CONTRACT-1& SPECIFIC RELIEF ACT Part-2

Modes of Revocation of Proposal or Offer

Q. 4 (d). Discuss the various modes of revocation of proposal or offer.

What are the different modes of revocation of proposal or offer? Examine.

Ans. Rule of Revocation of proposal [Section 5].- Section 5 of the Indian Contract Act, 1872 deals with rules regarding revocation of proposals and acceptances. With respect of revocation of proposal. Section 5 of the Indian Contract Act, 1872 lays down:

“A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer but not afterwards.”-

According to Section 4 of the Contract Act, the communication of the acceptance is complete, as against the proposer, when it is put in a course or transmission to him, so as to be out of the power of the acceptor.

Illustrations. A proposes by a letter sent through post to sell his house to B. B accepts the proposal by a letter sent through post.

A may revoke his proposal at any time before or at the moment when B (the acceptor) posts his letter of acceptance, but not afterwards.

Modes of revoking a proposal [Section 6]. Section 6 of the Contract Act lays down that a proposal is revoked in following manner:

1. By notice of revocation. It is revoked by the communication of notice of revocation by the proposer to the other party, or

2. By lapse of time prescribed. It is revoked by the lapse of the time prescribed in such proposal for its acceptance, or, if no time is so prescribed, by the lapse of a reasonable time, without communication of the acceptance;or

3. By failure to fulfil a condition precedent. If there is a condition set in the proposal, before fulfilling of which, the acceptor cannot accept the proposal, the proposal will naturally be revoked if the acceptor fails to fulfil that condition.

4. By death or insanity of proposer. It is revoked by the death or insanity of the proposer if the fact of his death or insanity comes to the knowledge of the acceptor before acceptance

Under English Law, if the proposer dies or becomes insane before his offer is received and accepted, the offer becomes a nullity. Death of the offeror according to English law is enough to cause the offer to lapse. It is not necessary that the fact of the death of the offeror must have come to the knowledge of the other party (the acceptor) before acceptance. Knowledge of death or insanity is essential under Section 6 of the Indian Contract Act

Communication must be from proposer or his authorised agent.- The words, “by the proposer” used in the clause imply that a notice of revocation shall be communicated to the other party by the proposer himself or his agent and not by any third person. But under the English law, the acceptor must come to know of the proposal by the proposer through some source. In English Law it is not necessary as under the Indian law that the proposer himself should communicate revocation of the proposal to the other party.

In Dickinson v. Dodds. (1872) 2 Ch. D 463, on the 10th June. Dodds made Dickinson an offer to sell him a house at £ 800. “The offer to be left open until Friday, 9 A. M. 12th June. On the 11th June, Dodds entered into contract to self the house to one A. One B informed Dickinson of his sale to A. but B was not acting under the authority of Dodds, Dickinson handed Dodds an acceptance of the offer a few minutes before 9 A. M. on the 12th. Dodds said. “You are too late, I have sold my property”. On Dickinson’s suing for specific performance, it was held that there was no contract.

The case of Dickinson v. Dodds. (1872) 2 Ch.D. 463, is not authority in India, since Section 6(1) makes it clear that the revocation of a proposal can be made by a communication of a notice of revocation by the proposer or by his authorised agent and knowledge through other source would not be good notice of revocation.

In accordance with Section 6 (1) of the Contract Act, it is clear that in India, the notice of revocation must be given by the proposer himself, a notice by a third person will not suffice.

Definition of Consideration

Q. 5 (a). What is consideration? Explain its essential ingredients with the help of suitable examples.

“Consideration must move from the promisee.” Explain.

What do you understand by consideration? Inadequacy of consideration does not render an agreement void. Explain with reasons.

Ans. Definition of consideration. According to Lord Denning. LJ.. “consideration is a cardinal necessity of the formation of the contract” Consideration is one of the essential ingredients of a contract. Section 25 affirms this proposition by laying down a general rule that. “an agreement without consideration is void.”

Lush, J in Currie v. Misa. (1875) LR 10 Ex 153, has defined the term “consideration” in the following words :-

“A valuable consideration in the eyes of law may consist either in some right, interest, profit or benefit accruing, to the one party, or some forbearance, and detriment, loss or responsibility givea, suffered or undertaken by the other “

In Chidambara lyer v. Renga Iver. AIR 1966 SC 193, the Supreme Court of India quoted with approval the above definition and pointed out that the above definition is almost similar to that contained in Section 2 (d) of the Indian Contract Act

Section 2 (d) of the Indian Contract Act defines ‘consideration’ as follows

“When at the desire of the pr. nisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing or promises to do or to abstain from doing something, such act or abstinence or promise is called a ‘consideration’ for the promise.”

Analysis of the Definition. The definition provided under Section 2 (d) can be analysed as follows:-

(1) When at the desire of the promisor

(2) The promisee or any other person.

(3) (i) has done or abstained from doing, or

(ii) does or abstains from doing, or

(iii) promises to do or to abstain from doing something

(4) Such act or abstinence or promise is called consideration for the promise

1. At the desire of the promisor- One of the essential ingredient of consideration is that the act or abstinence must be done at the desire of the promisor. If the act or omission is done at the desire not of the promisor, but at the desire of some other person, it would not be a good consideration according to Section 2 (d) of the Act.

In Durga Prasad v. Baldeo, (1880) 3 All 221, a market was built by the plaintiff not at the desire of the defendant but at the desire of the Collector of the district. The defendant was allotted a shop in the market. He promised to pay certain commission on all goods sold through him in the market. It was held that the promise made by the defendant to pay the commission was without consideration and, therefore, it could not be enforced.

2. The promisee or any other person. Under Indian Contract Act, consideration may proceed from the promisee or any other person. But under the English law, the consideration must proceed from the promisce. The definition of consideration under the Indian Contract Act is wider than it is in the English Law. However, both under the Indian and English law the general rule is that a contract can be enforced only by a person who is party to the Contract.

Thus, whereas under the English law consideration must move from the promisee, under the Indian Law it is not necessary. Section 2 (d) of the Contract Act clearly provides that consideration may move from the “promisee or any other person”.

3. (i) Has done or abstained from doing (Past consideration).- These words mean that something has already been done or abstained from doing and as a return of it, the promise is made therefor. In other words, the consideration for the promise is not furnished at present. The consideration precedes the promise. This is called as a past consideration.

Under the Indian Law, as distinct from English law, a past consideration is good consideration. In England, past consideration is no consideration. The use of the words “has done or abstained from doing” in the definition of “consideration” under Section 2 (d) of the Indian Contract Act shows that in India, past consideration is recognised as a proper consideration for the promise.

In Sindha v. Abraham, 28 Bom. 725, services were rendered by the plaintiff at the desire of the defendant expressed during defendant’s minority and continued even during after his majority. It was held that the past services formed a good consideration for subsequent express promise by the defendant to pay an annuity to the plaintiff.

Under English Law, general rule is that past consideration is no consideration, because every promise, express or implied, must be made in contemplation of a present or future benefit to the promisor. In England, there is only one exception to this general rule. When the past act is done at the request for which promise is made to compensate, such promise is enforceable

In Lampleigh v. Brathwait, (1615) Hob 105, the defendant who was convicted of murder requested the plaintiff to obtain for him pardon from the King. The plaintiff several times went to King at his own expenses to obtain the pardon. Thereafter, the defendant promised him to pay £100. The promise was held to be good as the defendant had done something at the request of the promiser although promise was made subsequently. The time barred debts have, always been dealt to be a valid consideration for new contract. The reason is that by lapse of time the debt is not destroyed though the remedy is lost.

(it) Does or abstains from doing (Executed consideration or present consideration). When at the desire of the promisor, the promisce or any other person does or abstains from doing something, it would be a good consideration within the meaning of Section 2 (d) of the Act.

When one party has done or completed all that he promised or undertook to do, the consideration is said to be executed. When something is being performed at present, it is present consideration.

Distinction between Present and Past Consideration

Present Consideration

1. Present consideration is that which is being performed at present.

2. Present consideration may be in the process of being performed and if it has been performed, it becomes executed consideration.

3. Present consideration is always at request.

4. Present consideration is valid in England and India both.

Past Consideration

1. Past consideration is that which was performed in the past.

2. Past consideration is not in the process of being performed and it is not an executed consideration.

3. Past consideration may be at request. It may not be at request.

4. In England past consideration is no consideration but past consideration at request is good consideration. In India past consideration is a good consideration.

(ii) Promises to do or to abstain from doing something (Future consideration or Excutory consideration). Where the promisee or any other person, at the desire of the promisor, promises to do or abstain from doing something, it will constitute a good consideration within the meaning of Section 2 (d) of the Act. Such consideration is called future or executory consideration.

An executory or future consideration is a promise made to do or to abstain from doing something in future, it is also called a promise for the promise. Thus, a promise given in consideration of benefit to be received in future or promise to do work in return for a promise of payment are illustrations of future or executory consideration.

According to Anson, ‘An executory consideration consists of a promise to do, forbear or suffer given in return for a like promise. Thus mutual promises to marry or a promise to do work in return for a promise of payment are illustrations of executory consideration.”

Under English Law, consideration must be ‘something’ which has some value in the eyes of law.

Indian Contract Act does not explicitly lay down that the consideration must be of some value in the eyes of law but this omission is notdeliberate. It is accidental and the Indian Courts have followed the English practice in this respect.

There are following essential points in this regard:-

(a) Consideration must be legal. Where the consideration or object of agreement is unlawful, the agreement is void and enforceable.

Where A asks B to beat C for which he promises to pay B Rs. 500, the consideration for this promise is not legal. It is prohibited under Section 23 of the Act.

