then agreement will be valid. The only condition is that the consent should be given freely, without any pressure. If the consideration is inadequate, the Court will determine only the question whether the consent was freely given or not. 5. Consideration must be real and not illusory : Consideration must be real and of some value in the eyes of law although it may not be adequate. Consideration is not real when it is uncertain, illusory or when it is physically or legally impossible to perform. It is sufficient if the consideration is of slight value as long as it is not unreal and illusory. Ex. A engages B for doing a certain work and promises to pay a reasonable sum. There is no way to determine reasonable amount. The consideration is not clear and so unenforceable.

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6. Performance of existing obligation is no consideration : The performance of an act by a person who is already bound to perform the same either as a public duty or under the existing contractual obligation cannot be consideration for a contract. Ex. A promised B to pay a sum of money to B if B will be present in the Court on a particular day. B had already received an order from the Court to appear at a trial in suit. A is not liable to pay to B because B is bound to do so. EXCEPTIONS TO NO CONSIDERATION NO CONTRACT There are some cases where even if there is no consideration in any agreement, it can be valid and binding. 1. Agreement made on account of natural love and affection : Where an agreement is made in writing and registered under the law on account of natural love and affection between the parties, it will be a binding contract even if there is no consideration. Agreement must be for natural love and affection. Natural love and affection may exist between husband and wife, father or mother and son or daughter, brother and sister etc. It could include parties related by blood or marriage. Ex.(a) A, for natural love and affection promises to give his son B Rs.1000. A puts his promise to B in writing and registers it. This is a valid contract. [Though there is no consideration from the side of B.] Ex.(b) In a registered agreement, an elder brother, on account of love and affection, promised to pay the debts of his younger brother, was held to be valid and binding and the younger brother could sue the elder brother in the event of his not carrying out his promise. 2. Promise to compensate for past voluntary services : If a person has done voluntarily something in the past for promsor and promisor promises to pay him certain sum of money for that work, it will be binding contract on promisor. An agreement without consideration is void unless it is a promise to compensate, wholly or in part, a person who has already and voluntarily done something for the promsor, or something which the promisor was legally compellable to do. Ex. 1. A finds Bs purse and gives it to him. B promises to give him Rs. 100. This is a contract. 2. A supports Bs infant son. B promises to pay As expenses in so doing. This is a contract. [Note that B was legally bond to support his infant son.] 3. A says to B, At the risk of your life, you saved me from a serious accident. I promise to pay you Rs.1000. This is a contract. Essential conditions : (1). Act done must be for the promisor or something which the promisor was legally compellable to do. (2). The promisor must be in existence when the act was done. Ex. Act done by a promoter before the formation of company is not done for the company. (3). The promisor must be competent to contract at the time when the act was done. Act done by a minor promisor will not fall under the exception. 3. Agreement to pay a time-barred debt : If an agreement is made by a person in writing to pay a time barred debt, or a part of it, will be valid even if it is not supported by any consideration.

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It is important to note that according to law of Limitation Act, debt becomes time barred if it remains unpaid or unclaimed for a period of 3 years. Such a debt becomes legally irrecoverable. Ex. A, took a loan of Rs.5,000 from B on January 4, 2000. Until January 3, 2003, it was neither paid nor claimed and so it had become time barred. But if in February 2003, A signs a written promise to B to pay Rs.3000 on account of debt, it is a valid contract. Essential Conditions : 1. the promise to pay the time barred debt must be made in writing and signed by the person charged therewith. It should not be a mere unconditional acknowledgement or an implied promise. Ex. A writes to B: I am willing to renew the promissory note, come and see me. A fails to renew. It is not an express promise to pay and therefore, B cannot succeed. The only bar to recovery should be limitation and not anything else. The debt should be perfectly lawful and binding on the debtor. 4. Completed Gift : A gift (which is not an agreement) does not require consideration in order to be valid. As between donor and donee, any gift actually made will be valid even though without consideration. In order to attract this exception there should not be natural love and affection or nearness of relationship between the donor and donee. The gift must however be complete. 5. Contract of Agency : No consideration is necessary to create an Agency. [Section 185.] 6. Contribution to charity : If a person has promised to pay a certain sum of money as charity and on the faith of that promise, the promisee has taken certain step or undertaken a liability, the promsor will be bound to pay the money even if it was a charity and there was no consideration from the promise. Ex. A has promised to B who is secretary of a trust, to pay Rs.10,000 for construction of a building for religious purpose. On the faith of this promise, B entrusted the work to a contractor and undertook liability to pay him, A will be held liable. CHAPTER - V CAPACITY TO CONTRACT An agreement becomes a contract if it is entered into between the parties who are competent to contract. Section 11 defines the person who is competent to contract who is of the age of majority, of sound mind and not disqualified. In other words a minor, a person of unsound mind, and disqualified by any law to which they are subjected, are incapable of entering into a contract. I. MINORS A person who is under 18 yrs. of age is a minor. 1. Minors contract is absolutely void : An agreement with or by minor is void and inoperative ab initio. A minors agreement being absolutely void, neither he nor the other party acquires any right or incurs any liability under the agreement. So, a minor is neither liable to perform what he has promised to do under an agreement, nor is he liable to repay money that he has received under an agreement. The idea behind this ruling is that a minor is incapable of judging what is good for him. Even if a minor has

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received any benefit, he cannot be asked to compensate or pay for it. A minor is incapable of giving a promise imposing a legal obligation upon himself. Ex. A minor executed a mortgage for a sum of Rs.20,000 out of which he received Rs.8000. Minor filed a suit subsequently for setting aside the mortgage. The moneylender claimed refund of Rs.8000 from the minor. It was held that minors contract is altogether void and the money lender therefore, cannot recover the amount. A minors contract being absolutely void, he cannot sue nor be sued upon it. Ex. A, a minor borrowed Rs.20,000 from B and as a security for the same, executed a mortgage in his favour. He became a major a few months later and filed a suit for the declaration that the mortgaged executed by him during his minority was void and should be cancelled. It was cancelled and B was not entitled to get repayment of money. 2. Specific performance of a minors contract : As a minors contract is absolutely void, there can be no specific performance of such a contract. Specific performance means actual carrying out of the contract as agreed. BUT, A contract entered into on his behalf by his parents/guardians or the manager of his estate, can be specifically enforced by or against minor provided that the contract is : (a) within the scope of the authority of the parent/guardian or manager; (b) for the benefit of the minor. 3. Minor can be a Promisee or a Beneficiary : Judicial decisions given from time to time establish that an agreement can be enforced for the benefit of a minor. Incompetency of a minor to enter into contract means incompetency to bind himself by a contract. However, there is nothing which debars him from becoming a beneficiary, e.g. a payee, an endorsee or a promisee in a contract. Such contracts can be enforced at his option, but not at the option of the other party. Ex.(a) M, aged 16, agreed to purchase a second-hand scooter for Rs.5000 from S, and paid an advance of Rs.500 and agreed to pay the balance on the next day and collect the scooter. On the next day M came with money, but S told that he has changed his mind and offered to return the money. M refused to return the scooter. S cannot avoid the contract, though M may, if he likes. Ex.(b) P, a minor, under a contract of sale delivered goods to the buyer. It was held that P was entitled to maintain a suit for the recovery of price. 4. If minor has received any benefit, he cannot be asked to pay for it : If there is an agreement with a minor and minor has received some benefit (as a promisee) under the agreement he cannot be forced to refund that benefit. Ex. M, a minor obtains loan by mortgaging his property. He is not liable to refund the loan. Even his mortgaged property cannot be made liable to pay the debt. 5. Agreement with a minor cannot be ratified when he attains majority : Since the agreement with a minor is null and void, it has no existence in the eye of law, it cannot be ratified when the minor attains majority. A fresh contract can be entered into by a minor on attaining majority with a fresh agreement. Ex. A, who is a minor borrowed Rs.50,000 from B and executed a promissory note in favour of B. A, after attaining majority, executed another promissory note in settlement

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and the first promissory note was cancelled. The second promissory note is also void for want of consideration. 6. The rule of Estoppel does not apply to a minor : A minor cannot be stopped for making a false representation as there can be no estoppel against him. A minor who falsely represents himself to be major and thereby induces another person to enter into a contract with him, can plead minority as a defence. The infant is not estopped from setting up infancy. Estoppel is a rule of evidence. Indian Evidence Act explains Estoppel as follows : Where one person has, by his declaration, act or omission, intentionally caused or permit another person to believe a thing to be true and to act upon such belief, neither he nor his representatives shall be allowed, in any suit or proceedings between himself and such person or his representative, to deny the truth of that thing. However, in many High Courts it has been held that equity requires a minor who seeks to avoid a contract which he induced the opposite party to enter into with him by a fraudulent misrepresentation as to his age to return the consideration which he received under it. 7. A minor Partner : As being incompetent to a contract, a minor cannot be a partner in a partnership firm, but can be admitted to the benefits of partnership with the consent of all the partners by an agreement executed through his lawful guardian. Such a minor will have a right to such a share of the property or profits of the firm as may be agreed upon and he would have access to and inspect and copy any of the accounts of the firm. The minor cannot participate in the management of the business and shall not share losses. He cannot be made personally liable for any obligations of the firm, although he may after attaining majority accept those obligations if he things fit to do so. 8. A minor can be an agent : because he is only a connecting link between the principal and a third party. A minor binds the principal by his acts without incurring any principal liability; he cannot be held personally liable for negligence or breach of duty. Thus in appointing a minor an agent, the principal runs a great risk. 9. Minor and insolvency : A minor cannot be adjudicated an insolvent, because he is incapable of contracting debts. Even for necessaries supplied to him, he is not personally liable, only his property is liable. 10. Minors liability for necessaries : Though a minor is incapable of entering into a contract, but if he or his dependents are supplied by another person with necessaries suited to his condition in life, the person who has provided such supplies is entitled to be reimbursed from the property of such incapable person. Minor is liable to necessaries supplied or for necessary services rendered to him or his minor dependents. For such contracts he cannot be held liable personally. His property or estate will be liable. 11. Minor cannot be a surety : A minor cannot be a surety as he is not liable to pay or compensate anything under any contract.

