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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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) b) c) Formation Performance 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, A

performance and termination can be clearly demarcated.

construction contract or a software development contract are the examples in this regard.

1 2 3

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

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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. 2. 3. 4. Who is to perform? When to perform? How to perform? And 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.

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

Specific Relief Act, 1969

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 The

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

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 4

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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

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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. 6

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 consumers or buyers interests, this Act has envisaged safeguard measures. They include express 7

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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.

Sec 2(A) Of The Act

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

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 masters 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 7

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

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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 9

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

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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. dismissed10. Therefore, the appeal is

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

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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. India Thermal Power Ltd. V. State Of M.P, Air 2000 Sc 1005. Section 10, At Page 1005 & 1009.

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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.

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

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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

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
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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)

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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.

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.
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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 & Co 20 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 anyones 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.

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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 21

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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 23

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

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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 buyers 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

23

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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. 2. 3. 4. 5. 6. It must be unconditional. Must be made at the proper place. Must conform to the terms of obligation. Must be made at the proper time. Must be made in the proper form. The person by whom the tender is made must be able and

willing to perform his obligations. 7. 8. 9. There must be reasonable opportunity for inspection. Tender must be made to the proper person. 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.

24

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 25

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 companys 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.

26

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

S. Butail & Co V. H. P Forest Corporation Air 2002 Hp 1 At P. 5 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
27 28

27

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 As 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 As 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

Nihal Chand V Amar Nath, Air 1926 Lah 625; Also See Hyde V Wrench (1840) 3 Beav 334 31 Air 1962 Sc 378
30

28

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

29

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

has been described as vendor and endorsement at the bottom thereof the expression, vendors 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.

30

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

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.
34

31

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 32

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 33

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 nephews 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.

34

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 discussion that and terms the between matter the parties be require further The

should

trashed

out.

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 nobodys case that the appellant agreed to the proposal of the plaintiff company contained 35

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

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.
37

36

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 37

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

40

M/S. RICKMERS VERWALTUNG GIMB H V. INDIAN OIL CORPORATION LTD., AIR 1999 SUPREME COURT 504. Section 7, At Page 504 & 508. M/S. LOTUS CONSTRUCTIONS, V. THE GOVERNMENT OF ANDHRA PRADESH, AIR 1997 A.P. 200. Section 7, At Page 200.

38

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

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 subsection (2) of section 6 is really a provision which equates the nonacceptance 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

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.
41

39

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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. i.

Consideration 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

45

46

Hindustan Aluminium Corporation Ltd. V. Uttar Pradesh State Electricity Board, AIR 1973 All 263. Union of India v S. Narain Singh AIR 1953 Punj 274, Somasundaram Pillai v Government of Madras, AIR 1947 Mad 366. 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.

40

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 promisors 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:


47

Consideration must move from the promisee; Consideration need not move to the promisor Consideration must be sufficient but need not be adequate;

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.

41

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 councils observation in Khwaja Muhammad Khan v Husaini Begam53, it will

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
51

42

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

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

43

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

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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 ownerdefendant 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 promisors 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 Bs 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.

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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 promisors 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.

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.
60

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 anothers 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.

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 persons 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
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.
65

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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 minors 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 minors instance. Generally the effects of a minors 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 minors, 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.

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.
68

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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 minors 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 necessariessuppose 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 lunatics 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
(1916) 40 Mad 308 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.
71 72

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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
74

by

pressure

either

by

threatening

to

commit

or

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.

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

committing any act, which is forbidden by the Indian Penal Code or by detaining a person unlawfully or threatening to do so 75. 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

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.
75

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 persons 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

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.
77

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 casesUnconscionable 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--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)

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.
79

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(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.

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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- 51984 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 deceased. 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 59

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 Dsouza V. Renie Fernandez, Air 1996 Ker. 280. Section 16, At Page 280 & 282.

60

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

84

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. Roshan Lal And Others V. Kartar Chand And Others. Air 2002 September. H.P. 131. Section 16 At Page 131, 134 & 135.