(b) Consideration must be real, not illusory, uncertain, or impossible. It must have some substantial value. Although the Courts will not look to the sufficiency or adequacy of consideration, an act or abstinence will have to possess certain qualities before it can be regarded as a good consideration. For example, the consideration “must be of some value in the eyes of law.” [Anson: Law of Contract, 23rd Edition, p. 91]

Where A buys books and gives B. the bookseller, a pronote signed by him (A) for the price of the books, the pronote here is a real consideration for the books.

Cases in which the consideration was held to be real and substantial.-

(i) The promise to give time to debtor.

(ii) The promise not to sue for a reasonable time.

(iii) A compromise of a disputed claim made bona fide is a valuable consideration for promise.

Performance of any existing duty may be a good consideration In the English law, in Ward v. Byham, (1956) | WLR 496, Denning L.J. observed

“a promise to perform an existing duty or the performance of it should be regarded as a good consideration because it is a benefit to the person to whom it is given.” This view was reitereated by Denning, L.J., in Williams v. Williams. (1957) | WLR 148.

It is a principle under the Contract Act that states that if a party to a contract is under pre-existing duty to perform, then no consideration is given for any modification of the contract and modification is therefore voidable.

In Anuradha Samir Vennagot v. M.S. Vennagot. (2016) 3 SCC (Civ) 701, the Supreme Court observed that it is a duty of the respondent husband to take care of the health and safety of the petitioner’s wife. Also, it is a primary duty of the husband only to provide facilities for the treatment of the petitioner. This is a pre-existing duty of the husband, provided the husband has sufficient means and he is deligently doing his part in taking care of her.

To conclude, performance of an existing duty constitutes a good consideration provided, of course, that is not contrary to public policy.

Adequacy of consideration

Explanation 2 to Section 25. An agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate, but the inadequacy of the consideration may be taken into account by the Court in determining the question whether the consent of promisor was freely given.

According to Explanation 2 to Section 25. Consideration need not be equal in value to the promise or even adequate in value of the promise That is a matter for the parties themselves to settle down when entering into a contract. The Courts would never interfere on the ground of inadequacy of consideration unless fraud is proved.

Illustration. A agrees to sell his house worth Rs. 1,000 to B for Rs. 10. Though the consideration is grossly inadequate, the contract cannot be set aside on this ground. Inadequacy of consideration may be considered as an evidence that the promise was not freely given.

Rules governing reality of consideration:

(i) The promisee must do, forbear, suffer or promise anything in respect of the promise to him.

(ii) His act, forbearance, sufferance or promise should have ascertainable value.

The reality of consideration is governed by these two rules, although it may be inadequate.

Valuable Consideration and Good Consideration

A consideration which is good but not valuable will not make a binding promise. A consideration which has some value in the eyes of the law is called valuable consideration. A consideration has value in the eyes of law when the promisee suffers some detriment, however small the detriment may be. A consideration, which is not opposed to public policy and morality is a good consideration.

Illustration.- A. for natural love and affection, promises to give his son B. Rs. 1,000. Here the consideration for the promise is good but not valuable and B cannot enforce this promise. However, if A puts his promise to be in writing and registers it then the promise becomes binding under Section 25(1).

Q. 5 (b). What do you mean by illusory consideration?

Ans. Illusory Consideration. Consideration must not be illusory, it must be real. It should not be vague, uncertain or impossible. For example, where A promises to find a treasure by magic if B pays him Rs. 50,000/-, this is an illusory consideration and therefore contract would not be valid.

Although the Courts will not look to the sufficiency or adequacy of consideration, an act or abstinence will have to possess certain qualities before it can be regarded as a good consideration. For example, the consideration “must be of some value in the eyes of law Cheshire and Fifoot have also remarked, the Courts will not “denounce an agreement merely because it seems to be unfair. The promise must, indeed, have been procured by the offer of some return capable of expression in terms of value A leading English case on the point is White v. Bluet, (1833) 23 LJ Ex 36, wherein the defendant had to pay a sum of money to his father and for the same he had executed a promissory note in favour of his father. He charged his father for inequitable distribution of property and complained all the time for it Consequently, the father offered to discharge him from all liability in regard to the promissory note in he stopped complaining. The Court was confronted with the question whether the defendant’s promise not to complain was sufficient or good consideration so as to make the father’s promise enforceable. The Court held that this was not a good consideration. The consideration must be real and illusory. It must be of some value in the eyes of law.

In India, the Indian Contract Act does not expressly say that the consideration must be of some value in the eyes of law but the Courts have generally followed the English law on this point. That is to say in India also, the consideration must be valuable in the eyes of law and not that must be real and not illusory (Kulasekara Perumal v. Pathakutty, AIR 1961 Mad 405 at p. 407).

Where the Bank allowed the petitioner to avail overdraft facility with the promise that amount shall be paid in execution of document and after the execution of the document, payment of amount was made, it cannot be said that the transaction was illusory and not real. Indeed it was real and not illusory Bank of Baroda v. Mis. Kayenkay Agencies, AIR 2003 NOC 495 (Delhi)]

Q. 5. (c) A stranger to consideration can enforce the contract.

Can a stranger to the consideration enforce the Contract ?

Ans. Contract may be enforced by stranger to consideration.- According to the definition of the word “consideration” as given in Section 2(d) of the Indian Contract Act, 1872, the consideration for a contract may move from promisee himself or “any other person”, ie, a stranger to the contract. Therefore, under the Indian Law a stranger to the consideration may also enforce the contract provided he is a party to the contract.

In this regard the Indian Law is materially different from the English Law. According to English Law, consideration must move from the promisee only. Therefore, under English Law a party who wishes to a contract must be able to show that he himself has furnished consideration for the promise of the other party.

Under Indian Contract Act the consideration may move from a stranger to the contract, ie., who is not a party to the contract.

In an early English case, namely Dutton v. Poole. (1677) 22 1.ev 210, a view contrary to the present rule in English Law was taken.

In Dutton v. Poole. (1677) 22 Lev. 210: 83 ER 423, the plaintiff’s father decided to cut the family tree for providing a marriage portion to his daughter (the plaintiff). His son (the defendant) promised to pay £1000 to his sister if his father refrained from doing so. The son failed to provide the money agreed. The sister sued the brother who argued that the agreement with his sister was without consideration. It was held that the plaintiff could recover the money from his brother (defendant), although she was stranger to consideration. According to the Court, the consideration by the father and promise to the father was similar to the consideration by the sister and promise to her on account of natural love and affection.

The law laid down in Dutton v. Poole is recognised in the Indian Contract Act, 1872. Reference may be also made hence to a well known case.

In Venkat Chinnaya v. Venkat Rammaya, ILR (1881) 4 Mad. 137, a defendant’s mother gifted her share in the Zamindari property by a registered deed of gift to her own daughter Rammaya with a direction to pay a certain sum of money annually to Chinnaya, her maternal uncle. On the same date Rammaya executed an agreement with Chinnaya agreeing to pay the amount annually. Latter on she refused to fulfil the said promise. A suit was brought to recover the amount due with interest by Chinnaya. Rammaya (the defendant) resisted the suit on the ground that no consideration moved from the side of Chinnaya and hence the promise could not be enforced. The Court relied on Dutton v. Poole, (1677) 22 Lev 210: 83 ER 423 and allowed the claim of the plaintiff. Besides, the promise to the plaintiff and gift deed which were executed simultaneously formed part of the same transaction and thus there was sufficient consideration for it.

In Gorakh Ram v. Laxmi, AIR 1953 SC 443, the Court held-Even a stranger can be ‘promisee’ and enforce the contract, even though the stranger himself had not passed any consideration.

Illustrations.-A. B and C enter into an agreement under which A pays Rs. 500 to B and B agrees to build a house for C. Here C is a party to the contract but stranger to consideration and can enforce the contract.

Thus, generally stranger to the consideration can sue but stranger to the contract cannot sue.

Q. 5. (d) What is the difference between Indian and English Law with respect to consideration ?

Distinguish between Indian and English Law regarding consideration.

Ans. Differences between Indian and English Law regarding consideration.-1. Under Indian Contract Act the consideration may proceed either from the promisee or any other person, if it be done at the desire of the promisor. But under English Law the consideration must move from the promisee. In other words, under English Law, a stranger to consideration cannot sue although he is not stranger to contract but under Indian Law a stranger to consideration can sue provided he is not stranger to contract. But both under the Indian and English Law, a stranger to a contract cannot sue.

2. Under Indian Law, consideration may be past, present or future. Under English Law consideration must necessarily be present or future. The general rule prevailing in England is that every promise, express or implied, in order to be binding must be made in contemplation of a present or future benefit to the promisor. However, under both laws, a time-barred debt has always been held to be a valid consideration, the reason being that by lapse of time, the debt is not destroyed though the remedy is lost.

3. Under English Law, the consideration though inadequate to the promise, must have some value in the eye of law, that is, it must be real. The same position is in India. [Section 25, Illustration (f)]

Differences between Indian and English Law regarding consideration.- In short, the main differences between Indian and English Law, regarding consideration are as follows:

Indian Law

1. Consideration may proceed either from the promisee or any other person.

2. Consideration may be past, present or future.

3. The definition of consideration under Section 2 (d) of the Contract Act does not specifically say that consideration must have some value but it is so [vide illustration (f) of Section 25].

English Law

1. Consideration must move from the promisce.

2. Consideration must necessarily be present or future.

3. Consideration must have some value in the eye of law.

Q. 5. (e) “Agreements without consideration are void.” Examine this statement and explain its exceptions with the suitable examples.

“There are cases in which the law does not require a consideration as a condition of the validity of the agreement.” Justify this statement.

What are those circumstances in which consideration is not essential to the validity of contracts.

State the exceptions of the rule that ‘an agreement without consideration is void’.

