commercial & industrial laws and auditing

Commercial&

Industrial Lawsand

Auditing

INTERMEDIATE : PAPER - 6

STUDY NOTES

THE INSTITUTE OFCOST ACCOUNTANTS OF INDIA12, SUDDER STREET, KOLKATA - 700 016

First Edition : January 2008Reprint : March 2009Second Reprint : August 2009Third Reprint : November 2009Second Edition (Revised) : December 2010Third Edition (Revised) : July 2011Reprint : January 2012

Published by :

Directorate of StudiesThe Institute of Cost Accountants of India12, Sudder Street, Kolkata - 700 016

Printed at :Das Printers61, Surya Sen Street,Kolkata - 700 009Indiaemail [email protected]

Copyright of these Study Notes is reserved by the Institute ofCost Accountants of India and prior permission from the

Institute is necessary for reproduction of the whole or any part thereof.

Syllabus

Paper 6: Commercial & Industrial Laws and Auditing

(One Paper: 3 hours:100 marks)

OBJECTIVES

To give an exposure some of important commercial laws essential for an understanding of the legalimplications of the modern business. Introduction to cover fundamental elements of the Legal Systemand the system of judicial precedent. The study to include essentials of establishing and performingsimple contracts and the remedies available in the event of a breach and an introduction to companylaw.

To gain expert knowledge of the Principles and Practice of auditing and assurance and their applicationto different practical situations.

Learning Aims

The syllabus aim to test the students ability to:

Explain fundamental aspects of the organisation and operation of the Legal System; Identify and explain the essential elements of a simple contract, what is regarded as adequate

performance of the simple contract, and the remedies available to the innocent party in the event ofa breach;

Explain the essential differences between sole traderships, partnerships and companies limited byshares;

Explain the way in which companies are administered, financed and managed; Understanding the concepts of auditing, and auditing technique. To gain knowledge on procedure of auditing in different business environment.

Skill set required

Level B: Requiring the skill levels of knowledge, comprehension, application, and analysis.

CONTENTS

SECTION I : COMMERCIAL & INDUSTRIAL LAW 50%

1. Laws of Contracts 15%2. Laws relating to Sale of Goods 10%3. Industrial Laws 20%4. Other Laws 5%

[III]

SECTION II : AUDITING 50%

5. Auditing Basics 10%6. Companies Act provisions relating to Audits 10%7. Review and Audit of Internal Control Systems 15%8. Information System Audit 10%9. Introduction to Management Audit 5%

SECTION : I COMMERCIAL & INDUSTRIAL LAW

1. Laws of Contracts

Essential elements of a valid simple contract.

Legal status of the various types of statements which may be made by negotiating parties. Enforceableoffers and acceptances, and the application of the rules to standard form contracts and modern formsof communication.

Meaning and importance of consideration.

Principles for establishing that the parties intend their agreement to have contractual force.

How a contract is affected by a misrepresentation.

Conditions and warranties

Manner in which law controls use of exclusion clauses and unfair terms in consumer and non-consumer transactions

Level of performance sufficient to discharge contractual obligations

Valid reasons for non-performance by way of agreement, breach by the other party and frustration

2. Laws relating to Sale of Goods

Formation of Contract of sale

Conditions and warranties

Transfer of ownership and delivery of goods

Unpaid seller and his rights

3. Industrial Laws

Factories Act

Industrial Dispute Act

Workman Compensation Act

Payment of Wages Act, Minimum Wages Act

[IV]

Provident Funds Act

Payment of Bonus Act

Payment of Gratuity Act

Consumer Protection Act etc

4. Other Laws

Limited Liability Partnership

RTI Act

Competition Commission Act

Negotiable Instruments Act.

SECTION II : AUDITING

5. Auditing Basics

Major influences of auditing; nature and scope of auditing; basic concepts of auditing; role of evi-dence in auditing; auditing techniques and practices generally accepted auditing standards; theconcept of materiality in auditing.

Fixed assets, investments, inventories, debtors, loans and advances, cash and bank balances, deben-tures and creditors, provisions for taxation, proposed dividend and gratuity other items in thebalance sheet; verification of items in the profit and loss account; contingent liabilities; disclosure ofaccounting policies, practice; expenditure during the period of construction; adjustments for previ-ous year provisions of the Companies Act, 1956 regarding accounts.

Statistical sampling in auditing. Use of ratios and percentages for comparison and analysis trends -inter-firm and intra-firm comparison.

6. Companies Act Provisions relating to Audits

Auditors appointment, remuneration, removal, rights of statutory auditors, duties of statutoryauditors, joint auditors, branch audits.

Report versus certificate, contents of the reports, qualifications in the report.

Relevant provisions of the Companies Act, 1956 and the Income-tax Act, 1961.

Interface between statutory auditor and internal auditor.

Corporate Governance

[V]

7. Review and Audit of Internal Control Systems

Nature and scope of internal auditing, financial versus operational audit; concepts of efficiencyaudit, propriety audit, voucher audit, compliance audit, pre and post audits.

CARO

Audit Report

Internal auditing function

Planning and process of internal audit

Verification of evidence, detailed checking versus sampling plans, statistical sampling as used ininternal auditing; flow chart techniques.

Internal control, nature and scope, internal auditor and internal controls.

Field work, collecting evidences, interviews; memoranda.

Audit notes and working papers.

Audit reports - techniques of effective reporting; follow up of audit report.

Summary reports of top management.

Communications in internal auditing - improving auditor-auditee relationship.

Scope of Audit Committee

Internal audit and investigation of fraud

8. Information System Audit.

9. Introduction to Management Audit.

[VI]

Paper 6 : COMMERCIAL & INDUSTRIAL LAWS AND AUDITING

Contents

SECTION I - COMMERCIAL AND INDUSTRIAL LAWS

Study Note - 1 : Indian Contract Act, 1872

Sl. No. Particulars Page No

1.1 Indian Contract Act, 1872-Concepts and Definitions 1

1.2 Communication, Acceptance and Revocation of Proposals 41.3 Contracts, Voidable Contracts and Void Agreements 51.4 Free Consent 71.5 Considerations 111.6 Void Agreements 131.7 Contingent Contracts 151.8 The Performance of Contracts 161.9 Time and Place for Performance 181.10 Performance of Reciprocal Promises 191.11 Appropriation of Payments 221.12 Indemnity and Guarantee 291.13 Bailment 351.14 Bailment of Pledges 38

1.15 Contracts of Agency 40

Study Note - 2 : Sale of Goods Act, 1930


2.1 Sale of Goods Act 1930-Concepts and Definitions 53

2.2 Condition and Warranty 56

2.3 Passing of the Property from the Seller to the Buyer 59

2.4 Performance of the Contract of Sale 61

2.5 Rights of an Unpaid Seller 64

2.6 Breach of Contract to deliver

Specific or Ascertained Goods 67

Study Note - 3 : Industrial Laws


3.1 The Factories Act,1948 71

3.2 Industrial Disputes Act,1947 1193.3 Workmen Compensation Act,1923 1583.4 Payment of Wages Act,1936 1803.5 Minimum Wages Act, 1948 1953.6 Employees Provident Funds and

Miscellaneous Provisions Act,1952 208

3.7 Payment of Bonus Act,1965 2173.8 Payment of Gratuity Act,1972 242

3.9 Consumer Protection Act,1986 254

Study Note - 4 : Other Laws


4.1 Limited Liability Partnership Act, 2008 264

4.2 RTI Act, 2005 2874.3 The Competition Act, 2002 304

4.4 Negotiable Instrument Act, 1881 338

Question Bank : Commercial & Industrial Laws 351

SECTION II - AUDITING

Study Note -5 : Auditing Basics I


5.1 Evolution of Auditing 3615.2 Definitions 3625.3 Major Influences of Auditing 3635.4 Nature of Auditing 3635.5 Scope of Auditing 3635.6 Role of Evidence in Auditing 3645.7 Auditing Techniques and Practices 3655.8 Generally Accepted Auditing Standards 371

5.9 Concept of Materiality in Auditing 374

Study Note - 6 : Auditing Basics II

Sl. No. Particulars Page No6.1 Verification of items in the Profit & Loss Account. 3776.2 Verification of Fixed Assets, Investments, Inventories,

Debtors, Loans & advances, Cash & Bank BalancesDebentures and Creditors, Provision for Taxation, ProposedDividend & Gratuity, Contingent liabilities, other itemsin the Balance Sheet. 383

6.3 Disclosure of Accounting policies, practice,expenditure during the period of construction. 398

6.4 Adjustments for Previous year 4006.5 Provisions of the Companies Act, 1956

regarding accounts. 4006.6 Statistical Sampling in Auditing. 4066.7 Use of Ratios and Percentages for

comparison and analysis trends. 4096.8 Inter firm and Intra firm comparison. 414

Study Note -7 : Companies Act Provisions Relating To Audits


7.1 Statutory Auditor Appointment, Remuneration,

Removal, Rights, Duties & Liabilities 4157.2 Joint Audit 4227.3 Branch Audit 4237.4 Audit Certificate 4267.5 Audit Report 4287.6 Relevant Provisions of the Companies Act, 1956

and the Income Tax Act 1961. 4337.7 Interface between Statutory Auditor and Internal Auditor. 4387.8 Corporate Governance 439

Study Note - 8 : Review And Audit of Internal Control System


8.1 Nature and Scope of Internal Auditing, Financialversus Operational Audit, Concepts of Efficiency Audit,Propriety Audit, Voucher Audit, Compliance Audit,Pre and Post Audits, Audit in depth. 441

Study Note -9 : Information System Audit And Management audit


9.1 Information System Audit 480Information System AuditComputer AuditingComputer Information System & EnvironmentComputer Information System and Internal ControlAudit RisksSteps in an AuditComputer Assisted Audit TechniquesAuditing in a Computerised Information System (CIS)Audit in the case of EDIAudit in case of E - Commerce EnvironmentAudit in Online system EnvironmentAudit in the case of Environment of personal computerAudit in case of data processing.

