Fundamental Principles of Law of Contracts

172
FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS 1 1. GENERAL PRINCIPLES The Indian Contract Act, 1872 does not profess to be a complete code dealing with the law relating to contract. It purports to do more than define and amend certain parts of the law 1 . The Act again does not affect particular usages or customs of trade, which may be enforced, though they are inconsistent with the express provisions of the Contract Act 2 . The general principles relating to contracts are covered Sections 1-75 of the Indian Contract Act, 1872 3 . Sections 126-238 of the Act deal with some of the special contracts. General principles focus on three phases of the contract. They are: a) Formation b) Performance c) Termination Contracts should be classified into transactional in nature and time consuming in nature. Transaction nature means, a one-time transaction, which takes within its fold formation, performance and termination in an intertwined manner. For instance if you buy a chocolate from a shop it is a contract of transaction in nature, but where as in the other category, owing to the nature of the subject matter involved in the performance of the contractual obligation take time. In other words in such a contract formation, performance and termination can be clearly demarcated. A construction contract or a software development contract are the examples in this regard. 1 Irrawaddy Flotilla Co. V. Bugwandas (1891) 18 Cal 620. 2 Ibid. 3 References Herein After To The Act Are To The Indian Contract Act, 1872.

Transcript of Fundamental Principles of Law of Contracts

Page 1: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

1

1. GENERAL PRINCIPLES

The Indian Contract Act, 1872 does not profess to be a complete

code dealing with the law relating to contract. It purports to do

more than define and amend certain parts of the law1. The Act

again does not affect particular usages or customs of trade, which

may be enforced, though they are inconsistent with the express

provisions of the Contract Act2. The general principles relating to

contracts are covered Sections 1-75 of the Indian Contract Act,

18723. Sections 126-238 of the Act deal with some of the special

contracts.

General principles focus on three phases of the contract. They are:

a) Formation

b) Performance

c) Termination

Contracts should be classified into transactional in nature and time

consuming in nature. Transaction nature means, a one-time

transaction, which takes within its fold formation, performance and

termination in an intertwined manner. For instance if you buy a

chocolate from a shop it is a contract of transaction in nature, but

where as in the other category, owing to the nature of the subject

matter involved in the performance of the contractual obligation

take time. In other words in such a contract formation,

performance and termination can be clearly demarcated. A

construction contract or a software development contract are the

examples in this regard.

1 Irrawaddy Flotilla Co. V. Bugwandas (1891) 18 Cal 620. 2 Ibid. 3 References Herein After To The Act Are To The Indian Contract Act, 1872.

Page 2: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

2

i. Formation

As is stated earlier, the Act is facilitating in nature and accordingly

detailed provisions have been incorporated to provide guidelines

with regard to formation of contract. Adherence to these provisions

will result in a legal, valid and binding contract. Section 2(h) of the

Act defines contract as an agreement enforceable by law. Section

10 details conditions compliance of which would decide whether

that agreement would be enforceable by law or not. According to

this section, every agreement must satisfy the conditions like

competency of the parties, free consent, consideration and lawful

object. It also mandates that the contemplated agreement should

not fall within the ambit of void agreements as stated in Section 23

to 30 of the Act.

ii. Performance

The very purpose of achieving the object of the contract squarely

depends upon the performance of the respective contractual

obligations created by the contract. Performance of any kind of

obligation requires clarity as to the following:

1. Who is to perform?

2. When to perform?

3. How to perform? And

4. What is the consequence of the non-performance?

Relevant provisions of the Act elaborately provide directions

clarifying the above aspects. At the same time, the Act recognizes

freedom on part of the parties to agreed as to the performance in a

manner different from that of the provisions.

Page 3: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

3

iii. Termination

The whole purpose of the law of contract is to ensure that the

promises are performed to the satisfaction of the parties. If the

obligations are performed accordingly, the purpose of the contract

is achieved and contractual relationship gets terminated.

With a view to protect the interest of the contracting party, the law

recognizes contractual remedy in the form of either compensation

in the form of damages or specific relief.4

a. Special Principles:

As hereinbefore stated, select special contract are covered by the

Act, 1872. Others are covered by special legislations. The

contracts of indemnity, guarantee and bailment are covered by the

Act. The Contract of Sale are covered by Sale of Goods Act, 1930

and Contract of Partnership are covered by the Indian Partnership

Act, 1932.

b. Contract of Indemnity:

The contract of Indemnity has been defined in Section 124 of the

Act as “A contract by which one party promises to save the other

from the loss caused to him by the conduct of the promisor himself

of by the conduct of any other person”. Being a species of contract,

the contract of indemnity is subject to the rules of consent, legality

of object etc. A promisee can recover not only damages, which he

may sustain but if there had been any suit against the promisee

any costs therein and any amount, bonafide paid in respect of any

compromise would also be recoverable. A claim to indemnity could

also arise on an implied contract. Such a contract may be based

4 Specific Relief Act, 1969

Page 4: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

4

either on an inference of fact to be deduced from the circumstances

of a particular case or on the obligations caused by the relationship

between the parties.

This is a significant principle of risk allocation which requires to be

taken note of when structuring of a contract takes place. Principle

of indemnity enables party to promise the other that in the event of

loss occasioned by determined causative factors, the party makes

the good loss. In practice, indemnity is invoked in a reciprocal

manner by the both the contracting parties referring to the

prossibilities and forseability of the related risk.

Indemnity could be either express of implied. This principle of

implied indemnity is recognised in contract of guarantee and

agency as well.

c. Contract of Guarantee :

Section 126 of the Indian Contract Act, 1872 defines a contract of

guarantee as a contract to fulfil a promise or to discharge the

liability of a third person in the eventuality of his default. The

primary aspects of a Contract of Guarantee is the satisfaction of

two elements of consensus ad idem and the existence of

consideration nonetheless the contract of guarantee should not be

vitiated by the presence of any of the three elements of incapacity,

flaw in consent and the unlawful character of the agreement. The

cardinal rule is that the guarantor must not be made liable beyond

the terms of his engagement. The enforceability depends upon the

term under which the guarantor agrees to bind himself in a

contract of guarantee. This principle is however subject to a few

recognised exception, one of them being, ambiguity. The judicial

trend however has been forthcoming in the sense that how the

Page 5: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

5

courts are not to interfere in enforcing a contract of guarantee

unless there is a specific plea of fraud or special equities raised by

the concerned party.

Thus a contract of guarantee may be for an existing debt or a

future debt, a contract is said to be a specific guarantee when it is

given for a single debt, it is said to be a continuing one when it

extends to a series of transactions generally unless the intention is

clear a guarantee would not be construed as continuing.

This is also another important principle of risk allocation.

Contextually, guarantee is a kind of undertaking made by the

contracting party which could be either with regard to performance

of contractual obligations in terms of particular standards or

delivering a product or service etc.

d. Contract of Bailment

The concept of bailment relates to the delivery of movable property

on a condition that the recipient shall ultimately return them to the

bailor, such transaction can be brought about either through

means of lending, pledge, hire or deposit for safe custody. Since

the transaction involves a transfer of procession hence the

contractual orientation. However, the basic elements of contract

are not the essential ingredient in a case of bailment. The criteria

of returning the goods back to the bailor is the distinguishing

feature between a contract of sale and bailment. A bailment may

well exist without the creation of a contract between the parties

and it may give rise to remedies which in substance cannot be said

to be contractual. The essence of bailment implies a host of duties

that need to be complied with both by the bailor and the bailee.

The concept of bailment also provides for the relevance of

Page 6: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

6

negligence in its varied degrees, which in all certainty need to be

satisfied in a case for damages.

e. Contract of Agency:

Contract of agency results in representative form of contracts. This

special contract enables a person to act on behalf of another person

and accordingly facilitates creation of legal relationship between the

other party and the third party. For instance, a specific contract of

agency between principal and agent, authorizes agent to act for and

on behalf of the principal and thus and enables binding contractual

relationship between principal and third party. In other words,

though factually, the agent enters into a contract, legally the

contract is recognised between principal and the third party.

However, it is necessary to note that, the capacity is always subject

to authority what is recognised by the contract. If the agent exceeds

or acts beyond the purview of the authority, naturally, his acts do

not bind principal.

Agency is a recognised form of commercial practice. It is not only

the choice of the parties which normally influences parties to create

this kind of special contracts. But also the nature of the trade or

business requires these contracts, so that the subject matter will

have a greater reach. By and large in our context, in case of

products like groceries, pharmaceutical drugs, any fast moving

consumer goods (FMCG) etc agencies are preferred by the

manufacturers.

f. Contract of Partnership:

Partnership is construed to be the notional extension of principle of

agency. This is owing to the reason that in a partnership, all the

partners not only represent the firm but also the partners as well.

Page 7: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

7

Partnership is a popular form of business organization. Speaking

for our context, many people prefer this entity mainly on account of

the reason that the process involved for the formation is relatively

non-technical and not cumbersome in nature. And the registration

of the partnership firm is not mandated by the law. May be, with a

view to obtain incentives like tax etc, the parties may decide to

register the same. The negative aspect of this form, as perceived by

many is that the liability on the part of partners is unlimited in

nature. Unlike in England, we do not have limited partnerships. As

a result, in the event of liability, it is not only the share of the

partners that is considered but also the personal properties of

partners as well.

The Indian Partnership Act, 1932 deals with this special contract.

This Act mainly provides guidelines as to construction of

partnership agreement, term of partnership, incoming and outgoing

partners, minor as a partner, registration of the firm and

retirement of partners and dissolution of the firm.

g. Contract of Sale:

Contracts relating to sale and purchase of movable property or

goods are covered by Sale of Goods Act, 1930. Contracts of sale

relating to immovable property are governed by Transfer of Property

Act, 1882. Sale as a matter of transaction is very pervasive in our

day to day life. As general principles of contract indicate, validity of

a contract does not demand that the contract must be reduced in

writing. The same principle is recognised in the case of sale of

goods also. In addition, a contract of sale could be either express or

implied. With a view to protect the consumer’s or buyers’ interests,

this Act has envisaged safeguard measures. They include express

Page 8: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

8

and implied conditions and warranties. As a matter of public policy,

the Act insists that in every contract of sale, some warranties and

conditions are implied in nature. Quite explicitly, the Act provides

that transfer of title is the crucial determinant of validity of a

contract of sale.

Detailed guidelines envisaged for creating a valid contract of sale,

transfer of title, transfer of property, rights of unpaid seller etc

under this Act.

2. Offer or proposal

Offer or proposal is made when a person expresses his/her

willingness, to enter into a contract with an intention to bind

himself/herself and consequently bind the person to whom the

offer is made on the assent of such person. Such an offer could be

in the form of an act, an omission or abstinence which means a

person could be willing to do something or abstain from doing

something to secure the assent of the person to whom such offer is

made against such Act or abstinence.5 The person making such

offer is called the ‘offeror’ or the ‘promisor’ and the person to whom

such offer is made is called the ‘promiseee’ or the ‘offeree’

i. General and Specific Offer

It is not necessary that an offer must be made to an ascertained

person but it does not crystallise into contract until and unless a

particular person comes forward and meets or performs the

conditions set out in the proposal. The principle can be stated as “

An offer need not be made to an ascertained person but no contract

can arise until it has been accepted by an ascertained person.”

5 Sec 2(A) Of The Act

Page 9: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

9

ii. Certainty

It is necessary that such offer should be certain and should be

capable of being accepted and should not be vague or uncertain.

This can be better understood from the below mentioned case

where the ruling of the court was as “In the case of a contract the

terms of an offer must be certain, and, the offer should be such as

in law is capable of being accepted and gives rise to a legal

relationship if the terms of an offer are unsettled or indefinite, its

acceptance cannot create any contractual relationship and the

vagueness of the offer would not carry any contractual force.

Nothing is more firmly settled than that the parties must make

their Own contract, which means that they must agree as to its

terms and that if they do not make any such contract in that way,

the Court cannot make a contract for them. There is also an

equally familiar principle that it is the duty of the Court as far as

possible to uphold a bargain between the parties and to give

efficacy to a commercial transaction and that it should for that

purpose interpret the contract or the offer, as the case may be,

fairly broadly without astuteness for discovery of defects. Whether

an offer or contract, as the case may be, is enforceable or capable

of being accepted in law, is a question the answer to which should

necessarily depend upon the facts and circumstances of each case,

no formula of universal application being possible for the solution

of all such cases. If a person is told that goods of more than one

description are available for sale and he is asked to state what

prices he would be willing to offer for those goods and which of

those goods he would be willing to buy at those prices, and that

person states only his prices but never indicates the goods required

Page 10: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

10

by him, it is, impossible for any one to suggest that there was any

acceptable offer made by him.6”

iii. Communication

The main ingredient of an offer as reflected in the text of the

Section defining offer/proposal is the word “signifies”. This

indicates that offer must be communicated to the person to whom

it is made. This is a very important ingredient as there can be no

assent or consent of an offer, which a party has not heard of.

This has been seen in the case of Lalman v Gauridutt7 where a

servant set out to find the nephew of the master after which the

master issued handbills offering a monetary reward to anyone who

might find out the boy. In the meanwhile the servant had traced

the boy. The plaintiff-servant did not ask for the reward and

continued in the master’s service and was dismissed later. At that

time the plaintiff-servant brought a suit to claim the reward. Here it

was held that the plaintiff had set out to seek the nephew before

the handbills were issued but he claimed that some handbills were

mailed to him and since he had traced the boy he was entitled to

the reward offered by the defendants. The courts held that for

acceptance in a General offer as in this case in order to constitute

the contract there must be acceptance of the offer prior to which

there should be knowledge of the offer. In this case the servant had

already set out to seek the missing nephew and was under an

obligation already before the award was announced and therefore

his performance did not amount to consideration for the

defendants promise.

6 Coffee Board V. Janab Dada Hajj Ibrahim Halari AIR 1966 Mad 118. 7 (1913) 11 All LJ 489

Page 11: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

11

This principle has been extended in an interesting manner in an

Australian case.8 In this case it was held that even if an acceptor

once knew of the offer but in course of time had completely forgot

about it at the time of acceptance his position would be no better

that of a person who has not heard about the offer at all. In this

case the Australian Government offered a reward of 1000 to anyone

giving information about certain murderers and if an accomplice,

not being the murderer were to be giving such information then he

would also be entitled to free pardon. An accomplice excited by the

offer of pardon gave the information without exercising his right of

reward. He was not allowed later to recover the reward.

The communication of a proposal is complete when it comes to the

knowledge of the person to whom it is made. If the offer is not

complete unless and until it is communicated to the person to

whom it is made, then it follows that the offer is completed not at

the place from where it was sent but where it was received. In the

instant case, if, as the plaintiff has alleged, it was the defendant

who made the offer from Ramganj and it was received by him, that

is the plaintiff, at Ratlam, then the offer was made at Ratlam where

it came to the knowledge of the plaintiff. If, on the other hand, it

was the plaintiff who made the offer from Ratlam and it came to the

knowledge of the defendant at Ramganj, then the proposal was

completed at Ramganj and not at Ratlam.9

The contention of the appellant, so far as existence of a contract

arrived at between the parties by way of correspondence is

concerned, is not sustainable and the same is overruled as the

8 R v Clarke (1927) 40 CLR 227 9 Kanhaiyalal v. Dineshchandra AIR 1959 MP 234

Page 12: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

12

Executive Director (commercial) was not authorized by the board

on its behalf in the present case. The respondents submitted that

the company has already entered into a fresh contract with the

board and has been placed on record to show that the barter

system has been dispensed with. Therefore, the appeal is

dismissed10.

Merely because a contract is entered into in exercise of an enabling

power conferred by a statute that by itself cannot render the

contract a statutory contract. If entering into a contract containing

prescribed terms and conditions is a must under the statute then

that contract becomes a statutory contract. If contract incorporates

certain term and conditions in it which are statutory then the said

contract to that extent is statutory. A contract may contain certain

other terms and conditions which may not be of a statutory

character and which have been incorporated therein as a result it

of mutual agreement between the parties11.

A contract would not become statutory simply because it is for

construction of a public utility and it has been awarded by a

statutory body. A statute may expressly or impliedly confer power

on a statutory body to enable it to discharge its functions. Dispute

arising out of the terms of such contracts or alleged breaches have

to be settled by the ordinary principles of law of contract. The fact

that one of the parties to the agreement is a statutory or public

body will not of itself affect the principles to be applied. The

10 M/s Jindal strips ltd. v. M.P.E B., AIR 1998 M.P 122,.Section 2(a), at page 122,

130,131,133,136 &137. 11 India Thermal Power Ltd. V. State Of M.P, Air 2000 Sc 1005. Section 10, At Page

1005 & 1009.

Page 13: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

13

disputes about the meaning of a covenant in a contract or its

enforceability have to be determined according to the usual

principles of the Contract Act. Every act of a statutory body need

not necessarily involve and exercise of statutory power12.

It is in the interest of the public that the question whether a

binding contract has been made between the State and a private

individual should not be left open to dispute and litigation; and

that is why conditions have been imposed and provisions have been

made that the contract must be in writing and must on its face

show that it is executed for and on behalf of the head of the State

and in the manner prescribed. The whole aim and object of the

legislature in conferring powers upon the head of the State would

be defeated if in the case of a contract which is in form ambiguous,

disputes are permitted to be raised whether the contract was

intended to be made for and on behalf of the State or on behalf of

the person making the contract. This consideration by itself would

be sufficient to imply a prohibition against a contract being

effectively made otherwise than in the manner prescribed, it is true

that in some cases, hardship may result to a person not conversant

with the law who enters into a contract in a form other than the

one prescribed by law. It also happens that the Government

contracts are sometimes made in disregard of the forms prescribed;

but that would not in our view be a ground for holding that

departure from a provision which is mandatory and at the same

time salutary may be permitted. A person who seeks to contract

with the Government must be deemed to be fully aware of statutory

requirements as to the form in which the contract is to be made.

12 Kerala State Electricity Board V. Kurien E. Kalafuil, Air 2000 Supreme Court 2573.

Section 10, At Page 2573, 2575 & 2576.

Page 14: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

14

Until contract is entered into as per the condition and in

accordance with law, the proposer does not acquire any right and

subsequent refusal to enter into contract or cancellation of highest

hid cannot be faulted when edged with public element unless it is

discriminatory or arbitrary. It must therefore be held that as that

as the contract was not in the form required, it could not be

enforced at the instance of the respondent13.

iv. Revocation

Section 6 states: “Revocation how made- a proposal is revoked-

a. By communication of notice of revocation by the proposer to

the other party,

b. By lapse of time prescribed in such proposal for its

acceptance, in case no time is prescribed by the lapse of reasonable

time without communication of acceptance,

c. By the failure of the acceptor to fulfil a condition precedent,

d. By death or insanity of the proposer if this fact comes to the

knowledge of the acceptor before acceptance.

Notice of revocation or the communication of revocation should

reach the offeree before acceptance is out of his power. An

illustration to section 5 explains the principle-“A proposes b a letter

sent by post to sell his apartment to B. B accepts the proposal by a

letter sent by post. A may revoke his proposal at any time before or

at the moment when B posts his letter of acceptance, but not

13 Chairman-Cum-M.D., Tea Plantation Corpn. Ltd., V. Srinivasa Timbers., Air 1999

Mad 111. Section 2(H) At Page 111 & 114.

Page 15: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

15

afterwards.” Section 5 14states that a proposal may be revoked at

any time before the communication of its acceptance is complete as

against the proposer and the communication of acceptance is

complete when it is put in a course of transmission to the proposer

such that it is out of power of the acceptor. Therefore it is essential

in order for the revocation of offer to be effective it must reach the

offeree before he mails his acceptance consequently putting it out

of his power15.

Where consideration is paid to keep an offer open for a certain

period of time it becomes irrevocable for that specified period of

time, the proposer cannot withdraw or cancel it during that period

and the offeree could accept it notwithstanding the revocation. The

communication of revocation if at all necessary has to come from

the offeror himself or any other person who has been authorised to

do so, it would be satisfactory if the offerer knew reasonably well

that the offer has indeed been withdrawn16. A general offer

published in a newspaper or other media can be withdrawn in the

same manner by a publication in the same form of media and the

revocation will effective even if someone happens to perform the

terms mentioned in the offer ignorant of the withdrawal. In case a

proposal before acceptance is renewed not in its entirety but only in

parts and purports to supersede the earlier communication, such

proposal will no longer be available for acceptance, only the part

14 Section 5, Revocation Of Proposals And Acceptance- A Proposal May Be Revoked

At Any Time Before The Communication Of Its Acceptance Is Complete As Against The Proposer, But Not Afterwards. An Acceptance May Be Revoked At Any Time Before The Communication Of The Acceptance Is Complete As Against The Acceptor, But Not Afterwards.

15 Henthron V Fraser (1892) 2 Ch 27, A Revocation Is Effective Only When It Is Brought To The Mind Of The Person To Whom The Offer Is Made.

16 Dickinson V Dodds (1876) 2 Ch D 463

Page 16: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

16

which has been renewed can be accepted and allotment of the rest

of the work if any will give him a right good in law17.

Issuance of a tender notice is only an invitation to the eligible

persons to apply. Someone making an offer pursuant to tender

notice is only an invitation to the eligible persons to apply.

Someone making an offer pursuant to tender notice, even though

the rates quoted by it may be the lowest, does not get any vested

right. Concededly, neither the 12 items for which petitioner had

filled in tender not anyone else, who might have filled in tender

with regard to other items, was ever allotted work. A period of more

than a year elapsed and when fresh tenders were floated, petitioner

would have been within its right to apply and contest for the grant

contract along with others. May be, that the time given for

submitting tenders was only ten days, out of which four were

holidays, but it had to be conceded during the course of arguments

that insofar as petitioner is concerned, it did not come to know

about the fact that tenders have been invited. The petitioner could,

thus apply for the works mentioned in tender notice, Annexure P-7

and contest with other eligible applicants. The plea put forward by

the petitioner that time allowed to fill in tenders was too short, can

well be taken by someone else and not by the petitioner, who, as

mentioned above, did come to know about the tender notice,

Annexure P-7. The mere fact that the petitioner had given the

lowest tender for 12 items when tender notice was earlier issued,

pursuant to which nobody was ever given the contract, cannot vest

17 Banque Paribas V Citibank N.A., (1989) 1 Malayasian Law Journal 329 CA

(Singapore)

Page 17: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

17

the petitioner with any right to get the contract for the said items

when fresh tender notice was issued after more than a year18.

A tenderer is entitled to revise his offer before acceptance of the

offer put with old rates. When the Contract Act itself allows the

offerer to revise by revoking his earlier offer, before that offer is

accepted by the opposite party, a condition to the contrary in the

tender cannot be made operative against the tenderer. In instant

case the tenderer had revised his earlier offer before its acceptance

by the opposite party. A telex message was thereafter sent by the

opposite party informing the tenderer that his offer at old rates is

accepted. However, the form of acceptance of tender was not sent to

the tenderer. The parties have not entered into a formal agreement

in writing. Both the parties rely on exchange of correspondence in

revised his earlier offer and that offer has not been accepted by the

opposite party. On the contrary, the opposite party, by his telex

message accepted the offer of old rates, and therefore, it cannot be

said that in this case, the binding contract has been concluded.

When there was no concluded contract, there was no question of

giving security for earnest money by way of Bank Guarantee by the

tenderer and thus the opposite party could not exercise its right to

invoke Bank guarantee. The Bank guarantee was not produced

before the Court inspite of repeated demands and therefore adverse

inference that it is conditional one could be drawn against the

opposite party from encashing the Bank guarantee, since there is

no concluded contract between the parties19.

18 R.R. Co-Op. Labour And Construction (Loc) Ltd., V. State Of Punjab, Air 1999 P.&

H. 244. Section 38, At Page 244 & 245. 19 Oil And Natural Gas Commission V. Balaram Cements Ltd., Air 2001 Guj. 287. Section 5, 10, 125, At Page 288, 295, 296, 297 &298.

Page 18: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

18

Expiry of time if any fixed or the lapse of time fixed for acceptance

will lead to an offer lapsing, if an offer states that it will remain

open only for a certain period of time or that the offer has to be

accepted within a certain date, it has to be accepted within that

specified time period. In case no time of acceptance is specified

then a reasonable period of time will have to discerned on the basis

of the facts, no specific time period can be stated which will vary

subjectively. An effective date of acceptance is when the party put

his acceptance into transmission, even if the date on which it

reaches the proposer is after the specifies date if any as long as

acceptance has been put into transmission before that date. An

offer can also lapse by failure to accept a condition precedent or if it

is not fulfilled or due death or insanity of the proposer if the fact

comes to the knowledge of the offeree before he accepts the offer or

communicates his acceptance.

v. Counter offer

There should be a match of offer and acceptance to create a

binding agreement. The offer must be accepted inclusive of all its

terms. However in reply to an offer the person to whom it is

addressed induces a new term or terms, or varies the existing

terms, then it will not amount to acceptance. It will instead be

treated as a counter-offer, which can be accepted or rejected by the

original offeror. This can be ideally illustrated by citing the case of

Tinn v Hoffman & Co20 where the offeree responded to an offer to

sell 1200 tons of steel with a request to purchase 800 tons, and he

20 (1873) 29 Lt 271

Page 19: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

19

was told that there was no acceptance and in fact there was a

counter offer which the sellers were free to accept or reject.

A counter offer not only fails as acceptance but also amounts to

rejection of original offer which cannot be accepted subsequently.

On the other hand an inquiry into the terms of a proposal at the

stage of negotiations cannot be construed as a counter offer or

rejection of terms of the offeror.

vi. Standing offer

When in a given situation, the offer is for a continuous period of

time, it is construed as a standing offer. In such circumstances,

periodical acceptance will be made by the concerned party. This

principle can be illustrated in the light of a situation where, supply

of groceries is made on a long term basis i.e., monthly. The offer

can be stipulated for one year. Each incidence of supply can be

construed as acceptance resulting in a valid contract.

vii. Cross-offer

When offer is exchanged with another offer, it is called Cross-offer.

viii. Express and Implied offer

A contract is said to be express when it is entered into by spoken or

written words.21

An implied contract would ideally mean a contract implied in law.

Though when there is a contract which is inferred form the conduct

of the parties than the contract has been used synonymously with

implied contract as for example the fall of a hammer at an auction

21 Section 9 of the Indian Contract Act

Page 20: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

20

or getting into a public transport to reach a particular destination it

is generally contracts in the nature of quasi and special contracts

which are actually implied contracts.

ix. Intention to create legal relations

There is no explicit provision under the Indian Contract Act which

deals with the ‘ intention of the parties’ It arises out of the

prevalent acceptance of this principle in common law and various

judicial interpretations.

‘Intention to Contract’ implies the need of the parties to bind each

other in the sense of enforcing mutual obligations into a legal

consequence. This naturally as it comes to anyone’s mind, is not

something that can be easily ascertained but will involve a string of

parameters in the form of the terms of the agreement and the

circumstances in which such terms where made, making such test

of confirmation objective in nature.

The test thus would be “what would be reasonably construed by a

person in the position of the parties, in the given set of

circumstances”.

In case of matters purporting to regulate relations social in nature

it follows as a natural corollary that the parties did not intend to

legal consequences to follow and in the case of business

relationships the presumption being the exact opposite that the

parties intended legal consequences to accrue.

This does not however mean that family or social matters cannot

give rise to a legally binding contract. It only means that the law

requires the parties to intend legal consequences.

Page 21: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

21

3. Offer and Invitation to offer

It is important to take notice that an offer and an invitation to treat

are two different things. An invitation is generally made at a

preliminary stage in the making of an agreement. If a man

advertises that he has a car, stock of books or a house to sell, this

is not an offer to be bound by any contract by in fact is only a

invitation to receive offers and negotiate. The definition of proposal

makes it very clear that the emphasis is on the expression of

willingness to do or to abstain with a view of gaining the assent of

the other party. The expression of willingness to contract according

to the terms of the offer must be mad with such finality that the

only thing remaining is the assent of the other party. On the other

hand where a person makes proposal on which he is willing to

negotiate without expressing his final willingness he only invites

the other party to make an offer on those terms, which he has

proposed.

The test seems to be whether the information given in the

purported offer (?) is capable of being accepted or not.

The case of McPherson v Appanna is a leading authority in this

area. the facts of the case are that the plaintiff in his letter of

August 14 addressed to Y stated that he confirmed his oral offer of

ten thousand for the bungalow, and he did not say in so many

words that he accepted the 'counter-offer' of defendant 1. Similarly,

in the cable which Y sent to defendant 1 on August 28, he did not

state that the latter's offer had been accepted, but stated that he

had been offered Rs. 10,000 for the bungalow and concluded with

the words "May I sell”? Neither party thus treated defendant l's

cable as containing a counter-offer. On the other hand, they

Page 22: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

22

proceeded on the footing that the plaintiff had made an offer of Rs.

10,000, which was subject to acceptance by defendant 1.

Apparently, defendant 1 was in communication not only with Y but

also W, and both of them rightly thought that no transaction could

be concluded without obtaining defendant l's express assent to it.22

Similarly in another case, Harvey v Facey23, Harvey was interested

in a piece of property known as Bumper Hall pen and Facey its

owner had been negotiating for its sale. H telegraphed F “ Will you

sell us Bumper Hall Pen? Telegraph Lowest Cash Price” To which F

replied by a telegram “Lowest price for Bumper Hall Pen 900

pounds”. In reply F said, “We agree to buy Bumper Hall Pen for a

sum of nine hundred pounds as asked by you”. Harvey sued for

specific performance and for an injunction to restrain the

conveyance of the property to another party. It was held by the

court in this case that agreement did not result in a concluded

contract as mere statement of the lowest price did not amount to

offer nor was there any implied promise to contractor to sell at that

price.

i. Display of Goods

Obtaining judicial interpretation indicates that the display is an

invitation to offer. Apparently, on the premise that such display is

only meant to attract the attention of the onlooker and in process,

invite him/her to make an offer.