Ans. Agreement without consideration is void. Consideration is an essential ingredient of a contract. Section 25 of the Indian Contract Act provides that an agreement without consideration is void.

Exceptions as to general rule contained in Section 25.- Though an agreement made without consideration is void under Section 25 yet this section itself lays down three exceptions where agreements without consideration are valid.

These exceptions are as follows:

1. Agreement made on account of natural love and affection [Section 25 (1)]. An agreement without consideration is valid if it is:

(i) expressed in writing;

(ii) registered under the law for the time being in force for the registration of document; and

(iii) made on account of natural love and affection between the parties standing in a near relation to each other.

Example.-A. for a natural love and affection, promises to give his daughter B Rs. 1,000. A puts his promise to B into writing and registers it. This will not be void for want of consideration and will be a valid contract.

The agreement must be shown to have been entered into on account of natural love and affection, this is not to be inferred in every case merely because no other motive for the promise is shown. Husbands and wives, parents and children, brothers and brothers or sisters, parents-in-law and daughters-in-law are near relations. However, only nearness of relation does not necessarily import natural love and affection where natural love or affection does not exist.

In Raj Lukhy Devi v. Bhoot Nath Mukharjee, (1900) 1 CWN 488, the husband promised to pay a certain sum of money per month to the wife as maintenance in order to get rid of her and the agreement was reduced to writing and registered, it was held that the agreement could not be enforced because it was not made out of natural love and affection.

In England, the mere fact of registration, i.e., solemnity of a deed, is itself enough to make the promise valid; but it is not so in India.

2. Promise to compensate wholly or in part for something voluntarily done [Section 25(2)].- An agreement without consideration is valid, if it is a promise to compensate wholly or in part, a person who has already voluntarily done:

(i) something for the promisor, or

(ii) something which the promisor, was legally compellable to do.

Illustration. A finds B’s purse and gives it to him. B promises to give A Rs. 50. This is a valid contract.

In Durga Prasad v. Baldeo, ILR (1880) 3 All 221, the plaintiff built a market at the desire of the Collector of the District. The defendant who subsequently occupied one of the shops in the market agreed to pay a certain commission on all goods sold through him in the market. In this case, the plaintiff contended that the agreement was enforceable under Section 25 (2) of the Act. But the Court rejected the contention of the plaintiff. Old field J., observed:

“To bring it within the provisions of the clause (i.e., Clause 2, Section 25), it must be shown that what was voluntarily done by the plaintiff was done, ‘for the promisor’ or something which the promisor was legally compellable to do…. this has not been shown. In fact when the plaintiff established the Ganj, the defendants were not in his mind and there was nothing done for them, for which compensation might be given.”

In order to invoke successfully the exception contained in Section 25 (2), the following essential elements must be there:

(i) The act must have already been done.

(ii) It must have been done voluntarily.

(iii) It must be done for the promisor or something which the promisor was legally bound to do.

(iv) The promisor must be in existence at the time when the act is done, and

(v) The promisor must promise to compensate for the act already done.

3. Promise made to pay a time-barred debt [Section 25 (3)].- An agreement without consideration is valid, if it is a promise:

(i) made in writing, and

(ii) signed by the person to be charged therewith or by his agent generally or specially authorised in that behalf, and

(iii) to pay, wholly or in part, a debt of which the creditor might have enforced payment but for the law for the limitation of suits.

Illustration. A owes B Rs. 1,000 but the debt is barred by the Limitation Act. A signs a written promise to pay B Rs. 500 on account of the debt. This is a contract.

The promise to pay the time-barred debt must be an express one.

In R. Suresh Chandra & Co. v. Vadnere Chemical Works and others. AIR 1991 Bom 44, the Bombay High Court held that the promise to pay a time-barred debt by a partner, showing that the firm is liable to P in its Balance Sheet, amounts to promise under Section 25 of the Contract Act.

Besides aforesaid two more exceptions are notable.-

1. Completed gift [Explanation 1 to Section 251. According to Explanation I to Section 25, nothing in this section shall affect the validity as between the donor and the donce, of any gift actually made.

2. Creation of agency [Section 185]. Section 185 of the Act provides-“No consideration is necessary to create an agency.”

Effect of Inadequacy of Consideration. According to Explanation 2 of Section 25, an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate.

But the inadequacy of the consideration may be taken into account by the Court in determining the question whether the consent of the promisor was freely given.

Illustration. A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A’s consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration.

Doctrine of Privity of Contract

Q. 5. (f). Explain the doctrine of privity of contract with exceptions.

Explain the rule that stranger to contract cannot sue with its exceptions.

‘A contract is a private relationship between the Parties who make it and no other person can acquire rights or incur liabilities under it.’ Explain.

Ans. Strangers to Contract cannot sue.-“Privity of contract” means the relationship subsisting between the parties to a contract. Doctrine of privity of contract provides a general rule that no one but the parties to a contract be bound by it or be entitled under it.

According to Anson’s Law of Contract, a promisee is unable to sue when there is no privity of contract between him and the promisor. The rule that one who is not a party to the contract does not acquire rights under it follows from the view which our law has adopted from the operation of contract generally; it has no particular connection with the doctrine of consideration.

The English Law of the doctrine of privity of contract which means a stranger to a contract cannot sue had been enunciated in Tweddle v. Atkinson, (1861) 1 BS 393, nearly two centuries later from the case Dutton v. Poole, (1672) 2 Lev. 210: 83 ER 523.

In Tweddle v. Atkinson, (1861) 1 BS 393: 123 ER 762, the plaintiff agreed to marry the daughter of William Guy, and in consideration of this marriage, Guy and the plaintiff’s father entered into a contract whereby each promised to pay a sum of money to the plaintiff. Guy failed to do so and the plaintiff sued his executors. It was held that the plaintiff was not entitled to suc.

Whitman, J. observed, “It is now established that no stranger to the consideration can take advantage of contract although made for benefit.”

In Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge and Co. Ltd.. (1915) AC 847, the principle enunciated in Tweddle v. Atkinson was affirmed by the House of Lords. Viscount Haldane L.C., observed:-

“In the law of England certain principles are fundamental. One is that only person who is a party to a contract can sue on it. The law of England does not recognize the Jus quaestium tertio rule.

Doctrine of Privity of Contract in India

The English Doctrine of Privity of Contract is applicable in India also.

In Jamuna Das v. Ram Avtar, (1911) 9 I.A. 7, a purchaser of property contracted with the seller to pay-off the mortgage debt on that property. In an action brought by the mortgagee against the purchaser to recover the mortgage debt, the Privy Council held that he could not enforce the contract so as to compel the purchaser to pay-off the debt because he was not a party to the contract.

In Krishna Lal v. Promila Bala Devi. AIR 1928 Cal. 518, the rule enunciated in Jamuna Das v. Ramautar was applied. Rankin, C.J. held- Although the definition of consideration contained in Section 2 (d) of the Contract Act is wider than in English Law yet there is nothing to encourage the idea that contracts can be enforced by a person who is not a party to the contract.

In M.C. Chacko v. State Bank of Travancore, AIR 1970 SC 504, the Supreme Court of India approved and endorsed the above observations of Rankin, C.J. in Krishna Lal’s case.

“It appears that the law is that even though under the Indian Contract Act the definition of consideration is wider than in English law, yet the Common Law principle is generally applicable in India, with the effect of that only a party to the contract is entitled to enforce the same. [Smt. Narayani Devi v. Tagore Commercial Corporation Ltd., AIR 1973 Cal 40]

Exceptions to the doctrine of privity of contract

The exceptions to the doctrine of privity of contract are as follows:-

(1) Trust. Where a trust is created in favour of a stranger, he can enforce the agreement of trust.

In Candy v. Candy. (1880) 16 Ch. D. 125, Golton, L. J. observed: “I the contract though in form, it is with A, is intended to secure a benefit to B so that B is entitled, to say that he has a beneficial interest as cestui que trust under that contract, then B would, in a Court of Equity, be allowed to sue upon and enforce the contract.”

The same view is held by the Indian Courts. (For example, Gorakh Ram v. Laxmi, AIR 1953 SC 443).

(2) Marriage Settlement. In cases of marriage settlements, the doctrine of privity of contract does not apply.

In Khwaja Mohd. Khan v. Hussaini Begum, (1910) 37 IA 152, the parents of the bride and the bridegroom agreed that the plaintiff (bride) would be entitled to Rs. 500 per mensem as Kharchaipandan, and the contract was held binding upon the defendant and the plea that the third party cannot suc upon the contract was negatived.

(3) Partition or family arrangement. – Where provision is made in a partition or family arrangement for maintenance or marriage of a female member, such female member can sue to enforce the agreement. [Dhan Kaur v. Sarla Devi, ILR (1946) All. 756].

(4) Charge. Where a charge is created in favour of a stranger, the stranger can sue to enforce the contract.

(5) Acknowledgment. This covers cases in which a party to the contract admits benefits of contract to be borned by him directly to a third party.

In Venkatareddi Naidu v. Narasimharao, AIR 1935 Mad. 115, the purchaser of a mortgaged property undertook to pay the mortgagee, it was held that the mortgagee could recover from the purchaser.

(6) Law regarding negotiable instruments. The doctrine of privity of contract does not apply in respect of law relating to negotiable instruments.

Mistake

Q. 5 (g). What do you mean by the mistake in a contract ? What is the effect of the following in a contract?

(i) Mistake of fact

(ii) Mutual mistake

(iii) Unilateral mistake

(iv) Mistake of foreign law

Ans. Effect of Mistakes in Contract. Mistake in an agreement affects the contract. According to Section 10 of the Contract Act, free consent is one of the essentials of the contract.

According to Section 14, the consent in a contract is not free if it is caused by coercion, undue influence, fraud, misrepresentation or mistake. Sections 13, 20, 21 and 22 of the Act deals with the law relating to mistake.