9.2 Introduction To Managemant Audit 489DefinitionNeedScopeManagement Audit ProcessAdvantages of Management AuditLimitations of Management Audit

Question Bank Auditing 492

Sl. No. Particulars Page No8.2 C. A. R. O. 4468.3 Internal Auditing Function 4498.4 Planning and Process of Internal Auditing 4618.5 Detailed checking versus Sampling plans,

Flow Chart Technique 4628.6 Internal Control, Nature and Scope,

Internal Auditor and Internal Controls 4648.7 Field work collecting evidences, interviews, memorandum 4728.8 Audit Notes and Working Papers 4738.9 Audit Reports and techniques of effective

reporting, follow up of Audit Report 4748.10 Summary Reports of Top Management 4768.11 Communications in Internal Auditing. 4778.12 Scope of Audit Committee 4778.13 Internal Audit and Investigation of fraud 478

Section - I

COMMERCIAL&

INDUSTRIAL LAWS

COMMERCIAL & INDUSTRIAL LAWS

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Study Note 1

INDIAN CONTRACT ACT, 1872This study note includes

Indian Contract Act, 1872-Concepts and DefinitionsCommunication, Acceptance and Revocation of ProposalsContracts,Voidable Contracts and Void AgreementsFree ConsentConsiderationsVoid AgreementsContingent ContractsThe Performance of ContractsTime and Place for PerformancePerformance of Reciprocal PromisesAppropriation of PaymentsIndemnity and GuaranteeBailmentBailment of PledgesContracts of Agency

1.1 INDIAN CONTRACT ACT, 1872 - CONCEPTS AND DEFINITIONS

INTRODUCTION

The word CONTRACT is common to all of us and virtually no business transactions can take place without anycontracts. The Indian Contract Act, 1872, deals with various types of contracts entered into by various peopleand defines the extremely important aspects of business transactions relating to contracts. In business dealingsoffers for sale are made and accepted, consideration is agreed, and conditions of sale are specified. Disputesarise when an offer or acceptance is violated, consideration is unpaid, and conditions of transactions areviolated. The Contract Act 1872 takes care of all these matters and provides remedies for all such disputes.Before enactment of Indian Contract Act,1872 the courts in India used to apply English Common laws as suitedto Indian conditions, customs and usages. Some difficulties were noticed in using English Common lawsaccordingly later on the courts started deciding cases based on Hindu personal laws and Muslim personal laws.But the same were still not found fit to address the then business complexities. Accordingly separate IndianContract Act, 1872 was enacted. This Act is based on English Common law which is to a large extent made up ofjudicial proceedings. Before 1930 the Act contained provisions relating to contract of Sales of goods andpartnership. Section 76 to 123 relating to Sales of Goods were deleted from the Indian Contract Act,1872 andenacted in another act Sales of Goods Act,1930. Similarly section 239-266 relating to partnership were repealedin 1932 and separate act, Indian Partnership Act, 1932 was passed.The Indian Contract Act,1872 is not an exhaustive Act as it does not cover all branches of the law of contract.There are other acts to deals with other types of contract like Sales of Goods Act for Sales of goods, PartnershipAct for Partnership Contract, Transfer of Property Act for contract relating to Sale of immovable property etc.Again it does not deal with all types of agreements, it deals with only those agreements which are enforceableby law or which give rise to legal consequences.

INDIAN CONTRACT ACT, 1872


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EXTENT AND COMMENCEMENT

The Indian Contract Act, 1872 extends to the whole of India except the State of Jammu and Kashmir; and it came into force on the first day of September, 1872.

ENACTMENTS REPEALED

The Indian Contract Act, 1872 does not affect nor does expressly repeal any provisions of any Statute, Act orRegulation and also does not expressly repeal any usage or custom of trade, nor any incident of any contract,not inconsistent with the provisions of this Act.

BASIC CONCEPTSSection 2

(a) When one person signifies to another, his willingness to do or to abstain from doing anything, with a viewto obtaining the assent of that other to such act or abstinence, he is said to make a proposal;

(b) When the person to whom the proposal is made signifies his assent thereto, the proposal is said to beaccepted. A proposal, when accepted, becomes a promise;

(c) The person making the proposal is called the promisor, and the person accepting the proposal is calledthe promisee;

(d) When, at the desire of the promisor, the promisee or any other person has done or abstained from doing,or does or abstains from doing, or promises to do or to abstain from doing, something, such act orabstinence or promise is called a consideration for the promise;

(e) Every promise and every set of promises, forming the consideration for each other, is an agreement;(f) Promises which form the consideration or part of the consideration for each other are called reciprocal

promises;(g) An agreement not enforceable by law is said to be void;(h) An agreement enforceable by law is a contract;(i) An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at

the option of the other or others, is a voidable contract;(j) A contract which ceases to be enforceable by law becomes void when it ceases to be

enforceable.

1.1.1 Essential elements of a valid contract(i) Agreement In order to constitute a contract, there must be an agreement in first place. An agreement

in turn is composed of two elements-offer and acceptance. Thus there must be atleast two parties-onemaking the offer and another accepting it. The terms of offer must be definite and the acceptance mustbe absolute and unconditional.

(ii) The parties must intend to create a legal relationship. Agreements of social or domestic nature do notcontemplate legal relationship, so they are not contracts.For example, a husband promising his wife to buy her a necklace on occasion of her birthday is not acontract.

(iii) Lawful consideration The agreement must be supported by a lawful consideration. Considerationmeans something in return. Something in return may be an act or abstinence. But it must be real andlawful.

(iv) The parties to an agreement must be capable of entering into a contract. A person is consideredcompetent if he is (a) eighteen years of age (b) of sound mind (c) not disqualified from contracting by anylaw to which he is subject.

(v) The object of agreement must be lawful.(vi) The consent of the parties must be free and genuine i.e. not induced by coercion ,undue influence, fraud

or misrepresentation.(vii) The agreement not expressly declared void or illegal by law.


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(viii) The terms of agreement must be certain and capable of performance.For example, D agrees to sell C garments. The type, quality, value etc are not discussed. The agreementcannot be enforced as terms are uncertain.Similarly, if A promises B to bring rainfall through magic. Such agreement cannot be enforced.

(ix) Legal formalities Where nature of agreement is such that it requires compliance of certain formalities,such requirements should be fulfilled. A contract may require registration in addition of being in writing.However as regards to legal effects, an oral contract has same weightage as a contract in writing.

Classification of Contract :Contracts can be classified in terms of their enforceability or form or extent of performance.

1. Based on Enforceability.(i) Valid Contract : An agreement enforceable by law is a valid contract. In other words it satisfies all the

requirements of a valid contract as laid down in section 10. If any of the essential requirement is missingit becomes a void contract.

(ii) Void agreement : An agreement not enforceable by law is said to a void. A void agreement has no legalconsequences.

(iii) Voidable contract : An agreement which is enforceable at the option of one or more parties thereto butnot at the option of other or others is a voidable contract.

(iv) Void contract : A Contract which ceases to be enforceable by law becomes void when it ceases to be soenforceable. Void agreement and void contract are different. Void agreement is void ab-initio but voidcontract is a valid contract at the beginning but subsequently becomes void when it ceases to beenforceable.

(v) Unenforceable contracts : These are the contracts which can not be enforced in a court of law because ofsome technical defects, these contracts becomes fully enforceable if the technical defects are removed.

(vi) Illegal Contracts : An illegal agreement is destitute of any legal effect from the very beginning. All illegalagreements are void agreements but all void agreements are not illegal.

