fundamental principles of law of contracts
TRANSCRIPT
FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS
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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.
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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.
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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
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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
FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS
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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
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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.
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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
FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS
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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
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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
FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS
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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
FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS
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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
FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS
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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.
FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS
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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.
FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS
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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.
FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS
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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
FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS
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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)
FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS
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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.
FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS
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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
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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
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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.
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
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)
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
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.
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
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.
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”
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
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.
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.
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.
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
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
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.
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
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.
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
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.
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.
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.
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.
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
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
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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
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.’
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
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.
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
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.
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.
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.
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.’
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)
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.
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.
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.
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.
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
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.
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
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.
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.
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.
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.
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.
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.
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 .
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
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.
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.
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
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
FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS
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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
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.
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.
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.
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.
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.
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:-
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
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.
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.
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 .
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.
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.
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.
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)
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,"
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.
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
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
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
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.
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.
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.
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
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
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.
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
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.
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
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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.
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.
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.
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]
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.
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.
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.
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.
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.
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
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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.
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
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.
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.
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
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.
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.
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
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
FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS
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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
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
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]
FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS
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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)
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.
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
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
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
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
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
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
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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
FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS
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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
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
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.
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
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
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
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
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
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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242 Mohd. Umar V. Nagar Palika Khatima, Air 1998 All. 227. Section 73, At Page
227 & 228.