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CONTRACT LAW
Master in Business Laws - Part I
Law of Contract
Course No: I
Module No: I-IX
Distance Education Department
National Law School of India University
(Sponsored by the Bar Council of India and Established
by Karnataka Act 22 of 1986)
Nagarbhavi, Bangalore - 560 072
Phone: 3211010 Fax: 3217858
E-mail: mbl@nls.ac.in
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CONTENTS
TOPICS
1. Contract: Concept and its Role in Developing Society (Module I) .............................................. 3
2. Capacity and Consideration (Module II)........................................................................................41
3. Free Consent and Public Policy (Module III).................................................................................75
4. Public and Government Contract
Engineering Contract and Quasi Contract (Module IV)............................................................... 108
5. Discharge of Contract (Module V) ................................................................................................. 142
6. Breach of Contract and Remedies (Module VI) ............................................................................ 181
7. Representative Contracts (Module VII) ......................................................................................... 212
8. Special Contracts (Module VIII)............................................................................................ 268
9. Digital Contract (Module IX) ............................................................................................... 326
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Contract: Concept & Its
Role in a Developing Society
Master in Business Laws
Law of Contract
Course No: I
Module No: I
Distance Education Department
National Law School of India University
(Sponsored by the Bar Council of India and Established
by Karnataka Act 22 of 1986)
Nagarbhavi, Bangalore - 560 072
Phone: 3211010 Fax: 3217858
E-mail: mbl@nls.ac.in
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Materials Prepared By :
1. Prof. N.L. Mitra M.Com., LL.M., Ph.D.
2. Mr. S.V. Joga Rao B.Com., LL.M., M.Phil.
Materials Checked By :
1. Mr. T. Devidas LL.M.
2. Ms. Sudha Peri LL.M.
Materials Edited By :
1. Dr. P.C. Bedwa LL.M., Ph.D.
2. Mr. V. Vijaykumar M.A., LL.M., M.Phil.
3. Mr. Harihara Ayyar LL.M.
4. Mr. P.P.R. Nair
National Law School of India University
Published by
Distance Education Department
National Law School of India University,
Post Bag No: 7201
Nagarbhavi, Bangalore - 560 072.
Printed at
National Printing Press, Koramangala, Bangalore - 95
Ph: 5710658
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INSTRUCTIONS
Basic Readings
The materials given in this course are calculated to provide exhaustive basic readings on topics and sub-topics
included in the course. Experts in the area have collected the basic information and thoroughly analysed the same
in topics and sub-topics. Lucid/supportive illustrations and leading cases are also provided. Relevant legislative
provisions are also included. Care has been taken to communicate basic information required for decision making
in problems likely to arise in the course-area. The reader is advised to read atleast three times. In the first reading
information provided are to be selected by making marginal notes using markers. The first reading, therefore,
necessarily has to be very slow and extremely systematic. While so reading the reader has to understand the
implications of those informations. In the second reading the reader has to critically analyse the material supplied
and jot down in a separate note book points stated in the material as well as the critical comments on the same. A
third reading shall be necessary to prepare a Check List so that the check list can be used afterwards for solving
problems like a ready reckoner. (The reader is required to purchase a Bare Act and refer to the relevant sections at
every stage.)
Supplementary Reading
Several supplementary readings are suggested in the materials. It is suggested that the reader should register with
a nearby public library like the British Council Library, the American Library, the Max Muller Bhavan, the National
Library, any University Library where externals are registered for the purpose of library reading, any commercial
library or any other public library run by Government or any private institution. Readers in Metropolitan and other
big cities may have these facilities. It is advised that these basic materials be photocopied, if necessary, and kept
in the course file. Supplementary readings are also required to be read more than once and marginal notes, marking
notes, analytical notes and check lists prepared. Any reader requiring any extra readings not available in his/ her
place may request the Course Coordinator to photocopy the material and send it by post for which charges at the
rate of .50 paise per page for photocopying and the postage charge shall be sent either by M.O. or by Draft in
advance. The Course Coordinator shall take prompt action on receiving the request and the payment.
Case Law
The course material includes some case materials generally based upon decided cases. These cases are to be
studied several times for,
(a) understanding the issues to be decided (b) decisions given on each issue (c) reasoning specified
It is advised that while reading a case the reader should focus first on the facts of the case and make a self analysis
of the facts. Then he/she should refer the check list prepared earlier for appropriate information relating to law and
practice on the facts. Then the student should prepare a list of arguments for and on behalf of the plaintiff/
appellant. Keeping the arguments for the plaintiff/appellant in view of the reader should try to build up counter
arguments on behalf of the defendant/respondent. These exercise can take days. After these exercises are done
one has to prepare the arguments for or against and then decide on the issues. While deciding it may be necessary
often to evolve a guiding principle which also must be clearly spelt out. Subsequently the reader takes up the
decision given in the case by the judge and compare his/her own exercise with the judgment delivered. A few
exercise of this type shall definitely sharpen the logical ability, the analytical skill and the lawyering competence.
Though it is not compulsory, the reader may send his/ her exercises to the Course Coordinator for evaluation. On
receiving such request the Course Coordinator shall get the exercises evaluated by the experts and send the
experts comment to the students. Through these exercises one can build up an effective dialogue with the experts
of the Distance Education Department (DED).
Problems and Responses
After reading the whole module which is divided into several topics and sub-topics the reader has to solve the
problems specified at the end of the module. The module is designed in such a manner that a reader can take about
a weeks time for completing one module in each of the four courses. It is expected that after finishing the module
over a period of a week the student solves these problems from all possible dimensions to the issue. No time limit
is prescribed for solving a problem though it would be ideal if the reader fixes his/her own time limit for solving the
problem - which may be half an hour per problem - and maintain self discipline. While solving the problems the
candidate is advised to use the check list, the notes and the judicial decisions - which he/she has already prepared.
After completing the exercise the student is directed to send the same to Course Coordinator for evaluation.
Though there is no time stipulation for sending these responses a student is required to complete these exercises
before he/she can be given the certificate of completion to appear for final examination.
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Contract : Concept and its Role in a
Developing Society
TOPICS
1. Genesis of Contract..................................................................................... 7
2. Contract : How to make............................................................................ 11
3. Justification for Contract............................................................................ 19
4. Types of Contract......................................................................................... 23
5. Terms of a Contract.................................................................................... 26
6. Contract in the Changing Society.............................................................. 29
7. Relevant Provisions of the Act................................................................... 33
8. Case Law...................................................................................................... 34
9. Problems....................................................................................................... 36
10. Supplementary Readings............................................................................. 40
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1. GENESIS OF CONTRACT
SUB - TOPICS
1.1 Introduction
1.2 Early history of Contract Law
1.3 Contract as a method of creating new rights
1.4 How is a contract made?
1.5 Definitions
1.1 INTRODUCTION
A modern industrial society is primarily built upon the fabric of
contract. The relational integration and determination of mutual
rights and obligations to a great extent, are dependent on ex
contractum (out of contract) terms. There is contract around,
between employer and the employees, producers and
distributors, vendors and the customers, carrier and the buyer
of services and the like. Even family relations also start with
contract, marriage being either a contractual relation or similar
to it. The very basic principle of market functioning in the early
period of mercantalism and industrialisation was laid down on
the efficient functioning of contractual relation by relative
assessment of rights and duties arising out of a contract. In a
modern state, government is also becoming a very important
party in contractual relations. It is, therefore, necessary to
understand how and when parties enter into such a contract in
order to examine their mutual rights and obligations, and the
time of origination of such rights and obligations. In order to
correctly evaluate these aspects, one has to understand the
following:
1. Whether the parties have agreed to make any binding right
and obligation for themselves?;
2. How they have made it?;
3. What are their mutual advantages and obligations?;
4. How they intended to perform their mutual duties and
when?;
5. What are the conditionals? and
6. What happens if one of the parties is unable to fulfil his/her
obligations?
Here we shall try to explain you why, when, and how a contract
is made.
1.2 EARLY HISTORY OF CONTRACT LAW
Generally speaking history of human civilization has experienced
several legal systems. Some of which are still in vogue in pure or
moderated form. Leading legal systems are:
1. Ecclesiastical/religious system is based on the religious,
textual and customary processes inducted through religious
faith and belief;
2. Romana-Germanic system is based on growing codification
on logical foundation as well as clear customary practices
which are secular in character. One of the earliest code was
Justenian code;
3. Civil law system based on a well structured constitutional
legal regime with inquisitorial procedural system. Western
European countries follow this system;
4. Socialist system with high public interest involved specially
on the issue of freedom of contract; and
5. Common law system which provided golden opportunity
for mercantilism and capitalism to develop with rapid
industrialisation. Besides, more than half of the globe was
under the domination of this common law system under
the British in eighteenth, nineteenth and early twentieth
centuries.
In Common law, Law of Contract was carved out of the law of
tort in the fourteenth and fifteenth centuries. Initially, three
writs' (Writ is a specific order/direction by the court to act in
a manner specified) used to play a very important key role. In
case of agreements of loan and credit Writ of debt was issued.
In clear cases of agreements, especially in writing, on transfer
of landed properties writ of covenant was issued asking the
party to perform his part and a writ of trespass was issued in
the event of any party to the contract of quasi contractual
situation transgressing the rights acquired by the other party.
Another writ to provide remedy in the event of a party to the
contract committing breach, known as Writ of deceit was also
issued. Trespass was issued in the event of physical injury to
person and property and deceit was issued in wide range of
cases. Similarly a composite writ of debt-debtenu used to be
issued in a situation where the defendant used to unjustly detain
something, on which, the plaintiff had the claim or was entitled
to possess. Of course the functional distinction between the
writs could not be very clearly stated now. One can, of course,
start carefully tracing the history.
The basic principle of action on civil wrong was based upon
three clear actions or inactions on the part of the defendant.
For example a person could have done something which is per
se wrong. In law it is known as Misfeasance. Such as, A agreeing
to sell to B something on which A has no right of title and
possession, and consequently B cannot acquire title or
possession. Secondly, a right act could be wrongly done, which
in law is termed as Malfeasance. Such as, A by use of coercion
forces B to sell his land to A. Here, A has used foul means
which he could rightly do as well i.e., without the use of force.
On the other hand, a right thing not done at all is known in law
as Nonfeasance. Such as, A not paying back the amount of
loan taken from B. In all these above cases the plaintiff could
seek justice against the action or inaction of the defendant. The
court used to issue writs in order to deliver justice to the plaintiff
by appropriately designing a simple or compound writ. But as
matters got complicated during the period of mercantilism at
the early part of industrialisation, different theoretical
foundations were necessary to legally bind parties in different
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contractual situations. In early sixteenth century the court of
Kings Bench formulated another remedy known as Assumpsit.
One could trace the conflict of ideas on remedying in the event
of breach of contract between court of Kings Bench and court
of Common pleas. Anyway, according to the court of Kings
Bench under every executory contract the parties used to assume
or promise to pay an amount or deliver goods. Thus action on
assumpsit was held to be more appropriate than the limited
applications of writs. Writs had pigeon-hole application
whereas contract required a wider legal remedies, especially
when contract of services were also involved during the period
of early industrialisation. In actions of assumpsit during the
earlier period there was scope for speculation as to the matter
of promise gratuitously made. Gradually, English courts held
that a quid pro quo would be required in all cases of promises
to be legally binding excepting where a promise is ipso facto
made binding under courts seal [This is explained in detail
subsequently on consideration]. With the rapid growth of
industrialisation in the last hundred and fifty years, importance
of contract could not be over estimated in all legal systems.
Moral foundations of a promise to make it legally binding in
religious or ecclesiastical systems, could not hold the system.