2. Based on method of formation.(a) Formal contracts : This term is usually found in English laws. Validity of these contracts depends upon

their form. They are valid even if they lack consideration. These contracts are of two types; Contractunder seal and contract of Records.Contract under seal are in writing and signed by the parties to them.Contract of Records includes the court judgements and recognisance, obligations in such cases ariseout of judgement and not under the contract.

(b) Simple Contract : All contracts other than formal are called simple contracts or parole contracts.

3. Based on extent of performance.

(a) Executed Contracts : An executed contract is one which has been completely completed by both theparties.

(b) Executory contracts : It is a contract which is wholly unperformed. If one party has performed his part ofobligation but the other party has not yet completed his obligation on the contract, the contract stillremains executory contract.

3. Based on Obligation.(a) Unilateral contract : Under this type of contract there is an obligation only on the part of only one party

when the contract is concluded.

(b) Bilateral Contract : Here there is an obligation on both the parties to the contract.



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1.2 COMMUNICATION, ACCEPTANCE AND REVOCATION OF PROPOSALS

INTRODUCTIONA proposal is defined as, when one person signifies to another his willingness to do or abstain from doinganything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make aproposal.[Sec2(a)]The term proposal used in the Indian Contract Act is like the term offer used in English laws. The person makingproposal or offer is called the promisor or offeror and the person to whom offer is made is called the offereeand the person accepting the offer is called the promisee or acceptor.An offer may be made either by words orby conduct. An offer, which is made by words, is called express offer and the one, which is inferred from theconduct of a person or the circumstances of the case, is called an implied offer. An example of implied offer isDelhi Metro Rail running Metro Rail on different routs to carry passengers at the scheduled tariff rates. This isa case of implied offer by DMRC and once a person board in the DMRC train he is said to have accepted theoffer by his act/conduct.Similarly an offer is different from an invitation to offer. In the case of invitation to offer the person sending outinvitation does not make an offer but only invites the other parties to make an offer. An advertisement for saleof goods by auction, quotations, catalogues of prices or display of goods at show room with price tag etc isinvitation of offer rather than offer.Offer can be specific or general. An offer is said to be Specific when it is addressed to a definite person orpersons. Such offer can be accepted only by the person or persons to whom it is made. A general offer on theother hand is addressed to public in large and may be accepted by anybody fulfilling the terms and conditions.As per secttion 3 of the act communication of proposals, the acceptance of proposals, and the revocation ofproposals and acceptances, respectively, are deemed to be made by any act or omission of the party proposing,accepting or revoking, by which he intends to communicate such proposal, acceptance or revocation, or whichhas the effect of communicating it.

COMMUNICATION WHEN COMPLETEAs per section 4 the communication of a proposal is complete when it comes to the knowledge of the person towhom it is made.

THE COMMUNICATION OF AN ACCEPTANCE IS COMPLETE

As against the proposer, when it is put in a course of transmission to him, so as to be out of the power of theacceptor;As against the acceptor, when it comes to the knowledge of the proposer.

THE COMMUNICATION OF A REVOCATION IS COMPLETEAs against the person who makes it, when it is put into a course of transmission to the person to whom it ismade, so as to be out of the power of the person who makes it; as against the person to whom it is made, whenit comes to his knowledge.

ILLUSTRATIONS

(a) A proposes, by letter, to sell a house to B at a certain price.The communication of the proposal is complete when B receives the letter.

(b) B accepts As proposal by a letter sent by post.The communication of the acceptance is completeas against A, when the letter is posted; as against B,when the letter is received by A.

(c) A revokes his proposal by telegram.

The revocation is complete as against A when the telegram is despatched. It is complete as against B when Breceives it.Brevokes his acceptance by telegram. Bs revocation is complete as against B when the telegram is dispatched,and as against A when it reaches him.


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REVOCATION OF PROPOSALS AND ACCEPTANCES (Section 5)A proposal may be revoked at any time before the communication of its acceptance is complete as against theproposer, but not afterwards.An acceptance may be revoked at any time before the communication of the acceptance, is complete asagainst the acceptor, but not afterwards.

ILLUSTRATIONSA proposes, by a letter sent by post, to sell his house to B.B accepts the proposal by a letter sent by post.A may revoke his proposal at any time before or at the moment when B posts his letter of acceptance, but notafterwards.B may revoke his acceptance at any time before or at the moment when the letter communicating it reaches A,but not afterwards.

REVOCATION HOW MADE (Section 6)A proposal is revoked

(1) By the communication of notice of revocation by the proposer to the other party;(2) By the lapse of the time prescribed in such proposal for its acceptance, or, if no time is so prescribed, by

the lapse of a reasonable time, without communication of the acceptance;(3) By the failure of the acceptor to fulfill a condition precedent to acceptance; or(4) By the death or insanity of the proposer, if the fact of the death or insanity comes to the knowledge of the

acceptor before acceptance.

ACCEPTANCE MUST BE ABSOLUTE (Section 7)

In order to convert a proposal into a promise, the acceptance must(1) Be absolute and unqualified;(2) Be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in which

it is to be accepted. If the proposal prescribes a manner in which it is to be accepted, and the acceptanceis not made in such a manner, the proposer may, within a reasonable time after the acceptance iscommunicated to him, insist that his proposal shall be accepted in the prescribed manner, and nototherwise; but if he fails to do so, he accepts the acceptance.

ACCEPTANCE BY PERFORMING CONDITIONS, OR RECEIVING CONSIDERATION (Section 8)

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

PROMISES, EXPRESS OR IMPLIED (Section 9)In so far as the proposal or acceptance of any promise is made in words, the promise is said to be express. Inso far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied.

1.3 CONTRACTS, VOIDABLE CONTRACTS AND VOID AGREEMENTS

WHAT AGREEMENTS ARE CONTRACTS? (Section 10)

As discused earlier, all agreements are contracts if they are made by the free consent of parties competent tocontract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.An agreement becomes a contract when the parties intend to give rise to legal obligations. If an agreement isincapable of creating duty enforceable by law,it is not a contract. An agreement is a wider term than a contract.All contracts are agreements but all agreements are not contract. Agreements of moral, religious or social



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nature like promise to attend marriage, birth day party etc are not treated contracts because they are notintended to create legal duty enforceable by law as the parties to such agreements never intended to createlegal consequences for breach thereof.Salmond observed that the law of contracts is not the whole law of agreement nor is it the whole law ofobligations. It is the law of those agreements which create obligation and those obligations which have theirsource in agreements.

WHO ARE COMPETENT TO CONTRACT? (Section 11)One of the essentials of a valid contract is the competency of the parties to make contract. Law has laid downcertain rules as to who are competent to enter into a valid contract. As per Section 11 every person is competentto 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.From the above provisions of the section it means the following types of persons are not competent to contract.

(a) A person who has not attained the age of majority, i,e minor.(b) A person of unsound mind(c) A person who is disqualified from contracting by some law.

Position of Minor.As per section 3 of the Indian Majority Act of 1875, every person in India is a minor if he has not attained the ageof 18 years of age. However in case of a minor of whose person or property or both a guardian has beenappointed under the Guardian and Wards Act, 1890 or whose property is under the superintendence of anycourt of wards before he attains 18 years if age is 21 years.The position of Minors agreement and effect thereof is as under;

(a) An agreement with a minor is void ab-initio.(b) The law of estoppels does not apply against a minor. It means a minor can always his plead his minority despite

earlier misrepresenting to be a major. In other words he can not be held liable on an agreement on the ground that sinceearlier he had asserted that he had attained majority.

(c) Doctrine of Restitution does not apply against a minor.(d) No Restitution on Attaining Majority. Ratification means approval or confirmation. A minor cannot confirm

an agreement made by him during minority on attaining majority. If he wants to ratify the agreement, afresh agreement and fresh consideration for the new agreement is required.

(e) Contract beneficial to Minor; A minor is entitled to enforce a contract which is of some benefit to him.Minority is a personal privilege and a minor can take advantage of it and bind other parties.

(f) Minor as an agent. A minor can be appointed an agent, but he is not personally liable for any of his acts.(g) Minors liability for necessities. If somebody has supplied a minor or his dependents with necessities,

minors property is liable.

WHAT IS A SOUND MIND FOR THE PURPOSES OF CONTRACTING? (Section 12)A person is said to be of sound mind for the purposes of making a contract if, at the time when he makes it, heis capable of understanding it and of forming a rational judgment as to its effect upon his interests.A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is ofsound mind.A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he isof unsound mind.

Illustrations

(a) A patient in a lunatic asylum, who is at intervals of sound mind, may contract during those intervals.(b) A sane man, who is delirious from fever or who is so drunk that he cannot understand the terms of a

contract or form a rational judgment as to its effect on his interests, cannot contract whilst such deliriumor drunken-ness lasts.