22 MacPherson (Col.) v. MN. Appanna AIR 1951 SC 184. 23 (1893) A.C. 552 (P.C)

Page 23: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

23

ii. Catalogues

A catalogue of prices in a shop is not an offer but is only an

invitation to prospective customers to make an offer to buy at those

prices which may be accepted or refused, similarly the display of

goods in a shop with price tags is not an offer even if the shop is a

self-service one. The shopkeeper is not making an offer to sell every

article in the shop to any person who can insist that on buying that

particular article by saying “I accept your offer...” There is no

contract by the shopkeeper to sell until the customer has taken the

article to him and offers to buy that particular article and the

shopkeeper accepts the offer of the customer, at the same time the

shopkeeper is not prevented from not accepting that offer for any

valid reason. Thus it is an offer by the customer to buy and the sale

is not effected until the buyer’s offer is accepted the same price.

This has been confirmed in a leading judicial interpretation. 24

iii. Tenders

Wherein goods are advertised for sale by tender, or an invitation for

tenders is made for execution of some works such advertisement

would amount to an invitation to offer and not offer. It is merely to

facilitate the process of calling for offers to ascertain which of these

offers would be in alignment with the requirements of the person

floating the tender.

The actual tender will be the offer and on acceptance it will be a

valid and binding contract.

However reward of tender is not necessarily to the highest bidder

by default but will depend on the parameters set for such reward

unless so specified in the tender document.

24 Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd

[1952] 2 All ER 482

Page 24: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

24

Such tender in the case of call for highest bid, will convert into a

contract when the highest bid is communicated.

In the case of tenders, which involve continuous supply of goods,

then the contract will be in the nature of a continuous offer and

acceptance. Such contract will be binding in each case of supply

once the order is paced and accepted and will not be a blanket

contract for all the supplies.

A tender is an offer. It is something that invites and is

communicated to notify acceptance. Broadly stated, the following

are the requisites of a valid tender.

1. It must be unconditional.

2. Must be made at the proper place.

3. Must conform to the terms of obligation.

4. Must be made at the proper time.

5. Must be made in the proper form.

6. The person by whom the tender is made must be able and

willing to perform his obligations.

7. There must be reasonable opportunity for inspection.

8. Tender must be made to the proper person.

9. It must be of full amount25.

iv. Auction Sales

In the case of an auction the question is whether the auctioneers

call for bid would amount to offer or invitation to offer.

Various judicial interpretations have affirmed the fact that the call

for a bid is an invitation to treat or a request of offer.

25 Tata Cellular V. Union Of India, Air 1996 Sc 11. Section 2(D), At Page 11 & 25.

Page 25: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

25

The bids made are offers, which are capable of being accepted or

rejected.

The contract is completed at the fall of the hammer and till such

time the offer can be withdrawn.

Similarly where a reserve price has been stipulated in the auction if

the auctioneer mistakenly accepts at a price lower than the reserve

price then it can be withdrawn even after the fall of the hammer.

Also an advertisement that an auction is to be held does not

constitute and offer and cannot be held capable of acceptance.

4. Acceptance

Acceptance is the assent given to a proposal, which converts it into

a promise. When the person to whom the proposal is made signifies

his assent, the proposal is said to be accepted. It clearly requires

an external manifestation or overt act for the assent to be signified,

this expression may be through an act or omission by which the

party accepting intends to communicate. One of the best

illustrations for this is the fall of the hammer in an auction sale,

which signifies the assent of the auctioneer towards the price

offered or bid. A mere mental determination or a state of mind to

accept a particular offer without any external indicators will be

insufficient, an agreement does not result from a state of mind.

Intention to accept an offer will not give rise to a contract, some

external manifestations are necessary like speech, action or writing

to signify that intent or mental resolve.

“B was a coal supplier, supplying coal to a railway company

without any formal agreement. On a suggestion that a formal

agreement be entered into, the agents of both parties met and a

draft agreement was readied which was sent to B for approval. B

obliged and filled up the blanks in the draft and also the name of

Page 26: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

26

an arbitrator and then returned it to the railway company. The

agent for the company put the draft in his drawer where it

remained without final approval. B kept up the supply of coal and

he also received payments according to the new terms. A dispute

having arisen he refused to be bound by the agreement.”

Even though the conduct of the company’s agent is evidence of the

fact that he had mentally accepted the new agreement, he had not

expressed this intention and mere retention was not satisfactory.

The subsequent conduct of the parties however very clearly show

that the supply and payment was on the basis of the proposed

agreement which was proof enough of their manifested intention.

As per Section 2(b) of the Indian Contract Act, 1872 a proposal

becomes a promise only when the person to whom the proposal

becomes a promise only when the person to whom the proposal is

made signifies his assent thereto whom the proposal is made

signifies his assent thereto and when the proposal is accepted. As

per Section 2(e). every promise and every set of promises forming

the consideration of each other is an agreement.

From the tow documents we are not able to find anything signifying

the assent of the plaintiff. Therefore there is no contract between

the plaintiff and the defendants. At the most they may be termed as

undertakings by the defendants 1 and 2. as per Section 10 of the

Indian Contract Act, 1872, all agreements are contracts, if they are

made by free consent of the parties competent to the contract. As

we have seen above, there is no agreement at all in the present case

by the plaintiff26.

26 S.M. Gopal Chetty V. Raman, Air 1998 Mad. 169. Section 2(B), 2(E), 10, At Page 170

& 171.

Page 27: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

27

An offer may be accepted either by express words or positive

conduct. Where an assessee accepted the letter of the chartered

accountant containing the terms proposed by him relating to

payment of the professional fee, the contract between the parties is

said to have been concluded.27

All the actions of the State and its instrumentality are bound to be

fair and reasonable. The actions are liable to be tested on the touch

stone of Article 14 of the Constitution of India. the State and its

instrumentality cannot be allowed to function in an arbitrary

manner even in the matter of entering into contract. The decision of

the State either in entering into the contract or refusing to enter

into a contract must be fair and reasonable. It cannot be allowed to

pick and choose the persons and entrust the contract according to

its whims and fancies. Like all its actions, the action even in the

contractual field is bound to be fair. It is settled law that the rights

and obligations arising out of a contract after entering into the

same is regulated by terms and conditions of the contract itself28.

i. Acceptance must be absolute and unqualified

The acceptance must be unqualified and absolute so that a

proposal can be converted into a promise29. An offer is vitiated

unless the person making the offer accepts any departure from the

terms of the offer. An acceptance with a variation is no acceptance

at all it is a counter proposal which must be accepted by the

person making the offer for there to be a contract.

27 S. Butail & Co V. H. P Forest Corporation Air 2002 Hp 1 At P. 5 28 Y.Konda Reddy V. State Of A.P., Air 1997 A.P. 121. Section 2(B), At Page 122. 29 Section 7 Provides “In Order To Convert A Proposal Into A Promise, The

Acceptance Must Be Absolute And Unqualified”

Page 28: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

28

“A offered to sell certain articles to B at a certain specified rate. B in

turn offered to buy those articles at a little less rate, which A did

not accept, but he also did not withdraw his original offer. Later B

accepted A’s original rate, this also was not accepted by A and B

sued him for breach of contract. It was held that B by his counter

offer to but at a reduced rate impliedly rejected A’s original offer

and there was no contract.30”

One of the landmark cases on this issue is Jawaharlal Burman v

Union of India31.

In this case the Respondent who was the Union of India filed a

petition against the appellant M/s Burman & CO. It was their

allegation that there was concluded contract between the parties in

respect of a tender issued by the respondents for which the

appellants had made a tender application. This application was

accepted which concluded a contract between the parties. As

disputes arose between the parties the same was referred to

arbitration, which went on for a considerable period of time. The

appellants then claimed that there was no concluded contract

between the parties as the tender had treated the security deposit

as a condition precedent. Negating this argument it was held that

the contract was for the immediate supply of the goods and in the

acceptance the appellant had represented that the earliest date by

which the delivery could be affected would be within 21 days from

the date of the receipt of the order and it also said that the full

quantity of the goods was required. Therefore reading this as a

whole it was concluded that it would not be possible to accept the

30 Nihal Chand V Amar Nath, Air 1926 Lah 625; Also See Hyde V Wrench (1840) 3

Beav 334 31 Air 1962 Sc 378

Page 29: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

29

appellants arguments that the deposit was meant to be a condition

precedent.

Where the acceptance of the proposal is not absolute and

unqualified the person making the offer will become bound by it if

his subsequent conduct is such as to show that he has accepted

the counter proposal, and when such counter proposal is accepted

the contract arises not in terms of the original proposal but in the

terms of the counter proposal.

It is borne out from the record that the plaintiff had made a

proposal for getting 215 buses insured against third party risk for a

period of one year and to that effect the plaintiff had made the

payment to the defendant, but the amount was accepted with the

condition ‘ premium is accepted subject to approval by DIC or GIC’.

It prima facie shows that the said proposal was not accepted

without a condition by the defendant and thereafter the said

proposal was sent to the higher authorities by the defendant who

had declined to accept the same. Thereafter the defendant vide his

letter and returned the amount to the plaintiff and was duly

accepted by the plaintiff. Thus, it was shown prima facie that there

was no concluded contract between the parties32.

The conditions which are merely conditions subsequent do not

constitute a conditional acceptance / counter offer. In the instant

case the petitioner was asked to acknowledge the receipt of the fax

and confirm acceptance and thus it was treated as an offer without

reference to its collaborator and whose offer having been accepted

by the fax of acceptance a concluded contract came into being. It

was stated that the fax of acceptance was addressed to the writ

petitioner only and at the bottom of the same the writ petitioner

32 The New India Assurance Co. Ltd. V. M/S. Haryana Roadways, Air 1997 P. & H.

257.Section 7, At Page 257 & 259.

Page 30: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

30

has been described as ‘vendor’ and endorsement at the bottom

thereof the expression, ‘vendor’s acceptance’ bas been used. The

subsequent conduct of the respondents also show that they had

proceeded on the basis that a concluded contract has come into

being. Reference to general conditions of contract by the petitioner

means that same would be acceptable by both the parties working

out the contract. It is clear beyond any shadow if doubt that the

parties had arrived at a concluded contract. If the parties have

arrived at a concluded contract the question of revocation thereof

and /or communication of such revocation to the petitioner had its

Calcutta Address would undoubtedly constitute cause of action

within the meaning of clause (2) of Art. 226 of the Constitution of

India33.

The main submission of the learned cou'1sel is at 25% of the plot

cost paid by the petitioners was not only received but also realised

and utilised and so it amounts to acceptance under the provisions

of the Contract Act. I am not able to accept the said submission.

Under S. 7 of the Indian Contract Act, the acceptance must be

absolute and unqualified. In the present case, it cannot be said

that the confirmation is a formal one. Mere reading of clauses 8

and 9 of the conditions, we can safely come to the conclusion that

only if a successful bidder pays 25% of the plot cost, his bid will be

considered for confirmation, and the Chairman is having right to

accept or reject any offer. So, the acceptance of 25% of the plot

cost, though it is part of sale consideration, and though the said

33 D.Wren International Ltd., V. Engineers India Ltd., Air 1996 Cal. 424. Section 4, 7, At Page 424.

Page 31: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

31

amount was realised, it cannot be said that it is an absolute

acceptance34.

Where there was correspondence between the parties discussing

conditions of the contract and a proposal was made by plaintiff

indicating certain changes in standard memo of contract to which

there was partial ac- acceptance and partial non-acceptance to the

proposed changes and plaintiff accepted and agreed to those terms

and conditions of the contract injunction against invocation of

bank guarantee under contract cannot be granted on ground that

there was no concluded contract because the contract was

concluded and the parties acted upon it. It was more so, when

bank guarantee was unconditional and irrevocable and there was a

covenant in the bank guarantee that change in terms and

conditions of the contract will not affect the bank guarantee. Thus,

even if some changes were made as alleged. it would not affect the

bank guarantee once parties arrived at consensus ad idem and

acted upon it. Moreover. even the bank guarantee contained a

covenant to the effect that the bank accepted to pay under the

bank guarantee the amount should the buyer (plaintiff) fail for

whatever reasons to carry out wholly or in part any of the

obligations under the said offer and subsequent contract to be

concluded and, therefore, in light of that clause, even a concluded

contract cannot be insisted upon for escaping from the liability

under the bank guarantee35.

34 Veera Property Development Pvt. Ltd. V. T.N. Slum Clearance Board, Air 1999

Mad 304. Section 2(B), 38, At Page 304 & 305. 35 Intercontinental (India) V. Indian S. & G.I.E.I. Corpn. New Delhi, Air 2001 Guj. 227.

Section 7, At Page 227, 233 & 234.

Page 32: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

32

As per Sec. 7 of the Contract Act, the acceptance of the offer must

be absolute. It must be absolute and unqualified and it should be

expressed in some usual and reasonable manner unless the tender

prescribed by any other manner in which it, should be accepted.

The cardinal principle, in the light of the S. 7 of the Contract Act is

that the offer and acceptance of an offerer must be absolute

without giving any room of doubt. It is well settled that the offer

and acceptance must be based or founded on three components;

Certainty, Commitment and Communication. A contract is built

upon three components as three pillars, certainty, commitment and

communication. If anyone of three components is lacking either in

the offer or in the acceptance there cannot be a valid contract. One

of the important components that is lacking in instant case is

certainty. The offer and acceptance must be devoid of any doubt

either in the mind of the offerer or accepter as the case may be. It

must be clear and unambigious.

In instant case the tenderer had submitted offer valid up to certain

date. The authority inviting tenders insisted that the offer be

extended to certain further date but the tenderer did not comply.

There was no clause in the tender empowering the authority to

insist on the offerer to extend the period as and when they

demanded. In the absence of such clause when the period was not

ex- tended by the offerer it could not be said that the offer was valid

beyond the original date. The subsequent letter sent by the

authority to the tenderer stated that though the offer made by the

plaintiff-tenderer is found to be lower and the authority has

considered the proposal for award of contract award of contract is

likely to be issued on or before the date given or specified on that

letter. The element of "certainty" contemplated by S. 7 of the

Page 33: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

33

Contract Act could not be inferred from the words "the award of

contract is likely to be issued by certain date." The letter does not

contain any commitment either. It could not be said that the

authority used the word in absolute term that the offer of the

tenderer has been accepted. Therefore, theletteroftl1e authority

cannot be treated as acceptance of the offer. The consequential

corollary there- fore is that the contract never came into existence.

The Bank Guarantee given by the tenderer was operative only up to

the period of acceptance of the offer. During the validity period, if

the tender has withdrawn from the offer, in order to safeguard the

interest of the authority, the Bank Guarantee was intended to be

executed. Therefore, in sum and substance there is no cause of

action arose for the authority to invoke the Bank Guarantee

because by the last date of validity of offer the period of offer ended

and there was no valid acceptance of that offer within that date and

therefore, the Bank Guarantee ceased to operate.

When the Bank Guarantee is absolute, no Court can issue

injunction unless a fraud is being established. To examine as to

whether the Bank Guarantee is absolute or not requires that the

relevant clauses in the Bank Guarantee itself be considered. In

view of the working of the Preamble Clause in the Bank Guarantee

the absolute clause contained in the Bank Guarantee has to be

read in con- junction with the preamble clause which stipulates the

period during which the Bank Guarantee should operate. It

stipulates the intent and purpose of which the Bank Guarantee has

been executed. When so read it is evident that the present Bank

Guarantee can operate only during the period and for the purpose

for which the Bank Guarantee postulates in its preamble. That

preamble has to be read along with the absolute clause. If the said

absolute clause is read in conjunction with the preamble it goes

Page 34: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

34

without saying that the Bank Guarantee cannot be called as an

absolute Bank Guarantee. Thus injunction against encashment of

Bank Guarantee was granted36.

ii. Communication of Acceptance

A common example of conduct acting as means of acceptance can

be found in general offers which are species of unilateral contracts,

where some act is demanded in return for the promise to pay, such

proposals demand acceptance by performance. Where the offeror

has indicated a particular mode of acceptance and the offeree has

accepted the offer by doing the act he did not have to notify the

offeror of his intention to accept in advance. Mere mental assent to

an offer will not conclude a contract, however the offeror may

indicate the mode of communicating acceptance, which may be

express or implied. The fact remains that whether expressly or

impliedly acceptance has to be signified, as an ordinary rule of law

an acceptance of a offer ought to be notifies to the person who

makes the offer so that there can be a meeting of minds, unless

this is done there will be no consensus which is necessary to make

a contract. Acceptance must be communicated to the person

making the offer; an acceptance to any other person is as

ineffectual as if no communication has been made. For e.g. A

offered by means of a letter to purchase his nephew’s horse. The

text of the letter was as follows “If I hear no more about the horse, I

consider the horse mine at 34 pounds”, no reply was sent to this

letter but the nephew communicated to B his auctioneer not to sell

the horse as it was already sold to his uncle. By mistake the

36 Kilburn Engineering Ltd. V. Oil And Natural Gas Corporation Ltd., Air 2000

Bombay 405. Section 7, At Page 405, 407 & 408.

Page 35: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

35

auctioneer sold the horse on which A sued the auctioneer B , but

the action failed.”

The illustration is an authority for two propositions, that

acceptance should be communicated to the offeror himself or to

any person he has authorized to receive and that a communication

to a stranger is no good, in this illustration the auctioneer even

though the nephew intended the uncle to have the horse. It is also

not open to an offeror to stipulate against an offeree who is

unwilling in a manner, which will make his silence equivalent to

acceptance. The offeree cannot be forced to take the positive route

by imposing a penalty on silence. It flows as a natural corollary

that acceptance must be given by a person who has the authority

to accept, information or communication of acceptance given by

unauthorised person is not valid.

So it was suggested in the second paragraph of the letter that the

matter is required to be ‘trashed out’ before further progress in the

construction may be made. This clearly suggests that the terms

between the parties have not reached a final stage. So there is clear

indication that terms between the parties require further

discussion and the matter should be ‘trashed out’. The

construction required new modification and unless the matter is

further discussed and thrashed out the construction may have to

be ‘pulled down in case of their ‘eventual requirement’. It is,

therefore, clear that the entire bargain rested at a stage of

negotiation only and nothing was finalized.

This letter can be looked at from another point of view also. By this

letter, it is clear that the plaintiff company was trying to introduce

a new terms which also unsettled the tentative bargain if any

arrived at between the parties. It is nobody’s case that the

appellant agreed to the proposal of the plaintiff company contained

Page 36: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

36

in the letter dated 25th September, 1958. Since there is no

agreement on this newly introduced term, it cannot be said that

there is concluded contract between the partied.

It is an admitted legal position that in order to find out whether

there is a concluded contract between the parties. It is permissible

to look into the facts and circumstances in its entirety. So looking

at the facts and circumstances in its totality, the conclusion is

inescapable that there is no concluded contract between the

parties37.

Under S.20, CPC a suit can be instituted where any of the

defendants resides or carries on business or where the cause of

action arises wholly or in part. Therefore, law provides an option to

the plaintiff to choose its forum where more than one Court has

jurisdiction to try the suit. It is open to the parties to choose one of

the forums for filing the suit by agreement and exclude the other

forums, but it is not competent to the parties to invest jurisdiction

on a Court when it has no jurisdiction as consent cannot confer

jurisdiction. In the instant case the parties have by consent agreed

to approach the Court at ‘B’. The note (subject to ‘B’ jurisdiction

only) printed in the lorry receipt is not signed by the plaintiff. There

is no evidence that this condition was acceded to the said clause.

Mere presence of a printed note at the bottom of the lorry receipt

enforced in a Court of law, in the absence of a proof that the same

was brought to the notice of the plaintiff and that it has accepted it

as a term of the contract38.

37 National Properties Ltd., V. Bata India Limited, Air 2001 Cal. 177. Section 9, At

Page 177 & 198. 38 M/S Prakash Road Lines (P) Ltd. V. H.M.T. Bearing Ltd., Air 1999 A.P.106. Section

10, 20, At Page 107 & 108.

Page 37: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

37

While deciding the question whether any agreement can be spelt

out from the correspondence between the parties the cardinal

principle to remember is that it is the duty of the Court to construe

correspondence with a view to arrive at a conclusion whether there

was any meeting of mind between the parties, which could create a

binding contract between them but the Court is not empowered to

create a contract for the parties by going outside the clear language

used in the correspondence, except insofar as there are some

appropriate implications of law to be drawn. Unless from the

correspondence it can unequivocally and clearly emerge that the

parties were ad idem to the terms, it cannot be said that an

agreement had come into existence between them through

correspondence. The Court, is required to review what .the parties

wrote and how they acted and from that material to infer whether

the intention as expressed in correspondence was to bring into

existence a mutually binding contract. The intention of the parties

is to be gathered only from the expressions used in the

correspondence and the meaning it conveys and in case it shows

that there had been meeting of mind between the parties and they

had actually reached an agreement, upon all material terms, then

and then alone can it be said that a binding contract was capable

of being spelt out from the correspondence.

In the instant case the entire correspondence on the record, shows

that no concluded bargain had been reached between the parties as

the terms of the standby letter of credit and performance guarantee

were not accepted by the respective parties, In the absence of

acceptance of the standby letter of credit and performance

guarantee by the parties, no enforceable agreement could be said to

have come into existence, The correspondence exchanged between

Page 38: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

38

the parties shows that there is nothing expressly agreed between

them and no concluded enforceable and binding agreement came

into existence between them, Apart from the correspondence the

fax messages exchanged between the parties, shows that the

parties were only negotiating and had not arrived at any agreement,

There in vast difference between negotiating a bargain and entering

into a binding contract. After negotiation of bargain in the present

case, the stage never reached when the negotiations were

completed giving rise to a binding contract. Thus the CI. 53 of the

Charter Party relating to Arbitration had no existence in the eye of

law, because no concluded and binding contract ever came into

existence between the parties39.

A reading of the various clauses of the tender would undoubtedly

show that a letter of communication of acceptance itself is not

enough unless the same is followed by an agreement and if no

agreement is entered within the stipulated period, shall result in

forfeiture of Earnest Money Deposit and the letter of acceptance

issued to the tender shall be deemed to have been cancelled.

Entering into an agreement, is, thus, not mere formality; but, one

of the necessary conditions for concluding the contract40.

Under the law, an offer may be accepted either by express words or

positive conduct. The defendant by asking the plaintiff to proceed

with the case without any reservation even after the receipt of the

letter containing the terms of professional fees, would amount to

39 M/S. RICKMERS VERWALTUNG GIMB H V. INDIAN OIL CORPORATION

LTD., AIR 1999 SUPREME COURT 504. Section 7, At Page 504 & 508. 40 M/S. LOTUS CONSTRUCTIONS, V. THE GOVERNMENT OF ANDHRA

PRADESH, AIR 1997 A.P. 200. Section 7, At Page 200.

Page 39: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

39

acceptance of the offer by conduct. Therefore, there gas been a

concluded contract between the parties. As a result, the issue is

decided in favour of the plaintiff and is entitled to the professional

fees as claimed41.

iii. Revocation

Acceptance of an offer should be made and communicated before it

lapses42,

An acceptance is also generally revocable, the acceptor can revoke

his acceptance to any offer before his earlier offer reaches the

proposer by using any speedier methods of revocation, thus the

communication of revocation will necessarily have to reach before

the acceptance itself in order to be effective43.

In the case of Hindustan Aluminium Corporation Ltd. v

Uttarpradesh State Electricity Board the rule of revocation was

thus explained by the courts ”Sub-section (2) of section 6 of the

Contract Act is suggestive of the result that in case there has been

a refusal on the part of the offeree the offer may be taken to have

come to an end. The offer in case it is not accepted within a

reasonable time is treated as having been refused. Thus sub-

section (2) of section 6 is really a provision which equates the non-

acceptance within a particular time with refusal and if the real

principle is that the revocation of the proposal under section 6(2) is

really the result of implied refusal by the offeree. There is no reason

41 S. BUTAIL AND COMPANY V. H.P. STATE FOREST Corpn. AIR 2002 Feb. H.P. 1.

SECTION 7 At Page 1 & 5. 42 An Offer Lapses In The Circumstances Provided For In Section 6 Of The Contract

Act. 43 Sec 5 Indian Contract Act, Ibid.

Page 40: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

40

to treat the proposal as continuing in a case where there is an

express refusal.44”

iv. Provisional Acceptance

An acceptance may be provisional subject to final approval and

such a acceptance will not bind either party until the final approval

is given and the offeror can cancel his offer45. When a provisional

acceptance is confirmed subsequently this fact should be notified

to the offeror only then does he become finally bound, thus it is a

question of fact whether the parties intend to be bound by a

provisional agreement or whether it is only a tentative

arrangement46.

5. Consideration

i. What is it?

The doctrine of consideration is something of a misnomer. It is true

that every man is by law of nature bound to fulfil his engagements,

and it is equally true that the law of country supplies no means,

nor affords any remedy to compel the performance of an agreement,

which has been made without sufficient consideration. The

simplest definition is given by Blackstone- consideration is the

recompense given by the party contracting to the other. It is a price

of promise for which the promise of the other is bought and the

44 Hindustan Aluminium Corporation Ltd. V. Uttar Pradesh State Electricity Board,

AIR 1973 All 263. 45 Union of India v S. Narain Singh AIR 1953 Punj 274, Somasundaram Pillai v

Government of Madras, AIR 1947 Mad 366. 46 In Winn v Bull (1877) 47LJ Ch 139; the parties entered into a agreement for a lease

subject to the approval and preparation of a formal contract. When the final draft was prepared the parties could not agree on the terms, it was held that there was no contract as this was an agreement subject to the terms being approved and those terms were not approved.

Page 41: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

41

promise given for value is enforceable. It is something, which is of

value in the eyes of law and may be in the form of benefit to the

plaintiff or some detriment to the defendant47. Consideration is the

price of a promise, a return or quid pro quo something of value

received by the promisee as inducement of the promise48.

The definition of consideration was clearly stated in Curie v Misa49

“A Valuable consideration, in the sense of the law, may consisit

either in some right, interest, profit or benefit accruing to the one

party, or some forbearance, detriment, loss or responsibility given

or suffered or undertaken by the other

It is important to note that section 2(d) clearly emphasises in order

to be consideration an act or abstinence must be done or promised

to be done in accordance with the desire of the promisor, unless it

is done at the desire of the promisor an act shall not be good

consideration. At the same time an act that is done at promisor’s

desire will furnish a good consideration for his promise irrespective

of the fact that it is of no personal significance or benefit to him50.

ii. What constitutes consideration?

The primary rules that must be followed for consideration are:

• Consideration must move from the promisee;

• Consideration need not move to the promisor

• Consideration must be sufficient but need not be adequate;

47 Section 25 of the Indian Contract Act begins with a declaration that “an agreement

made without consideration is void…” 48 Section 2(d) of the Contract act defines consideration as “When at the desire of the

promisor, the promisee or any other person has done or abstained from the doing, or abstains from the doing, or promises to do or to abstain from doing , something, such act or abstinence or promise is called a consideration for the promise.

49 (1875) LR 10 Ex at p.162 50 Durga Prasad v Baldeo (1880) 3 All 221, Kedar Nath v Gorie Mohammed 1886 ILR

14 Cal 64.

Page 42: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

42

iii. Privity of Contract and Consideration

An act, which is to constitute a consideration, may be done by the

promisee or any other person. As long as there is a consideration

for a promise it is immaterial who has furnished it. It can move

from the promisee or from any other person if the promisor does

not object. English law has two fundamental propositions:

(1) Consideration must move from the promisee and any other

person furnishing it will render the promisee a stranger to the

consideration and therefore the contract cannot be enforced.

(2) A person who is not a party to the contract cannot enforce it

even if it is made for his benefit, being a stranger to the contract he

can claim no rights. The first of these two provisions is not

enforceable in India at all in view of the clear provision that a

promise is enforceable as long as there is some consideration for it,

whether it moves from the promisee or any other person is

immaterial51.

The position in India as to privity of contract is quite peculiar as

the Contract Act makes no provision for or against the rule, there

has been a great divergence of opinion among the courts on the

point whether a stranger to a contract can enforce it or not. A

number of decided cases declare that a contract cannot be enforced

by a stranger; in view with the decision in Tweedle v Atkinson52 and

equally there is a contrary view in line with the privy council’s

observation in Khwaja Muhammad Khan v Husaini Begam53, it will

51 Chinnaya v Ramaya (1882) 4 Mad 137, Samuel Pillai v Ananthanatha Pillai (1883) 6

Mad 351 52 124 RR 610 53 (1910) 37 IA 152

Page 43: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

43

be pertinent to mention that the Supreme Court has expressed

itself in favour of the rule which upholds the privity of contract54.

With the passage of time the courts have laid down a number of

exceptions to the rule of privity of contracts, most of them are

associated with special branches of the law of contract such as

negotiable instruments, agency, railway receipts, transfer of

property and bills of lading. Among the most commonly known

exceptions are trust or charge, partition or family arrangements,

estoppel and covenants running with land.

� Trust or charge:

When a charge or interest has been created on some specific

property in favour of a person then such a person can enforce it

though he has not been a party to it. The Privy Council in the case

of Khwaja Muhamad Khan v Hussaini Begum has affirmed this.55

Also in the case of Rana Uma Nath Baksh Singh V Jang Bahadur

56a trust in the favour of a third party and that person was allowed

to maintain a suit to enforce such right.

