CONTRACT LAW _ Pritam Sir

Genesis of Law of Contracts: The Mercantile law of which Contract law is an essential part, originated at a time when it was gravely felt that it could no longer be possible to regulate a variety of business transactions through the old, outdated and irrational personal laws of the parties to a particular suit. Say for example, before the enactment of a well defined system of mercantile law, the rights of Hindus and Muslims were used to be governed by their respective personal laws, usages and customs. As such where both parties were Hindus, they were regulated by the Hindu law and if they were Muslims then, Mohammedan law was applied. Adding further to the confusion, in case where one party was a Hindu and the other Muslim, the personal law of the defendant (the opposite party) was applied. And in case of persons other than Hindus and Muslims and where the personal laws and usages of Hindus or Muslims were silent on particular point then the courts generally applied the principles of English law.

            Gradually, a need for the enactment of a uniform law regulating the contracts was realized to dispense an equal justice to any party to a dispute and hence, took the birth of Indian Contract Act in 1872. Since then, a number of laws have been enacted to supplement this body of law say, in the form of Negotiable Instruments Act-1881; The Sale of goods Act, 1930, The Arbitration Act of 1940 and so on…

            So far as the growth, enrichment and sources of Indian Mercantile law is concerned, besides other sources, it is the English mercantile law that practically constitutes the foundation upon which the superstructure of Indian Mercantile law has been built. Even today, despite the enactment of various statutory laws touching upon the field of Indian Mercantile law, our courts still take recourse to the English Mercantile law to decide on matters where either some principles are not expressly spelled out in the Indian law or some ambiguity is there in it.

            Then, the Indian statutory laws enacted by the Parliament from time to time supplemented by the judicial decisions (Case law) constitute another major source of Indian mercantile law. The Indian Courts have added enormously to the growth of this branch of law especially by deciding on such cases where the main law or Act is silent by applying the principles of justice, equity and good conscience. Similarly, the customs and usages regulating a particular trade provided they have been widely known and be in use for a long period of time, are certain and reasonable as well as must not be opposed to any legislative enactment, have had also guided the Indian Courts in deciding disputes arising out of mercantile transactions.

Why law of contracts? We all know that today we live in such a world that runs purely on promises which include promises of not only the most sundry kind, but also of the most significant kinds either financially or otherwise. In short, we can say that every one of us enters into a number of contracts almost everyday without even realizing that what exactly we are doing from the point of law or for that matter, what kind of contract we have actually entered into with the other party. Say for example, you may not even give a slightest thought to what you are doing when you entrust your scooter to a mechanic for repairs or when you purchase a movie ticket or purchase a packet of your favorite Maggie. From the view point of law, in all such cases, you have actually made a contract which under law may be described under various names say, a contract of bailment, the moment you entrust your scooter for repairs with the mechanic or a contract of the sale of goods when you purchase your Maggie and so on…

            Now taking the instances of such contracts to a little larger canvass, we will see that in business transactions quite often the promises are made at one time and its performance follows later keeping in view the complex nature of business transactions. Imagine a situation, if either of the parties to such business transactions were free to go back on its promise and that too without incurring any liability, it would not only put the other party at a loss, but create a kind of situation where it would become impossible to carry on any kind of trade or business. To overcome such situations, where a promisor is made bound to honor his promise made to the other party, the law of contract was enacted which lays down the legal rules relating to such legal promises, their formation, their performance as well as their legal enforceability.

            Explaining the objective and significance of law of contracts, Sir William Anson, (an authority on English law of contracts):

            “The law of contract is intended to ensure that what a man has been led to expect shall come to pass; that what has been promised to him shall be performed.”

What is a contract? As noted above, the Law of Contract plays an important role in laying down the legal rules relating to the following matters:

• To form legal promises
• The formation of contract
• Their performance and
• Their enforceability

Law of Contract applies not only to a business community, but to others as well. From dawn to dusk, we enter into a number of contracts, such as engaging a plumber to set right a leaking tap, giving clothes for dry cleaning, hiring a motorcar etc. Each time, we are actually making a contract.

            Noted further that so far as contract law as it is practiced in India, consists of both Indian law (i.e. the Indian Contract Act, and the general principles of law that are - established and accepted in the United Kingdom, so called as 'English law or 'Common Law.

Moreover, before do we go ahead to understand the contract law and essentials of a contract from the legal perspective, we need to understand one most important fact at the outset that although, the things called contracts or agreements are almost pervasive to our life and we venture out making a whole lot of contracts almost every day in our life right from the simplest contracts of purchasing our medicines from a medical shop to the most complex ones involving purchasing a house from a builder. But then, we won’t be calling every form of such contracts as the one of a legally enforceable kind until, the same fulfills some of the essential conditions required under contract law so as to make it legally binding on the opposite party. And what these conditions are, these are being enumerated under section 10 of the Indian contract Act-1872. So, let’s have a fleeting idea about the same before we can proceed further:

Section-10 of the Indian contract says that a legally enforceable contract must fulfill the following conditions viz.

• That the agreement should be by the free consent;
• That the parties to such an agreement should be competent to enter into an agreement. Here the competency to an agreement refers to the age or mental condition of the contracting parties etc...
• That the purported contract should me made against a lawful consideration except those which are valid & enforceable without a consideration.
• That the agreement should be for a lawful purpose or object and not for any unlawful or immoral purpose and finally,
• It should not have been declared void as such by the Indian contract Act.

It may also be noted in this context that a contract to be a legally binding one, besides fulfilling the above conditions, it also needs to be looked upon the fact that whether the contracting parties are thinking in the same terms so far as the implications of the agreement between them are concerned. This is referred to as the “meeting of minds” of the contracting parties. Simultaneously, it is also required that whether a third party looking at the said agreement would also think that the contracting parties have really intended to enter into a legally binding agreement between them.

Now let’s analyze the definition of a contract and then, zero in on its essentials:

Definition of Contract:

Sec. 2(g) of the Indian contract Act defines contract as “an agreement enforceable by law”.

Thus,

Contract = Agreement + Legal Obligation i.e. an agreement which creates a legal obligation or an agreement enforceable by law.

 

When an ‘agreement’ happens?

• When a person to whom a proposal is made signifies his acceptance, it results in an agreement. Proposal herein this context is also called as an ‘offer’ and within the meaning of the contract Act, the one who makes an offer is thus, referred to as an ‘offeror’ and to whom it is being made is an ‘offeree’.

Thus, clearly enough, an,

Agreement = Offer + Acceptance

Now let’s define the term ‘offer’ first of all:

What is an offer? The Indian contract act defines the term offer in the following words:

'When a person signifies to another his willingness to do or abstains from doing anything, with a view to obtaining the assent of that other to such an act or abstinence, he is said to have made an offer or proposal.'

To take an example, an effective offer would be 'If you sell your house to me, I will give you Rs.20, 000/-.'

It's the acceptance of the offer that creates a valid contract. So to form an effective contract, an offer has to be communicated to the person to whom it is made and for whom it is intended AND then accepted by this person. A person cannot accept an offer unless an offer is communicated to him / her, or rather, a person, cannot accept an offer unless, he/she knows about it.  Say for example,

When a person does an act without knowing that an offer has been made under which whatever, he has performed, will be rewarded under the said offer. It is not possible for that person to later claim that a valid contract existed. For example, A’s daughter is lost in the train on the way from Delhi to Bombay. A tries in vain to find her, but does not succeed. In desperation, he gives an advertisement in the local newspaper, announcing a reward for the person who finds her: Y, an illiterate woman, on finding the lost girl, takes her to a police station, where she meets A, the girl's father. The woman has found the girl and as such, is deemed to have performed the act for which the reward was promised, without knowing that an offer/promise existed, i.e. without knowing that A had made an offer to reward the person whosoever found his daughter. Thus, since she has no knowledge of the offer made by A, she will not be able to take legal action against A even if he refuses to give her the reward, since no valid contract has come into existence between them.

This is because there has been neither an agreement of terms or meeting of minds between them, nor has the act been done in return for the promise.

Now consider another situation, where Y knew of the reward, and found the girl, not because she could claim the reward, but because she was worried about her safety. In such a case, despite her motive in doing the act being different, she is nevertheless entitled to the reward if she chooses to accept if, because by her action, she has accepted the offer of the reward.

The person making the offer is called Offeror or Promisor and the person to whom offer is made is called Offeree or Promisee.

What is invitation to an offer? An invitation to an offer merely indicates the interest of one party to enter into negotiations and is by no means supposed to form a binding contract. E.g. the menu card given at the restaurant is an invitation to an offer, and when a person goes there and orders for the particular food items from the menu card, he makes an offer and that is required to be accepted by the restaurant. It comes from the Latin phrase- invitation ad offerendum (inviting an offer).

Tender is another fine example of an Invitation to offer wherein, invitation to offer is made and the people who fill in the tender, make the offer and that is later accepted. Auction is another example of an Invitation to an Offer, where the property owner asks for (invites) offers for a certain amount and then selects one of the offers. A shop owner displaying, their goods for sale is generally making nothing more than an invitation to treat and the person who comes to the shop is required to make an offer.

What is a counter Offer? The counter offer is made against the original offer, where the other party changes the original offer and modified offer is made to the original offer.

Cross Offers: When two offers are made simultaneously in ignorance of each other’s offer, it is referred to as cross offers. In short, when two parties make identical offers to each other without knowing that they have made similar offers to each other earlier, they are said to have cross offers. In such cases, the court will not construe one offer as the offer and other as the acceptance and as such there can be no concluded contract.

Communication of an offer:  

Offer is the first stage of the contract so there cannot be a contract without the communication of offer. Section 4 of the Indian Contract Act says that. "Communication of a proposal is complete when it comes to the knowledge of the person to whom it is made"

Thus, the communication of an offer is complete when it comes to the knowledge of the person to whom it is made and from whom the acceptance is being sought.

Acceptance of an offer: As we already know that a contract emerges from the acceptance of an offer only and thus, acceptance represents the act of assenting to an offer by the offeree. In other words, it is the manifestation by the offeree of his willingness so as get himself bound by the terms and conditions of the offer. As Lord, Anson, described acceptance as something done to the offer as what a lighted match is to a train of gunpowder. As a lighted match stick being applied to a train of gunpowder would produce irrevocable consequences, so is the effect of an acceptance by producing something which cannot be recalled or so called undone.

Whenever, the offeree signifies his assent to the offeror, the offer is said to be accepted. Thus, an offer when accepted, it naturally becomes a promise or what we call as an agreement.

Acceptance may be express or implied. It is said to be an express one when it is communicated by words spoken or written or may be by doing some required act. On the other hand, it is said to be an implied one, when its acceptance is to be gathered from the surrounding circumstances or from the conduct of the parties.  

It is now evident from the above that an agreement requires:

• Plurality of persons.
• Consensus-ad-idem [identity of minds]. Both the parties should think of the same thing in the same manner and should create:

Contract normally creates a ‘legal obligation’:

• It basically implies a duty enforceable by law.
• An agreement to become a contract must create a duty enforceable by law. In conclusion, for the formation of a contract, there must exist an agreement which gives rise to legal obligations between the parties.

Points to remember:

1.         All contracts are agreements but all agreements are not contracts.

2.         All legal obligations do not necessarily give rise contracts.

Say for example, there are a plenty of such legal obligations that don’t arise out of any kind of contracts e.g. Obligation to observe traffic rules.

Entry of ‘IT’ into the business world and birth of “e-Contracts”:
Today with the recent advancements in the areas of computer technology, telecommunications and information technology, there has been a tremendous change not only in the standard of living of the people, but also in the way, they used to conduct business earlier.

As such, the all pervasive IT-revolution has made it possible today that the information or communication is no more restricted either on account of geographical constraints or time and the same is both transmitted and received far and wide and that too with unimaginable speeds just at the click of the mouse. And it is at this juncture that the so called ‘electronic commerce’ takes its birth and offers utmost flexibility to business environment in terms of place, time, space, distance, and modes of payment etc.

This emerging phenomenon of e-commerce today is associated primarily with the buying and selling of information, products and services via computer networks and thus, has become a mean of transacting business electronically usually, over the Internet. And the natural concomitant of this e-commerce or e-business is the birth and growth of new instruments of business called e-contracts as against the traditional form of paper contracts.

Definition of e-contracts: e-contract is a contract that is modeled, specified, executed as well as deployed by a software system.

In conceptual terms, e-contracts are very much similar to traditional (paper based) commercial contracts wherein, the vendors present their products, prices and terms to prospective buyers through electronic media by using a software system and thereby, inviting the prospective buyers to consider their options, negotiate prices and terms (wherever possible) and accordingly, place their orders and make payments through the same media and once the payment is confirmed at the other end, the vendors deliver the purchased products to the buyers within a specified period of time.

But since because, the e-commerce employs some different ways in conducting the business as against the traditional commerce; most importantly by virtue of its being faceless; it certainly raises some unaccustomed and interesting technical and legal challenges so far as the recognition and conclusion of such e-contracts are concerned between the contracting parties. Therefore, following concerns can reasonably be raised and of course, needed to be considered with regard to the conclusion and recognition of such e-contracts such as:

• Whether e-contract is a valid contract?
•  Would a seller making details of goods and services with prices indicated thereon through a website is deemed to have made an offer?
•  Whether e-contracts satisfy the legal requirements of those agreements which ought to be reduced into writing as well as into signed documents?
•  Whether e-contracts do interpret, adopt and compile all other existing legal standards in the context of electronic transactions?

 

Before do we answer these questions, let’s first of all, analyze as what the law says about these e-contracts in the context of their recognition.

About an ‘e-Offer’: The law already recognizes contracts formed by using facsimile, telex and other similar technology. An agreement between parties is legally valid, if it satisfies the requirements of the law regarding its formation, i.e. that the parties have intended to create a contract primarily, so called, having a meeting of minds. This intention on their part may be evidenced by their having complied with 3 classical cornerstones of every kind of contract i.e. offer, acceptance and consideration.

As understood, one of the early steps in the formation of a contract lies in arriving at an agreement between the contracting parties by means of an offer and acceptance. Advertisement on a website may or may not constitute an offer as offer and invitation to treat are two distinct concepts. Being an offer to unspecified person, it is probably an invitation to treat, unless a contrary intention is clearly expressed. The test is of intention whether by supplying the information, the person intends to be legally bound by it or not. When consumers or prospective buyers, respond through an e-mail or by filling in an online form, built into the web page itself, it is probably they, who make an Offer. The seller at the other end can accept this offer either by an express confirmation of the same or by his conduct.

About an ‘e-Acceptance’: Same as in traditional contracts, an unequivocal i.e. explicitly clear and unconditional communication of an acceptance is also required to be made strictly according to the terms of the offer so as to create a valid e-contract. The critical issue however is that when an acceptance does take effect in this case so as to determine where and when the contract comes into existence. The general receipt rule is that acceptance is effective when received. For e- contracting however, no conclusive rule has been settled. As such, the applicable rule of communication depends upon the reasonable certainty of the message being received.

Say for example, when parties connect directly, without a server, they will be aware of failure or partial receipt of a message. Such a party realizing the fault must request re-transmission of the same as acceptance is only effective when received.

On the other hand, when there is a common server, the actual point of receipt of the acceptance is crucial in deciding the jurisdiction in which the e-contract is concluded. If the server is trusted, the postal rule may apply, if however, the server is not trusted or there is uncertainty concerning the e-mail’s route, it is best not to apply the postal rule. When arrival at the server is presumed insufficient, the ‘receipt at the mail box’ rule is preferred.

About Consideration and Performance of an e-contract: Contracts result only when one promise is made in exchange for something in return. This something in return is called as ‘consideration’. The present rules of consideration apply to e-contracts as well. Nevertheless, there has been a concern among consumers regarding Transitional Security over the Internet so far as payments are concerned. In order to redress this issue, the e-directive on Distance Selling tries to generate confidence among the consumers by minimizing abuse by purchasers and suppliers. It specifies accordingly that---

• A list of key points must be supplied to the consumer in ‘a clear and comprehensible manner;
• A written confirmation or confirmation in any other another durable medium must be made available and accessible to the consumer of such principle points;
•  A right of withdrawal should be given to the consumers so as to enable them to avoid deals entered into by them inadvertently or without sufficient knowledge by providing for seven-day’s cooling-off period free from penalty or reason to return the goods or reimburse the cost of services;
• The performance should be delivered within thirty days of the order unless, otherwise expressly agreed;
•  Reimbursement of sums lost to fraudulent use of credit cards. It places the risk of fraud on the credit card Company, requiring them to take steps to protect their position;
•  On the other hand, there is also a need to protect the sellers from rogue purchasers. For this the provision of ‘charge-back clauses’ and encouragement of pre-payment by buyers is recommended.
•  Thus, this Directive adequately protects rights of consumers against unknown sellers including that of the sellers against unknown buyers.