The principle of Pacta Sunt Servanda of Romano-Germanic
system meaning thereby, promise once made is binding or one
must observe ones words given to other, else he takes the curse
of the God, a principle of the ecclesiastical system could not
hold the test of time. Rapid industrialisation required more
transparancy in the legal system. Gradually more and more
countries started codification of the law of contract. India
however, has its codified contract law enacted in 1872. One
can easily understand the benefits of codification, viz.,
1. transperency of law at any given point of time;
2. easy public accessibility; and
3. amendability with the change of time and need.
The argument made by common law advocates against
codification is that it makes law more rigid as compared to the
judge made law, is untenable. Judges by their nature of training
and work, tend to become rigid and Status quoist (meaning
person supporting status quo). Hence Common Law system
based upon case law became mostly non-dynamic specially
before Karl Marx came on to the scene. Legislative process,
on the other hand, is bound to respond quickly to the requirement
of time. Members of the legislature as represent the people so
they understand well the need of the time and the people in a
better way.
In fact with rapid globalization of economic production
relations and quicker communication links, a uniform
commercial code is bound to come for the whole world in the
long run. The movement is already felt strongly. Through
multi-lateral treaties and conventions many areas of the
commercial contract have already been globally codified.
Marine contracts, contracts of transnational services, tele-
communication contracts, contracts of exports and imports,
international commercial arbitration, technology use contracts,
contracts on Intellectual properties etc. are either already under
some sort of globalised code or under high globalisation. One
can, at this stage, note the growing number of global legislations
in the area of contract. Sir Henry Maine (Friedman, Law in a
Changing Society, 119-120) is perhaps right when he said that
codification is a test of modernisation of the legal system. One
may further add to it by suggesting that universalisation and
secularisation are perhaps other two attributes of the most
advanced legal culture.
1.3 CONTRACT AS A METHOD OF CREATING NEW
RIGHTS
Contract is the method through which individuals make law
for themselves by creating rights and obligations ex contractas.
As a human being, a person shall have some rights, duties and
obligations ex factum i.e., by mere fact of being a person in the
society. For example, basic human rights or fundamental rights
or family rights like right of parenthood, right of succession,
right of paternal or maternal names etc., are rights ex factum.
But each individual is an economic being as well as a social
identity. As an economic being he/she takes rational economic
decisions to enter into contracts with others to derive better
social, economic and other pleasures, through such relations
by creating new rights and obligations. A person understands
that his/her factual social existence shall be more meaningful if
he/she takes economic decisions rationally. By entering into a
new contractual relation and thereby altering his/her position
in relation to creation of wealth. Contract is the sole method
of altering factual situations and raising more and more wealth
and economic satisfaction. Without contractual relations
society would have remained static. Through contract wealth
of a person is increased, so also of societys and society is made
dynamic.
1.4 HOW IS A CONTRACT MADE ?
A contract is made between two or more parties where-
a. An agreement is made through one party making an offer
and the other accepting the same; an offer accepted
becomes a promise;
b. The agreement being legally enforceable in so far as it fulfills
the following conditions:
(i) parties must be willing to enter into a legal relation;
(ii) parties must be competent to enter into a contract
that results in legally enforceable rights, duties and
obligations;
(iii) parties must have given free consent to the terms of
the contract;
(iv) there is a lawful object and consideration;
(v) the agreement is not against public policy or morality;
and
(vi) the agreement is not otherwise void in the eyes of
law.
c. Once an agreement fulfills the above conditions it becomes
a legally binding contract.
All these conditions require critical analysis.
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1.5 DEFINITIONS
In order to understand the law and technicalities of contract
specially as to when and how a contract is made, we are required
to have a clear understanding of denotative (area of application)
and connotative (quality and attribute) definitions of some of
the terminologies we use in this course.
(a) Proposal
In English common law a proposal is known as an offer. In
every contract one party, generally speaking, is required to take
initiative for proposing or offering a term which other party
may accept if interested to make an agreement. A proposal or
offer can be defined as an intimation by words or conduct, of
a willingness to enter into a legally binding contract, and which
in its terms expressly or implicitly indicates that it is to become
binding on the offer or as soon as it has been accepted by an
act, forbearance or return promise on the part of the person to
whom it is addressed. (Guest, A.G, Ansonss Law of Contract,
(24th Edn, LPE), p.28) According to sec. 2(a) of the Indian
Contract Act (ICA) when a person signifies to another his
willingness to do or to abstain from doing anything, with a view
to obtaining the assent of the other to such act or abstinence, he
is said to make a proposal. [See sec. 2 (a)]
(b) Acceptance
According to sec. 2(b) of the Indian Contract Act, when the
person to whom the proposal or offer is made signifies his assent
thereto, the proposal is said to be accepted.
(c) Promise
According to sec 2(b) a proposal when accepted becomes a
promise. Suppose A offers to sell his horse to B, and B accepts
the offer, there is a promise.
(d) Agreement
To make a contract there has to be an agreement. An offer and
acceptance constitute the agreement. According to sec.2(e) of
the Indian Contract Act, every promise and every set of
promises, forming the consideration of each other, is an
agreement. Suppose A offers Rs.1,00,000/- for Bs plot of
land and B accepts the offer, there is an agreement between A
and B.
(e) Contract
According to some juristic writers of the nineteenth century,
contract is an agreement between free and consenting minds.
In this subjective sense, the concept is very near to the Roman
idea of consensus ad idem, i.e., the meeting of two minds.
There are obvious difficulties in accepting this definition
because individual liberty and freedom of contract - the two
essential notions necessary for consenting minds, are two ideal
classical notions that have cased to have idealistic attraction in
an acquisitive society of modern times. For example, a young
boy of 13 or 14 years, Ram Kishan, ran away from his home at
Baheri on the 9th of June 1993. The father offered a reward of
Rs.500 to anybody who traces the boy and brings him home.
On July 19, Mr. Harbhajan was at Dharmshala of Bareilly
Railway station. There he saw the boy, overheard part of the
conversation of the boy and realised that he was Ram Kishan.
He promptly took the boy to the Railway Police station where
he made a report and sent a telegram to the boys father. Could
Mr. Harbhajan be entitled to the reward? In this example, it is
immaterial to argue whether the extent of Mr. Harbhajans liberty
to trace the boy is of paramount consideration, or the extra
effort to undertake the liability of finding out the boy. Rather
objectivists try to define the term more positively by defining
the contract as a promise enforceable by law. This positive
definition has also certain demerits of irreconcilability with
questions of morality and ethics at times. Suppose, the father
came to know that Mr. Harbhajan traced the boy but just before
he could take the boy to police station and sent the telegram he
withdrew the proposal for reward. Is this not an immoral or
unethical act for him to do? In fact, at times some subjective
considerations become essential on the issue of legality and
illegality. For example, in the above situation, the question
whether Mr. Harbhajan did fulfil all conditions of the offer for
reward was the issue in consideration. For the time being let us
take the advice of Anson, that certain legal concepts are
defeasible. These are capable of being withered or defeated
in a number of different contingencies but if no such
contingency arises, the import remains intact. The Indian
Contract Act 1872, has tried to define the term in Sec. 2(h) in
the same positive manner as an agreement enforceable by law
is a contract'.
(f) Void agreements
An agreement which is not enforceable by law at all is an
agreement void ab initio i.e., from the very beginning. This
means that such agreements do not create any rights or
obligations in favour of or against the agreementing parties.
The second marriage of a Hindu spouse, while the first marriage
subsists, does not create any rights in favour of the second
spouse, and hence there is no necessity of a decree of divorce.
In other words, if a party to an agreement, agrees to do an act
which he is forbidden by law to do, no contractual rights or
obligations arise. Such an agreement cannot be the basis of
any further agreement, because all those consequential or
collateral agreements also become void ab initio. For example,
A agrees to sell a property to B to which he has no title or right
of possession. This agreement therefore cannot create any right
in favour of B, nor an obligation against A. Now suppose,
relying on the validity of this agreement B agrees to sell the
same property to C, that agreement is also void ab initio. In
Cundy v. Lindsay [(1878) 3 App.C.459]. The plaintiff received
an order for handkerchiefs from Blenkarn who gave his address
as, 37 Woodstreet, Cheapside. He signed his name to make it
look like Blenkiron & Co. a respectable firm known by
reputation to the plaintiffs and carrying on their business at
123, Woodstreet. The plaintiff sent the goods to Blenkiron &
Co, 37 Woodstreet, where Blenkiron took possession of them.
He later sold them to the defendants. It was held that there was
no contract between the plaintiffs and Blenkarn, as the plaintiff
had never intended to deal with him. So the property in the
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handkerchiefs did not pass to Blenkarn, and, consequently, he
could pass none to the defendant. So plaintiff was entitled to
take the whole lot of handkerchiefs from the defendant, and the
defendants argument that they had purchased the goods
bonafide, for value consideration was not deemed a valid
defence.
(g) Void Contracts
A contract which is valid at the time of entering into it, but
becomes void at the time of performing the contract due to
change of circumstances is known as void contract. That is, if
a contract is enforceable by law at the time of entering into it,
but becomes unenforceable at the time of execution, such
contract is known as void contract. A contract collateral to a
void contract is not necessarily void. For example, suppose
Suresh has landed property in Bombay. He received a notice
of acquisition on 1-1-1994. He thought that in order to
substantiate the market rate of the land or a reasonable value he
could resort to an agreement of sale of the land. So he offered
his land for sale to Dinesh for Rs.50 lakhs. Dinesh was unaware
of the notice of acquisition. This agreement is void ab initio
and no importance is to be given to the existence of agreement
while computing the compensation. Whether Dinesh had paid
any advance on the agreement need not also be considered.
But suppose Suresh and Dinesh had entered into the agreement
for sale - purchase of land before the issuance of notice of
acquisition to Suresh. In such a case, consideration could be
given while computing compensation about the existence of
that contract, which had become void on the service of the
notice. We can take another example to this point. Manish, a
minor, sold a property to Dinesh, who later on sold part of the
property to Harish. Here both the sales are void, because the
agreement between Manish and Dinesh is void ab initio, and
consequently the later agreement between Dinesh and Harish
is also void. But suppose, Manish is an adult person and he
agrees to sell the property to Dinesh because Dinesh has
threatened to kill his brother unless Manish agrees to sell the
property. Now suppose the sale did take place, and thereafter
Dinesh sold part of it to Harish. After sometime Manish applied
to the court and did prove that he had to agree because of the
threats from Dinesh. The Court gives the decree of avoidance
i.e., declares the contract between Manish & Dinesh void. Here
Manish will not be able to get the part of the property sold to
Harish, because the contract between Dinesh and Harish was
valid and could not be terminated on grounds of avoidance of
contract due to Coercion, unless of course Harish was also a
party to that coercion or Harish had purchased the property
with knowledge of the coercion.
(h) Voidable Contracts
A contract which is avoidable at the option of a party is known
as voidable contract. In other words, a voidable contract is one
where one party can go to the court on justifiable plea and can
avoid the contract under the direction of the Court. Such a
contract remains absolutely valid until the court gives the order
of avoidance. As per sec. 19(a) & (b) of the Indian Contract
Act, a contract is voidable by the party suffering from the
consequences of coercion (S.15), undue influence (S.16), fraud
(S.17), and misrepresentation (S.18). Once the court gives the
order, the contract becomes void.
(i) Illegal agreement
An illegal agreement is one where, if the agreement is performed
parties would violate the provisions of some law. For example,
A offers to pay Rs.1,00,000 to B if B murders C. This agreement
is illegal. Such an agreement itself is an act of conspiracy. If B
murders C, B will be prosecuted for murder and A on charge of
murder or abetment of murder. All illegal agreements are void,
but all void agreements are not illegal.