� Marriage Settlement, Partition and Family Arrangements

When an agreement made either in connection with a marriage or a

partition or a family arrangement is for the benefit of a person

though he is not a party to it, he can enforce such agreement. I n

the case of Rose Fernanadez v Joseph Gonsalves57 a girl whose

father has entered into an agreement with the defendant, could on

attaining majority enforce such agreement as it was concluded for

her marriage.

� Acknowledgement or Estoppel

54 In M.C Chacko v State Bank of Travancore (1966) 2 SCC 343. 55 (1910) 37 IA 152 56 AIR 1938 PC 245 57 ILR (1924) 48 Bom 673

Page 44: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

44

When a party has to make payments to another which payment

arises form a contract and he acknowledges this fact to the third

party then a binding obligation is incurred by him

� Covenants running with land

Principles relating to immovable property will also vary the rule of

privity. That is to say that if a person who purchases a land with

notice that the owner is bound by an agreement regarding

covenants running with the land then he shall be bound by them.

The doctrine of privity of contract is subject to many exceptions,

one of them being that a beneficiary can sue on a contract for

enforcement of the benefit intended to confer on him by the

contract58.

The doctrine of privity of contract implies a mutuality at Will and is

interaction of parties and their successors. It creates a legal bond

or tie or vinculum juris personal to the parties. The rule, thus, is

that no one except the parties to a contract can be bound by or

entitled under a contract. This doctrine, which debars third party

to enforce a contract, forbids the parties to the contract from

enforcing any obligation there under against a stranger. A person

cannot be subject to the obligation of a contract to which he is not

a party and the logical consequence is that a stranger cannot

acquire rights under a contract. This general rule, no doubt, is

subject to certain exceptions. Two of the exceptions to the general

rule that a stranger cannot enforce a contract are the beneficiaries

under a trust created by a contract, or in the case of a family

58 Klaus Mittlebachert V. East India Hotels Ltd., Air 1997 Del 201. Section 2(D) At Page 230.

Page 45: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

45

arrangement. To this can be added the beneficiary under a

marriage settlement or partition.

Where an agreement for sale of land was entered into by the owner-

defendant with plaintiff who was elder brother of other plaintiffs,

the agreement would not be enforceable by or against the other

plaintiffs. The other plaintiffs who were not parties to the

agreement would not fall under any of the categories of

beneficiaries. Therefore, the plaintiffs other than plaintiff-elder

brother being strangers to the agreement were not bound by the

said agreement as there was lack of mutuality and reciprocity of

the binding nature of the agreement between them and

defendant59.

iv. Past Consideration

Consideration is an act, which has already been done or is in the

process of being done or is promised to be done in the future at the

promisor’s desire. It should be contemporaneous with the promise

as it is the price for the promise, if the act has been done before a

promise is made it is called past consideration and this is no

consideration at all. Consideration and promise ought to go

together. For example: A has lost her bracelet and B finds it and

delivers the bracelet to A. A in recognition of B’s service promises to

pay B a sum of money. The promise here is for a act which was

done before any promise existed and is not a price for the promise,

it is to pay for a past act and is nothing more than a expression of

gratitude. The position in India is different and past consideration

may arise either by services rendered at request without any

promise or through voluntary services. Section 25(2) sufficiently

covers past voluntary service, which is a service rendered without

59 Harnam Singh V. Purbi Devi, Air 2000 H.P. 108 Section 10, 37, At Page 108 & 112.

Page 46: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

46

any request or promise and there is a subsequent promise to pay

for the service, which has already been rendered. “If A is saved by B

from robbers and the latter promises a reward, this promise will be

enforceable60. As concerns past service at request there is some

uncertainty, not being covered either by Section 2(d) or by Section

25(b). Section 2(d) requires that an act should be done at the

promisor’s desire pre-supposing the existence of a promise to pay

for the act and even when construed strictly would not allow a

request without any promise to pay to hold water. Some

commentators are of the opinion that this would include a request

for services with a promise to pay subsequently61. It is important to

distinguish between past and executed consideration, an executed

consideration is one where an act has been in response to a

promise. A reward for finding a lost article is the best example; the

offer here can be accepted only on production of that lost article to

the offeror. Consideration may thus include an act already done or

one which is in the process of being done for example: A agrees to

sell and B agrees to buy a car for a certain stated price. Simply put

A has agreed to sell and B has agreed to buy.

Consideration shall be something of value which not only the

parties to a contract think is valuable but also one which is

considered to be valuable in the eyes of law. The Indian Contract

Act does not provide that consideration has to be good or valuable

but it has always been understood to mean something, which has

value in the eyes of law, as long as it is not illusory and unreal;

adequate or not it is sufficient even if it is of slight value.

60 By Sec. 25(2), Which Provides That ‘A Promise To Compensate Wholly Or In Part,

A Person Who Has Already Voluntarily Done Something For The Promisor’ Is Enforceable.

61 Pollock And Mulla Have Been In Favour Of This Interpretation.

Page 47: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

47

Inadequacy of consideration may be taken into account by the

courts only when the question of consent arises. Suppose A agrees

to sell a car, which is worth 100,000 for 1000 and denies that his

consent was free, the inadequacy of the consideration is a fact,

which the court will take into account.

This brings us to a very important question of whether performance

of an existing obligation would amount to valid consideration. The

following case explains this proposition.

The promise of M to perform his part of the executory contract for

sale of the mills, which he had already contracted with a third

party so to do, constituted good consideration for the promissory

note executed by I who, upon subsequent performance of the

promise, admittedly recovered out of the price realised by the sale

of the mills a sum of Rs. 3,25,000. 62

v. Promissory Estoppel

Estoppel is a concept applicable both in law and equity. Estoppel

commonly means to prevent a person from denying facts, which he

has asserted preciously.

Promissory Estoppel is a type of equitable estoppel, which provides

that where a person has expend money or effort on another’s

property in the mistaken belief that he will acquire an interest in

the property and he is encouraged by the true owner, then latter he

is estopped from asserting his full title against the former.

Promissory estoppel is generally concerned with the promise and

the intentions.

62 Indermal Tekaji Mahajan v. Ramprasad Gopilal AIR 1970MP 40.

Page 48: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

48

This principle has evolved form a very landmark called the High

Trees case, which is discussed below.

By a lease of 1937, the plaintiffs leased a block of flats to the

defendants for 99 years at a rent of £2,500 pa. With the advent of

war and many vacancies in the flats, the plaintiffs agreed in 1940

to reduce the rent by 50%. No time limit was set for the reduction.

By 1945 the flats were full again. The plaintiff company thereupon

wrote to the defendants, asking for the full amount of rent plus

arrears. Subsequently, the present action was instituted to test the

legal position. The plaintiffs claimed the full rent for the last two

quarters of 1945. The defendants pleaded, inter alia, that the

agreement of 1940 related to the whole term of the lease; Of,

alternatively, that by failing to demand rent in excess of £1,250

before September 1945, the plaintiffs had waived their rights in

respect of any rent in excess of that amount which had accrued

before that date.

It was held that the plaintiffs' claim would succeed although, as

regards the earlier period, the promise to reduce the rent was

binding even though it had been given without consideration.

Denning J:

‘I find that the conditions prevailing at the time when the reduction

in rent was made, had completely passed away by the early months

of 1945. I am satisfied that the promise was understood by all

parties only to apply under the conditions prevailing at the time

when it was made, namely, when the flats were only partially let,

and that it did not extend any further than that. When the flats

became fully let, early in 1945, the reduction ceased to apply.

Page 49: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

49

In those circumstances, under the law as I hold it, it seems to me

that rent is payable at the full rate for the quarters ending

September 29 and December 25, 1945.

If the case had been one of estoppel, it might be said that in any

event the estoppel would cease when the conditions to which the

representation applied came to an end, or it also might be said that

it would only come to an end on notice. In either case it is only a

way of ascertaining what is the scope of the representation. I prefer

to apply the principle that a promise intended to be binding,

intended to be acted on and in fact acted on, is binding so far as its

terms properly apply. Here it was binding as covering the period

down to the early part of 1945, and as from that time full rent is

payable.’63

In contemporary society a number of questions have risen on this

theory and certain principals have been established in such case of

Promissory Estoppel, being that the promise should be clear and

unequivocal, and can also apply whenever there is a representation

whether of fact or of law, preset or future, which is intended to be

binding, intended to induce a person to act on it and he does act on

it.

vi. Adequacy of consideration

What amounts to adequate consideration has been categorically

laid out in the following pronouncement by the court “The words

'adequate consideration' clearly postulate that consideration must

be capable of being measured in terms of money value having

regard to the market price of the property, the value that it may

63 Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 High

Court

Page 50: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

50

fetch if sold, the value of similar lands situated in the vicinity/so on

and so forth. In the instant case, therefore, the legislature by using

the word 'adequate' to qualify the word 'consideration' has

completely ruled out and excluded gift from the ambit of clause (b)

of the proviso. In these circumstances, therefore, the argument that

by not expressly excluding gift, clause (b) of the proviso includes

gift cannot be accepted particularly in the face of the clear and

unambiguous language used by clause (b) of the proviso in

describing the nature of the transaction as one for adequate

consideration.64”

6. Capacity

According to Section 10 of the Act, capacity of the parties is a very

essential ingredient to be complied with. Otherwise, the created

relationship is not valid. Under this head, physical, mental and

intellectual capacity is taken into consideration.

i. What constitutes competency

Section 10 of the Indian Contract Act entails that the parties to the

contract must be competent to contract. Section 11 of the act

states that ”Every person is competent to contract who is of the age

of majority according to the law to which he is subject, and who is

of sound mind, and is not disqualified from contracting by any law

to which he is subject.” Accordingly, this principle takes within its

fold, minors, persons of unsound mind and any other person who

is declared by the law as incompetent or any other who is not in a

position to understand and appreciate the nature of terms and

conditions in a contract.

64 Sonia Bhatia v. State of Uttar Pradesh (1981) 2 SCC 585: AIR 1981 SC 1274: (1981) 3

SCR 239: (1981) 7 ALR 244: 1981 All LJ 467.

Page 51: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

51

The Collector being a statutory authority can only act in terms of

the statute and he cannot exercise his statutory powers in

implementing and executing a non-statutory agreement. Further,

no one can confer on a statutory authority the authority to do what

the statute does not authorize or not to do what it is statutorily

authorised to do. Such an agreement would be hit by Section 10 of

the Contract Act as no one has the authority to enter into an

agreement which it is not competent to contract and which if

permitted it is not competent to contract and which if permitted

would defeat the provisions of the law65.

ii. Effects of Minors Agreement

Section 10 of the Contract Act requires that the parties must be

competent to contract, the following persons will be incompetent to

contract – minors or those who are not above the age of 18 except

when a guardian is appointed in which case it will be 21 yrs;

persons legally disqualified and person’s of unsound mind66. Even

though section 10 and 11 require parties to a contract to be

competent and also declare that a minor is incompetent, it is not

made clear by either section whether an agreement is void or

voidable. This was laid to rest by the Judicial Committee of the

Privy Council in Mahoribibi v Dhamodas Ghose67, since this

pronouncement it has not been doubted that agreement with a

minor is absolutely void, any other interpretation would have be

65 Mahesh Chnadra V. Zila Panchayat, Mainpuri, Air 1997 All. 248. Section 10, At Page 248 & 249. 66 Section 11 Of The Contract Act States-‘Every Person Is Competent To Contract

Who Is Of The Age Of Majority According To The Law To Which He Is Subject And Who Is Of Sound Mind And Is Not Disqualified From Contracting By Any Law To Which He Is Subject.’

67 (1903) 30 Ia 114.

Page 52: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

52

unjustified leaving the child with the option of choosing between

agreements and which he will enforce. What the law affords is

protection for the child against poor judgement, ignorance and

immaturity not just fraudulent manipulation by others. Ordinarily

a minor’s agreement should be devoid of all effects as it is void;

there should be no contractual obligation on either side. This is not

wholly true in the Indian context, as an agreement, which confers

benefit on a minor, is not void and can be enforced at the minor’s

instance. Generally the effects of a minor’s agreement will need to

be considered independently68. On the contrary when a minor

seeks the aid of the court in order to revoke or nullify a contract,

relief may be granted on the condition that benefits obtained under

that contract would be restored or suitable compensation would be

given to the other party69, the principle of ratification which would

relate back to the date of making of a contract will not be

applicable in case of minor’s, a person on attaining majority cannot

ratify an agreement which is void made by him during his

minority70. It is necessary into a new contract with fresh

consideration as the one which passed under the old contract

cannot be implied into the new one, a contradiction in terms which

is unacceptable would take place as a void contract cannot be

ratified.

68 In case of a contract with a minor- there is no estoppel against a minor, no liability

in contract or in tort arises, an infant can be compelled to restore goods or property he obtains by misrepresentation only as long as it is in his possession (doctrine of equitable restitution)

69 Jagarnath Singh v Lalta Pd., (1909) 31 All 21, a minor was allowed to recover possession of property which was sold to him on the condition that he restored consideration; also see Mahomed Syedo. Ariffin v Yeoh Ooi Gark, AIR 1916 PC 242.

70 Nazir Ahmed v Jiwandas, AIR 1938 Lah 159; Indian Cotton Co v Raghunath, 33 Bom LR 111; Armugam v Duraisinga, (1914) 37 Mad 38.

Page 53: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

53

iii. Beneficial Contracts

Though the law declared that a minors agreement is “absolutely

void” it is however being reviewed and being limited to cases where

a minor is brought under obligations by another party seeking to

enforce such obligations.

In Ragavachariar v Srinivasa71 it was held that “what is meant is if

an infant is incompetent to contract or that his contract is void is

that the law will not enforce any contractual obligation of an infant”

Thus a minor can enforce such contracts which is of some benefit

to him but under which he is not required to bear any obligation

iv. Liability of Necessaries

A minor’s contract as stated earlier is void in most cases except in

the case on necessaries being supplied to a minor, this is the

exception to the rule, which is embodied in Section 68 of the

Contract act72. There exists a liability in the case of necessaries-

suppose a shopkeeper supplied necessaries for the day to day

existence of a lunatic which are suitable to his standard of living or

life he is entitled to be reimbursed from the lunatic’s property if any

according to the law. Necessaries can be defined on the basis of

numerous judicial pronouncements73 as it is not defined in the act

to mean – those things without which a person cannot reasonably

exist (food, lodging, clothing etc..). Articles of luxury are always

excluded yet in some cases luxurious articles of utility may be

71 (1916) 40 Mad 308 72 Sec. 68 states ‘If a person incapable of entering into a contract, or any one whom he

is legally bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person.’

73 Chappel v Cooper (1844) 13 M and W 252, 258; Jogan Ram Marwari v Mahadeo Prasad Sahu, (1909) 36 Cal 768; Kanwarlal v Surajmal, AIR 1963 MP 58; Shyam Charan Mal v Choudhary Debya Singh, (1894) 21 Cal 872.

Page 54: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

54

allowed, this makes the concept of necessities a highly subjective

one which will need to be determined with reference to surrounding

circumstances.

7. Free Consent

Section 10 of the Indian contract Act in addition to capacity of

parties lists Free consent as an important ingredient of a contract.

Section 13 defines the concept of consent, which is “Two or more

persons are said to be in consent when they agree upon the same

thing in the same sense”.

Similarly section 14 states when consent is not said to be free when

it is not caused by

An agreement, which is coerced, or one which is imposed on the

other party by undue influence, fraud or misrepresentation is a

contract which is voidable. Free consent is one of the most

essential requirements in a contract and courts will normally

consider the circumstances surrounding an agreement as well as

look into consideration where lack of free consent is alleged74.

i. Coercion

An agreement, which is a result of coercion, is voidable at the

option of the person whose consent was got due to such coercion.

Coercion can be caused by various techniques and consent can be

obtained by pressure either by threatening to commit or

74 Sec.14 of the Contract act defines free consent as ‘ Consent is said to be free when it

is not caused by: i. Coercion, as defined in section 15, or ii. Undue influence, as defined in section 16, or iii. Fraud, as defined in section 17, or iv. Misrepresentation, as defined in section 18, or v. Mistake, subject to the provisions of sections 20,21 and 22.

Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation or mistake.

Page 55: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

55

committing any act, which is forbidden by the Indian Penal Code or

by detaining a person unlawfully or threatening to do so75. If for

example A threatens to throw B overboard while on a ship unless

he signs particular agreement, this would amount to coercion and

criminal intimidation and the contract will be voidable at the option

of B.

Short of undue influence or duress, an agreement between the

parties cannot be rendered nugatory on the ground that the

consideration is not adequate. The Courts do not entertain the plea

of inadequacy of consideration as a ground for refusal to perform

the obligations under a contract. In fact, the Courts do not go into

the question of adequacy of consideration when considering

whether an agreement is binding or not. Equity may give the relief

of setting aside a transaction as it was “improvidently obtained”

when unfair advantage is taken of a person who is poor, ignorant or

weak-minded, or is for some other reason in need of special

protection Specific Performance may be refused on similar ground,

but mere inadequacy of consideration is not a ground for relief

where the parties have bargained on equal terms76.

ii. Undue Influence

75 Coercion is defined in sec. 15 as ‘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 prjudice of any person whatever, with the intention of causing any person to enter into an agreement.’

(It is immaterial whether or not the Indian Penal Code is in force where the coercion is employed)

76 Vijaya Minerals Pvt. Ltd. V. Bikash Chandra Deb., Air 1996 Cal. 67. Section 16, 25, 52, 54, At Page 67 & 74.

Page 56: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

56

There are certain relationships which involve domination or give a

certain person the ability to dominate, where parties to agreement

may be so related to each other that one is capable of dominating

the will of the other, to his benefit and the other parties detriment.

Undue influence can be likened to fraud where the mind of the

victim is controlled; there is a difference between duress or coercion

and undue influence. Normally in cases of coercion there is a real

or apprehended physical threat to the person’s life or body whereas

in the case of undue influence violence may not be apparent but

the relationship between the two parties which may be one of trust

or confidence may give rise to an opportunity for abuse77. The

possible number of relations where one party is able to dominate

the will of the other is innumerable and would include all those

cases where parties are not on a equal footing, influence is

acquired or where confidence is reposed and abused78. Without

prejudice to the generality of the principle it can be said that a

person with real or apparent authority, fiduciary relation or a

person who is in mental distress can take advantage or be

vulnerable to undue influence respectively.

The burden of proof will rest on the plaintiff who wants to avoid a

contract on undue influence to prove or show that the other party

was in a position to dominate his will in relation to the contract

and that this position was actually abused to obtain the consent of

the plaintiff, only in rare cases is the presumption of undue

influence proof enough. In case a contract involves a father and

son, it is for the son to prove in case he wants to avoid the contract

77 Mahboob Khan v Hakim Abdul Rahim, AIR 1964 Raj 250; Saxon v Saxon, (1976) 4

WWR 300, 305, 306(BCSC) Canada. 78 Smith v Kay, (1859) 7 HLC 750, 779; Huguenin v Basely, (1807)14 Ves 273; National

Westminster Bank v Morgan, (1985) 1 All ER 821.

Page 57: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

57

that the father who is in a position of apparent authority as well as

in a fiduciary duty actually abused that position forcing the son to

enter into an agreement to his detriment79. The presumption is

raised in some of the following cases-

� Unconscionable Bargains, economic duress or inequality of

bargaining of power.

� Contracts with a pardanashin lady.

Influence in the eye of law has to be contradistinguished with

persuasion. Any and every persuasion by one party to the other to

contract cannot lead to inference or conclusion that such party has

influenced the other party. One may by his act and conduct

convince and persuade the other party to do a particular act and if

the other party does such an act freely and of own violation may be

to his or her prejudice or to his or her disadvantage or even to his

or her peril, it cannot be said that such act was influenced by the

other80.

Chapter II of the Contract Act deals with void and voidable

contractual agreements vis-à-vis parties. In order to attract section

16 of the Contract Act, undue influence by one of the parties is

necessary and it is necessary to prove that the contracting party

was in a position to dominate the will of the other and that position

was used in order to obtain an unfair advantage over the others.

The Apex Court in Afsar Shaik v. Suleman Bibi, (AIR 1976 SC 163)

79 Mathu v Cherchi, (1990) 1 Ker LT 416; Anjadenessa Bibi v Rahim Buksh, (1915) 42

Cal 286; Ram Chandra Singh v Basdeo Singh, AIR 1982 All 437; Alec Lob (Garage) Ltd. V Total Oil G.B. Ltd., (1983) 1 All ER 944 Ch.D.; Afsar Sheik v Soleman Bibi, (1976) 2 SCC 142.

80 Shrimati V. Sudhakar R. Bhatkar, Air 1998 Bom. 122. Section 16(3), At Page 122, 124 & 125.

Page 58: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

58

(supra) has laid down that in order to constitute undue influence

two basic elements must be cumulatively present namely; first the

relations subsisting between the parties are such that one of the

parties is able to dominate the will of the other and second the

party in dominant position uses that position to obtain an unfair

advantage over the other. Both these conditions must be pleaded

with particularity and proved by the person seeking to avoid the

transaction. In the same judgment, the Apex Court pointed out

sub- section (3) of S. 16 contains a rule of evidence and in order to

avoid a transaction on the ground of undue influence, it has to be

proved: (a) that the party who had obtained the benefit had at the

material time been in a position to dominate the will of the other

conferring the benefit; and (b) that the transaction is

unconscionable. If these conditions are proved, the burden shifts

on the party benefiting by the transaction to show that it was not

induced by undue influence. If either of these two conditions is not

established the burden will not shift. If the first condition is not

established the question of shifting burden on the defendant would

not arise. Therefore, the contention of learned advocate for the

appellant that undue influence exercised by advocate Shri Rui

Gomes Pereira would bring the transaction within the scope and

ambit of section 16 of the Contract Act cannot be accepted. Of

course, we are not satisfied, on the basis of the evidence on record,

that any undue influence was exercised by Advocate Shri Rui

Gomes Pereira, on the appellant81.

The next question to be looked into is whether settlement deed, is

vitiated by fraud, misrepresentation, undue influence or collusion.

81 Maria V. Shripad Vishnu Kamat, Air 1998 Bombay 46 Section 14, 16, at page 46 & 52.

Page 59: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

59

According to the second plaintiff Ext. B I is vitiated by undue

influence. Section ]6 of the Indian Contract Act defines undue

influence: "A contract is said to be induced by undue influence,

where the relationship subsisting between the parties is such that

one of the parties is in a position to dominate the will of the other

and uses that position to obtain an unfair advantage over the

other". Here, in this case, the first plaintiff was residing with

defendants] and 2. Ext. Al4 letter written by the defendant goes to

show that the first plaintiff's condition was very bad. The letter

reads, "he simply lies in bed and rolls with pain. He has lost control

cover his kidneys and also that everything is gone unconsciously,

even the speech is not clear at all." This letter is dated 8-6-1984.

P.W. 5, the Professor and Head of Neurology Department, has

deposed that the first plaintiff was under his treatment from 2- 5-

1984 and he developed stroke. He had speech problem.

P. W. 2 Cardiologist attached to the Benzigar Hospital, Kollam also

has deposed that from 27- 4-1984 he was admitted to the hospital

for hyper- tension and cerebral vascular accident. All these go to

show that the condition of the deceased was very bad in April,

1984. His cognitive ability has been impaired and was always

under disorientation. The defendants were looking after the de-

ceased. Therefore, it can be seen that the defend- ants were in a

position to dominate the will of the deceased. It is also evident from

the evidence of P. W s. 2 and 5, that the first plaintiff was not in a

position to speak. He was also not in a condition to think over, as

he was affected by brain disease, memory and personality

disorders. The first plain- tiff has to depend on the defendants for

his existence, The defendants 1 and 2 have no case that any other

person was looking after him. Admittedly, D.W. 1 was married in

1982. The defendants had a case that prior to her marriage, there

Page 60: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

60

was an agreement between the second plain- tiff and the deceased,

the fifth defendant and her children, that as all the properties of

the fifth defendant had to be given to her children, the properties of

the deceased plaintiff will be divided among his children equally. It

is also con- tended that in fulfillment of the oral agreement and

having regard to the fact that defendants 1 and 2 had to meet the

entire expenses for treatment; he had executed Ext. B 1 reserving

the right of residence in favour of defendants 4 to 6. Exts. B3 to B5

are the gift-deeds executed by the sixth defendant in favour of the

plaintiff and the third defendant. They rely on those documents to

show that they were executed in pursuance of the oral agreement.

But it is see that Exts. B-3 to B- 5 came into existence after the

relationship between the parties have become strained. There were

disputes between the parties, which can be seen from Exts. B-6

and B-7. To prove the said oral agreeme9t there is absolutely no

evidence.

The plaint property is the one wherein the residential building is

situated. The fifth defendant, who had no right over the plaint

property, got a right of residence under Ext, B-1. It is provided in

Ext.B-1 that in the event of their jointly selling the plaint schedule

property, they should pay Rs. 10,000/- each from the sale proceeds

to the plain- tiff and the third defendant. From this, it is clear that

the plaintiff and the third defendant will not get anything if the

property is not sold, or if the right of either defendants 1 and 2 is

released in favour of the other. Thus, the defendants obtained

unfair advantage under Ext. B-1. The Court below has correctly

appreciated the evidence, both oral and documentary and came to

the conclusion that Ext. B-1 is vitiated by undue influence82.

82 Marci Celine D’souza V. Renie Fernandez, Air 1996 Ker. 280. Section 16, At Page 280 & 282.

Page 61: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

61

In the case, the lessor sought the declaration of the lease deed as

null and void. There were sufficient averments by the plaintiff that

the defendant took undue advantage of a helpless and illiterate old

lady and made he to thumb mark some papers with the motive of

usurping her property and that he was guilty of abuse of faith and

that she never leased out the agricultural property for a period of

99 years as recorded in the lease deed by a low amount of Rs. 2500

per annum and no amount was paid. It therefore held that undue

influence was exercised by the defendant83.

There was no fiduciary relationship between the donee Shri Sunder

and the donor defendant No. 1 Kartar Chand. There is no evidence

on record to show that defendant No.1 was in a position to

dominate the will of Shri Sunder in executing the gift deed. Simply

because Shri Sunder was 85 years of age and he had already

executed a will in the favour of the plaintiffs in the year 1969 or the

witnesses attesting the gift deed are not from the village of Shri

Sunder or Defendant No.1 has not been proved to be the legally

adopted son of Shri Sunder, it cannot be presumed that the gift

deed is the result of undue influence. Therefore, the Court finds no

infirmity that the gift deed is a legal and valid document and the

will is of no consequence. There is no merit in this appeal and it is,

therefore, rejected84.

83 Hamelo (Deceased) By L.R. V. R.V. Jang Sher Singh. Air 2002 May. P&H. 147.

Section 16 At Page 147, 148, 156 & 157. 84 Roshan Lal And Others V. Kartar Chand And Others. Air 2002 September. H.P.

131. Section 16 At Page 131, 134 & 135.

Page 62: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

62

Where both the Courts below upon consideration of the evidence on

record have arrived at the concurrent finding that the plaintiff, an

illiterate lady executed the disputed deed of sale with necessary

mental act of understanding the nature of the transaction. Such

finding of fact cannot be interfered with in Second Appeal unless it

is wholly absurd or materially vitiated by non-consideration of

evidence to the contrary.

In the instant case held that the illiterate lady was in need of

money. She understood that there was no misrepresentation or

undue influence. Thus the sale deed executed by her could not be

declared to be fraudulent or inoperative85.

In order to establish undue influence in a case of nature of inter

vivos transactions as is embodied in Section 16 two important

things must be proved; one, that the relation between the parties

was such that the vendee or the donee was in a poition to dominate

the will of the vendor or the donor and he has used that position to

obtain an unfair advantage over the vendor or the donor and it is

insufficient for a person seeking the relief to show that the relations

of the parties have been such that one naturally relied upon for the

advice and the other was in a position to dominate the will of the

first in giving it86.

Section 19-A of the contract act provides for rescission of an

agreement or contract on account of undue influence, it is voidable

at the option of the party whose consent was so caused and in case

85 Sita Bewa V. Gangadhar Bharati, Air 1999 Ori.154. Section 16, 18, At Page 155, 156

& 157. 86 Habeeb Khan V. Valasula Devi, Air 1997 A.P. 53. Section 16, At Page 53.

Page 63: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

63

any benefit is received such a contract can be set aside absolutely

or under such terms and conditions as the courts deems just.

Chapter II of the Contract Act deals with void and voidable

contractual agreements vis-à-vis parties. In order to attract section

16 of the Contract Act, undue influence by one of the parties is

necessary and it is necessary to prove that the contracting party

was in a position to dominate the will of the other and that position

was used in order to obtain an unfair advantage over the others.

The Apex Court in Afsar Shaik v. Suleman Bibi, (AIR 1976 SC 163)

(supra) has laid down that in order to constitute undue influence

two basic elements must be cumulatively present namely; first the

relations subsisting between the parties are such that one of the

parties is able to dominate the will of the other and second the

party in dominant position uses that position to obtain an unfair

advantage over the other. Both these conditions must be pleaded

with particularity and proved by the person seeking to avoid the

transaction. In the same judgment, the Apex Court pointed out

sub- section (3) of S. 16 contains a rule of evidence and in order to

avoid a transaction on the ground of undue influence, it has to be

proved: (a) that the party who had obtained the benefit had at the

material time been in a position to dominate the will of the other

conferring the benefit; and (b) that the transaction is

unconscionable. If these conditions are proved, the burden shifts

on the party benefiting by the transaction to show that it was not

induced by undue influence. If either of these two conditions is not

established the burden will not shift. If the first condition is not

established the question of shifting burden on the defendant would

not arise. Therefore, the contention of learned advocate for the

appellant that undue influence exercised by advocate Shri Rui

Gomes Pereira would bring the transaction within the scope and

Page 64: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

64

ambit of section 16 of the Contract Act cannot be accepted. Of

course, we are not satisfied, on the basis of the evidence on record,

that any undue influence was exercised by Advocate Shri Rui

Gomes Pereira, on the appellant87.

iii. Misrepresentation

A representation is a statement, which is made by one party to the

contract to the other, which although is not a term of a contract,

nevertheless is a reason that induced that other party to enter into

the contract. If the statement is untrue then it is a

misrepresentation.