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12. Minors liability in tort : A tort is a civil wrong for which the ordinary remedy is damages. A minor is not liable for his tort, unless the tort is in reality a breach of contract. Ex. A minor hired a horse for riding and injured it by over-riding, he was not held liable. The Court observed that the infant in the course of doing what he is entitled to do under the contract is guilty of negligence, he cannot be made liable in tort if he is not liable on the contract. But if the wrongful action is of the kind not contemplated by the contract, the minor may be held liable for tort. Thus where a minor hired a horse for riding under express instructions not to jump, he was liable when he lent the horse to one of his friends who jumped it, whereby it was injured and ultimately died. II. PERSONS OF UNSOUND MIND A person of sound mind : A person is said to be of sound mind for the purpose of making a contract, if at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effects upon his interests. If a person is usually of sound mind but occasionally of unsound mind he may make a contract when he is of sound mind. Contracts by persons of unsound mind : 1. Lunatics : A lunatic is a person who is mentally deranged due to some mental strain or other personal experience. He suffers from intermittent intervals of sanity and insanity. He can enter into contracts during the period when he is of sound mind. 2. Idiot : An idiot who has completely lost his mental powers. He does not exhibit understanding of even ordinary matters. Idiocy is permanent whereas lunacy is periodical insanity with lucid intervals. An agreement of an idiot is void like that of a minor. 3. Drunken or intoxicated person : A drunken or intoxicated person suffers from temporary incapacity to contract, i.e., at the time when he is so drunk or intoxicated that he is unable to form a rational judgement. The position of a drunken or intoxicated is similar to that of a lunatic. For that period of being drunken or intoxicated he should be incapable of understanding the nature of the contract and its legal consequences. 4. Hypnotised person : Hypnotism produces temporary incapacity, till the person is under the impact of artificially induced sleep. Under hypnotism contract cannot be made. 5. Mental decay : because of old age, sickness, etc. In cases where the contract is sought to be avoided on any of the above grounds, the burden of proof lies on the party who sets up such a disability; but if unsoundness of mind is once established, the burden of proving a lucid interval is on him, who sets it up the contract. An agreement entered into by a person of unsound mind is treated on the same footing as that of a minors, and therefore, an agreement by a person of unsound mind is absolutely void and inoperative as against him but he can derive benefit under it.

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The property of a person of unsound mind is, however, always liable for necessaries supplied to him or to any one whom he is legally bound to support. III. DISQUALIFIED PERSONS The third type of incompetent persons are those who are disqualified from contracting by any law to which they are subject. 1. Alien enemies : An alien means a citizen of a foreign country. During peace time with his country an alien can enter into contract with an Indian, but during war time, he becomes an alien enemy. An alien friend can contract, but not an alien enemy 2. Foreign Sovereigns and Ambassadors: They are in a privileged position and are ordinarily considered incompetent to contract, because they can sue others to enforce the contracts entered upon with them, but cannot be sued without obtaining the prior sanction of the Central Government. 3. Convict : A convict is one who is found guilty and is imprisoned. During the period of imprisonment, a convict is incompetent (a) to enter into contract; and (b) to sue on contracts made before conviction. On the expiry of sentence, he is at liberty to institute a suit and the Law of Limitation is held in abeyance during the period of his sentence. 4. Married women : Married women are competent to enter into contract with respect to their separate properties provided they are major and are of sound mind. They cannot enter into contracts with respect to their husbands property. However a married woman can act as an agent of her husband and bind her husbands property for necessaries supplied to her, if he fails to provide her with these. 5. Insolvent : An insolvent cannot enter into contracts as his property vests in the hands of the Official Assignee or the Official Receiver who enters into contract on behalf of the insolvent. This qualification of the insolvent is removed after he is discharged. 6. Joint-Stock Company and Corporation incorporated under a special Act : A Company or Corporation is an artificial person created by law. It cannot enter into contracts outside the powers conferred upon it by its Memorandum of Association or by the provisions of its special Act, as the case may be. Again, being an artificial person it cannot enter into contract of a strictly personal nature. Ex. Marriage. CHAPTER - VI FREE CONSENT Section 13 : Free consent is essential for creation of a contract. Two or more persons are said to consent when they agree upon the same thing in the same sense. There should be identity of minds or consensus ad idem. Without free consent there is no contract. The consent is said not to be free when it would have been given due to coercion, undue influence, misrepresentation, fraud or mistake.

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In the absence of free consent, the contract may turn out to be either voidable or void depending upon the nature of the flaw in consent. When consent to an agreement is caused by coercion, undue influence, misrepresentation or fraud, there is no free consent and the contract is voidable at the option of the party whose consent was so caused. But when consent is caused by bilateral mistake as to the matter of fact essential to the agreement, the agreement is void. In such a case there is no agreement at all. I. Coercion Section 15 : Coercion is the committing or threatening to commit any act forbidden by the Indian Penal Code, or the unlawful detaining or threatening to detain, any property, to the prejudice of any person whatsoever, with the intention of causing any person to enter into an agreement. Effect of coercion : When consent to an agreement is caused by coercion, the agreement is voidable at the option of the party whose consent was so caused. This means that the aggrieved party may either exercise the option to affirm the transaction and hold the other party bound by it, or repudiate the transaction by exercising a right to rescission (to invalidate or annul). If the aggrieved party opts to rescind a voidable contract, he must restore any benefit received by him under the contract to the other party from whom received. II. Undue influence Section 16 : A contract is said to be induced by undue influence where (a) 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 (b) he uses the position to obtain an unfair advantage over the other. Ex. The relationship between master and servant or police officer and the accused or where exists a fiduciary relationship ( mutual trust and confidence) as between father and son, guardian and ward, doctor and patient, if one of the parties to the contract is illiterate or pardanashin women undue influence may come into play. In cases where there is a presumption of undue influence the burden of proving that the person who was in a position to dominate the will of another, did not use his position to obtain an unfair advantage, will lie upon the person who was in a position to dominate the will of the other. He can rebut or oppose the presumption by arguing that full disclosure of facts was made, or that the price was adequate or that the other party was in receipt of competent independent advice and his consent was free. Ex. An old illiterate woman made a gift of almost the whole of her property to her nephew, who was managing her estate. The old woman later filed a petition to set aside the gift on the ground of undue influence, the onus lies on the nephew to prove that the transaction was bona fide, well understood and free from undue influence. When consent to an agreement is caused by undue influence, the agreement is voidable at the option of the party whose consent was so caused. Such a contract may be set aside absolutely or if the party who was entitled to avoid has received any benefit thereunder, may validate it upon terms and conditions as the Court may deem just and equitable.

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Distinction between Coercion and Undue Influence Coercion Undue Influence 1. Consent is obtained by threat of an 1.Consent is obtained by dominating the offence. will. 2. It is mainly of a physical character. 2. It is of moral character, involving use of moral force or moral power. 3. There is no presumption of coercion. 3. Presumption lies in some of the Burden of proof lies on the aggrieved relationship. 4. If benefits received it has to be restored 4. Court may decide whether to restore part in case of rescission. of it or whole, or contract may be set aside without direction for refund. 5. There may be criminal liability. 5. No criminal liability. III. FRAUD Section 17 : Fraud exists where a false representation has been made knowingly, without belief in its truth and recklessly without care whether it is true or false. The intention of the party must be to deceive the other party to the contract or to induce him to enter into a contract. Three conditions lie in it : (1) 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. (2) Active concealment of a fact by a person having knowledge or belief of the fact. (3) A promise made without any intention of performing it. (4) Any such act or omission as the law specifically declares to be fraudulent. Essential elements of fraud : 1. There must be a representation and must be false (False representation): It should have been made intentionally to deceive the other party. There must be some suggestion that a fact is true when it is not true by one who does not believe it to be true. An absence of honest belief in the truth of the statement made is essential to constitute fraud. If the representor honestly believes his statement to be true, he cannot be liable in deceit no matter how ill advised, stupid or even negligent he may have been. In order to be called fraudulent representation the false statement must be made intentionally. Ex. A company used a prospectus but it did not give reference of a document which disclosed liabilities. This gave impression that companys financial position was sound. If that document had been disclosed, the impression would have been quite different. It was held that non-disclosure amounted to fraud and any one who purchased shares on the faith of this prospectus could avoid the contract. 2. The representation must be related to a material fact : A mere opinion, expression or description is not regarded as representation. Ex. A says to B that these clothes are best available in the market for Rs. 200. This is mere opinion or expression. 3. The representation must have been made before the conclusion of the contract : with an intention to deceive the other party.

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4. The other party must have relied and induced to act upon the representation: A false representation is not enough to give a right of action. The other party must have relied and acted upon that statement. If the representation does not come to notice of a party, it cannot be said to have misled that party. Similarly, if there was any obvious defect or flaw which could be reasonably investigated by inspection, then the other party cannot shut his eyes. Ex. A bought shares in a Company on the faith of a prospectus which contained an untrue statement that B was a director of the Company. A had never heard of B, therefore, the statement was immaterial from his point of view. As claim for damages in this case was dismissed because the untrue statement had not induced A to buy the shares.