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Going by the spirit of the section it is clear that a person is sound mind if he fulfills the following two conditions.(a) He/she is capable of understanding the contract.(b) He/she is capable of forming a rational judgment about the effects of such contract on his interest.

A person not satisfying any of these two conditions is not treated a person of sound mind.

Other Disqualified Persons.The persons who are disqualified from entering into contract due to certain other reasons may be from legalstatus, political status or corporate status. Some of such categories of persons are given below;

(a) Alien Enemy : An agreement with an Alien Enemy is void.(b) Foreign Sovereign and Ambassadors : Foreign sovereigns and their representatives enjoy certain

privileges and immunities in every country. They cannot enter into contract except through their agentsresiding in India.

(c) Convicts : A convict can not enter into a contract while he is undergoing imprisonment.(d) Insolvents : An insolvent person is one who is unable to discharge his liabilities and therefore has applied

for being adjudged insolvent or such proceedings have been initiated by any of his creditors. An insolventperson cannot enter into any contract relating to his property.

(e) Company or Statutory bodies : A contract entered into by a corporate body or statutory body will be validonly to the extent it is within its Memorandum of Association.

1.4 FREE CONSENT

INTRODUCTION

One of the essential elements of a valid contract is that there should be free consent of the concerned partiesto the contract. Two or more persons are said to consent when they agree upon the same thing in the samesense. [See 13]

FREE CONSENT [See 14]

Consent is said to be free when it is not caused by(1) coercion, or(2) undue influence, or(3) fraud, or(4) misrepresentation, or(5) mistake, subject to provisions of sec 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, undueinfluence, fraud, misrepresentation or mistake.

(1) COERCION [See 15]

Coercion is the committing or threatening to commit, any act forbidden by the Indian Penal Code (45 of 1860),or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, withthe intention of causing any person to enter into an agreement.

Explanation: It is immaterial whether the Indian Penal Code (45 of 1860) is or is not in force in the place where thecoercion is employed.

IllustrationsA, on board an English ship on the high seas, causes B to enter into an agreement by an act amounting tocriminal intimidation under the Indian Penal Code (45 of 1860).



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A afterwards sues B for breach of contract at Calcutta.A has employed coercion, although his act is not an offence by the law of England, and although section 506 ofthe Indian Penal Code (45 of 1860) was not in force at the time when, or at the place where the act was done.

(2) UNDUE INFLUENCE [See 16](1) A contract is said to be induced by undue influence where the relations subsisting between the parties

are such that one of the parties is in a position to dominate the will of the other and uses that position toobtain an unfair advantage over the other.

(2) In particular and without prejudice to the generality of the forgoing principle, a person is deemed to be ina position to dominate the will of another(a) Where he holds a real or apparent authority over the other, or where he stands in a fiduciary

relation to the other; or(b) Where he makes a contract with a person whose mental capacity is temporarily or permanently

affected by reason of age, illness, or mental or bodily distress.(3) Where a person, who is in a position to dominate the will of another, enters into a contract with him, and

the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden ofproving that such contract was not induced by undue influence shall lie upon the person in a position todominate the will of the other.

Nothing in this sub-section shall affect the provisions of section 111 of the Indian Evidence Act, 1872 (1 of 1872).There is presumption of undue influence in the following relationships:

(i) Parent and child(ii) Guardian and ward(iii) Doctor and patient(iv) Solicitor and client(v) Trustee and beneficiary

(vi) Religious advisor and disciple(vii) Fiance and fiance

There is however no presumption of undue influence incase of relationship of (i) landlord and tenant (ii) debtorand creditor (iii) husband and wife. The wife has to be pardanashin for such presumption. In these relationshipsundue influence has to be proved.

Illustrations(a) A, having advanced money to his son, B, during his minority, upon Bs coming of age obtains, by misuse of

parental influence, a bond from B for a greater amount than the sum due in respect of the advance. Aemploys undue influence.

(b) A, a man enfeebled by disease or age, is induced, by Bs influence over him as his medical attendant, toagree to pay B an unreasonable sum for his professional services. B employs undue influence.

(c) A, being in debt to B, the moneylender of his village, contracts a fresh loan on terms which appear to beunconscionable. It lies on B to prove that the contract was not induced by undue influence.

(d) A applies to a banker for a loan at a time when there is stringency in the money market. The bankerdeclines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms.This is a transaction in the ordinary course of business, and the contract is not induced by undue influence.

(3) FRAUD [See 17]

Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance,or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into thecontract:

(1) The suggestion, as a fact, of that which is not true by one who does not believe it to be true;


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(2) The active concealment of a fact by one having knowledge or belief of the fact;(3) A promise made without any intention of performing it;(4) Any other act fitted to deceive;(5) Any such act or omission as the law specially declares to be fraudulent.

Explanation : Mere silence as to facts likely to affect the willingness of a person to enter into a contract is notfraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the personkeeping silence to speak, or unless his silence is, in itself, equivalent to speech.

Illustrations

(a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horsesunsoundness. This is not fraud in A.

(b) B says to A - If you do not deny it, I shall assume that the horse is sound. A says nothing. Here, As silenceis equivalent to speech.

(c) A and B, being traders, enter upon a contract. A has private information of a change in prices which wouldaffect Bs willingness to proceed with the contract. A is not bound to inform B.

(4) MISREPRESENTATION [See 18]

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 an 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 anyoneclaiming under him ;

(3) Causing, however innocently, a party to an agreement to make a mistake as to the substance of thething which is the subject of the agreement.

(5) MISTAKE

Mistake means an erroneous belief about something.Mistake can be -

(a) Mistake of law, or(b) Mistake of fact.

(a) MISTAKE OF LAW

When a party enters into a contract, without the knowledge of law in the country, the contract is affected bysuch mistake but it is not void. A contract is not voidable because it was caused by a mistake as to any law inforce in India. The reason here is that ignorance of law is not an excuse at all. However if a party is induced toenter into a contract by the mistake of law then such a contract is not valid.

IllustrationA and B make a contract grounded on the erroneous belief that a particular debt is barred by the Indian Law ofLimitation; the contract is not voidable.

(b) MISTAKE OF FACT

Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement,the agreement is void.

Explanation : An erroneous opinion as to the value of the thing which forms the subject-matter of the agreementis not to be deemed a mistake as to a matter of fact.



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Illustrations

(a) A agrees to sell to B a specific cargo of goods supposed to be on its way from England to Bombay. It turnsout that, before the day of the bargain-, the ship conveying the cargo had been cast away and the goodslost. Neither party was aware of the facts. The agreement is void.

(b) A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain,though neither party was aware of the fact. The agreement is void.

(c) A, being entitled to an estate for the life of B, agrees to sell it to C. B was dead at the time of the agreement,but both parties were ignorant of the fact. The agreement is void.

CONTRACT CAUSED BY MISTAKE OF ONE PARTY AS TO MATTER OF FACT (Section 22)

A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as toa matter of fact.

VOIDABILITY OF AGREEMENTS WITHOUT FREE CONSENT (Section 19)

When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contractvoidable at the option of the party whose consent was so caused.A party to a contract, whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist thatthe contract shall be performed, and that he shall be put in the position in which he would have been, if therepresentations made had been true.

Exception : If such consent was caused by misrepresentation or by silence, fraudulent within the meaning ofsection 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the meansof discovering the truth with ordinary diligence.

Explanation: A fraud or misrepresentation which did not cause the consent to a contract of the party on whomsuch fraud was practiced, or to whom such misrepresentation was made, does not render a contract voidable.

Illustrations

(a) A, intending to deceive B, falsely represents that five hundred mounds of indigo are made annually at Asfactory, and thereby induces B to buy the factory. The contract is voidable at the option of B.

(b) A, by a misrepresentation, leads B erroneously to believe that five hundred mounds of indigo aremade annually at As factory. B examines the accounts of the factory, which show that only four hundredmounds of indigo have been made. After this B buys the factory. The contract is not voidable on accountof As misrepresentation.

(c) A fraudulently informs B that As estate is free from encumbrance. B thereupon buys the estate. Theestate is subject to a mortgage. B may either avoid the contract, or may insist on its being carried out andthe mortgage-debt redeemed.

(d) B, having discovered a vein of ore on the estate of A, adopts means to conceal, and does conceal, theexistence of the ore from A. Through As ignorance B is enabled to buy the estate at an undervalue. Thecontract is voidable at the option of A.

(e) A is entitled to succeed to an estate at the death of B; B dies; C, having received intelligence of Bs death,prevents the intelligence reaching A, and thus induces A to sell him his interest in the estate. The sale isvoidable at the option of A.

POWER TO SET ASIDE CONTRACT INDUCED BY UNDUE INFLUENCE (Section 19A)When consent to an agreement is caused by undue influence, the agreement is a contract voidable at theoption of the party whose consent was so caused.Any such contract may be set aside either absolutely, or, if the party who was entitled to avoid it has receivedany benefit thereunder, upon such terms and conditions as to the Court may seem just.