Any misstatement of facts, which is material to a contract, is

misrepresentation and consent induced on the basis of such a

statement will render the contract voidable88. Misrepresentation

would include any breach of duty which brings an advantage to the

person committing it by misleading the other to his prejudice, there

may be no intention to deceive but circumstances may make the

party who derives benefit from the transaction liable as if motives of

fraud or deceit had been the real factor. It was held in an English

case where the surgeon while conducting vasectomy did not warn

the man that his wife had a slight chance of becoming pregnant

that the surgeon was responsible to the couple for the undue

87 Maria V. Shripad Vishnu Kamat, Air 1998 Bombay 46 Section 14, 16, At Page 46 & 52. 88 Sec. 18 defines Misrepresentation as ‘Misrepresentation means and includes- (1)

the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true; (2) any breach of duty which, without any intent to deceive, gains an advantage to the person committing it, or any one claiming under him, by misleading another to his prejudice, or to the prejudice of any one claiming under him; (3) causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is the subject of the agreement.’

Page 65: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

65

inconvenience caused and that the plaintiffs are entitled to

damages for the discomfort and pain of a normal pregnancy89.

For the untrue statement to constitute an actionable

misrepresentation it must meet the following requirements:

• It must be one of facts, not opinion or intention of law;

• It should have induced the contract.

An unwarranted statement is one where person positively asserts

that a fact is true and the information does not warrant it, even if

he believes it to be true. Supposing A told B that C would be the

managing director of a particular company and A had received this

information not from C but from Z and this information turned out

to be untrue, it cannot be said that A was warranted in making a

positive assertion. A warranted statement is one where the

information is received from a trustworthy source or else it would

amount to misrepresentation90. In case a representation acquires or

results in a contract being formed or even as a term in a contract,

the contract can not only be avoided if that term turns out to be

untrue but the disadvantaged party can also sue for damages for

breach91. Misrepresentation can also be caused however innocently

by making the party to an agreement to make a mistake as to the

substance of the thing, which is the subject of the agreement92. If

one of the parties to an agreement leads or allows the other to

make a mistake as to the nature or quality of the subject- matter or

suppresses vital facts or conceals them it would be considered

89 Thake v Maurice, (1986) 1 All ER 497 CA 90 Oceanic Steam Navigation Co. v Soonderdas Dharamsey, (1890) 14 Bom 241;

Mohanlal v Sri Gunagaji Cotton Mills Co., (1900) 4 Cal WN 369. 91 Richview Construction Co v Raspa, (1975) 11 Ontario Reports (2d)377, J.Evans &

Sons v Andrea Merzario Ltc., (1976) 2 All ER 9130, CA. 92 Sec.18(3)B

Page 66: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

66

misrepresentation93. It is pertinent to note that whenever

misrepresentation of facts takes it has to be of facts material to the

contract and general expressions will not come under it scope, a

representation of a state of mind is also a representation of fact and

where at the stage of negotiations one party makes a statement or

forecast in order to induce the other party to enter into the contract

and where the party making the statement has special expertise or

knowledge about the subject matter of the negotiations they will be

liable for any breach owing to changing circumstances or

otherwise94. Section1995 makes it very clear that in order for a

contract to be voidable it is necessary that misrepresentation of

material fact be the cause of the consent and that the

disadvantaged party had no means of discovering the truth with

ordinary diligence96.

An insurer can validly repudiate a contract of Insurance on the

ground of misrepresentation or suppression of material facts. It is

well settled that a contract of insurance is contract Uberriamafide

and there must be complete good faith on the part of the assured.

The assured is thus under a solemn obligation to make full

disclosure of the material facts, which may be relevant for the

93 Nursery Spinning & Weaving Co., Re, ILR (1880) 5 Bom 92; Dambarudhar v State

Of Orissa, AIR 1980 Ori 188; R v Kylsant (1932) 1 KB 442; Haji Ahmad Yarkhan v Abdul Gani Khan, AIR 1937 Nag 270.

94 Esso Petroleum Co. Ltd v Mardon, (1976) 2 All ER 5. 95 Explanation to sec. 19 provides that: A fraud or misrepresentation which did not

cause the consent to a contract of the party on whom such misrepresentation was made, does not render a contract voidable. If such consent was caused by misrepresentation or by silence fraudulent within the meaning of Section 17, the contract, nevertheless, is not voidable, if theparty whose consent was so caused had the means of discovering the truth with ordinary diligence.

96 Peek v Gurney, (1873) LR 6 HL 377; Shoshi Mohun Pal Chowdhary v Nobo Krishto Poddar, (1874) 5 Cal 801; Morgan v Government of Hyderabad, ILR (1888) 11 Mad 419; Mithoolal Nayak v L.I.C., AIR 1962 SC 814.

Page 67: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

67

insurer to take into account, while deciding whether the proposal

should be accepted or not. While making a disclosure of the

relevant facts, the duty of the Insured to state them correctly

cannot be dilute97.

iv. Fraud

Fraud can be defined as a false statement made knowingly or

recklessly without belief in its truth, it is intentional

misrepresentation of a fact98. Fraud in most cases would mean

active concealment of a material fact and needs to be differentiated

from passive concealment or mere silence, which in most cases

would not amount to fraud. The question that arises here would be

to what extent can silence be construed as not amounting to fraud?

Silence will amount to fraud when there is a duty to speak when

trust and confidence are reposed99, where silence will become

deceptive in case one of the parties has more information about a

particular subject matter and does not disclose it, where there has

been a change in circumstances after a representation has been

made and the change has not been communicated100 and when a

97 Life Insurance Corporation Of India V. Ajit Gangadhar Shanbhag, Air 1997 Kant.

157. Section 10, At Page 157. 98 Sec 17 Defines It As “ To Mean And Include Any Of The Following Acts Done

With An Intent To Deceive Or To Induce A Person To Enter Into A Contract- (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 Person Who Has Knowledge Or Belief Of The Fact; (3) Promise Made Without Any Intention Of Performing It; (4) Any Other Act Fitted To Deceive; (5) Any Such Act Or Commission As The Law Specially Declares To Be Fraudulent.

99 Foel V Law Union & Crown Insurance Co., (1908) 2 Kb 863; Brownlie V Campbell, 5 App Cas 925.

100 With V O’flanagan, (1930) Ch 575 Ca; Rajagopala Iyer V South Indian Rubber Works, (1942) 2 Mlj 228

Page 68: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

68

person under no apparent duty to disclose a fact, reveals only half

of the truth101.

The seller contended that the agreement to sell was obtained by

fraud under the pretext that the defendant was executing a surety

bond. The courts disbelieved the case of the defendant that he had

executed only surety bond. The findings of fact recorded by the

courts are based on evidence on record and do not suffer from

perversity. Therefore, the concurrent findings of fact cannot be

interfered with102.

In this case, the wife who was having a much higher academic

qualification than her husband, gave consent to marriage on

representation by husband that he was having attractive job. Later

it was found that husband was actually undergoing apprenticeship

training in a factory that cannot be held to be regular job. It was

held that it is a case of misrepresentation of fact and the Petition

for annulment of marriage has to be decreed103.

3. It is a well settled law even within the province of civil litigation

when an allegation of misrepresentation or fraud is made, that the

level of proof required is extremely high and is rated on par with a

criminal trial. On the basis of the material before the Court here, it

would therefore be impossible to uphold the charge that the

101 Junius Construction Corp V Cohen, (1931) 257 Ny 393; R.C Thakkar V Gujarat

Housing Board, Air 1973 Guj 34. 102 Ratan Pal Singh V. Kunwar Pal Singh, Air 2001 All. 224. Section 17, At Page 224 &

225. 103 Bindu Sharma V. Ram Prakash Sharma, Air 1997 All. 429. Section 17, At Page 429.

Page 69: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

69

compromise decree stood vitiated on grounds of either

misrepresentation of fraud104.

Where both the Courts below upon consideration of the evidence on

record have arrived at the concurrent finding that the plaintiff, an

illiterate lady executed the disputed deed of sale with necessary

mental act of understanding the nature of the transaction. Such

finding of fact cannot be interfered with in Second Appeal unless it

is wholly absurd or materially vitiated by non-consideration of

evidence to the contrary.

In the instant case held that the illiterate lady was in need of

money. She understood that there was no misrepresentation or

undue influence. Thus the sale deed executed by her could not be

declared to be fraudulent or inoperative105.

In order to constitute fraud it is well known that the person making

the statement must have been aware of the falsity of the statement

and the party defrauded remains ignorant of the correct situation.

Fraud is committed where one person induces another to enter into

some contract or transaction on a false belief by a representation of

fact which is not true and which he does not believe to be true. The

effect of fraud on an agreement so far as consent to it is procured

by it may be a complete misunderstanding on the part of the

person deceived as to the nature of the transaction undertaken, or

the person of the other party. But if the other party has the facts

104 Savithramma V. H.Gurappa Reddy, Air 1996 Kant. 99. Section 16, 17, At Page 99 &

104. 105 Sita Bewa V. Gangadhar Bharati, Air 1999 Ori.154. Section 16, 18, At Page 155, 156

& 157.

Page 70: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

70

before it or has the meal1S to know cannot be said to have been

defrauded even if a false statement has been made.106

Distinction between Fraud and Misrepresentation

Both fraud and misrepresentation have a lot of things in common;

the difference being that fraud is more or less intentional whereas

misrepresentation may be quite innocent. In case of fraud an action

in tort for damages is available which is not the case with

misrepresentation if in fact it is simple misrepresentation, moreover

a misrepresentation can offer a defence of discovering truth with

ordinary diligence whereas a person who has committed fraud

cannot raise this defence.

Wherever a contract has been concluded and is tainted with

coercion, undue influence, fraud or misrepresentation it becomes

voidable at the option of the party who is at a disadvantage.

Rescission is still subject to certain limitations-

� Where on becoming aware of a right to rescind the contract is

affirmed, the right to rescind is lost. Here affirmation may be

express or implied.

� Rescission must be claimed within a reasonable time once

misrepresentation is discovered.

� As soon as a third party acquires rights in the subject matter,

the right to rescission is lost.

� A party seeking rescission must be capable of restoring any

benefits, which he has acquired under the contract, thus rescission

is always subject to restitution.

� Sec. 75 of the Indian Contract act provides for- ‘A party

rightfully rescinding a contract is entitled to compensation for any

106 Kamal Kant Paliwal V. Prakash Devi Paliwal AIR 1976 Raj 79.

Page 71: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

71

damage which he has sustained through the non-fulfilment of the

contract’

It is a well settled law even within the province of civil litigation

when an allegation of misrepresentation or fraud is made, that the

level of proof required is extremely high and is rated on par with a

criminal trial. On the basis of the material before the Court here, it

would therefore be impossible to uphold the charge that the

compromise decree stood vitiated on grounds of either

misrepresentation of fraud107.

v. Mistake

True consent of both parties and consensus ad idem is at the root

of all contracts i.e. an agreement on the same thing in the same

sense108. For e.g. if two people enter into a contract concerning a

ship which has a particular name and where one party had a yacht

similarly named in mind and the other a ship, there is no contract

between the two. Mistake can operate on a contract in two ways, it

can defeat the consent supposed to be given to the contract

altogether or it may mislead the parties as to the purpose which

they originally contemplated. The cases in which the consent is

defeated would fall under the ambit of Section 13109 and where

mistake does not defeat consent but the parties are mislead Section

107 Savithramma V. H.Gurappa Reddy, Air 1996 Kant. 99. Section 16, 17, At Page 99 &

104. 108 Smith V Hughes, (1871) Lr 6 Qb 597, 609; Raffles V Wichelhaus, Exchequer (1864)

2 H&C 906 109 Sec.13 Defines Consent As ‘ Two Or More Persons Are Said To Consent When

They Agree Upon The Same Thing In The Same Sense.’

Page 72: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

72

20110 would apply. For e.g. suppose A agrees to sell to B a bale of

cotton on it way from Bombay. The bale is stolen before the day the

agreement was concluded between A and B and neither party was

aware of these facts. The agreement is void. Thus Section 20 will be

effective when both parties in an agreement are mistaken and it is

as to a matter of fact and that fact is essential to the agreement.

These provisions are supplemented by two other Sections 21 and

22, which emphasises that the mistake should be of a fact and not

law. In case of mistake of law which is in force in India the contract

will not be voidable but in case the mistake is of a foreign law then

it has the same effect as that of a mistake of fact. At the same time

where only one party has committed a mistake as to a matter of

fact in a contract it will not be voidable. It is important to note that

the provisions regarding mistake will be applicable only when the

facts are essential to a contract or agreement as such they can be

broadly categorised as-

� The nature and content of the promise itself.

� The identity of the parties and

� The identity and nature of the subject matter of the contract.

vi. Of Law and Fact

Mistake could be with regard to either of law or of fact. Relevant

provisions of the Act deal with Mistake of fact only. When it comes

110 Sec.20 Provides ‘Where Both Parties To An Agreement Are Under A Mistake As

To A Matter Of Fact Essential To The Agreement, The Agreement Is Void.’ (An Erroneous Opinion As To The Value Of The Thing Which Forms The Subject-Matter Of The Agreement Is Not Deemed As Mistake As To A Matter Of Fact)

Page 73: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

73

to mistake of law it is not acceptable. However of foreign law is

construed to that of Mistake of fact.

vii. Unilateral, Bilateral and Mutual Mistake

Mistakes in the formation of contracts may be of three kinds,

namely, unilateral mistake, mutual mistake and common or

bilateral mistake. In a case of unilateral mistake only one of the

contracting parties is mistaken and the other knows of his mistake.

Its consequence is that the contract is void. In a case of mutual

mistake the contracting parties misunderstand each other and

there is no real correspondence of offer and acceptance. The parties

are really not consensus ad idem and there is in fact no agreement

at all. In this case also the contract is void. In a case of common

mistake both the contracting parties make the same mistake. The

minds of the contracting parties are ad idem and there comes into

being an agreement, but it is devoid of force and efficacy because

both the parties are mistaken about some fact which is vital to the

agreement. Section 20 of the Indian Contract Act deals with the

common mistake of fact and not mutual mistake of fact. Section 20

does not apply to a case where the contracting parties have made

no mistake as to any fact existing at the time of the making of the

contract and it is complained that one of them is unable to carry

out its part of the contract on account of the unexpected refusal of

a third person to carry out his obligation under another

agreement.111

The parties in the instant case had executed a Memorandum of

Understanding for construction of houses one of the clauses

111 Uttar Pradesh Government V. Lala Nanhoo Mal Gupta AIR 1960 All 420.

Page 74: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

74

provided that the Arbitration Act, 1940 shall not be applicable to

the arbitration under that clause. The parties were not suffering

from mistake of fact in respect of matter, which was essential to the

contract. There fore the agreement is not void in view of Section 20

of the Contract Act. Therein though the condition in that clause

ousting the applicability of the Arbitration Act was void in view of S.

28 of the Contract Act read with S. 47 of the Arbitration Act.

Section 28 of the Contract Act does not have the effect of making

the whole agreement void but only that portion which relates to the

ouster of the jurisdiction. It says in the concluding part of it that

the stipulation is void “to that extent.” A combined look of the

Memorandum of Understanding thus demonstrates that the parties

had entered into written agreement with the intention that the

dispute arising under the contract were to be resolved through

arbitration. The illegal conditions ousting applicability of the

Arbitration Act can be ignored and the provisions of the Act of 1940

can be made applicable to the arbitration proceedings112.

An agreement would be void if both the to the agreement were

under a mistake as to a matter of fact essential to the agreement.

The mistake has to be mutual and in order that the agreement be

treated as void, both the parties must be shown to be suffering

from mistake of fact. Unilateral mistake is outside the scope of this

section. The other requirement is that the mistake, apart from

being mutual, would be in respect of a matter which is essential' to

the agreement. Where the parties to an agreement to sell land were

not ad idem with respect to the unit of measuring land in as much

112 Rajasthan Housing Board V. Engineering Project(India) Ltd. And Another. Air

2000 Raj 200.Section 20, 28, At Page 201, 205 & 206.

Page 75: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

75

as while the seller intended to sell the and in terms of "kanals", the

plaintiff intended to purchase it in terms of "bighas", the "mistake"

with which the parties were suffering, cannot be said to be not

related to a matter essential to the agreement. In such a case the

dispute is not with regard to the unit of measurement only. Since

these units relate to the area of the land, it is really a dispute with

regard to the area of the land which was the subject-matter of

agreement for sale, or, to put it differently, how much area of the

land was agreed to be sold, is in dispute between the parties and it

is with regard to the area of the land that the parties were suffering

from a mutual mistake. The area of the land is as much essential to

the agreement as the price, which incidentally, was to be calculated

on the basis of the area113.

An agreement would be void if both the to the agreement were

under a mistake as to a matter of fact essential to the agreement.

The mistake has to be mutual and in order that the agreement be

treated as void, both the parties must be shown to be suffering

from mistake of fact. Unilateral mistake is outside the scope of this

section. The other requirement is that the mistake, apart from

being mutual, would be in respect of a matter which is essential' to

the agreement. Where the parties to an agreement to sell land were

not ad idem with respect to the unit of measuring land in as much

as while the seller intended to sell the and in terms of "kanals", the

plaintiff intended to purchase it in terms of "bighas", the "mistake"

with which the parties were suffering, cannot be said to be not

related to a matter essential to the agreement. In such a case the

113 Tarsem Singh V. Sukhminder Singh, Air 1998 Sc 1400. Section 2(H), 20, At Page

1400, 1404 & 1405.

Page 76: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

76

dispute is not with regard to the unit of measurement only. Since

these units relate to the area of the land, it is really a dispute with

regard to the area of the land which was the subject-matter of

agreement for sale, or, to put it differently, how much area of the

land was agreed to be sold, is in dispute between the parties and it

is with regard to the area of the land that the parties were suffering

from a mutual mistake. The area of the land is as much essential to

the agreement as the price, which incidentally, was to be calculated

on the basis of the area114.

viii. Identity of the contracting parties

Mistake as to identity may occur when one of the parties represents

himself to be someother person and thereby induces the other

party into an agreement under that false identity115. Fraud can be a

ingredient in such cases, but there have been cases atleast in

England where inspite of fraud being practised, where parties are

face to face the presumption is that the contract is made with the

person actually present116. A person’s identity is different from a

persons attributes and any mistake as to attributes in a contract

will not make it voidable. A mistake as to identity can occur only

when such person exists within the knowledge of the plaintiff and

he intends to deal with that particular person only, if the identity

assumed is itself fictitious mistake as to identity will not occur117 “

114 Tarsem Singh V. Sukhminder Singh, Air 1998 Sc 1400. Section 2(H), 20, At Page

1400, 1404 & 1405. 115 Jaggan Nath V Secretary Of State For India, (1886) 21 Punj Rec No. 21, P.37;

Central National Bank V United Indusrtrial Bank, 1954 Scr 391; Boulton V Jones, (1857) 27 Lj Ex 117; Hardman V Booth, (1863) 1 H&C 803; Cundy V Lindsay, (1878) Ac 459.

116 Ingram V Little, (1961) 1 Qb 31; Lewis V Averay, (1971) 3 All Er 907 117 King’s Norton Metal Co v Edridge, Merret & Co, Court of Appeal, (1897) 14 TLR

98.

Page 77: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

77

A one Mr. Wallis adopted the fictitious name of Hallam & Co and by

letters placed orders for goods with the plaintiffs who complied with

the orders. Wallis sold the goods to the defendants, who bought in

good faith. The defendants were sued for the value of the goods. It

was held that as there was no separate distinct entity of Hallam &

Co and another called Wallis, the contract was voidable with Wallis

for fraud but not after the defendants had acquired the goods in

good faith.” However in cases where the identity of the parties is

vitally important no contract can arise where there has been a

mistake as to identity, the importance of the identity is subjective

and will depend upon the nature of agreement, promise and

surrounding circumstances118. For e.g. A on account of his severe

criticism of some member of a theatre was aware that he would not

be allowed to view the first performance at the theatre had his

friend procure tickets for the performance. On the day of the

performance the manager refused entry for which A sued him for

breach of contract, it was held that there was no subsisting

contract as while purchasing the ticket the fact was not disclosed

that it was for A, here the identity of the plaintiff A was material to

the formation of the contract keeping in view the circumstances of

the case.

On the other hand mistake as to subject matter can take place

where there is the subject matter ceased to exist before the contract

was made119, there is a mistake as to title or rights(the buyer may

already be the owner of that which the seller purports to sell to him

unknowingly)120, the parties may have had different subject matters

118 Said v Butt, (1920) 3 KB 497; Sowler v Potter, (1940) 1KB 27. 119 Couturier v Hastie, (1856) 5 HLC 673; Bell v Lever Bros., (1932) AC 161. 120 Cooper v Phibbs, (1865) LR 2 HL 149, Sole v Buthcher, (1949) 2 All ER 1107

Page 78: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

78

in mind121 or may have committed a mistake as to substance of the

subject matter (mistake as to quality of subject matter may not

render the agreement void, and will not affect a contract unless it is

the mistake of both parties)122.

Mistake as to the nature of promise will render the agreement void

ab intio, eventhough a agreement which is induced by fraud is only

voidable at the option of the party at a disadvantage. There is an

important distinction which needs to be taken note of between

misrepresentation which is fraudulent for example as to the

character of a document and as to it’s contents. The former is void

whereas the latter is only voidable. For e.g. if a the contents of a

General Power of Attorney are wrongly stated or explained to a

person before he signs it will be voidable at his option but if a Sale

deed is stated as a Power of attorney then the deed is

inoperative123. The Supreme Court has stated unambiguously

“though a contract or other transaction induced by fraud is not

void, but only voidable at the option of the other party defrauded,

there is a clear distinction between fraudulent misrepresentation as

to the character of the document as opposed to its contents. While

the former is void, in the latter it is only voidable124”.

As stated earlier mistake will operate subject to some inherent

limitations such as; mistake has to be of both parties in order for

an agreement to be void under section 20, and erroneous opinion

121 Ibid FN 54. 122 Seikh Brothers v Ochener, (1957) AC 136 (PC); Shahabuddin v Vilayat Alikhan,

75IC 614; Ramachandra v Bisra Ganeshchandra, 39 IC 78; Smith v Hughes, 1871LR 6 QB 597.

123 Sarat Chandra V Kanailal, AIR 1929 Cal 786; Dularia Devi v Janardhan Singh, 1990

Supp SCC 216. 124 This distinction was developed by the supreme court in Ningawwa v Byrappa

Shiddapa Hirekurabar, (1969) 2 SCR 797 following the principle laid down in Foster v Mackinnon, (1869) LR 4 CP 704.

Page 79: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

79

as to the subject matter or its value is not considered as a mistake

and importantly mistake must be one of fact and not of law in order

for section 21 to be effective.

ix. Non est factum

It means, it is not my deed. This principle derived from common

law and duly endorsed by our own courts connotes that, in a given

situation if the person enters into or signs a contract thinking that

the deed in question deals with a particular subject matter and in

fact it is something different, the person is entitled to say that the

signed deed is his or hers.

8. VOID AGREEMENTS

The expression “void” has several facets. One type of void acts,

transactions, decrees are those which are wholly without

jurisdiction, ab initio void and for avoiding the same no declaration

is necessary, law does not take any notice of the same and it can be

disregarded in collateral proceedings or otherwise. The other type of

void act, e.g. may be transaction against a minor without being

represented by a next friend. Such a transaction is good

transaction against the whole world. So far the minor is concerned,

if he decides to avoid the same and succeeds in avoiding it by

taking recourse to appropriate proceeding the transaction becomes

void from the very beginning. Another type of void act may be

which is not a nullity but far avoiding the same a declaration has to

be made. Voidable act is that which is a good act unless avoided,

e.g. if a suit is filed for declaration that a document is fraudulent

and /or forged and fabricated, it is voidable as apparent state of

affairs is real state of affairs and a party who alleges otherwise is

Page 80: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

80

obliged to prove it. If it is proved that the document is forged and

fabricated and a declaration to that effect is given a transaction

becomes void from the very beginning. There may be a voidable

transaction which is required to be set aside and the same is

avoided from the day it is so set aside and not any day prior to it. In

cases, where legal effect of a document cannot be taken away

without setting aside the same, it cannot be treated to be void but

would but would be obviously voidable125.

Lawful Object is one of the other requirements mentioned in the

Indian Contract act essential to complete a valid contract.

Though contracts intend to regulate private interests IT IS STILL

THE RESPONSIBILITY OF THE STATE TO SEE THAT IN COURSE

OF SERVING PRIVATE INTERESTS, social interests also need to be

protected. Therefore the Contract Act reinforces the principle that

any agreement that interferes with the rights of a third party or of

the social interest at large is declared to be void. Hence where the

object or the consideration of the of the agreement is not is

unlawful it will be void.126. For e.g. if A, B and C agree to share

125 Dhurandhar Prasad Singh V. Jai Prakash University, Air 2001 Sc 2552. Section 23,

At Page 2553 & 2559. 126 Sec. 23 states ‘What considerations and objects are lawful, and what not- The consideration or object of an agreement is lawful , unless- It is forbidden by law; Is of such a nature that, if permitted, it would defeat the provision of any law; or Is fraudulent; or Involves injury to the person or property of another; or The court regards it as immoral or opposed to public policy. In each of these cases the consideration or object of an agreement is said to be

unlawful. Every agreement of which the object or consideration is unlawful is void.

Page 81: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

81

equally the money they get on cheating D, this is not a valid

agreement. Similarly if A agrees to get B a seat in a college even

though he has not passed the exam on payment of Rs. 10,000, this

agreement is void as the consideration is unlawful.

Section 23 deals with both legality of object and consideration, in

some cases they may be the same thing but it is normally seen that

they are two different things.

The following heads have been enlisted by section 23 as being not

lawful and let us examine each of these.

a. Opposed to Public Policy

If an agreement aims to injure another person or property or the

object of the agreement between two people is one that injures

another person or property it is unlawful and void. So an

agreement, which may involve a civil wrong, to assault a person,

threaten him or to commit a crime will fall in this category127. The

law does not allow any person to recover any benefits from the

fruits of his own crime, thus a person will not be able to gain

anything which is the result of a illegal or unlawful act that he has

committed in the first place. For example if a person has committed

a murder in order to get hold of ancestral property which otherwise

would not have devolved upon him, he will not be permitted to

participate in this succession128. Similarly if courts of law in the

country interpret any agreement to fall within the parameters,

which are against public policy or opposed to it will be struck down

127 Allen v Rescous, (1677) 2 Lev 174; Brown Jenkison & Co. Ltd V Percy Dalton

(London) Ltd., (1957) 2 QB 621; See also Satish Chandra v Kashi Sahu, ( 1918) 3 Pat LJ 412.

128 Giles v Giles, (1972) Ch 544; Beresford v Royal Insurance Co. Ltd., (1937) 2 KB 197; Scottish Union & National Ins. Co v Roushan Jahan, (1945) 20 Luck 194.

Page 82: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

82

and the courts will refuse to enforce them. In the broadest sense

public policy means acts, which are in the interest of the public,

the country and its polity, policy aimed at achieving progress and

development and courts from time to time have and will revise what

is for and against public policy. The Supreme Court has stated that

any agreement, which will go against or has the tendency of going

against prevailing social values, public interest or public welfare, is

regarded as opposed to pubic policy129.

Contracts or agreements, which are related or connected to the

following purposes, have been held to be against public

consistently by various judicial interpretations.

� Payment out of black money.

� Marriage of minor girl or marriage brokerage contracts.

� Price escalation clauses.

� Trading with the enemy or agreements, which are contrary to

public policy of friendly state.

� Interference with administration of justice.

Under Section 23, contracts opposed to public policy and immoral

would be really void and not illegal, and in that respect Indian law

seems to deviate from English law. The distinction between void

contracts and illegal contracts is as follows. A void contract is one,

which has no legal effect. An illegal contract, though resembling the

void contract in that it also has no legal effect as between the

immediate parties, has this further effect that even transactions

collateral to it become tainted with illegality and are, therefore, in

129 Gherulal v Mahadeodas AIR 1959 SC 781; Ratanchand Hira Chand v Askar

Nawaz Jung,AIR 1976 AP 112; Amrit Banaspati Co. Ltd v State of Punjab, (1992) 2 SCC 411.

Page 83: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

83

certain circumstances not enforceable. If an agreement is merely

collateral to another or constitutes an aid facilitating toe carrying

out of the object of the other agreement which though void. is not

prohibited by law it may be enforced as a collateral agreement. If on

the other hand it is part of a mechanism meant to carry out what

the law has actually prohibited. Court cannot countenance a claim

based on the agreement being it is tainted with an illegality of the

object sought to be achieved, which is hit by the law. Where a

person entering into an illegal con tract promises expressly or by

implication that the contract is blameless such a promise amounts

to collateral agreement upon which the other party if in fact

innocent of turpitude may sue for damages130.