Liability and Damages under e-contracts: A party that commits breach of an agreement may face various types of liability under contract law. Due to the nature of the systems and the networks that business employ to conduct e-commerce, parties may find themselves liable for contracts which technically originated with them but, due to programming error, employee mistake or deliberate misconduct, were actually executed and released without the actual intent or authority of the party. Sound policies dictate that parties receiving messages be able to rely on the legal expressions of the authority from the sender’s computer and thus, legally be able to attribute these messages to the sender. In addition to employing information security mechanisms and other controls, techniques for limiting exposure to liability include the following:

• Trading partner and legal technical arguments;
•   Compliance with recognized procedures, guidelines and practices;
•  Audit and control programmers and reviews;
•  Technical competence and accreditation;
•  Proper human resource management;
•  Insurance;
•  Enhance notice and disclosure mechanisms and
•   Legislation and regulation addressing relevant secure electronic commerce issues.
• Digital Signatures: Section 2(p) of The Information Technology Act, 2000 defines ‘digital signatures’ as authentication of any electronic record by a subscriber by means of an electronic method or procedure. A digital signature functions for electronic documents like a handwritten signature does for printed documents. The signature is an unforge-able (one that can not be copied or forged) piece of data that asserts that a named person wrote or otherwise, has agreed to the document to which the signature is attached. A digital signature actually provides a greater degree of security than a handwritten signature. The recipient of a digitally signed message can verify both that the message originated from the person whose signature is attached and that the message has not been altered either intentionally or accidentally since it was signed. Furthermore, secure digital signatures cannot be repudiated; the signer of a document cannot later disown it by claiming that his signature was forged. In other words, digital signatures enable authentication of digital messages, assuring the recipient of such a digital message regarding both the identity of the sender and the integrity or veracity of the message. The fundamental drawback of online contracts is that if there is no alternate means of identifying a person on the other side other than these digital signatures or a public key, it is possible to misrepresent one’s identity and try to pass of as somebody else.
• E-contracts: The bottom line: e-contracts are well suited to facilitate the re-engineering of business processes occurring at many firms involving a composite of technologies, processes, and business strategies that aids the instant exchange of information. In fact, the bottom-line of the e-contracts lies in the fact of their having both merits and demerits of their own. On the one hand, they reduce costs, saves time, enhance customer response and improve service quality by reducing paper work thus, increasing automation. With this, E-commerce is expected to improve the productivity and competitiveness of participating businesses by providing unprecedented access to an on-line global market place with millions of customers and thousands of products and services on display. But then on the other hand, since in electronic contract, the proposal focuses not on humans who make decisions on specific transactions, but on how risk should be structured in an automated environment. Therefore, the object is to create default rules for attributing a message to a party so as to avoid any fraud and discrepancy in the contract.
• Having discussed something about the e-contracts including the law governing the regulation of such contracts which no doubt, is still an emerging phenomenon, let’s now revert back onto resuming our discussion on traditional forms of agreements and their various aspects which the law of contracts essentially deal with.

Types of Contract:

1.         Contracts on the basis of creation:

            a.         Express contract

                        It is one, which is made by words spoken or written.

            b.         Implied contract

It is one, which can be inferred from the conduct of a person or the circumstances of a case.

2.         Contracts on the basis of Enforceability

            a.         Valid contract

It is a contract, which satisfies all the essential elements preserved by law. It is enforceable by both the parties.

Note: A detailed description of all the essential elements of a valid contract is presented below.

1. Void Agreement

It is an agreement where in any of the essential elements of a valid contract is missing.

1. Voidable contract

It is an agreement, where in free and voluntary consent of one of the parties is missing and hence the party whose consent is not free can avoid the contract. Let’s proceed first to understand the essential elements of a valid contract:

 

I.          VALID CONTRACT:

            Essential Elements of a Valid Contract:

1.         Offer and Acceptance:

There must be a ‘lawful offer’ and a ‘lawful acceptance’. In other words there are some legal rules governing offer and acceptance. In what manner, this offer is to made and accepted, it follows the same rules as have stated above under individual explanations on offer and acceptance.

2.         Intention to Create Legal Relations:

Both the parties to a contract must contemplate legal consequences. For example, a husband offering to take his wife out for a movie is not an agreement intended to create legal relations. Refer to the following case law as to what constitute an intention to create legal relations:

Case Law: Balfour Vs Balfour

A husband agreed to send his wife 30 pounds every month, while he was away. After a while, as he failed to pay the amount, his wife sued him for it. Held, she could not recover the amount, as it was yet another special agreement, common in couples and the parties did not contemplate legal consequences.

3.         Lawful Consideration:

            Consideration is the price paid for the promise of the other.

What constitutes a lawful consideration?

The Indian Contract Act defines a lawful consideration as follows:

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

The definition of consideration requires thus, in the first place, that the act or abstinence which is to be a consideration for the promise, should be done at the desire of the promisor; secondly, that it should be done by the promisee or any other person on his behalf and, lastly, that the act or abstinence may have been already executed or is in the process of being done or may be still executory, that is to say, to be performed in the future.

Consideration must be real:

Consideration need not be adequate to the promise but it must be of some value in the eyes of law. Courts will not make bargains for the parties to a suit and, if a person gets what he contracted for, will not make inquire whether it was equivalent to the promise that s/he gave in return. Though consideration need not be adequate, it must be real.

For example: A promises to give his new Rolls-Royce car to B, provided B will fetch it from the garage. Is there a valid contract?

No.

The act of fetching the car cannot by any stretch of imagination be called a consideration for the promise. In reality there is no consideration whatever.

Consider another fact situation, which formed the fact situation of a celebrated English case:

The defendant owed a sum of money under a promissory note to his father; he (the defendant), perpetually, day and night, complained to his father that he had not been treated equally with other children in the distribution of his property. Thereupon the father promised to discharge him from all liability in respect of the loan and the note, provided he would stop complaining, which the defendant accordingly did. The question was whether the defendant's promise to cease his complaints was a sufficient consideration to sustain his father's promise.

It was held that such promises were not binding, as there was no real consideration.

Moreover, as stated above in the definition of consideration, a consideration may be an act/abstinence or a promise. Similarly, it may also be past, present or future.

For example, Robert promises to supply on 20^th.November, 10 quintals of wheat for a consideration of Rs. 5000/-.

 

 

4.         Capacity of the Parties: This requirement of a valid contract is referred to as the competence of the parties to a contract.

The Indian Contract Act defines the following categories of persons who are considered to be competent to enter into valid contracts under law i.e. Those:

1.         who have attained the age of majority under the law that is applicable to them, i.e., 18 years under Indian law unless the court has appointed a guardian for the minor person or property, in which case it is 21;

2.         who are of sound mind, i.e., persons who at the time of  making the contract, are capable of understanding it and of making a rational judgment as to its effect upon his interests; and

3.         who are not disqualified from contracting by the law which applies to them.

In short, we can say that following categories of persons are eligible to contract:

• The major parties;
• The mentally sound parties and
• The parties not disqualified by law from contracting.

All of the above conditions have to be satisfied by all the parties for a contract to be valid. The Indian Contract Act also specifies that persons, who are usually of unsound mind but occasionally of sound mind, do, can make a contract when of sound mind. A corollary to this being that a person who is usually of sound mind, but occasionally of unsound mind cannot make a contract when of unsound mind. A contract entered into in contravention of all these provisions, i.e., a contract entered into by a person who is not competent to contract, is void.

What is the status of minors?

As regards minors, any contract made by a minor is void. Depending on the nature of the contract and the circumstances of the case, however, it may be possible for a minor to enforce an agreement under which s/he gets an interest, though the other party will not be able to enforce the minor's obligations arising out, of the contract.

Here we also need to study Section 68 of ICA, which states that:

"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 the supplies is entitled to be reimbursed from the property of such incapable person."

Decided cases have defined necessaries to include articles without which the particular minor, with regard to her/his fortune and circumstances, cannot reasonably exist, i.e., food, clothing, shelter, education, intellectual, moral and religious, and instruction in art or trade.

5.         Free Consent:

Both parties to a contract must enter it out of their free will and consent.

What does free consent imply?  

Free consent implies that the party accepting an offer and entering into a contract with another must have done so because s/he, without any force or pressure from anyone, whether physical or mental, agrees with the terms of the offer and wishes to establish the contractual relationship with the other party. The Indian Contract Act seeks to define the concept of free consent in terms of the absence of any illegitimate external factors, legally called ('vitiating factors') that may have forced a person to enter into a contract:

Consent is said to be “free”, when it is not affected by reasons such as:

• Coercion
• Undue influence
• Fraud
• Misrepresentation
• Mistake

Although, whenever, a consent has been obtained under any of the above factors, it can not be deemed to be a free consent and hence, makes the contract to suffer from some infirmity, but the actual effect of any of such factors on the existence of a contract varies from the kind of factor involved such as:

a.         If the contract has been entered into because of a mistake, the contract is void. A void contract means that it is a legal nullity, i.e., the contract is treated as if it never existed and the parties are in the same position as they would have been had they never entered into such a contract. On the other hand,

b.         If the factors vitiating consent are fraud, coercion, undue influence or misrepresentation, it renders the contract voidable rather than a pure void i.e., it gives the party whose consent has not been freely obtained to have the option of either accepting or rejecting the same. But until such a party rejects the contract on account of its being suffered from any of the above infirmities, the same shall continue to remain enforceable as regards the parties to the contract. To know more about it, it is pertinent to discuss each of the above vitiating factors individually in some more details…

 

A.)       What is coercion?  The term 'coercion' has been defined in the Indian Contract Act in Section 15 as below:

"Coercion" is the committing, or threatening to commit, any act forbidden by the Indian Penal Code, or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the, intention of causing any person to enter into an agreement.”

All acts prohibited by the IPC thus, fall within the ambit of 'coercion' and may include violence or the threat of violence to any person or his/her property. The threat of a lawful prosecution for an act actually committed by the person being threatened does not however, fall within the meaning of coercion, since it is not a forbidden act within the IPC. Only a threat to institute a false prosecution is forbidden under the IPC.

It may be something of relevance to note herein this context that under the English law, there is also a recognition of some other kind of duress what they call as ‘economic duress’ which usually involves one party taking advantage of the poor financial situation or condition of that of the other party so as to force him/her to accept poor terms in the contract.

Another form of economic duress however, may also be considered, when one party threatens to break an existing contract, thereby forcing the other party to enter into a contract. The right of the threatened party to Vitiate (reject) the contract, however, depends on the facts & circumstances under which such a threat has been issued. But then, it would probably not be allowed if a party had accepted the same without any protest on his or her part or if they had unnecessarily and without good cause, delayed their action to vitiate the contract or to claim the loss suffered by them.

Notwithstanding this distinction under the English law however, the Indian law makes no special distinction based on either the effect of the coercion or the nature of pressure applied, but defines coercion broadly and without any categorization as such to all acts that are forbidden by the IPC.

In Common law, if the pressure being applied is lawful and for a legitimate result, then it may not amount to duress, and therefore, may not be sufficient to vitiate the contract and render it voidable.

Finally, in English law, a party claiming vitiation of its consent will have to prove that the threats made to him/ her contributed to the decision on his or her part to enter into a particular contract. This is irrespective of whether the party would, even in the absence of such threats, have entered into the contract.

Whether coercion entails only vitiation of a free consent or a complete absence of consent:

            Within the meaning of law, coercion simply implies a vitiation of consent, i.e., no free consent and thus,             does not imply an absence of consent or so called, absence of consensus ad idem i.e. meeting of minds.

Assume that a person holds a gun to your friend's head and threatens to kill him/her unless you marry him. This is a clear case of coercion, but it does not mean that you and the person threatening you are not agreeing as regards the terms of the proposed contract. On the contrary, it is extremely clear. You ARE agreeing – but not voluntarily, and that is what vitiates the contract.

Thus, it would be, incorrect to say that in cases of coercion, consent is defeated, just because, the parties do not agree to the same thing in the same sense. Here the threatened party is aware as to the nature and terms of the contract and in fact, intend to enter into the contract, but only involuntarily. 'The only difference being that this choice of entering into the contract is constrained and it is made only in the belief that there is no feasible alternative open to it. Thus, is the rationale behind the object of law under which, in a situation like this, the threatened party is given the option to withdraw his or her consent and can make the contract voidable at his or her instance or option.

This concept can be further explained in a leading case as was decided by the Madras High Court entitled: Chikham Amiraju v. Chikham Seshamma.

In this case, a Hindu threatened to commit suicide and made his wife and son execute a release in favour of his brother in respect of certain properties that they claimed as their own. The wife and son signed and later contested the release on the ground that the same had been executed under coercion of her husband, threatening to commit suicide.

The question before the court to be decided was whether "threat to commit suicide amounted to coercion within the meaning of Section 15 of the ICA and thus, to determine, whether the release deed so executed under coercion, was voidable".

The judges had a difference of opinion firstly, to decide whether committing suicide is an act prohibited under the IPC, because:

1. The IPC specifically and only prohibits an attempt to commit suicide and not suicide itself just because, no punishment is prescribed for committing a suicide.
2. Unless an act is made punishable, it cannot be said to be forbidden.

In this case, the majority held that the person committing suicide is not punished under the IPC not because, the act of committing suicide is not forbidden, but for the simple reason that the person, once dead, cannot be punished.

Therefore, based on the above conclusion reached by the court, it was held in the case that suicide is also an act prohibited by the IPC, and as such, a threat to commit suicide would constitute coercion. 

 

It was exactly on the similar fact situations, that a question was asked in one of the previous year’s CLAT that sounded somewhat like this:

Savitri, Ramayya's wife, signed the transfer deed transferring her property in Ramayya's name because, Ramayya had threatened to commit suicide. She later on challenged the deed in a court of law on the ground that the same was voidable in law since, she had been coerced to do it. Applying the principle of law as laid down by the Madras High Court in the above case and our knowledge about all that constitutes coercion, we can also solve this question by applying the law that Savitri has right to make the above transfer deed as voidable on its being vitiated under coercion.

B.)       What is undue influence & what constitutes it? The term undue influence includes the less direct forms of pressure that can be exerted by a person to achieve a particular end. This type of influence can even exist within a parental relationship, where the relationship existing between the parties is such that one can naturally exert an influence over another. Exerting influence over another becomes "undue" only when it is unfairly exerted to achieve a specific result, like the execution of a particular agreement.

The difference between coercion and undue influence is as follows:

Coercion, more often than not, is physical and material, i.e., it is either the threat of some bodily harm or harm to property, or it is economic terms (actions punishable by the Indian Penal Code);

Whereas, Undue influence is relatively a more subtle form of influence or pressure exerted when two persons are in a relationship such that by virtue of such a relationship, one exerts a natural and normal influence over the other, and the person in the superior position makes undue use of this confidence or trust to obtain consent to an agreement to which the other person would not otherwise have consented. This usually involves an abuse of the existing relationship between the parties.

The Indian Contract Act defines 'Undue Influence' as follows:

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

(2)        In particular, and without prejudice to the foregoing principle, a person is said to be able dominate the will of another under some of the following conditions:

(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.

(c)        -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 evidence adduced to be unconscionable, the burden of proving that such contract was not induced by undue influence, shall lie upon the person in a position to dominate the will of the other."

 

As we already know that presence of an undue influence in a contract, makes it voidable at the option of the party whose consent has or had been so obtained. This is because the law wants the victimized party to have a choice to stay in or get out of the contract.

When a person can be deemed to dominate the will of another?  

It is generally said and has even been held judicially that one party can be in a position to dominate the will of another in all cases where: there is a trust, confidence and inequality in the relationship between them.

What is a fiduciary relationship?  

A fiduciary relationship is one where a person places confidence in, or trusts another, whatever the basis or origin of this feeling may be. Fiduciary relationships may include a variety of relationships ranging from the relationship between a doctor and patient, a solicitor/ lawyer / advocate and a client, a person and his managing agent, relationship between a person from whom advice is expressly sought and the person seeking the advice, relationship between a spiritual adviser and devotee, relationship between a parent and child or between a guards list is not exhaustive. In fact, in addition to any of the relationships listed here, any other relationship in which one person places confidence and trust in another, is a fiduciary relationship. To put it very, very simply, any relationship of trust is a fiduciary relationship — it is not necessary that there be an existing relationship between two people, such as that of a parent and child — even if two complete strangers are interacting in order to enter into an agreement, of whom one places his trust in another, if the other accepts such trust, a fiduciary relationship is created.

Imagine that Roshni is a devotee of Sri Yuga Yogi and as such reposes great confidence in him, trusts him implicitly and is heavily influenced by him. Imagine also that being under his influence; Roshni decides to gift her land to his ashram. This seems to be a clear case of a fiduciary relationship where Sri Yuga Yogi has obtained Roshni’s consent to the gift by abusing the confidence placed in him by her. Thus, it may be said that her consent has been obtained through undue influence.

The Indian law on undue influence is largely based on Common law principles, which have a similar category of 'undue influence'.

Let us examine a celebrated case, Tate v. Williamson (1866), where the Common law principle has been clearly laid down. In this case, a student, being estranged from his father, asked his uncle advise him on the means to repay his debts. His uncle, suffering ill health, deputed his nephew to do the same. During the course of the conversation between them, the student said that he would be willing to sell part of his estate. The nephew, on hearing this, offered to buy it for 7000 Pounds. Before actually executing the sale contract, the nephew got the estate valued by a surveyor, as per which the value of the land was 20,000 Pounds, but he did not disclose to the student. The sale went through, and after one year, the student died of excessive drinking. Now the issue was whether to set aside the sale.