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2. CONTRACT : HOW TO MAKE
SUB TOPICS
2.1 Introduction
2.2 Proposal
(a) Various methods of making a proposal
(b) Buyer is the offeror in the common law system
(c) Proposal must not be confused with invitation to treat
(d) Proposal must be communicated
(e) Counter offer
(f) Proposal to be made to a person
(g) Withdrawal or revocation of a proposal
2.3 Acceptance
(a) Acceptance must be in toto
(b) When is acceptance made?
(c) Silence is no acceptance
(d) Acceptance by conduct
(e) Revocation of acceptance
2.4 Where is the contract made?
2.5 Proposal and acceptance in three forms
2.6 Types of Agreement
2.7 Contract : A final comment
2.1 INTRODUCTION
According to the provisions of Indian Contract Act, 1872, an
agreement enforceable by law is a contract. So to make a
contract there has to be (i) an agreement and (ii) it must be
enforceable by law. An agreement is a promise or a set of
promises. A proposal when accepted becomes a promise.
Formation of contract can be explained by the following chart.
CONTRACT
(S. 2h) Agreement enforceable by law
(S. 2e) Promise/Set of promises
(S. 2a) Proposal + (S. 2b) Acceptance
Note: From the above, it is clear that the basis of contract is a
proposal made by one person and an acceptance of the
same by another.
2.2 PROPOSAL
The following are the ingredients in a proposal : (i) two persons
are necessary for a proposal - One to make it and the other to
receive it. If A wants to sell a house, there has to be another
person B, who would be willing to buy the house i.e., A cannot
sell the house to himself; (ii) the proposer must signify his/her
willingness; (iii) to do something or to abstain from doing; and
(iv) the proposal requires the consent of the other person. Let
us take an example. A proposes to sell his land for Rs. 50,000
and signifies it to B, which B may accept. This is a proposal.
But one must not confuse desire of a person with intention to
do or abstain from doing a thing. For example, A has a desire
to become Prime Minister of the country, which he tells to B.
This is not a proposal in the legal sense of the term.
2.2.1 Various methods of making a proposal
Proposal or offer can be made in various ways. A bus plying in
a route is an offer by conduct. Any intending passenger getting
into the bus, accepts the service. But that is not so in the case
of plying a train. Train fare has to be tendered in the counter
proposing the destination and the ticket must be obtained.
Proposing the place for journey and tendering the fare is the
proposal and issue of tickets is the acceptance, the railway ticket
itself being the formal document of acceptance. A railway time-
table or a book list or a menu chart are not proposals. These are
mere documents of information available to the intending buyer.
Proposal may be given in writing. In some cases a proposal is
required to be in writing. For example, a government contract,
a contract of significant resource mobilization or a contract for
transfer of immovable property are given in writing. On the
other hand, in innumerable contracts in our daily life proposal is
made orally. When parties are situated at a distance, an oral as
well as a written proposal is generally made through the use of
tele-communication system like telephones, telex, teleprinter,
telegram, fax or through letters.
2.2.2 Rules for ascertaining the offeror:
1. Labelling Method
In the common law system a buyer is generally the proposer.
In a modern agreement, the proposal is given in a clear form
and conditionalities of it often become transparent over a series
of dialogue which is required to be taken together to formulate
the final proposal. Sellers often stipulate conditionalities but
these are not the proposals. It is the buyer who formulates his
proposal on the conditionalities stipulated in such a form that
the seller can accept the proposal. For example, a person requires
a project loan from a bank. He makes an enquiry. The bank
stipulates that the project papers are required to be given in a
stipulated form specifying certain informations required to be
certified by a recognised chartered engineer and the loan can
be sanctioned on some definite terms and conditions. Whatever
the bank has stipulated would be considered as mere
information and the person seeking that information cannot say
I accept your terms and hence the bank would be liable to
provide a loan. It is upon the person seeking the loan to prepare
all papers as per the conditionalities and submit the proposal
which the bank may or may not accept.
Conceptually speaking, this principle of suggesting that a buyer
is always the proposer can be said to be a labelling process
i.e., the buyer is labelled as the offeror. In this labelling process
the court generally starts its calculation from the behaviour of
the customer in order to locate what is his offer and what are
the terms and when it is made in its entire form. Thus the court
makes the forward calculation as to what has happened one
after the other from the point of buyer giving his proposal.



12
2. Back Calculation Method
Some of the authors suggested a different inquisitorial method
of back calculation (meaning the court goes back to the first
instance giving rise to the contract to ascertain the rights and
liabilities of the parties. In this method the courts do not start
with the presumption that the buyer is the offeror) in which the
proximate action of the defendant is examined for determination
of plaintiffs remedy and then back-calculate the chain of
actions according to the approximation of remedy. Whereas
the former has a question of moral hurdle involved, the latter
has a principle involved in decision making. To make things
clear, suppose, a seller has marked a packet of dozen table
tennis balls at say, Rs.100.00 in the self-service counter. A
possible customer picks the packet up and tenders Rs.100.00
which the seller in the counter refuses to sell. In the labelling
method, buyer being the proposer, proposes the packet to the
seller at Rs.100.00. The seller may or may not accept it. Since
seller does not accept it, there is no remedy. The question
involved here is that how far the seller displaying the packet in
the self-service shelf stipulating a price and thereafter refusing
to sell it, is morally justified? Has he not ditched the buyer?
According to this argument the court has to critically look into
the behaviour pattern of the seller which has immediately caused
the grievance. Suppose the court finds the action of refusal to
sell as unjustified and unreasonable, it may back calculate and
decide that the price stipulation is itself a proposal. Suppose,
the packet is already sold and is inadvertantly placed in the
shelf, then the court may decide the action of the seller to be
justified and placement of the article and stipulation of the price
to be not an offer. Here the certainty in law is at stake.
Labelling makes decision making definite whereas the back
calculation meets the need for variations to be taken into
decision-making in each individual case but sacrificing
certainty. Business world prefers certainty than judicial
discretion and uncertainty.
In Mc Pherson v. Appanna, (AIR 1951 SC 184) the owner of
a house property had two local representatives for two
properties. Both were told to look after a particular property to
be sold. One customer wanted to pay for the house rupees six
thousand and the caretaker of the property sent the information
to the owner communicating the offer of rupees 6,000 by
telegram. The owner, in return, sent a telegram to the caretaker
stating Wont accept less than ten thousand. Caretaker
informed the proposer about the content of his masters telegram.
The same proposer immediately accepted whatever was
stipulated by the owner of property as the counter-offer and
later on sent a letter communicating his acceptance of the term
of paying Rs 10,000 for the property. Meantime, the other
representative sent another offer of Rs.11,000 which the owner
accepted and asked his representative to complete the sale-deed.
The earlier person filed a suit for breach of contract. Here the
court tried to examine the nature of the telegram of the owner
suggesting that he would not accept anything less than
Rs.10,000/-. This according to the court was not a counter
offer which could be accepted. Incidentally, it may be noted
that an offer cannot be conditionally accepted. If any condition
is attached to the acceptance, it becomes a counter offer. But
in this case it was not a counter offer since there was no definite
proposal in the telegram. It was merely an information that
anything less than Rs.10,000 would not be accepted. There was
no definite proposal. The earlier persons accepting to pay Rs
10,000 was itself the proposal which was never accepted by the
owner. Hence there was no agreement and, as such, no breach
of contract by the owner.
2.2.3 Proposal must not be confused with invitation to treat
Proposal and invitation, information and intention to propose
must be distinguished. The following examples would illustrate
the same:
i. The Secretary of a school advertised inviting applications
for the post of headmaster. X, an applicant was interviewed
for the post. The board of managers interviewed the
candidates and selected X for the post. A manager in his
individual capacity informed X about the selection. But X
did not get any letter of appointment. The court held that
there was no contract. The fact remains that there was no
offer. Advertisement for the post was merely intention to
offer. Application for the post was information. Interview
as the preparatory step for the possible offer. The letter of
appointment would only be the offer. (See Powell v. Lee
(1908) 99 L.Y. 284)
ii. A through telegram communicated to B, will you sell us
your Bangalore house ? Telegraph at what price. B replied
by telegram, `lowest price of the Bangalore house rupees
nine lakhs. A communicated back by telegram accepted
your offer of nine lakhs. It is not a contract because Bs
telegram of `lowest price is simply an information and
not a definite proposal. (See Harvey v. Facey ((1893) A
C 552-59) IE & E. 295, 309)
(iii) A advertised in the newspapers that an auction shall take
place at an address on a stipulated day and time. B reaches
the spot but finds the auction withdrawn without notice.
No action can be taken because it is an invitation to offer
and not an offer. (See Harris v. Nickerson [(1873) L.R.8
Q.B. 286]
The three examples given above relating to intention,
information and invitation to contract show the common law
situation of invitation to treat to be distinguished from the
offer or proposal. In civil law system things are not very
different. But in civil law system, for example in France, a
group of lawyers (Notably, Baudry Lacantinerie et Barde, 1,30.)
consider catalogues or trade circulars as conditional offers, i.e.,
offer open until the stock is exhausted. Goods displayed in the
shop window or on a counter with a price attached are also
legally analysed in the same way. According to them this is the
natural way. Ofcourse other section of the jurists as well as the
courts seems to be inclined in interpreting in the common law
way. They consider it only as an invitation to treat without
attaching any liability to the seller on the statements made. (See
Planiol et Ripert, 6,n
o
127,ni; Req. 29.4.1923 D 1904.1.136 et
al.) Ofcourse, as against the later there is a very strong objection
that this is to impute artificially the initiative to the wrong party
[See Carbomier, 2 (100)].
In most of the commercial contracts parties go through a chain
of events. In case everything goes well there is no problem.
But once a problem arises the whole process of the contract
requires a thorough scrutiny, in order to understand wherefrom
the offer started and upto what situation is simply remains as
13
an invitation to treat. It has already been stated earlier that the
common law system (followed in India) and the civil law system
of France and Germany have different ways of approach.
Whereas, in common law the identification is based upon the
buyer and seller, and the buyer makes the offer unless it is clearly
provided otherwise; in civil law the point of origin of the right of
promise, is taken as the first point of origin of the contract i.e.,
the offer. Upto that point, the dialogue between the parties in
exchanging information remains as an invitation to treat. Often
the offer itself crystallises after a long dialogue, containing
several enquiries, information, identification of subject matter,
offer of trade and cash discounts etc. Until the total offer
crystallises, there is no question of any acceptance. It means
that before the subject matter of the agreement is determined a
lot of information passes between the parties, and only then,
the buyer identifies the article he intends to buy. After a course
of dialogue and exchanges the buyer comes to understand the
reasonable price that he can offer. And, finally, they talk of a
lot of other issues like terms of sale, guarantees and warranties
and the after sales service. It may appear to the onlooker that
there are innumerable number of offers and acceptances
constituting the whole deal, but that is not so. In fact, when
everything crystallises and the buyer is in a position to propose
comprehensively, the offer is said to be made. Upto that level,
all that is thought to be various offers and acceptances are only
in reality invitation, intention and information necessary for
making an offer. Due to this complexity in modern commercial
contract, European law on contract started becoming codified
according to the common law practice of the buyer being the
offeror unless otherwise intended by the parties.
(d) Proposal must be Communicated
According to sec.3 of the Indian Contract Act, offer must be
communicated to the offeree in the manner intended by the
offeror. Uncommunicated offer is no offer and it cannot be
accepted. In Lalman Sukla v. Gouri Dutt,[(1913) ALJ 489]
the plaintiff was an employee of the defendant. He agreed to
go to Haridwar to search for the missing nephew of the
defendant and finally found the boy without knowing that the
defendant had announced some reward for the work. The issue
was could he demand the reward ! The court held that being
under the obligation, which he had incurred before the reward
in question was offered, he cannot claim the amount. A person
ignorant of the offer cannot be said to have accepted it only
because he has done something which the offer has stipulated.