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Illustrations

(a) As son has forged Bs name to a promissory note. B, under threat of prosecuting As son, obtains a bondfrom A for the amount of the forged note. If B sues on this bond, the Court may set the bond aside.

(b) A, a moneylender, advances Rs. 100 to B, an agriculturist, and, by undue influence, induces B to executea bond for Rs. 200 with interest at 6 per cent per month. The Court may set the bond aside; ordering B torepay Rs. 100 with such interest as may seem just.

1.5 CONSIDERATION

INTRODUCTION

One of the essential elements of a contract is consideration. Consideration means something in return. It maybe either some benefit conferred on one party or some detriment suffered by other.It may be an act orabsistence or promise. For example, if A agrees to sale goods to B for a price of Rs. 20,000/-, the amount is theconsideration for A for parting with the goods.Sec.2(d) defines consideration as, When at the desire of the promisor, the promisee or any other person hasdone or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing,something, such act or abstinence or promise is called a consideration for the promise.An agreement without consideration is not enforceable and therefore is void.In this chapter rules regarding consideration, exceptions to the rule of no consideration no contract and otherlegal provisions are discussed.

Legal rules regarding consideration :

(1) It must move at the desire of the promisor. Any act or abstinence at the desire of third party is notconsideration.

(2) It may move from the promisee or any other person. Consideration may be furnished even by astranger under Indian Law.

(3) It may be an act, abstinence or forbearance or a return promise.(4) It may be past, present or future which the promisor is already not bound to do.(5) It must not be unlawful.

The consideration or object of an agreement is lawful, unlessIt 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 regardsit as immoral, or opposed to public policy.In each of these cases, the consideration or object of an agreement is said to be unlawful. Everyagreement of which the object or consideration is unlawful, is void.

Example :(a) A agrees to sell his house to B for 10,000 rupees. Here Bs promise to pay the sum of 10,000 rupees is the

consideration for As promise to sell the house, and As promise to sell the house is the consideration forBs promise to pay the 10,000 rupees. These are lawful considerations.

(b) A promises to pay B 10,000 rupees at the end of six months, if C who owes that sum to B, fails to pay it. Bpromises to grant time to C accordingly. Here the promise of each party is the consideration for thepromise of the other party and they are lawful considerations.

(c) A promises, for a certain sum paid to him by B, to make good to B the value of his ship if it is wrecked ona certain voyage. Here As promise is the consideration for Bs payment, and Bs payment is theconsideration for As promise, and these are lawful considerations.

(d) A promises to maintain Bs child and B promises to pay A 1,000 rupees yearly for the purpose. Here thepromise of each party is the consideration for the promise of the other party. They are lawful considerations.



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(e) A, B and C enter into an agreement for the division among them of gains acquired, or to he acquired, bythem by fraud. The agreement is void, as its object is unlawful.

(f) A promises to obtain for B an employment in the public service, and B promises to pay 1,000 rupees to A.The agreement is void, as the consideration for it is unlawful.

(g) A, being agent for a landed proprietor, agrees for money, without the knowledge of his principal, to obtainfor B a lease of land belonging to his principal. The agreement between A and B is void, as it implies a fraudby concealment by A, on his principal.

(h) A promises B to drop a prosecution which he has instituted against B for robbery, and B promises torestore the value of the things taken. The agreement is void, as its object is unlawful.

(i) As estate is sold for arrears of revenue under the provisions of an act of the legislature, by which thedefaulter is prohibited from purchasing the estate. B, upon an understanding with A, becomes thepurchaser, and agrees to convey the estate to A upon receiving from him the price which B has paid. Theagreement is void, as it renders thetransaction, in effect, a purchase by the defaulter, and would so defeatthe object of the law.

(j) A, who is Bs power of attorney holder, promises to exercise his influence, as such, with B in favour of C,and C promises to pay 1,000 rupees to A. The agreement is void, because it is immoral.

(k) A agrees to let her daughter to hire to B for concubine. The agreement is void, because it is immoral,though the letting may not be punishable under the Indian Penal Code, (45 of 1860).

Consideration may be present, past or future.Past consideration is something wholly done or suffered before making the agreement.Present consideration is basically an act, which has been done in response to a positive promise. It is also calledexecuted consideration.Executory or future consideration; when consideration is to move at a future date it is called future or executoryconsideration.One of the important thing to note about consideration is that consideration need not be adequate. So long asthe consent of the parties is free inadequacy of consideration is immaterial. However inadequacy ofconsideration may be taken into account by the courts in determining the question whether the consent of theparties is free or not.

UN LAWFUL CONSIDERATIONThe Agreements are void, if Considerations and objects unlawful in part.If any part of a single consideration for one or more objects, or any one or any part of any one of severalconsiderations for a single object, is unlawful, the agreement is void.

Example :A promises to superintend, on behalf of B, a legal manufacture of indigo, and an illegal traffic in other articles.B promises to pay to A a salary of 10,000 rupees a year. The agreement is void, the object of As promise and theconsideration for Bs promise, being in part unlawful.

NO CONSIDERATION (Section 25)An agreement made without consideration is void, unless(1) Agreement without consideration void, unless it is in writing and registered.It is expressed in writing and

registered under the law for the time being in force for the registration of documents, and is made onaccount of natural love and affection between parties standing in a near relation to each other.

(2) Or is a promise to compensate for something done. It is a promise to compensate, wholly or in part, aperson who has already voluntarily done something for the promisor, or something which the promisorwas legally compellable to do.

(3) Or is a promise to pay a debt barred by limitation law. It is a promise, made in writing and signed by theperson to be charged therewith, or by his agent generally or specially authorized in that behalf, to paywholly or in part a debt of which the creditor might have enforced payment but for the law for thelimitation of suits.


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In any of these cases, such an agreement is a contract.Explanation 1: Nothing in this section shall affect the validity, as between the donor and donee, of any giftactually made.Explanation 2: An agreement to which the consent of the promisor is freely given is not void merely because theconsideration is inadequate; but the inadequacy of the consideration may be taken into account by the Court indetermining the question whether the consent of the promisor was freely given.Example :

(a) A promises, for no consideration, to give to B Rs. 1,000. This is a void agreement.(b) A, for natural love and affection, promises to give his son, B, Rs. 1,000. A puts his promise to B into writing

and registers it. This is a contract.(c) A finds Bs purse and gives it to him. B promises to give A Rs. 50. This is a contract.(d) A supports Bs infant son. B promises to pay As expenses in so doing. This is a contract.(e) A owes B Rs. 1,000, but the debt is barred by the Limitation Act. A signs a written promise to pay B Rs. 500

on account of the debt. This is a contract.(f) A agrees to sell a horse worth Rs. 1,000 for Rs. 10. As consent to the agreement was freely given. The

agreement is a contract notwithstanding the inadequacy of the consideration.(g) A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A denies that his consent to the agreement was freely

given. The inadequacy of the consideration is a fact which the court should take into account in consideringwhether or not As consent was freely given.

1.6 VOID AGREEMENTS

INTRODUCTIONOne of the essential elements of an enforceable agreement i.e. a contract is the lawfulness of the object. Behindany enforceable agreement there is an intention to create legal relationship which implies that there is sometransaction. The object of such transaction should be lawful, else agreements shall not be enforceable by law.There are some agreements, which have specifically declared as void in the Act itself. Such agreements arespecified in section 23, 24, 25 to 30 and 56 of the Act. These agreements are void even if they satisfy theconditions of a valid contract, as they are not enforceable.

AGREEMENT IN RESTRAINT OF MARRIAGE VOID (Section 26)Every agreement in restraint of the marriage of any person, other than a minor, is void.

AGREEMENT IN RESTRAINT OF TRADE VOID (Section 27)Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of anykind, is to that extent void.Saving of agreement not to carry on business of which goodwill is sold.Exception 1.One who sells the goodwill of a business may agree with the buyer to refrain from carrying on asimilar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwillfrom 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.

AGREEMENTS IN RESTRAINT OF LEGAL PROCEEDINGS VOID (Section 28)Every agreement,

(a) by which any party thereto is restricted absolutely from enforcing his rights under or in respect of anycontract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which hemay thus enforce his rights; or

(b) which extinguishes the rights of any party thereto, or discharges any party thereto from any liability,under or in respect of any contract on the expiry of a specified period so as to restrict any party fromenforcing his rights, is void to that extent.



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Savings of contract to refer to arbitration dispute that may arise

Exception 1.This section shall not render illegal a contract, by which two or more persons agree that anydispute which may arise between them in respect of any subject or class of subjects shall be referred toarbitration, and that only the amount awarded in such arbitration shall be recoverable in respect of the disputeso referred.