Section 23 of the Indian Contract Act provides that consideration or

object of an agreement is lawful, unless it is forbidden by law; or is

of such a nature that, if permitted, it would defeat the provisions of

any law, or is fraudulent; or involves or implies injury to the person

or property of another; or the Court regards it as immoral, or

opposed to public policy. The said Section further provides that in

each of these cases, the consideration or object of an agreement is

said to be unlawful and every agreement of which the object or

consideration is unlawful, is void. The contention of the petitioners

is that the agreement falls under the last category of unlawful

agreements that is cases where the Court regards an agreement as

being opposed to public policy. In Central Inland Case (AIR 1986

SC 1571) the Supreme Court observed: “….. the expression ‘public

policy’ and ‘opposed to public policy’ are incapable of precise

definition. It connotes some matter which concerns the public good

130 Rajat Kumar Rath V. Government Of India, Air 2000 Ori.32. Section 23, At Page 32, 34, 35 & 36.

Page 84: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

84

and public interest. The concept of what is for the public good or in

the public interest has varied from time to time131.

An agreement that if a person is promoted to the higher post or put

to officiate on that post or, as in the instant case, a stop-gap

arrangement is made to place him on the higher post, he would not

claim higher salary or other attendant benefits would be contrary to

law and also against public policy. It would, therefore, be

unenforceable in view of Section 23 of the Contract Act132.

Considering the nature of business of parties, the fact that the

defendants are manufacturers and the plaintiff is only a selling

agent, the doctrine of perpetuity should not be applied to such

agreements because one party may completely ruin the other

party’s business by sheer inaction on their part133.

The proposition that a contract between the arties will prevail over

an overriding statutory provision is contrary to basic norms of

jurisprudence. A statutory provision is the sovereign will of the

legislature and the same binds every one and certainly the parties

who are coming under it unless the provision is made subject to

contract or the law is repealed or declared unconstitutional by a

competent Court. If the proposition aforesaid is followed the same

will lead to disastrous consequences. Any two individuals would be

allowed to contract out of a statutory liability. It is well settled that

there can be no contract that could defeat the provision of any law.

131 Desigowda V. Karnataka Industrial Area Development Board, Air 1996 Kant. 197.

Section 25, At Page 197 & 200. 132 Secretary-Cum-Chief Engineer V. Hari Om Sharma, Air 1998 Sc 2909. Section 23,

At Page 2909 & 2910. 133 Rohit Dhawan V. G.K. Malhotra And Another. Air 2002 April. Del. 151. Section 23

At Page 151 & 159.

Page 85: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

85

This is one of the important facets of Section 23 of the Contract

Act134.

The use of property by the plaintiff for non-conforming purpose,

that is, for running a bank is violation of Section 14 of the Delhi

Development Act. Under Section 23 of the Indian Contract Act an

agreement is lawful unless it is forbidden by law or is of such

nature that, if permitted it would defeat the provisions of any law or

is fraudulent or involves or implies injury to the person or property

of another, or the court regards it as immoral or opposed to public

policy. In each of these cases, the agreement is unlawful and void.

The contract where specific performance is sought by the plaintiff

being in contravention of Section 14 of the Delhi Development Act

is prima facie unlawful and void under Section 23 and cannot be

legally enforced against the defendants135.

It is seen that the object of assignment of the Government land in

favour of the lessee is to provide him right to residence. If any such

transfer is made contrary to the policy, obviously, it would be

defeating the public purpose. But if would be open to the

Government to regulate by appropriate covenants in the lease deed

or appropriate statutory orders as per law or to make a law in this

behalf. But so long as that is not done and in the light of the

permissive language used in cl. (12) of the lease deed, it cannot be

said that the bequest in favour of strangers inducting a stranger

into the demised premises or the building erected thereon is not

134 Universal Petrochemicals Ltd., V. Rajasthan State Electricity Board, Air 2001

Calcutta 102. Section 23, At Page 102 & 106. 135 State Bank Of India V. M/S Aditya Finance & Leasing Co. Pvt. Ltd., Air 1999 Del.

18. Section 23 At Page 18,21 & 22.

Page 86: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

86

governed by the provisions of the regulation or that prior

permission should be required in that behalf. However, the stranger

legatee should be bound by all the covenants or any new covenants

or statutory base so as to bind all the existing lessees136.

It may be noticed that former limb of submission referred to above,

proceeds on the assumption that concerned official(s) of plaintiff-

bank since the inception of transaction were aware that the

building to be constructed on said plot could be used only for

residential purposes and despite that the bank agreed to take on

lease said two floors thereof for running its branch there. Needless

to say that in Para No, 10 of the written statement on merits also

the defendants have alleged that the plaintiff fully knew the

purpose for which the building could be used; that there was no

false representation by the defendants that building could be used

for commercial purposes; that there was no prohibition from DDA

in regard to the use of building to be constructed for banking

purposes. In support of this plea Pala Ram Gupta (DW-l) deposed

that after the building was complete, bank raised objection that as

the area falls within residential zone in the Master Plan it will not

be in a position to take it on lease. Plaintiff had not imposed any

condition that defendants should obtain prior permission from

DDA for functioning of its branch and many other branches of

banks were operating in the locality at that time. In cross-

examination, he admitted that he did not obtain any permission

from DDA for the purpose of giving the building on rent to a bank

nor did he apply for grant of such a permission. Ram Gopal Gupta

(DW-2) de- posed that one of the branches of plaintiff- bank is

136 State Of W.B. V. Kailash Chandra Kapur, Air 1997 Sc 1348. Section 23, At Page 1348 & 1353 .

Page 87: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

87

functioning in Greater Kailash in the premises owned by

Jagmander Dass. In cross-examination, he admitted that plot No.

G-39, Greep Park is a residential plot. Obviously, statements of

both these defendants do not support the said plea/submission

that concerned official(s) of plaintiff- bank knew since the inception

of transaction that building to be constructed on said plot could be

held only for residential purposes.

Since the defendants have failed to establish that concerned

official(s) of plaintiff-bank were aware since the inception of

transaction that building to be constructed on said plot No. G-39

could be used only for residential purposes, taking note of the ratio

in Kuju Collieries Ltd.'s case (AIR 1974 SC 1892) (supra), the

defendants cannot legally resist repayment of aforesaid amount of

Rs. 75,000/- with interest on the ground of agreement contained in

aforesaid letter dated 25th August, 1975 as also lease deed dated

9th October, 1975 being void under Section 23 of the Contract Act.

Further, as is manifest from aforementioned clause 15 of lease

deed, the plaintiff-bank had been assured by the defendants that

said two floors could be used by it for commercial purposes and

they even undertook to compensate the bank if any penalty was

levied by any authority whatsoever including Municipal

Corporation of Delhi during the continuance of lease period. Thus

the plea taken in said para 10 of the written statement that there

was no false representation by the defendants that buildings could

be used for commercial purposes deserves to be repelled being

dishonest. Suffice it to say that defendants have not led any cogent

evidence in support of yet another plea taken in said para of

written statement about there being no prohibition from DDA

regarding use of building for running a branch by bank. Running of

Page 88: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

88

some of the branches of banks in nearby localities cannot be taken

as proof that there was no prohibition from DDA in regard to use of

the defendants' building which admittedly is situated in a

residential area for banking purposes. Universal Plast Ltd. (AIR

1985 Delhi 383) and Malladi Seetharama Sastry's cases (AIR 1968

Andh Pra 315) (supra) were rendered on the facts having no

similarity with the facts of present case and, therefore, they are of

no assistance on the issues on hand137.

b. Agreements without consideration

These kinds of agreements are dealt with in section 24 of the Indian

Contract Act. A agrees to superintend on behalf of B a legal

manufacture of certain goods which are legal along with the trade

of goods which is illegal. For this A is promised Rs. 100,000; the

agreement is void as the object and consideration is part unlawful.

Generally speaking Section 24 merely reiterates the principle

enshrined in section 23. What is important in this provision is that

it is that part of the agreement that has in its fold either the

unlawful consideration or object which becomes void and the rest

of the provisions in the agreement remain enforceable, wherein

such division between lawful and unlawful covenants can be made.

Even though the appellant is not entitled to succeed this appeal on

the basis of the aforesaid contentions, the appeal is liable to

succeed in part in view of the admission of the defendant, who,

while being examined as D.W.1 has admitted his willingness to pay

to the Bank. To be more specific, the defendant has stated in

paragraph 3 of his deposition:-

137 The Bank Of Rajasthan Ltd., V. Sh. Pala Ram Gupta And Another, Air 2001 Delhi

58. Section 23, At Page 58 & 64.

Page 89: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

89

“I am willing to pay the legal dues of my mother.”

In paragtaph-5, he has further stated:-

“I have seen the statement of account filed in the court. I am only

willing to pay the principal amount of Rs.6,000/-, but not willing to

pay so much interest”

In view of such admission of the defendant In deposition indicating

his willingness to pay a sum of Rs. 6,000/-, the claim of the

appellant. Bank can be accepted to the above extent even though

the suit itself was barred by time. If the defendant could have

extended the period of limitation by acknowledging his liability in

accordance with section 19 of the Limitation Act, or entered into a

fresh contract in respect of a time-barred debt in: accordance with

section 25 of the Contract Act, there is no reason why he cannot be

found liable in a time-barred suit on the basis of admission made

in the deposition in such suit138.

There should be consensus ad idem for a concluded contract and

Section 25(1) of the Contract Act contemplates that when a transfer

is without consideration, it is void contract. In instant case there

was no concluded contract between shareholder and broker. The

acquiescence of shareholder did not amount to consent since she

had not expressly authorised her husband to transfer her shares.

The transfer as Re. 1/- . As a consequence, in the eye of law, there

is no consideration and, therefore, the transfer agreement was

void139.

138 State Bank Of India V. Dilip Chandra Singh Deo, Air 1998 Orissa 129. Section 25,

At Page 129 & 130. 139 M/S John Tinson And Co. Pvt. Ltd. V. Surjeet Malhan, Air 1997 Sc 1411. Section

10, At Page 1411 & 1412.

Page 90: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

90

c. Restraint of Marriage

Section 26 states that every agreement in restraint of marriage of

any person, other that a minor, is void. Such restraint could be

general or partial. In a leading case140 there was an agreement

between two widows that if any of them remarried she should

forfeit her right to her share in the deceased husbands property.

The court upholding the agreement held that since the agreement

imposed no restraint on the remarriage it cannot be held

completely void. The Restraint was only with regard to enjoyment of

the property rights.

d. Restraint of Trade

Every agreement by which any one is restrained by exercising a

lawful profession, trade or business of any kind is to that extent

void.141 A right protected, as a constitutional right cannot be taken

away by entering into a contract. The principle underlying this rule

is that every person be given liberty and freedom to trade, and a

contractual obligation should not snatch such right.

The leading English case of Nordenfelt v Maxim Nordenfelt Gun

CO.142 established this principle for the first time.

In this case a guns and ammunition manufacturer, agreed with the

buying company not to practice the same trade for 25 years and

not to engage in any business competing with the business of the

company. He later entered into an agreement with another

140 Raorani V Gulab Rani(AIR 1942 All 351) 141 Section 27 142 (1894) Ac 535

Page 91: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

91

manufacturer of guns and ammunition ad there was an action

initiated against him by the company.

The courts here held that as regards the first portion the agreement

the restraint was general in nature and that it was not

unreasonable. However the latter part of the agreement whereby he

was prohibited from competing with the company in any business

that the Company may carry on was held to be unreasonable. And

thereby it was also held to be void.

This judgement gave an insight into the most important

observations on this account being that all restraints are contrary

to public policy and therefore void unless there are some special

circumstances justifying it and such justification is only possible if

the restraint is in the interest of the contracting parties or in public

interest.

As per the Indian Contract Act 143 every agreement by which

anyone is restrained from exercising a lawful profession, trade or

business of any kind, is to that extent void. In India all such

agreements in restraint of trade are void whether they are of

general or partial nature.

However there are some exceptions to this theory which are listed

as follows:

Sale of Goodwill:

This exception states that a when a person buys the goodwill of

another then he may impose such reasonable restrictions as to the

time and place on the seller of the goodwill. The exception states

that “ One who sells the goodwill of a business may agree with the

buyer to refrain from carrying on similar business within specified

143 Section 27

Page 92: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

92

local limits, so long as the buyer or any other person deriving title

to the goodwill from him, carries on a like business therein,

provided that such limits appear to the court reasonable, regard

being had to the nature of the business.

Partnership Agreements:

The Partnership Act there are provisions which make valid such

clauses. They are:

• A partner may agree not to carry on business, other than the

firms business, while being a partner.

• A retiring partner may agree not to carry on business, similar

to that of the firm within specified time period and within the local

limits.

• Partners may agree that on dissolution of the firm or in

anticipation make an agreement not to carry on similar business

with in the given local limits or within specified time periods.

• The partners while selling the goodwill of the firm may agree

not to carry on business within a specified local limit for the

specified period.

Also judicial interpretations have held trade combinations not to be

agreements in restrain of trade.

Scope of the section

Section 27 of the Contract Act is in absolute terms. It does not say

that only unreasonable restraint of trade is void and reasonable

restraint of trade is void. The scheme of the old Contract Act was to

enunciate the rule in section 27 and also lay down in the statute

itself the exceptions to the rule. The first exception regarding the

Page 93: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

93

sale of goodwill of the business is annexed to section 27 itself.

Three more exceptions to the rule were also a part of the Chapter

on Partnership in the unamended Contract Act which later became

the Partnership Act, 1932. These exceptions are contained in

sections 11(2), 36(2) and 54 of the said Act. It will be seen that the

framers of the Contract Act wanted to state the complete law as to

the general rule that restraint of trade is void and also the

exceptions based on reasonableness to such a rule. It is to be noted

that the contract between the master and servant was not the

subject-matter of any of the exceptions. If the rule is subject to the

stated exceptions only, the ordinary interpretation of these

statutory provisions would be that no other exceptions are to be

engrafted upon these statutory rules stated in section 27. If a

contract of service is valid and the performance of the contract by

the employee requires that during the period of, service he must

not engage in any other work and must not divulge to any person

the trade secrets of the employer then under such an agreement,

even in the absence of a negative covenant prohibiting the employee

from doing so, the employee would be prohibited by law from doing

so. For, these acts are inconsistent with the performance of the

contract which would amount to a breach of contract. This

conclusion can be based on the contract itself even without

invoking section 27. But any restraint imposed by the employer on

the employee would prima facie be illegal and void as being directly

hit by section 27 if it is to operate after the expiry of the period of

service contract.144

144 Krishan Murgai v. Superintendence Company of India (P) Ltd. AIR 1979 Del 232.

Page 94: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

94

In another case it was held “One cannot lose sight of the fact that

the defendant No.3 being a qualified person possessing a degree of

H.E. (Chem) and having obtained sufficient experience in the

course of his employment either with the plaintiff or other

companies, the experience being his assets, it is difficult at this

stage to injunct him unless proper evidence is led that he has

disclosed or divulged any secrecy or confidentiality reposed in him

while he was in the service with the plaintiff company. The

circumstances pointed out by the plaintiff that defendant No.3,

during the course of his employment with the plaintiff had

participated in the meetings relating to the invention of the new

process of manufacturing AIP and ZnP and, immediately on his

termination, joined the defendants Nos. 1 and 2 and divulged all

the information of manufacturing AIP and ZnP, and the defendants

Nos. 1 and 2, in turn, in fact, are also manufacturing the same,

prima facie, do not appear to be so strong enough to clinch the

issue in favour of the plaintiff as defendants Nos. 1 and 2 have

come out with a specific case that even prior to the defendant No.3

joining the defendants Nos. 1 and 2 they were actually

manufacturing AIP and ZnP by using white/yellow phosphorus. As

can be seen from the various bills of purchase of machinery and

the licence dated 20-5-93 issued by the licensing authority for

manufacture of AIP and ZnP by using white/yellow phosphorous,

prima facie, it appears that the defendants Nos. 1 and 2 have, in

fact, been manufacturing the product in question even prior to the

defendant No.3 joining them. In that view of the matter, the

plaintiff has failed to make out even a prima facie case in its favour

and is therefore not entitled to the relief prayed for.145”

145 Sandhya Organic Chemicals P. Ltd. v. United Phosphorous Ltd. AIR 1997 Guj 177.

Page 95: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

95

The Contract act, 1872 does not process to be a complete code

dealing with the law relating to contracts, to the extent the Act

deals with a particular subject, it is exhaustive upon the same and

it is not permissible to import the principles of English law dehors

the statutory provision, unless the statute is such that it cannot be

understood without the aid of the English law. When a rule of

English law receives statutory recognition by the Indian legislature,

it is the language of the Act which determines the scope,

uninfluenced by the manner in which the analogous provision

comes to be construed narrowly, or otherwise modified, in order to

bring the construction within the scope and limitations of the rule

governing the English doctrine of restraint of the trade.

Under S. 27 of the Contract Act, a service covenant extended

beyond the termination of the service in void146.

Solus or Exclusive dealing agreements

As also agreements supporting Solus or Exclusive dealing

agreements and agreements with employees restraining them to a

valid extent have also not been held to be in restraint of trade by

various courts.

“Since the parties to the 1993 agreement were Coca Cola and GBC

only and the shareholders of GBC were not parties to the

agreement, it cannot have any binding force on the shareholders of

GBC. Clause (b) of paragraph 19 cannot, therefore, be construed as

146 Sandhya Organic Chemicals P. Ltd. V. United Phosphorous Ltd., Air 1997 Guj.

177. Section 27, At Page 177.

Page 96: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

96

placing any restraint on the right of the shareholders to transfer

their shares. It can only be construed to mean that in the event of

the shareholders of GBC transferring their shares and such

transfer resulting in an effective transfer of control of GBC, Coca

Cola has a right to terminate the agreement and even without

terminating the agreement Coca Cola has the additional right to

discontinue supplying GBC with essence/syrup and/or other

materials for such length of time as Coca Cola may in its sole

judgment deem necessary without thereby cancelling or prejudicing

Coca Cola's right to cancel or terminate the agreement for the said

cause or for anyone or more other cause or causes. In other words,

in the event of effective transfer of control of GBC as a result of

transfer of shares by the shareholders, apart from its right to

cancel the agreement Coca Cola has also been given the right to

discontinue the supply of essences/syrup and/or other materials to

GBC. This clause governs the relationship between Coca Cola and

GBC inter se and it cannot be construed as placing a restraint on

the right of the shareholders to transfer their share. 147”

e. Restraint of legal Proceedings

The Indian Contract Act also restrains any agreement whereby a

party is restricted absolutely from enforcing his rights under or in

respect of any contract by a legal proceeding, or any clause in a

contract that reduces the time limit of enforcement of any legal

right.

An agreement which in effect seeks to curtail the period of

limitation and prescribes a shorter period than that prescribed by

147 Gujarat Bottling Co. Ltd. v. Coca Cola Co. (1995) 5 SCC 545: (1995) 84 Comp Cas

618.

Page 97: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

97

law would be void as offending section 28 of the Contract Act. But

there could be agreements which do not seek to curtail the time for

enforcement of the right but which provide for the forfeiture or

waiver of the right itself if no action is commenced within the

period stipulated by the agreement. Such a clause in the agreement

would not fall within the mischief of section 28 of the Contract Act.

To put it differently, curtailment of the period of limitation is not

permissible in view of section 28 but extinction of the right itself

unless exercised within a specified time is permissible and can be

enforced.148

However the section also has listed out some exceptions to this rule

in the form of agreements where there is a mention of referral of the

a dispute to arbitration. This clause will not render the contract

void.

In Pearl Insurance Co. v. Atma Ram, AIR 19 Punjab 236, the <Full

Bench of Punjab High Court was faced with a similar condition as

is contained in Clause 6(ii) of the insurance policy Ex. PW 1/1 in

the present case. The question posed for determination by the Full

Bench was whether clause 19 of the policy (which is similar to

clause 6(ii) in the present case was rendered void by virtue of

Section 28 of the Contract Act, 1872. While upholding the validity

of the clause, the Full Bench held :-

" As a result of the above discussion, on principle and authority the

validity of the clause similar to CI. 19 must be upheld principally

on following grounds:

148 Food Corporation of India v. New India Assurance Co. Ltd. (1994) 3 SCC 324

followed; Vulcan Insurance Co. Ltd. v. Maharaj Singh (1976) 1 SCC 943 affirmed. National Insurance Co. Ltd. v. Sujir Ganesh Nayak & Co. (1997) 4 SCC 366: AIR 1997 SC 2049: (1997) 89 Comp Cas 131.

Page 98: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

98

(1) The primary duty of a Court of law is to enforce a promise,

which the parties have made and to uphold the sanctity of

contracts into which the parties have an unfettered right to enter

provided they are not opposed to public policy or are not hit by any

provision of the law of the land.

(2) The object and exigencies of insurance are such that

promptitude in asserting or enforcing a claim and also in its

settlement was of the essence. The Insurance Companies would

thus be justified in putting a time-limit within which the claim

must be enforced: otherwise all rights under the policy would come

to an end.

(3) A clause of this nature does not provide a different period of

limitation from the one prescribed by the Indian Limitation Act.

Notwithstanding the existence of the clause, it is open to the

insured to maintain an action within three years as prescribed by

the Limitation Act subject to the Company waiving the clause

although under the Limitation Act the suit must be dismissed if

instituted after the expiry of the prescribed period and the waiver is

wholly ineffective.

(4)A contract may contain within itself the elements of its own

discharge express or implied for the determination in certain

circumstances.

(5)as the clause does not limit the time within which the insured

could enforce his rights and only limits the time during which the

contract will remain alive it is not hit by the provisions of Sec. 28 of

the Contract Act.

The above ratio laid down by the Full Bench of the Punjab High

Court was approved and upheld by the Supreme Court in National

Insurance Co. Ltd. v. Sujir Ganesh Nayakand Co. (1997) 4SCC 366:

(AIR 1997 SC 2049). It was observed as under:-

Page 99: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

99

" From the case-law referred to above the legal position that

emerges is that an agreement which in effect seeks to curtail the

period of limitation and prescribes a shorter period than that

prescribed by law would be void as offending Section 28 of the

Contract Act. That is because such an agreement would seek to

restrict the party from enforcing his right in Court after the period

prescribed under the agreement expires even though the period

prescribed by law for the enforcement of his right has yet not

expired. But there could be agreements which do not seek to curtail

the time for enforcement of the rights but which provide for the

forfeiture or waiver of the right itself if no action is commenced

within the period stipulated by the agreement. Such a clause in the

agreement would not fall within the mischief of Section 28 of the

Contract Act. To put it differently, curtailment of the period of

limitation is not permissible in view of Section 28 but extinction of

the right itself unless exercised within a specified time is

permissible and can be enforced. If the policy of insurance provides

that if a claim is made and rejected and no action is commenced

within the time stated in the policy, the benefits flowing from the

policy shall stand extinguished and any subsequent action would

be time-barred. Such a clause would fall outside the scope of

Section 28 of the Contract Act. This, in brief, seems to be the

settled legal position.

In the present case, admittedly the claim regarding loss and

damage was lodged by the plaintiff with the defendants within 12

months of the happening of loss and damage. Such claim was

repudiated by the defendants on 27-3-1992 vide letter Ex. PW 1/6.

Therefore, in terms of clause 6(ii) the plaintiff could have enforced

the claim against the defendants by way of a suit within 12 months

from such repudiation. In other words. the claim could have been

Page 100: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

100

enforced till 26-3-1993. The present suit was filed on 2-1-1995, for

enforcement of the claim, that is, about two years after the expiry of

the period prescribed under Clause 6(ii). On the failure of the

plaintiff to enforce the claim within the period stipulated in Clause

6(ii) of the Insurance policy Ex. PW 1/1, the forfeiture clause came

into play and the right of the plaintiffs to enforce the claim stood

extinguished149.

The parties in the instant case had executed a Memorandum of

Understanding for construction of houses one of the clauses

provided that the Arbitration Act, 1940 shall not be applicable to

the arbitration under that clause. The parties were not suffering

from mistake of fact in respect of matter, which was essential to the

contract. There fore the agreement is not void in view of Section 20

of the Contract Act. Therein though the condition in that clause

ousting the applicability of the Arbitration Act was void in view of S.

28 of the Contract Act read with S. 47 of the Arbitration Act.

Section 28 of the Contract Act does not have the effect of making

the whole agreement void but only that portion which relates to the

ouster of the jurisdiction. It says in the concluding part of it that

the stipulation is void “to that extent.” A combined look of the

Memorandum of Understanding thus demonstrates that the parties

had entered into written agreement with the intention that the

dispute arising under the contract were to be resolved through

arbitration. The illegal conditions ousting applicability of the

149 H.P. Horticulture P.M. & P. Corpn. Ltd. V. U.I. Insurance Co. Ltd., Air 2000

H.P.11. Section 28, At Page 11 & 14.

Page 101: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

101

Arbitration Act can be ignored and the provisions of the Act of 1940

can be made applicable to the arbitration proceedings150.

Right of the parties to have recourse to legal action is not excluded

by the agreement. The parties are only required to have their

dispute/s adjudicated by having the same referred to arbitration.

Merely because the arbitrators are situated in a foreign country

cannot by itself be enough to nullify the arbitration agreement

when the parties have with their eyes open willingly entered into

the agreement. The instant case is clearly covered by Exception 1 to

S. 28. Moreover, in this case the parties have willingly initiated the

arbitration proceedings on the disputes having arisen between

them: They have appointed arbitrators, participated in arbitration

proceedings and suffered an award. The plea that the parties

between whom the dispute arose, are both Indian Parties and the

contract which had the effect of compelling them to resort to

arbitration by foreign arbitrators and thereby impliedly excluding

the remedy available to them under the ordinary law of India

should be held to be opposed to public policy was not raised either

before or during arbitration proceedings, nor before the single

Judge of the High Court in the objections filed before him, nor in

the Letters Patent Appeal filed before the Division Bench. Such a

plea would not be available to be raised by the appellant before the

Supreme Court for the first time151.

150 Rajasthan Housing Board V. Engineering Project(India) Ltd. And Another. Air

2000 Raj 200.Section 20, 28, At Page 201, 205 & 206. 151 M/S. Atlas Export Industries V. M/S. Kotak & Company, Air 1999 Sc 3286.

Section 28, At Page 3286 & 3288.

Page 102: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

102

An agreement which in effect seeks to curtail the period of

limitation and prescribes a shorter period than that prescribed by

law would be void as offending Section 28 of the Contract Act. That

is because such an agreement would seek to restrict the party from

enforcing his right in Court after the period prescribed under the

agreement expires even though the period prescribed by law for the

enforcement of his right has yet not expired. But there could be

agreements which do not seek to curtail the time for enforcement of

the right but which provides for the forfeiture or waiver of the right

itself if no action is commenced within the period stipulated by the

agreement. Such a clause in the agreement would not fall within

the mischief of S. 28 of the Act. To put it differently, curtailment of

the period of limitation is not permissible in view of Section 28 but

extinction of the right itself unless exercised within a specified time

is permissible and can be enforced. If the policy of insurance

provides that if a claim is made and rejected and no action is

commenced within the time stated in the policy, the benefits

flowing from the policy shall stand extinguished and any

subsequent action would be time-barred. Such a clause would fall

outside the scope of Section 28 of the Contract Act.

Where a clause in an agreement of insurance extending insurance

to losses arising from riot or strike, provided for filing of claim

within stipulated time and the insured, though informed insurer

about strike on two dates, filed suit after expiry of stipulated

period. Clause providing for filing of claim, within stipulated period

did not curtail period of limitation prescribed by law and suit was

time-barred152.

152 National Insurance Co. Ltd. V. Sujir Ganesh Nayak & Co, Air 1997 Sc 2049. Section

28, At Page 2049, 2054 & 2055 .

Page 103: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

103

The agreement was executed at Madras. The parties have agreed

that all disputes, differences and/or claims shall be settled at

Bombay. No part of cause of action had occurred at Bhubaneswar

except showing some payment to the defendant. That by itself does

not confer a light to the plaintiff to file a suit at Bhubaneswar153.

In order to prove that a binding contract of insurance was

concluded, there should be an offer put forward by one party to the

contract and an acceptance of the same by the other party. It

cannot be disputed that the usual practice is that an offer is made

by the party who completes the proposal form and sends it to the

insurer for their consideration., which should be followed by a valid

acceptance. An acceptance would be of no effect unless the parties

have agreed upon every material term of the contract they wish to

make. In an insurance contract, the definition of the risk is to be

covered, the duration of insurance cover, the amount and mode of

payment of premium and the amount of insurance payable in the

event of a loss, all must be stated. Only then can it be stated that

there was consensus ad idem. The commencement and the

duration of the risk must be studied and it should be mentioned in

the document. In so far as the subject matter of insurance is

concerned, there should not be any ambiguity. It could be safely

concluded that there was no contract of insurance at all154.

Where an agreement was executed between plaintiff and the

Electricity Board and it contained an ouster clause having clear

153 Dilip Kumar Ray V. Tata Finance Ltd. Air 2002 Feb. Ori. 29. Section 28. At Page 29

& 32. 154 M/S Marthi Crystal Salt Co. Ltd. V. Oriental Insurance Co. Ltd., Air 2001 Mad.

288. Section 28, At Page 289, 302, 303, 304 & 306.

Page 104: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

104

and unambiguous language, which stipulated that all disputes and

claims arising out of said contract are to be settled at place ‘J’ or

triable ‘only’ before any competent Court at place ‘J’ the word ‘Only’

in this case has to be given weightage, which on proper

construction means that jurisdiction of all other Courts is

excluded, so filing of suit by plaintiff against the Board with regard

to additional demand made for supply of electricity on basis of

incorrect reading in checkmeter before Court having territorial

jurisdiction i.e. at place where cause of action arose is improper.

More so when said Court was not the one mentioned in ouster

clause of the agreement155.