The Court held that the purchase must definitely be set aside. The student asked the nephew for some advice, thereby establishing a confidential relationship between them. This confidence that the student reposed in the nephew placed an extra duty on the shoulders of the nephew to disclose all matters connected to the transaction (i.e. the purchase of the estate), including those, which he may not, under normal circumstances, have to disclose. It was held that "whenever two persons stand in such a relationship that, while it continues, confidence is necessarily reposed by one, and the influence which naturally grows out of that confidence is possessed by the other, and this confidence is abused, or the influence is exerted to obtain an advantage at the expense of the confiding party, the person so availing himself of his position will not be allowed to retain the advantage, although the transaction could not have been impeached if the relationship did not exist." Thus, the difference between the first and second strands of this sub clause is that while a person, who is in a fiduciary relationship with another, necessarily has some real authority over that person a person having real authority over another, need not necessarily be in a fiduciary relationship with that person.

Study the following illustration:

A young man in his teens is influenced to such an extent by an elder successful man that he incurs large liabilities to another person. This is definitely a case where the consent of the young man to incur these liabilities is vitiated by the undue influence exercised over him by the elder man, who was in a position to dominate his will. There is, however, no fiduciary relationship between the parties, and there is no extra duty that the elder man owes to the younger man by virtue of the nature of the relationship between them.

C.)       Fraud:  The Indian Contract Act defines Fraud and its constituents as below:

"Fraud means and includes any of the following acts done with 'intent to deceive' or to induce person to enter into a contract-

(1)        The suggestion that a fact is true when it is not true and the person making the suggestion do not believe it to be true;

(2)        Active concealment of a fact by a person who has knowledge or belief of the fact;

(3)        Promise made without any intention of performing it;

(4)        Any other act fitted to deceive;

(5)        Any such act or omission as the act specially declares to be fraudulent,"

As is clear from the above definition, acts falling within 'fraud' are varied and include all methods whereby, one person can deceive another besides, also includes any act that may not fall within the first three clauses but which is 'fitted to deceive'.

In fact, there is a very thin line of distinction between misrepresentation and fraud in the sense that misrepresentation is generally innocent just because, the person who makes it (i.e. one who makes the representation) invariably believes it to be true. Whereas, imagine a situation wherein, a representation made by a person who himself does not believe it to be true, but he still makes it just to mislead the person to whom, the representation is made, so as to induce him into doing something in consequence of that, is said to have committed a fraud and that is why referred to as fraudulent misrepresentation. A very important element in fraud thus, is the intention of the person making the representation. Unlike in misrepresentation (where a representation is innocently made), in fraud, the guilty person should not only have made a misrepresentation, but also should have done so with the intention or the state of mind to deceive the person to whom it was addressed.

Let’s now see what the contract law says about the term ‘fraud’:

Section 17(1): The first sub-clause is addressed to false representations that are made without belief in their truth, in order to induce a person to enter into a contract or with the intention to deceive that person. Thus if a person makes a false representation, honestly believing it to be the truth, it will not constitute fraud under this clause. Principles given in the entrance papers are usually based on this clause.

Section 17(2): The second sub-clause deals with active concealment of a fact by a person having knowledge of or belief in the fact. This is an area requiring careful study. Silence in all circumstances will not qualify as fraud. It is an accepted principle of law that each person entering into a contract ought to check such facts as may be checked. Thus, in a business transaction where one person has some additional information regarding a material fact, which may affect the consent given by the other person, s/he is not under a duty to disclose that information. While silence regarding a material fact may amount to misrepresentation (see previous section), it will not constitute fraud. Thus, as per the example given in the definition Section, when A is selling an unsound horse to B and keeps silent as regards the quality of the horse, the act does not amount to fraud.

Explaining the above point, here is the relevant case law as decided by the Supreme Court, Shri Krishan V. Kurukshetra University (1976). In this case the facts were as follows:

A candidate, having knowledge of the fact that he had an attendance shortage, did not mention this fact in the examination form. The University instituted proceedings against him for having committed fraud.

It was held by the Supreme Court that it was the University's duty to verify the forms and to call for information in cases requiring clarification. Thus, the University, having failed to do so, cannot claim that the student committed a fraud by not disclosing the fact. Silence regarding a material fact amounts to fraud where it is 'active concealment'. Say for example, refer the following points:

(a)        When the silence itself is deceptive.

Even mere silence can be deceptive in certain situations; imagine a situation where, before entering into a contract for the purchase of a house, the purchaser says to the seller, "if you say nothing and maintain silence, I will assume that the house is structurally sound and free of defects", In this situation, the seller's silence shall amount to agreeing that in fact the house structurally sound and free from all defects. If this is not the case, and the house is structure weak, and has seepage problems, then the seller's silence has in fact deceived the buyer, a therefore constitutes fraud.

(b)        When a person not bound by a duty to disclose, nevertheless, discloses part of a particular material fact, and keeps silent about the remaining part, s/he will have committed a fraud The reason behind this is that in the absence of a duty to disclose, if a person chooses' disclose something, then s/he will be under a duty to disclose that particular matter entirely, not, the law considers that a fraud has been committed.

(c)        When the person maintaining silence has a duty to speak arising from either of the following:

1.         A fiduciary relationship, i.e., where the relationship between the persons contracting is such that one places confidence and trust in the statements of the other, e.g. in a contract between a parent and child.

2.         Uberrima fides contracts (contracts made in good faith) i.e. when one party, having no means of ascertaining the facts, is compelled to rely on the statement of another' e.g., in contract between an insurance –company and the insurer (the person taking the insurance), the insurance company is compelled to rely on the facts provided by the person taking the insurance as the Company has no reasonable and independent means of checking them.

Sometimes a change in circumstances may also render a representation false. A person makes representation regarding a material fact, which is true at the time when the representation is made. After t. this, a change in circumstance occurs, consequent to which the representation is rendered false, e.g. you make an honest statement to a person wishing to buy your car that the car is in perfect condition. Two months after this your car is involved in an accident, and is damaged. If you continue with the contract without disclosing the change of circumstances, you will have committed a fraud. Thus, when a representation is rendered false by a change in circumstances, unless the person who has made the representation elec.' communicates the change in circumstances, s/he will have committed fraud.

The third sub-clause of the Definition Section covers those situations where a person assumes a responsibility through a contract without any intention of actually fulfilling it, e.g., a person contracts with another for the purchase of a house, but has no intention of paying the purchase price.

The fourth and fifth sub-clauses of the definition Section are general provisions that are broad enough to include all those acts that in principle satisfy the requirements of a fraudulent transaction, and all those acts that are declared fraudulent under any other statutes or legislation.

D.)       Misrepresentation: Misrepresentation simply means a mis-statement, i.e., a statement that is incorrect' Misrepresentation is defined in the Indian Contract Act as: "Misrepresentation means and includes-

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

(2)        any breach of duty which, without any intent to deceive, gains an advantage to the person committing it, or any one darning under him, by misleading another to his prejudice, or to the prejudice of any one claiming under him;

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

 

When a person makes a statement based on some information received from a trustworthy source and not from a third party, i.e., not from hearsay, it is a warranted statement. In certain situations, where the representation is such that the other party accepts it as a term of the contract, the disadvantaged party can avoid the contract and also claim damages on the basis of such breach.

Breach of duty involves those situations when the breach of a person's duty misleads the other to his disadvantage and brings some advantage to the person breaching the duty. Consider the facts of a decided case where a person, not having time to read-a-deed, signed it on being given the impression that it has incorporated certain already agreed upon terms. The deed turned out to contain a release in the favour of the second party. The first party sought to avoid this.

The Court held that though the second party was under no obligation to disclose the contents of the deed, but the moment the first party placed confidence in the second party, it became their duty to disclose the contents of the deed. Non-disclosure of the same was held to be misrepresentation.

If a party, without intention and innocently, makes a representation that makes the other party believe mistakenly that the subject matter is of a different nature or quality (similar to what was studied under mistake), then such a representation qualifies as a misrepresentation.

A party could misrepresent either through a specific statement regarding the subject matter or a fact material to the agreement or through suppression of important facts (as in indicated in clause [3]). It is pertinent to note that a representation by a seller praising what he is selling may not be a misrepresentation (unless it also constitutes a misrepresentation as to the subject matter), an expression of opinion by a person also may not be a misrepresentation (unless the person to whom the statement is made is not in possession of all facts, in which case, it would appear as if the person making the statement was implying awareness of certain facts that justified the statement of opinion).

It is pertinent to point out here that Section 19 of the Indian Contract Act specifically provides that:

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

Thus, unless a party’s consent is based on or because of the misrepresentation, the party cannot reject the contract.  In addition to this, it must also be noted that the Indian contract Act also provides for an exception to the general rule of voidability of the contract on the ground of misrepresentation. This could happen in situations wherein, the party whose consent has been secured by such misrepresentation or by any other so called fraudulent ways, has had had the means of discovering the truth with ordinary diligence."

Thus, if a representation is such that the person to whom it was made, had the means to discover the truth with ordinary diligence (i.e. with no special effort except acting on the means readily available), then the party cannot rely on the misrepresentation to avoid the contract. This principle has further evolved in Common law to mean that a person, who relies on the available means to discover the truth and fails, cannot rely on the misrepresentation to avoid the contract. On the other hand, if the person, though having the means to discover the truth, relies instead on the representation made by the person, s/he may rely on misrepresentation to avoid the contract. This is because the courts do not think justified to allow a person to escape the consequences of his statement by saying that since the other person had an opportunity to discover the truth s/he ought not to have relied on the representation.

 

E.)       Mistake:  As we already know that it is the consensus-ad idem or meeting of minds that is vitally required to conclude a valid contract. Sometimes, this meeting of minds between the contracting parties fails just because of some mistake on their part either with respect to the essential terms of the contract or sometime time due to a misunderstanding as to the actual subject matter of the contract.

The Indian contract Act states about ‘mistake’ in the following words:

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

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

What kind of mistakes as to a contract would make it void?

 a.)       A mistake as to the existence of, or the title to, the subject matter of the contract: This may happen when the subject matter ceases to exist (without the knowledge of either party), or when the ownership of the property which is the subject matter of the agreement, already (without either the purchaser or the seller being aware of the same) or when the seller of a particular property which is the subject matter of the agreement, is not actually the owner of the property - for example, when the property has been appropriated by the Government without the

Knowledge of the seller.

b.)        A mistake as to the quality of the thing contracted for. This would render the contract invalid if the difference 'aqua* was such that the thing intended to be contracted for and the things contracted for and the thing actually contracted for, were essentially different. Thus, it is sometimes said that while a mistake as to substance may render a contract invalid, a mistake as to the quality of the thing contracted for, need not necessarily do so. Consider the facts of a decided case: Oscar Chess, Ltd v. Williams (1957): a person buys a car from another person both believing that it is a 1948 model. In fact, it is a 1939 model. This mistake, though fundamental to the contract, is only a mistake as to an attribute or a quality as opposed to a mistake as to the substance. Therefore, the contract was held to be valid. Because of the unclear distinction between the terms "substance’ and ‘quality` warily', however, this area is open to interpretation by the courts, and one cannot state with authority any one outcome.

c.)        Mistake regarding a fundamental assumption: Established cases have tried to define this category by mentioning that a fundamental assumption is one which 'both parties must necessarily have accepted in their minds as an integral and essential element of the subject matter of the contract.

In conclusion, only the following contracts made under a mistake are void:

1. contracts that have been entered into when both parties are under a mistake  as to a matter of fact essential to the contract, and
2. contracts that have been entered into when both parties are under a mistake as to any law not in force in India.

6.         Lawful Object:

Under the provisions of Indian contract Act, a lawful object or consideration for which an agreement has been made shall be considered as lawful unless;

-           it is forbidden by law; or

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

-           is fraudulent; or

-           involves injury to the person or property of another; or

-           the court regards it as an immoral or the one that is opposed to public policy.

In short, we can say that the object (purpose) for which the agreement has been entered into must not be fraudulent/illegal/immoral or opposed to public policy. For example, Somu agrees to pay Rs. 50000/- if Kalu gets a defamatory article published about Monu in his magazine.

Thus, every agreement or contract of which either the consideration or object is unlawful shall be void…

What constitutes the ‘object’ of an agreement?  

Well, the object of an agreement is basically the purpose or design for which the agreement is being entered into or in other words, it can also be described as the reason for the agreement. This is different from the consideration for the contract, which is actually, the price that you pay for buying somebody’s offer once you accept the same in order to get what you want. Sometimes, the object and the consideration of the agreement are the same, but they may also be distinct and separate.

Understand this point from one of the historical cases named: [C.S. Rao v. K. Raja Rama Mohan Rao (1952)] wherein, a person borrows some money to get his daughter married off and if the daughter is a minor, such marriage is prohibited under the Child Marriage Restraint Act. While the consideration for the contract is the loan which is being borrowed whereas, the object of the contract is the marriage of the minor daughter which, if allowed and enforced, would defeat the purposes of the Child Marriage Restraint Act. This may also fall under the category of acts that are opposed to public policy. Thus, either way, the contract is void for having an unlawful object.

Similarly, in the same context, wagering agreements (to make a bet) are unenforceable, i.e., you cannot claim relief on the basis of a wagering agreement because; it is not recognized as an enforceable contract under the Indian Contract Act.

7.         Writing and Registration:

• It must be clearly understood that contracts need not necessarily be in writing.
• It may be oral.
• It may even be implied.

However, Indian Contract Act lays down that in certain special cases, for a contract to be valid, it must only be in writing. Besides, it also needs to be registered.

Thus, for example:

An agreement for a sale of immovable property must be in writing and registered.

8.         Certainty:

To ensure that a contract is valid, the terms of it must be certain. In other words “agreements, the meaning of which is not certain or capable of being made certain are void”.

For example, Mr. Sharma agrees to sell his car to Mr. Mukesh at “best competitive price”, since the price is not clearly ascertainable in this case, the agreement is void.

9.         Possibility of Performance:

The contract Act lays down that “Agreement to do an impossible act is void”.

For example

Nagabushan agrees to bring a dead body alive in return for a core of rupees. The agreement is not enforceable.

10.       Not Expressly Declared Void:

The Contract Act has expressly declared certain agreements to be void.

Following are the cases:-

• Agreement in restraint of marriage.
• Agreement in restraint of trade.
• Agreement in absolute restraint of legal proceedings. Thus, an agreement should not be expressly declared void by the Act.

Remember

• A valid contract is enforceable by both parties.
• A valid contract gives rise to rights and duties.

II.        VOIDABLE CONTRACT:

The Contract Act defines voidable contract as, “an agreement enforceable by law at the option of one or more of the parties there to, but not at the option of the other/others”.

Generally, a contract becomes voidable, when free and voluntary consent of a party to the contract is affected. Such a party can actually set aside the contract within reasonable time & before third parties acquire title to the subject matter of the contract.

Rahat threatens to shoot Sahil if Sahil refuses to sell his 15 acres of land to him for Rs. 5 lakhs. The contract has been effected using coercion and is voidable (cancelled) at the option of Sahil.

Note:

There are other circumstances when the contract becomes voidable:

• When a contract contains reciprocal promises, and one party to the contract prevents the other from performing his promise, then the contract becomes voidable at the option of the party so prevented.
• When a party to the contract promises to do a certain thing within a specified time, but fails to do it, then the contract becomes voidable at the option of a promises provided, time is essence of the contract.

III.       VOID AGREEMENT:

            An agreement not enforceable by law is said to be void.

This happens, when one of the essential elements of the valid contract, except that of free consent is absent in a contract.

 

Example:

An agreement with a person who is mentally unsound is void ab-initio.

OR

An agreement made without consideration is void.

IV.       VOID CONTRACT:

This is a contract, which was originally valid, becomes void due to circumstances beyond the control of the parties. This is termed as Supervening impossibility or doctrine of frustration.

Cases When a Valid Contract Turns Void

(a)        Upon cancellation of a voidable contract

(b)        Upon a contract becoming subsequently void

(c)        Upon one of the parties becoming mentally unsound

(d)        Upon one of the party’s demise [Only in the case of personal contract]

(e)        Upon one of the parties becoming enemy alien

(f)        Upon the destruction of subject matter in a contract

(g)        Upon change in legislation by the government.

In all the above cases we term it as a void contract.

Note: Commercial impossibility does not make a contract void. For example, A agrees to supply 100 bags of cement @ Rs. 180/bag. Now if the price of cement goes up, A cannot excuse himself from the contract. He is bound to supply cement at the above-mentioned rate, although he might incur losses by doing so.

Let’s now redo contract law with the help of relevant case law study besides referring to relevant sections of Indian contract act-1872.

Definition of Offer [Sec 2(a)]

“A person is said to have made a proposal, when he signifies to another his willingness to do or to abstain from doing anything with a view to obtaining the assent of that other to such act of abstinence”. Thus an officer involves.

a.         It must be made by one person to another person.

b.         It must be an expression of willingness to do or abstain from doing something

c.         It must be made with a view of obtain the consent of the other person to the proposed act or abstinence.

General Rules Pertaining to a valid Legal Offer:

Rule 1:            An offer must give rise to legal consequences. It follows that parties must enter an agreement for the purpose of enforcing it in a court of law. If the agreement is devoid of its legal effect, it is not a contract at all.