Suits barred by such contracts.When such a contract has been made, a suit may be brought for its specificperformance, and if a suit, other than for such specific performance, or for the recovery of the amount soawarded, is brought by one party to such contract against any other such party, in respect of any subject whichthey have so agreed to refer, the existence of such contract shall be a bar to the suit.

Saving of contract to refer questions that have already arisen.Exception 2. Nor shall this section render illegalany contract in writing, by which two or more persons agree to refer to arbitration any question between themwhich has already arisen, or affect any provision of any law in force for the time being as to references toarbitration.

AGREEMENTS VOID FOR UNCERTAINTITY (Section 29)

Agreements, the meaning of which is not certain, or capable of being made certain, are void.

Example :

(a) A agrees to sell to B a hundred tons of oil. There is nothing whatever to show what kind of oil wasintended. The agreement is void for uncertainty.

(b) A agrees to sell to B one hundred tons of oil of a specified description, known as an article of commerce.There is no uncertainty here to make the agreement void.

(c) A, who is a dealer in coconut oil only, agrees to sell to B one hundred tons of oil. The nature of As tradeaffords an indication of the meaning of the words, and A has entered into a contract for the sale of onehundred tons of coconut oil.

(d) A agrees to sell to B all the grain in my granary at Ramnagar; There is no uncertainty here to make theagreement void.

(e) A agrees to sell to B one thousand maunds of rice at a price to be fixed by C. As the price is capable ofbeing made certain, there is no uncertainty here to make the agreement void.

(f) A agrees to sell to B my white horse for rupees five hundred or rupees one thousand. There is nothingto show which of the two prices was to be given. The agreement is void.

AGREEMENTS BY WAY OF WAGER ARE VOID (Section 30)

Agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be wonon any wager, or entrusted to a person to abide by the result of any game or other uncertain event on which anywager is made.

Exception in favour of certain prizes for horse-racing.This section shall not be deemed to render unlawful asubscription, or contribution, or agreement to subscribe or contribute, made or entered into for or toward anyplate, prize or sum of money, of the value or amount of five hundred rupees or upwards, to be awarded to thewinner or winners of any horse-race.

Section 294A of the Indian Penal Code not affected.Nothing in this section shall be deemed to legalize anytransaction connected with horse-racing, to which the provisions of section 294A of the Indian Penal Code,(45 of 1860) apply.


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1.7 CONTINGENT CONTRACTS

INTRODUCTIONThere are some contracts wherein there is no element of uncertainty in their performance. In other wordsthere performance is not dependent upon a particular event. Such contracts are known as absolute contracts.Butthere are some contracts, the performance of which depends upon the happening or non happening of anuncertain event, collateral to such contracts. Such contracts are called contingent contracts. Contract ofInsurance; guarantee and indemnity are examples of contingent contracts.

CONTINGENT CONTRACT (Section 31)A contingent contract is a contract to do or not to do something, if some event, collateral to such contract,does or does not happen.

IllustrationA contracts to pay B Rs. 10,000 if Bs house is burnt. This is a contingent contract.

ENFORCEMENT OF CONTRACTS CONTINGENT ON AN EVENT HAPPENING (Section 32)Contingent contracts to do or not to do anything if an uncertain future event happens cannot be enforced by lawunless and until that event has happened.If the event becomes impossible, such contracts become void.

Illustrations(a) A makes a contract with B to buy Bs horse if A survives C. This contract cannot be enforced by law unless

and until C dies in As lifetime.(b) A makes a contract with B to sell a horse to B at a specified price, if C, to whom the horse has been

offered, refuses to buy him. The contract cannot be enforced by law unless and until C refuses to buy thehorse.

(c) A contracts to pay B a sum of money when B marries C. C dies without being married to B. The contractbecomes void.

ENFORCEMENT OF CONTRACTS CONTINGENT ON AN EVENT NOT HAPPENING (Section 33)Contingent contracts to do or not to do anything if an uncertain future event does not happen can be enforcedwhen the happening of that event becomes impossible, and not before.

IllustrationsA agrees to pay B a sum of money if a certain ship does not return. This ship is sunk. The contract can beenforced when the ship sinks.

WHEN EVENT ON WHICH CONTRACT IS CONTINGENT TO BE DEEMED IMPOSSIBLE, IF IT IS THEFUTURE CONDUCT OF A LIVING PERSON (Section 34)If the future event on which a contract is contingent is the way in which a person will act at an unspecified time,the event shall be considered to become impossible when such person does anything which renders it impossiblethat he should so act within any definite time, or otherwise than under further contingencies.IllustrationsA agrees to pay B a sum of money if B marries C.C marries D. The marriage of B to C must now be considered impossible, although it is possible that D may dieand that C may afterwards marry B.

WHEN CONTRACTS BECOME VOID WHICH ARE CONTINGENT ON HAPPENING OF SPECIFIED EVENTWITHIN FIXED TIME (Section 35)Contingent contracts to do or not to do anything if a specified uncertain event happens within a fixed timebecome void if, at the expiration of the time fixed, such event has not happened, or if, before the time fixed, suchevent becomes impossible.



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When contracts may be enforced which are contingent on specified event not happening within fixed time.Contingent contracts to do or not to do anything if a specified uncertain event does not happen within a fixedtime may be enforced by law when the time fixed has expired and such event has not happened, or, before thetime fixed has expired, if it becomes certain that such event will not happen.

Illustrations(a) A promises to pay B a sum of money if a certain ship returns within a year. The contract may be enforced

if the ship returns within the year, and becomes void if the ship is burnt within the year.(b) A promises to pay B a sum of money if a certain ship does not return within a year. The contract may be

enforced if the ship does not return within the year, or is burnt within the year.

AGREEMENTS CONTINGENT ON IMPOSSIBLE EVENTS VOID (Section 36)Contingent agreements to do or not to do anything if an impossible event happens, are void, whether theimpossibility of the event is known or not to the parties to the agreement at the time when it is made.

Illustrations

(a) A agrees to pay B 1,000 rupees if two-straight lines should enclose a space. The agreement is void.(b) A agrees to pay B 1,000 rupees if B will marry As daughter C. C was dead at the time of the agreement.

The agreement is void.

1.8 THE PERFORMANCE OF CONTRACTS

INTRODUCTION

Every Contract creates certain obligation on each of the parties involved in it. When both the parties to theContract fulfill their obligations towards each other, the contract is said to be performed. When both the partiesto the contract have performed their obligations, the contract is said to be discharged by performance.

OBLIGATION OF PARTIES TO CONTRACTS (Section 37)The parties to a contract must either perform, or offer to perform, their respective promises, unless suchperformance is dispensed with or excused under the provisions of this Act, or of any other law.Promises bind the representatives of the promisor in case of the death of such promisor before performance,unless a contrary intention appears from the contract.

Illustrations(a) A promises to deliver goods to B on a certain day on payment of Rs. 1,000. A dies before that day. As

representatives are bound to deliver the goods to B, and B is bound to pay Rs. 1,000 to As representatives.(b) A promises to paint a picture for B by a certain day, at a certain price. A dies before the day. The contract

cannot be enforced either by As representatives or by B.

EFFECT OF REFUSAL TO ACCEPT OFFER OF PERFORMANCE (Section 38)Where a promisor has made an offer of performance to the promisee, and the offer has not been accepted, thepromisor is not responsible for non-performance, nor does he thereby lose his rights under the contract.Every such offer must fulfill the following conditions :

(1) it must be unconditional(2) it must be made at a proper time and place, and under such circumstances that the person to whom it is

made may have a reasonable opportunity of ascertaining that the person by whom it is made is able andwilling there and then to do the whole of what he is bound by his promise to do:

(3) if the offer is an offer to deliver anything to the promisee, the promisee must have a reasonableopportunity of seeing that the thing offered is the thing which the promisor is bound by his promise todeliver.


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An offer to one of several joint promisees has the same legal consequences as an offer to all of them.IllustrationsA contracts to deliver to B at his warehouse, on the first March, 1873,100 bales of cotton of a particular quality.In order to make an offer of a performance with the effect stated in this section, A must bring the cotton to Bswarehouse, on the appointed day, under such circumstances that B may have a reasonable opportunity ofsatisfying himself that the thing offered is cotton of the quality contracted for, and that there are 100 bales.

EFFECT OF REFUSAL OF PARTY TO PERFORM PROMISE WHOLLY (Section 39)

When a party to a contract has refused to perform, or disabled himself from performing his promise in itsentirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, hisacquiescence in its continuance.

Illustrations

(a) A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two nights inevery week during the next two months, and B engages to pay her 100 rupees for each nights performance.On the sixth night A willfully absents herself from the theatre. B is at liberty to put an end to the contract.

(b) A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two nights inevery week during the next two months, and B engages to pay her at the rate of 100 rupees for eachnight. On the sixth night A willfully absents herself. With the assent of B, A sings on the seventh night. Bhas signified his acquiescence in the continuance of the contract, and cannot now put an end to it but isentitled to compensation for the damage sustained by him through As failure to sing on the sixth night.