Can silence be Fraudulent ? 1. As a rule mere silence is not fraud because there is no duty cast by law on a party to a contract to make a disclosure to the other party, of material facts within his knowledge. Ex. A and B being traders enter into a contract. A has private information of a change of price which would affect Bs willingness to proceed with contract. A is not bound to inform B. 2. Silence is fraudulent, if the circumstances of the case are such that it is the duty of the person keeping silence to speak. Contracts of utmost good faith are such in which the law imposes a duty of abundant disclosure on one of the parties thereto, due to peculiar relationship of the parties or due to the fact that one of the parties has peculiar means of knowledge which is not accessible to the other. The following contracts come within such a category : (a) Fiduciary relationship : where parties stand in a fiduciary relationship to each other. The person in whom confidence is reposed is under a duty to act with utmost good faith and to make a full disclosure of all material facts concerning the transaction known to him. Fiduciary relationship include between Principal and Agent, Solicitor and client, guardian and ward, trustee and beneficiary. Ex. Where a broker who was employed to buy shares for the client, sold his own shares to the client, without disclosing this fact to him and without obtaining his consent, therefore, it was held that the sale can be avoided by the client. (b) Contracts of Insurance : The insurer contracts on the basis that all material facts have been communicated to him. It is an implied condition of the contract that full disclosure of facts have been made, and if there has been non-disclosure he shall be entitled to avoid the contract. Ex. In case of life insurance, disease etc. have to be disclosed. ( c) Contract of marriage engagement. (d) Contracts of family settlements : Contracts of family settlements and arrangements require full disclosure of all material facts within the knowledge of the parties to such contracts. Such a contract is not binding if either party has been misled by the concealment of material facts.

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(e) Share allotment contracts : Promoters and directors, who issue the prospectus of a company to invite the public to subscribe for shares and debentures, possess information which is not available to general public and as such they are required to disclose all information regarding the company with strict and scrupulous accuracy. 3. Silence is fraudulent where the circumstances are such that silence is equivalent to speech. Ex. A says to B If you do not deny it, I shall assume that the horse is sound. B says nothing. Hence, Bs silence is equivalent to speech. If the horse is unsound, Bs silence is fraudulent. Consequence of fraud : A contract induced by fraud is voidable at the option of the party defrauded. If it is not avoided, it is valid. A party who has been induced to enter into a contract by fraud has the following remedies : (1) He can rescind the contract. In other words he can avoid the performance of contract. But it should be done within a reasonable time. If within the interval a third party, who does not know about the fact, acquired an interest to the property for value, he cannot rescind the contract. Ex. A purchased certain goods from B by making a misrepresentation. A sells the goods to D before B avoids the contract. B loses the right to avoid the contract. (2) He can ask for restitution and insist that the 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. Ex. A, fraudulently informs B that As estate is free from encumbrances. B thereupon buys the estate. The estate is subject to a mortgage. B may either avoid the contract, or may insist on its being carried out and the mortgage debt redeemed. (3) The aggrieved party can also sue for damages, if any. Fraud is a civil wrong; hence, compensation is payable. Ex.1. If the party suffers injury because of unsound horse, which was not disclosed despite inquiry, compensation can be claimed. Ex. 2. If a man is fraudulently induced to buy a house with encumbrances, he can claim the expenses of moving to the house, in addition to rescission of the contract. IV. MISREPRESENTATION Section 18 : A positive assertion of a fact which is not true, though is believed to be true by the one making the assertion. Either he believes that it is true or he does not know that it is true; and there is no intention to deceive other or to gain an advantage by misleading other. A wrong representation made intentionally is known as fraud. According to SS. 18, there is misrepresentation in the following 3 cases : (a) Positive assertion of unwarranted statements of material facts believing them to be true. If a person makes an explicit statement of fact not warranted by his information ( = without any reasonable ground), under an honest belief as to its truth though it is not true, there is misrepresentation. Ex. A says to B who intends to purchase As land, My land yields 10 quintals of wheat per acre. A believes the statement to be true, although he did not have sufficient grounds for the belief. Later on, it transpires that the land produces only 7 quintals of

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wheat per acre. This is misrepresentation. This is positive assertion. If A says My land is fertile, this is mere opinion or words of commendation which is not positive assertion. (b) Breach of duty which brings an advantage to the person committing it by misleading the other to his prejudice. In some cases when a statement is made, it is true, but subsequently, before it was acted upon, it became false to the knowledge of the person making it. In such cases the person making the statement comes under an obligation to disclose the change in circumstances to the other, otherwise he will be guilty of misrepresentation. Ex. A, before signing a contract with B for sale of business, correctly states that the monthly sales are Rs.50,000. Negotiations lasted for five months, when the contract of sale was signed. During this period sales dwindled to Rs.10,000 a month. A unintentionally keeps quiet. It was held that there was misrepresentation and B was entitled to rescind the contract. (c) Causing mistake about subject-matter innocently : If one of the parties induces the other, though innocently, to commit a mistake as to the quality or nature of the thing bargained, there is misrepresentation. Ex. In a contract of sale of 500 bags of wheat, the seller makes a representation that no sulphur has been used in cultivation of wheat. However, sulphur had been used in 5 out of 100 acres of land. The buyer would not have purchased the wheat but for the representation. There is a misrepresentation. Distinction between Fraud and Misrepresentation Fraud Misrepresentation 1. There is intention to deceive. 1. No intention to deceive. 2. Mis-statement is made knowing it 2. Mis-statement is made believing it to be untrue. He does not believe it to be true. true, which is untrue. 3. Party can not only rescind but also can 3. The party can rescind, but no damage claim damage. can be claimed. 4. Party is liable under criminal law. 4. Party is not liable under criminal law. 5. Fraud is deliberate or wilful. 5. Misrepresentation is innocent. 6. The contract is voidable even if the 6. The aggrieved party cannot avoid the aggrieved party had the means to discover contract if it had means to discover the the truth with ordinary diligence. truth with ordinary diligence. Effects of Misrepresentation 1. He can avoid or rescind the contract, treating the contract as voidable. 2. He may affirm the contract and insist that he shall be put in the position in which he would have been. V. MISTAKE Section 20 : Mistake means an erroneous belief about something. When both the parties are at a mistake of relevant facts, the contract shall be void. Ex. A agrees to buy form B a certain horse. It turns out that the horse was dead at the time of the agreement, but both parties were ignorant of the fact. The agreement is void.

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Mistake may be of two types : 1. Mistake of law.

2. Mistake of fact.

1. Mistake of law : (a) Mistake of law of the Country : It is expected that every one should have knowledge of the law of the Country. There is a well settled rule that Ignorance of law is no excuse. According to this maxim, party cannot be allowed to get any relief on the ground that it had done something without knowing the law. A mistake of law is no excuse and so the contract cannot be avoided. Accordingly, no relief can be granted on the ground of mistake of law of the Country. Ex. A owed B Rs.10,000. B was under the impression that the debt was time-barred. Therefore, B pressed A to pay the amount of the debt before it is barred by time. A was aware that the debt was not barred by the Law of Limitation. A offered to pay Rs.3000 in full settlement of Bs debt. B accepted the offer. Thereafter B found out that the debt was not barred by the law of limitation. B desired to avoid the contract. The contract between A and B was founded on the erroneous belief that As debt is barred by the law of limitation. This is a mistake as to the law in force in India. B cannot avoid the contract (b) Mistake of foreign Law : Mistake of foreign law is treated as the mistake of fact and so the agreement in such a case is void. 2. Mistake of Fact : Mistake of facts may be of two types : (A) Bilateral mistake; (B) Unilateral mistake. (A) Bilateral Mistake : when both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement. Here there is no real correspondence of offer and acceptance because each party understands the contract in a different way. In fact, there is no agreement at all. In case of bilateral mistake the contract is void ab initio. There must be three conditions to declare the agreement void ab initio. (i) Both the parties must be under a mistake : The mistake must be mutual. Both the parties should misunderstand each other so as to nullify consent. Ex. A having 2 houses M and N, offers to sell house M, and B not knowing that A has 2 houses, thinks of house N and agrees to buy it. Here there is no consent and the agreement is void. (ii) Mistake must relate to some fact and not to judgement or opinion : An erroneous opinion as to the value of the thing which forms the subject-matter of the agreement is not to be deemed a mistake as to a matter of fact. Ex. A buys a car thinking that it is worth Rs.80,000 and pays Rs.80,000 for it when it is worth only Rs.40,000. The contract remains good. A has to blame himself for his ignorance of the true value of the car and he cannot avoid the contract on the ground of mistake. (iii) The fact must be essential to the agreement : The fact must be such which goes to the very root of the agreement. There are certain conditions that cover such a mistake :

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(a) Mistake as to the existence of the subject-matter of the agreement. If at the time of the agreement and unknown to parties, the subject-matter of the agreement has ceased to exist, or if it has never been in existence, then the agreement is void. Ex. 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. (b) Mistake as to the identity of the subject-matter. Where both the parties are working under a mistake as to the identity of the subject-matter i.e., one party has one thing in mind and the other party had another, the agreement is void for want of consensus-ad-idem. Ex. A contract of sale of certain quantity of cotton was made which was being brought by a ship named Trojan. There were two ships of the same name and the parties had different ships in mind at the time of entering into contract. It was held that there was no binding contract. (c) Mistake as to the title (ownership) of subject-matter. If the seller is selling a thing which he is not entitled to sell and both the parties are acting under a mistake, the agreement is void. Ex. A agreed to take a lease of fishery from B, though contrary to the belief of both the parties at that time A was a tenant for life by inheritance of the fishery and B had no title at all. It was held that the lease agreement was void. (d) Mistake as to the quantity of the subject-matter. If both the parties are acting under a mistake of the quantity of the subject-matter, the agreement is void. Ex. P inquired from H about the price of rifles, stating that he would buy as many as 50. H quoted the price. P telegraphed Send 3 rifles. The telegraph clerk transcribed the message as Send the rifles. H sent 50 rifles. P accepted only 3 rifles and returned 47 rifles. H filed a suit for damages for non-acceptance of 47 rifles. It was held that there was no contract as there was no consent and it made no difference even if the mistake was made by the negligence of a third party. P was bound to pay for only 3 rifles. (e) Mistake as to the quality of the subject-matter. If there is a mutual mistake of both the parties as to the quality of the subject-matter, i.e., if the subject-matter is essentially different from what the parties believed it to be, the agreement is void. Ex. A, contracts with B to sell a particular horse, which is believed by both the parties to be a race horse. But later on it turns out to be a cart horse. The agreement is void. (f) Mistaken assumption going to the root of agreement. Ex. A man and woman entered into an agreement for separation on the erroneous assumption that their marriage was valid. The agreement was held void as the parties entered into the contract under a false and fundamental assumption that they were lawfully married. (B) Unilateral Mistake Where only one of the contracting parties is mistaken as to a matter of fact, the mistake is a unilateral mistake. Section 22 provides that a contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact. Accordingly, in case of unilateral mistake a contract remains valid unless the mistake is caused by misrepresentation or fraud, in which case the contract is voidable at the option of aggrieved party. Also, there have been some cases where the Court ruled in cases of unilateral mistakes caused by fraud or misrepresentation, an agreement void ab initio. (i) Unilateral mistake where contract is valid : If a man due to his own negligence or lack of reasonable care does not ascertain what he is contracting about, he must blame