Case Law: BALFOUR Vs BALFOUR

A husband agreed to send his wife 30 pounds every month, while he was away. After a while, as he failed to pay the amount, his wife sued him for it. Held, she could not recover the amount, as it was yet another social agreement, common in couples and the parties did not contemplate legal consequences.

Rule 2:                        Mere abatement of intention is not an offer.

Example:         Rajeev in the course of his conversation mentioned to Rakesh, that he plans to give Rs. 10 lakhs to anyone marrying his daughter with his consent. The above statement is merely an intention, which should not be mistaken for an offer.

Rule 3:                        A mere supply of information does not tantamount to an offer.

When a person supplies information or merely invites offers, he cannot be said to have made an offer.

Case Law:       HARVEY Vs. FACEY

X sent a telegram to Y asking, “will you sell Bumper Hall Pen? Quote the lowest price”. Y replied through a telegram “Lowest price for Bumper Hall Pen is 900 pounds”. X replied stating “I agree to buy Bumper Hall Pen fro 900 pounds”. In a suit brought by X against Y, the Court held that quoting of price by Y is a merely a supply of information and not an offer.

Rule 4:                        A general offer must be distinguished from a specific offer.

A general offer is an offer to the world at large and not to a particular person.

Case Law: CARILL Vs CARBOLIC SMOKE BALL COMPANY

Carbolic smoke Ball Company, a pharmaceutical company, was interested in testing a new drug in the market. They advertised in the paper promising a reward of 100 pounds to anyone, who used the drug and contracted the disorder called influenza. One Mrs. Carlill bought it and used it as per the instructions printed on the label. Upon contracting influenza, she contacted the company to claim the reward.

The company refused to pay her the promised sum. The Court held that the company was liable to pay Mrs. Carlill, as there arose a contract between the lady and the company, as soon as she fulfilled the condition.

Rule 5:                        An offer must be communicated to the offeree.

                        An offer is effective only when it is communicated to the offeree.

Until the offer is made known to the offersee, there can be no acceptance and no contract.

Case Law: LALMAN Vs GAURI DATT

A master sent his servant in search of his missing nephew. In the meantime, the master advertised in the newspaper, promising a reward of Rs.500 to anyone who traces the boy. The servant brought back the boy. After a couple of days the servant came to know about the reward and claimed it. Held, that the servant was not entitled to the reward, for doing anything in ignorance of an offer cannot be constructed as acceptance.

Rule 6:                        Terms of the offer must be certain.

To constitute a lawful offer, the terms of the offer must be definite and not vague and ambiguous.

Example:         X offers to give a lavish dinner to Y upon Y’s completion of a certain work.

                        The terms of the offer being vague, it does not give rise to a lawful offer.

Rule 7:                        An invitation to an offer is not an offer:

                        An offer must be distinguished from an “invitation to receive offer”.

Such invitations for offers are therefore, not offers in the eyes of law and do not become agreements by their acceptance.

Example:         Questions goods on display with prices marked, auction sale.

All these are cases of invitations to receive offer, hence if a customer asks for goods/makes an offer, the seller is free to accept the offer or not.

Contract by Post:

Contracts through post differ from contracts made in person. When parties sit across a table and enter into a contract, the offer and acceptance are almost instantaneous and completed then and there. So, the question of revocation of an offer and its acceptance respectively can take place on the spot. However, when the same has to take place by post say, by presuming, A is the offeror and B is the offeree/acceptor, following five situations may arise in such a case with regard to the sending of an offer and its acceptance on the other side, viz.

Situation No.1: A posts a letter of offer to B. B can accept the offer, when the letter of offer reaches him. Offer should be communicated to the offeree.

Situation No.2: B posts a letter of acceptance. Now, B has done whatever is necessary and within his power to conclude the contract. The letter is now out of the reach of B. So, a contract has come into existence of which B alone can enforce against A.

Situation No.3: The letter of acceptance reaches A. Acceptance having been communicated by B. A can now enforce the contract against B.

Note: Even if the letter of acceptance doest not reach A, B can enforce the contract against A, just because, the moment B posts his acceptance; it remains out of his reach now to do anything about it.

Case Law: Household Fire and Carriage Accident Insurance Company Ltd. Vs. Grant

The defendant applied for allotment of shares in a company. This was the offer. The Company allotted shares to the defendant and the letter of allotment (i.e. acceptance of the offer) was posted. The letter did not reach the defendant. Later on, the defendant was called upon to pay for the shares. It was held that the defendant had to pay for the shares even though; the letter of allotment of shares had not reached him.

Situation No.4: Revocation of Offer: If A wants to revoke the offer, he should do so before B can enforce the contract against A. B gets a right under the contract the moment B posts the letter of acceptance. Hence, for the revocation of offer to be effective, the letter of revocation of offer should reach B well before B posts the letter of acceptance.

Situation No.5: Revocation of Acceptance: If B wants to revoke the acceptance; he should do so before A can enforce the contract against B. Since,  A gets a right under the contract, when the letter of acceptance reaches A. Hence, for the revocation of acceptance, the letter conveying the same should reach A, earlier than the letter of acceptance itself. In other words, the letter of revocation of acceptance should overtake the letter of acceptance.  

Rules Pertaining to Acceptance:

(1)        Acceptance must be absolute and unqualified.

In order to be legally effective, it must be an absolute and unqualified acceptance of all the terms of the offer. Even the slightest deviation from the terms of the offer makes the acceptance invalid.

(2)        Acceptance must be given only by the person to whom the offer has been made.

Case Law: Boulton vs. Jones

A sold his business to the manager V without disclosing the fact to his customers. C, a customer, who had a running account with A, sent an order for the supply or goods to A by name. B received the order and executed the same. C refused to pay the price held that there was no contract between B and C because C never made any offer to B and as such C was not liable to pay the price to B.

(3)        Silence can never amount to acceptance.

Mental acceptance or quiet assent not evidenced by words or conduct does not amount to a valid acceptance; and this is so even where the offeror has said that such a mode of acceptance will suffice. Acceptance must be communicated to the offeror, otherwise it has no effect.

Case Law: Felthouse Vs Bindley

F offered by a letter to buy his nephew’s horse or $30 stating “If I hear no more from you, I shall consider the horse mine.” The nephew sent to reply as suggested by F, but told B his auctioneer, not to sell that particular horse, as he intended to sell that horse to F. B sold the horse by mistake. It was held, F could not succeed because his nephew had not communicated his acceptance to him.

(4)        Acceptance must be given within a reasonable time and before the offer lapses.

To be legally effective, acceptance must be given within the specified time limit, if any, and if no time limit is stipulated, acceptance must be given within a reasonable period of time.

CONSIDERATION

Definition of the Term “Consideration”

Sec.2 (d) of the Indian Contract Act, defines consideration as follows “When at the desire of the promisor, the promisee or any other person on his behalf, has done or abstained from doing, or does or abstains from doing, something, such act or abstinence or promise is called a consideration for the promise.”

                                               

CONSIDERATION

           

                        It may be                                 It may be past,                           it need not be

                        furnished by                            present or future                            adequate

                        any person                               future              

At the desire of                                    A stranger to a                         It must be something

the promisor.                           contract cannot                               of value

                                                sue.

Thus consideration consists of an/a

(a) Act                                     (b) Abstinence                         (c) Promise

Which may be rendered in the

(a) Past                                     (b) Present                               (c) Future

Example: X promises to deliver a piece of furniture to Y and Y promises to pay Rs. 5,000 on delivery. In this case, the consideration for each of these promises is as under:

PROMISE	CONSIDERATION
For X’s promise	Y’s promise to pay Rs. 5,000 on delivery
For Y’s promise	X’s promise to deliver furniture

I.          Essentials of a Valid Consideration:

(1)        Consideration must move at the desire of the promisor. Thus an act done voluntarily by the promisee or at the desire of the third party will not constitute a valid contract.

Example: A voluntarily rescues B’s son from droning in the river. Here, A cannot claim remuneration from B, because he has not done it at B’s request.

(2)        It may be furnished by any person, not necessarily the party to the contract.

Case Law: Chinnaya Vs Rammaya

An old lady transferred a property to her daughter. In return, she wanted her daughter to pay an annuity to her uncle (i.e.) the old lady’s brother. Accordingly, the girl, made a deed agreeing to pay a particular sum to her uncle. After a while, she stopped paying the sum. Her contention was that since her uncle had not given her any consideration, she was not obliged to hold on to her promise. The Court however held that consideration had moved from her mother.

(3)        A stranger to a contract cannot sue.

A person may be a stranger to the consideration, but he should not be a stranger to the contract. This is referred to as the principle of “privity of contract.”

(4)        Consideration may be past, present or future.

a.) Past Consideration: When something is done or suffered before the date of the agreement, at the desire of the promisor, it is called past consideration.

Example:         Shyama Shastri teaches music to Bala Murugon’s son at the latter’s request from January to July. In September, Bala Murugan promises to pay Shyama Shastri a sum of Rs. 5000 for his services. The music lessons given by Shyama Shastri will be past consideration.

b.) Present Consideration: Consideration which moves simultaneously with the promise is called as present consideration.

Example:         Harish sells and delivers a cycle to Rakesh, who promises to pay on the 1^st of the next month. The consideration moving from Harish is present consideration, which is moving simultaneously with the promise of Rakesh

c.) Future Consideration: When the consideration on both sides is said to move at a future date, it is called as future consideration.

Example:         Satish promises to sell and deliver 10 bags of wheat to Kamesh for Rs. 8000 after a week, upon Kamesh’s promise to pay the greed price at the time of delivery.

(5)        Consideration must be ‘something of value’

            Consideration must be real and competent. It should not be

1. Physically impossible
2. Legally impossible
3. Uncertain
4. Illusory

(6)        Consideration need not be an adequate one.

            Thus, a car worth 1 lakh may be sold for even Rs. 25000/-

Is the consideration always a condition precedent to a valid contract?

Note the following exceptions, what we call as contracts without consideration:

II.        Contracts without consideration:

Generally a contract without consideration is void however, in certain exceptional cases; a contract may be valid even if it is not supported by a consideration.

Following are the exceptions to the general rule “No consideration, No contract”.

a.)        Agreement made on account of natural love and affection.

            An agreement made without consideration is enforceable if, it is

• Made between parties in near relationships. (Ex: Husband and wife/Brother and sister).
• Out of love and affection.
• In writing
• Also registered

                        Case Law: Venkataswamy vs. Rangaswamy

            An order brother on account of natural love and affection, promised to pay the debts of his younger brother. The agreement was in writing and registered. Held, that the wife could not enforce the agreement because it was not made out of love and affection.

B.         Agreement to compensate for past voluntary service:

A promise made without consideration is valid, if it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or done something which the promisor was legally compelled to do.

            Example: Seema rescued Vishnoo from drowning in the river. Raghu, Vishnoo’s father, in gratitude for Seema’s service, promises to pay Rs. 5000/- to Seema. This contact between Seema and Raghu is valid, although it is not supported by consideration.

 

C.        An agreement to pay time-barred debt:

Where there is an agreement, made in writing and signed by the debtor or by his authorized agent, to pay wholly or in part a debt barred by the law of limitation, the agreement is valid even though it is not supported by any consideration. A time barred debt cannot be recovered and therefore, a promise to repay a debt is without consideration, hence the importance of the present exception.

CAPACITY OF PARTIES

Every person is competent to contract who is

            A major                                  of sound mind                  not disqualified by any law

Minor’s Agreements:

1.         An agreement by a minor is absolutely void and inoperative as against him. Where a minor is charged with obligations and the other contracting party seeks to enforce those obligations against minor, the agreement is deemed void ab-initio.

            Case Law: MOHIRIBIBI Vs DHARMODAS GHOSH

A minor borrowed a sum of money after mortgaging his property. The mortgagee moved the Court for repayment of the sum borrowed. The Privy Council held that money advanced to a minor could not be recovered because agreement with a minor is void.

2.         Agreement beneficial to minors are Valid Contracts:

However, in a contract, if a minor is a beneficiary, the contract is valid and enforceable.

            Case Law: RAGHA VA CHARIAR Vs SRINIVASA

In this case, a minor was the morgagee. The minor had lent money to an adult mortgagor. The Madras High Court held that where a minor is a beneficiary, the contract would be enforced in favour of the minor.

3.         Minor’s Contract cannot be ratified:

Ratification means subsequent acceptance or adoption of an act/agreement. Since a minor’s agreement is void ab-initio, the minor on his attaining majority cannot ratify the agreement entered during his or her minority.

            Case Law: ARUMUGAM Vs DURAISINGA TEVAR

A minor had borrowed money during his minority. Upon attaining majority, he executed a promissory note in favour of the creditor to repay the borrowed sum. Held that the promissory note was unenforceable, as ratification of a void agreement was not possible. Note: The loan transaction between the minor and the creditor was a void agreement.

4.         Rule of Estoppel Does Not Apply to Minors:

Estoppel means, “When one person has by words spoken, written or by conduct, leads another one to believe certain that to be true, and the latter acts upon such belief, he is prevented from denying the truth of that thing. A minor is not estopped from setting up the plea of minority. In other words, he may plead infancy to escape from a liability incurred under any contract.

            Case Law: LESLIE Vs SHEILL

A minor boy borrowed funds, falsely representing that he was a full age. Later he pleaded before the court that he was only a minor and hence not in a position to repay. The court held that the rule of Estoppel does not apply to minors and held that the boy was not liable.

5.         Minor’s Liability for Necessaries:

When a minor is supplied for the necessaries of life, by another person, then the person, who has so supplied such necessaries to the minor, is entitled to be reimbursed from the property of the minor.

            Note:   The above rule is applicable to a person of unsound mind also.

6.         Minor as a Partner:   

Minor, being incapable of contracting, cannot become a full-fledged partner. However, Sec. 30 of the Indian Partnership Act permits a minor to be admitted to the benefits of a partnership firm.

7.         Position of Minor’s Parents:

The parents of a minor are not liable for agreement made by a minor unless, the minor acts on behalf of the parents.

8.         Minor and insolvency

            A minor cannot be declared insolvent, as he is not personally liable for his debts.

9.         Minor and agency

A minor can be appointed as an agent. But then, only the principal will be responsible to third parties for the acts of his minor agent. However, the principal cannot hold the minor agent personally liable for any wrongful acts.

10.       Minor as a member of a company

A minor cannot become a member of a company, as he is incompetent to contract. He cannot purchase shares in the company. Where he inherits shares, the name of the guardian will be entered in the Register of Members.

DISQUALIFIED PERSONS who cannot contract under the ICA-1872:

1.         Alien enemies: A person cannot enter into contracts with alien enemies.

2.         Convict: During the period of imprisonment, a convict is incompetent---

            (a)        to enter into contracts

            (b)        to sue on contracts made before conviction

3.         Insolvent person

            An insolvent person is incompetent to contract with respect to his property.

4.         Foreign Sovereigns and Ambassadors

Although, they can enter into contracts and enforce them, but they cannot be sued in our courts without the permission of the Central Government.

 FREE CONSENT

Concept of Free Consent

       Coercion       undue influence         fraud              Misrepresentation        mistake

a.)        Coercion:

Sec.15 of the Contract Act defines coercion as “committing or threatening to commit, any act forbidden by the IPC, or the unlawful detaining or threatening to detain, any property with the intention of causing any person to enter into an agreement.”

Effect of Coercion:

A contract brought about by coercion is voidable at the option of the party whose consent was or has been obtained by coercion.

Can a threat to commit Suicide Amount to Coercion?

Yes, in the case “Chikkam Amiraju Vs Chikkam Seshamma, (a case already discussed in the preceding pages), in which the Madras High Court answered the question in the affirmative while holding that a threat to commit suicide does amount to coercion. In that case a person, by a threat to commit suicide, induced his wife and son to execute a release deed in favour of his brother in respect of certain properties, which they claimed as their own. The transaction was set aside on the ground of coercion.

b.)        Undue Influence:

            “A contract is said to be induced by undue influence where---

(i)         the relation subsisting between the parties is of such a nature that one of the parties is in a position to dominate the will of the other; and

(ii)        he uses the position

1. to obtain an unfair advantage over the other.”

Case Law: MANNU SINGH VS UMADA TT PANDEY

A spiritual advisor told his disciple that if the latter give away all his properties to the Guru, he would attain “Mukti”. The disciple accordingly x/made out a release deed. Later, he sought to set it aside and the Court held that the contract was affected by undue influence.

Effect of Undue Influence:

When consent to an agreement is caused by undue influence, then the agreement constituting such a contract is voidable at the option of the aggrieved party.

c.)        Fraud:

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 the contract.

Fraud includes any of the following acts:

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

Example: P sells to Q a chain representing it to be a gold chain, while it is actually not. It amount to fraud.

1. The active concealment of a fact by one having knowledge or belief of the fact.

Example: X, a furniture dealer, conceals the crack in a furniture and sells it to Y. This would amount to fraud through active concealment.

1. A promise made without any intention of performing it   

Example: A man purchased some goods on credit knowing fully well that he will not be able to pay for it.

1. Any other act fitted to deceive

Example: It covers those acts which are meant to deceive but are not covered under the above mentioned clauses.

1. Any such act or omission as the law specially declared to be fraudulent.

Example: Under the Transfer of Property Act, if a seller fails to reveal to the buyer any material defect of which he is aware, it amounts to fraud.

d.)        Misrepresentation:

A representation when wrongly made though, innocently is termed as misrepresentation.