Anson has rightly observed a person who does an act for which
a reward has been offered in ignorance of the offer cannot say
either that there was a consensus of wills between him and the
offeror, or that his act was done in return for the promise offered.
(Guest Ansonss Law of Contract 24 Edn, LPE, p.34).
Communication of offer is essential for its consequent
acceptance. A pair of cross offers with same terms from opposite
parties do not make an agreement unless one is made with
reference to the other. For example, suppose X intends to
purchase 800 tons of coal at Rs.700 per ton and writes to Y and
Y at the same time writes to X for selling 800 tons at Rs.700
per ton. These are known as cross offers where one crosses the
other at the transit. This is not a contract. (Tim v. Hoffman LC
(1873) 29 L.T. 271)
Terms of offer must also be communicated to bring out the
terms and conditions within the offer. This is very important
specially in the case of standard form agreements (Standard
form agreement is one where conditions are standardised by
the sale of goods and services in the form of information based
on which terms the proposer has to submit his proposal). For
example, a customer intending to get power connection has to
submit his proposal or application for power connection on the
basis of terms and conditions stipulated by the Board or in the
offer where terms and conditions are written elsewhere.
Suppose, the terms and conditions in a laundry are stated on
the backside of the bill. The notice of the customer must be
attracted to those conditions. In such a case it will be sufficient
if the proposal gives a reasonable notice of the contractual terms.
Suppose the front side of the document refers to vide reverse
or turn back or conditions given overleaf, such a notice is
enough to bring those conditions within the fold of the offer.
But if no notice is given and the conditions are kept outside the
promise, then the offer is not complete.
A proposal made through a telephone but not heard does not
become a proposal or offer. A teleprinter or a fax not bringing
the total proposal does not constitute any offer or proposal.
According to sec. 4 of the Indian Contract Act, the
communication of proposal is complete only when it comes to
the knowledge of the person to whom it is made.
(e) Counter-offer
If the offer is not accepted in its original terms and conditions
and is accepted with different terms or new terms stipulated,
the original offer is rejected and it stands terminated. Afterwards
the same cannot be activated. The acceptance with new terms
or suggestion of new terms becomes a counter-offer. For
example, A offers to sell a farm to B for Rs.10,00,000. B wants
to pay Rs.9,50,000. This is a counter-Offer. Suppose A refuses
it. B afterwards wanting to pay Rs.10,00,000 would not be
able to accept As earlier proposal because that proposal has
been terminated or cancelled with the counter-offer. Bs offer
is to be termed as a new proposal, i.e., a counter-offer.
Sometimes in a business contract it becomes very difficult to
identify the proposal in its entire form with conditionalities,
because the proposal crystallises over a bilateral dialogue. If
the dialogue is through correspondence or is made orally, the
whole of it must be viewed in its entirety according to the
intention of the parties in order to determine the proposal in its
entire form.
(f) Proposal to be made to a person
Proposal or offer must be made to another person. In one sense
it means that offer must not be made to self. For example, a
stock brokers offer for buying and selling the same share
benami, shall not constitute a proposal at all. The second
meaning is that offer requires two persons, one to make it and
another to whom it is made. A proposal made by the Managing
Director of a limited company for and on behalf of that company
to the Managing Director but acting in his private capacity, is a
good proposal. Here the proposer is the limited company since
it is a legal person. The other person is the MD, acting in his
private capacity. But it is not necessary that offer has to be made
to a definite person. Offer not made to anyone in particular
i.e., one which may be accepted by anyone, is a general offer.
14
When offer is made to a specific person it is a specific offer. For
example, if a reward is declared to anyone who finds the lost
dog, it is a general offer, but Xs offer to purchase Ys law
books for Rs.50,000/- is a specific offer. The third meaning is
that a person to make an offer and to receive it must be either
a person-in-fact or a person-in-law. The corporate bodies are
person-in-law and can make or receive offer, ofcourse, within
the scope of its terms of incorporation. These principles are
same or similar in all other legal systems.
(g) Withdrawal or revocation of proposal
Offer or proposal may be withdrawn at anytime before it is
accepted. This is the general principle of revocation of offer in
common law as well as in civil law. In India the codified law is
more detailed, because the law relating to acceptance was not
the same earlier in India as it was in the common law or in the
civil law system. According to sec.5 of the Indian Contract
Act, proposal can be revoked at anytime before the
communication of acceptance is complete as against the
proposer but not afterwards. Suppose X proposes to buy Bs
motor car for rupees one lakh on 1.1.92. The letter reaches X
on 5.1.92. The offer is made on 5.1.92. Now suppose B agreed
to sell the car and sends the letter on 8.1.92. The communication
of acceptance is complete against X on 8.1.92. So if X wants
to withdraw or revoke the offer, he has to do it before 8.1.92.
Suppose X agrees to be the guarantor if Y discount bills with
State Bank of India for a period of twelve months. This is
known as a standing offer for twelve months against acts of
discounting bills. On every bill being discounted, the offer or
proposal turns into a promise. Suppose after three months X
revokes his guarantee giving notice, he shall not be liable for
further discounting of bills. (See Offord v. Davies (1862) 12 N.S.
748. A Statutory law, or a law passed by the legislative system
of a country and promulgated on the people is known as a
codified law. So Indian Contract Act, 1872 is a codified law).
In unilateral contracts (Unilateral contract is a promise for an act
e.g. reward for an act) the revocation of the proposal becomes
sometimes a complicated issue. Suppose X proposes a reward
of Rs.1000 if anyone brings back his lost dog. Here if X is
allowed to withdraw his offer before the finder of the lost dog
brings it to him, there may be a miscarriage of justice. Suppose
X comes to know that B has found his lost dog and is about to
come with it and X withdraws his offer. This will be against
fairness and natural justice. In order to prevent such miscarriage
of justice Lord Denning held that when the other party started
to execute the act, the acceptance is complete and hence it cannot
be withdrawn thereafter. In Errington v. Errington, [(1952)
1 KB 290] a father promised that if his son and daughter-in-
law paid up the mortgage amount on the property, the property
would be theirs. They started paying off the mortgage amount
in instalments. Lord Denning held that the promise could not
be withdrawn thereafter though the execution of the promise
could be done only when the payment is made. Some authors
argue that acceptance must be distinguished from performance
of the act. To the parties who have already commenced
execution, the proposer is obligated to keep the offer open for a
reasonable time. But there are contradictory decisions on this
issue. For example, The House of Lords in Morrison
Steamship Co. Ltd v. The Crown ((1924) 20 U.L.R. 283)
held that commencement of execution of an act does not convert
offer into a promise. It may only entitle the party for an action
for damages on quantum merit.
According to sec.6 of the Indian Contract Act, revocation may
be (a) by way of notice; (b) by lapse of time; (c) by failure of the
acceptor to fulfil condition precedent to acceptance; and (d) by
incapacity or death of the acceptor.
Distinction must be made between lapse of an offer and
revocation. Though effect is same, revocation is by the deliberate
action of the proposer. He withdraws it by notice. But a proposal
is dampened due to lapse of time. A proposal standing for a
specific time limit, becomes automatically withdrawn at the end
of the time unless it is renewed. Infact, such a withdrawal does
not require a notice to be served. If it is to be renewed, then
only a notice is to be served again. Similarly, if the acceptor is
unable to fulfil prior condition, the proposal is automatically
withdrawn. A proposes to pay B Rs.500 if B marries C. B marries
D. The proposal is automatically withdrawn.
Death or incapacity automatically revokes the proposal, if the
other party comes to know of it before acceptance. In civil law,
such as French law, death or insanity of the proposer
automatically terminates the proposal provided it happens
before acceptance. Knowledge of the acceptor is immaterial.
(Req. 21.4.1891 D.1892.1.181) It seems that French law in this
regard is more logical than the common law on which statutory
law in India is framed. Similarly, a proposal open for a definite
period, according to French law cannot be retracted but in
common law, so also in Indian law, proposal for definite or
indefinite period can be revoked with notice.
2.3 ACCEPTANCE
A proposal becomes a promise only when it is accepted by the
other party to whom the proposal is made. For example, a traveller
intending to go to a place by train tenders the fare at the railway
counter. This is a proposal made to the railways for going to a
place by train. When the ticket is issued to the proposer, it is
said to be accepted. Once accepted the proposal becomes a
promise. Acceptance can be formal through written documents.
For example, suppose A writes to B, offering to purchase Bs
plot of land for Rs. 50,000. B writes back accepting the proposal.
This is a formal acceptance. But acceptance may also be made
orally or by conduct. Suppose A advertised in the newspaper
announcing that anyone who contracts influenza within a
fortnight of taking the antiflu tablet made by the proposer
would be given a thousand rupees. If B takes the tablets after
seeing the advertisement and gets the flu within a fortnight, B
would be entitled to the money because Bs taking, of the antiflu
tablet is his acceptance of the proposal. (See Carlill v. Carbolic
Smoke Ball Co). Similarly, if B gets into a plying route-bus, he
is bound to pay the fare since he has accepted by his conduct
to travel in the bus. (See Derry v. Peak) Thus acceptance may
be in the form of (a) an act ; or (b) a promise. If A proposes to
give his daughter in marriage to B and B accepts, B is actually
promising to marry As daughter on the stipulated date and
time.
According to sec.2 (b) of the Indian Contract Act, when the
person to whom the proposal is made signifies his assent
15
thereto the proposal is said to be accepted. As such, a
proposal to be accepted requires (a) assent of the promise;
and (b) of the actual proposal in its entire form.
(a) Acceptance must be in toto
A offers B his horse in harness for 30e. B accepts it in
double harness. (Jordon v. Norton) This is no acceptance.
This is only a counter-offer. Acceptance in order to convert a
proposal into a promise must be absolute and unqualified.(U.P.
State Electricity Board v. Goel Electric Stores, AIR 1977 All
494) Any alteration of terms or changing of conditions of the
proposal by the acceptor while accepting will make the
acceptance a counter-offer. Counter-offer is the new offer which
now the original proposer is to consider for acceptance. Suppose
A proposes to purchase Bs house for Rs.60,000 and B says he
may consider a proposal not below Rs. 1,00,000. Bs statement
is not a counter-proposal. Bs statement amounts to (1) rejection
of As proposal out right and (2) information to A that B is
likely to consider any proposal unless it is Rs. 1,00,00 or more.
So far as manner of acceptance is concerned the acceptor is
to accept the proposal in some usual and reasonable manner.
But if the proposal prescribes a manner in which it is to be
accepted, and the acceptance is not made in such manner, the
proposer may, within a reasonable time after the acceptance is
communicated to him, insist that his proposal shall be accepted
in the prescribed manner not otherwise, but if he fails to do so,
he is deemed to have accepted the acceptance. For example, A
writes to B offering to purchase Bs house for rupees nine lakhs
and requires acceptance by post. Suppose B meets him and
communicates his acceptance orally. A may insist that B write
his acceptance. If he does not insist, it will be presumed that A
has accepted his acceptance.
(b) When is acceptance made?
Unless the proposer dispenses with communication of
acceptance, for example by proposing that find out my lost
dog I will pay you rupees two hundred, acceptance is made
when it is communicated. According to sec.4 of Indian Contract
Act, acceptance is complete.