PERSON BY WHOM PROMISE IS TO BE PERFORMED (Section 40)

If it appears from the nature of the case that it was the intention of the parties to any contract that any promisecontained in it should be performed by the promisor himself, such promise must be performed by the promisor.In other cases, the promisor or his representatives may employ a competent person to perform it.

Illustrations

(a) A promises to pay B a sum of money. A may perform this promise, either by personally paying themoney to B or by causing it to be paid to B by another; and, if A dies before the time appointed forpayment, his representatives must perform the promise, or employ some proper person to do so.

(b) A promises to paint a picture for B: A must perform this promise personally.

EFFECT OF ACCEPTING PERFORMANCE FROM THIRD PERSON (Section 41)

When a promisee accepts performance of the promise from a third person, he cannot afterwards enforce itagainst the promisor.

DEVOLUTION OF JOINT LIABILITIES (Section 42)

When two or more persons have made a joint promise then, unless a contrary intention appears by thecontract, all such persons, during their joint lives, and after the death of any of them, his representative jointlywith the survivor, or survivors, and after the death of the last survivor, the representatives of all jointly, mustfulfill the promise.

ANY ONE OF JOINT PROMISORS MAY HE COMPELLED TO PERFORM (Section 43)

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

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



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Sharing of loss by default in contribution. If any one of two or more joint promisors makes default in suchcontribution, the remaining joint promisors must bear the loss arising from such default in equal shares.Explanation : Nothing in this section shall prevent a surety from recovering from his principal, payments madeby the surety on behalf of the principal, or entitle the principal to recover anything from the surety on accountof payments made by the principal.

Illustrations(a) A, B and C jointly promise to pay D 3,000 rupees. D may compel either A or B or C to pay him 3,000

rupees.

(b) A, B and C jointly promise to pay D the sum of 3,000 rupees. C is compelled to pay the whole. A isinsolvent, but his assets are sufficient to pay one-half of his debts, C is entitled to receive 500 rupeesfrom As estate, and 2,250 rupees from B.

(c) A, B and C are under a joint promise to pay D 3,000 rupees. C is unable to pay anything, and A iscompelled to pay the whole. A is entitled to receive 1,500 rupees from B.

(d) A, B and C are under a joint promise to pay D 3,000 rupees, A and B being only sureties for C. C fails topay. A and B are compelled to pay the whole sum. They are entitled to recover it from C.

EFFECT OF RELEASE OF ONE JOINT PROMISOR (Section 44)Where two or more persons have made a joint promise, a release of one of such joint promisors by thepromisee does not discharge the other joint promisor or joint promisors; neither does it free the joint promisorso released from responsibility to the other joint promisor or joint promisors.

DEVOLUTION OF JOINT RIGHTS (Section 45)

When a person has made a promise to two or more persons jointly, then, unless a contrary intention appearsfrom the contract, the right to claim performance rests, as between him and them, with them during their jointlives, and, after the death of any of them, with the representative of such deceased person jointly with thesurvivor or survivors, and. after the death of the last survivor, with the representatives of all jointly.

Illustration

A, in consideration of 5,000 rupees, lent to him by B and C, promises B and C jointly to repay them that sum withinterest on a day specified. B dies. The right to claim performance rests with Bs representative jointly with Cduring Cs life, and after the death of C with the representatives of B and C jointly.

1.9 TIME AND PLACE FOR PERFORMANCE

The time and place of performance of a contract are determined by an agreement between the parties. Therules regarding time and place of performance are summarized below :

TIME FOR PERFORMANCE OF PROMISE, WHERE NO APPLICATION IS TO BE MADE AND NO TIME ISSPECIFIED (Section 46)Where, by the contract, a promisor is to perform his promise without application by the promisee, and no timefor performance is specified, the engagement must be performed within a reasonable time.

Explanation : The question What is a reasonable time is, in each particular case, a question of fact.

TIME AND PLACE FOR PERFORMANCE OF PROMISE, WHERE TIME IS SPECIFIED AND NOAPPLICATION TO BE MADE (Section 47)When a promise is to be performed on a certain day, and the promisor has undertaken to perform it withoutapplication by the promisee, the promisor may perform it at any time during the usual hours of business onsuch day and at the place at which the promise ought to be performed.


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IllustrationA promises to deliver goods at Bs warehouse on the 1st January. On that day A brings the goods to Bswarehouse, but after the usual hour for closing it, and they arc not received. A has not performed his promise.

APPLICATION FOR PERFORMANCE ON CERTAIN DAY TO BE AT PROPER TIME AND PLACE(Section 48)

When a promise is to be performed on a certain day, and the promisor has not undertaken to perform it withoutapplication by the promisee, it is the duty of the promisee to apply for performance at a proper place and withinthe usual hours of business.

Explanation : The question What is a proper time and place is, in each particular case, a question of fact.

PLACE FOR PERFORMANCE OF PROMISE, WHERE NO APPLICATION TO BE MADE AND NO PLACEFIXED FOR PERFORMANCE (Section 49)

When a promise is to be performed without application by the promisee, and no place is fixed for the performanceof it, it is the duty of the promisor to apply to the promisee to appoint a reasonable place for the performanceof the promise, and to perform it at such place.

Illustration

A undertakes to deliver a thousand maunds of jute to B on a fixed day. A must apply to B to appoint a reasonableplace for the purpose of receiving it, and must deliver it to him at such place.

PERFORMANCE IN MANNER OR AT TIME PRESCRIBED OR SANCTIONED BY PROMISEE (Section 50)

The performance of any promise may be made in any manner, or at any time which the promisee prescribesor sanctions.

Illustrations

(a) B owes A 2,000 rupees. A desires B to pay the amount to As account with C, a banker. B, who also bankswith C, orders the amount to be transferred from his account to As credit, and this is done by C.Afterwards, and before A knows of the transfer, C fails. There has been a good payment by B.

(b) A and B are mutually indebted. A and B settle an account by setting off one item against another, and Bpays A the balance found to be due from him upon such settlement. This amounts to a payment by A andB respectively of the sums which they owed to each other.

(c) A owes B 2,000 rupees. B accepts some of As goods in deduction of the debt. The delivery of the goodsoperates as a part payment.

(d) A desires B, who owes him Rs. 100, to send him a note for Rs. 100 by post. The debt is discharged as soonas B puts into the post a letter containing the note duly addressed to A.

1.10 PERFORMANCE OF RECIPROCAL PROMISES

PROMISOR NOT BOUND TO PERFORM UNLESS RECIPROCAL PROMISEE READY AND WILLING TOPERFORM (Section 51)When a contract consists of reciprocal promises to be simultaneously performed, no promisor need performhis promise unless the promisee is ready and willing to perform his reciprocal promise.

Illustrations

(a) A and B contract that A shall deliver goods to B to be paid for by B on delivery.A need not deliver the goods, unless B is ready and willing to pay for the goods on delivery.B need not pay for the goods, unless A is ready and willing to deliver them on payment.



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(b) A and B contract that A shall deliver goods to B at a price to be paid by installments, the first installmentto be paid on delivery.A need not deliver, unless B is ready and willing to pay the first installment on delivery.B need not pay the first installment, unless A is ready and willing to deliver the goods on payment of thefirst installment.

ORDER OF PERFORMANCE OF RECIPROCAL PROMISES (Section 52)

Where the order in which reciprocal promises are to be performed is expressly fixed by the contract, they shallbe performed in that order; and,where the order is not expressly fixed by the contract, they shall be performed in that order which the natureof the transaction requires.

Illustrations

(a) A and B contract that A shall build a house for B at a fixed price. As promise to build the house must beperformed before Bs promise to pay for it.

(b) A and B contract that A shall make over his stock-in-trade to B at a fixed price, and B promises to givesecurity for the payment of the money. As promise need not be performed until the security is given, forthe nature of the transaction requires that A should have security before he delivers up his stock.

LIABILITY OF PARTY PREVENTING EVENT ON WHICH THE CONTRACT IS TO TAKE EFFECT(Section 53)

When a contract contains reciprocal promises, and one party to the contract prevents the other from performinghis promise, the contract becomes voidable at the option of the party so prevented; and he is entitled tocompensation from the other party for any loss which he may sustain in consequence of the non-performanceof the contract.

Illustration

A and B contract that B shall execute certain work for A for a thousand rupees. B is ready and willing to executethe work accordingly, but A prevents him from doing so. The contract is voidable at the option of B; and, if heelects to rescind it, he is entitled to recover from A compensation for any loss which he has incurred by its non-performance.