Where an agreement was executed between plaintiff and the

Electricity Board and it contained an ouster clause having clear

and unambiguous language, which stipulated that all disputes and

claims arising out of said contract are to be settled at place ‘J’ or

triable ‘only’ before any competent Court at place ‘J’ the word ‘Only’

in this case has to be given weight, which on proper construction

means that jurisdiction of all other Courts is excluded, so filing of

suit by plaintiff against the Board with regard to additional demand

made for supply of electricity on basis of incorrect reading in

checkmeter before Court having territorial jurisdiction i.e. at place

where cause of action arose is improper. More so when said Court

was not the one mentioned in ouster clause of the agreement156.

155 M/S Rajaram Maize Products V. M.P. Electricity Board, Jabalpur, Air 1999 M.P.

44. Section 23, 28, At Page 44 & 45. 156 M/S Rajaram Maize Products V. M.P. Electricity Board, Jabalpur, Air 1999 M.P.

44. Section 23, 28, At Page 44 & 45.

Page 105: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

105

f. Uncertainty

The Indian Contract states that agreements, the meaning of which

is not certain, or capable of being made certain are void.157

g. Wager

William Anson has defined wager as “a promise to give money or

moneys worth upon determination or ascertainment of an

uncertain event “. This is the apt explanation of what would

constitute a wager. The Indian Contract Act 158 declares any

agreemtn by way of wager void and that no suit shall be brought for

recovering anything alleged to be won by any wager, or entrusted to

any person to any person to abide by the rules of any game or other

uncertain event on which any wager is made.

However this section does not render unlawful any subscription or

contribution or agreement to subscribe, made or entered into for or

towards any plate, prize or sum of money of the value or amount of

five hundred rupees or upwards, to be awarded to the winners of a

horse race.

Agreement for payment of prize money on lottery ticket. A lottery

comes within category of ‘wagering contract’ contemplated under

S.30. Hence, the contract is void. Neither provisions of Central nor

State Act controlling activities relating to lottery would change its

nature.159

157 Section 29 158 Section 30 159 Subhash Kumar Manwani V. State Of M.P., Air 2000 M.P.109 Section 30, At Page 109.

Page 106: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

106

Section 294-A of the Indian Penal Code also prohibits such

agreements.

The necessary ingredients that constitute a wagering transaction

are:

1. There is a promise to pay money

2. This promise is dependent on the happening of a future

uncertain event

3. Either of the parties can win or lose

4. Both parties have equal chance to win or to lose

5. Apart form the money or moneys worth involved as

consideration no other consideration is present in the transaction.

The leading case of Gherulal v Mahadeo 160 that “though a wager is

void and unenforceable it is not forbidden by law” Thus a wagering

agreement is not unlawful under Section 23 of the Contract Act

and is not struck down on account of public policy but because it

has been held void under Section 30 of the Act.

9. Discharge of Contracts

i. Reciprocal Promises

Reciprocal promises exist when a contract cosmists of an exchange

of promises. Reciprocal promises are” promises which form the

consideration or part of the consideration for each other are called

reciprocal promises”161. These promises have to be simultaneously

performed and therefore the promisor is not bound to perform his

160 AIR 1959 (Supreme Court 781) 161 Section 2(f)

Page 107: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

107

part of the promise unless the promisee is ready and willing to

perform his part of the promise. This is laid down by section 51.

As regards to the oprder of performance of such promises section

52 states that when there is an order of performance fixed yet e

contract then they shall be performed in that order and where there

is no order specified then they shall be performed in that order

which the nature of the transaction requires.

Fro example in a contract for construction the where it has been

decided that payments shall be made on the basis of construction

done and based on the billing for work complete at such stage then

such payment shall be due only when such work is complete.

Section 51 to 58 of Indian Contract Act 1872 deal with performance

of Reciprocal Promises. Of them, Sections 51, 52 and 54 are alone

relevant for the purpose of the present case. Section 51 deals with

a contract consisting of reciprocal promises to be simultaneously

performed: It reads :-

“Section 51:- Promisor not bound to perform unless reciprocal

promisee ready and willing to perform.- When a contract consists of

reciprocal promises to be simultaneously performed, no promisor

need perform his promise unless the promisee is ready and willing

to perform his reciprocal promise.”

Section 52, dealing with the order of performance reciprocal

promises, reads as under :-

"Section 52:- Order of performance of reciprocal promises.-Where

the order in which reciprocal promises are to be performed is

expressly fixed by the contract, they shall be performed in that

order; and, where the order is not expressly fixed by the contract,

they shall be performed in that order which the nature of the

transaction requires,"

Page 108: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

108

Section 54 dealing with the effect of default as to that promise

which should be first performed reads as under :-

"Section 54:- Effect of default as to that promise which should be

first performed in contract consisting of reciprocal promises- When

a contract consists of reciprocal promises, such that~ one of them

cannot be performed, or that its performance cannot be alarmed till

the other has been performed, and the promisor of the promise last

mentioned fails to perform it, such promiseor cannot claim the

performance of the reciprocal promise, and must make

compensation to the other party to the contract or any loss which

such other party may sustain by the non-performance of the

contract,"

The case on hand may not be one of a contract consisting of

reciprocal promises to be performed simultaneously as

contemplated under Section 51. However, it is clear from the

reading of the terms and conditions of Clause II of the suit

agreement that the liability of the firm, M/s. Vegi Venkateshwara

Rao and Brothers to pay Rs. 8,00,000/- to the plaintiff which was

passed on to the 1st defendant under Ex. A-5, is subject to the

plaintiff giving up 20% share in the godown complex site with

buildings etc. situated at Rajaram Mohan Road and getting the

leases of M/s. V. J. Enterprises and M/s. Sri Krishna Trading

Company endorsed or attorned in favour of the firm and its

partners. Therefore, we are of the considered view that this is a

case governed by the provisions of Sections 52 and 54. We have

already held under points 1 to 3 that the suit agreement is one of

reciprocal promises and the plaintiff committed breach of promises

he made under the same.

Page 109: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

109

It is well settled that while seeking performance of reciprocal

promise by the opposite party, the plaintiff has to specifically plead

and prove that he has performed or has been ready and willing to

perform the promise he has made see Vairavan v. Kannappa. AIR

1925 Mad 1029, Abdullah Bey v. Tenenbaum, AIR 1934 PC 91 and

Tan Ah Boon v. Johre State, AIR 1936 RC 236. In the case on

hand, the plaintiff has done the neither. Therefore, he cannot

maintain the present suit. Even otherwise, the suit is premature as

held by us under point No.4. Thus, viewed from any angle, the suit

is liable to be dismissed162.

Where an agreement contains reciprocal promises forming the

consideration for each other it is not necessary to show the

existence of separate consideration for the purpose of enforcing the

contract.163

In a leading case164 the defendant took on lease a land from the

Municipality of a town on the condition that he pays Rs. 630 for

levelling charges and possession was to be delivered after levelling.

The question that arose was what point of time the sum due to be

paid, was it after or before the levelling and the agreement was

silent on this point. The Court here held that though in some cases

there was a custom to pay in instalments as the work progresses

and in ordinary course of business no payment is generally made

before the work is done therefore , it cannot be expected for the

entire amount to be paid in advance in the absence of any express

agreement to that effect”

162 Vegi Venkateswara Rao V. Vegi Venkatarama Rao, Air 1998 Ap 6. Section 52, 54,

At Page 6 & 12. 163 Varghese Paul v. Narayanan nair 1999 (3) CCC 559 (ker) 164 Hashman v Lucknow Improvement Trust (1927) 101 IC 847

Page 110: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

110

Section 53 speaks of the Liability of a party preventing the event on

which the contract is to take effect. It states that where there are

reciprocal promises and one of the party to the contract prevents

the other form performing his promise, the contract becomes

voidable at the option of the other party so prevented: and he is

entitled to claim compensation form the other party for any loss he

may sustain in consequence of the non performance of the

contract.

For example in a case before the Privy Council where a defendant

has supplied a crusher in order to get a mine cleared of a rock and

the crusher supplied was too inadequate it was held that such an

obstruction to performance has enabled the contractor to recover

his expenses and loss of profit.

Section 54 speaks of the effect of the default of one of the parties. It

states that where there is a presence of reciprocal promise, such

that one of them cannot be performed, or that its performance

cannot be claimed till the other has been performed, and the

promsior of the promise last mentioned fails to perform it, such

promisor cannot claim the performance of the reciprocal promise

and must make compensation to the other party to the contract for

any loss which such other party may sustain by the non

performance of the contract.

This was seen in the case of Nathulal V Phoolchand165 where the

plaintiff was the owner of a ginning factory constructed on

agricultural land and held nominally in the name f his brother,

which he sold to the defendant who paid half the price and was put

in possession. The buyer did not pay up the balance and the seller

rescinded the contract and brought action for possession.. It was

165 (1969) 3 SCC 120

Page 111: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

111

held that if the nature of the contract required that the seller

should have his name recorded as the owner and obtain

permission form the state Government for the transfer of the

agricultural land before he could claim final payment. Therefore as

long as the seller did not carry out his part of the contract the

buyer could not be called upon to pay the balance of the price.

Section 57 speaks of Reciprocal promises to do things legal and

also other things illegal. It stats that where persons reciprocally

promise to do certain things which are legal and secondly under

specified circumstances to do certain other things which are illegal,

the first set of promises is a contract but the second is a void

agreement.

As for example A and B agree that A shall sell B a house for Rs.

10000 but that if B uses it as a gambling house he shall pay 50000

for it. The first set of reciprocal promises here is lawful and that

contract is valid and the second set is for unlawful object making

the agreement void.

ii. Alternate Promises

An alternate promise is one where parties have alternate options

either for alternate promise or for alternate consideration or both,

and in such a case the alternative that is legal is only enforceable.

As for instance A and B agree A shall pay B 1000 rupees for which

B shall afterwards deliver to A either rice or smuggled opium. This

is valid contract to deliver rice and is a void contract as to the

opium.

Discharge by Performance

The discharge of a contract though extinguishes the initial set of

rights and obligations various consequences may follow form the

various modes of discharge. Performance is the fulfilment of the

Page 112: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

112

contractual obligations and is always doing what the parties

intended to do and are required to do under the law as stated

under section 37 of the Act. Performance is complete when the

obligations are carried out completely by the contracting parties

and it renders the contract discharged.

Attempted performance will also discharge the contract. Attempted

performance or Tender is the attempt on the part of the promisor to

perform the obligations absolutely unconditionally and at the time

and the place so require under the contract and in the event the

performance requires delivery of some thing then such reasonable

opportunity of seeing the thing offered. This has been laid down

under section 38 of the Act.

It also states that when so tender of performance has been made

and is not accepted then the promisor is not responsible for non

performance and also does not lose any right thereby accrued

under the contract.

iii. Who Should Perform

Each party under the contract is bound to perform or offer to

perform his respective promise, unless the performance is

dispensed with or excused under the provisions of the Contract Act

or any other law. This has been laid down under section 37

Section 37 also states that the obligation of the promisor also binds

his legal representatives in the case of the death of the promisor

unless a contrary intention appears form the contract.

When there is personal skill involved or is a contract founded on

personal; considerations then such a contract is ended at the death

of the promisor and the personal action ends at that point of time.

Page 113: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

113

The doctrine of privity of contract implies a mutuality at Will and is

interaction of parties and their successors. It creates a legal bond

or tie or vinculum juris personal to the parties. The rule, thus, is

that no one except the parties to a contract can be bound by or

entitled under a contract. This doctrine, which debars third party

to enforce a contract, forbids the parties to the contract from

enforcing any obligation there under against a stranger. A person

cannot be subject to the obligation of a contract to which he is not

a party and the logical consequence is that a stranger cannot

acquire rights under a contract. This general rule, no doubt, is

subject to certain exceptions. Two of the exceptions to the general

rule that a stranger cannot enforce a contract are the beneficiaries

under a trust created by a contract, or in the case of a family

arrangement. To this can be added the beneficiary under a

marriage settlement or partition.

Where an agreement for sale of land was entered into by the owner-

defendant with plaintiff who was elder brother of other plaintiffs,

the agreement would not be enforceable by or against the other

plaintiffs. The other plaintiffs who were not parties to the

agreement would not fall under any of the categories of

beneficiaries. Therefore, the plaintiffs other than plaintiff-elder

brother being strangers to the agreement were not bound by the

said agreement as there was lack of mutuality and reciprocity of

the binding nature of the agreement between them and

defendant166.

When a loan transaction is concluded with the repayment of whole

amount and nothing is due towards the same, the relationship of

166 Harnam Singh V. Purbi Devi, Air 2000 H.P. 108. Section 10, 37, At Page 108 & 112.

Page 114: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

114

borrower and lender comes to an end. In loan transactions there is

an obligation on the part of the borrower to discharge the loan

fully. Once such discharge is done, a duty is cast upon the lender

to handover the loan documents or documents obtained for the

security, to the borrower. The lender cannot escape from that

obligation under any pretext. Documents of a cleared loan

transaction cannot be withheld on the ground of expenses incurred

in connection with a case that has nothing to do with the loan

transaction167.

3. In view of the above consideration and findings, we are of the

opinion that the National Commission was right in limiting the

liability undertaken in the contract entered to by the parties and in

awarding the amount for deficiency in service to the extent of the

liability undertaken by the respondent. Therefore, we do not think

that there is any illegality in order passed by the Commission. Shri

Krishamani has brought to out notice that there are number of

judgments covering divergent views. In view of the view we have

expressed above, it is now settled law and the Tribunals would

follow the same. Lastly, it is contended that besides the amounts

awarded by the State Commission, liberty, may be given to the

appellant to pursue the remedy available in law. It is needless to

mention that the remedy available at law would be pursued

according to law168.

Joint promisors

167 M/S Eco Ceramics V. Karnataka State Financial Cprpn., Air 2001 Kant 167. Section

37, At Page 167 &168. 168 Sukhbir Singh V. Brij Pal Singh., Air 1996 Sc 2508. Section 37, At Page 2509 & 2510.

Page 115: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

115

In the case of joint promisors principles laid down by section 42 to

44 will apply.. According to section 42, unless the contrary is

indicated, joint promisors must jointly fulfil the promise. ? However

according to section 43, unl3ess a contrary intention appears, the

promisee may compel anyone or the more of the several joint

promisors to perform the whole of the promise. As for example if A,

B and C have jointly promised to repay a debt to D then they are

bound to rapay so jointly but C may compel all or any of them

repay the entire amount and after the death of any one of them his

representative along with the survivors and after the death of the

last survivor the representatives of all jointly must fulfil the

promise unless it contrarily intended.

Section 43 gives the right to the joint promisor the right to claim

equal contribution form the others and where one of them defaults

the others must bear the deficiency in equal proportion.

Also section 44 states the release of any joint promisor by the

promisee does not discharge the others form the liability not does it

free such joint promisor from liability of contribution.

iv. Who can claim performance?

Primarily it is the promisee who can claim performance whether the

contract is for the benefit of the promisee or any third person as

stated in the concepts of privity of contract.

In the event of the death of the promisee then his legal

representative can enforce the promise in suitable cases.

Joint Promisees

Section 45 of the act states that when a promise is made to more

that one person jointly, unless contrarily indicated the right to

claim performance rests with tem during their joint lives and on the

Page 116: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

116

death of any of them, with the representatives of such deceased

person jointly with the survivors and after the death of the last

survivor with all the representatives jointly. Thus the devolution of

the rights are in the same way as the devolution of the joint

liabilities as earlier discussed.

"The object of inviting their offers was only to get the terms and

conditions of the respective companies for consideration by the

Board of Directors of this respondent and to select tile best suited

to the interest of this respondent. Being a new project implemented

by raising finance from various sources all efforts were made to

make the project viable. Hence when Ext. RI(a) letter was sent

inviting offers the paramount consideration was to get the best offer

for the benefit of tire 1st respondent. There was no minimum

estimate amount or otl1er conditions for acceptance and rejection

like the usual tender procedure".

To tile same effect, the third respondent had also raised a

contention. Even though the above contention appeared in the

pleadings, it does not appear that it was argued before the learned

single Judge. Hence, we could have rejected the above argument by

stating that it was not argued before the learned single Judge. But

we feel that on merits also, there IS no substance in the contention.

If the offers were made only pursuant to Ext. RI(a) probably me

respondents would have a good case. But according to us, it is Ext.

P5 that forms the basis. In Ext. P5, it is categorically stated by tile

CIAL that it was decided to provide a fair opportunity to all the

eligible agencies, one final chance to give their best offer before

taking a final decision. The contract period will be for a period of 10

years. Ext. P5 requested the tenderers to quote their offers with

Page 117: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

117

regard to ground handling services with the following conditions:

(1) Quantum of equity contribution/interest free de- posit (2)

Annual licence fee to CIAL on percent age basis of gross turnover

and (3) The contract period would re for 10 years. Ext. P5 further

slates that the offers should reach on or before 1700 Hours on 28th

July, 1998. Besides, the tenderers were also directed to give Bank

Guarantee by Ext. P7 dated 5-8-1998. Ext. P7 letter states thus:

“The Board of Directors have decided to obtain a Bank Guarantee

from all participants to a value of 10% of their Equity/lntere9t Free

Deposit offered, valid for 06 months so as to make the offers

binding till a decision is taken by CIAL. If the selected agency backs

out at any time from their commitment this amount will be

forfeited”.

The tenderers were also requested to furnish the list of equipments

and audited statement of accounts for the past three years. This

clearly shows that the first respondent was not mainly gathering

information from various persons as the offers which they can

make. On the other hand, the statement in Ext. P5 coupled with

the direction to give Bank Guarantee with forfeiture clause clearly

show that Ext. P5 is a public tender. Hence, we are of the view that

the contention raised by the respondents that they can reject any

offers without any reason, cannot be countenanced169.

v. Time and place for performance

Sections 46 to 50 deal with the questions of time and place for

performance.

169 Cambatta Aviation Ltd., V. Cochin International Airport Ltd., Air 1999 Ker. 368.

Section 38, At Page 368 & 373.

Page 118: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

118

Section 46 states that where by the contract the no time for

performance is specified the engagement must be performed at a

reasonable time. It also adds that what is reasonable time is in

each particular case is a question of act

According to section 47 when a promise is to be performed on a

certain day, without application by the promsiee the promisor may

perform it during the usual hours of the business of such day and

when such day fixed happens to be public holiday as far as the

Negotiable instruments act is concerned, performance should be

offered on the prior day and will depend on the trde practices in

other cases.

Section 48 states that when the promise is to e performed on a

certain day and the promsiee has to apply for performance., it is

the duty of the promisee to apply for performance within the usual

hours of business and at a proper time and place which again is

question of fact in each particular case.

Section 49 states that where a promise is to be performed without

application by the promisee and no place is fixed then it is the

duty if the promisor to apply the promisee to appoint a reasonable

place and perform at such place.

To cite an illustration if X undertakes to deliver thousand mounds

of rice to y on a fixed day X must apply to Y to appoint a reasonable

place and deliver it there.

As a near fallout of this is the fact that a debtor should seek the

creditor and repay the loan which is a rule of the common law.

According to section 50 the performance of any promise may be in

any manner or at any time, which the promisee prescribes.

Time is not usually the essence of the contract in cases involving

contracts of immovable property. Time can be made as the essence

of the contract by specifically inserting this clause in the agreement

Page 119: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

119

between the parties. In this case, time of one month was not a term

of the contract. It was not made a term of the contract specifically

by the parties of the contract170.

vi. Time as essence

It is a general trade practice to specify the time for performance in

the contract itself and it is expected that the parties will perform

within the time stipulated. But if there is a failure on the part of

one of them to so perform then arises the question of what will be

effect of the same on the contract.

Section 55 states that where there is a promise to do a certain

thing or things before a specified time and the promisor fails to

perform at the stipulated time then the contract or so much of it as

ahs not been performed becomes voidable at the option of the

promisee, if the intention of the parties was that time should be the

essence of the contract.

If it was not the intention of the parties that time should be the

essence of the contract then the contract does not become voidable

by the failure to do such a thing at or before the specified time but

the promsiee is entitled to compensation from the promisor for any

loss occasioned to him such failure..

If in the case of a contract that becomes voidable by the above

mentioned reason and the promisee accepts performance of such

promise at any time other than that agreed, then the promisee

canot claim compensation fro any loss occasioned by the non

performance of the promise at the toime agreed, unless at time of

such acceptance, he gives notice to the promisor of his intention to

do so.

170 Rakha Singh. V. Babu Singh. Ir 2002 September. P&H. 270. Section 46 At Page 270

& 275.

Page 120: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

120

The following can be circumstances when time can be generally

construed to be of essence:

• Where the parties have expressly aggress to treat it as o

essence

• Where any delay will operate as an injury

• Where the nature of the contract requires it to be so as for

example when the party asks for extension of time.

This has been well illustrated in the Case of Bhudra Chand v

Betts171 which is an authority onm this principle.. In the case the

plaintiff stipulated the defendent to engage his elephant for the

purpose of Kheda operations, the operation for capture of wild

elephants. I was the stipulation on the contract that the elephant

would be delivered on the 1st of October but h defendant obtained

an extension of time till the 6th of October and yet did not deliver

the elephant till the 11 th. The plaintiff revised to accept the

elephant and sued for damages for breach. It was held that he

could recover as the parties intended that time should be of the

essence of the contract and this was confirmed by the fact that the

defendant had obtained an extension of time and if it was not

intended that time should be of the essence then the defendant

would not have asked for such extension.

Ordinarily, time is not the essence of a contract for the sale of

immovable property. The parties, in a given case, may make time of

the essence either expressly in terms which unmistakably provide

unmistakably that they intended to do so. Alternately, making of

time as the essence of a contract may be inferred from the nature of

171 (1915) 22 Cal Lj566: 33 Ic 347

Page 121: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

121

the contract, the property or the surrounding circumstances. A

mere stipulation in a contract laying down the time for performance

is not sufficient to make time the essence of a contract for sale of

immovable property. A party to a contract cannot by his unilateral

act make time of the essence unless the circumstances are such as

would establish that the other party to the contract had delayed or

defaulted in the performance of his obligations under the

agreement. Moreover, the stipulation of a particular date by which

the purchase price is to be paid would not necessarily result in an

invalidation of the right of the purchaser if the payment was not

effected by that date. So long as the purchaser is willing to make

payment on or before the date, which was prescribed or within a

reasonable time, the ordinary presumption of time not being the

essence of the contract for the sale of immovable property would

not be displaced.

Where the original agreement for sale of property contained no

stipulation that the was of essence of agreement, and the

purchaser has paid first installment and did not decline to pay the

balance of the consideration nor sought an indefinite extension of

time to pay the second installment and in fact paid the second

installment, and was ready and willing to perform his part of

obligations under agreement, the vendor was not justified in

unilaterally attempting to make time essence of agreement. In such

a case, the mere fact that a part of the payment of second

installment was made by a post-dated cheque which was dated

fifteen days thereafter was not sufficient to justify the termination

of the contract172.

172 Chakungal Jayapalan, Air 2000 Bombay 410. Section 55, At Page 410, 414, 415 &

416.

Page 122: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

122

It is well-settled that in a contract of immoveable property time is

not the essence of the contract unless it is stipulated so by express

terms or by necessary implication. It is equally well-settled that

fixation of the period within which the contract has to be performed

does not make the stipulation as to time essence of the contract.

Specific performance by no means an absolute right, but one which

rests entirely on the judicial discretion exercised with reference to

facts of each case. Generally liquidated damages are fixed on the

contract more for securing performance173.

In transactions where time is the essence of the contract, delay is

fatal. By fixing the time limit, of six months for execution of the sale

deed, it was clear that time was the essence of the contract. It is

also true that time is not the essence of the contract for immovable

property. Mere fixation of the time period within which the contract

is to be performed is not conclusive to state time to be the essence

of the contract174.

After accepting the delayed payments and interest, the respondent

could not have cancelled the allotment. The full payment as well as

interest at 25% no delayed payment was made by the petitioner

and was duly accepted by the respondent. Therefore the

development authority cannot cancel the allotment175.

Time is not considered the essence of the contract for immovable

property unless specified in the terms of the contract and if the

other side is notified that the said time is the essence of the

contract. Here, time is not considered the essence of the contract

173 E. Bhagwan Das V. Dilip Kumar, Air 1998 Andhra Pradesh 374. Section 55, 74, At

Page 373 & 374. 174 Raghuvir Singh Bhatty V. Ram Chandra Waman Subedhar. Air 2002 Jan. All 13.

Section 55 At Page 13 & 17. 175 R.K. Saxena V. Delhi Development Authority. Air 2002 August. Sc 2340. Section 55

At Page 2340 & 2341.

Page 123: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

123

and hence, over and beyond the period of ten months the parties

still have three more years for fructification of the sale deed176.

Initially, the date for performance of the agreement was fixed as

15. 7. 1992. Such an agreement was substituted and replaced by

another agreement wherein no specific date for the execution of the

sale deed was fixed. The sale was contingent upon the result of the

suit that was filed against the defendant by his brother and sister.

It is specifically stipulated that the defendant would execute the

sale deed in favour of the plaintiffs after the decision of the said

deed. No time was fixed within which the sale deed was to be

executed after the suit’s decision177.

Time is not the essence of the contract when the contract is of

immovable property. It should be either stipulated in the contract

that time is the essence of the contract so far as the agreement is

concerned or the part considering the time stipulated ad the

essence of the contract should notify the other party that time is

considered to be the essence of the contract. No emphasis was

made by the vendor specifically that time was the essence of the

contract. The vendor did not notify the purchaser that time was

considered the essence of the contract178.

General Practices where time is regarded as the essence:

Commercial/Business Contracts:

176 K. Ramakrishnan (Died) And Others V. Siddhammal And Others. Air 2002 June.

Mad. 241. Section 55 At Page 241, 242 & 248. 177 Dalip Sigh V. Ram Nath And Another. Air 2002 August. H.P. 106. Section 55 At

Page 106 & 109. 178 Sri Brahadambal Agency And Partnership Firm V. Ramsamy And Others. Air

2002 August. Mad. 352. Section 55 At Page 352.

Page 124: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

124

In contract of these nature where performance is provided within

specified time , time is presumed to be of essence. In a leading

case179 the appellants were carrying on import business at Bombay

and contracted to supply to the respondent mill a quality o Italian

Fibre Cotton. The shipment was to take place in October or

November. The Contract contained a remark that “this contract is

subject to import licence and therefore the shipment is not

guaranteed” A part of the goods were supplied and accepted

however the rest were not supplied in time mentioned. The buyer

chose to avoid the contract on this ground and it was held that in

spite of the remark that the shipment date was not guaranteed,

time was of the essence and the buyer was entitled to avoid the

contract.

In the case of Mahabir Prasad Rungta v. Durga Dutt180, there was a

contract to transport coal form a colliery to the railway station and

the colliery owner had to keep the road in repair and arrange for

the petrol. He had also to pay for the work done on the 10 of the

next month. It was alleged that these thing were not done and

therefore the other party could not go on with the work. He

therefore rescinded the contract and sued for damages. It was held

by the Supreme Court that in commercial transactions ordinarily

time is of the essence and hence in this case the time of doing

these activities was very important and therefore section 55 would

become operational and held that the contract could be rescinded

and compensation could be claimed.

Construction Contracts:

179 Chian Cotton Exporters V Bihari Lal Ramchandra Cotton Mills Ltd [Air 1961 Sc

1295] 180 [Air 1961 Sc 990]

Page 125: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

125

Timely schedule of completion of construction contracts is obvious

as it is a commercial service.

Property Contracts:

In a contract for sale of land or ay other immovable property, time

is generally not of essence is presumed as gathered form the

pro9noncment of the Supreme Court. However if could be shown

that it was the intention of the parties that time should be of the

essence then it would be so considered. But just the incorporation

of a clause imposing penalty does not y itself show an intention to

make time the essence..

The intention should be gathered form factors like nature of the

property, the possibility of the price fluctuation, the need for the

contract, the conduct of the parties and such other circumstances.

However a renewal of a lease or the option of purchase or

repurchase of a property muist be exercised strictly within the time

limited for the purpose.

Sale of shares

In the case of sale of shares since it is a commercial transaction the

time of completion is an important factor.

vii. Appropriation of Payments

When a debtor owing several distinct debts to one person, makes a

payment, which is not sufficient to discharge all the debts, the

question arises to which particular debt the payment is to be

applied181. Such right of appropriation may be exercised by the

debtor, creditor or by the law itself.

The general rule of appropriation of payments tow a decretal

amount is that such an amount is to be adjusted firstly strictly in

181 The Act in Sections 59-61 lays down the underlying principles relating to this

concept.

Page 126: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

126

accordance with the directions contained in the decree and in the

absence of such direction, adjustments, be made firstly in payment

of interest and costs and there- after in payment of the principal

amount. Such a principle is, however subject to one exception, i.e.

that the parties may agree to the adjustment of the payment in any

other manner despite the decree. As and when such an agreement

is pleaded, the onus of proving is always upon the person pleading

the agreement contrary to the general rule or the terms of the

decree schedule.

In such a case, the debtor also cannot take refuge of Ss. 59 to 61 of

Contract Act. The provisions of Ss. 59 to 61 of the Contract Act are

applicable in cases where a debtor owes several distinct debts to

one person and db not deal with cases in which the principal and

interest are due on a single debt. The principal and interest due on

a single debt or decree passed on such debt carrying subsequent

interest cannot be held to be several distinct debts. S. 60, if applied

independently, cannot be held to be conferring any right upon the

judgment debtor as it confers a discretion in favour of the creditor

to apply such deposited amount to any lawful debt actually due

and payable by the debtor when such debtor omits to intimate the

discharge of the debt in the manner envisaged under S. 59. Ss. 59

and 60, Contract Act, would be applicable only in pre decretal stage

and not thereafter. Post-decretal payments have to be made either

in terms of the decree or in accordance with the agreement arrived

at between the parties though on the general principles as

mentioned in Ss. 59 and 60 of the Contract Act182.