Therefore, the law relating to mistake under the Indian Contract Act may be classified as follows:

(a) Absence of consent [Section 13].

(b) Mistake by ignorance or misconception of some matter [Sections 20, 21 and 22).

Absence of Consent [Section 13]. Section 13 of the Contract Act defines the term “Consent” as follows:

“Two or more persons are said to consent when they agree upon the same thing in the same sense.” Such kind of consent is known as consensus ad idem. There will be no contract if the parties are not at ad idem.

Mistake of this category may relate to-

(a) As to the identity of the person;

(b) As to the identity of the subject matter;

(a) Mistake as to the identity of the person. It the offeree is mistaken about the identity of the offeror and if he contracts on such mistaken assumption, parties cannot be said to be ad idem.

(b) Mistake as to the identity of the subject-matter.-“In this type of mistake, the parties, though generally ad idem, contract on the basis of an assumption which subsequently proves to be false.” (Anson).

(c) Mistake as to the Nature of Transaction. If there is a mistake as to the nature of the transaction, the contract is void.

Mistake by Ignorance or Misconception of some matter

[Sections 20, 21, 22]

Mistake of fact [Section 20].- Section 20 provides: “When both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void.”

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

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

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

Explanation to Section 20.- Explanation to Section 20 provides:

“an erroneous pinion as to the value of thing which forms the subject- matter of the agreement, is not to be deemed a mistake as to matter of fact.”

Thus, it is not every mistake that vitiates a contract but only that mistake as to fact which is essential to the agreement.

The mistake of fact may be of following types:

(1) Mistake regarding existence of the subject-matter of the contract.

(2) Mistake regarding title of the thing.

(3) Mistake regarding the quality of the thing.

Mutual Mistake [Section 20]. It is only mutual mistake of fact that renders the agreement void.

Section 20 provides, “where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void.”

Thus, the mistake of fact in order to render agreement void must be of both the parties i.e., the mistake must 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. [Tarsem Singh v. Sukhminder Singh. AIR 1998 SC 1400].

Unilateral mistake [Section 22]. Section 22 provides “A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact”.

A unilateral mistake of fact or a mistake of fact by one of the parties to the contract does neither make the agreement void nor voidable.

In A. A. Singh v. Union of India, AIR 1970 Manipur, the plaintiff, the highest bidder in an auction for the right of fishery for one year, was under the belief that it was for three years. Since the mistake was unilateral, the agreement could not be avoided.

Mistake of foreign Law [Section 21].-Section 21 of the Contract Act differentiates between mistake of an Indian law and mistake of foreign law. Section 21 provides:-

“A contract is not voidable because it was caused by mistake as to any law in force in India, but a mistake as to a law not in force in India has the same effect as a mistake of fact.”

Thus, mistake of an Indian law is not treated as a mistake of fact. There is a presumption that everybody knows the law and nobody can escape the civil or criminal liability on the ground of ignorance of law. However, mistake of a foreign law has been treated by the section in the same way as a mistake of fact.

Thus, mistake of foreign law to render the agreement void must be of both the parties to the contract ie. it must be mutual mistake and it must be essential to the agreement.

Lawful Objects and Lawful Consideration

Q. 5. (h) What do you understand by lawful consideration ? When is the consideration or object of an agreement unlawful ? Explain.

What is lawful object and lawful consideration ? State in brief the effects of unlawful objects and considerations on contracts.

Explain the objects which have been declared as unlawful by the Indian Contract Act.

Ans. Essential conditions of validity of consideration and object of an agreement as provided under Section 23.- According to Section 23, the consideration or object of an agreement is lawful, unless :-

(1) It is forbidden by law; or

(2) is of such a nature that if permitted, it would defeat the provisions of any law; or

(3) is fraudulent; or

(4) involves injury to the person or property of another; or

(5) The Court regards it as-

(a) immoral, or

(b) opposed to public policy.

Every such agreement of which object or consideration is not lawful is void.

The words ‘object’ and ‘consideration’ in this section are not synonymous. They are distinct in meaning. The word ‘object’ means purpose or design.

In Joffer Mehar Ali v. Budge Budge Mills, (1909) 33 Cal. 702, the Court held-There may be nothing objectionable so far as the consideration for an agreement is concerned and yet the purpose for which it is entered into may be unlawful and the agreement would be void.

1. Forbidden by law. A contract is illegal if it be in contravention of a statute or opposed to its general policy and intent or forbidden by law or legislative enactments.

If A promises to obtain for B an employment in the public service, and B promises promises to pay Rs. 1000 to A. The agreement is void, as the consideration for it is unlawful.

In S. L. Fernandes v. V. M. Fernandes, AIR 1981 Goa 18, an agreement to sell liquor without a licence, when a licence was essential to sell the same, was held to he void.

2. Would defeat the provisions of any law. An object or consideration may be unlawful not simply because it is forbidden but also because it indirectly defeats the provisions of any law. “The word “law” in the expression “defeats the provisions of any law” in Section 23 of the Indian Contract Act is limited to the express terms of an Act of the legislature.” This was held by the Supreme Court in Union of India v. Colonel S.N. Murthy. (2012) I SCC (Civ.) 368).

Illustration. A promises B to drop a prosecution which he has instituted against B for robbery, and B promises to restore the value of the things taken. The agreement is void, as its object is unlawful, for it defeats the provisions of criminal law. A who is guilty of the crime of robbery must be dealt with according to law. [Illustration (h) to Section 23]

3. Fraudulent. The object or consideration of an agreement should not be vitiated by fraud. For example, A being an agent for a landed proprietor, agrees for money, without the knowledge of his principal, to obtain for B a lease of land belonging to his principal. The agreement between A and B is void, as it is fraudulent against A’s principal.

Similarly, if A, B and Center into an agreement for the division among them of gains acquired, or to be acquired by fraud, such agreement would be void, as its object is unlawful.

4. Involves an injury to the person or property of another.- The consideration or object which involves or implies injury to the person or property of another is unlawful and, therefore, void. For Example, A asks B. an editor of a newspaper, to publish a defamatory article against C and promises to pay Rs. 1,000 for the work. The agreement between A and B is void as involves injury to the person of C and therefore, a suit to recover Rs. 1,000 cannot be brought by B.

5. The Court regards it as. (a) Immoral. An agreement, the object or consideration of which is immoral, is void and cannot be enforced For example, A agrees to let a woman on hire to B for concubinage. The agreement is void.

What is immoral at a material time depends on the fact and circumstances of the case and the prevailing standards of morality in the society. Some acts have however been regarded as immoral since time immemorial and may continue to be regarded as such.

In Gherulal Parekh v. Mahadeodas Maiya. (1959) 2 SCR 342, Subba Rao J, gave the following examples of agreements which are void on the ground of immorality. “Settlements in consideration of concubinage. contracts of sale or hire of things to be used in a brothel or by a prostitute for purposes incidental to her profession, agreements to marriage for consideration, or contract facilitating divorce are held to be void on the ground that the object is immoral.”

In Pearce v. Brooks. (1866) LR 1 Ex 213, the defendant prostitute wa sued for the hire money of a carriage in which she used to go every evening to attract customers. The suit was dismissed on the ground that the plaintif contributed towards the performance of an immoral act and hence she wa liable to suffer. It was held that if a person contributes to the performance of an illegal act by supplying anything, he cannot recover the value of the thing.

(b) Opposed to public policy. The term ‘public policy’ has not beer defined in this Act but it has been used in its broadest sense.

In State of Rajasthan v. Basant Nahata, AIR 2005 SC 3401, the Supreme Court observed, “Public policy is not capable of being given a precise definition. What is ‘opposed to public policy’ would be a matter depending upon the nature of the transaction.”

In Central Inland Water Transport Corpn. Ltd. v. Brajonath Ganguly AIR 1986 SC 157, the Supreme Court expressed the view that in fact the act of defining the term ‘public policy’ is an uphill task or it is rather difficult to it give a satisfactory definition of the term.

However, it explained the scope of public policy as follows:

It is, thus, clear that the principles governing public policy must be and are capable, on proper occasion, of expansion or modification. Practice which were considered perfectly normal at one time have today becom obnoxious and oppressive to public conscience. If there is no head of publi policy which covers a case, then the Court must in consonance and in keeping with public good and public interest declare such practice to b opposed to public policy. Above all, in deciding any case which may not b covered by authority our Courts have before them the bacon light of the Preamble of the Constitution. Lacking precedent, the Court can always b guided by that light, and the principles under the Fundamental Rights and the Directive Principles enshrined in our Constitution.

In Ratanchand Hirachand v. Askar Nawaz Jang. AIR 1976 AP 112, the Andhra Pradesh High Court explained the scope of the public policy a follows:

“The twin touchstone of public policy are advancement of the publi good and prevention of public mischief.”

In Secretary-cum-Chief Engineers Chandigarh v. H. O. Sharma, AIN 1998 SC 2909, the Supreme Court held-An agreement that if a person is promoted to the higher post, he would not claim higher salary is agains public policy and is unenforceable in view of Section 23.

In Gherulal Parekh v. Mahadeodas, AIR 1959 SC 781, the Supreme Court held-Though the heads (of public policy) are not closed and though theoretically it may be permissible to evolve a new head under exceptiona circumstances of a changing world, it is advisable in interest of stability of society not to make any attempt to discover new heads in these days.”

Capacity to Contract

Q. 6 (a) Who are competent to contract?

What do you understand by the competency to enter into a contract ? Who are competent to form a contract under the Indian Contract Act?

Ans. Who are competent to contract. According to Section 10, the parties must be competent to contract. Section 10 of the Contract Act provides-

“All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.”

Section 11 lays down the provision about the persons who are competent to contract.