(a) as against the proposer when it is put into the course of
transmission so as to be out of the power of acceptor, and, (b)
as against the acceptor when the proposer receives the
acceptance. For example, A accepts by a letter or by a telegram,
Bs proposal of offering Rs. 6 lakhs for As house, as per As
instruction. As soon as the letter is posted or the telegram is
despatched, the communication of acceptance is complete
against the proposer and the acceptance is complete as against
the acceptor as soon as the letter or the telegram reaches B. In
England acceptance is complete against both acceptor and the
proposer as soon as the acceptance is put into the course of
transmission. That is, acceptance once made cannot be taken
back because it is complete and binding against both the parties
as soon as it is put in the course of transmission. According to
the principles of law in England, the course of transmission is
stipulated by the proposer and therefore, the course of
transmission becomes agent of the proposer. Suppose if the
proposer stipulates either post or, telegram or telephone or Fax,
as the course of transmission, the communication media
becomes the instrumentality of the proposer, or in other words
the agent of the proposer. As such, a letter posted with proper
stamp and correct address, or telephone made or a telegram
sent or a letter sent by fax must be taken as complete against
both the parties. But a cut-off communication or a dead letter
box or a disconnected fax system or a dead telephone line cannot
set the acceptance in the course of transmission. Such as, a
proposal orally made and accepted orally with a disturbed sound
on account of an overflying aeroplane and not being heard by
the proposer is not a communication, as Lord Denning tries to
explain. If a modern course of communication is inoperative,
one cannot say that the acceptance is complete when the acceptor
puts the acceptance in the inoperative system. But if the fax
machine is operative and the message is received, the proposer
cannot take a defence by saying that there was no staff in the
office to send the message to the defendants. On the contrary,
if the fax machine does not receive the message or suddenly
stops taking the message in full without communicating the
exact position, the acceptance is not made at all.
(c) Silence is no acceptance
Silence is no indicator in a positive legal system such as ours.
Justice Macnaughten once observed that human mind is a trait,
even the devil does not know what is in the mind, what to talk
about a poor judge ! Positive law requires clear positive
indication of acceptance. So long the matter is confined to the
self of the acceptor, it is not regarded as acceptance. Besides,
no one can compel another to consider his/her proposal and
therefore to speak. Suppose X makes a proposal to Y. X cannot
compel Y to consider the proposal and to speak on it. Y has the
right to completely disregard it and maintain his silence. So
silence cannot be presumed as a mode of acceptance because if
it is allowed, a person is compelled to speak. Suppose X
proposes to Y and suggests if you remain silent I will take it
as acceptance. It means now Y has to say no if she does not
intend to marry X and as such cannot ignore Xs proposal. This
is unreasonable and an infrigment on the right of a person.
But that does not mean that conduct cannot be prescribed as a
means of acceptance. Suppose a pharmaceutical company
advertises reward to anyone contracting influenza within a
fortnight of using the anti-flu tablet manufactured and sold by
the firm, the firm has to give the amount to anyone who
purchases the pill, uses it and has an attack of flu within the
time. This is not a mental acceptance only because
communication of acceptance is not made i.e., swallowing the
pill was not informed to the company. Acceptance may not
be communicated if the proposer dispenses with the
communication. If swallowing the pill is enough prescription,
no further communication is needed. If one follows the
instructions printed in the prescription of the company, as in
the instant case, that would constitute acceptance and no
communication to the company is necessary. Acceptance may
be made either by a Promise to act in future or immediately.
The nature and manner of acceptance is determined by the
proposer. In a case where a proposal was made to supply coal
at a price to a railway company and the manager of the railway
company wrote the letter of acceptance but kept the same in his
drawer, it was held there was no communication of acceptance
and hence no contract. (Brogdan v. Metropolitan Railway
Company). It was almost similar to a mental acceptance and
not allowed in a positive legal structure. Ofcourse under old
16
Hindu law in India silence used to be treated as acceptance.
However under our present contract laws, this principle does
not find a place.
(d) Acceptance by conduct
Acceptance can be validly made by conduct if conduct is
prescribed by the proposer to accept an offer. As for example,
any proposal to reward against an act by the offeree can only
be accepted if the offeree does that act. Suppose a
pharmaceutical company gives an advertisement for paying
Rs.10,000 to any person who takes the anti-flu tablet for 7
days continuously and yet contacted with flu within a month
after taking the tablets. Now suppose Mrs. X purchased the
tablets and consumed those tablets for 7 days and then suffered
an attack of flu within 15 days, can she demand Rs.10,000 from
the company? Can the company refuse payment because Mrs.X
did not inform them about her taking the tablets and thereby
accepting their offer? Can the company take a plea that it was
only inviting offers for taking the tablets manufactured by the
company?
Here the advertisement of the Company cannot be treated as
information to treat. In an information to treat a response is
needed for making a proposal. Here no such reaction is needed.
As such, it is a proposal by itself. The proposal stipulated the
action of taking the anti-flu tablet for 7 days and contacting flu
within one month. It did not prescribe that the proposer had to
communicate acceptance before taking the tablet. Hence
fulfilment of the prescription by the company is quite a valid
acceptance. It is acceptance by conduct.
(e) Revocation of acceptance
In English common law acceptance once made cannot be
revoked. But as suggested earlier in English law over the years
two rules of communication transpired. One for oral
communication of offer and acceptance in which the
communication of acceptance to the offer is emphasised, i.e.,
acceptance is made only when acceptance is communicated to
the offeror. The other for the acceptance in writing and sending
it by post where communication is complete as soon as it is put
into the course of transmission. Here in the second case, whether
the offeror really got the communication of acceptance or not
cannot be the issue at all. In both the cases, common law is
based upon the premise that acceptance once made cannot be
revoked or withdrawn. According to Anson, acceptance is like
a lighted match-stick to a train of gun-powder. Once the lighted
match-stick is thrown, there is no escape from explosion.
A lighted match-stick cannot operate explosion unless the gun
powder is dampened by operation of time or by counter-offer.
It can also not operate if the gun-powder is removed i.e., the
offer is revoked before the acceptance. Otherwise, acceptance
once made, makes the proposal a contract which is a complete
fusion between a proposal and acceptance.
In India, the law is different. Here acceptance can be withdrawn
at anytime (sec. 4 and 5 of ICA) before the acceptance is
complete as against the acceptor i.e., before the acceptance is
actually communicated to the proposer. Suppose A accepted
through a letter a proposal from B. As soon as A puts the letter
of acceptance in the post box, it is binding on B and he cannot
thereafter withdraw his proposal. But as far as A is concerned
it is still not binding because as against A the acceptance is
complete only when the letter reaches B. If A sends another
letter through speed post and that letter reaches B earlier than
the letter of acceptance, the second letter withdrawing the
acceptance is valid and binding. According to sec.5 letter of
revocation is complete against the revoker as soon as it is posted
and against the other party when it reaches. So, As withdrawal
letter is required to be posted before his letter of acceptance
reaches B.
The reason for giving an opportunity of revoking the acceptance
is perhaps an equitable one. While the proposer has a
reconsideration time between his proposing the issue and
acceptors putting in his acceptance, acceptor is given a
breathing and rethinking time between putting in a letter of
acceptance and its reaching the proposer. This is perhaps, a
demand of equality of opportunity.
In India therefore there can be a situation where the acceptance
is complete against the proposer, because the communication
of acceptance is put in the course of transmission, but the
acceptance is not complete against the acceptor himself even
though he puts the acceptance letter into the communication
line. Apparently it looks illogical, because, the proposer is
bound by the contract though he does not know when was the
communication put into the course of transmission and he is
not in receipt of the same. He cannot take the plea that since he
has not received the communication of acceptance, he is not
bound by it. Lord Justice Macnaughten explained this apparent
contradiction. According to him, while making the offer usually
the offeror stipulates the media of communication. So if the
acceptor has correctly and in time puts the acceptance in
transmission as per the offerors directions, has he not done
everything what he is required to do? So on account of any
fault in the media of transmission if either party has to suffer it
is illogical that the proposer should suffer instead of the acceptor.
Ofcourse Justice Macnaughten did not take into account
mechanical faults of the communication media in his principles
of communication but by and large his logic is sound. According
to some authors, this rule of communication of acceptance is
full of dichotomy, because, even with knowledge that the
acceptance has been made the acceptor himself is not bound by
the contract until the letter reaches the proposer. In defence of
the statutory provision it can be said that the Statute wanted to
extend similar opportunity of revocation to both the offeror and
acceptor; because, the offeror can revoke his offer until the
acceptance is put in course of transmission. Hence the
opportunity to rethink is also given to the acceptor also, and,
he can withdraw the acceptance before the acceptance is
received by the proposer.
Those who argue for the dichotomy, offer and acceptance
according to them are made in two places, which makes the
problem of jurisdiction of the court very complicated. This is
explained in the next issue.
2.4WHERE IS THE CONTRACT MADE
The question where is the contract made, is a very important
issue because (a) it determines the time of forming the contract;
(b) it stipulates the jurisdiction of the court; and (c) it affixes the
rights and obligations of the parties. A contract is made as
soon as it is accepted. Under the common law system, as per
17
the postal rules acceptance is complete as soon as acceptance
letter is put into the course of transmission. So if the acceptance
letter is put into the course of transmission in Rai-Bareilly,
acceptance is complete there at Rai-Bareilly, and the District
court there will have jurisdiction. In England once the letter of
acceptance is put in the course of transmission, the acceptance
is complete against both the parties and the contract is
immediately formed. Sir William Anson gave a simili for
acceptance in the lighted match-stick to a train of gun-powder
example. In this logic the media of communication acts as the
agent of the proposer. In India we do not follow the same rule in
totality. Acceptance is complete, as already stated, against
proposer, when the letter is posted. Hence, in so far as formation
of the contract is concerned, the time and place of posting the
acceptance letter in transmission is decisive, the acceptor also
gets an equitable opportunity to withdraw his acceptance till
the letter reaches the proposer. The media of communication is
treated independent and not as an agent of the proposer. The
postal rule is clear and easily applicable in cases where
conventional communication method is followed. But in case
of modern communications the difficulty arises. For example, if
acceptance letter is posted at Bangalore, acceptance is complete
in Bangalore and Bangalore city court shall have the jurisdiction.
But suppose it is faxed from Bangalore to Delhi. Where is the
contract made? Lord Denning explained the situation in Entores
Ltd v. Miles Far East Corporation [ (1955) 2 ALL ER]. According
to him there is no clear rule about contracts made by telephone
or by telex. Communication by these means are virtually
instantaneous and stand on a different footing. Lord Denning,
therefore, rejected the postal rule and decided that it is not until
the message is received that the contract is made. In essence
original offer was faxed by the defendant firm, Miles Fax East
Corporation of Amsterdam, against which, the London firm being
the plaintiff made a counter offer. As such the court decided
that since the acceptance through fax was received in London,
the London court has the jurisdiction in deciding the case. Thus
according to this decision, in all cases where telephone, telex or
fax is used, the place of receipt of the message is construed as
the place of contract.
This rule is against the postal rule and Indian law regarding
communication. According to this age-old principle, as soon
as the acceptance is put into the course of transmission at its
place, acceptance is complete (in case of India, of course against
the proposer). So the place of dispatching fax or telex or
telegram should be the place determining the jurisdiction, not
the place of receipt of the message. As such decision in Entores
is just the reversal of the common law principle, acceptance is
effective when and where it enters the channel of
communication. Justice Shaw also noticed that the views of
state courts in the US which enforced this old Common law
principle. According to the state courts in the US by the
technical law of contracts the contract is made in the district
where the acceptance is spoken (See Traders & Co. v. Arnold
Gin Co. Tax Civ App 225 SW. 29 1011). Justice Hidayatullah
had very rightly doubted the justiciability of the `ratio in
Entores and held that the language of sec.4 of the Indian
Contract Act could cover the case of communication over the
telephone, as well.(Bhagwandas Goverdhandas Kedia v.
Girdharilal Purshottamdas & Co. & others, AIR 1966 SC
543).