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himself and cannot avoid the contract. Thus, as a rule, a unilateral mistake is not allowed as a defence to avoid a contract. Ex. X buys rice from Y after checking the sample, under the impression that the rice is old. The rice however is new. X cannot avoid the contract. The rule of Caveat Emptor (Buyer Beware) of the Sale of Goods Act is applicable here. (ii) Contract voidable : If the unilateral mistake is caused by fraud or misrepresentation, the contract is voidable on the part of the other party and can be avoided by the injured party. Ex. A has a horse with a hole in the hoof. A so fills it up that the defect cannot be discovered on a reasonable examination. B purchases the horse under the impression that the horse is sound. Here A is guilty of fraud and as such on the discovery of the defect B can avoid the contract because the unilateral mistake has been caused by As fraud. (iii) Agreement void ab initio : Where a consent is given by a party under a mistake which is so fundamental as goes to the root of the agreement and has the effect of nullifying consent, no contract will arise even though there is unilateral mistake only. Ex. (a) Mistake as to the identity of person contracted with, where such identity is important. Whenever the identity of the person with whom one intends to contract is important element of the contract, a mistake with regard to the person contracted with destroys his consent and consequently annuls the contract. A case : In Said vs Butt. Butt, the managing director of a theatrical Company, gave instructions that no ticket was to be sold to Said, who was a very bad critic of all the plays of the Company. Said, knowing this asked a friend to buy a ticket for him. With this ticket Said went to the theatre but was refused admission. Said filed a suit for damages for breach of contract. It was held that there was no contract with Said. Here the identity of the person was a material element in the formation of the contract. Ex. (b) Mistake as to the nature and character of a written Document : where the consent is given by a party under a mistake as to the nature and character of a written document. The rule of law here is that where the mind of the signer did not accompany the signature. A case : An old illiterate woman executed a deed under the impression that she was executing a power of attorney authorizing her nephew to manage her estate, while in fact it was a deed of gift in favour of her nephew. Whereas the woman never intended to execute a gift of deed, nor was the deed read out or explained to her. The document was held to be void as her mind did not go with her signature. CHAPTER - VII VOID AGREEMENTS

An agreement not enforceable by law is a void agreement. Void Agreement does not give rise to any legal consequences and is void ab initio. Types of void agreements There are 15 types of void agreements : 1. Agreement made by incompetent persons (minor, unsound mind, etc.) 2. Agreement made under bilateral (mutual) mistake as to a matter of fact essential to the agreement. 3. Agreement made under mistake as to a law not in force in India. 4. Agreements where the consideration or the object is unlawful.

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5. Agreements of which the consideration or object is unlawful in part and the illegal part cannot be separated from the legal part. 6. Agreements made without consideration. 7. Agreements in restraint of marriage. 8. Agreements in restraint of trade. 9. Agreement in restraint of legal proceedings. 10.Agreement the meaning of which is uncertain. 11.Agreement by way of wager. 12.Agreement contingent on an uncertain future event if the event becomes impossible. 13.Agreement contingent on an impossible event. 14.Agreement to do an impossible act. 15.Agreement to do an act which subsequently becomes impossible. Agreements 1 to 6 have been discussed earlier. The rest are discussed here. 1. Agreements in restraint of a marriage (Sec.26) Every individual enjoys the freedom to marry, therefore, every agreement in restrain or interference of the marriage of any person, other than a minor, is void. The restrain may be general or partial but the agreement is void, and therefore, an agreement agreeing not to marry at all, or a certain person, or a class of persons, or for a fixed period is void. It is interesting to note that a promise to marry a particular person does not imply any restraint of marriage, and is, therefore, a valid contract. Ex. (a) A agrees with B for good consideration that she will not marry C. It is a void agreement. (b) A agrees B that she will marry him only. It is a valid contract. 2. Agreement in restraint of trade (SS. 27) The Constitution of India guarantees the freedom of trade and commerce to every citizen and therefore, every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. Ex. An agreement whereby one of the parties agrees to close his business in consideration of the promise by the other party to pay a certain sum of money, is void, being an agreement in restraint of trade, and the amount is not recoverable, if the other party fails to pay the promised sum of money. Exceptions to Rule 2.: (i) Restraining freedom of action : Agreements merely restraining freedom of action necessary for the carrying on of business are not void, for the law does not intend to take away the right of a trader to regulate his business according to his own discretion and choice. Ex. An agreement to sell all produce to a certain party, with a stipulation that the purchaser was bound to accept the whole quantity, was held valid because it aimed to promote business and did not restrain it. But where in a similar agreement the purchaser was free to reject the goods, (i.e. was not bound to accept the whole quantity tendered, it was held that the agreement was void as being in restraint of trade. (ii) Sale of Goodwill : The seller of the goodwill of the business can be restrained from carrying on a similar business within specified local limits, so long as the buyer or

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any person deriving title to the goodwill from him, carries on a like business therein, provided the restraint is reasonable in point of time and space. Ex. A, a seller of imitation jewellery in London sells his businesss to B and promises that for a period of two years he would not deal : (a) in imitation jewellery in England; (b) in real jewellery in England; and (c) in real or imitation jewellery in certain foreign countries. The first promise alone was held lawful. The other two promises namely, (b) and (c) were held void as the restraint was unreasonable in point of space and the nature of business. (iii) Partners agreements : An agreement in restraint of trade among the partners or between any partner and the buyer of firms goodwill is valid if the restraint comes within any of the following cases : (a) An agreement among the partners that a partner shall not carry on any business other than that of the firm while he is a partner. (b) An agreement by a partner with his other partners that on retiring from the partnership he will not carry any business similar to that of the firm within a specified period or within specified local limits provided the restrictions imposed are reasonable. (c) An agreement among the partners upon or in anticipation of the dissolution of the firm, that some or all of them will not carry on a business similar to that of the firm within a specified period or within specified local limits, provided the restrictions imposed are reasonable. (d) An agreement between any partner and the buyer of the firms goodwill that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits, provided the restrictions imposed are reasonable. (iv) Trade combinations : An agreement, the primary object of which is to regulate and not to restrain it, is valid. Thus an agreement in the nature of a business combination between traders or manufacturers, e.g. not to sell their goods below a certain price, to pool profits or output and to divide the same in an agreed proportion, does not amount to restrain of trade and is perfectly valid. Similarly, an agreement amongst the traders of a particular locality with the object of keeping the trade in their own hands is not void merely because it hurts a rival in trade. But if an agreement attempts to create a monopoly, it would be void. (v) Negative stipulations in service agreements : An agreement of service by which a person binds himself during the term of agreement, not to take service with anyone else, is not restraint of lawful profession and is valid. But an agreement of service which seeks to restrict the freedom of occupation for some period after termination of service, is void. 3. Agreements in restraint of legal proceedings (SS.28) : An agreement by which a party is restricted from taking a legal proceeding in respect of any of his right is declared void. Similarly, an agreement by which the time limit within which one agreement provides (Limitation Act), that no party shall go to a Court of law in case of any dispute or breach of contract, is void ab initio. An agreement which limits the time within which one may enforce his contract rights (less than 3 months), without regard to the time allowed by the Limitation Act is void.

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An agreement which provides for forfeiture of any rights arising from a contract, if suit is not brought within a specified period, without regard to the time allowed by the Limitation Act (less than 3 years), is void. 4. Uncertain agreements (SS.29) : If there is any agreement, the meaning of which is not certain or it cannot be made certain, it will be treated void. It is important that parties should be aware of the nature and scope of their mutual rights and obligations under the contract. If the meaning of the words used in contract are vague or indefinite, it cannot be enforced by law. Ex. (a) A agrees to sell to B a hundred tons of oil. Agreement is void because what kind of oil is uncertain. (b) A agrees to sell to B one thousand kg. of rice at a price to be fixed by C. It is not void as the price is capable of being made certain. (c) A agrees to sell to B his horse for rupees 500 or 1000. It is void as there is nothing which of the prices will be fixed. 5. Wagering agreements (SS.30) : Wager means bet. When there is an agreement between two parties by which one promises to pay money or moneys worth on the happening of some uncertain event, it is called wagering agreement. Ex. If A and B agree that if it rains today, A will pay to B Rs.100 and if it does not rain B will pay to A Rs.100. It is a wagering agreement. Both the parties hold opposite views about a future uncertain event. Essential elements of wagering contract (a) There must be a promise to pay money or moneys worth. (b) The promise must be conditional on an event happening or not happening. (c) The event must be an uncertain one. If one of the parties has the event in his hands, the transaction is not a wager. (d) Each party must stand to win or lose under the terms of agreement. An agreement is not a wager if one party only wins and cannot lose, or if he may lose but cannot win, or if he can neither win or lose. (e) No party should have a proprietary (ownership) interest in the event. The stake must be the only interest which the parties have in the agreement. No suit can be brought for recovering anything that is won by wager, if the losing party refuses to pay. Special cases : Commercial transactions : Agreements for sale and purchase of any commodity or share market transactions, in which there is a genuine intention to do legitimate business, i.e., to give and take delivery of goods or shares are not wagering agreements. If there is no such genuine intention and parties only want to gamble on the rise or fall of the market by paying or receiving the differences in prices only, the transaction would be wagering agreement and therefore void. Lotteries : A lottery is a game of chance. Hence, the lottery business is a wagering transaction, which is void and illegal. Crossword puzzles: Where puzzles depend upon a chance, it is a lottery and therefore, a wagering transaction. Thus a crossword puzzle, in which prizes depend upon