Example:         A sells a camera to B, genuinely believing it to be of Japanese make. However, it turned out to be a Taiwan make. The buyer gets the right to cancel the contract, as B’s consent has been affected by misrepresentation.

Note:   In the above example, had A intentionally made the statement, it would have turned out to be a case of fraud.

Fraud & Misrepresentation – A Comparison:

In both cases, the representation having been so made, is untrue.

However, in the case of fraud, the intention to cheat is willful, whereas, in the case of misrepresentation, the wrong statement is made innocently without any willful intention. In both cases however, the contract becomes voidable and the aggrieved party may set it aside.

However, in the case of fraud, which is also a civil wrong, the aggrieved party may even file a suit for damages in addition to rescinding the contract.

Following are the Cases Where Silence is also deemed to be Fraudulent in nature:

(1)        Contracts- “Uberrimae fidei” [Contracts requiring utmost good faith]

These are contracts where one party has peculiar means of knowledge, which are not accessible to the other.

Examples:       i.          Contract of insurance

                        ii.         Contract of marriage engagement

                        iii.        Share allotment contracts

1. Contract of family settlement

            Case Law: PEEK Vs GURNEY

            The prospectus of a company did not refer to the existence of a document disclosing liabilities. This gave the impression that the company was prosperous. If the existence of a document had been disclosed, the impression would have been quite different. Held, non-disclosure amounted to fraud and any one who purchased shares on the faith of the prospectus could avoid the contract.

e.)        Mistake:

            It may be defined as a wrong belief about something.

The following classification will be useful in understanding how it is dealt with under Contract Act.

                                                                  Mistake

           

            Mistake of Facts                                                         Mistake of Law

Unilateral                    Bilateral                                  Local Law                     Foreign Law

i.          Mistake of Law:

“Ignorance of law is no excuse” is the maxim, which applies in this context also. Thus, if a party makes a mistake of law and wants to avoid the contract on this ground, it is not viable and allowed and thus, no relief can be granted.

ii.         Mistake of Foreign Law:

This stands on the same footing as that of mistake of fact. Hence, mistake of foreign law makes the agreement void.

iii.        Unilateral Mistake:

When only one party to a contract makes a mistake regarding facts related to the contract, it is termed as a unilateral mistake.

Exception No.1

Circumstance under which unilateral mistake renders a contract voidable:

When a party to the contract obtains the consent of the other party by fraudulent means.

Example:         Satish sells a house to Ramesh, representing that it is in good condition, and free from defects. Actually, the building had developed quite a few cracks, which were cleverly concealed by Satish by sealing and painting them up.

                        In this case, if Ramesh buys the house, believing that the building is in a good condition, he can later on set aside the contract, if he learns the truth at a later date.

 

Exception No.2

Circumstances under which a unilateral mistake makes a Contract Void:

(a)        Mistake as to the Nature of Transaction:

When there is a mistake, touching upon the very root or nature of the Contract, it is said to be a mistake with regard to nature of the contract.

 

            Case Law: FOSTER Vs McKINNON

            A blind man was induced to sign a bill of exchange. It was represented to him that it was only a guarantee. Held, the blind man was not liable on the bill of exchange. The court observed that the document was void, as his mind did not accompany his signature.

(b)        Mistake as to the Identity of Party Contracted with:

When one party, let us say A, makes an agreement with C, thinking him to be B, this agreement is not valid because, there is a mistake with regard to the identity of the real person.

            Case Law: CUNDY Vs LINDSAY

One Belkaran imitating the signature of Belkaran induced Lindsay to supply goods to him. Belkaran sold the goods to Cundy, who paid for them. Lindsay sued Cundy for the recovery of the good. The court held Lindsay could recover the goods from Cundy. This was not mere case of fraud. This was a case of mistake as to identity of party contracted with. The court observed as fellows “Of him he never thought”. About him he never knew”. “Within he never intended to deal”. So, there was no contract, in the first place between Lindsay and Belkaran. In the absence of a contract, Belkaran could not have passed any title to Cundy. With the result of the Court held that, Lindsay could recover the goods from Cundy.

Case Law: PHILIPS Vs BROOKES

A man called North entered a jeweller’s shop and selected some jewels. When he took out his Cheque book, the shopkeeper asked him to identify himself. North identified himself as Sir George Bullough. North signed the cheque as Sir George Bullough. North pledged the jewels with a pawn broker. The cheque was dishonoured. The shop keeper sought to recover the jewels from the pawnbroker. Held, the shopkeeper could not recover. The shopkeeper did not make any mistake as to the identity of the party contracted with him. He only entered the contract with the person who appeared before him.

Note:   This is a case of fraud and not mistake as to the identity of a person contracted with.

iv.        Bilateral Mistake:

When both parties to a contract are under a mistake of fact that is very essential to the contract, the contract is rendered void. An agreement is void, where there is a bilateral mistake as to the subject matter of the contract.

            Example:         Sohan agrees to buy from Rohan, a cow. It turns out that the cow was dead at the time of the bargain though, neither party was aware of the fact. The agreement is void.

           

This is a situation, where both the parties have made a mistake pertaining to the existence of the subject matter of the contract. However, similar mistakes can also be made with respect to the following matters in a particular contract:

(a)        Mistake as to the quantity of subject matter

            Case Law: HENKEL Vs POPE

A customer enquired the prices of rifles and said he might need about 50 numbers. Later he sent a telegram with the words “send three rifles”. But the telegraph clerk transmitted the message as “send the rifles”. The seller, recalling the earlier remark of the buyer, sent 50 rifles. Buyer accepted three of them and retuned the remaining ones. The seller filed a suit against the buyer to recover the prices of remaining rifles. Held that there was bilateral mistake, hence the contract relating to 47 rifles was declared void.

(b)        Mistake as to the quality of subject matter

Example: X agrees to buy a particular horse from Y. Both believe it be a race horse, but it turns out to be a cart horse. The agreement is void because there is a bilateral mistake as to the quality of the subject matter.

(c)        Mistake as to the Title

Under very rare circumstances a person agrees to purchase some goods which unknown to himself and the seller, is own already. This agreement is void ab-initio.

Case Law: COPPERAS PHIBBS

A agreed to take lease of fishery from B, though contrary to the belief of both parties at the time. A was tenant for life by inheritance of the fishery and B had no title at all. It was held that the lease agreement was void.

 (d)       Mistake as regards to the identity of the subject matter

Where both parties are working under a mistake as to the identity of the subject matter i.e. one party had one thing in mind and the other party had another, the agreement is void for lack of identity of minds of both parties.

 

VOID AGREEMENTS:

Lawful objects (end) must be accomplished by lawful means (lawful consideration).There may be free consent, parties may be competent, consideration may also be lawful, but if the very purpose of agreement is unlawful or illegal, the agreement is void.

Thus consideration or object of an agreement is considered lawful unless.

(a)        If it is forbidden by law:-

An agreement for sale/purchase of a controlled article above the standard price fixed by the relevant law.

(b)        If it is of such a nature that if permitted, it would defeat the provisions of any law:-

Example:         Firoz gives a loan of Rs 2 lakhs to Mr. Khan to celebrate his minor daughter’s marriage. In this case, giving a loan is lawful, but the purpose for which it is given is unlawful. [As it is against the child marriage restraint Act].

(c)        If it is fraudulent:-

Example:         Rahul and Atul agree to cheat Puru and share the gains equally.

 (d)       If it involves injury to a person or property of another:-

Example:         Ravinder agrees to set important files belonging to Devinder on fire provided, Manvinder pays him Rs. 50000/-. The contract between Ravinder and Manvinder is void.

(e)        If the Court regards it as immoral:-

An agreement, whose object or consideration is immoral, is summarily illegal and therefore, void.

(f)        If the court regards it as opposed to public policy:-

An agreement is unlawful, if the court regards it as opposed to public policy.

Public policy is that principle of law, which holds that no citizen can lawfully do that which is injurious to the public or is against the interest of the society or the state as such.

Examples of Agreements against public policy.

• Agreement creating an interest opposed to duty.
• Agreements interfering with the course of justice.
• Trading with an alien enemy.

Void Agreements:

“An agreement not enforceable by law is said to be void” [Sec.2 (g)].

Thus, a void agreement does not give rise to any legal consequences and is void ab-initio. In the eyes of law, such an agreement is no agreement at all from its very inception.

Following are agreements declared to be void:-

(a)        Agreements in restraint of marriage

Under the Contact Act, an agreement in restraint of the marriage of any person other than a minor is void.

Example:         A promised to marry B only and nobody else, and in default to pay Rs. 50,000. A however married C and B sued A for recovery of Rs. 50,000. Held, B could not recover the amount as the agreement was in restraint of marriage.

(b)        An agreement where in a person is restrained from pursuing a lawful profession, trade or business of any kind, is to that extent void.

            Note:   There are some important exceptions under this rule.

• An agreement of service by which a person binds himself, during the term of the agreement not to take service with anyone else, is not in restraint of lawful profession and is valid.
• An agreement between traders in the same locality not to sell their products below a particular price is valid.

(c)        Agreements in restraint of legal proceedings:

An agreement by which a party is restricted absolutely from taking usual legal proceeding in respect of any rights arising from a contract is void.

Or

An agreement which limits the time, within which one may enforce his rights by ignoring the provisions of the Limitation Act, is void.

(d)        Agreement the meaning of which is uncertain is void.

Example:         A agrees to pay Rs. 1, 00,000 when he will be in a position to pay. The agreement is void for its uncertainty.

(e)        Wagering agreements are void

An agreement between 2 persons under which money or money’s worth is payable by one person to another on the happening or non-happening of a future uncertain event is called a wagering event. In short, it refers to all bet based agreements. Such agreements are chance-oriented and therefore, completely uncertain and hence, cannot be legitimized in the eyes of law.

Example:         A agrees to pay Rs. 10,000 to B, if India wins a cricket match.

(f)        Agreement to do impossible acts is void.

Example:         Drona agrees to put life into the body of a dead horse in return for 5 lakhs. Such contracts are also referred to as frustration of contracts.   

(g)        Agreement contingent on impossible events.

Example:         Rakesh promises Tarun to a give a loan of Rs.10 lakhs, if the later/marries his sister, Rekha. However, Rekha is dead at the time of agreement. The agreement is void.

QUASI CONTRACTS:

(1)        The term ‘Quasi’ means similarity or “bears resemblance to”.

(2)        A Quasi contract is similar to normal contracts so far as the origin of contractual obligations under it are concerned. However, it is different from a contract in respect of the fact that there is no formal agreement entered into by the parties as being understood conventionally in the form of an offer and acceptance etc. Thus, to state that the quasi-contracts actually give rise to legal obligations only.

Contract = Agreement + Legal Obligation

Quasi Contract = Legal Obligation

(3)        In case of quasi contracts, there is no offer, no acceptance, no consensus-ad-idem (i.e., meeting of minds) and absolutely, no intention on the part of the parties to strike a contract. Still, the law, from the conduct and relationship of the parties, imposes an obligation on one party and confers rights on the other party. The obligation is called quasi contractual obligation.

(4)        Thus, quasi contract, in principle is based on the doctrine of unjust enrichment, which declares that a person should not be allowed to enrich himself unjustly at the expense of another.

 

Quasi-Contractual Obligations:

(1)        Claim for necessaries supplied to a person incapable of contracting or on his account.

Example:         Subhash supplies Suraj, a mentally unsound person with necessaries, suitable & vitally required for his very condition of life. Here, Subhash is entitled to be reimbursed from Suraj’s property.   

Conditions, which need to be satisfied for arising obligations under quasi-contracts:

a.         The minor or the person incapable of contracting is not personally liable.

b.         Only his estates are liable.

c.         The goods supplied or services rendered must qualify as necessaries.

d.         Only reasonable amount can be claimed for the supply of necessaries.

e.         Such necessaries should be supplied only to a person who is either incapable of contracting or his dependents.

(2)        Reimbursement of persons paying money due by another, in payment of which he is interested:-

            The Contract Act lays down that if one person who is interested in the payment of money which another is bound to pay by law, and the former pays it, he is entitled to be reimbursed by the latter.

Example:         A sub-tenant pays the arrears of rent due by the tenant to the landlord, in order to save the tenancy from forfeiture.

(3)        Obligation of Person Enjoying Benefit of Non-Gratuitous act:-

When a person does something lawfully to another, or delivers something to him, not intending to do so gratuitously and the other person enjoys the benefits there of, he is bound to compensate the latter for the things done or so delivered.

Example:         SM & Sons delivers a basket containing any fruits to Mr. Kishore, by mistake, Mr. Kishore and his family consume it, despite knowing that the goods are not intended for them. Now, the family must compensate SM & sons.

(4)        Responsibility of Finder of Lost Goods:-

When a person comes across things belonging to another and takes them into his custody, he must restore it to the true owner. The law provides that nobody should have an unjust enrichment at the expense of the other.

Example:         A finds a purse left behind by a passenger in a bus. If he takes custody of it, he is under an obligation to restore it to its owner.

(5)        Liability of a Person to Whom Money is paid or thing Delivered by Mistake/under coercion.

Example:         A and B jointly owe Rs.5000/- to C, A alone pays the amount to C and B, not knowing this fact, pays Rs. 5000/- over again to C. C is bound to repay the amount to B.

REMEDIES FOR BREACH OF CONTRACT

                                                           

REMEDIES

Suit for Specific Performance                Damages                             Suit for Injunction

      Ordinary         Damages for         Special    Nominal               Exemplary

      Damages        Discomfort &         Damages            Damages              Damages

                             Inconvenience

What is a breach of the contract? As we have already learnt about the core principle of law of contracts which inter-alia, provides that agreements should be kept or in short, contracts should be honored because, by sticking closely to this proposition, we can only make the commercial world go round with ease. But then, what remedies, the contract law affords in situations when one party backs out on its promise and puts the other party and its business interests in jeopardy. In fact, in its simplest terms, it is this stance of backing out of one of the parties from performing his part of the contract is what we call as the breach of a contract.

Thus, a breach of contract occurs when a party fails to perform his obligations under the contract and the party which is injured inconsequence thereof, may bring an action (i.e. file a case) against the breaching party so as…

1. to restrain the other party from breaching the contract; so called injunction;
2. to force the party to perform its obligations under the contract; or  so called specific performance;
3. to claim damages from the breaching party, for losses whatever, suffered as a result of such a contractual breach.

Whenever there is a breach of contract, the aggrieved party is entitled to damages, amongst other remedies such as, specific performance or injunction etc. While the remedies like specific performance entail a direction from the court of law to the breaching party to stick to the right side of the contractual obligation i.e. urging upon it to perform the contract and its specific obligation under the same at the direction of the court. Whereas, an injuction will simply restrain the party from breaching a contract by way of either doing or omitting to do a certain act.

What are Damages?

Damages are a monetary compensation i.e. compensation in terms of money allowed to the injured party for the loss/injury suffered by him as a result of the breach of a contract.  However, seeking damages against the contractual breach seems to be a viable remedy, but every action for damages, arising from a breach of contract, may give rise to two problems:

Firstly, the problem of "remoteness of damages" i.e., whether the damage is too far for the act to be responsible for it, and

Secondly, that of "measure of damages" i.e., how much damages should be awarded to the injured party and how would the courts arrive at such a conclusion.

To have a bit clear idea about this, we need to understand the above two terms and concepts involved therein in some detail. But before do we understand the above concepts, it need to be emphasized that the fundamental principle underlying damages is not punishment, but compensation to the injured party.

Generally, compensation commensurates with the injury/loss sustained, arising naturally from the breach. In fact, if actual loss is not proved, no damages will be awarded. But, the fact that how this compensation is determined by the court, we need some clarity on the above two concepts:

What does the concept of “Remoteness of Damages” really imply?

In order to establish a right to damages, the first thing that the plaintiff must show and prove that the loss which he has been occasioned to him was caused, but by a breach of the contract by the other party. Once the plaintiff establishes this fact beyond doubt that a particular loss has been incurred by him because of such a breach of the contract done by the other party, the Court will then enter into the question of determining whether the said loss has resulted directly from the breach or the same is related somewhere, 'remotely' to it (i.e. whether the damage is so remote from the act that the act cannot be held responsible for the damage). This determination on the part of the court assumes importance just because; the law will not force the defendant to assume responsibility for all those losses that the plaintiff may not conceivably have suffered as a consequence of the breach had they not occasioned out of any direct act or omissions of the defendant rather, hold him responsible for only those losses that arise directly from his/her actions. In other words, it can be said that every breach of contract has various consequences, but the defendant may not be held liable for certain losses that are too 'remote' to be comprehended within the sweep of defendant’s breach of contract and obviously therefore, for such losses, the plaintiff is not entitled to any compensation from the defendant.

The foundation of the law on this concept of ‘remoteness of damages’ is contained as was laid down by the court in the famous case of Hadley v. Baxendale:

Where two parties have made a contract which one of them has broken, the damages which the other party ought to have received in respect of such a breach of contract should be such as may fairly and reasonably be considered to have either arisen naturally, i.e., according to the usual course of things from such breach of contract itself or such as may reasonably be supposed to have been in the contemplation of both the parties when they concluded the contract between themselves to be the probable result of such a breach.