2.5 PROPOSAL AND ACCEPTANCE IN THREE FORMS
Proposal and acceptance can take shape in three ways, viz,
promise for a promise or bilateral promise ; promise for an action
or unilateral promise ; and action for an action or bilateral action.
A bus plying on a route and an intending traveller makes a
contract by bilateral action i.e., plying of the bus is the proposal
and getting into it is the acceptance. A promise of a reward for
an act is a unilateral promise, e.g., a promise of a reward for
finding a lost child is a unilateral promise. A promise to buy a
land is a bilateral promise because there are two promises one
proposes to buy the land and the other accepts it. Contract may
be executory or executed. For example, a promise to pay railway
fare for a travel takes the form of a contract only when the
promise to pay the fare is executed. This is an executory contract,
but a land deal remains an executory promise for long because
execution of the contract takes place after a long time. This is
an executory contract. A unilateral promise is binding only when
the other party has acted according to the demand of the
promise.
2.6 TYPES OF AGREEMENT
A proposal accepted becomes an agreement. Such agreements
may be either expressed by words spoken or written or it may
be implied i.e., not spoken or written in words. For example X
sits in Ys shop and sells goods in the presence of Y. There is
deemed to be a contractual relation between X and Y authorising
X to sell goods. (sec 9) An agreement may be reciprocal in
nature. Bilateral promises are reciprocal promises. For example,
a contract between A and B that A will deliver goods and B will
pay on delivery of the goods. This is a reciprocal promise (sec
8 & 51). An agreement may be a joint promise by two or more
promisors or by two or more promisees. In an agreement there
can be an alternate promise, as well. For example, A promises
his home X or Y to B for Rs. 51,00,000. This is an alternate
promise. Agreements may be contingent depending upon a
future uncertain event or conditional, based on conditions,
expressed or implied.
2.7 CONTRACT : A FINAL COMMENT
An agreement enforceable by law is contract. Therefore, to be
a contract there has to be (a) agreement as explained above and
(b) such an agreement must be enforceable by law. Sec.10 of
the Indian Contract Act stipulates that an agreement to be
enforceable by law :
(i) must be entered into by persons capable of entering into
the contract (Ss. 10, 11 and 12);
(ii) must be a product of free consent i.e., consent free from
coercion, undue influence, fraud, misrepresentation or
mistake (Ss, 15 to 22) ;
(iii) must have valid consideration and lawful objects (Ss. 23,
24 and 25); and
(iv) must not be otherwise void under Ss. 26 to 30.
Ofcourse, contract is to be entered into by parties intending to
create a legal relation. Social agreements are kept out of the
realm of contract because otherwise social relations shall be
vitiated by stringent legal provisions. In Balfour v. Balfour,
Lord Justice Atkin opined that in respect of such social and
domestic promises each home is a domain into which Kings
18
writ does not seek to run, and to which his officers do not seek
to be admitted. In this case a husband promised to send 30
monthly to run the household to his wife who remained in
England on medical grounds whereas the husband returned to
his place of work at Ceylon. The Court held that the promise
here was not intended by either party to be attended by legal
consequences.
A flow chart of agreement and the revocation of offer and
acceptance is given below :
Against 'A' Against 'B'
Offeror Acceptor
1-1-94 10 a.m. (Posted) 7-1-94 at 1 p.m (Reached)
7-1-94 at 10 a.m. (Posted) 14-1-94 at 2 p.m. (Reached)
23-1-94 at 6 p.m. (Reached) 14-1-94 at 4 p.m. (Posted)
27-1-94 at 10 a.m. (Reached) 22-1-94 at 1 p.m. (Posted)
Explanation of Chart
On 1-1-94, A dropped a letter of offer to B which reached B on
7-1-94 at 1 p.m. In the meanwhile A had sent another letter
withdrawing the offer on 7-1-94 at 10 a.m. B had despatched
his letter of acceptance on 14-1-94 at 4 p.m., which reached A
on 23-1-94 at 6 p.m. Before the letter of acceptance reached A,
B had sent his letter revoking the acceptance on 22-1-94 at 1
p.m. which reached A on 27-1-94. In the light of these facts, let
us ascertain whether a valid contract has been achieved between
the parties applying the principles governing communication
and revocation of offer and acceptance.
The sequence of events relating to communicatin and revocation
of offer and acceptance against A and B may be explained as
follows:
Communication of offer is complete on
Revocation of offer is complete on
Communication of acceptance complete
Revocation of acceptance complete
Now the questions are:
1) Is there a valid offer and acceptance?
2) Is there a valid revocation of offer?
3) Is there a valid revocation of acceptance?
4) Ultimately, what is the effect of correspondence?
Communication of offer is
valid acceptance. In effect, there cannot be a binding contract.
Similarly the letter of revocation of offer is valid because it has
reached the acceptor before the letter of acceptance is posted.
Letter of acceptance is not valid against 'A' because it reached
him on 23-1-94 by which time, the offer was withdrawn and
came into effect against 'A' on 7-1-94 itself. Revocation of
acceptance is not significant and effective as there was no valid
offer, nor acceptance existing on 22-1-94.
Since the letter of acceptance is posted at 4 p.m. on 14-1-94, by
which time the offer is already withdrawn, there cannot be a
Figure 1: Flow Chart of Agreement & Revocation
19
SUB-TOPICS
3.1 Introduction
3.2 Sociological Reasons
3.3 Political Reasons
3.4 Economic Reasons
3.5 Towards building of a Legal Theory
3.1 INTRODUCTION
Contract is a method through which individuals make law for
themselves by creating rights and obligations through mutual
understanding and contract. As a human being a person enjoys
some rights and at the same time he is liable to discharge certain
duties and obligations ex factum, i.e., by mere fact of being a
person in the society. For example, some human rights or
fundamental rights or family rights like right to parenthood,
right of succession, etc, these are rights ex factum. But each
individual is also a social, political and economic being having
a distinct identity. Thus each one of us design and acquire
some rights or are subject to certain duties and obligations by
mutual understanding for making a society developed and
progressed. Contract is the sole method of altering factual
situations through the process of give and take. Without this
contractual relations society would have remained static. This
contractual phenomenon is explained by different people in
different ways. Several theories are formulated to explain why
a contract is a dynamic process of building up of a society.
According to the theoretical justifications the reason why a
contract is made is explained in the following paragraphs.
3.2 SOCIOLOGICAL REASONS
Society progresses through the process of contract. Contract
brings various sections of the society closer through interacting
processes which make the culture uniform and standardise the
practice. Through the instrument of contract, Hobbs explained,
that there is a constant mix in the society. Some sociologists
term it as a hot-pot in which there is a constant movement of
social institutions. According to Durkheim through the process
of mutual give and take a social equilibrium is arrived at.
Contract is a modality through which individuals as well as
social institutions reach at a consensual goal. Even the patterns
of contract depends upon the structure of society. As for
example, the patterns of a contract in a pre-feudal or feudal
society are different from that of an industrial society. The
technique of contract, therefore, differs on a basis of social
mores. In a feudal society the personalised variations in the
contractual paradigm is more visible than in an industrial society.
In an industrial society on the other hand, there has to be a
growing standardization, and therefore, the span of individual
choice or action is limited. Obviously, why contract, what
contract, and how contract - all these questions are dependent
upon the social structure and the social system. According to
Max Weber in a capitalist society social institutions have
conflicting interests. Necessarily, therefore, people involved
in those social institutions have conflicting interests. Such
conflicting interests are constantly at friction by their respective
positions and through their respective strengths and weaknesses.
These conflicting strengths and weaknesses are adjusted through
the method of contract. Therefore according to him there is no
presumption of equality in the status of contract. Contract brings
those conflicting social interests at an optimal balance beyond
which the system cannot be stretched. Hence, contract is a
limited modality of interest adjustments.
3.3 POLITICAL REASONS
Various political theoreticians tried to explain the emergence
of the state through a system of multi partite contract between
people living over a geographical location with a distinct identity
of a common language, culture and ethos. According to Hobbes,
state is a product of a social contract of all persons in a given
geographical location with distinct identity in a situation of utter
chaos and confusion which Indian philosophers described as
Matsyanyaya, and the French philosopher called it leviathan
i.e., anarchy. In such a desperate situation, people who wanted
to put an end to the chaos and confusion argeed to transfer all
their rights to a ruler/sovereign who in turn would protect all
individuals. Thus according to Hobbes the state, authority and
kingship originated. The other French philosopher propounding
the social contract theory gave another version. According to
Locke people of a given area having distinct identity agreed
amongst themselves not in a stage of chaos but at a stage of
understanding and mutual cooperation to transfer, one most
important power in them to a person or a group of persons.
This important right was the right of interpretation of law of
nature. Thus contract was the method through which one right
of all the individuals, viz, the right to interpret the law of nature
was reposed to their Sovereign. In fact, the Constitution of
India has also followed the same pattern of social contract
process and that is the reason why the preamble declares that
the people of India gave to themselves this Constitution.
According to the political theoreticians contract is a mutual
agreemental process through which a party acquires a right,
interest or a profit or a benefit as against duty, responsibility,
loss or detriment. Whereas the power of a person is acquired
initially by factual situation like strength, force, etc, and
consequently been limited by the terms of agreement. The
alteration of this power is possible through collective processes
which may be bi-partite, tripartite or multipartite. These mutual
consultations, understandings and give and take make the whole
socio-political system dynamic with substantial moral
foundation. Thus positivists who believe contract being a
process of regulation of inter-personal relations through
understanding which can be explained through right duty
correlation. Naturalists explain the basis of contract through
3. JUSTIFICATION FOR CONTRACT
20
the moral foundation of mutual understanding, faith and trust.
This type of theoretical foundation of contract is explained by
Stoics in their rule of pacta sunt servanda. On the other hand,
a positivist political philosopher would try to explain the
foundation of contract through an Hohfeldian process.
According to the contract emanates from power to determine
right of a person as against duty to another. It is a process of
empowering one and disempowering the other. It involves a
kind of immunity to one as against liability to another. It is
therefore seen as a distinct political process. In fact the citadel
of democracy through adult franchise is based upon the political
justification of contractual social living. Of course such a kind
of political justification of contractual power is based upon
certain assumptions. For example, all human beings are equal,
each of them has the minimum level of conscience to determine
and regulate inter-personal and intra-societal rights and duties,
immunity and liability, empowerment and disability.
Citgwick in his Element of Politics (1879) said, Performance of
contract presents itself as the chief positive element, protection
of life and property been the chief negative element. Withdraw
contract suppose that no one can count upon the fulfilment
of any engagement and the members of a human community
are atoms that cannot effectively combine; the complex
cooperation and division of employments that are the essential
characteristics of modern industry cannot be introduced among
such beings. Suppose contracts are freely made and effectively
sanctioned, and the most elaborate social organisations become
possible, at least in a society of such human beings as the
individualistic theory contemplates; gifted with mature reason
and governed by enlightened self-interest. Of such beings it is
prima facie plausible to say that, when once their respective
relations to the surrounding material world have been determined
so as to prevent mutual encroachment and secure to reach the
fruits of his industry, the remainder of their positive mutual rights
and obligations ought to depend entirely on that coincidence
of their free choices, which we called contract (p.82). Thus the
very basic political foundation of industrial society is based on
the principle of contract. Sir George, Jessel, M.R., observed in
Printing and Numerical Registering Company v. Sampson, that
it is that men of full age and competent understanding shall
have the utmost liberty of contracting, and that their contracts
entered into freely and voluntarily shall be held sacred and shall
be enforced by courts of justice. This is how the moral
philosophy of a liberal society has been built up.