According to Section 11:

“Every person is competent to contract who:

(i) is of the age of majority according to the law to which he is subject; and

(ii) is of sound mind; and

(iii) is not disqualified from contracting by any law to which he is subject.”

Thus according to Section 11, the following persons are not competent to contract:

(a) Minors,

(b) Persons of unsound mind, and

(a) Minor’s Contract. A minor’s contract is altogether void and not merely voidable. [Mohiribibi v. Dharmodas Ghosh, ILR (1903) 30 Cal 539 (PC)]

(b) Persons of unsound mind.-Persons who are mentally deficient Cannot make a valid contract. A person may be mentally deficient by reason of lunacy, idiocy or drunkenness. A contract entered into by person of unsound mind is void (Kamola Ram v. Kaura Ram, 41 PR of 1912).

Under English Law, the contract of a lunatic is not void ab initio. It is voidable if it can be shown that the other party knew of his unsoundness of mind. The burden of proof regarding unsoundness of mind and knowledge of the other contracting party rests on the party who seeks to avoid the contract.

Under Indian Law, it is not necessary to prove that the person dealing with the lunatic knew of his being a person of unsound mind. The contract of a lunatic, like that of a minor, is void. The presumption is primarily in favour of sanity and so the defendant has the burden upon him to prove his lunacy or unsoundness of mind.

What is a sound mind for the purposes of contracting [Section 121. According to Section 12:

(a) A person is said to be of sound mind for the purposes of making a contract if at the time when he makes it is capable of understanding it and of forming a rational judgment as to its effect under his interests.

(b) A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind.

Thus, a person shall be regarded as of sound mind if at the time of entering into a contract (i) he thoroughly understands the nature and contents of it and (ii) he has capacity of forming a rational judgment as to the consequences which he will have to suffer as a party to the contract. If a person is generally of unsound mind but sometimes of sound mind, he may enter into a contract during the period of lucid interval when he is a sound mind. If a person is generally of sound mind but sometimes of unsound mind, he cannot enter into a contract during the period of unsoundness of mind.

Illustration. A patient in a lunatic asylum, who is at intervals, of sound mind, may contract during those intervals. But a sane man, who is delirious from fever or who is so drunk that he cannot understand the terms of the contract or form a rational judgment as to its effects on his interest cannot contract while such delirium or drunkenness lasts.

In Ram Sunder v. Raj Kumar Sen, ILR (1958) 55 Cal. 255, the Court held that merely showing that the deceased was a person of weak intellect would not bring a case within Section 12 of the Act. It must be shown clearly that when any particular transaction was made there was such infirmity of mind as to disable the man of old age from understanding what he was doing.

(c) Disqualification from contracting by any law to which he is subject. A person who is disqualified to contract by any law to which he is subject, cannot be deemed to have capacity to contract.

Thus, an agreement made by an alien enemy or by a person who is adjudged as an insolvent by a Court is void. An insolvent is incompetent to contract only after he has been adjudged as insolvent by the Court. For example, an insolvent may contract after insolvency proceedings have starte and until he has been adjudged as insolvent. Ram Raju v. Official Receiver AIR 1964 Andh. Pra. 299].

The capacity of a corporation or a company to make contracts is regulated and limited by law.

Minor’s Agreement

Q. 6 (b). Write a critical note on minor’s contract with leading cases.

Explain with decided cases that minor’s contracts are void-ab- initio.

Can a minor’s contract be specifically enforced and ratified? Discuss.

Ans. Minor’s Agreement. One of the necessary conditions of a valid contract is that the parties must be competent to contract. Section 10 of the Contract Act lays down-“All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.”

According to Section 11-“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.”

Therefore, from Section 11 it can be deduced that minors are incapable to contract.

Age of Majority. The age of majority is determined by Indian Majority Act, 1875. According to the Indian Majority Act, every minor who has attained the age of 18 years becomes a major.

Effect of Minority on Contracts

(1) Contract by minor is void ab initio. According to Indian Law, a contract made by a minor is void ab initio and not merely voidable and this is so whether the person contracting with him is aware of his minority or not.

In Mohiri Bibi v. Dharmodas Ghose, ILR (1903) 30 Cal 539 (PC), ‘A’, a minor executed a mortgage deed in favour of ‘B’, a money lender to secure a loan of Rs. 20,000. While considering the proposed advance, the attorney and agent of B received information that ‘A’ was a minor, yet he advanced the loan and got the deed executed. Subsequently, the minor sued for the declaration that the mortgage deed executed by him during his minority was void and should be cancelled.

The Privy Council held-A minor’s contract is void at initio and wholly void and not merely voidable.

(2) No estoppel against minor. In case where minor has misrepresented about his age and thereby induced another to contract with him, will there be any estoppel against such minor? At one time this question created a controversy but it is now settled law that there is no such estoppel against the minor [Khan Gul v. Lakha Singh, AIR 1928 Lah 609].

In Ajudhia Prasad v. Chandan Lal, AIR 1937 All 610 (FB), Sulaiman C.J. observed:

“….when the contract itself is void the plea of estoppel must fail. No estoppel can be pleaded against a statute. If the Contract Act declares that the contract by a minor is void nothing can prevent the minor from pleading that such a contract is void on the ground of his minority.”

(3) Minor and ratification. If a minor makes an agreement he cannot ratify it even after attaining majority for there can be no ratification of a void contract. If, therefore, a minor passes a promissory note during minority, and after attaining majority purports to ratify his act by renewing the promissory note, the ratification is of no effect and the note is void and cannot be sued upon except where there is a new consideration at the time of renewal. [Suraj Narain v. Sukhu Ahir, (1929) 51 All 164 (F.B)]

“As it is now finally settled that a minor’s agreement is void, it follows that there can be no question of ratifying it.” [Pollock and Mulla).

(4) Minor and sale of goods. Where a minor buys goods on credit and subsequently refuses to pay the price, the shop-keeper cannot recover the price of the goods from the minor. The reason is that the contract of sale is void, therefore, the obligation to pay the price is not binding on the minor. But, since the contract of the same is void, it follows that the ownership of the goods has not passed to the minor. The ownership still remains vested in the seller. Therefore, the seller can recover the goods from the minor. If, however, the minor has already consumed the goods (for example, eaten up the fruits) the shop-keeper cannot recover the price.

If the minor resells the goods to third person, the second contract of sale is also void and of no effect. The reason is that in contract of sale the ownership of goods is transferred from the seller to the buyer but in this case, the minor never acquired any ownership of the goods and he can recover them from any subsequent purchaser.

(5) Validity of Contracts of immovable property entered into by the guardian of a minor. On this point, the development of law took the following course-

In Mir Sarwarjan v. Fakaruddin, (1911) ILR 39 Cal. 232, the guardian of the minor entered into a contract of purchase of immovable property on behalf of minor. The minor sued for specific performance of the contract. His action failed though the contract was for his benefit. In the opinion of the Court, it was not within the competence of the guardian of a minor to bind the minor or the minor’s estate.

In Srikakulam Subrahamanyam v. Kurra Subba Rao, AIR 1948 PC 45, the Privy Council overruled its earlier decision in Mir Sarwarjan’s case and held a transaction of land, entered through his mother as guardian, was binding. Thus, if the contract is in the interest of the minor, Court may declare such a contract as valid.

In Durga Thakurain’s case, (AIR 1982 Ori. 158) the opinion of Privy Council as expressed in Subrahmanyam’s case was upheld unequivocally.

Certain Exception

(a) Minor and supply of necessaries [Section 68]. Section 68 gives an exception to the general rule that contracts by minors are void. Section 68 of the Contract Act lays down-

“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.” Thus. according to this section, if necessaries of life are supplied to minors, the person who supplies them is liable to be reimbursed out of the property of the minor, if there is any. In other words, we can say that if a minor has no property, there is no remedy for a person who supplies the necessaries. Again, even in the case of necessaries there is no personal obligation on the minor to pay. If the minor has property of his own, the supplier will be reimbursed from that property but he cannot file a suit to get a decree against a minor personally.

What are ‘necessaries’.-‘Necessaries’ means goods suitable to the conditions of a life of minor. The word ‘necessary’ is not confined to the barest necessaries which would enable a minor to keep the body and soul together. It means the articles fit to maintain the particular minor in the state or position or degree in the life in which he lives. For example, in the case of an Oxford undergraduate, a watch was held to be necessary. [Peter v. Fleming, (1840) 6 M. & W. 42].

“Objects of mere luxury cannot be necessaries, nor can objects which though of real use, are excessively costly.” [Pollock and Mulla].

The application of the rule stated in Section 68 is not confined to the necessaries supplied to the minor himself but extends to necessaries provided for the members of his family. (Chapple v. Cooper, (1844) 13 M&W 42 pp 46-47; also see Illustration (b) of Section 68 which is in relation to a lunatic equally applies to a minor).

(b) Contract for benefit of minor. A contract for the benefit of a minor is not void.

Illustration. A minor who was a very promising tennis player received coaching lessons in tennis from well-known professional coach under an agreement by virtue of which the coach was to be paid a certain sum of money for his coaching. It was held that the coach could be reimbursed from the estate of the minor, if any.

The Supreme Court held that a minor though not competent to contract would not be incapable to receive the property. So a gift made in favour of a minor would be valid. [K. Balkrishnan v. K. Kowalam, Alk 2004 SC 1257]

The Madras High Court held that a minor could enforce the mortgage where he had advanced full money against the mortgage. Raghava Chariar v. Srinivasa. (1916) 40 Mad 308]

(c) Obligation of person who has received advantage under void agreement or contract that becomes void [Section 65].-Section 65 lays down that, “When an agreement is discovered to be void, or when a contract becomes vojd, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it.”