Section 59 of the Contract Act applies to all cases of appropriation

irrespective of whether it is a post decretal stage or where no legal

182 M/S. I.C.D.S. Ltd., V. Smithaben H. Patel, Air 1999 Sc 1036. Section 56, 60, 61, At

Page 1036, 1039 & 1042.

Page 127: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

127

proceedings have intervened. A debtor making a payment, who is

faced with multiple heads, does have the option to indicate as to

specifically which of the heads the amount, which is paid, should

be appropriated against. It is equally true that the law does not

envisage any compulsion on the part of the creditor to accept, such

direction or a mandate .It is open to the creditor to accept the

condition or, it is up to the creditor to refuse to accept that

condition183.

The general rule of appropriation of payments tow a decretal

amount is that such an amount is to be adjusted firstly strictly in

accordance with the directions contained in the decree and in the

absence of such direction, adjustments, be made firstly in payment

of interest and costs and there- after in payment of the principal

amount. Such a principle is, however subject to one exception, i.e.

that the parties may agree to the adjustment of the payment in any

other manner despite the decree. As and when such an agreement

is pleaded, the onus of proving is always upon the person pleading

the agreement contrary to the general rule or the terms of the

decree schedule.

In such a case, the debtor also cannot take refuge of Ss. 59 to 61 of

Contract Act. The provisions of Ss. 59 to 61 of the Contract Act are

applicable in cases where a debtor owes several distinct debts to

one person and db not deal with cases in which the principal and

interest are due on a single debt. The principal and interest due on

a single debt or decree passed on such debt carrying subsequent

interest cannot be held to be several distinct debts. S. 60, if applied

independently, cannot be held to be conferring any right upon the

183 Smt. Smithaben H. Patel V. M/ S. Industrial Credit And Development Syndicate,

Air 1997 Kant. 188. Section 59, At Page 188.

Page 128: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

128

judgment debtor as it confers a discretion in favour of the creditor

to apply such deposited amount to any lawful debt actually due

and payable by the debtor when such debtor omits to intimate the

discharge of the debt in the manner envisaged under S. 59. Ss. 59

and 60, Contract Act, would be applicable only in pre decretal stage

and not thereafter. Post-decretal payments have to be made either

in terms of the decree or in accordance with the agreement arrived

at between the parties though on the general principles as

mentioned in Ss. 59 and 60 of the Contract Act184.

The general rule of appropriation of payments tow a decrial amount

is that such an amount is to be adjusted firstly strictly in

accordance with the directions contained in the decree and in the

absence of such direction, adjustments, be made firstly in payment

of interest and costs and there- after in payment of the principal

amount. Such a principle is, however subject to one exception, i.e.

that the parties may agree to the adjustment of the payment in any

other manner despite the decree. As and when such an agreement

is pleaded, the onus of proving is always upon the person pleading

the agreement contrary to the general rule or the terms of the

decree schedule.

In such a case, the debtor also cannot take refuge of Ss. 59 to 61 of

Contract Act. The provisions of Ss. 59 to 61 of the Contract Act are

applicable in cases where a debtor owes several distinct debts to

one person and db not deal with cases in which the principal and

interest are due on a single debt. The principal and interest due on

a single debt or decree passed on such debt carrying subsequent

interest cannot be held to be several distinct debts. S. 60, if applied

184 M/S. I.C.D.S. Ltd., V. Smithaben H. Patel, Air 1999 Sc 1036. Section 56, 60, 61, At

Page 1036, 1039 & 1042.

Page 129: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

129

independently, cannot be held to be conferring any right upon the

judgment debtor as it confers a discretion in favour of the creditor

to apply such deposited amount to any lawful debt actually due

and payable by the debtor when such debtor omits to intimate the

discharge of the debt in the manner envisaged under S. 59. Ss. 59

and 60, Contract Act, would be applicable only in pre decrial stage

and not thereafter. Post-decrial payments have to be made either in

terms of the decree or in accordance with the agreement arrived at

between the parties though on the general principles as mentioned

in Ss. 59 and 60 of the Contract Act185.

10. Discharge by Agreement

Introduction

As much as a contract arises as an agreement between parties,

which bind the parties, it can also be discharged by further

agreements or consent between them. Thus this form of discharge

may be by Novation or by Remission or Waiver.

Section 62 provides the effect of novation, rescission and alteration

of a contract.

When the parties to a contract agree to substitute a new contract

for it, or to rescind or alter it, the original contract need not be

performed186.

i. Novation

185 M/s. I.C.D.S. Ltd., v. SMITHABEN H. PATEL, AIR 1999 SC 1036. Section 56, 60,

61, at page 1036, 1039 & 1042. 186 Sec. 62, Indian Contract Act, 1872.

Page 130: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

130

When the parties to a contract substitute or agree to substitute the

existing contract with a new contract it is called as novation.

The concept of novation is best explained in the case of Scarf v.

Jaradine187. In this case Lord Selborne explained the same in the

following manner”…. There being a contract in existence, some new

contract is substituted for it either between the same parties or

between different parties, the consideration mutually being the

discharge of the old contract….”

Novation may thus take place by

• Changing of parties of the original contract

• Substitution of new contract in the place of the old

In the former case of novation by change of parties an illustration

would be where one of the parties agrees to accept another third

person in the place of the opposite party. This generally takes place

in the case of reconstitution of partnership firms. Sometimes a

new partner is admitted into an existing firm or when a partner

retires from the firm and the new firm is constituted it is ca case of

novation.

In the latter case when novation takes place there is a substitution

of a new contract for the old between the same parties and the

original contract is discharged and need not be performed.

In both these cases the requisites are that:

i. There must be an original and subsisting contract when the

novation takes place and

ii. The new agreement should be valid and enforceable

One of the essential requirements of 'Novation'; as contemplated by

S. 62, is that there should be complete substitution of a new

contract in place of the old. It is in that situation that the original

187 (1882) 7 App Cas 345, 351

Page 131: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

131

contract need not be performed. Substitution of a new contract in

place of the old contract which would have the effect of rescinding

or completely altering the terms of the original contract, has to be

by agreement between the parties. A substituted contract should

rescind or alter or extinguish the previous contract. But if the

terms of the two contracts are inconsistent and they cannot stand

together, the subsequent contract cannot be said to be in

substitution of the earlier contract188.

4. Novation under Section 62 of the Contract Act requires a clear

plea, issue and evidence. Such a question cannot be raised or

accepted under Section 100, CPC for the first time in Second

Appeal. There was no such issue in the Courts below and the

defendant’s evidence was contrary to such a theory189.

ii. Recession And Alteration

Section 62 also provides for the parties to a contract to agree to

rescind or alter the contract, in which case again the original

contract is discharged.

This recession may be by mutual consent of the parties whereby

they agree to \cancel all or some of the terms of the contract of

they may also substitute new terms. Such rescission may be

possible such the party rescinding it does so without prejudice to

any of his rights to claim compensation for breach when the other

party fails in his performance.

188 Lata Construction V. Rameshchandra Ramnikil Shan, Air 2000 Sc 380 Section 62,

At Page 381 & 383. 189 Babu Ram V. Indra Pal Singh, Air 1998 Sc 3021 Section 62, At Page 3021 & 3027.

Page 132: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

132

In the instant case, the general power of attorney itself makes it

clear that the power of attorney holder has a right to deal with all

the properties belonging to the principal as on the date and any

other properties which may be acquired subsequent thereto also.

As such the contention that the contract for sale of property

entered by the general power of attorney holder with the plaintiff-

purchaser was liable to be cancelled since the principal had no full

fledged and valid title to the property at the time when she

constituted power of attorney and therefore, the power of attorney

had no right to deal with the properties which are acquired and

owned by him subsequent to the date of power of attorney cannot

hold water in the eye of law.

Revocation by purchaser-Claim for refund of consideration paid-

Plea by vendor to set off loss suffered due to revocation-Can be

considered only if vendor proves that he was fully ready and pre-

pared to perform his part of the contract as per the terms of the

agreement.

Section 55 (2) of T.P. Act deems implied contract for title in every

conveyance and even in cases where there is a completed contract

of sale, the purchaser is entitled to cancel the contract and seek

the refund of purchase money. When that is so as regards a

completed contract, in a contract which is only at an executory

stage, it would not be proper in law to force upon the purchaser to

purchase the property on the ground that he was aware of the

defective or imperfect title at the time of agreement of sale. It does

not prevent in law for the purchaser to revise his opinion before the

contract is concluded however with a qualified liability on the

purchaser to compensate any loss or damages which the vendor

Page 133: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

133

has sustained In the course of such trans- action for which the

purchaser has equally contributed by his folly190.

In the instant case the appellants wrote a letter to the Managing

Director or the Corporation dated 17-11-1980 and it was stated

that "the bus was purchased by debtor by availing the loan and the

debtor defaulted in making payments. By an agreement the

appellants have agreed to pay the dues and take over the bus. They

are prepared to pay the above balance amount on behalf of debtor.

They are prepared to provide sufficient security for the payment of

the balance amount. They have therefore, requested the

Corporation to release the vehicle and accept their security as

guarantee for future payment. There is no dispute that the vehicle

was released in favour of the appellant after executing an equitable

mortgage by deposit of title deeds. There is nothing in the evidence

on record to show that after 17-11-1980 either debtor paid any

installment dues towards the loan or took over possession of the

bus. There is also no dispute that the appellants committed default

in payment of the balance dues while the t vehicle was in their

possession. On a reading of said letter it becomes crystal clear that

they have (undertaken to repay the liability of debtor and in , order

to enable them to do so they took possession I of the vehicle which

was purchased by debtor and (seized by the Corporation and they

agreed to (provide sufficient security for the loan. The letter 1

therefore leaves no room for doubt that on and I from 18-11-1980.

The liability of debtor ceased and in his place the appellants

became the debtors of the corporation. This conclusion is re-

enforced by the fact that an equitable mortgage was created not as

a collateral security but as evidence of a fresh loan transaction. It is

190 R.L. Pinto And Another V. F.F. Menzes And Another, Air 2001 Karnataka

141.Section - 62, 73, 188, At Page 141, 143 & 144.

Page 134: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

134

also apparent from the letter that debtor had entered into an

agreement with the appellants and to this effect. Thus the

Corporation as well as debtor who were parties to old contract

agreed for a new contract with the appellants and in respect of the

loan amount and accordingly the corporation agreed to release the

vehicle in favour of the appellant. Therefore, there was, novation of

contract whereby the original debtor ceased to be a debtor and the

appellants undertook the liability as the principal debtor to pay the

outstanding dues191.

iii. Remission

Section 63 states that every promisee may be dispense with or

remit wholly or in part the performance of the promise, or may

extend the time for such performance, or may accept instead of it

any satisfaction, which he thinks fit.

The main ingredients therefore are that the party who can demand

performance as a matter of right:

• Remits or dispenses with it wholly or in part

• Extends the time for such performance

• Accepts any other performance in satisfaction.

Mere payment and acceptance of a lesser sum without the accord

that it will be in the extinction of the balance liability will not be full

satisfaction of the debt192.

191 Godan Namboothiripad V. Kerala Financial Corpn., Air 1998 Ker. 31. Section 62,

At Page 31 & 33. 192 M/S. Saraswat Trading Agency V. Union Of India. Air 2002 March. Cal. 51.

Section 47, 54, 63 At Page 51, 54 & 55.

Page 135: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

135

11. Discharge by impossibility or Frustration

Impossibility of performance is another important theory in the

discharge of contracts. Impossibility may discharge a contract and

this may occur at any stage of the contract.

Such impossibility may be an initial impossibility or a supervening

impossibility.

The first part Section 56 talks of the principle of initial

impossibility and states” An agreement to do an act impossible in

itself is void”

Thus if an agreement contains a promise to perform something

which is ex facie impossible, it is then void ab initio base don’t the

two legal principles that ‘the law does not recognise what is

impossible’ and secondly ’what is impossible does not create an

obligation’.

An illustration for the same would be A and B agree to discover

treasure by magic. This agreement is void.

The second portion of section 56 speaks about subsequent

impossibility. I t states that a contract to do an act which after the

contract is made, becomes impossible, or by reason of some event

which the promisor could not prevent, unlawful, becomes void

when the act becomes impossible or unlawful.

One of the earliest case of Paradine v. Jane .

Specific performance of agreement of sale of a flat was denied by

the company that was building and developing flats on ground

whose original lease of land was terminated by the municipality. It

was found that representations were made and there was every

possibility of the government as well as the municipality

respectively renewing the lease and revalidating the building plans

in question. The relief of specific performance cannot be refused to

Page 136: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

136

the purchaser who was ready and willing to perform her part of the

contract193.

3. The Court can relieve a contracting party from the obligations of

a contract under S. 56 of the Contract Act only by reason of a

supervening event or untoward happening beyond the contract of

the parties which renders the contract impossible of performance

after the same was made. The performance of a contract becomes

impossible of it is rendered impracticable from the point, of view of

the object and purpose which the parties had in view at the time of

entering into the contract or if an untoward event or change of

circumstance upsets or destroys the very foundation upon which

the parties rested their bargain. It is not sufficient for a contracting

party invoking the doctrine of frustration to show that the

supervening event has made the contract onerous or difficult to

perform. He must prove the impracticability and impossibility of the

contract. A contracting party cannot be relieved from the

performance of his part of the contract if the frustration of the

contract is self generated or the disability is self-induced194.

4. In this case there was an agreement allowing the plaintiff to

store goods in cold storage cooling chamber of a particular unit.

The performance of the contract depended upon continuous power

supply. The plaintiff knew that no generating set was available at

the Unit and the agreement was made accordingly. Ultimately, the

goods were damaged due to the failure of power supply. It was held

193 Nirmala Anand V. Advent Corporation Pvt. Ltd. Air 2002 August. Sc 2290. Section

56 At Page 2290 & 2291. 194 Eacom's Controls (India) Ltd. V. Bailey Controls Co., Air 1998 Delhi 365. Section

56, At Page 365, 373, 376, 377 & 378.

Page 137: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

137

that the defendant is not liable for loss or damage caused to

plaintiff195.

5. Where a compromise was arrived at in a suit for dissolution of

partnership and rendition of accounts, the decree passed on basis

of such compromise could not be challenged on ground that the

basis of compromise agreement i.e. the alleged partnership had

already become frustrated, when the compromise agreement was

independent and not based on the partnership agreement which

was alleged to have been frustrated and the agreement was also

acted upon. It was more so when the objector took part in the suit

for two years and filed a written statement in which objection that

the partnership was frustrated was also raised by him and still he

entered into the compromise agreement with the other party196.

i. Grounds of frustration

Grounds of frustration cannot be categorically laid down as these

grounds may differ depending on the nature of contract and the

nature of impossibility. The list could be exhaustive and would new

grounds keep springing up given the present economic conditions

one will not be able to predict the same. However there are some

very established and oft seen grounds, which have been discussed

below:

• Destruction of the subject matter of the contract:

This ground as the heading indicates will apply when the subject

matter ceases to exist

195 State V. Mukunda Oja, Air 1997, Gau 113.Section 56, At Page 113. 196 Chaman Lal Jain V. Arun Kumar Jain, Air 1996 Del. 108. Section 56, At Page 108

113 & 114.

Page 138: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

138

The interpretation laid down by the courts in the case of Taylor v

Caldwell197 is one of the finest examples of this principle. In the

said case The defendant had allowed the plaintiff to use a music

hall for certain concerts. Before the day of the first concert the

music hall was destroyed by fire. The plaintiff sued the defendant

for breach and the courts held that here the contract was

frustrated on account of the fact that it was subject to an implied

condition that the performance would become impossible if the

thing perishes without the default of the promisor.

Similarly in the case oif Howell v Compound198. In this case there

was a contract for slae of 200 tons of potatoes to be grown. The

crop failed by reson of being destroyed by a disease. Here it was

held that neither party would be held liable for the failure of the

crop, which rendered the performance impossible.

In another similar case when a ship ran aground the same result

was made applicable199.

• Death or Disablement of a party to do a personal service:

This ground of frustration was established in a well known

authority of Robinson v Davinson where there was a contract

between the plaintiff and Mrs. Davinson who was an eminent that

she would play at a concert to be given by the Plaintiff on a

particular day. She reported sick on the morning of the concert and

the Plaintiff lost a sum due to the postponement of the concert. The

Plaintiff sued for damages and the courts held that Ms. Davinson

was excused from performance the contract.

197 3 B&S 826: 122 ER 30 198 (1876) 1 QBD 258 (CA) 199 Jackson v Union Marine Insurance Co. Ltd., (!874) LR 10 CP 125

Page 139: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

139

Similarly in the case of Marshall v Horland& Wolff Ltd 200 this

doctrine was applied to industrial relations. 9in this case M was in

employment of a Company since 1946. He fell ill and did not attend

till 1971 and the Company retrenched him giving the usual

benefits. M had to undergo an operation before he could resume

work. Here the courts held the contract of service had not been

frustrated. It was stated that in considering whether the further

performance had become impossible, regard must be had to the

terms of employment, the nature of the illness, its duration and the

prospects of recover, and the period of the past employment and on

the basis of all these premises the courts affirmed that the contract

had not been frustrated.

• Non Existence or Non occurrence of a particular state of things

The rule of the implied term laid down in the case of Taylor v

Caldwell was extended to the case of Krell v Henry201 one of the

cases In what is known as the Coronation series, where the non

existence or the non occurrence of a contemplated event formed the

foundation of a contract.. In this case the defendant agreed to hire

the rooms of the plaintiff for two days to watch the coronation of

King Edward. However the contract had no mention of such

purpose. The coronation was cancelled because of the king

suddenly taking ill. The plaintiff sued the defendants for rent of the

rooms and the defendants refused to pay. The courts here held that

the rooms were rented with the specific purpose to view the

coronation of the king and since that did not take place the

substance of the contract and the existence of the particular state

of things was gone and therefore the contract was discharged by

frustration.

200 (1972) 2 AER 175 201 (1903) 2 KB 740

Page 140: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

140

However the same principle did not apply to a case where the

foundation of the contract was not destroyed. In the case of Henry

Bay Steam Boat Co. v Hutton 202 also a coronation case, the

defendants chartered a stem boat for two days to take passenger

for viewing the naval review and a cruise round the fleet for a day.

There was unpaid balance for the hire. The Royal Navy Review was

cancelled and the defendants did not have use of the ship. However

in this case the courts ruled otherwise and held that the naval

review was not the foundation of the contract and hence the

defendants were made liable to pay the unpaid balance of hire.

• Intervention by Government or Legislative

A contract can be rendered impossible sometimes by legislative or

executive intervention. As sometimes the performance is sometimes

made so by the executive or legislative intervention, which directly

operates on the performance of the contract.

This has been seen in the case of Baily v De Crespingny 203 where

there was a lease by the defendants to the plaintiffs for a term of

eighty nine years. The defendants retained the adjoining land and

covenanted that that neither he nor his assigns would during the

term of the lease erect any buildings on it a railway Company

acting on statutory powers took the land compulsorily and built a

station on it/ The plaintiffs sued the defendants and it as held that

the legislative compulsion had created a new kind of assigned of

the land for whose acts the defendant was not responsible.

In another case there was a contract by a firm in 1914 wit the

Water Board to construct a reservoir within six years. But they

ware asked to stop the work in 1916 by a notice under the Defense

Acts and Rules. They claimed that the contract was put to an end

202 (1903) 2 KB 683 CA 203 (1869) 4 AB 180

Page 141: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

141

and could not be resumed after the War. Then it was held by the

House of Lords that the interruption by the Executive authorities

and its duration until the War ended was of such a character that

the contract if resumed would be a different contract from the

contract broken off and therefore it has been discharged by

impossibility.

• Intervention of War

Impossibility of performance can also be caused by intervention of

war or warlike conditions. The ideal case law to be followed in

understanding this circumstance is the case of Horlock v Beal204

where a ship owner engaged a seaman for two years under articles

and in course of the articles running the ship was seized by

Germany in a Belgia port and the crew interned for a n indefinite

period. The contract was held to be discharged and the ship owner

was held to be under no obligation to continue paying the seamans

wages.

But if war prevents only one of the ways of performing a contract

which way was not a mutual understanding o the part of the

contract then in such a case the doctrine of frustration cannot be

invoked.

This is well illustrated in the case of Twentsche Overseas Trading

Co. Ltd v Uganda Sugar Factory Ltd.205 Where there was a contract

specified for supply of “Krupps” steel rails. The Appellants claimed

that the rails specified were to be obtained from a German firma

and that firm only. However te second World War intervened

making the trade impossible and illegal with the German firm. The

Privy Council however held reference to “Krupps” was a mere

specification of therails. Though the appellants intended Germany

204 (1916) 1 AC 486 205 AIR 1945 PC 144

Page 142: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

142

as the source of the supply but it was made the basis or foundation

of the contract as known to the other party and also that there

were other sources of supply. Hence the defendants were not

allowed to invoke the doctrine of frustration.

In the case of Tskiorglou & Co. Ltd. V Noblee &Throl G.m.b.H206

there was a sale to sell three hundred tons of Sudan groundnuts

c.i.f Hamburg. The usual and normal route was the Suez Canal and

the shipment was due in the month of November / December 1956

and in the month of November re Suez Canal was closed for

operations because of the Anglo French War with Egypt and was

reopened only in April. It was claimed by the appellants that there

was implied term that the shipment is to be made by The Suez

Canal only and hence there was a frustration of contract. Negating

this point the House of Lords held that no such term could be

implied and though the customary or the usual route was closed

the appellants should ship the nuts through an alternative route

however greater the expense might be and they could claim

frustration under no circumstances.

• Frustration in Commercial contracts

The principle of frustration in commercial contracts was applied in

the case of Jackson v Union Marine Insurance CO.207 where the

plaintiffs ship was chartered to proceed to New Port and load a

cargo at San Fransico. On the way to New Port the ship aground.

After some weeks the charter party chartered another ship and the

plaintiff lost the freight under the charter party. The question that

arose was that whether the total loss depended on whether the

chatterers found the contract impossible without waiting for the

206 (1962) AC 93 207 [L.R. 10]

Page 143: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

143

ship to be repaired, which would have taken a long time. It was

held that the adventure was frustrated by the perils of the sea and

both the parties were discharged.

ii. Limitations of the doctrine

Frustration leads to the dissolution of the contract immediately.

Ideally in the case of frustration there should be a failure of

something.

However there are some limitations to such theory of frustration,

whgcih negate the possibility of raising such a ground.

They are:

1. Self induced frustration

As a ground for discard of a contract by frustration, a frustration

that is self-induced is not tenable. . This principle has been

explained in the case of National Fish Ltd. V Ocean Trawlers Ltd.208

In this case the appellants hired the trawler of the respondents.

This use of this trawler was subject to a licence from the Canadian

Government. The appellants who owned five trawlers applied for

the licence of only three trawlers and therefore the licences to only

three were granted and when they were given the option they chose

not to mention this particular trawler for the licence. They later

claimed that there was frustration on account of this and choose to

repudiate the contract. It was held that there was no frustration as

frustration should not be due to the act or election of a party.

Hence self-induced frustration cannot be a frustration.

2. Frustration discharges the contract immediately:

208 (1935) AC 435 (PC)

Page 144: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

144

The consequence of frustration does not depend on the intention of

parties but operates immediately. The legal effect of frustration

does not depend upon the intention or opinions of the parties as to

the event. The Supreme Court of India has laid down that

frustration puts an end to the liability to perform the contract but

does not terminate the whole contract

12. BREACH OF CONTRACT

Introduction

The failure to perform the terms of the contract constitutes a

breach and this breach may entitle a party to repudiate the

contract. It can be said that a breach does not automatically

discharge the contract but will give the innocent party the option of

treating it as repudiated. It means that the innocent party is

discharged from performing his primary obligations under the

contract.

Breach generally gives rise to the right to claim damages by the

innocent party.

However the innocent party may choose to continue with the

contract and only sue for damages

i. Forms of breach

A breach generally occurs when a party to the contract renounces

his liability or makes it impossible to fulfil the contract, or fails to

perform his obligation under the contract.

Thus a breach may be of two kinds

• Anticipatory Breach

• Actual or Present Breach.

When the party in default has repudiated the contract before the

performance is due then such breach is called Anticipatory breach.

Page 145: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

145

When the party in default has committed a fundamental breach

when the performance is due it is called a Actual or Present Breach

ii. Renunciation and Repudiation

All irregularities on the performance of a contract may not be

classified as repudiation so a s to put an end to the contract. What

is to be ascertained is the effect of such breach on the contract as a

whole. This has been seen in the case of Maple Flock Co Ltd. V

Universal Furniture Products Ltd.209, where in a contract for the

supply of 100 tons of flock of Government standard to be delivered

by instalments, sixteen deliveries were below the standard and the

buyer attempted to treat it as repudiation the courts held that the

sellers conduct did not show an intention to throw away the

contract and therefore the buyer should have to be content with

damages for the defective goods.

iii. Anticipatory Breach

An explicit or implicit repudiation of the contract even before the

performance is due will amount to an anticipatory breach. The

essence of anticipatory breach is that the breach occurs before the

time fixed for performance.

Section 39 of the Indian Contract Act embodies the principle of

Anticipatory breach and states that ”when a party to a contract ahs

refused to perform, or disabled himself from performing, his

promise in its entirety, the promisee may put an end to the

contract unless he has signified, by words or conduct, his

acquiescence in its continuance”.

209 (1934) 1 KB 148

Page 146: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

146

Here the innocent party need not wait until the day fixed for

performance in order to commence his action but can immediately

treating the contact as repudiated sue for damages.

He also has the right to elect affirmation of such contract by

treating the contract as still in force in which case he will be bound

by his choice.

This form of breach may be either explicit or implicit.

One of the earliest cases of such explicit repudiation was seen in

the case of Hochester v De LA Tour210 where an employer told his

employee (a Travelling Courier) before the time of performance had

arrived that he would not require his services. The courier sued for

damages at once. It was held that he was entitled to do so.

In the case of Omnium D’ Enterprises V Suthurland211 D chartered

a ship to P to be placed at his disposal as soon as she was released

from the Government service in which the ship was engaged. D sold

her to another person before the release and it was held that the

contract had come to an end and P may bring action for breach

forthwith.

This kind of breach would also apply when the performance has

been contingent. This has been seen in the case of Frost V Knight

the defendant promised the plaintiff that he would marry her on

the death of his father. Before father died, he changed his mind

and the plaintiff sued for breach of promise.

She was entitled to do so.

210 (1853) 2 E&B 678 211 (1919) 1 KB 618

Page 147: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

147

Sir Alexander Cockburn CJ:

'Considering this to be now settled law... we should have had no

difficulty in applying the principle of the decision in Hochster v De

la Tour to the present case, were it not for the difference which

undoubtedly exists between that case and the present, namely,

that whereas there the performance of the contract was to take

place at a fixed time, here no time is fixed, but the performance is

made to depend on a contingency, namely, the death of the

defendant's father during the life of both the contracting parties. It

is true that in every case of a personal obligation to be fulfilled at a

future time, there is involved the possible contingency of the death

of the party binding himself before the time of performance arises;

but here we have a further contingency, depending on the life of a

third person, during which neither party can claim performance of

the promise. This being so, we thought it right to take time to

consider whether an action would lie before the death of the

defendant's father had placed the plaintiff in a position to claim the

fulfilment of the defendant's promise. After full consideration, we

are of opinion that, notwithstanding the distinguishing

circumstances to which I have referred, this case falls within the

principle of Hochsler v De La Tour and that consequently the

present action is well brought.

The considerations on which the decision in Hochsler v De La Tour

is founded are that by the announcement of the contracting party

of his intention not to fulfil it, the contract is broken; and that it is

to the common benefit of both parties that the contract shall be

taken to be broken as to all its incidents, including non-

performance at the appointed time, and that an action may be at

once brought and the damages consequent on non-performance be

assessed at the earliest moment as thereby many of the injurious

Page 148: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

148

effects of such non-performance may possibly be averted or

mitigated.'

Likewise it is not necessary that the innocent party has to treat the

contract as repudiated. He may choose to keep the contract alive

and wait for the other party to perform. In such a case where eth

party elects to keep the contract as continuing then his affirmation

can be regarded as a species of waiver. Here the innocent party

waives his right to treat the contract as repudiated and may later

be estopped from changing his election. One such case is that of

Averry v Bowden212.

The defendant chartered the plaintiff s ship Lebanon and he agreed

to load her with a cargo at Odessa within 45 days. At Odessa, the

defendant told the captain that he had no cargo for him and

advised him to go away. During the 45 days the Crimean War broke

out, rendering performance of the contract illegal.

No cause of action has arisen before the outbreak of war.

Lord Campbell CJ:

'According to our decision in Hochster v De la Tour, to which we

adhere, if the defendant, within the running days and before the

declaration of war, had positively informed the captain of the

Lebanon that no cargo had been provided or would be provided for

him at Odessa, and that there was no use in his remaining there

any longer, the captain might have treated this as a breach and

renunciation of the contract; and thereupon, sailing away from

Odessa, he might have loaded a cargo at a friendly port from

another person; whereupon the plaintiff would have had a right to

212 (1855) 5 E&B 714

Page 149: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

149

maintain an action on the charter party to recover damages equal

to the loss he had sustained from the breach of contract on the

part of the defendant. The language used by the defendant's agent

before the declaration of war can hardly be considered as

amounting to a renunciation of the contract: but, if it had been

much stronger, we conceive that it could not be considered as

constituting a cause of action after the captain still continued to

insist upon having a cargo in fulfillment of the charter party.'