3.4 ECONOMIC REASONS
Economic theoreticians try to explain contract as an economic
means of acquisition of wealth. If there is no contract between
parties for mutual exchange of goods and services the society
shall remain as primitive and static. According to them the
productivity of the whole society depends upon the individuals
right to mutually exchange their economic resources to the
maximum exploitation of utilities. The economists rely on
certain basic presumptions. As for example, according to them
every human being is an economic rational being. This rational
human being constantly attempts to maximise his material
satisfaction through exchange of economic goods and services
and while doing this the person takes the decision on the pure
consideration of the quality of the goods that can maximise his
satisfaction. And of course every economic being is a dis-
satisfied identity having insatiable demands. The function of
economics depends upon the triangle of scarcity, choice and
exchange. Material goods and services are scarce, and that is
why there is always an existence of a person whose demand is
more than the others. Therefore, he tries to acquire the goods.
The peaceful way of getting the goods is achieved through
exchange. Here comes the importance of contract. Suppose in
As family there is a patient and the doctor has advised A to
give oranges to the patient. As demand for oranges would go
up because utility of the orange to the patient has become very
high. Suppose A is mentally prepared to offer one rupee for an
orange. The market price is 75paise per orange, then there is no
difficulty for A to contract for orange with the supplier. A then
thinks of having the second orange for which he may be ready
to pay not more than 90 paise, third one for 80 paise and the
fourth one say 70 paise. A has to stop his purchasing after third
orange because seller is not in a position to give him at less than
75 paise per orange. That is, why a person enters into a contract
for what thing, and in what quantity depends upon his need
and the utility of goods to him, and at what stage his marginal
utility and suppliers marginal cost is same as the supplier cannot
sell at a price below his marginal cost.
Utilitarians like Bentham would explain the reason of contract
through the concept of pain and pleasure. According to him
every person while entering into contract with another person
makes a comparative assessment between the pleasure that he
would enjoy by acquiring goods or services from another person
and the pain that he is going to sustain on account of losing
goods or services or money. Therefore this exchange is going
to be the key work in the contract. Through this exchange
process individuals maximise their satisfaction of their utilities
and the state attains their highest gross national income.
Therefore, economist will always try to explain the basis of a
contract through assessment of comparative advantage.
Economists who belong to the critical, analytical thought explain
contract through relative improvement of capital building
process. According to Pareto, a change in the betterment of an
individual without injuring the interest of any one is an
improvement in the economic standing of the parties. This
improvement is known as Pareto improvement. If all individuals
in a given society through the process of contract make
improvements to their lot without any detriment to another, the
total improvement thus arrived at is known as Pareto optimality.
For example in the following two diagrams we find that the price
of a commodity in a competitive market is Rs.10/-, in which A
and B are two operators. Their marginal cost curve is as follows:
21
In this diagram the vertical line represents price and the
horizontal base is the number of commodity produced by A and
B. Whereas MM is the marginal revenue curve of firm A and
firm B. The two figures show that As marginal revenue equals
the price in the market while the production is at 20 and the price
is at Rs. 5. In the above example, if A produces 21st unit, his
marginal revenue shall be less than Rs. 5. In case of B, if B
produces one less, his marginal revenue is higher than Rs. 5.
Now if A produces the 21st unit and sells it to B at Rs.5/- and
suppose B in a year could produce only 5 units and purchases
the additional unit from A, B will have no profit no loss situation
because had he produced the 15th unit his marginal cost would
have been Rs.5/-. This is a situation where one party improves
the position but not at the cost of the other. This is known as
Pareto improvement. In a perfect competitive market Pareto
optimality is reached at a point when marginal utility of the
consumers becomes equal to the marginal cost of the producers.
After that point further Pareto improvement is not possible. So
people resort to contract and mutually exchange either goods
and services or money in order to arrive at this Pareto optimality,
provided there is a free competitive market.
According to Posner, if contract is allowed to operate resources
it will gravitate their most valuable use. If A owns a good that
is worth only $ 100 to him but $150 to B, both will be made
better-off by exchange of As goods for Bs money at any price
between $ 100 or $ 150 ... By making both of them better-off
the exchange will also increase the wealth of the society (of
which they are members), assuming the exchange does not reduce
the welfare of non-parties more than it increases As and Bs
welfare. Before the exchange which, let us say, takes place at a
price of $ 125 A had goods worth $ 100 to him and B had $ 125 in
cash a total $ 225. After the exchange, A has $ 125 in cash and
B has a good worth $ 150 to him, a total of $ 275. The exchange
has increased the wealth of society by $ 50 (ignoring, as we
have done, any possible third party effects). [Economics of
Contract Law, p.1]
According to Marxian economists the production relation of a
society which is the fundamental economic relation determines
its political structure. Individual freedom which is talked about
in market-contract society is essentially based upon the status
of the contracting party. As such a contract society is based
upon the dynamics of inequality and exploitative exercise. Thus
Marxians economists are against contract society. Whether such
a society is possible or not is a matter of conjecture where each
one will be equal to others and each will have rights and
obligations on all material sections of the society. Naturally
Marxians economists also believe that contract is the method
through which individuals make alteration to their material
relation.
Figure 2
22
3.5 TOWARDS BUILDING A LEGAL THEORY
After carefully appreciating the various social, political and
economic explanations and theories on contract one may try to
build up a legal theory of contract. For example, a positivist
(one who believes that law is and not `ought ; there is a
cause and effect relationship in legal application to fact and
decision and there has to be a sanction element in the instrument
of law.) would try to theorise contract as a mutual agreement
between the parties which law as public instrument will enforce
and therefore it has to take care of a private agreement. Such a
theory is based upon the concept of right, duty, correlation.
The definition of contract in the Indian Contract Act as an
agreement enforceable by law is, therefore, based upon the
principle of legal positivism. This type of theorisation is
independent of the concept of morality. But when issues arise
out of the question of inconceivable gain in an agreement with
a pardanashin woman or an agreement against public policy or
morality, should law enforce such a type of agreement ? Basic
requirement of judgement based upon law and justice are not
co-equal. Therefore often a positivist approach faces a limitation.
Lewellyn in one of his articles [1931, 40 Yale L.J. 704] attempted
a realist approach in answering the question why contract?
According to him contract is a social and legal machinery
appropriate to arranging affairs in any specialized economy which
relies on exchange rather than tradition (the manner) or authority
(the army, the USSR) for apportionment of productive energy
and of product. It is a machinery which like status, but in contrast
to torts, makes it easy to insist on affirmative action. Contract
in the strict sense is the specific legal machinery appropriate
when such an economy moves into the phase of credit
meaning or connoting thereby future dealings in general; in
which aspect, the mutual reliance of two dealers on their
respective promises comes of course into major importance.
This machinery of contract applies in general to the market for
land, goods, services, credit or for any combination of these ....
Thus one can see the distinction in approach in the theoretical
perspective as well. Whereas positivist theory emphasizes the
political foundation of contract, i.e., the character of
enforceability, realists look from multidisciplinary angle with
more emphasis on the economic relations, of course without
minimizing the utility of legal enforcement of promises.
23
4. TYPES OF CONTRACT
SUB-TOPICS
4.1 Introduction
4.2 Types of contract on the basis of parties
4.3 Types of contract on the basis of time
4.4 Types of contract on the basis of function
4.5 Types of contract on the basis of nature
4.6 Standard form of contract
4.1 INTRODUCTION
Contract may be of different types based upon its nature, parties,
time and function.
4.2 TYPES OF CONTRACT ON THE BASIS OF PARTIES
A contract essentially involves more than one party. It has
already been pointed out earlier that such contract can be formed
in three ways, viz., promise for an act. Therefore, there cannot
be a contract which involves either an act or promise of one
party alone. There can be a situation where a unilateral contract
involving only one partys promise or an act can be treated as
contract. For example, if A promises to donate Rs.10,000/- to
the commissioner of a municipality for the construction of a
town hall, such promise of donation cannot be a contract because
there is no reciprocity of either promise or action. That means A
in exchange does not receive any right or benefit for the promise.
This type of promise is known as promise without consideration
and therefore not a valid contract. But suppose based upon
that promise of A, the Commissioner of municipality undertakes
the construction work and incurs the liability for paying the
construction bill. A shall be liable for his promise of donation,
based upon the principle of promissory estoppel. (Kedar Matt
v. Gouri Mohammed) This is an equitable principle which we
will discuss in the chapter on consideration. This type of
unilateral promise can be called as unilateral contract, is specified
in sec. 25(1) of the Indian Contract Act.
Almost all commercial contracts are bilateral in nature. Where
two parties enter into a contract each promising to do some act
for the other, such contracts are known as bilateral contracts.
For example, in a contract for the construction of a bridge the
contractor promises to construct the bridge against the promise
of government or local bodys promise for payment. All contracts
for sale of movable and immovable properties and other contracts
for lease, rent, mortgage etc are bipartite contracts. In fact most
of the contracts are bilateral, determining rights and obligations
of the two parties to the contract.
In a multilateral contract, there are several parties determining
their rights and duties under the contract. For example GATT
(General Agreement on Tariff and Trade) is a multipartite contract.
4.3 TYPES OF CONTRACTS ON THE BASIS OF TIME OF
PERFORMANCE
In a contract one party generally agrees to perform an act for
another. Such contracts shape the rights and obligations of the
parties in reference to that contract within a reasonable time,
provided that, the execution of the contract is completed. Such
contracts where both parties have fulfilled their obligations are
known as Executed contracts. But if both the parties are yet to
execute the contract, the contract is known as executory. Time
is a very important factor in the capital market contracts (Stock
Exchange Contracts). A contract which is to be performed
within one day from the date of entering into the contract, is
known as Spot contract. A contract which is to be performed
within a reasonable time though no time limit is mentioned is
known as Ready contract. On the other hand if a contract is
to be performed on a future date, i.e., if the contracting parties
agree that on a future date the stock shall be transferred and the
payment shall be made it is known as future contract.
4.4 TYPES OF CONTRACT ON THE BASIS OF
FUNCTION
When private parties enter into a contract to determine their
mutual rights and duties, it is known as private contract. All
mercantile contracts, property contracts, service contracts, etc
are private contracts. On the other hand contracts entered into
by the state or the government or by any instrumentality of the
state are known as public contracts. There is distinction between
private contract and public contract in so far as procedure in
making the contract itself is concerned. This will be discussed
in detail in the chapter on government contracts.
4.5 TYPES OF CONTRACT ON THE BASIS OF
NATURE
Contract may be written or oral. Most of the commercial
contracts are entered in writing, but contracts made by common
people in their daily life are oral. Contracts may be express or
implied. Oral contracts or written contracts are express contracts.
But sometimes contracts may be made impliedly. For example, if
A allows B to sit in his shop and transact business in his absence,
in the eye of law it shall be deemed that there is a contract of
employment or agency between A and B.
A contract made between parties based upon mutual promise is
known as reciprocal promise. For example, A agrees to deliver
goods to B as against Bs promise of paying the money on
delivery. Here both the parties promise to perform an act. This
type of contract consisting of mutual promises/acts is known
as reciprocal contract.
A contingent contract is one to perform or not to perform an
act, if some future uncertain event, collateral to such contract
does or does not happen. As for example, A contracts to pay B
Rs.10,000/- if Bs house is burnt. This is a contingent contract
(sec.31), because burning of Bs house is an uncertain event
24
which cannot, under normal circumstances, be controlled by
the parties to the contract.
A contract is conditional if the performance or non performance
of a contract depends upon a condition. For example, A agrees
to take Bs house on rent at Rs.5,000/- per month provided the
house is re-furnished. This condition may be either prefixed or
suffixed. Conditions are said to be prefixed, if the performance
of the contract depends upon prior fulfilment of the condition.