The extent of applicability of Section 65 in the case of a minor who has received benefits under an agreement made by him, are governed by the following rules:

(i) The minor must return any benefit received by him under the agreement.

(ii) But this principle mentioned just above, must not be used as pretext for imposing upon the very obligation under the agreement.

Illustrations. (a) A pays B 1,000 rupees, in consideration of B’s promising to marry C. A’s daughter, C is dead at the time of the promise. The agreement is void, but B must repay A the 1,000 rupees.

(b) A contracts with B to deliver to him 250 maunds of rice before the first of May. A delivers 130 maunds only before that day, and none after. B retains the 130 maunds after the first of May. He is bound to pay A for them.

Free Consent, Factors Vitiating Free Consent

Q. 7. (a) Explain the term ‘free consent’. What factors vitiate the consent given by a person? Give examples.

What do you understand by consent? Is it necessary that the parties should be ad idem for a valid contract? When is a consent said to be not free? Discuss.

Ans. Consent. Section 13 of the Contract Act defines the term “consent”. It provides:

“Two or more persons are said to consent when they agree upon the same thing in the same sense”.

This is known as consent ad idem. Unless and until the parties are at ad idem there is no contract.

Where the parties must agree to the same thing in the same sense, only then the parties are said to consent. Where the parties have different things in mind or understand the same things in different ways, there is no real consent. For example, two parties may enter into an apparent contract regarding a particular person or ship misled by the similarity of names. In such case, there is no contract. On the other hand, if the parties agree to the same thing in the same sense, a mere verbal error will not vitiate or affect a contract.

Parties ad idem. Ad idem means agreeing to the same thing in the same sense. Where two or more persons agree upon the same thing in the same sense, they are said to be ad idem. It is necessary that they should be of the same intention concerning the matter agreed upon. They should come to the same determination.

In some cases, it may so happen that the consent may have been given under the mistake and the mistake may be complete as to prevent the formation of any real agreement “upon the same things”. Such fundamental error may relate to:

(1) the identity of the party; or

(2) the nature of transaction; or

(3) the subject-matter of the agreement.

(1) Mistake as to the identity of the party. There may be a case where there has been a mistake or error as to the identity of party or person with whom an agreement is made. It generally occurs where one of the parties represents himself to be some other person than he really is.

In Cundy v. Lindsay & Co.. (1878) 3 AC 459, one Blenkarn taking advantage of similarity of his name with Blenkarn & Co., wrote in the name of Blenkarn & Co. to Lindsay & Co. and ordered goods from them. They mistook his order for that of Blenkiron (because the signature on the letter ordering the goods was also made to look like Blenkiran’s) a respectable firm, and delivered the goods to Blenkarn. Blenkarn sold the goods to Cundy and did not pay Lindsay & Co. for them. In a suit by Lindsay & Co. against Cundy, it was held that there was no real agreement between Blenkarn and Lindsay & Co. and that Cundy could get no title to the goods from Blenkarn.

The mistake of identity can be only when a particular identity exists in the knowledge of the plaintiff.

(2) Mistake as to the nature of transaction. In case of a mistake as to the nature of the transaction, the contract is void. If a person signs a gift deed under the mistaken impression that the deed pertains to the power of attorney, the deed will be void on this ground.

(3) Mistake as to the identity of the subject-matter of the agreement. Where parties to an agreement have made a mistake as to the identity of the thing (that is, the subject-matter of the contract) contracted for, the case must obviously fall under Section 13. If one party intends to contract with regard to one thing and the other with regard to something else, there is no agreement, for the parties are not one as to the subject- matter of the agreement.

In Raffles v. Wichelhaus, (1864) 159 ER 375, A agreed to buy of Ba cargo of cotton. “To arrive ex-Pearless from Bombay”. There were two ships named “Pearless” both sailing from Bombay, and the plaintiff had in his mind one of these ships and the defendant the other. Held-As there was a mistake as to the identity of subject matter of the supposed contract, there was no contract at all.

When consent is free

According to the Section 14 of the Contract Act, “Consent is said to be ‘free’ when it is not caused by:

(1) coercion (as defined in Section 15), or

(2) undue influence (as defined in Section 16), or

(3) fraud (as defined in Section 17), or

(4) misrepresentation (as defined in Section 18), or

(5) mistake (subject to the provisions of Sections 20, 21 and 22).

Thus, “free consent” is the consent which has been obtained by the free will of the parties, voluntarily given out of their own accord without any of (a) coercion, or (b) undue influence, or (c) fraud, or (d) misrepresentation, or (e) mistake.

In Smt. Kiran Bala v. Bhaire Prasad, AIR 1982 All. 242, the first marriage of a girl was annulled on the ground of her unsoundness of mind. She was married second time. Facts of unsoundness of her mind were concealed from the bridegroom. Held that consent of the husband was obtained by fraud and marriage could be annulled.

Effect:

When consent is not free. The effect of the first four circumstances, namely, coercion, undue influence, fraud and misrepresentation is that the contract becomes voidable at the option of the party, while the mistake renders the contract altogether void. Where both the parties to the contract are under mistake as to matter of fact essential to the contract. A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to the matter of fact.

In short, it can be said that according to the definition of “free consent” contained in Section ’14’:

(i) Not only consent but free consent is necessary to complete the validity of a contract. (Section 10)

(ii) Where there is no consent, or no real and certain object of consent, there can be no contract at all.

(iii) Where there is consent but not free consent, there is generally a contract voidable at option of the party whose consent was not freely obtained.

(iv) If consent is given under any of first four circumstances, mentioned in Section 14, then the contract is voidable at the option of the party whose consent was so caused. (Sections 19 and 19-A)

(v) If the consent is caused by mistake of the parties then the agreement is void. (Section 20)

(vi) Thus, it is essential for the formation of a valid contract that there should be free consent of both the parties to the contract.

Coercion and its effect on contract

Q. 7. (b) What is ‘coercion’? Explain its effect on contract and distinguish between Coercion and Duress.

What do you understand by term Coercion? Whether threat to commit suicide is coercion? Explain.

Ans. Coercion.-Section 15 of the Indian Contract Act, 1872 defines the term “coercion”. According to Section 15.-

The consent of a party will be deemed to have been caused by coercion if it is obtained under any one or more of the following circumstances-

(i) Commission of an offence. If the other party commits an offence forbidden by the Indian Penal Code with intention of obtaining such consent.

(ii) Threatening to commit an offence. If the party threatens to. commit an offence forbidden by the Indian Penal Code, with the intention of obtaining such consent.

(iii) Unlawfully detaining any property. If the other party unlawfully detains any property to the prejudice of any person whatever, with the intention of obtaining such consent.

(iv) Threatening to detain unlawfully any property. If the other party threatens to detain unlawfully any property, to the prejudice of any person whatever, with the intention of obtaining such consent (Section 15).

Explanation to Section 15.-“It is immaterial whether the Indian Penal Code is or is not in force in the place where the coercion is employed”.

Illustration. A. on board an English ship on the high seas, causes B to enter into an agreement by an act amounting to criminal intimidation under the Indian Penal Code. A afterwards sues B for breach of contract at Calcutta. A has employed coercion, although his act is not an offence by the law of England, and although Section 506 of the Indian Penal Code was not in force at the time when or place where the act was done.

On the death of the husband, the widow was threatened by the relatives that unless she adopted a boy they would not allow her to remove the dead body. It was held that the adoption was invalid since it had been obtained by coercion |Ranaganyakamma v. Alwar Setti. (1890) 13 Mad 241].

The plaintiff was threatened that he would be arrested and detained under MISA: Such a threat would fall within the mischief of Section 15 of the Indian Contract Act Kishori Lal Kalra v. N.D.M.C., AIR 2001 Del. 402].

Effect of “coercion” on contract [Section 19].- According to Section 19 of the Contract Act when consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.

Threat to commit suicide, whether coercion. There is some controversy regarding the question whether threat to commit suicide constitutes coercion within the meaning of Section 15 of the Contract Act. According to Section 15 of the Contract Act an offence to constitute coercion should be an act forbidden by the Indian Penal Code. Under the Indian Penal Code, attempt to commit suicide is punishable and not the threat to commit suicide.

In Amıniraju v Seshamma, (1917) 41 Mad. 33, a man gave a threat to his wife and son to commit suicide if they did not execute a release bond regarding some property which the wife and son claim as their own. The majority judgment held that the threat to commit suicide must be deemed to be forbidden since the attempt to commit suicide was punishable under Section 309 of the Indian Penal Code. But in his dissenting judgment Oldfield J. held that the Section 15 of the Indian Contract Act must be interpreted strictly. An act could be said to be forbidden by the Indian Penal Code only when it was punishable under it. Since the threat to commit suicide was not punishable, it could not be said to be forbidden.

Recommendation of the Law Commission.- As regards the words “any act forbidden by Indian Penal Code, the Law Commission in its 13th Report (1958) recommended:

The words “any act forbidden by the Indian Penal Code;, should be deleted and a avider expression be substituted therefore, so that the Penal Laws other than the Indian Penal Code may also be included.”

Distinction between Coercion and Duress. What is ‘coercion’ in India, is called ‘duress’ in England. The following are the points of distinction between Coercion and Duress.

Coercion

1. Under Indian Contract Act, ‘coercion’ includes both menace to person and menace to goods.

2. In India, coercion may be directed even against a third party.

3. In India, it is sufficient to constitute coercion if the unlawful threat induces the consent to the agreement.

Duress

1. In England, to constitute ‘duress’ it must be a menace against person and not against goods.

2. But, in England the subject of ‘duress’ must be the contracting party, his wife or children.

3. In England, the standard of ‘duress’ is whether a person of ordinary firmness shall be constrained under the circumstances to enter into the agreement.