The rule laid down by the court in the above case, consists of two branches or sub-rules which prescribe that the damages are recoverable from the breaching party under the following two conditions:

1)         when they are of 'such a nature as may fairly and reasonably be considered as arising naturally, according to the usual course of things' from the breach, or

2)         when they are of 'such a nature as may reasonably be supposed to have been in the contemplation of both the parties at the time they made the contract'.

The Indian Contract Act incorporates both the branches of the rule as what was propounded in Hadley v. Baxendale.

Accordingly, the relevant section of the ICA provides that

"When a contract has been broken, the party who suffers by such a breach is entitled to receive from the party who has broken the contract, compensation for any loss or damage caused to him thereby, but only for such a loss which naturally arose in the usual course of things from such a breach or for that matter, a loss which the parties very well knew, when they made the contract to be likely to ensue from the breach of it. And such compensation is not to be given to the injured party for any remote and indirect loss or damage sustained by it on account of the breach."

Although there are two branches to the rule in Hadley v. Baxendale, but in essence, they both form a part of a single integrated general principle.

And this single general principle which embraces both the branches of the Hadley-Baxandale rule is that the aggrieved party is only entitled to recover such part of the loss which actually resulted from the breach and is the one that was reasonably foreseeable by both the parties when they concluded the contract as the loss that could likely to result from the breach of the contract.

Now what that constitutes a “reasonably foreseeable loss”, it all depends upon the knowledge, then possessed by the parties or, at all events, by the party who later commits the breach.

For this purpose, ‘knowledge possessed’ is of two kinds: one imputed and the other that is the actual one. Everyone, as a reasonable person, is assumed to know and comprehend the 'ordinary course of things’ and consequently, what loss that is liable to occur from a breach of contract under those ordinary course of things. This is the subject matter of the first branch of the rule. But to this knowledge, which a contract breaker is assumed to have possessed whether he actually possesses it or not, there may have to be added, in a particular case, knowledge which he actually possesses, of special circumstances outside the 'ordinary course of things'; a knowledge of such a kind that a breach in those special circumstances would be liable to cause even more loss. Such a situation attracts the operation of the second branch of the rule and makes this additional loss recoverable. Under neither branch is it necessary that the contract breaker should actually have asked himself what loss is liable to result from a breach. It suffices that, if he had considered the question, he would, as a reasonable man, have concluded that the loss in question was liable to result.

In order to understand this rule even more clearly, let’s discuss it with the help of some examples, considering each branch of the rule side by side and then, resolving the same into understanding the single general principle.

The first branch of the rule in Hadley v. Baxendale

This deals with such damages as may fairly and reasonably be considered as arising naturally, i.e., according to the usual course of things, from the breach of contract, as the probable result of the breach. It depends, as we have observed earlier, on the knowledge that the parties are presumed to possess. The difficulty arises in where to draw the line. Basically, one has to try and determine what it is reasonable to know given a certain fact situation, and what, according to the usual course of things, it is reasonable to expect to happen. In order to understand the applicability of the above rule, consider the following noted case law on the point entitled

Monarch Steamship Company Limited v. Karlshamns:

The facts of the case relate to a British vessel that had been chartered from the defendant ship owners in April, 1939, to load a cargo of Soya beans in Japan to be delivered at the port of Karlshamns in Sweden. Under 'normal circumstances, the vessel was supposed to have reached the port of Karlshamns somewhere, in July after having set off on its journey from Japan in April, but owing to the defective state of the boilers, the ship became un-seaworthy and did not arrive in the European waters even until September. By that time, however, war had broken out between Great Britain and Germany and the vessel was ordered by the British Admiralty to proceed to and discharge at Glasgow instead, at the designated port of Karlshamns. The plaintiffs, a Swedish Company who had purchased the said cargo of Soyabeans however, required the beans for their business in Sweden, as there were none available out there. The Plaintiff’s consequently incurred unnecessary expenses in having the cargo further forwarded to Karlshamn from the point of discharge at Glasgow in neutral ships and thus, claimed damages from the defendant ship company in respect of the extra expenses they were made to bear for transporting the cargo to the designated port of karlshmns. And hence, the question arose, whether the defendant company was liable for this?

The single word answer for this question would be fairly, yes!

Just because; applying the first branch of the rule under consideration so as to determine what it is reasonable to know given a certain fact situation and what according to the usual course of things, it is reasonable to expect to happen. The question is 'what reasonable businessmen must be taken to have contemplated as the natural or probable result, if the contract were broken'.

In the present case, the possibility of war must have been present in the minds of the parties and experienced businessmen would know that one of the risks that would be consequent upon prolongation of the voyage at that time would be the diversion of the vessel by the order of the Admiralty and which actually did happen. Since, under the given fact situation of the year-1939, it was very probable that war would break out.

Keeping this fact into consideration, the Court thus held that the damage was therefore, not too remote a consequence of the un-seaworthiness of the ship and the plaintiffs could recover the costs of transshipment incurred extra by the plaintiff. Having discussed and understood the applicability of the first branch of the above rule, it now becomes also pertinent to know the following:

When the first branch of the rule is not applicable?

The first branch of the rule does not cover losses that may arise as a result of the origin of some special facts which were not known to the breaching party at the time of conclusion of the contract. However, this knowledge of special circumstances cannot be imputed, but must actually exist in reality. For example, to quote here the actual facts of the case of Hadley v. Baxendale to understand the point.

Here in this case, the plaintiffs' who were millers and had their mill stopped by the breakage of a crankshaft and thus, it became necessary to send the damaged crankshaft to the makers so as to enable them have a pattern on which they could make an exact replica of the same to make the new one.  The defendants, who were carriers, undertook to deliver the shaft to the makers, but the only information given to them was 'that the article to be carried was the broken shaft of a mill and that the plaintiffs were the owners of that very shaft. Nothing more than the above limited information was supplied to the defendants by the plaintiff as such.

By some neglect on the part of the defendants, the delivery of the shaft was delayed and in consequence of such a delay, the mill could not be restarted until some time after it could have otherwise been. The plaintiffs thus, lost profits which they would otherwise have made had there been no delay in the supply of the new shaft by the defendants.

The question before the court was whether this loss of profits ought to be taken into account in estimating the damages to be recovered from the defendants?

The court however, held that the plaintiffs' could not recover for this loss.

Why because, the circumstances communicated to the defendants did not show that a delay in the delivery of the shaft would entail any loss of profits to the mill owner, plaintiffs. Simultaneously, it could also be presumed that the plaintiffs might have had another shaft as a spare to be used for the time being, or there might have been some other defect in the machinery to cause the stoppage of the mill and the plaintiffs were unnecessary passing the buck onto the defendants.

It was also considered by the court that in the great multitude of cases of millers sending off broken shafts to third persons by a carrier under ordinary circumstances, such consequences would not, in all probability, have occurred and moreover, the plaintiffs never communicated these special circumstances to the defendants regarding the fact that they have had no other means at their disposal to run the mill except the timely supply of the repaired or new shaft whatsoever.

Hence, the first rule is not applicable, as the loss in profits would not have flowed naturally from the breach of this contract in the great multitude of such cases occurring under ordinary circumstances. As such, the plaintiffs could claim loss of profits as damages only if the special circumstances had been communicated to the defendants. In that case then, the second branch of the rule would have been attracted had the defendants been apprised of such special circumstances by the plaintiff.

Let’s have another hypothetical situation on this, say for example, in a situation in which

‘A’ contracts to sell and deliver to B, on the first of January, a certain clothing material to be used by B for manufacturing some caps of a particular kind which have their demand in the market place only during that very season when he contracted with ‘A’ for the supply of the material cloth. The cloth however, is not delivered till after the appointed time, and is therefore, too late to be used that year for making caps.

In this case, the question also arises is - Whether B is entitled to the profits that he expected to cash on by making caps, to be recovered from A?  This question can be answered by considering some of the following aspects say:

If the cloth, which A delivered to B, even though after the stipulated time could have been used for a variety of purposes rather than for making caps only and if B did not inform A that it was to be used exclusively for making caps, then A will not be liable to pay the profits which B had expected to make from.

However, what B can be entitled to receive from A, by way of compensation, is the difference between the contract price of the cloth and its market price at the time of delivery.

[Note: If, however, cloth of that type was ordinarily used only for making caps, then the situation would be different. ‘A’ would have been presumed to have known that if the cloth were delivered late, loss of profits would have been in the usual course of things].

The second branch of the rule in Hadley V. Baxendale:

This deals with the accrual of such damage or damages to the injured party out of the breach of a contract as may reasonably be supposed to have been in the contemplation of both parties when they concluded the contract to be the probable result of such a breach. Thus, it is concluded that the application of this second branch of the rule depends, but upon the knowledge of the contract-breacher at the time of the contract, of special circumstances outside the 'ordinary course of things (knowledge being of such a kind that a breach in those circumstances will cause more loss). The knowledge in this case is actual and not imputed. To illustrate the point, consider the facts & figures of the following case law entitled Simpson v. London and North Western

Railway Company:

In the above case, the plaintiff who was a manufacturer, used to send the specimens of his manufactured goods for exhibition purposes in different agricultural shows. After exhibiting his goods in one of such shows at Bedford, he entrusted some of his sample goods to an agent of the defendant company for being carried to another show to be hosted at Newcastle. On the consignment note he wrote: 'Must be at Newcastle Monday certain.' Owing to a default on the part of the defendant company, the samples arrived late for the Newcastle show. The plaintiff therefore, claimed damages for his loss of profits at the said show. Here again the question arose:

Was the defendant liable to pay damages to the plaintiff for the loss of profits at the show?

The simple answer is, yes, if we try to answer it from the view point of the loss being reasonably foreseeable to be the actual result of the contractual breach when both the parties had entered into a contract.

Given the facts of the case, the defendant had the knowledge of the special circumstances regarding the fact that the goods were to be exhibited at the Newcastle show and so should have contemplated that a delay in delivery might result in this loss just because, the show would no more be existing, if the specimens were to be delivered after the specified day. Had it been the other way round that is, the plaintiff had omitted to state specifically on the consignment note, the wordings: 'Must be at Newcastle on Monday certain'...

In such a situation obviously, the loss of profits as was claimed by the plaintiff could not have fairly and reasonably been considered to have arisen naturally, i.e., according to the usual course of things from such a breach of the contract. Why because; a delay in the delivery of goods in such a scenario and consequent loss in profits at some show would have been too remote a consequence to be actually considered. More importantly, under such a situation, it would have not been reasonable to suppose that the defendant had contemplated about the same at the time of striking the contract that the loss of profits would be the probable result of the breach of the contract they had entered into. Therefore, in conclusion, only if the defendant had special knowledge of the show, could the defendant be held liable. Let’s now zero in on the legal concept of the measure of the damages…

The concept of “Measure of Damages”:

In essence, the main rationale in the eyes of law, behind awarding damages to the injured party in a contractual breach is to place the plaintiff (injured party), so far as money can do it, in the same situation as if the contract has been duly performed. He by virtue of awarding him such damages is thus enabled to make up for the loss of gains which he has been deprived of by the said breach. Therefore, while deciding on the measure of such damages, the courts generally take into consideration two main aspects…

Firstly, imagining the situation in which the plaintiff would have been placed, had the contract been performed.

Secondly, determining the quantum of damages to be awarded to the plaintiff so as to place him in the same situation of there being a contract performed say, in terms of the profits or other pecuniary advantages he would have gained or obtained.

Once the courts arrive at a conclusion after considering the above two aspects, it proceeds further to award some of the following kinds of damages to the plaintiff…

Different Kinds of Damages:

(1)        Ordinary Damages

(2)        Special Damages

(3)        Exemplary Damages

(4)        Nominal Damages

(5)        Damages for inconvenience and discomfort

1.)        Ordinary Damages:

These are the damages which arise naturally and directly in the usual course of things from the breach of contract itself.

In other words, ordinary damages are restricted to the direct and proximate consequences of the breach of contract suffered by the plaintiff.

Case Law:       Hadley Vs Baxendale

The plaintiff was a mill owner. He entrusted a broken shaft, to the defendant, who was a carrier, to be delivered to the maker as a pattern for a new one. The defendant was only told that the broken shaft was a part of the machinery and ought to be replaced. Due to some neglect on the part of the defendant, the delivery of the shaft was delayed. As a result, the mill remained closed and the plaintiff lost profits, which he would otherwise have made. The plaintiff claimed the loss of profits as a part of damages to be recovered from the defendant. Held that the plaintiff was only entitled to recover damages, which arose in the usual course of things from such a breach. Thus, the plaintiff was entitled to recover damages for the delay in delivering the broken shaft. Since the defendant was not informed, that the mill had to be kept idle, till the shaft was replaced, the plaintiff was, not justified in claiming loss of profits.

As noted earlier and may be repeated once again here that the above is a leading case to have become instrumental in laying down the foundations of modern law of damages both in England and India.

2.)        Special Damages:

These damages arise on account of the special/unusual circumstances affecting the plai        ntiff. They in short, refer to such remote losses to have ensued to the plaintiff which do not result from the natural and probable consequences of the breach of contract. These can be claimed only if the special circumstances, which would result in special loss to the plaintiff following a breach of the contract are being brought to the notice of the other party (defendant) right at the beginning when they concluded the contract.

Note: That any subsequent knowledge on the part of the defendant of the special circumstances will not create any special liability on his part even if some loss or damage has occurred to the plaintiff from a contractual breach. Consider the following case law on this important point:

Case Law: Govinda Rao vs. Madras Railway Company   

Govinda was a tailor and consigned through rail some sewing machines to a place in Tamil Nadu. He planned to take part in a village fair, where he hoped to stitch garments and make profits. However, the train reached the particular town after the fair concluded to the consequence that Govinda could not participate in the fair. He sued the Railway Company for loss of profits.

 Held that he could not recover any compensation from the defendant Railway Company owing to the fact that the special circumstances (about the fair) were not brought to the notice of the Railway Company at the beginning of the contract itself i.e. while booking the consignment with the Railway Company.

3.)        Exemplary/Vindictive Damages:

These damages are awarded with a view to punish the erring party for the breach of a contract, but not by way of awarding the compensation to the injured party for the loss suffered by it instead, by inflicting punishment on the defendant. But these so called ‘exemplary damages’ are awarded only under following two exceptional cases viz.

(a)        When there is breach of a contract to marry and

(b)        In cases relating to the dishonor of a cheque by a banker when there are sufficient funds to the credit of the customer.

4.)        Nominal Damages:

These are awarded only for the namesake just to uphold the rights of the plaintiff by the application of a legal machinery. These are thus, neither awarded by way of any compensation to the aggrieved party nor by way of inflicting any punishment on to the guilty party. These are, as stated above, awarded to uphold the right of the aggrieved party.

5.)        Damages for inconvenience and discomfort:

Damages can also be recovered from the defendant for causing any substantial inconvenience or discomfort to the plaintiff as a result of the breach of contract.

 Other remedies for the breach of contract:

(I)        Suit for Specific Performance:

Specific performance means the actual carrying out of a contract as per agreement. It is a direction given by the court to the defendant to actually perform the promise that he has made. It is however, a remedy which is very sparingly used.

Example:         A agrees to sell a house to B. Later, A refuses to sell. Now B can file a suit against A for specific performance. The court may order A to perform what he had basically agreed, to do. (To sell the house)

Specific performance is not granted by the court, as a rule in some of the following cases or kinds of contracts:

            (1)        Where the contract is of a kind of personal services.

            (2)        Where one of the parties to the contract lacks the capacity to contract.

            (3)        Where the court cannot supervise the actual execution of the contract.

            (4)        Where monetary compensation is an adequate remedy.         

(II)       Suit for an injunction:

Injunction is an order of the court restraining a person from doing a particular act. Thus, injunction is more of a preventive relief than that of a monetary compensatory nature. Injunction may however, be either of a temporary or permanent nature.

Example:         X is trying to put up an illegal construction on the third floor of his house. Y, his immediate neighbour objects to it, as ventilation to his house is affected. Y can now move the court for injunction against X to stop the construction.

SPECIAL KINDS OF CONTRACTS:

Why special kinds of contracts? Among the various kinds of contracts that we may generally enter into, there does arise certain other kinds of contracts where owing to the very nature of the relationship between contracting parties, some special rights and duties arise between them and hence, the birth of special kinds of contracts take place. Although, such special contracts are regulated by the same contract law and need to fulfill all the conditions and rules that are applicable to any other conventional contract, but due to their special nature, they are governed further by some special rules specifically applicable to them.

Some of these special contracts that we shall be studying herein the following pages that may fall within the scope and requirement of CLAT.

These special kinds of contracts that deserve mention may fall within some of the following categories viz. contracts of bailment, contract of agency and the contract of partnership etc. inter-alia others.

(A.)      Contract of Bailment:

What is bailment? A Bailment in its simplest terms is a kind of contract wherein, the property of one person remains in the possession of another person, for a temporary period. Say for example, a person leaving his lap top with a lap top repair shop or mechanic or for that matter, leaving his car at a garage or at a workshop for repairs and service etc…

The Indian Contract Act defines Bailment in the following words:

"A 'bailment' is the delivery of goods by one person to another for some purpose upon a contract that they shall when the purpose is accomplished, be returned or otherwise be disposed of according to the directions of the person delivering them to the other person."