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

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.
85

62

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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--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 63

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

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.
87

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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

Thake v Maurice, (1986) 1 All ER 497 CA 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
89 90

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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
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.
93

66

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

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 Oflanagan, (1930) Ch 575 Ca; Rajagopala Iyer V South Indian Rubber Works, (1942) 2 Mlj 228
97

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 interfered with102. findings of fact cannot be

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

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.
101

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

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.
104

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 limitationsWhere 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.

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

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.
107

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 asThe 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)

72

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 agreement.111 The parties in the instant case had executed a Memorandum of Understanding for construction of houses one of the clauses
111

out his obligation under another

Uttar Pradesh Government V. Lala Nanhoo Mal Gupta AIR 1960 All 420.

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

75

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 persons 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

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 Kings Norton Metal Co v Edridge, Merret & Co, Court of Appeal, (1897) 14 TLR 98.
114

76

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

Said v Butt, (1920) 3 KB 497; Sowler v Potter, (1940) 1KB 27. 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
118 119

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 its 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
121 122

Ibid FN 54. 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.

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.
123

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 79

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

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 notThe consideration or object of an agreement is lawful , unlessIt 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.
125

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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
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.
127

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

82

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 partys 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.

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.
131

84

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

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.
134

85

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 plaintiffbank 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 crossexamination, 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 .

86

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 87

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

139

State Bank Of India V. Dilip Chandra Singh Deo, Air 1998 Orissa 129. Section 25, At Page 129 & 130. M/S John Tinson And Co. Pvt. Ltd. V. Surjeet Malhan, Air 1997 Sc 1411. Section 10, At Page 1411 & 1412.

89

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

Raorani V Gulab Rani(AIR 1942 All 351) Section 27 142 (1894) Ac 535
140 141

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

91

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

92

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

93

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

94

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

95

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

96

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

97

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

(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:98

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

" 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 99

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

100

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

151

Rajasthan Housing Board V. Engineering Project(India) Ltd. And Another. Air 2000 Raj 200.Section 20, 28, At Page 201, 205 & 206. M/S. Atlas Export Industries V. M/S. Kotak & Company, Air 1999 Sc 3286. Section 28, At Page 3286 & 3288.

101

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 .

102

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 Bhubaneswar 153.

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

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.
153

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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

156

M/S Rajaram Maize Products V. M.P. Electricity Board, Jabalpur, Air 1999 M.P. 44. Section 23, 28, At Page 44 & 45. M/S Rajaram Maize Products V. M.P. Electricity Board, Jabalpur, Air 1999 M.P. 44. Section 23, 28, At Page 44 & 45.

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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

Section 29 Section 30 159 Subhash Kumar Manwani V. State Of M.P., Air 2000 M.P.109 Section 30, At Page 109.
157 158

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Section 294-A of the Indian Penal Code also prohibits such agreements. The necessary ingredients that constitute a wagering transaction are: 1. 2. There is a promise to pay money This promise is dependent on the happening of a future

uncertain event 3. 4. 5. Either of the parties can win or lose Both parties have equal chance to win or to lose 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 promises161. These promises have to be simultaneously performed and therefore the promisor is not bound to perform his

160 161

AIR 1959 (Supreme Court 781) Section 2(f)

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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,"

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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.

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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

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
162

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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

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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 111

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

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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 ownerdefendant 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.

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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
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.
167

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 115

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

116

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

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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 118

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

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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.

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

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.
173

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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 suits 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

177

178

K. Ramakrishnan (Died) And Others V. Siddhammal And Others. Air 2002 June. Mad. 241. Section 55 At Page 241, 242 & 248. Dalip Sigh V. Ram Nath And Another. Air 2002 August. H.P. 106. Section 55 At Page 106 & 109. Sri Brahadambal Agency And Partnership Firm V. Ramsamy And Others. Air 2002 August. Mad. 352. Section 55 At Page 352.

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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:

Chian Cotton Exporters V Bihari Lal Ramchandra Cotton Mills Ltd [Air 1961 Sc 1295] 180 [Air 1961 Sc 990]
179

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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.

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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.

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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.

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

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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

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.
185

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 defendants 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.