Undue Influence

Q. 7. (c) Define undue influence. Who may apply to set aside the Contract induced by undue influence?

Define undue influence and briefly explain the circumstances in which a consent to a contract is said to be induced by undue influence. Differentiate between coercion and undue influence.

Ans. Undue influence. The term “undue influence” has been defined under Section 16 of the Indian Contract Act, 1872. According to Section 16 (1).-

A contract is said to be induced by ‘undue influence’, where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other, and (the party which is in such position) uses that position to obtain an unfair advantage over the other.

Principle underlying undue influence. It is one of the most legitimate objects of all laws to protect people from being forced, tricked or mislead in any way by others into parting with their property. “The equitable doctrine of undue influence has grown out of and been developed by the necessity of grappling with insidious forms of spiritual tyranny and with infinite varieties of fraud.” (Allcard v. Skinner).

Essentials of undue influence. Section 16 (1) lays down following essential elements to constitute undue influence:

(1) Relationship between the parties being such that one of the parties is in a position to dominate the Will of the other;

(2) He uses that position to obtain unfair advantage over the other;

(3) Unfair advantage is in fact obtained.

In Allcard v. Skinner. (1887) 36 Ch. D. 145, a woman became a sister of a protestant institution and took the vow of poverty, chastity and obedience. The vow of poverty required the absolute surrender for ever of all individual property. She gave her property to the defendant. Later on, she left the sisterhood and sued for the recovery of the property on the ground that the property had been procured by the defendant under undue influence. Although she lost due to delay in filing the suit, the Court of Appeal held- Influence of one mind over another is very subtle and of all influences religious influence is the most dangerous and the most powerful.

In Niko Devi v. Krip. AIR 1989 HP 11, the plaintiff and defendant were in fiduciary relationship. Suit property belonged to father and mother who died when daughter was 10 years old. Her property was being managed by the defendant who got a gift executed from her, she being an illiterate girl. The Court held that undue influence was there and gift was avoided by the Court [Subhash Chandra v. Ganga Prasad, AIR 1967 SC 878 followed).

In Joseph John Peter Sandy v. Veronica Thomas Rajkumar, (2013) 2 SCC (Civil) 332, the Supreme Court held that failure to make specific allegations of undue influence is not fatal when facts of the case on record justify inference of undue influence.

Presumption of domination. According to Section 16 (2), a person is deemed to be in a position to dominate the will of another :-

(a) where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other; or

(b) where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress.

Generally speaking, the relations of solicitor and client, trustee and beneficiary, spiritual advisor and devotee, medical attendant and patient, parent and child are those in which such a presumption arises. But the presumption of undue influence merely on the basis of near relationship is not permissible. Subhash Chandra Das Mushib v. Ganga Prasad Das Mushib, AIR 1967 SC 808; See also M. Rangasami v. Rangammal, AIR 2003 SC 3120]

Burden of proving undue influence. Where a person who is in a position to dominate the will of another, enters into a contract with him and the transaction appears, on the face of it, or on the evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person who is in a position to dominate the will of the other. [Section 16 (3)]

(a) A, having advanced money to his son B during his minority, upon B’s coming of age obtains by misuse of parental influence, a bond from B for a greater amount than the sum due in respect of the advance. A employs undue influence [Subhash Chandra v. Ganga Prasad, AIR 1967 SC 878).

(b) A. a man enfeebled by disease or age is induced by B’s influence over him as his medical attendant, to agrees to pay B an unreasonable sum for his professional service. B employs undue influence Daya Shankar v. Bachi. AIR 1982 All. 376].

Contracts with pardanashin ladies. A contract with a pardanashin lady is presumed to have been induced by undue influence. There is, however, no statutory definition of the term ‘pardanashin lady’. According to Bombay High Court, a woman does not become pardanashin simply because she lives in some degree of seclusion. Once, it is shown that a contract is made with a pardanashin lady, the law presumes undue influence. The burden lies on the other party to prove that no undue influence was used and she had freely consented [Kalibaksha Singh v. Ram Gopal Singh. (1913) 41 IA 23].

Those who contract with a pardanashin lady have onus (burden) to show that she understood the nature and effect of the transaction.

Effect of undue influence on contract [Section 19-A].- Section 19-A deals with the consequences of agreements obtained by undue influence. Section 19-A lays down,-

“When consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent is so caused.

Any such contract may be set aside either absolutely or, if the party who was entitled to avoid it has received any benefit thereunder, upon such terms and conditions to which the Court may seem just.”

According to Section 19-A, (a) the party whose consent to the contract has been obtained under ‘undue influence’ may or may not treat the agreement as void, i. e., the transaction is voidable at the option of the party whose consent has been so caused;

(b) (i) such a contract may either be absolutely set aside by the Court, or (ii) if the person whose consent has been obtained under undue influence, has received any benefit from the other party than under such terms as seems to the Court just.

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

(b) A. a money-lender, advances Rs. 100 to B. an agriculturist, and by undue influence induces B to execute a bond for Rs. 200 with interest at 6 percent per month. The Court may set the bond aside, ordering B to repay Rs. 100 with such interest as may seem just.

In Sunder Rai v. Suraj Bali, 47 All. 392, the Court held-It is perfectly under the discretion of the Court to direct or not to direct the refund of the benefit received while setting aside the contract. It may also direct the refund of benefit as a whole or only part of it.

Distinction between Coercion and Undue influence

Coercion

1. In coercion, the consent is obtained by committing or threatening to commit an act prohibited by I.P.C. or unlawfully detaining any property or threatening to detain any property.

2. In case of coercion existence of relationship between the parties is not necessary.

3. In coercion there is element of physical force.

Undue influence

1. In undue influence the consent is obtained by dominating the will of another and the consent is freely given under the belief that he is not to be put to any loss by giving such consent.

2. To make out a case of undue influence, there must be certain relationship between the parties in which one party is in a position to dominate the will of other.

3. Influence is due to moral pressure, that’s why sometimes remarked as moral coercion.

Fraud

Q. 7 (d) What is ‘fraud’ ? What are its essential ingredients? Does silence amount to fraud? Discuss.

Discuss the elements of ‘fraud’ and explain that mere silence does not amount to fraud.

Ans. Definition of “fraud”. Section 17 of the Indian Contract Act defines fraud as follows:

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

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

2. the active concealment of a fact by one having knowledge or belief of the fact;

3. a promise made without any intention of performing it;

4. any other act fitted to deceive;

5. any such act or omission as the law specially declares to be fraudulent.

Explanation to Section 17 provides:

Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances are such that, regard being had to them, it is the duty of the person keeping silence to speak or unless his silence, is in itself, equivalent to speech.

Illustrations. (1) A sells, by auction, to B. a horse which A knows to be unsound. A says nothing about horse’s unsoundness. There is no fraud in A.

(2) B says to A. “if you do not deny it. I shall assume that the horse is sound”. A says nothing. Here A’s silence is equivalent to speech.

Essential elements of Fraud

In Derry v. Peek, (1880) 14 AC 337, Lord Herscell observed:

“…….fraud is proved when it is shown that a false representation has been made (1) knowingly, or (2) without belief in its truth or (3) recklessly careless whether it is true or false.”

According to Section 17 of the Contract Act, there are following essential elements of “fraud”.-

1. The act of fraud must have been committed-

(i) by one of the parties to a contract, or

(ii) with his connivance, or

(iii) by his agent.

2. It must be. (i) A suggestion as to a fact (suggestio falsi) which is not true by one who does not believe it to be true. The statement must have been made without belief in its truth. If a false statement is made not deliberately but recklessly without inquiry whether it is true or false, it will amount to fraud. However, if a statement which turns out to be false is made in the honest belief that it is true, there is no fraud.

A mere statement of intention or opinion must be distinguished from a suggestion of the act. A mere statement of opinion does not amount to fraud if the opinion is honestly held. [Abdulla Khan v. Girdhari Lal, (1904) Punj. Rev. No. 149]; or

“Fraud is committed where one person induces another to enter into some contract or to transaction on a false belief by representation of fact which is not true and which he does not believe to be true.” [K. K. Paliwal V. P. D. Paliwal, AIR 1976 Raj. 79].

Fraud is an act of deliberate deception with the design of securing something by taking unfair advantage of another. It is a deception in order to gain by another’s loss. It is a cheating intended to get an advantage. [State of Andhra Pradesh v. T. Suryachandra Rao. AIR 2005 SC 3110].

(ii) An active concealment of a fact (suppressio verii) by one having knowledge or belief of the fact. If a man conceals fact that is material to the transaction, knowing that the other party is acting on the presumption that no such fact exists, it is as much a fraud as if the existence of such fact was expressly denied or the reverse of it expressly stated. For example, A. a horse dealer sold a mare to B. A knew that the mare had cracked hoof which he filled up in such a way as to defy detection. The defect was subsequently discovered by B. It was held that agreement could be avoided by Bas his consent was obtained by fraud.

(Such a case must be distinguished from the provision made to the exception to Section 19 where it is laid down that if consent is caused by misrepresentation or by silence, fraudulent within the meaning of Section 17 the contract nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence); or

(iii) A promise made without any intention of performing it.

(iv) Any other act fitted to deceive. All surprise tricks, cunning. dissembling and other unfair ways that are used to cheat any one are frauds This sub-section covers all these cases of fraud; or

(v) Any such act or omission as the law specially declares to be fraudulent. Section 55 of the Transfer of Property Act lays down that the seller of immovable property is required to disclose to the buyer any material defect in the property of which the seller is aware and the buyer is not aware, and which the buyer could not with ordinary care discover. An omission to make such disclosure amounts to fraud.

3. It must have been committed-

(i) with intention to deceive, and

(ii) the person on whom the deception was intended must have actually been deceived.