EFFECT OF DEFAULT AS TO THAT PROMISE WHICH SHOULD BE FIRST PERFORMED, IN CONTRACTCONSISTING OF RECIPROCAL PROMISES (Section 54)

When a contract consists of reciprocal promises, such that one of them cannot be performed, or that itsperformance cannot be claimed till the other has been performed, and the promiser of the promise lastmentioned fails to perform it, such promisor cannot claim the performance of the reciprocal promise, and mustmake compensation to the other party to the contract for any loss which such other party may sustain by thenon-performance of the contract.

Illustrations

(a) A hires Bs ship to take in and convey, from Calcutta to the Mauritius, a cargo to be provided by A, Breceiving a certain freight for its conveyance. A does not provide any cargo for the ship. A cannot claimthe performance of Bs promise, and must make compensation to B for the loss which B sustains by thenon-performance of the contract.

(b) A contacts with B to execute certain builders work for a fixed price, B supplying the scaffolding andtimber necessary for the work. B refuses to furnish and scaffolding or timber, and the work cannot beexecuted. A need not execute the work, and B is bound to make compensation to A for any loss causedto him by the non-performance of the contract.


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(c) A contracts with B to deliver to him, at a specified price, certain merchandise on board a ship whichcannot arrive for a month, and B engages to pay for the merchandise within a week from the date of thecontract. B does not pay within the week. As promise to deliver need not be performed, and B must makecompensation.

(d) A promises B to sell him one hundred bales of merchandise, to be delivered next day, and B promises Ato pay for them within a month. A does not deliver according to his promise. Bs promise to pay need notbe performed and A must make compensation.

TIME IS ESSENCE OF THE CONTRACT (Section 55)When a party to a contract promises to do a certain thing at or before a specified time, or certain things at orbefore specified times, and fails to do any such thing at or before the specified time, the contract, or so much ofit as has not been performed, becomes voidable at the option of the promisee, if the intention of the parties wasthat time should be of the essence of the contract.Effect of such failure when time is not essentialIf it was not the intention of the parties that time should be of theessence of the contract, the contract does not become voidable by the failure to do such thing at or before thespecified time; but the promisee is entitled to compensation from the promisor for any loss occasioned to himby such failure.Effect of acceptance of performance at time other than that agreed upon.If, in case of a contract voidable onaccount of the promisors failure to perform his promise at the time agreed, the promisee accepts performanceof such promise at any time other than that agreed, the promisee cannot claim compensation for any lossoccasioned by the non-performance of the promise at the time agreed, unless, at the time of such acceptance,he gives notice to the promisor of his intention to do so.

AGREEMENT TO DO IMPOSSIBLE ACT (Section 56)

An agreement to do an act impossible in itself is void.Contract to do act afterwards becoming impossible or unlawful.A contract to do an act which, after the contractis made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful,becomes void when the act becomes impossible or unlawful.

COMPENSATION FOR LOSS THROUGH NON-PERFORMANCE OF ACT KNOWN TO BE IMPOSSIBLEOR UNLAWFULWhere one person has promised to do something which he knew, or, with reasonable diligence, might haveknown, and which the promisee did not know to be impossible or unlawful, such promisor must makecompensation to such promisee for any loss which such promisee sustains through the non-performance of thepromise.

Illustrations(a) A agrees with B to discover treasure by magic. The agreement is void.(b) A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract

becomes void.(c) A contracts to marry B, being already married to C, and being forbidden by the law to which he is subject

to practise polygamy. A must make compensation to B for the loss caused to her by the non-performanceof his promise.

(d) A contracts to take in cargo for B at a foreign port. As Government afterwards declares war against thecountry in which the port is situated. The contract becomes void when war is declared,

(e) A contracts to act at a theatre for six months in consideration of a sum paid in advance by B. On severaloccasions A is too ill to act. The contract to act on those occasions becomes void.

RECIPROCAL PROMISES TO DO THINGS LEGAL, AND ALSO OTHER THINGS ILLEGAL (Section 57) Where persons reciprocally promise, firstly, to do certain things which are legal, and, secondly, under-specifiedcircumstances, to do certain other things which are illegal, the first set of promises is a contract, but the secondis a void agreement.



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IllustrationA and B agree that A shall sell B a house for 10,000 rupees, but that, if B uses it as a gambling house, he shall payA 50,000 rupees for it.The first set of reciprocal promises, namely, to sell the house and to pay 10,000 rupees for it, is a contract.The second set is for an unlawful object, namely, that B may use the house as a gambling house, and is a voidagreement.ALTERNATIVE PROMISE, ONE BRANCH BEING ILLEGAL (Section 58)In the case of an alternative promise, one branch of which is legal and the other illegal, the legal branch alonecan be enforced.

Illustration

A and B agree that A shall pay B 1,000 rupees, for which B shall afterwards deliver to A either rice or smuggledopium.This is a valid contract to deliver rice, and a void agreement as to the opium.

1.11 APPROPRIATION OF PAYMENTS

APPLICATION OF PAYMENT WHERE DEBT TO BE DISCHARGED IS INDICATED (Section 59)Where a debtor, owing several distinct debts to one person, makes a payment to him, either with expressintimation, or under circumstances implying that the payment is to be applied to the discharge of some particulardebt, the payment, if accepted, must be applied accordingly.

Illustrations(a) A owes B, among other debts, 1,000 rupees upon a promissory note which falls due on the first June. He

owes B no other debt of that amount. On the first June A pays to B 1,000 rupees. The payment is to beapplied to the discharge of the promissory note.

(b) A owes to B, among other debts, the sum of 567 rupees. B writes to A and demands payment of this sum.A sends to B 567 rupees. This payment is to be applied to the discharge of the debt of which B haddemanded payment.

APPLICATION OF PAYMENT WHERE DEBT TO BE DISCHARGED IS NOT INDICATED (Section 60)Where the debtor has omitted to intimate and there are no other circumstances indicating to which debt thepayment is to be applied, the creditor may apply it at his discretion to any lawful debt actually due and payableto him from the debtor, whether its recovery is or is not barred by the law in force for the time being as to thelimitation of suits.

APPLICATION OF PAYMENT WHERE NEITHER PARTY APPROPRIATES (Section 61)Where neither party makes any appropriation the payment shall be applied in discharge of the debts in orderof time, whether they are or are not barred by the law in force for the time being as to the limitation of suits. Ifthe debts are of equal standing, the payment shall be applied in discharge of each proportionatly.

CONTRACTS WHICH NEED NOT BE PERFORMED EFFECT OF NOVATION, RESCISSION ANDALTERATION OF CONTRACT (Section 62)

If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contractneed not be performed.Illustrations

(a) A owes money to B under a contract. It is agreed between A, B and C that B shall thenceforth accept Cas his debtor, instead of A. The old debt of A to B is at an end, a new debt from C to B has been contracted.

(b) A owes B 10,000 rupees. A enters into an agreement with B, and gives B a mortgage of his (As) estate for5,000 rupees in place of the debt of 10,000 rupees. This is a new contract and extinguishes the old.


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(c) A owes B 1,000 rupees under a contract, B owes C 1,000 rupees. B orders A to credit C with 1,000 rupeesin his books, but C does not assent to the arrangement. B still owes C 1,000 rupees, and no new contracthas been entered into.

PROMISEE MAY DISPENSE WITH OR REMIT PERFORMANCE OF PROMISE (Section 63)Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, ormay extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit.Illustrations

(a) A promises to paint a picture for B. B afterwards forbids him to do so A is no longer bound to perform thepromise.

(b) A owes B 5,000 rupees. A pays to B, and B accepts in satisfaction of the whole debt, 2,000 rupees paid atthe time and place at which the 5,000 rupees were payable. The whole debt is discharged.

(c) A owes B 5,000 rupees. C pays to B 1,000 rupees, and B accepts them, in satisfaction of his claim on A. Thispayment is a discharge of the whole claim.

(d) A owes B, under a contract, a sum of money, the amount of which has not been ascertained. A withoutascertaining the amount gives to B, and B, in satisfaction thereof, accepts the sum of 2,000 rupees. Thisis a discharge of the whole debt, whatever may be its amount.

(e) A owes B 2,000 rupees, and is also indebted to other creditors. A makes an arrangement with his creditors,including B, to pay them, a composition of eight annas in the rupee upon their respective demands.Payment to B of 1,000 rupees is a discharge of Bs demand.

CONSEQUENCES OF RESCISSION OF VOIDABLE CONTRACT (Section 64)

Where a person at whose option a contract is voidable rescinds it, the other party thereto need not performany promise therein contained in which he is promisor. The party rescinding a voidable contract shall, if he hasreceived any benefit thereunder from another party to such contract, restore such benefit, so far as may be, tothe person from whom it was received.

OBLIGATION OF PERSON WHO HAS RECEIVED ADVANTAGE UNDER VOID AGREEMENT ORCONTRACT THAT BECOMES VOID (Section 65)

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