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.
188

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 plaintiffpurchaser 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 paidPlea by vendor to set off loss suffered due to revocation-Can be considered only if vendor proves that he was fully ready and prepared 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

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 reenforced 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.

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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

192

Godan Namboothiripad V. Kerala Financial Corpn., Air 1998 Ker. 31. Section 62, At Page 31 & 33. M/S. Saraswat Trading Agency V. Union Of India. Air 2002 March. Cal. 51. Section 47, 54, 63 At Page 51, 54 & 55.

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 dont 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

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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

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.
193

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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
195 196

State V. Mukunda Oja, Air 1997, Gau 113.Section 56, At Page 113. Chaman Lal Jain V. Arun Kumar Jain, Air 1996 Del. 108. Section 56, At Page 108 113 & 114.

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

3 B&S 826: 122 ER 30 (1876) 1 QBD 258 (CA) 199 Jackson v Union Marine Insurance Co. Ltd., (!874) LR 10 CP 125
197 198

138

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.
200 201

(1972) 2 AER 175 (1903) 2 KB 740

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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
202 203

(1903) 2 KB 683 CA (1869) 4 AB 180

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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
204 205

(1916) 1 AC 486 AIR 1945 PC 144

141

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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
206 207

(1962) AC 93 [L.R. 10]

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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)

143

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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. 144

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

210 211

(1853) 2 E&B 678 (1919) 1 KB 618

146

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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 nonperformance 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 147

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

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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

213 214

(1983) 1 AER 449 (1988) 2 All ER 742

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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. one 3. 4.

Is the obligation subject to failure and entire or a divisible

Is the broken part a term of the condition 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 151

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 152

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 153

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

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.
216

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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

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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 manufacturers 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

156

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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

157

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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

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 where the

Baxandale were reexamined in a subsequent case220

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 plaintiffs 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

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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.
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.
221

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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.

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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. b. c. d. e. Necessaries supplied Reimbursement of money Person enjoying the benefit Finder of lost goods 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 163

FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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 defendants performance is excused by

impossibility or because of plaintiffs material breach, so that the defendant is not in default, yet he has been enriched by the plaintiffs 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.

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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.

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

229

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. Food Corporation Of India V. Alleppey Municipallity, Air 1996 Ker. 241. Section 70, At Page 241 & 256. 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.

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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

232

M/S Somaiya Organics (India) Ltd., V. State Of Uttar Pradesh, Air 2001 Sc 1723. Section 72, At Page 1725 & 1735. O.N.G.C. V. Assocoation Of Natural Gas Consuming Inds. Air 2001 Sc 2796. Section 72, At Page 2796 & 2799.

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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 plaintiffpurchaser 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 paidPlea by vendor to set off loss suffered due to revocation-Can be considered only if vendor proves that he was fully ready and prepared 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.

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FUNDAMENTAL PRINCIPLES OF LAW OF CONTRACTS

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

235

236

R.L. Pinto And Another V. F.F. Menzes And Another, Air 2001 Karnataka 141.Section - 62, 73, 188, At Page 141, 143 & 144. Lala Sumer Chand Goel (Since Deceased By L.Rs.) V. Rakesh Kumar. Air 2002 March. All. 82. Section 73 At Page 82 & 86. P.K. Abdulla V. State Of Kerala And Another. Air 2002 March. Ker. 108. Section 73. At Page 108 & 110.

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The plaintiffs 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

238

239

The Pravar Sahakari Sakhar Karkhana Ltd. V. The Express Industrial Corporation, Vinvat. Air 2002 May. Bom. 185. Section 73, 74 At Page 186 & 193. Thyssen Stahlunion Gmbh V. Steel Authority Of India. Air 2002 June. Del. 255. Section 73 At Page 255 & 270. Fact Engineering Works V. Kerala Industries, Air 2001 Ker. 326. Section 73 At Page 327, 329 & 330.

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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

241

Ghaziabad Development Authority V. Union Of India, Air 2000 Sc 2003. Section 10, 65, 73, At Page 2004, 2006 & 2007. Union Of India And Others V. Solar Pesticide Pvt. Ltd, Air 2000 Supreme Court 862. Section 73, At Page 862, 866, 867, 868 & 869.

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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.

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