However not all anticipatory breaches will entitle the other party to

end the contract a s seen in the case of Afovos Shipping Co.Sa v

Pagnan 213. Under the terms of a charter party, hire was payable

semi-monthly in advance. The charterers paid the hire punctually

until, due to an error by both parties' banks, one payment was late.

The owners claimed that they were entitled to withdraw the vessel,

inter alia, under the doctrine of anticipatory breach.

Similarly a refusals to treat such a breach as discharge and

continue with the contract may sometimes operate as a

disadvantage in so far as the fact that the affirming party may

subsequently be in breach. And the repudiating may escape

liability as seen in the case of Fercometal SARL v Mediterranean

Shipping Co. SA.214

iv. Restitution in Anticipatory Breach

213 (1983) 1 AER 449 214 (1988) 2 All ER 742

Page 150: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

150

When there is an anticipatory breach the aggrieved party can put

an end to the contract and sue for damages. However this brings us

to a very important question of what should be done about the

benefits he may have received under the contract till such time.

Section 64 mandates that a party rescinding a voidable contract

shall restore any benefit received there under from any party to it

as may be to such party.

This has been held in the case of Murlidhar Chaterjee v

International Film Co 215 party where a firm, of film importers

agreed to supply to P films at a fixed rate and after the supply of

one film payment was made against it. Thereafter due to some

difficulties the film was returned and another sum was paid against

which no film had been supplied. P wrote to B for breach of

contract and B accepted the repudiation. Thereafter P sued for

refund of money and was allowed refund under section 64.

v. Actual Breach

Actual breach takes place when the performance is due and a party

by his words or conduct shows that he does not have any intention

to perform the contract.

Such failure of performance may be total or partial and is a ground

for the discharge of a party by breach. Failure of performance can

occur only during performance.

In order to ascertain these factors whether the failure is fatal the

following must be noted:

1. Whether there are mutual promises which are dependent,

independent or concurrent

215 AIR 1943 PC 34

Page 151: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

151

2. Is the obligation subject to failure and ‘entire’ or a ‘divisible’

one

3. Is the broken part a term of the condition

4. Does the breach go to the root of the contract

VI. REMEDIES FOR BREACH

In any breach of contract whether actual or anticipatory the

principal or the primary obligations are replaced by a secondary set

of obligations in order to compensate the person form damages in

respect of loss arising due to the breach, irrespective of the fact the

innocent party has absolved himself from the contract. Therefore

remedies to such breach may arise from those spelt out in the

contract itself or those arising from common law or statutory

remedies. In addition to the legal remedies the courts of equity have

also developed discretionary remedies in the form of specific

performance and injunction in order to strengthen the ends of

justice

13. Remedies spelt out in the contract

It is a trade or a commercial practice to stipulate the remedies

arising form breach in the contract itself. Allocation of risk and

prior anticipation and projection of any such mishap minimises the

need for litigation in future and therefore it had become prevalent

commercial practice to incorporate the due remedies in the event of

a breach of contract.

Generally contractual remedies will include:

• Rescinding the contract by the innocent party in the event of

breach

• Quantum of damages or a means to calculate the damages,

whereby the parties agree on predetermined quantum of damages

Page 152: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

152

to be paid by the party committing the breach known as liquidated

damages.

• Alternatively, a penalty clause is stipulated

a. Contractual Remedy

(i)Rescission

When there is a breach by one party the other may rescind the

contract and treat himself as absolved from his obligations and

hold the defaulting party liable. Such remedy in case of a voidable

contract where the party may sue for remedy for rescission may be

under the Specific Relief Act, 1963.

ii. Restitution

Where the injured party has performed his part of the contract and

has not received country performance then the appropriate remedy

may be restitution on respect of his own performance. Thus

restitution or restoration may be another remedy whereby

adjudging the rescission the court may require the party to whom

the relief is granted to restore to whatever extent possible any

benefit received from the other party and to make compensation to

him.

This is giving effect to the principle embodied in section 64 of the

Contract Act that he who seeks equity must do equity.

Where under a contract of insurance the insured gave a cheque to

the insurer towards the first premium amount, but the cheque was

dishonoured by the drawee-bank due to insufficiency of funds in

the account of the drawer, the insurer is not liable in such a

situation to honour the claim, the reason is: The essence of

insurance business is coverage of risk by undertaking to indemnify

the insured against loss or damage. Motivation of insurance

Page 153: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

153

business is that the premium would turn to be profit of business in

case no damage occurs. But to ask insurance company to bear

entire loss of dam- ages of somebody else without receiving a pie

towards premium is contrary to principles of equity, though the

insurance companies are made liable to third parties on account of

statutory compulsions due to initial agreement between insured

and company concerned. The insurer has no liability to the insured

unless and until the premium payable is received by Insurer. In a

contract of insurance when an insurer gives a cheque towards

payment of premium or part of the premium, such a contract

consists of reciprocal promise. The drawer of the cheque promises

the insurer that the cheque, on presentation, would yield the

amount in cash. It cannot be forgotten that a cheque is a Bill of

Exchange drawn on a specified banker. A Bill of Exchange is an

instrument in writing containing an unconditional order directing a

certain person to pay a certain sum of money to a certain per- son.

It involves a promise that such money would be paid. Thus, when

the insured fails to pay the premium promised, or when the cheque

issued by him towards the premium is returned dishonoured by

the bank concerned the insurer need not perform his part of the

promise. The corollary is that the insured cannot claim

performance from the insurer in such a situation.

Further under S. 25 of the Contract Act an agreement made

without consideration is id. Section 65 of the Contract Act says that

when a contract becomes void any person who has received any

advantage under such contract is bound to restore it to the person

from whom he received it. So, even if the insurer has disbursed the

amount covered by the policy to the insured before the cheque was

returned dlshonoured, insurer is entitled to get the money back.

However, if the insured makes up premium even after cheque was

Page 154: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

154

dishonoured but before date of accident it would be a different case

as payment of consideration can be treated as paid in the order in

which the nature of transaction required it216.

In view of the provisions of S.65 of the Contract Act and Art.47 of

the Limitation Act, when a contract becomes not enforceable either

it being ab initio or voidable then, in such a situation any person

who has received any advantage under such agreement or contract

is bound under law to refund the consideration or to make

compensation for it to the person from whom he had received it

provided a suit for recovery of it is filed within three years limitation

from the date of failure of such agreement or contract. Therefore in

case of suit for possession of property transferred by registered sale

deed or in alternative refund of amount of compensation when the

sale deed found void and the transferor admitted execution of sale

deed and receipt of amount of compensation, the refusal to grant

the relief of refund of amount of compensation is prayed for in the

suit which was filed within three years from the sale deed was

illegal217.

(iii) Liquidated Damages and penalty

General

The parties to the contract may make sometimes make a genuine

assessment of the losses which are likely to result in the event of a

breach and stipulate that such sum shall be payable in the event of

a breach of contract.

216 National Insurance Co. Ltd., V. Seem A Malhotra And Others, Air 2001 Supreme

Court 1197. Section 65, At Page 1197, 1199 & 1200. 217 Amri Devi V. Ridmal, Air 1998 Raj. 25. Section 65, At Page 25 &27.

Page 155: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

155

Such clauses enable a party to know his liability in advance. If,

however, the clause is not an assessment of losses but intended as

punishment on the contract-breaker, then the clause is a penalty

clause and is void.

A liquidated damages clause will be effective in the event of a

breach and the plaintiff will not recover more than that sum. No

action for unliquidated damages will be allowed. Where the clause

is a penalty clause, then in an action for breach of contract it is

disregarded.

There is always the great probability that the parties may often be

in dispute over whether the clause was a penalty or liquidated

damages clause. Various rules have been formulated to deal with

such contingencies.

The mere fact that a payment is described in a contract as a

'penalty' is not of itself decisive. The court will look at the

construction of the clause itself and the surrounding

circumstances and may, on these, conclude that what is described,

as a penalty clause is, in fact a liquidated damages clause.

In Dunlop Pneumatic Tyre Co v New Garage 218 that is a leading

case on penalties Lord Dunedin laid down three rules concerning

penalty clauses:

i) The use of the words 'penalty' or 1iquidated damages' may prima

facie be supposed to mean what they say, yet the expression used

is not conclusive.

218 [1915] AC 79

Page 156: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

156

ii) The essence of a penalty is a payment of money as in terrorem of

the offending party; the essence of liquidated damages is a genuine

covenanted pre-estimate of damage.

iii) Whether a sum stipulated is penalty or liquidated damages

would be a question of construction of the clause to be decided

upon the terms and inherent circumstances of each particular

contract, judged as of the time of making the contract, not as at the

time of breach.

The case is as follows:

The defendant bought tyres from the plaintiff and agreed not to

tamper with manufacturer’s marks or sell below the list price or sell

to any person blacklisted by the plaintiff or exhibit or export tyres

without the plaintiffs consent.

The defendant agreed to pay £5 for every tyre he sold or offered in

breach of the agreement. In breach, the defendant sold to the

public below the list price.

HELD: “The provision for payment of £5 was not penal. Looking at

the language of the contract itself the character of the transaction

and the circumstances, it was clear that the provision was to

prevent a price war and therefore protect the plaintiffs’ sales. The

clause was therefore an attempt to estimate damage at a certain

figure and as the figure was not extravagant, it could only be

concluded that it was a bargain to truly assess damages and not a

penalty clause.”

Clauses, which underestimate damages

Page 157: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

157

Where the contract has underestimated damages in the event of a

breach, either because of inflation, or through bad bargaining, then

damages will limited to the amount stipulated by the contract.

Payments, which are not, liquidated damages

Some contracts stipulate for payment of a particular sum on the

happening of certain events other than breach of the contract itself.

These payments are not liquidated damages and the distinction

between liquidated damages and penalties is inapplicable.

Alder v Moore [1961] 2 QB 57

The defendant, a professional footballer, received £500 from an

insurance company for an injury, which was supposed to have

disabled him. He signed a declaration that he would not play

professional football again and that 'in the event of infringement of

this condition, he will be subject to a penalty of the amount paid

him in settlement of his claim. The defendant began playing

football four months after signing the declaration and the plaintiff

sought recovery of the £500. The defendant argued the clause was

a penalty and that the underwriters had suffered no loss by his

playing football again.

HELD: that this was a contract for the payment of a certain sum in

a certain event which was not a breach of contract, and that event

having happened, the sum was payable.

Withholding payments

This can often be a penalty unless the contract stipulates that

there will be no payment until performance is completed.

Gilbert-Ash v Modern Engineering [1974] AC 689

Page 158: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

158

A subcontractor was entitled to payments on the issue of

architects' certificates, but the main contractor had, in the same

contract, the right to withhold or suspend payments if the

subcontractor 'failed to corn ply with any provisions' of the contract

HELD: This provision was invalid as a penalty clause.

b. Remedies under Common law

We have seen earlier that damages may be spelt out in the contract

itself either or in the form of liquidated damages or penalties.

However damages also entail remedies that are brought about

under common law and those imposed by the statutes.

This principle was considered in the earliest case of Hadley v

Baxandale219 .

The principles established in this case have been revisited and

affirmed over and over again and have formed the base for

codification in the Indian Contract Act. Section 73 of the Act speaks

about the compensation for loss or damage caused by breach of

contract. It states that when a contract has been broken, the party

who suffers by such breach is entitled to receive, from the party

who has broken the contract, compensation for any loss or damage

caused to him therby, which naturally arose in usual course of

things from such breach, or which the oparties knew when they

made the contract to be likely to result form the breach of it.

Such compensation is not to be given for any remote and indirect

loss or damage sustained by reason of such breach.

219 (1854) 9 Ex 341

Page 159: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

159

Thus the two primary rules that were made out in this decision as

regards damages in the event of a breach are:

1. General Damages: General Damages arise on account of the

default on breach and is a direct consequence of such breach

2. Special Damages: Special Damages arise when there are

special circumstances and they are so created by the breach that

the loss so caused cannot be made good unless the same is

brought to the knowledge of the defendant.

These rules which were established in the case of Hadley v

Baxandale were reexamined in a subsequent case220 where the

question of remoteness of liability was considered and it was held

that any loss actually resulting from the breach as was at the time

of the contract “reasonably foreseeable” as liable to result from the

breach was recoverable. What constituted reasonable forsee was at

that time what was the knowledge possessed by the party who

eventually committed the breach. This would ideally include the

losses that would arise in the normal course of business and if

there are special circumstances involved then in that particular

case the knowledge of such special circumstances.

The plaintiff’s claim for liquidated damages is not maintainable

under Section 74 of the Indian Contract Act which contemplates

payment of stipulated penalty in case of breach of contract. The

contract does not stipulate any specific penalty in the event of

breach of contract. The essence of liquidated damages is a genuine

covenanted pre-estimate of damage. The fact, however, remains

that the defendant committed breach of contract. A party who

suffers on account of breach of contract is entitled to un-liquidated

220 Victoria Laundry(Windsor) Ltd. V Newman Industries (1949) 2 KB 528 CA

Page 160: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

160

damages. Therefore, damages of Rs. 25000 are awarded to the

plaintiff221.

The doctrine of ‘Promissory Estoppel’ cannot be said to have any

application in the instant case as no promise can be said to have

made in favour of the writ petitioner, pursuant to the amendment

to the Scheme nor can it be said that it altered its position

pursuant thereto222.

In the instant case there is no restriction on the quantity of power

consumed. Thus merely because there is a general clause in the

form of H.T. agreement that there is an obligation on the part of the

consumer to pay all the charges levied by the Board, it does not

mean that the Board can levy and collect penalty without any basis

whatsoever. Further, it is not shown that any loss has accrued to

the Board by the consumption of so much energy by the petitioner.

In the absence of any breach of contract and in the absence of any

loss or damage caused to the Board thereby, the question of levying

any penalty does not arise. Even in the case of breach of contract,

Section 74 of the Contract Act entitles a person complaining of

breach of contract to get reasonable compensation and it does not

entitle him to realize anything by way of penalty. Thus the board

would not be entitled to collect any penalty from the petitioner on

the so-called excess of energy consumed by the petitioner

proportionate to the demand exceeded223.

221 The Pravar Sahakari Sakhar Karkhana Ltd. V. The Express Industrial Corporation,

Vinvat. Air 2002 May. Bom. 185. Section 73, 74 At Page 186 & 193. 222 Union Of India V. Tata Iron & Steel Co. Ltd., Air 2000 Cal 56. Section 74, At Page

57, 64 & 65. 223 M/S Sri Vishnu Cements Ltd. V. A.P. State Electricity Board, Air 1999 A.P.103.

Section 74, At Page 103, 105 & 106.

Page 161: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

161

In the instant case it is nowhere pleaded by the petitioners that the

burden of octroi was not passed on and there is also no proof to

that effect. The petitioners have simply pleaded that the octroi

could not have been collected as per Entry No. 86; but it ought to

have been collected as per Entry No., 38(a); and as the octroi was

wrongly collected, they are entitled to refund. This much pleading

is not at all sufficient to grant the relief of refund224.

c. Equitable Remedies

Other than the statutory and common law remedies equitable

remedies are also available in case of a breach of contract.

Generally legal and equitable remedies are complementary and

principles of equity find place in the various statutory remedies.

Equitable remedies are generally in the form of Specific

performance of the contract , or in the form of an injunction or the

rectification and cancellation of an instrument or recession.

i. Specific Performance:

Specific performance is generally granted by the Court directing

the defendant to actually perform the contract according to the

terms of the contract.

Enforcement of such specific performance happens in

circumstances envisaged under Section 10 of the Specific Relief

Act.

These could be circumstances where there is no means of

ascertaining the actual damage cause by the non performance of

224 Garware Plastics & Polyester Ltd., V. Municipal Corpn. Aurangabad, Air 1999

Bom 431. Section 74, At Page 431, 435 & 436.

Page 162: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

162

the compensation on money for the non performance would not

adequately compensate the aggrieved party.

However the specific relief Act also categorically lays down under

Section 14 contacts, which cannot be specifically, enforced being:

• Contracts the non performance of which would be duly

compensated in monetary terms

• Contracts wherein the details of the contract are so minute

that the Court will not be able to enforce specific performance or its

material terms

• Contracts which by nature is determinable

• Contract the performance of which involved the performance

of a continuous duty that the Court cannot supervise.

It is well-settled that in a contract of immoveable property time is

not the essence of the contract unless it is stipulated so by express

terms or by necessary implication. It is equally well-settled that

fixation of the period within which the contract has to be performed

does not make the stipulation as to time essence of the contract.

Specific performance by no means an absolute right, but one which

rests entirely on the judicial discretion exercised with reference to

facts of each case. Generally liquidated damages are fixed on the

contract more for securing performance225.

ii. Injunctions:

Another equitable remedy that can be sought is the process of

injunction.

225 E. Bhagwan Das V. Dilip Kumar, Air 1998 Andhra Pradesh 374. Section 55, 74, At

Page 373 & 374.

Page 163: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

163

Injunction has been defined as a judicial process whereby a party

is ordered to refrain for doing a particular Act or thing or to do a

particular Act or thing.

It is generally a remedy that acts in personam and does not run

with the subject matter or the property.

Such injunctions may be

• Temporary or permanent in nature or

• Preventive or Mandatory in nature.

Injunctions are generally issued under equitable remedies

when damages are not found appropriate to for the loss arising out

of breach.

QUASI CONTRACTS

Essentially, the principle of quasi-contracts premised upon

foundations of natural justice and equity. It is a fictional

contractual relationship in the sense that, without there being offer

and acceptance and other essential ingredients, subject to certain

condition, the law imposes a contractual obligation on the part of

certain parties.

Broadly, the following principles are covered in the act:

a. Necessaries supplied

b. Reimbursement of money

c. Person enjoying the benefit

d. Finder of lost goods

e. Payment by mistake or cercion

The common law at an early date recognized an obligation on the

part of a person who had been unjustly enriched at the expense of

another to make restitution in the amount of such enrichment.

Since the remedy lay in a form of action traditionally recognized as

Page 164: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

164

contractual, it was necessary to imply a promise to restore the

benefit although no such promise was in fact ever made. In other

words, to bring about a just result the law supplied both promise

and the resultant legal remedy for its supposed ‘breach’. From the

form of action in which the right was enforced combined with the

source of implication of the non-existent promise, came the term

‘Contract implied law’.

“It is clear that the remedy in quasi contract is usually available

where there is no contract at all and is the only remedy to prevent

unjust enrichment as where money is paid or received for the use

of another, overpayment by mistake, tort cases etc., and in contract

cases, where the defendant’s performance is excused by

impossibility or because of plaintiff’s material breach, so that the

defendant is not in default, yet he has been enriched by the

plaintiff’s part performance.”226

Where the premises in question was taken on rent by a Bank and

the demand for enhancement of rent was made by plaintiff landlord

before expiry of lease, however, the Bank continued to be in

possession of premises on old rent and even the decretal amount

received by the: Bank in a suit for recovery of loan given to a

person for whom plaintiff had stood surety, was, adjusted towards

the loan amount payable by that person and not deposited to

plaintiffs ac- count towards rent of suit premises, the Bank was

liable to pay entire suit-claim for rent at enhanced rate and not

226 Urban Improvement Co. Pvt Ltd. V. Sardar Ujagar Singh, Air 1996 P. & H.

167. Section 69, At Page 173.

Page 165: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

165

only the decretal amount as received by Bank and deposited

towards loan account as afore- said, in view of principle of "tenant

holding over" and its consequential effect making the tenant liable

to pay damages or mesne profits to the landlord for continuing in

possession without any authority of law and similarly, in view of

the principle of "unjust enrichment" under the provisions of S. 70

of Contract Act. In such a case, stand taken by the Bank that it

was not liable to pay the rents at the enhanced rates because the

proposal made by the plaintiff was not agreeable to the head office

of the Bank also, cannot be sustained in view of the fact that the

earlier lease that was existing between the plaintiff and the

defendant Bank for the period prior to expiry of lease was entered

into between the parties without the involvement of the head office.

Similarly, the plea that the plaintiff is not entitled to claim damages

or mesne profits subsequent to the termination of lease unless a

separate inquiry and a fresh trial is held for the said purpose

cannot be sustained for the simple reason that the Bank, was made

known about the fresh terms of the lease clearly much earlier to

the expiry of the lease as also after the expiry of the lease period.

Therefore, by once again directing the plaintiff to go to the civil

Court for seeking fresh trial and inquiry into the mesne profits

would cause him unnecessary hardship227.

In a writ petition praying for refund of overcharges paid under the

Major Ports Trusts Act, a plea for unjust enrichment was taken by

227 Bank Of India V. V. Swaroop Reddy, Air 2001 Andhra Pradesh 260. Section 70, At

Page 260 & 269.

Page 166: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

166

authorities under the contract act for the first time at the time of

arguments. Such a plea at the end of the case cannot be raised228.

The principles governing the quasi contract are sufficiently

attracted in the case of payment of service charges to Municipal

Corporation for the services rendered by them. Thus payment of

service charges by executive orders relating to Central Govt.

properties is nothing other than the compensation payable under

Section 70 of the Contract Act. Thus the Corporations can demand

compensations by issuing a bill prescribing the particulars of

demand and notice of liability incurred in default of payment229.

In a writ petition praying for refund of overcharges paid under the

Major Ports Trusts Act, a plea for unjust enrichment was taken by

authorities under the contract act for the first time at the time of

arguments. Such a plea at the end of the case cannot be raised230.

The principle of unjust enrichment cannot be extended to give a

right to the state to recover or realise vend fee after the statute has

been struck down. There is no factual basis on which the court can

conclude that the appellants have, in fact, realised the amount of

228 Gujarat Steel Tubes Ltd. V. Board Of Trustees Of Port Of Kandla And Another.

Air 2002 May. Guj. 173. Section 70, 72 At Page 173 & 180. 229 Food Corporation Of India V. Alleppey Municipallity, Air 1996 Ker. 241. Section

70, At Page 241 & 256. 230 Gujarat Steel Tubes Ltd. V. Board Of Trustees Of Port Of Kandla And Another.

Air 2002 May. Guj. 173. Section 70, 72 At Page 173 & 180.

Page 167: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

167

vend fee and allowing them to retain it will result in their getting

enriched unjustly231.

Agreement for supply of natural gas were entered into between the

ONGC and different industries. The agreement stipulated the price,

mode of payment and also the interest payable in case of delay in

payment. After the expiry of the term of these agreement, ONGC the

supplier proposed that the contract should be renewed but at the

enhanced price. The purchaser thereon challenged the increase in

the price of gas as fixed. By an interim order, the Court directed the

supplier to supply gas as the old rate. The escalation in price made

by ONGC was finally found to be valid by Court. ONGC the seller

thereupon demanded from the purchasers the difference in price

and also interest for delayed payment at the rate stipulated in the

agreement. The claim made for interest was disputed by the

purchasers. Held, ONGC was entitled to claim interest from the

purchasers for the delayed payment of the principal amount232.

In the instant case of work contract it was inter alia agreed that on

satisfactory completion of work within the stipulated time the

contractor would be entitled to 15% increase in terms of the price

as agreed. The facts and circumstances of the case revealed that

the stipulated time for completion of work was not treated as the

essence of the contract by both the parties and the admitted delay

was contributory by both the parties. Thus, the snag of completion

of work within stipulated period created by the agreement having

231 M/S Somaiya Organics (India) Ltd., V. State Of Uttar Pradesh, Air 2001 Sc 1723.

Section 72, At Page 1725 & 1735. 232 O.N.G.C. V. Assocoation Of Natural Gas Consuming Inds. Air 2001 Sc 2796.

Section 72, At Page 2796 & 2799.

Page 168: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

168

been lifted, the contracted would automatically become entitled to

the increase of 15%233.

In the instant case, the general power of attorney itself makes it

clear that the power of attorney holder has a right to deal with all

the properties belonging to the principal as on the date and any

other properties which may be acquired subsequent thereto also.

As such the contention that the contract for sale of property

entered by the general power of attorney holder with the plaintiff-

purchaser was liable to be cancelled since the principal had no full

fledged and valid title to the property at the time when she

constituted power of attorney and therefore, the power of attorney

had no right to deal with the properties which are acquired and

owned by him subsequent to the date of power of attorney cannot

hold water in the eye of law.

Revocation by purchaser-Claim for refund of consideration paid-

Plea by vendor to set off loss suffered due to revocation-Can be

considered only if vendor proves that he was fully ready and pre-

pared to perform his part of the contract as per the terms of the

agreement.

Section 55 (2) of T.P. Act deems implied contract for title in every

conveyance and even in cases where there is a completed contract

of sale, the purchaser is entitled to cancel the contract and seek

the refund of purchase money. When that is so as regards a

completed contract, in a contract which is only at an executory

stage, it would not be proper in law to force upon the purchaser to

purchase the property on the ground that he was aware of the

233 Gratex Machinery Co. V. Mahindra & Mahindra Ltd., Air 2001 Mad. 473. Section

72, At Page 473, 479 & 480.

Page 169: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

169

defective or imperfect title at the time of agreement of sale. It does

not prevent in law for the purchaser to revise his opinion before the

contract is concluded however with a qualified liability on the

purchaser to compensate any loss or damages which the vendor

has sustained In the course of such trans- action for which the

purchaser has equally contributed by his folly234.

The trial court recorded a finding of fact that time was not the

essence of the contract between the parties and if the sale deed was

not executed on the date alleged by the defendant, it cannot be said

that it stood repudiated by lapse of time when there was no plea

that the suit was barred by time235.

The respondents have not proved that they sustained any legal

injury due to the breach of contract committed by the appellant. If

the respondents are in a position to produce evidence whereby the

court can assess reasonable compensation, then without proof of

actual loss damages will not be awarded and the amount

mentioned by the contract shall be penalty. In such circumstances,

the respondents are not entitled to forfeit the security amount or

the retention amount. The appellant is allowed to recover both the

security amount of Rs. 100000 and the realization amount of Rs.

86563 respectively236.

234 R.L. Pinto And Another V. F.F. Menzes And Another, Air 2001 Karnataka

141.Section - 62, 73, 188, At Page 141, 143 & 144. 235 Lala Sumer Chand Goel (Since Deceased By L.Rs.) V. Rakesh Kumar. Air 2002

March. All. 82. Section 73 At Page 82 & 86. 236 P.K. Abdulla V. State Of Kerala And Another. Air 2002 March. Ker. 108.

Section 73. At Page 108 & 110.

Page 170: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

170

The plaintiff’s claim for liquidated damages is not maintainable

under Section 74 of the Indian Contract Act which contemplates

payment of stipulated penalty in case of breach of contract. The

contract does not stipulate any specific penalty in the event of

breach of contract. The essence of liquidated damages is a genuine

covenanted pre-estimate of damage. The fact, however, remains

that the defendant committed breach of contract. A party who

suffers on account of breach of contract is entitled to un-liquidated

damages. Therefore, damages of Rs. 25000 are awarded to the

plaintiff237.

The learned arbitrator fell in grave error in applying the principle of

the true market value at the time when the contract would have

been performed as he applied the principle enunciated in Section

73 of the Indian Contract Act on the presumption that no goods

were supplied at all238.

The defendant is entitled to levy liquidated damages only if there is

breach of contract by the plaintiff. It is not necessary for the

defendant to file a suit to establish that the plaintiff has committed

breach of contract. Therefore, both the parties should be given an

opportunity to adduce further evidence and, therefore, the appeal is

allowed239.

237 The Pravar Sahakari Sakhar Karkhana Ltd. V. The Express Industrial

Corporation, Vinvat. Air 2002 May. Bom. 185. Section 73, 74 At Page 186 & 193.

238 Thyssen Stahlunion Gmbh V. Steel Authority Of India. Air 2002 June. Del. 255. Section 73 At Page 255 & 270.

239 Fact Engineering Works V. Kerala Industries, Air 2001 Ker. 326. Section 73 At Page 327, 329 & 330.

Page 171: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

171

The provision contained in the brochure issued by the Development

Authority that it shall not be liable to pay any interest in the event

of an occasion arising for return of the amount should be held to be

applicable only to such cases in which the claimant is itself

responsible for creating circumstances providing occasion for the

refund240.

To claim refund of duty it is immaterial. Whether the goods

imported are used by the importer himself and the duty thereon

passed on the purchaser pf, the finished product or that the

imported goods are sold as such with the incidence of tax being

passed on to the buyer. In either case the principle of unjust

enrichment Will apply and the person responsible for paying the

import duty would not be entitled to get the refund because of the

plain language of Section 27 of the Act. Having passed on the

burden of tax to another person, directly or indirectly, it would

clearly be a case of unjust enrichment if the importer/seller is then

able to get refund of the duty paid from the Government

notwithstanding the incidence of tax having already been passed on

to the purchaser. The principle of unjust enrichment incorporated

in Section 27 of the Act would be applicable in respect of imported

raw material actively consumed in the manufacture of a final

product241.

Money due under a contract cannot be recovered as arrears of land

revenue, unless any statutory provision makes it recoverable as

arrears of land revenue or there is an agreement between the

240 Ghaziabad Development Authority V. Union Of India, Air 2000 Sc 2003.

Section 10, 65, 73, At Page 2004, 2006 & 2007. 241 Union Of India And Others V. Solar Pesticide Pvt. Ltd, Air 2000 Supreme

Court 862. Section 73, At Page 862, 866, 867, 868 & 869.

Page 172: Fundamental Principles of Law of Contracts

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

172

parties to the contract for recovery of the amount due under the

agreement as arrears of land revenue.

Where the money was due under the contract award to the

petitioner but neither any statutory provision nor any stipulation in

the contract was placed before the Court to point out that the

amount sought to be recovered under the impugned citation was

recoverable as arrears of land revenue, the recovery of the amount

under the impugned citation is not proper242.

***************

242 Mohd. Umar V. Nagar Palika Khatima, Air 1998 All. 227. Section 73, At Page

227 & 228.