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correspondence of the competitors solution with a previously prepared solution, is a wager. But if prizes depend upon skill and intelligence, it is a valid transaction. Thus prize competitions which are games of skill and in which effort is made to select the best competitor, e.g., picture puzzles, literary competitions and athletic competitions are not wagers. But the prize should not exceed Rs.1000 as per the provisions of Prize Competitions Act 1955. Insurance contracts : Insurance contracts are valid even though they provide for payment of money by the insurer on the happening of a future uncertain event. Such contracts differ from wagering agreements mainly in three respects : (a) The holder of an insurance policy must have an insurable interest in the event upon which the insurance money becomes payable. Thus contracts of insurance are entered into to protect an interest. In a wagering agreement, there is no interest to protect and the parties bet exclusively because they can thereby make some easy money. (b) Contract of insurance is based on scientific and actual calculation of risks, whereas wagering agreements are a gamble without any scientific calculation of risks. (c) Contracts of insurance are regarded as beneficial to the public, whereas wagering agreements do not serve any useful purpose. 6. Agreements contingent on impossible events : If there is an agreement to do or not to do anything on the happening of an impossible event, it is void whether the parties know or not that the event is impossible at the time when contract is made. Ex. (a) A agrees to pay B Rs.50,000 if the Sun will rise from the west. The agreement is void because it is impossible. (b) A agrees to pay B Rs.1000 if B will marry C. C was dead at the time of the contract. The agreement is void even if they didnt know about it. 7. Agreement to do impossible act : An agreement to do an impossible act is void. Ex. (a) A agrees B to discover treasure by magic. The agreement is void. (b) A agrees with B to run with a speed of 200 km. per hour, is void. No restitution/return/restoration of the benefit received from the plaintiff is allowed under void agreements. CHAPTER - VIII Contingent Contract A contract may be either absolute or contingent. When it is absolute the fulfilment of contract does not depend on any condition positive or negative. 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. It is a contingent contract, the performance of which is dependent upon the happening or non-happening of an uncertain event, collateral to such contract. Any ordinary contract can be changed into a contingent contract, if its performance is made dependent upon the happening or non-happening of an uncertain event.

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Ex. (i) A contracts to sell B 10 bales of cotton for Rs.20,000, if the ship by which they are coming returns safely. (ii)A promises to give a loan to B if he is elected the president of a particular association. (iii)A contracts to indemnify B Rs.50,000, in consideration to Bs paying Rs.500 annual premium, if Bs factory is burnt. Contract of insurance and contracts of indemnity and guarantee are common instances of contingent contracts. A Collateral Event is one which does not form part of consideration of the contract, and is independent of it. Ex. A contracts to pay Rs.2 lakhs to B, a contractor, for constructing a house, provided the construction is approved by an architect. Here the consideration is Rs.2 lakhs for the construction of the house, and the event is approval by the architect which is a collateral event, which is independent of the consideration, and is on the happening of this event that the contract shall be enforced. Essentials of a contingent contract (1) The performance of such a contract depends upon the happening or nonhappening of some future event. (2) The future uncertain event is collateral, i.e., incidental or accompanying but not main and is secondary. Rules regarding contingent contracts 1. Enforcement of contracts contingent on happening of a future uncertain event : Contingent contracts depend on the happening of future uncertain event. Till the event takes place the contract cannot be enforced by law. And if the event becomes impossible, the contract becomes void. Ex. A contracts to pay B Rs.10,000 when B marries C. C dies without being married to B. The contract becomes void. 2. Enforcement of contracts on the non-happening of a future uncertain event : 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. Ex. A agrees to pay Rs.50,000 if a certain ship does not return. This ship is sunk. The contract can be enforced when the ship sinks. 3. Contracts contingent on future conduct of a living person : When the person acts within given time differently than expected, the event on which the contract is contingent, is considered to be impossible. Ex. A agrees to pay B Rs.20,000 if B marries C. C married D. The marriage of B and C must be considered impossible, although it is possible that D might die and C may afterwards marry B. 4. Contracts contingent on a specified event happening within a fixed time : Contingent contracts to do or not to do anything if a specified uncertain event happens

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within a fixed time become void if, at the expiration of the time fixed, such event has not happened, or if before the time fixed, such event becomes impossible. Ex. A promises to pay B a sum of Rs.20,000 if a certain ship returns within a year. The contract may be enforced if the ship returns within a year, and becomes void if the ship does not return or gets burnt within the year. 5. Agreements contingent on impossible events : Such contingent contracts are void whether the impossibility of the event is known or not known to the parties to the agreement at the time when it is made. Ex. (a) A agrees to pay B Rs.1000 if two straight lines should enclose a space. This will never happen, hence, the agreement is void. (b) A agrees to pay B Rs.2000 if B marries C. C was dead at the time of agreement. The agreement was void. An important point to note is that a contingent event may be a future event or it may be an act of a third party. But it can never be the act of the party to a contract. Once it becomes the act of a party to the contract, it loses its collateral character and becomes consideration to the promise contained in the contract. Distinction between Wagering contract and Contingent contract : Wagering contracts are contingent contracts. But all contingent contracts are not wagering contracts. Wagering contracts Contingent contracts 1. It is an agreement by mutual promises 1. Not necessary that there should be each of them conditional on the happening mutual promise. All contingent contracts or not happening of an unknown event. are not wagers. 2. The performance of any promise 2. The performance of any promise depends on happening of some uncertain depends on happening of some future events. uncertain event which is collateral to the contract. 3. Interest of the parties is to make gain by 3. Parties have other interest: insurable luck only. interest in the subject matter. 4. Future uncertain event determines the 4. Future uncertain event is just collateral. action of the parties. Such uncertain event may or may not happen and affect the parties. 5. It is void. 5. It is not void, but valid. 6. The parties are not interested in the 6. The parties are interested in the occurrence or non-occurrence of the event. occurrence or non-occurrence of the event. 7. It is illegal. 7. It is legal.

CHAPTER IX PERFORMANCE OF CONTRACTS When both the parties to the contract fulfil their respective legal obligations created under the contract, it is called performance of contract.

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When a contract is duly performed by both the parties, the contract comes to an end and nothing remains after that. The performance may be (i) Actual performance : When the parties have done what they had undertaken to do or have fulfilled their obligations under the contract, they are said to have actually performed the contract. (ii) Attempted performance : When one of the parties to the contract offers to perform the contract but the other party does not accept it, there is attempted performance. Ex. A agrees to sell his watch to B for Rs.200. A offers to deliver the watch but B does not accept it. There was an attempted performance by A. The promisor is not responsible for non-performance in case of attempted performance. Who can demand performance? It is only the Promisee who can demand performance of the promise under a contract. A third party cannot demand performance of the contract even if it was made for his benefit. Ex. A promises B to pay a sum of Rs.1000 to C. The person who can demand performance is B and not C. If A does not pay the amount to C, C cannot take any action against A. It is only B who can take action against A. On the death of B, Bs legal representatives are entitled to enforce the promise against A. By whom contracts can be performed? 1. By the promisor himself : If there is something in the contract to show that it was the intention of the parties that the contract must be performed by the promisor, then it must be performed by the promisor. Ex. : Where the contract is such that which needs personal skill or diligence of the promisor, e.g. a contract to paint a picture. 2. By an agent : When personal consideration is not the foundation of a contract, the promisor or his representative may employ a competent person to perform it. Ex. A promises to B a sum of money. A may perform this promise either by personally paying the money to B or by causing it to be paid to B by another. 3. By legal representative : In the case of contracts not involving personal skill etc., the legal representatives are bound to perform the contract in case of the death of the promisor before performance. Ex. (i) A promises to deliver goods to B on a certain day on payment of Rs.1000. A, dies before that day. As representatives are bound to deliver the goods to B, and B is bound to pay Rs.1000 to As representatives. (ii) A promises to paint a picture for B by a certain day, at a certain price. A, dies before that day. The contract cannot be enforced either by As representatives or by B. 4. Performance by a third person : If a promisee accepts performance of the promise from a third person, he cannot afterwards enforce it against the promisor. It is important to note that once the promisee has accepted the performance by third party, the promisor is discharged from his liability against promise Ex. A is to receive Rs.5000 from B. In place of B, Rs.4500 is paid by E which is accepted by A, in full settlement from B. Now A cannot claim any amount from B.

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Performance of joint promises Where there are more than one promisor or promisee in a contract, it is known as joint contract. Joint promises may take any of the following shapes : (1) Where several joint promisors make a promise with a single promise, e.g. A, B and C jointly promise to pay Rs.3000 to D. (2) Where a single promisor makes a promise with several joint promisees, e.g. P promises to pay Rs.3000 to Q and R jointly. (3) Where several joint promisors make a promise with several joint promises, e.g. A, B and C jointly promise to pay Rs.3000 to P, Q and R. Who can demand performance of joint promises? SS.45 provides that when a promise is made to several persons jointly, the right to claim performance rests with all the promisees jointly and a single promisee cannot demand performance. When anyone of the promisees dies, the right to claim performance rests with the legal representatives of such deceased person. Ex. B and C jointly lend Rs.5000 to A who promises jointly to repay them that sum with an interest on a day specified. B dies. The right to claim rests with Bs legal representatives jointly with C during Cs life. After the death of C, the right to claim performance rests with the representatives of B and C jointly. Time and place of performance At what time and at which place the contract should be performed is a matter that should be determined by the promisor and promisee themselves. Normally, as a rule, promisee has a stronger role in this. Therefore, where prescribed by the promisee : The contract must be at the specified time and place. Where not prescribed by the promisee : If no time and place are prescribed by the promisee, then the contract must be performed : (a) Within a reasonable time : If no time and place of performance are determined, it must be performed on a working day within reasonable time. What is reasonable time is a question of fact to be determined in each particular case. Ex. A, promises to deliver goods at Bs warehouse on a particular day. On that day A brings the goods to Bs warehouse, but after the usual hour for closing it, and they are not received. A has not performed his promise. (b) At proper place : What is a proper place is a matter of fact in each particular case. Generally speaking, the promisor must ask the promisee where he would like the contract to be performed. Contracts which need not be performed Under the following circumstance the contracts need not be performed : (1) If parties to a contract agree to novation or alteration, the original contract need not be performed. In such a case, original contract is substituted by a new contract.