In such a kind of contract, the person who delivers the goods is called as a Bailor and the one to whom the goods are delivered and hence, keeps the goods in his or possession till the purpose is accomplished is referred to as a Bailee.

For more clarity, some more common examples of a bailment contract may be cited as the one giving his vehicle for servicing or the one giving his or her old jewellery to a gold smith for melting and being redesigned into a new model etc.

Basically thus, handing over a certain property to another on the basis of a contract that is either oral or written, for a particular purpose on this understanding that as and when the specified purpose is accomplished, the goods shall be returned to the owner of the goods what we call as the bailor.

A bailment contract, depending on whether it is gratuitous in nature (where goods are lent without any reward or otherwise (where goods are lent for a consideration), there establishes the extent of duty on the part of the bailor. For example, in a gratuitous bailment, the bailor, i.e., the person lending the article is duty bound to disclose to the bailee all defects whatever that may be found in the goods or articles being lent which materially interfere with the use of them or which somehow, expose the bailee to extraordinary risks about which the bailor is aware of. And, in any case, if such a disclosure is not made by the bailor to the bailee, then the bailor himself shall be responsible to the bailee for all the damages that may directly result from such a defect(s). On the other hand, in a bailment for reward or hire, the bailor will be liable for all damages whether or not he or she was aware of such defects in the goods/articles having been bailed.

In the same context, a contract of bailment also creates a similar duty or duties on the part of the bailee as is being specified by the Indian Contract Act in this regard that:

“In all cases of bailment, the bailee in respect of the goods having bailed to him is bound to take as much care of the goods as a man of ordinary prudence would, under similar circumstances, takes care of his own goods, of the same bulk, quality and value.”

Furthermore, the Contract Act also restricts this duty on the part of the bailee by saying that:

"The bailee, in the absence of any special contract, is not responsible for any loss, destruction or deterioration that may be caused to the goods bailed, if he has taken the amount of care that may be expected from a man of ordinary prudence to have taken of his own goods under the similar circumstances of the goods of same nature, quality or value.”

Since there are neither uniform standards nor any statistics that could somehow, point out the amount of care that a man of ordinary prudence would, under similar circumstances, take care of his own goods of the same bulk, quality and value of the goods bailed, its interpretation is therefore, remains to be very fact-specific and dependent purely on the discretion of the court. And the court's decision varies with every fact situation, e.g. in a case of theft, where the bailee's goods have also been stolen along with those of the bailor, it cannot in such a case be said that the bailee has fulfilled his duties. It could on the other hand, also mean that the bailee has failed to take prudent care of his own goods and due to this neglect of the bailee, he has not only lost his own goods to theft, but also that of the bailor. As an illustration for example, a situation can be imagined wherein:

A bailee placed the bailor's ornaments or jewellery in a locked safe and kept the key of the safe in the cash-box that lay in the same room where the locked safe is located. Although, the room was locked, but being on the ground floor, it was easily accessible to burglars by removing the latch. It was held that the bailee would be liable for not taking reasonable care of the goods in his possession.

In addition to the above, the law imposes certain other duties on the bailee as regards the goods or articles in her/his possession of that of the bailor such as:

1. Duty not to use the goods or articles bailed in an unauthorized manner. If he does so, the bailee will be liable to compensate the bailor for any damage that may arise to the goods from any such use or during such use.
2. Duty to ensure that the goods delivered to him (bailee) by different parties, do not get mixed. However, with the consent of the bailor, the bailee may mix the goods of the bailor with her/his own goods. If however, the mixing is done without the bailor's consent, and the bailor's goods may be separated from the mixture, the bailee's liability will be to the extent of bearing the expense for such separation. But, in case, it may not be possible to separate the bailor's goods from that of the mixture, then in such cases, the bailee becomes duty bound to-compensate the bailor for the loss that may occasion out of such mixing of the goods.
3. Duty to return the goods immediately after the completion or accomplishment of the purpose for which the goods were delivered to the bailee in accordance with the directions of the bailor without even requiring the bailor to demand for the same. If the bailee fails in this endeavor, then he is responsible to the bailor for any loss, deterioration or destruction caused to the goods right from the time the goods have been bailed till the time of their actual return.

Noted that some familiar issues may crop up sometimes arises in the context of the bailment contract in a situation where other than the original and actual owner, someone else, bails the goods belonging to the actual owner to the bailee without the knowledge of the actual owner. In such a case, given the fact of the actual owner having come to know of the transaction later on and demands his goods from the bailee, a question arises as to whom should the bailee return the goods so bailed to him?

Say for example, assuming that Rita is the owner of a Honda Activa. One day, her neighbor named Sita drove it off to market when it was parked in front of her house without Rita's knowledge and on her way back, she banged it onto a stationary truck. In order to save her skin, Sita gives it to a denting-painting mechanic requesting that it be repaired and repainted to the original colour.  The mechanic accordingly duly repairs and repaints the same and decides to return it back to Sita after the job. By then however, Rita somehow comes to know of the fact and asks the mechanic not to return the scooter to Sita. In such a scenario, can the mechanic exercise his option to retain the scooter for being returned to Rita rather than to Sita?

Obviously, the simple answer to this will be no within the meaning and essence of a bailment contract as it is the duty of the bailee to return the goods only to the bailor who has actually bailed the goods to him. As such, the mechanic has a duty to return the scooter only to Sita who has actually bailed the same to him and he does not have any right to retain the scooter on the pretext that the bailor does not have the right to receive the scooter back just because, it does not belong to her. 

If we consider the above situation, the other way round wherein the mechanic being unaware of the fact that the scooter does not actually belong to Sita, returns the same to her on the basis of her being the bailor, but later on discovers that it actually belongs to Rita who also same time, finds out about this and thus, threatens to sue the mechanic on the ground that he has handed over the scooter to someone who was not its rightful owner. In such a case also, the mechanic is not liable just because, the mechanic has, in good faith, returned the scooter to Sita under the belief that she having bailed the scooter to him for repairs must be its rightful owner even though, he discovers that she is not its rightful owner and has stolen the same from Rita.

In all cases of bailment so far as the liability of the bailee with respect to any loss or damage to the goods bailed is concerned, if the bailee can show that he has had taken all possible reasonable care to avoid any damage that was reasonably foreseeable or has had taken all reasonable precautions to minimize or reduce risks that were legally apprehended, he would not be placed under any kind of liability towards the goods or articles so bailed.

There might arise certain situations wherein the goods may increase in value or they may earn profit when they are in the possession of the bailee. In such cases, unless the contract between the bailor and the bailee is required to deliver these profits back to the bailor. (e.g. if a cow that has been left with Ramesh by Sudhir gives birth to a calf, then Ramesh is duty bound to give the calf to Sudhir along with the cow).

As regards the rights of the bailee:

• He is entitled to compensation as per the terms of the bailment contract.
• He is entitled to the expenses (as in a gratuitous bailment) incurred for the purpose of bailment.

Therefore, logically enough, in all such situations, wherein, the bailee's lawful charges have not been paid by the bailor, the bailee has a right of lien on the goods, i.e. the bailee will be entitled to retain the goods till such time as the charges due in respect of the goods have been paid to him by the bailor.

What will happen in a situation wherein, a bailee is wrongfully deprived of using or possessing the goods bailed to him or for that matter, the goods so bailed are either injured or destroyed by the action of some third person?

What are the remedies available to the bailee in such situations?

 In the event of such happenings, the Contract Act treats the bailee as the owner of the goods and thus, gives him the right to sue the third party as if he is the owner of the goods having been bailed to him.

The ‘gist’ of the contract of bailment for easy recapitalization:

Bailment is a delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them.

The person delivering the goods is called the ‘bailor’; the person to whom they are delivered is called the ‘bailee’.

Example: A hires a motorcar from T for a trip to Mahabalipuram. T is the bailor and A is the bailee.

Duties of the bailee and bailor:

(1)        Duty to take reasonable care of goods delivered to him.

(2)        Duty not to make unauthorized use of goods entrusted to him.

(3)        Duty not to mix goods bailed with own goods.

(4)        Duty to return the goods.

(5)        Duty to deliver any accretion or enhancement in goods to the bailor.

Duties of Bailor:

(1)        Duty to disclose any faults in goods so bailed.

(2)        Duty to repay necessary expenses in case of gratuitous bailment.

(3)        Duty to receive back the goods.

(4)        Duty to indemnify bailee.

(5)        Duty to repay any extra-ordinary expenses in case of a non-gratuitous bailment.

(B.)      The contract of Agency:

Who is an Agent? An agent is a person employed to do any act for another or to represent another in dealings with third persons. The person who is being represented by such a person is known as the principal and he himself, is known as an agent.

Thus, in its simplest terms, an agent is someone who can represent another person (i.e. the Principal) with third parties. Let us assume, the agent is X and the Principal is Y. Here within the meaning of the contract of ‘agency’, X can act as the representative of Y and in that very capacity, can create, modify or terminate contractual obligations between Y and any other third party. The relationship thus constituted this way is called Agency. Take for example another illustration wherein a person say, ‘Y’ who is a car dealer, appoints X as his salesman. In that capacity, ‘X’ sells a car to a third person say, ‘A’. The moment X sells a car to A, there exists a contract between A and Y even though, in this case, Y himself has not personally entered into any kind of contract with A. X, acting on behalf of Y, has created certain contractual obligations for Y towards A. This is a relationship of Agency where Y is the Principal and X is the agent.

If X enters into a contract with a third party A, then by virtue of him being Y's agent, Y is tied into a contract with A.

The terms, “Agent" and "Principal" are defined in the Indian Contract Act as follows:

"An agent is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the principal."

In the above example, Y would be the principal and X would be his agent. The above definition would be wide enough to embrace a servant as well. However, the crucial distinction lies in the fact that the principal should authorize his agent to represent or act for him or on his behalf so far as the creation of his contractual relations with third parties are concerned.

What are the salient Features of an Agency?

1.         “He, who does through another, does it by himself”:

            It means ‘the acts of the agent are, for all legal purposes, the acts of the principal.’

            Examples: X purchases from Z goods worth Rs.10000 on credit on behalf of Y, now Z can proceed against both X and Y if the amount is not paid. 

2.         A Delegate cannot further delegate:

It means that an agent, being himself a delegate of his principal, cannot pass on that delegated authority to someone else.

 3.        An Agent is duty bound to follow principal’s direction or customs:

An agent is bound to contract the business of his principal according to the directions given by the principal and to keep himself within the confines of his authority. In the absence of any such directions, the agent has to follow the custom that prevails in businesses of the same kind. If the principal sustains any loss as a result of the agent not acting in accordance with these customs, the agent must compensate the same to his principal; and if any profit accrues from the transaction, the agent must account for it to the principal. Note the following case law to understand the point.

Case Law:       Lillev Vs Doubleday

A principal instructed his agent to lodge his goods in a particular warehouse. The agent however deviated from the instructions. The agent instead, placed the goods in another warehouse, where the goods perished due to fire. Held, the agent was liable because, he acted contrary to the instructions of his principal.

Note the delicate point of distinction here, if the warehouse in which the agent was actually instructed and supposed to lodge the goods were turned out to be unsafe and owing to this factor, the agent on his own initiative lodged the goods in another warehouse that was safe, then the agent would not have been liable even though, the goods were destroyed as a result of fire just because, the “agency of necessity” would have then come into being.

Similarly, as said above must be repeated here that in case there are no such instructions received by the agent from his principal, then the prevailing customs pertaining to the relevant business need to be followed. Say for example, if the prevailing customs pertaining to a particular business require that the goods should be sold on credit or otherwise, in return for a negotiable instrument and if the agent still does so, then he will be grossly liable to his principal for any loss that may occur in a transaction done contrary to the established customary practices.

4.         An agent should not deal on his own account:

It means that he must not himself buy from or sell to his principal goods he is asked to sell or buy on behalf of his principal, without obtaining the consent of his principal.  

Example:         Muthiaya directs Ramu, his agent to buy a certain house for him. Ramu tells Muthiaya that it cannot be bought and instead, buys the house for himself. Muthiaya on discovering that Ramu has bought the house for himself may compel him to sell it to him at the price he bought it for.

 

The above proposition of a contract of agency may also be described as the one of a kind of duty on the part of the agent to avoid a conflict of interest between him and his principal by way of placing himself in such a situation that his duty towards the principal and his own interest comes into a conflict unless, he has already made a full disclosure of his interest in a particular transaction to his principal, specifying its exact nature and having obtained his assent in that regard. Thus, an agent has the duty not to do anything that would bring his personal interest and his duty to the principal in conflict with each other. This conflict invariably arises when the agent is personally interested in the principal’s transaction say for example, in a situation wherein, the agent himself buys the property which he has been appointed to sell for by the principal or for that matter, when the agent delivers his own goods to the principal which he has been instructed to purchase for and on behalf of the principal.

This therefore implies an important principle of agency that an agent may not depart from his own character of acting as an agent to his principal and should not in any case, become a principal party to the transaction irrespective of the fact that by virtue of this change in attitude on the part of the agent, no injury has been caused to the principal. This further means that unless, an agent has obtained the consent from his principal, he cannot himself buy the land, he is supposed to sell on behalf of his principal not even if he buys the same at the market price and no loss of profit could possibly ensue to the principal by doing so.

 

This can further be explained through the following fact situation:

A directs B to sell A's estate. B, while looking around the estate before selling it, finds a mine on the estate which is unknown to A. B informs A that he wishes to buy the estate for himself, but conceals the discovery of the mine. A allows B to buy the same although, in ignorance of the existence of a mine. A, on discovering that B knew of the mine at the time he bought the estate proceeds for annulling the sale. The question now is:  will he succeed?

The simple answer is obviously, yes, why because; B, being A's agent, has a duty not to put himself in a position where his duty and interest conflict with each other as stated in the above mentioned proposition of law. In this case, no real consent of the principal can be deemed to have been obtained by B, the agent for, B has concealed a material fact from A. Therefore, A can very well repudiate the sale.

5.         Principal’s liability for the acts of his agent:

The principal is liable for all acts of the agent done within the scope of his actual and apparent authority. The principal is even liable for the misrepresentation made or fraud committed by the agent acting within the scope of his actual or apparent authority during the course of the agency business.

6.         Duty of reasonable care and skill on the part of the agent:

An agent is bound to conduct the business of agency with as much skill as is generally possessed by persons engaged in similar business, unless the principal has notice of his want of skill. The agent is always bound to act with reasonable diligence and to use such skills as he possesses; and to make compensation to his principal in respect of the direct consequences of his own neglect, want of skill or misconduct.

Consider the following fact situation:

A, a merchant in England, directs B, his agent in Bombay, who accepts the agency, to send him 100 bales of cotton by a certain ship. B, having it in his power to send the cotton, omits to do so. The ship arrives safely in England. Soon after the ship’s arrival, the price of cotton rises.

Here in this case, the agent i.e. ‘B’ is bound to make good to A the profit which might have been made by him through the 100 bales of cotton at the time the ship arrived, but not any profit which he might have made by the subsequent price rise. Consider another illustration:

A, an insurance-broker employed by B to effect insurance on a ship, omits to see that the usual clauses are inserted in the policy. The ship is lost afterwards. Consequent to the omission of the clauses, nothing can be recovered from the underwriters. A is bound to make good the loss to B.

Nevertheless, the standard of care and skill that an agent has to exhibit or exercise depends upon the nature of his profession. An agent having authority to sell on credit must take care to ascertain the solvency of his buyer. An insurance broker must see that the usual clauses for the protection of the principal are inserted in the policy. Similarly, an estate agent should know the relevant land laws and also must take care to ascertain the solvency of the tenant.

If the principal suffers any loss owing to the agent's want of care or skill, the agent must compensate the principal for any such loss. No doubt, the agent is liable to make compensation to his principal only in respect of the direct consequences of his own neglect, want of skill or misconduct, but not in respect of losses or damages that are indirectly or remotely caused by any such neglect, want of skill or misconduct on his part.

7.         Duty not to make secret profit from the agency:

The agent must not except with the knowledge and assent of his principal, make any profit from the transactions into which he may enter on behalf of his principal. It is immaterial that the principal has suffered no injury or that the agent has acted throughout the period of transactions, in good faith. Any such profit, if made secretly by the agent, must be paid over to the principal.

Consider the case law:  Hippisley V. Knee Brothers:

The plaintiff employed the defendants, the auctioneers, to sell certain property for him, and undertook to pay them a commission on the sale over and above their out-of-pocket expenses including those of printing and advertising. The defendants received discounts from printers and advertisers, but charged the plaintiff with the full amount in the honest belief that they were entitled to keep the discounts for themselves. In this case, it was held that the defendants are bound to return the discount money to the plaintiff despite the fact that the defendants have had acted honestly under an honest belief that they were entitled to retain the discount money so availed by them from printers and advertisers.

It was held that being an agent, the defendants under law were duty bound not to make any secret profit from the transaction. Thus the ruling of the court that the defendants were bound to account to the plaintiff for discounted money.

 

How can an agency be created?  The relationship of principal and agent i.e. an agency may be created under any of the following ways:       

(1)        By an actual authority to contract given by the principal to the agent;

(2)        By an ostensible authority conferred by the principal on the agent even though no actual authority has been given;

(3)        By an implication of law in cases of necessity.