The deceit must have aimed at-

(i) the other party to the contract; or

(ii) his agent; or

(iii) with a view to induce the other party to enter into the contract

It is not necessary that representation should be made to the other party. An act will be sufficient to amount to fraud if it is made with intention that the other party should act upon it. [Langridge v. Levy. (1837) 2 M&W 519].

In Shri Krishan v. The Kurukshetra University. AIR 1976 SC 376, the Supreme Court held-Where a person on whom fraud is committed is in a position to discover the truth by due diligence, fraud is not proved.

Mere silence does not amount to fraud

Explanation to Section 17-Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech.

Illustrations of Section 17-(a) A sells, by auction, to B, a horse which A knows to be unsound, A says nothing to B about the horse’s unsoundness. This is not fraud by A.

(b) B is A’s daughter and has just come of age. Here, the relation between the parties would make it A’s duty to tell B if the horse is unsound.

(c) B says to A-‘If you do not deny it, I shall assume that the horse is sound.” A says nothing. Here, A’s silence is equivalent to speech.

(d) A and B. being traders, enter upon a contract. A has private information of a change in prices which would affect B’s willingness to proceed with the contract. A is not bound to inform B.

If a candidate does not mention the fact of the shortage of attendance in his examination form, it will not be a fraud. It is the duty of the University to scrutinize forms and call for the candidate in case of doubt (Shri Krishan v. The Kurukshetra University. AIR 1976 SC 376).

In K. K. Paliwal v. P. D. Paliwal, AIR 1976 Raj. 79, it was held-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.

When Silence amounts to speech ?

Explanation to Section 17 mentions the following exceptions:

1. The circumstances of the case are such that regard being had to them, it is the duty of a person keeping silence to speak. In case of contract ‘uberrimae fidei (contract of utmost good faith), it is the duty of one party to disclose all the material facts within its knowledge to the other and such contract may, therefore, be invalidated by non-disclosure of a material fact. There is no general duty to disclose facts which are or might be equally within the means of knowledge of both the parties. (Pollock and Mulla).

2. His silence is in itself equivalent to speech. Where silence on the part of a party is in itself equivalent to speech, it can amount to fraud.

Illustration. A says to B. “if you do not deny it, I shall assume that the horse is sound”, in connection with an agreement to purchase a horse belonging to B. B says nothing. Here B’s silence is equivalent to speech and if the horse is unsound, the contract can be repudiated at the option of A.

“Mere silence is not the same thing as active concealment”.- There is distinction between active concealment and mere silence.

Where a person on whom fraud alleged to have been committed is in a position to discover the truth by due diligence, fraud is not proved. (Shri Krishan v. Kurukshetra University. AIR 1976 SC 376).

Where the buyer having the fullest opportunity of examining the article to be sold, is under a misapprehension as to its quality and the seller knowing of such mistake remains silent, the contract is valid. There is no legal obligation on a vendor to inform the purchaser that he is under a mistake not induced by the act of the vendor. II, however, there is legal obligation on the part of the seller to disclose everything, for example, when the buyer relies on the seller or when there is a latent defect, the contract is bad. (Smith v. Huges, (1871) LR QB 597].

Illustration. A makes an offer to sell his room to B. There is a crack on the wall which A does not disclose to B but B could easily discover that by using ordinary care. If B purchases the room, he cannot subsequently reject the contract by pleading that his consent was obtained by fraud created due to silence of A. Mere silence is not fraud in this case.

3. Change of ‘circumstances’. The party to the contract should communicate to the other party the change of the circumstances. In such position, the party who makes the representation should communicate it to the other party.

Q. 7 (e) Discuss the effect of fraud on contract.

What is the effect of fraud on contract? Examine.

Ans. Effect of Fraud on Contracts. Sectior 19 lays down the effect of coercion, fraud or misrepresentation on contract as follows:

(i) Agreement caused by coercion, fraud or misrepresentation voidable. When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.

When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.

Illustration-A, intending to deceive B. falsely represents that five hundred maunds of indigo indigo are made annually at A’s factory, and thereby induces B to buy the factory. The contract is voidable at the option of B.

(ii) Party defrauded may insist for performance of the contract. A party to a contract whose consent was caused by fraud or misrepresentation may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been if the representation made had been true.

Illustration.-A. fraudulently informs B that A’s estate is free from encumbrances. B thereupon buys the estate. The estate is subject to a mortgage B may either avoid the contract or may insist on its being carried out and mortgage debt redeemed.

(iii) In case, party defrauded did not use ordinary diligence- The contract is valid [Exception to Section 19]. If the party whose consent was obtained either by misrepresentation or silence which amounted to fraud had the means of discovering the truth with ordinary diligence and did not use these means then, the contract shall be deemed a valid one and not voidable.

The ordinary diligence may be taken to be of such diligence which a prudent man would consider appropriate to the matter having regard to the importance of the transaction in itself and of the representation in question as effecting its results.

Illustration. A goes to purchase a tin of oil from B and asks him, “Is this oil of superior quality”. B says, “Yes, it is of superior quality, but if you have any doubt you can examine the oil present in the tin before you”. A subsequently finds that the representation of R was not correct. A has no legal remedy against B. A had the means of discovering the true facts with ordinary diligence.

(iv) Explanation of Section 19.-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.

Illustration. A. by misrepresentation leads B. erroneously to believe that 500 maunds of indigo are made annually at A’s factory. B examines the accounts of the factory, which show that only 400 maunds of indigo have been made. After this, B buys the factory. The contract is not voidable on account of A’s misrepresentation because it did not cause the consent of B to the contract and the contract is valid.

(v) Person defrauded may claim damages. The person whose consent has been caused by fraud is entitled to avoid the contract and claim damages from the party who committed the fraud for any loss caused by such fraud, the reason being that fraud is a tort of civil injury like defamation or negligence, etc.

‘Misrepresentation’

Q. 7. (f) Define ‘Misrepresentation’. What are its essential ingredients? Examine.

What is ‘Misrepresentation’? What are its effects on contract? Discuss.

Ans. ‘Misrepresentation’. Generally speaking, misrepresentation which is known as ‘innocent representation’ is a statement of a material fact not known to be false without an intention to deceive. According to Cheshire and Fifoot, a representation is “a statement made by one party to the other before or at the time of contracting, with regard to some existing facts or to some past event, which is one of the causes that induces the contract A misrepresentation is innocent where the representator believes his assertion to be true and consequently has no intention of deceiving the representee.

Definition of “Misrepresentation” (Section 18]. Section 18 of the Contract Act lays down:

“Misrepresentation means and includes:

1. the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true;

2. any breach of duty which, without an intent to deceive gains an advantage to the person committing it, or anyone claiming under him, by misleading another to his prejudice or to the prejudice of anyone 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.

Essentials of Misrepresentation

Following elements must be present in every case of misrepresentation:

(i) There must be representation by one party to another.

(ii) The representation must be an ‘assertion of facts’ and must not relate to matter of ‘opinion’.

(iii) The representation must be untrue-A man buys a plot under misapprehension that it is rich in coal. He asks the seller, “is your plot rich in coal?” Though the seller knows that his plot is not rich in coal. He replies in the affirmative only to make the sale a certainty. But suppose, the purchaser subsequently finds the plot rich in coal according to his expectation but contrary to the expectation of the seller. In such circumstances, the representation of the seller would not be regarded untrue.

(iv) The representation must have caused the consent of other party to contract. If one party is guilty of misrepresentation but this misrepresentation has no effect on the other party and does not induce him to give his consent to the contract, the law will not recognise this as a case of misrepresentation. The aggrieved party shall have no remedy against this case.

In case, where one party is guilty of misrepresentation but the other party had the means of discovering the true facts with ordinary diligence but he did not do so, the contract cannot be set aside on the ground of misrepresentation.

Effect of misrepresentation [Section 19].- When consent to an agreement is caused by misrepresentation, the party whose consent was so caused, has the following alternative courses open to him:

(i) May avoid the contract. He can treat the contract as voidable and can set it aside at his option; or

(ii) May insist for performance. He may insist that the contract shall be performed and he shall be put in the same position in which he would have been if the representation made had been truc.

In Hindustan General Insurance Society v. S. Subramanium, AIR 1957 Mad. 162, the respondent furnished incorrect information in the proposal form to the insurance company. It was held that as the insurance company had been induced because of the misrepresentation, the company was entitled to repudiate it.

Distinction

Q. 8. Distinguish between the following:

(a) Coercion and Duress

(b) Coercion and undue influence

(c) Fraud and Misrepresentation.

Ans. (a) Distinction between Coercion and Duress[Please see Q. 7 (b)]

(b) Distinction between Coercion and Undue influence[Please see Q.7 (c))

(c) Distinction between Fraud and Misrepresentation

According to Pollock and Mulla, “the principal difference between fraud and misrepresentation is that in the one case the person making the suggestion does not believe it to be true and in the other he believes it to be true though in both the cases it is a main statement of facts which misleads.”

Fraud

1. In fraud, there must be an intention to deceive.

2. As regards remedy of damages, fraud, besides avoiding the contract gives rise to an action ex delicto i.e. an action for deceit and the aggrieved party can recover damages if he has sustained any damage, in consequence of fraud practised upon him by the other party.

3. Fraud, may amount to an offence of cheating.

4. Fraud, besides avoiding the contract, gives rise to an independent action.

5. In the case of fraud, the person making the suggestion does not believe it to be true.

Misrepresentation

1. Misrepresentation may be innocent, that is, there may not be intention to deceive or any intention to gain an advantage.

2. As regards remedy of damages, misrepresentation merely entitles the aggrieved party to avoid the contract.

3. Misrepresentation, does not amount to an offence.

4. Misrepresentation may only vitiate the contract but does not give rise independent action. to an

5. In the case of mis- representation, the person making the suggestion believes it to be true.