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(2) If parties to a contract agree to dispense with or remit performance of promise either wholly or in part, the original contract stands discharged. This is technically called as remission. (3) When a person at whose option a contract is voidable rescinds it, the other party need not perform his promise. (4) If any promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his promise, the promisor is excused for non-performance of the contract. Ex. A, contracts with B to repair Bs house. B neglects or refuses to point out to A the places where his house requires repair. A will be excused for non-performance. CHAPTER - X DISCHARGE OF CONTRACTS Discharge of contract means end of the contractual relationship between the parties. When the rights and obligations of the parties come to an end, it is said that contract is discharged. A contract may be discharged by 6 different ways : 1. By performance. 2. By agreement or consent. 3. By impossibility. 4. By lapse of time. 5. By operation of law. 6. By breach of contract. 1. Discharge by Performance When the contract is performed by both the parties and there nothing remains to do, then it is called discharged by performance. In such a case both the parties are discharged and contract comes to an end. But if only one party performs the promise, he alone is discharged. This is the most common way of discharge. Discharge by performance may be of 2 ways : (i) Actual performance; (ii) Attempted performance. (i) Actual Performance : When each party to the contract fulfils the obligation arising out of the contract within the time and in the manner prescribed. This is actual performance and contract comes to an end or stands discharged. But if one party only performs his promise, he alone is discharged. And he gets a right of action against the other party who is guilty of breach. (ii) Attempted performance or tender : When the promisor offers to perform his obligation under the contract, but unable to do so because the promisee does not accept the performance. This is called attempted performance or tender. Thus tender is not actual performance but is only an offer to perform the obligation under the contract. And a valid tender of performance is equivalent to performance.

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Essentials of a valid tender : (1). It must be unconditional : A conditional tender is no tender. Ex. A debtor of the company B, offers to pay if shares are allotted to him at par. It is no tender. He is putting a condition. (2). It must be made at proper time and place : A tender before or after the due date or at a place other than agreed upon is not a valid tender. Ex. A is a tenant of B. He offers him rent at a marriage party. B is not bound to accept as the tender is not made at a proper place. (3). It must be of the whole obligation contracted for and not only of the part : Deciding to pay in instalment and offering to pay the first instalment was held an invalid tender. (4). If deliver of goods, it must give a reasonable opportunity to the promisee for inspection of goods : to make sure that the goods tendered are of contract description. (5). It must be made by a person who is in a position and is willing to perform the promise : No minor or idiot. (6). It must be made to the proper person : to the promisee or his duly authorized agent, not to a stranger. (7). If there are several joint promisees, an offer to anyone of them is a valid tender. But if payment has to be made, then it has to be made to all joint promisees and not to any one of them only; because when promise is made to two or more persons jointly, the right to claim performance rests with all of them jointly. (8). In case of tender of money, exact amount should be tendered in the legal tender money. Tendering a smaller or larger amount is an invalid tender. Tendering a Rs.100 currency note in place of Rs.2 to a conductor is not valid tender; or a cheque is an invalid tender because it is not a legal tender, but if the creditor accepts that he cannot afterwards raise an objection. Effect of refusal to accept a valid tender If an offer of performance is made properly, the contract is deemed to have been performed by the promisor/tenderer and the promisee can be sued for breach of contract. A valid tender thus discharges the contract. Exception : Tender of money however, does not discharge the contract. The money will have to be paid even after the refusal of tender, but without the interest. 2. Discharge by mutual agreement or consent Since it is a contract by agreement, it may be discharged by another agreement by the same parties. The rule says a thing may be destroyed in the same manner, in which it is created. Various ways of discharge of contract by mutual agreement :

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(1)Novation : When a new contract is substituted for the existing contract, it is called novation. In such a case the original contract is supposed to be discharged and need not be performed. Ex. A owes Rs.10,000 to B. Meanwhile B owes Rs.10,000 to C. By mutual agreement B orders A to pay Rs.10,000 to C. The novation, new contract is that A has to pay to C. Conditions to Novation (a) Novation cannot be compulsory. All the parties have to agree with mutual consent. In the foregoing example, if C were not to agree and refuse the money from A, A still remains a debt to B and the contract is not yet discharged. (b) The new contract must be valid and enforceable. If the new contract is not enforceable, the original contract revives. (2) By Alteration When there is a change in one or more of the terms of contract, alteration takes place. If there is a material alteration in the contract by mutual consent, the original contract is discharged and a new contract in new form takes place. Ex. Change in the amount of money to be paid, or a change in the rate of interest. It is important to note that material alteration should be done with the mutual consent of all the parties. The difference between novation and alteration : In case of novation there may be a change of parties also, while in case of alteration parties remain the same, only the terms of contract are altered. (3) Rescission Before the date of performance the parties may make agreement to cancel the contract. This is known as rescission. (4) Remission Remission means acceptance of a lesser sum than what is contracted or lesser fulfilment of the promise. Ex. A owes B Rs.5000. A pays Rs.2000 only and B accepts it in satisfaction of the whole debt. The whole debt is discharged. (5) By Waiver Waiver means the deliberate abandonment or giving up of a right which a party is entitled to under a contract, whereupon the other party to the contract is released from his obligation. Strictly speaking there is no need of mutual agreement. It is to the benefit of the other party, so he will agree to it. Ex. A, promises to paint a picture for B. B later on forbids him to do so. A is no longer bound to perform the promise. (6) Merger Merger of two or more rights into one contract is known as merger. When a superior right and an inferior right coincide and meet in one with the same person, it is called merger of rights. In such a case inferior right automatically stands discharged or vanished.

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Ex. Under a lease A is holding a house of B. Later on, A purchases that house from B. In this case the lease right of A shall stand automatically discharged. 3. Discharge by impossibility of performance A contract is discharged if its performance becomes impossible. This rule is based on the following two principles : (a) The law does not recognize what is impossible; and (b) What is impossible does not create an obligation. There are two kinds of impossibility : (1). Initial impossibility; (2). Subsequent or supervening impossibility. (1). Initial impossibility : is that impossibility which was existing at the time of making the agreement. Such impossibility is only physical impossibility and not a legal impossibility. Agreement to do such an impossible act is void. Initial impossibility may be of two types : (a) Known impossibility : is that impossibility which is known to both the parties while entering into an agreement. It is called absolute impossibility. It does not create any right or obligation, and the agreement is void ab initio. The parties are not entitled to any restitution or compensation. Ex. A agrees with B to discover treasure by magic. (b) Unknown impossibility : is that impossibility which is not known to the parties while making the contract. The agreement is void on the ground of mistake by both. (2) Subsequent or supervening impossibility : Impossibility which arises subsequent or after the formation of contract is called subsequent or supervening impossibility. In such cases contract becomes void. If the impossibility is caused by reasons beyond the control of the parties, the parties are discharged from further performance of the obligation. It covers the following : (a) Destruction of subject-matter : If a factory premise where a machinery has to be installed, is destroyed by fire. (b) Failure of ultimate purpose : Ex. A hired a room in the city to view the passing procession of the Governor. The Governor fell ill and the procession was cancelled. A filed a suit for the recovery of rent. It was held that A need not pay the rent as contract was discharged on failure of the ultimate purpose or on a postponement of the procession which was the foundation of the contract. (c) Death or personal incapacity of promoter : Where the performance of a contract depends upon the personal skill or qualification or the existence of a given person, the contract is discharged on the illness or incapacity or the death of that person. Ex. A and B contract to marry each other. Before the time fixed for marriage , A goes mad. The contract becomes void. Ex. An artist undertook to paint a picture for certain price. But before he could do so, he met with an accident and lost his right arm. It was held that the artist was discharged due to disablement.

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(d) Change of law : A subsequent change in law may render the contract illegal and in such cases the contract is deemed discharged . The law may actually forbid the doing of some act undertaken in the contract, or it may take from the control of the promisor something in respect of which he has contracted to act or not to act in a certain way. Ex. A sold 100 bags of whet to B at Rs.500 per bag. But before delivery the Government rendered the sale and purchase of wheat by private traders illegal under the Defence of India Rules. The contract was discharged by impossibility created by subsequent change in law. (e). Outbreak of war : All contracts entered into with an alien enemy during war are illegal and void ab initio. Contract entered into before the outbreak of war are suspended during was and may be revived after the war is over, provided they have not already become time-barred. Cases not covered by supervening impossibility The general rule of contract is He that agrees to do an act must do it, or pay the damages for not doing it. Thus, unless the performance becomes absolutely impossible (as discussed above), a person is bound to perform any obligation which he has undertaken and cannot claim to be excused by the mere fact that performance has subsequently become unexpectedly burdensome, more difficult or expensive. Some cases : (i) Difficulty of performance : Increased or unexpected difficulty and expense do not excuse from performance. Ex. In July X contracted Y to send certain good from Bombay in September. In August Transport Companies went on strike and transport was available but at a higher price. It was held that the increased price did not excuse performance. (ii) Commercial impossibility : When in a transaction profits dwindle to a very low level or actual loss becomes certain, this is known as commercially impossible, yet this situation does not discharge a contract. (iii) Impossibility due to the default of a third person : The doctrine of supervening impossibility does not cover cases where the contract could not be performed because of the impossibility created by the failure of a third person on whose work the promisor relied. Ex. A, a wholesaler entered into a contract with B for sale of certain goods to be produced by C. C was unable to produce those goods. A was liable for damages to B. (iv) Strikes and lockouts : These are not covered by supervening impossibility because strikes are manageable (labour may be available elsewhere) and Lock-outs are selfinduced, therefore, the impossibility is not absolute and the default is due to the promisor himself. (v) Failure of one of the objects : When a contract is entered into for several objects (purpose), the failure of one of them does not discharge the contract. Ex. A company agreed to let out a boat to the King of England, for 2 purposes, one, for naval inspection and the second, to sail round the fleet. The King fell ill and naval