             Let’s discuss the necessary implications of each one of the above ways or modes under which the relationship of an agency may be created

 

(1)        By actual authority to contract:

The above authority to contract given by the principal to his agent may be either       an express one or could be implied such that whatever an agent does under such an authority shall bind the principal so far his contractual obligations with the      third parties are concerned, as the Indian Contract Act provides in this regard in the following terms:

"Contracts entered into through an agent, and obligations arising from an act done by an agent may be enforced in the same manner, and will have the same legal consequences as if the contracts had been entered into and the acts done by the principal in person."

Thus, it is necessary for this effect to follow that the agent must have done the act within the scope of his authority. The authority of an agent can be either actual or ostensible. So far as actual authority is concerned, as said above, it can either be express or implied. While an authority is said to be an express one, when it is given by words that may be spoken or written whereas, an authority is said to be implied, when it can be inferred from the circumstances of the case. To understand this point, consider the facts of the following illustration: 

‘A’ owns a shop somewhere in the outskirts of Chandigarh say, around 25 kms away from Chandigarh and thus, visits his shop only occasionally. The shop is thus being managed by one ‘B’, who is a localite and has been appointed by A to run and manage the shop on his behalf. A has also authorized B to place the orders for goods as and when required for the shop with a local wholesaler named ‘C’ in the name of A and consequently, paying for the goods so ordered out of A's funds understandably with A's knowledge.

In this arrangement, it is amply clear that B has an implied authority from A to order goods from C in the name of A for the purposes of running the business and the shop effectively. Implied authority thus, is an instance of real or actual authority being exercised by an agent for, it is conferred upon the agent by the conduct of the principal himself as can be interpreted from the facts of the above illustration wherein, B used to order for the goods from C well within A's knowledge. By his own conduct, A has conferred an authority, so called an implied authority on B to do so.

 Therefore, in conclusion, we can reasonably say that so far as distinction between express and implied authority is concerned, it is not something in fundamental terms rather, depends merely on whether the said authority has been somewhere delimited by words or it can simply be inferred from the conduct of the principal as such. For example, X could tell A that he is to act as manager or he could put A in a certain position where it would naturally mean that A is to act as manager under an implied authority given by X to A…

(2)        Creation of an agency by an ostensible authority conferred on the agent:

An ostensible authority is the one that apparently seems conferred on an agent in the eyes of others or as it appears to others to have been conferred as such on him. Since, it often coincides with actual authority therefore; the principal is always liable for all acts of the agent which have been done by him within the scope of his ostensible authority. As said above, an ostensible authority being an authority possessed by an agent as it reasonably appears to third parties. Clearly thus, when any third party while reasonably believing that the agent possesses such an authority, does any act under this belief or impression, then the principal who has placed his agent in that particular status, cannot later maintain that there was no such authority that his agent has had been conferred with.

For example, in a situation wherein the Board of Directors has appointed a managing director and have expressly provided that the MD is not authorized to order for any goods worth more than Rs.5,000/- except on the sanction of the Board. In this case clearly, the actual authority of the MD is subject to the limitation of Rs.5, 000/- worth of goods order, but his ostensible authority includes all the usual authority being exercised by a managing director and the company shall be bound by his ostensible authority insofar his dealings with those who do not know of the said limitation are concerned just because, all those third parties would deal with him under an impression that he can reasonably be deemed to have possessed a particular authority in the capacity of Managing director. Thus, if he orders goods worth Rs. 10,000/-, the company is bound to make good the purchase price to the other party who does not know of the Rs.5, 000/- limitation as being his actual authority.

Consider the facts of historic case law to understand the point of law:

In a case, the plaintiff by virtue of an agreement with the defendant’s, dispatched a truckload of potatoes to them which the latter refused to accept. The plaintiff then sent his agent to make the defendants to take the delivery of the product or to sell the same at the available price. On this, the defendant’s offered the agent a lesser sum of money than what it could have been in lieu of the full payment, which the agent accepted readily. The plaintiff although, received the said amount, but brought an action for the balance due from the defendants.

In this case, it was held that the plaintiff cannot recover the balance which he claimed was due against the defendants on the ground that the defendants have full right to reasonably presume that the agent, who was sent by the plaintiff to sell the product at the available price, had reason to believe that the agent did carry an authority (ostensible authority) with him to settle with the defendants even at a less price and that was why he accepted the same. Thus, since the act of the agent was within his ostensible authority, the principal could not then maintain that there was no such authority vested by him on his agent.

(3)        By implication of law in cases of necessity (an ‘agency’ of necessity):

In certain circumstances, the law itself confers an authority on one person say, an agent for our present purposes, to act as an agent for another although, without there being any consent received in this regard from the principal as such. The creation of such a relationship under law is referred to as an agency of necessity. The rationale behind the creation of such an ‘agency of necessity’ may be attributed to the origin of such extraordinary and pressing circumstances that warrant an immediate action on the part of the agent by assuming self conferred extraordinary powers in good faith so as to protect the interest of his principal or any third party.

 Although the powers of the agents are under ordinary circumstances limited to particular acts for which he has been authorized by the principal; yet, extraordinary emergencies may arise under which a person who is an agent may, from the necessities of the case, be justified in assuming extraordinary powers. Any act done fairly by an agent under such circumstances shall be binding upon his principal.

In essence, we can say that an agency of necessity confers some special authority on an agent in an emergent situation and an act done by the agent in the exercise of such an extended authority would bind the principal with any third party, if the agent was not able to communicate with his principal and the course whatever, he undertook under such circumstances was necessary. This further means that whatever an agent did under such circumstances was practically, the only reasonable and prudent course of action, left open to the agent to take recourse to and that whatever he did, he did it by acting purely in good faith and in the sole interest of the parties concerned. This proposition of law may be explained with the help of the following case law: Sims & Co. v. Midland Railway Company:

A certain quantity of butter was consigned with the defendant railway company. It was delayed in transit owing to a strike that paralyzed the railway traffic for a few days such that the consigned good (butter) on its being a perishable commodity was likely to get spoiled in the meantime, the railway company thus sold it off.

 

The question thus, came to the fore in this case was:

Was the railway company (defendant) authorized to sell the commodity and would the sale be held binding on the Plaintiff?

It was answered in the affirmative by the court by invoking the principle of necessity. The court however, further clarified that although, under ordinary circumstances, the said railway company which was deemed to be an agent of the plaintiff, would not have any authority to sell the commodity, but by the origin of extraordinary circumstances i.e. strike, the company's action would deemed to be a justified one insofar, as the necessities posed by the circumstances of the case were concerned.

Therefore, for all practical purposes, the sale could be declared to be binding on the owner (the principal).

Speaking in the same voice, the court also held that under a contract of agency, the agent is even authorized to establish a privity of contract between the principal and any third party.

What can be the different categories or classes of Agents?

There are two such categories/ classes of agents:

(a)        Sub-agent

(b)        Substituted Agent

(a)        Sub-Agent:

Who is a sub-agent? He is a person employed by and acting under the control of the original agent in the business of the agency. He acts under the control of the original agent and between the agent and sub-agent; the same relationship of principal-agent subsists as it exists between the original agent and his principal. Sub-agent thus, discharges such of the functions as have been authorized to him by the original agent in the course of his agency business. For example, stock brokers appoint clerks to transact business on behalf of their clients.

(b)        Substituted Agent:

Sometimes, the principal may ask the agent to name another person to act for the principal in carrying out a part of the business of agency. Such a person is known as the Substitute Agent. For example, Ishwar Chand appoints Raghu as his agent to collect rent from his tenants. One tenant defaults and Ishwar Chand wants to initiate legal action against the defaulting tenant. He asks Raghu to refer him to a particular competent lawyer. Raghu names one Mr. Puneet, an established lawyer to represent Mr. Ishwar Chand. Here in this example, the lawyer, Mr. Puneet can be termed as a substituted agent.

Agent’s duty to name such a person (substituted agent):

In selection of a substituted agent for his principal, an agent is bound to exercise the same amount of discretion as a man of ordinary prudence would exercise in his own case; and if he does this, he is not responsible to the principal for the acts or negligence of such a substituted agent so selected by him for his principal.

THE PARTNERSHIP ACT- 1932:

What is a Partnership?

Partnership refers to that relationship between persons who have agreed to share the profits of a business entity which is being carried on by all of them collectively or any one of them while acting for all. Such of the persons engaged in such a relationship of a business entity are referred to as the ‘partners.’

Nature and Types of Partnership: A partnership as noted above is the relation between persons (called 'partners') who have agreed to share the profits of a business carried on by all of them or by any of them acting for all. Collectively, all the partners constitute a partnership firm.

Essentially, the partnership is the relationship that binds the partners whereas; the firm is the collective name for all the partners. Legal issues pertaining to a partnership firm are governed by the Indian Partnership Act, 1882, as amended in 1932, which inter-alia lays down that the minimum number of Persons required to constitute a partnership is 2 (obviously, because otherwise there can exist no relationship) and the maximum number is 10 in case of banking business and 20 in case of all other businesses. Since 'partnership' is only a term used to collectively refer to all the partners, it is obvious that the partnership firm is not something like a separate entity from that of the persons who actually constitute it, i.e., it is not an entity separate from them as it happens in a company and its shareholders. This is essentially what that separates a partnership firm from that of a company although, there does exist some other fundamental differences between the two which can be delineated as below:

• In a partnership, a partner cannot transfer his or her share (part of the capital) without the consent of all other partners, whereas in a company, this does not apply and the shares are freely transferable.
•  While the death or retirement of a partner dissolves the firm, the same situation does not affect a company in a similar manner in the sense that a company still continues irrespective of the death or retirement of a shareholder.
•  A company is a distinct legal entity and can therefore, sue and be sued. A partnership on the other hand, legally, cannot do so. And finally,
•  In a partnership firm, the partners may be held personally liable for debts and liabilities that may incur on a partnership firm. The same however, is not the case in a company. Moreover, in a partnership, the liability of a partner is not only joint, but several as well. In a company, the same is limited only to the extent of the share being held an individual shareholder.

While creating a partnership firm, the relationship between the parties is usually incorporated in a written document like a contract document that is called the `Partnership Deed’. This deed lays down the terms of agreement between the parties; it addresses issues such as number and identity of partners, profit sharing, business and place of its operation, method of operation, duration of partnership and its termination, etc.

A partnership could also be 'at will', where each partner can remain in the partnership only so long as he/she so desires.

Under this kind of partnership basically, any partner at his or her will, may terminate the partnership by giving his/her notice or information in this regard to all other partners. At the same time, a partnership could also be of a ‘particular type’ where it is to be created for a specific or a particular business or transaction purpose  say for example, purchasing an antique vintage car and reselling the same after doing it up or after refurbishment at a better price. Once this business has been successfully carried out, such a partnership then stands dissolved.

It needs here to emphasize that the kind of unique and special relations that a partnership creates between and among partners is that insofar as the partners and the relationship that subsists between them is concerned, they all are Principals.  However, so far as a partner’s relationship with the firm is concerned, for all practical purposes, each partner is an agent of the firm and of each other as regards third parties. This simply and clearly boils down to the fact that each partner is like an agent of the rest of the partners and thus, in this capacity, a contract entered into by a single partner with any third party is sufficient to bind all other partners into a contractual obligation just as a principal is bound by a contract entered into by his agent.

Full partnership vs. Limited liability partnership (LLP): A distinction:

PARTNERSHIP		LIMITED LIABILTY PARTNERSHIP (LLP)
Law:	Partnership is governed by Indian Partnership Act, 1932	Limited Liability Partnership Act 2008 governs LLP.
Extent of Liability:	Each partner is (jointly with other partners and severally i.e. separately) responsible to the extent of any liability.	Each partner is liable to the extent of his contribution to the LLP capital.
Number:	The Maximum Number of partners in a partnership firm is 20.	There is no limit on number of partners in LLP.
Registration:	The Registrar of Firms registers a partnership firm.	Registrar of Companies registers LLP.
Status:	Partnership Firm is not a legal entity. It has limited identity for the purposes of tax law.	LLP has a separate legal entity.

Relationship between Partners: As noted above and reiterated once again here that the relationship between partners is governed by the deed or the Agreement entered into by them in order to establish a partnership firm. This Agreement may be an express or implied one. However, the law itself, under the relevant Act, confers certain rights and duties upon partners. Let’s have a bird’s eye view of some of those:

Authority of a Partner: This is one of the most significant aspects that generally crop up in a partnership firm, because very often the rights of third parties as against the firm and other partners, depends on whether the act which may give rise to such rights, was within the authority of the partner in question. Therefore, it is one of the distinguished features of a partnership that each partner is both a principal and an agent of every other partner and each one is bound by the others in carrying on the trade or business of a firm.

The term authority however in simplest terms means an ability to represent the others and thereby, making the others liable.

Every partner can, by virtue of his being an agent of the firm, bind the firm as well as other partners with any act done by him provided and only if:

• the act has been done by him in the firm's name OR
•  in any other manner, expressing or implying an intention to bind the other partners as such.

There are two types of such authorities:

                                                            Authority

           

                                                         Express       Implied

Express Authority of a Partner:

When a partner is expressly authorized by an agreement of all the partners to do certain acts on behalf of the firm, it is called express authority of the partner. The firm is bound by all acts of a partner done within the scope of his express authority even if the acts are not within the scope of the partnership business.

What is an “implied Authority” of a partner?

Implied authority of a partner could be deduced to have been possessed by him under certain situations, if the partner…

• is carrying on the business of the kind usually carried out by the firm;
• in the usual way (as is usual in the partnership business) and
• the act is in the firm's name or in any other manner expressing or implying an intention to bind the other partners of the firm through such an act.

In all such cases of the above nature, the partner will be deemed by law to have the 'Implied Authority' (also ostensible or apparent authority) to bind the firm with such acts. It is also important to mention here that as with every other aspect of partnership, the implied authority of a partner may also be restricted or expanded by the deed.

Thus, the implied authority of a partner always depends on the kind of business being carried on by the partnership firm.

Say for example, A partner pledges the machinery of the firm to raise funds for meeting his personal debts. It is not the case of an implied authority and the firm is not liable.

To illustrate the point further with the help of another illustration wherein, two persons named, A and B are carrying on a partnership business as pawnbrokers. One day, ‘C’ pawns a bangle to A in their partnership shop of pawn brokering. A without showing the said bangle in the partnership records, appropriates it later on to his own use. ‘C’, after some days came to their shop along with the required amount of money which she had taken from the firm against the collateral security of her gold bangle and asked for the same to be returned. The firm denied having any knowledge of the said transaction between A and C and also refused to incur any liability for A’s actions.

The moot question here is:  will the firm be liable for the action of A?

Clearly, as per the principle of implied authority which A has clearly exercised by his act of taking the bangle can be construed to be an act that is something a part of the ordinary course of this partnership's business and therefore, the firm will be bound by A’s act and will have to compensate C for the loss of her bangle owing to the misappropriation on the part of the A.

Had the situation been the other way round wherein C had conspired with A to carry out this fraud, then the firm would not have been held responsible for the loss of the bangle, because this would not have then constituted the said act to be in the ordinary course of the firm’s business.

Nevertheless, the partnership Act also specifies certain acts that will not be construed to fall within the implied authority of a partner such as acquisition and transfer of immoveable property etc.

Authority of a Partner in Emergencies:

The Act also gives a partner the authority during emergencies to do all such acts as a person of ordinary prudence would do (in his/her own case) under similar circumstances, in order to protect the firm. All such acts consequently, shall remain binding on the firm.

Some other important concepts under the Partnership Act:

(1)        Partner by estoppel/holding out:

Usually, a person who wants to become a partner consciously enters into an agreement with other like minded persons; shares profit and losses and represent one another in the course of the business of partnership.

However, if a person represents to the outside world by words spoken/written or by his own conduct that he is a partner in a certain partnership firm, he is then precluded from denying his being a partner and is liable as a partner in that firm to any one who has on, the faith of such a representation granted credit to the firm.

Note:   In reality such a person is not a partner and has no ties with the partnership firm whatsoever.

Example:         P, Q & R are partners in a firm, Z is generally seen in the company of P, Q & R, tells T that he is also a partner in the firm, T believing the representation of Z, lends money to the firm. Upon the default of the firm, T can make Z liable on the basis of doctrine of holding out or estoppel.

(2)        Effect of Notice to a Partner:

Notice to a partner who habitually acts in the business of the firm, of any matter relating to the affairs of the firm operates as notice to the firm, except in the case of fraud on the firm, committed by or with the consent of that partner.

Example:         A partner while negotiating with a seller of truck to be purchased for the firm is aware that it is a stolen vehicle, nevertheless purchases it for the firm. The firm later on cannot deny such knowledge, despite being in the dark about the bad title of such a truck.

(3)        Liability of a partner to outsiders:

(a)        Every partner-is liable, jointly with the other partners and also severally, for all acts of the firm done while he is partner.

(b)        Further the liability of all the partners is unlimited.

(c)        Where, by the wrongful act/omission of a partner, loss or injury is caused to any third party, the firm is liable therefore to the same extent as the partner himself.

(d)        The firm is also liable where the partners have misapplied or misappropriated any money/property received from a third party, while it is in the custody of the firm.

                                                     

 

…The End…