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inspection was cancelled, but sailing round was the fleet was possible. It was held that the contract was not discharged because one of the objects was still possible. 4. Discharge by lapse of time : A contract should be performed within a specified period which is called a period of limitation. If it is not performed and no action is taken by the promisee within the period of limitation, he cannot take legal action in the Court. Ex. In cases of breach of contract action has to be taken within 3 years of the default (from the time it is due). Once 3 years expire the debt becomes time barred and the other party is discharged of his liability to perform, and he will have not to pay. 5. Discharge by breach of contract : When parties to the contract fail to perform their obligations or their performance is defective, breach of contract takes place. Breach of contract operates as a discharge of the contract. The breach of contract may be actual or anticipatory. 1. Actual breach of contract : it may take place in the following 2 ways : (i) When performance is actually due : When a person does not perform his part of the contract at the time when it is due, he will be liable for its breach. Ex. A agrees to deliver to B 20 chairs on March 1, 2008, and fails to do so on that day. There is a breach of contract by A. If B refuses to accept deliver, there is a breach by B. (ii) During the performance of the contract : When one party fails to perform his obligation during the performance of the contract. Ex. C contracts with a Railway Company to supply it 5000 steel chairs at a certain price, to be supplied in instalments. After 4000 chairs were supplied, the Railway Company asked C to deliver no more. It was held that C could bring an action for breach of contract against the Railway Company. 2. Anticipatory breach of contract : It takes place before the due date of actual performance. It may take place in 2 ways : (a) Expressed : By expressly renouncing his obligation under the contract. When one party to the contract communicates to other party, before the due date of performance that he has no intention to perform it. (b) Implied : When one of the parties does some act so that the performance of his promise becomes impossible. Here the party disables himself from performing the contract by his own act. Ex. A agrees to sell his horse to B on March, 1, 2009, but before that day he sells that horse to C. Effect of anticipatory breach : In case of anticipatory breach, the promisee is excused from performance, and it gives an option to the promisee (i) either to treat the contract rescinded and sue the other party for breach of contract without waiting for due date of performance; or (ii) elect not to rescind but to treat the contract as still operative and wait for the time of performance and then hold the other party responsible. He keeps the contract alive not only for his own benefit but for the guilty party also.

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CHAPTER - XI Quasi-Contracts Valid contracts are agreements enforceable by law. But in actual life, many cases happen when there is no offer, no acceptance and in fact no intention of the parties to enter into a contract but from the conduct and relationship of the parties the law imposes obligation on one party and confers right in favour of the other. In other words, under certain special circumstances obligations resembling those created by a contract are imposed by law although the parties have never entered into a contract. Such obligations imposed by law are referred to as Quasi-Contracts or Constructive contracts under English law, and Certain relations resembling those created by contracts under the Indian law. The term Quasi-Contract has been used because such a contract resembles with a contract so far as result or effect is concerned, but it has little or no affinity with a contract in respect of mode of creation. A quasi-contract rests upon the equitable doctrine of unjust enrichment which declares that a person shall not be allowed to enrich himself unjustly at the expense of another. Duty, not a promise or agreement is the basis of such contracts. Damages for the breach of contract can be filed in the case of a quasi-contract in the same way as in the case of a completed contract. Kinds of Quasi-Contracts : Sec. 68 72. 6 kinds : (1) Supply of necessities to person incapable of contracting (Sec. 68): If a person, incapable of entering into contract, or any one whom he is legally bound to support, is supplied by another person with necessities suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property/estate of such incapable person. The following points need to be emphasized : (a) The Section does not create any personal liability but only the estates are liable. (b) The things supplied must come within the category of necessaries, not only bare necessities of existence, but all things which are reasonably necessary to the incompetent person, having regard to his status in society, e.g. Not only food and shelter but a watch, a radio, etc. (c) Necessities should be supplied only to such incompetent person or to some one whom he is legally bound to support, such as his wife and children. (d) Incompetent persons property is liable to pay only a reasonable price for goods or services supplied and not the price which the incompetent person might have agreed to. Legally speaking an incompetent person cannot agree to anything.

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(2) Reimbursement of person paying money due by another, in payment of which he is interested (Sec. 69) : 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. Ex. B holds land on a lease granted by A. The revenue (rent) payable by A to the Government being in arrear, his land is advertised for sale by the Government. Under the revenue law, the consequence of such sale will be the annulment of Bs lease. To prevent the sale and the consequent annulment of his own lease, B pays to the Government the sum due from A. A is bound to make good to B the amount so paid. The following conditions must be satisfied : (i) The plaintiff should be interested in making the payment in order to protect his own interest and the payment should not be voluntary one. Also, the payment must have been done in good faith and not to manufacture evidence of title to land or any other thing. (ii) The payment must be such as the other party was bound by law to pay. (iii)The payment must not be such as the plaintiff himself was bound to pay. Ex. As joint promise. (3) Obligations to pay for non-gratuitous acts (Sec. 70) : Where a person lawfully does anything for another person or delivers anything for him, not intending to do so gratuitously ( free of cost), and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore the thing so done or delivered. For compliance of this Section the following conditions must be fulfilled : (a) The thing must have been done lawfully. (b) It must have been done by a person not intending to act gratuitously. (c) The person for whom the act is done must have enjoyed the benefit of it. Ex. X, a trader leaves goods at Ys house by mistake. Y treats the goods as his own and enjoys them. Y is bound to pay to X. Ex. A saves Bs property from fire. A is not entitled to compensation from B if the circumstances show that A saved the property without any intention of getting any reward. Ex. A saves Bs son from drowning. He cannot claim reward. (4) Responsibility of finder of goods (Sec. 71) : If a person finds goods which belongs to another and keeps into his custody, he has same responsibility as a bailee. Duties of finder of goods : (a) He must try to find out the real owner of the goods and must not appropriate the property to his own use. (b) If the real owner is traced, he must restore the goods to him on demand. (c) Till the goods are in his possession, he must take as much care as he would take care of his own property. (d) If he does not take these measures, he will be guilty of mis-appropriation of the property under Sec. 403 of I.P.C.

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Rights of finder of goods : (a) Till the true owner is found he can retain possession of the goods against everybody in the world. (b) He is entitled to receive from the true owner, all expenses incurred by him for preserving the goods or finding the true owner. (c) He has lien (right to keep possession) on the goods until the expenses is paid. (d) He is not entitled to file a suit in Court for such amount (compensation) but he can file a suit for any reward offered by the owner for return of the goods. (e) The finder of goods can sell the goods in the following cases : (i) When the thing found is in danger of perishing. (ii) When the owner cannot with reasonable diligence be found out. (iii) when the owner is found out, but refuses to pay the lawful charges of the finder which amounts to two-thirds of the value of the thing found. After selling, the balance has to be returned to the real owner. (5) Liability of a person to whom money is paid or thing delivered by mistake or under coercion : He must repay or return what is paid to him and is not due by contract or otherwise. The term mistake has been used without any qualification or limitation and may mean both mistake of law or mistake of fact. Ex. 1. A and B jointly owe C Rs.1000. A alone pays the amount to C. B not knowing this fact pays Rs.1000 over again to C. C is bound to repay the amount to B. Ex. 2. A Railway Company refuses to deliver up certain goods to the consignee except upon 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. Ex.3. As fruit parcel was delivered under a mistake to B who consumes the fruits thinking them as his birthday present. B is bound to pay for the fruits to A. (6) Claim on the basis of Quantum Meruit : The phrase Quantum Meruit literally means as much as earned, or as much as is merited. It is applicable where a person has done some work under a contract and the other party repudiates (refuses with denial) the contract, or happening of some event makes the further performance of contract impossible, then the person who has performed the work can claim remuneration for the work he has already done. The person is said to have claimed by Quantum Meruit. Ex. A was employed as a managing director in a Company. After he rendered service for 6 months, it was found that the Board of Directors was not qualified to appoint him. It was held that A is entitled for the services rendered by him on quantum meruit basis. Essentials of a claim on the basis of quantum meruit (a) The party doing the work must have been prevented to perform the contract either by the other party or by impossibility or illegality and not on his own volition. Ex. A engaged B to write a book to be published by instalments in a weekly magazine. The magazine had to be abandoned after a few issue. B could ask for remuneration for the work done on the basis of quantum meruit. (b) The contract must be divisible. If the contract is not divisible the claim on the basis of quantum meruit will not arise.

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Ex. A mate was engaged for a complete voyage against a lump sum payment of Rs.500. the mate died before the voyage was completed. It was held that his widow could not claim on quantum meruit basis as the voyage was not completed and the contract was not divisible. Cases in which a claim on the basis of quantum meruit arises : (a) If a contract becomes void, the party who has taken any benefit under the agreement, must repay it. Ex. A agreed to decorate Bs flat for a lump sum of Rs.1000. A did the work, but B complained of faulty workmanship. B got the defect removed by paying Rs.250. It was held that A could recover R.1000 less Rs.250. (b) When something is done or delivered non-gratuitously. (c) When one party is prevented to perform the contract due to impossibility or illegality. Distinction between Quasi contract and Ordinary contract Quasi contract Ordinary contract 1. It does not arise out of agreement but is 1. It arises out of agreement. imposed by law. 2. It does not possess all the essentials of a 2. It possesses all the essentials of a valid valid contract. contract. 3. Liability/obligation is thrust upon by 3. Liability/obligation is mutually created law. voluntarily. 4. It is founded upon the principle of 4. It is founded upon general principles of justice and equity. contracts. 5. An agreement is not essential. 5. Agreement is essential.

CHAPTER - XII Remedies for breach of contract If a contract is broken, the law will endeavour, so far as money can do it, to place the injured party in the same position as if the contract has been performed . A contract creates obligations enforceable at a Court of law. Therefore, if a party has failed to perform its part, the other party has a right to move the Court of law for enforcing the contract. A remedy is the means given by law for the enforcement of a right. When a contract is broken, the injured party has one or more of the following remedies : 1. Rescission of the contract. 2. Suit for damages.

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3. Suit upon quantum meruit. 4. Suit for specific performance of the contract. 5. Suit for injunction. 1. Rescission of the contract Rescission means cancellation, revocation or putting an end to a contract. When one of the parties to a contract makes a breach of contract the other may treat the contract as rescinded. He is discharged from all obligations under the contract. Further, under Sec. 75 a person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfilment of the contract. Ex. A contracts to supply 100 kg of tea leaves for Rs.10,000 to B on 15th April. If A does not supply the tea leaves on the appointed day, B need not pay the price. B may treat the contract as rescinded and may sit quietly at home. B may also file a suit for rescission and claim damages. Applying to the Court for rescission of the contract is necessary for claiming damages for breach. In practice a suit for rescission is accompanied by a suit for damages in the same plaint/application. If a party rescinds the contract, he is liable to restore any benefit he has received under the contract. But he is also entitled to be compensated any damage which he has sustained through non-fulfilment of the contract by the other party. Right to rescission is lost in the following cases : (i) Where the contract is ratified expressly or implied by the party who is entitled to rescind the contract. In other words the party waives its right to rescind. (ii) Where the contract is not divisible and the party wants to rescind only a part of the contract. (iii) Where the parties cannot be placed in the same position in which they were before the breach took place. This may happen when the subject matter is destroyed or consumed by the party. (iv) Where in the meantime third parties have acquired interest bonafide and for value. 2. Suit for damages Damages are monetary compensation allowed to the injured party by the Court for the loss or injury suffered by him by the breach of contract. The fundamental principle of damage is not punishment but compensation. Compensation must be commensurate with the injury or loss suffered. If actual loss is not proved, no damages will be awarded. Kinds of damages Damages may be of 4 kinds : (a) Ordinary or general damages : Ordinary damages are that which arise directly and naturally as a result of a breach of contract. A reasonable man can anticipate such damages. Ordinary damages are restricted to the direct consequences of the breach of contract and not concerned with remote or indirect losses.

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Ex. A, contracts to sell and deliver 50 quintals of wheat to B at Rs.475 per quintal, the price to be paid at the time of delivery. The price of wheat rises to Rs.500 per quintal and A refuses to sell the wheat. B can claim damages at the rate of Rs.25 per quintal. Ex. A, contracts to buy rice from B at Rs.950 per quintal. No time being fixed for delivery. A afterwards informs B that he will not accept the rice if tendered to him. The market price of rice on that day is Rs.930 per quintal. B is entitled to receive from A compensation at the rate of Rs.20 per quintal. (b) Special damages : Special damages are also known as particular damages. Special damages are those which do not arise directly due to a breach of contract. Special damages cannot be claimed as matter of right. They can be claimed only if the special circumstances result in a special loss in case of breach of contract. These can be claimed only if the special circumstances which would result in a special loss in case of the breach of contract are brought to the notice of the other party. It is important that such damages must be known to the parties and they must be aware of it at the time when the contract is entered. Subsequent knowledge of the special circumstances will not create any special liability on the guilty party. Ex.1. A taxi driver gave his taxi for repair to a mechanic, informing him that an unreasonable delay will result in loss of income of Rs.100 per day. The mechanic unreasonably delays the repair of the taxi. A is entitled to recover loss of income at the rate of Rs.100 per day. Ex.2. A, a tailor, delivered a sewing machine and some cloth to a Railway Company to be delivered at a place where a festival was to be held. He expected to earn some exceptional profit at the festival but he did not bring this fact to the notice of the railway authorities. The goods were delivered after the conclusion of the festival. It was held that A could not recover the loss of profit. (c) Exemplary or Vindictive damages : The damages which are awarded with a view to punish the guilty party for the breach of contract and not by way of compensation for the loss suffered by the aggrieved party, are known as exemplary or vindictive damages. Normally, the law of damages for the breach of contract does not punish the guilty, but compensates the loss suffered. Therefore, exemplary damages or vindictive damages have no place in the law of contract and are not recoverable. There are, however, two exceptions in this rule: (i) Breach of a contract to marry : In this case the amount of the damage will depend upon the extent of injury to the partys feelings. One may be ruined, other may not mind so much. [Mental agony, suffering, humiliation.] (ii) Dishonour of a cheque by a banker when there are sufficient funds to the credit of the customer : In this case the rule of ascertaining damage is the smaller the cheque, the greater the damage. Of course the actual amount of damages will differ to the status of the party. (d) Nominal damages : are those which are awarded only for the name sake. These are neither awarded by way of compensation to the aggrieved party nor by way of punishment to the guilty party. These are awarded to establish the right to decree for breach of contract when the injured party has not actually suffered any real damage and consist of a very small sum of money.

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Ex.1. Where in a contract of sale of goods if the contract price and the market price is almost the same at the date of breach of the contract, then the aggrieved party is entitled only to nominal damages. Ex. 2. A took a shop on rent from B and paid one months rent in advance. B could not give possession of the shop to A. A chose to do no business for 8 months though there were other shops available in the vicinity. A sued B for breach of contract and claimed damages for the loss suffered. It was held that he was entitled only to a refund of his advance and nothing more, as he had failed in his duty to minimize the loss by not taking another shop in the neighbourhood. It is the duty of the injured party to mitigate damage suffered as a result of the breach of contract by the other party. He must use all reasonable means of mitigating the damage, just as a prudent man would, under similar circumstances. He cannot recover any part of the damage, traceable to his own neglect to mitigate. Rules regarding the measure of damages ( a summary) (1). The damages are awarded by way of compensation for the loss suffered by the aggrieved party and not for the purpose of punishing the guilty party for the breach. (2). The injured party is to be placed in the same position, so far as money can do, as if the contract has been performed. (3). The aggrieved party can recover by way of compensation only the actual loss suffered by him, arising naturally in the usual course of things from breach itself. (4). Special or remote damages , i.e., damages which are not the natural and probable consequence of the breach are usually not allowed until they are in the knowledge of both the parties at the time of entering into the contract. (5). The fact that damages are difficult to assess does not prevent the injured from recovering them. (6). When no real loss arises from the breach of contract, only nominal damages are allowed. (7). If the parties fix up in advance the sum payable as damages in case of breach of contract, the Court will allow only reasonable compensation so as to cover the actual loss sustained, not exceeding the amount so named in the contract. (8). Exemplary damages cannot be awarded for breach of contract except in case of breach of contract of marriage or wrongful refusal by the bank to honour the customers cheque. (9). It is the duty of the injured party to minimise the damage suffered. (10). The injured party is entitled to get the costs of getting the decree for damages from the defaulter party. 3. Suit upon Quantum Meruit : the literal meaning of the phrase is as much as is earned, or in proportion to the work done. A right to sue upon quantum meruit usually arises where after part performance of the contract by one party, there is a breach of contract, or the contract is discovered void or becomes void. This remedy may be availed of either without claiming the damages (claiming reasonable compensation only for the work done) or in addition to claiming damages for breach (claiming reasonable compensation for part performance and damages for the remaining unperformed part). The aggrieved party may file a suit upon quantum meruit in the following cases :-

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(1) Where work has been done in pursuance of a contract, which has been discharged by the default of the defendant. Ex. A engages B, a contractor, to build a three storied house. After a part is constructed A prevents B from working any more. B, the contractor, is entitled to reasonable compensation for work done under the doctrine of quantum meruit in addition to the damages from breach of contract. (2) Where work has been done in pursuance of a contract which is discovered void or becomes void, provided the contract is divisible. Ex. A contracts with B to repair his house at a piece rate. After a part of the repairs were carried out, the house is destroyed by lightening. Although the contract becomes void and stands discharged because of destruction of the house, A can claim payment for the work done on quantum meruit. But, if the contract was to pay a lump sum after the repair was fully done, then A cannot claim quantum meruit because no money was due till the whole job is done. (3) When a person enjoys benefits of non-gratuitous act although there is no express agreement between the parties. Sect. 70 lays down the rule that when services are rendered or goods are supplied by a person without an intention of doing so gratuitously and the benefit of the same is enjoyed by the other party, the latter must compensate the former or restore the thing so delivered. Ex. 1. A, a trader, leaves certain goods at Bs house by mistake. B treats the goods as his own. He is bound to pay A for them. Ex. 2. A ploughed the field of B with a tractor to the satisfaction of B in Bs presence. It was held that A was entitled to payment as the work was not intended to be gratuitous and the other party has enjoyed the benefit of the same. 4. Suit for specific performance : Generally, damages are granted by way of monetary compensation. But when monetary compensation is not sufficient, the Court may direct the responsible party to carry out his promise. It is usually granted in contracts connected with land, buildings, rare articles and unique goods having some special value to the party suing. In all such contracts monetary compensation is not an adequate relief because the injured party will not be able to get an exact substitute in the market. Specific performance is not granted in the following cases : (i) Where monetary compensation is an adequate relief (ii) Where the Court cannot supervise the actual execution of the contract, e.g. a building construction contract. (iii) Where the contract is for personal services, e.g. contract to marry or to paint a picture. 5. Suit for injunction : Injunction is an order of the Court restraining a person from doing a particular act. Where a party is in breach of negative term of the contract (i.e. where he is doing something which he promised not to do), the Court may, by issuing injunction, restrain him from doing what he promised not to do. Thus injunction is a preventive relief. Ex. A agrees to sing at Bs theatre for one year and not to sing elsewhere. During the year A agrees to sing at Cs theatre and thus refuses to sing at Bs theatre. In this case the contract is of personal nature, therefore, the Court cannot order specific performance as

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it cannot efficiently supervise performance, but can grant injunction order restraining A to sing at Cs theatre, thus compelling A to sing at Bs theatre.