A suffixed condition on the other hand is one where contract
terminates on happening of the condition after the contract is
performed. For example, A transfers his house to B on condition
that B will not marry C. The house will remain with B only till he
refrains from marrying C. The moment he marries C, the contract
is terminated and A gets his house back.
4.6 STANDARD FORM OF CONTRACT
The impact of industrial civilization in realm of contract is felt
mostly through the process of standardization. For example, a
seller selling two sets of the same model of TV cannot sell them
at different terms to two customers at a given point of time. The
terms of sale are standardized for all possible customers. Any
variation in the terms is treated as unfair trade practice. Standard
form of contract is, therefore, one where terms of the contract
are all standardized and generally printed. These terms are often
determined by trade association for the use of its members either
contracting inter se or with outside public. The basic idea behind
standard form contract is that a trader of uniform goods cannot
discriminate between his customers. The argument of buyer
being the offeror shall not insulate the seller for discriminating
between the buyers of the same or similar commodities in so far
as price, quality and services are concerned. To make it clear
suppose X approaches a dry cleaning shop with some of his
garments. The charges are fixed according to the nature of
clothes. The condition of the service and the delivery are all
printed at the back side of the bill. Therefore, the customer has
no other option excepting agreeing to terms and conditions so
fixed. The philosophy that like must be treated alike is the
outcome of the culture of industrial civilization. Therefore the
shopkeeper cannot argue that since the customer was willing to
pay more and offered more he accepted a price higher than
what was fixed. Standard form contract, therefore, is a contract
where the customer after being fully aware of price, terms and
conditions i.e., conditions of delivery and terms of payment
opts to enter the contract. The Standard form contract, therefore,
is philosophically against the principle of buyer being always
the offeror.
Standard form contracts save time and make several types of
contract based on risk assumptions and risk distributions quite
possible. As for example, contract of insurance, carriage, banking
and the like. It is also a device to clearly exclude liability by
express provision where under normal circumstances a liability
would arise. Ofcourse taking this plea a person cannot avoid
the professional risk. Standard form contracts have the
following pattern:
(i) Conditions of the contract, like subject matter, services, price,
delivery, payment, etc. are clearly stated
(ii) Prefixed or suffixed conditions either binding the contract
or terminating the contract are stipulated
(iii) Rights and duties of the parties are specifically outlined, if
not positively atleast by negative statements commonly
called as Exemption Clauses; and
(iv) Consent of the parties are indicated either by signature or
by reference.
Standard form contract has certain basic principles:
(i) Knowledge presumed
A signatory to the contract cannot argue that the contents of the
agreement have not been communicated, or that these were not
read or not explained. Suppose X gives her clothes to a dry
cleaner and in the bill it is printed that if the goods are not
taken delivery off within a week from the delivery date indicated
in the bill the dry cleaner shall not be responsible for any damage
caused. In such a case suppose the goods are not taken delivery
off within a week and the goods are kept open on the floor, and
are partly damaged by rats, the shopkeeper may refuse to accept
liability. X cannot take the plea that she is ignorant about the
condition. Of course liability from negligence cannot be
exempted through any exemption clause like this. For example,
X takes a cycle on rent from a shop. The standard form receipt
states that for personal injuries the shop shall not be liable. But
if the injury is caused to X on account of the cycle being not fit
for riding the shop shall be responsible. (White v. Warwrick
& Co Ltd [(1953)1 WLR 1285]
The exemption clause is one where insulation is provided against
negligence. For example, if X undertakes to decorate Bs
premises at the sole risk of B as regards loss or damage by fire,
howsoever it may be caused. Under such circumstances even
if the house is damaged by fire due to negligence, X is not
liable to compensate, especially when X urges Y to take an
insurance against fire.(J. Archdele Ltd v. Com Services Ltd
(1954)1 WLR 459)
At present consumers are generally protected against loss on
account of negligence inspite of such exemptions, provided
these exemptions can even remotely be connected with unfair
trade practices.
(ii) Notice of Exemption
The exemption is required either to be printed in the document
of contract or clearly mentioned in it. Suppose X asks her niece
to buy a railway excursion ticket for her. The ticket on the face
of it had the printed words see back and on the back a
statement that it is issued subject to the conditions set out in the
companys time table which one could buy for Rs.12/-. If one
of those conditions exempt the railway company from liability
of personal injury, can X being injured in the trip claim damages
on the plea that she is illiterate and could not get the notice
from the ticket nor had she enough money to buy the time table?
In a similar situation the British court held that as the notice was
25
clear and as the ticket was a common form document the railway
was not liable (Thompson v. L.M & S Rly [(1930) 1 K.B 41]).
Similarly if X purchases an air ticket and puts his baggage in the
carrier for which he is given a ticket containing a clause that
damages rule as per the conditions stipulated in the ticket. In
the ticket the rule is printed in very small words which X knows
to be printed but cannot read. A clause so printed stipulates
that for loss of the baggage a compensation of $ 40 only is
payable per bag unless a higher value is declared and higher
freight is paid. Can the traveller in such situations, claim the
higher compensation on the plea that such a small printing
cannot be properly read ? Such an important condition is
required to be directly brought to notice. In a similar case it was
held by a British court that the defendants would have to show
that they gave a reasonable notice that the writing contains
conditions.(Burnett v. Westminister Bank Ltd [(1965)3 WLR
863]). Presently this type of notice is critically reviewed by the
judiciary from the point of view of public interest. If any small
indication of notice goes against the consumers interest then
the courts generally started ignoring such exemption clause.
In an interesting case, the plaintiff booked a room in the
defendants hotel, and nothing special was told to her at the
reception desk where the contract was made. She later saw a
notice in her bedroom exempting the defendant from liability
of articles lost or stolen unless handed to the management for
safe custody. It was held that such a notice in the bedroom
cannot be said to have been incorporated in the contract because
the contract was made at the reception desk, where no
instructions were given to see notices provided in the bedroom.
(iii) Exemption clauses are strictly interpreted :
It is a well settled rule of construction that if one party puts
forward a printed form of words for signature by the other, and
afterwards it is found that these words are inconsistent with the
main object.... of the transaction as disclosed by the terms
specially agreed, the court will limit or reject the printed words
so as to ensure that the main object of the transaction is achieved.
[New Chatel Asphalte Co v. Bernett (1957)]. An example
may be taken from Glynn v. Margetson [(1893) A.C 351 1
WLR 356]. A bill of lading provided for shipment of oranges
by a ship lying in the port Malaga and bound for Liverpool with
liberty to proceed to and stay at any port or ports in any station
in the Mediterranean, Black Sea or Adreatic or on the coasts of
Africa, Spain, Portugal, France, Great Britain or Ireland for the
purpose of delivery of coal, cargo or passengers or for any
other purposes whatsoever. The ship went east of Malaga,
retraced her course and then reached Liverpool. As a result of
the delay the oranges deteriorated. The carrier was held liable
despite the deviation clause because the court limited the import
of the general words of the exception with reference to the main
object or intent.
(iv) Exclusion from fraud, misrepresentation, fiduciary
obligation or natural justice cannot be made:
No standard form contract can contain a clause excluding a
party from the liability arising out of misrepresentation, fraud
or fiduciary obligations or natural justice. Lord Denning in
several cases also held that the rules of a union purporting to
oust rules of natural justice would be void. Similarly a Director
or a promotor of a company has a fiduciary duty to the company
not to make a profit without disclosing his self interest. He
cannot opt out of such a duty by providing any exemption clause
in a contract between him and the company.
(v) Exemption clause should not be unreasonable :
The Common Law principle is that the exemption clause is not
invalid merely because it is unreasonable [Luddit v. Ginger
Cooti Airways Ltd (1947) AC 233]. But inherent inconsistency
and unreasonableness or irrelevance for the main purpose of
the contract shall vitiate exemption clause. Similarly a lawfully
bound duty cannot be obliterated by an exemption clause.
(vi) No fundamental breach can be covered up by an
exemption clause :
In Woolmer v. Delmer Price Ltd, [(1955)1 Q.B. 291] the
defendants agreed to store the plaintiffs fur coat at customers
risk. The coat was lost in some unexplained way. It was held
that the defendant could not rely on the exemption clause as
the coat might have been lost as a result of a fundamental breach.
Government contracts or big turn key contracts are examples
of standard form contract. Standard form contracts have several
advantages. They are :
(i) It shifts the risk of contract from buyer to the seller as far
as fixation of terms of contract is concerned. So buyers
option is either to enter into the contract or not to enter into
the contract;
(ii) Standard form contract saves buyers from exploitation;
(iii) All conditions of contract are certain and definite; and
(iv) The complexity of the burden of proof and evidences are to
a great extent simplified.
Example of a Standard Form Contract :
All insurance policies are standard form contracts. When a
person wants to insure his life, he has to accept the terms and
conditions specified by the Insurance company. He himself
cannot make any changes in the contract. It is a take it or leave
it contract, i.e., there is no compromise or special considerations
for anyone, and, even if some of the conditions result in hardship
to the person he cannot complain. Some other examples of
standard form contracts are : a cloak room ticket ; a laundry/dry
cleaners bill; a telephone bill etc.
26
5. TERMS OF CONTRACT
SUB-TOPICS
5.0 Introduction
5.1 Terms of Representation
5.2 Test of Contractual intention
5.3 Conditions and Warranties
5.4 Implied Terms
5.5 Construction of Terms
5.6 Exception Clauses
5.0 INTRODUCTION
The rights & obligations of contracting parties arise on account
of the express and implied contracts and warranties. In order to
enforce these rights and obligations, one must look into the
facts and context of each case, the intention of the parties etc.
Let us now examine the principles pertaining to the
interpretation of terms of contract.
5.1 TERMS OF REPRESENTATION
A commercial contract generally contains various terms in the
contract. All these terms are determined through a detailed
discussion over a period of time. Sometimes it becomes
necessary to analytically examine the whole affair of the contract
in order to understand what are the terms and conditions of the
whole contract. Some of these terms are expressedly stipulated
by the parties, but some other terms remain hidden and implied.
Some terms though stipulated are not essential but some other
terms though not expressly stipulated are treated as being very
important for the existence and performance of the contract.
Justice Williams explained these terms in Behn v. Burness
[(1863), 3 B.45.751] in the following terms:
Properly speaking a representation is a statement, or assertion,
made by one party to the other, before or at the time of the
contract, of some matter or circumstance relating to it. Though
it is sometimes contained in the written statement, it is not an
integral part of the contract; and consequently the contract is
not broken though the representation proves to be untrue.
In order to explain such type of representations, Anson has cited
two cases [Contract, pg.125]. In the first case, a private seller
sold a motor car to a firm of dealers. He told them that the car
was of 1948 model. The log book showed that it was first
registered in 1948. But, in fact, the car was a 1939 model and
the log book had been altered by some unknown person. The
court held that it was a mere representation, not giving rise to
any action for breach of contract.
In the second case, a motor dealer stated to a private purchaser
that the car has done only 20,000 miles, based on the reading
of the milometer whereas the fact was that the car had already
done 1,00,000 miles. The court held that the term was a
contractual one, and therefore, the contract was terminated. The
court distinguished the above two cases on the ground that, in
the first case the seller honestly believed what was stated,
whereas in the second case the fact stated should be within the
knowledge of the seller. The above distinction shows that some
terms in the contract become an essential part of the contract,
whereas others remain as representations.
Therefore, terms of contract are divided into two groups : (1)
those which form, the basic core of the contract, denial of which
will either amount to denial of contract or entitlement of
substantial damages. These types of stipualtions/statements
are called contractual terms or conditions; (2) those statements
which are innocent in formation, stated bonafidely, but are not
fundamental to the conception of the contract are mere
representations.
5.2 TEST OF CONTRACTUAL INTENTION
The main test as to whether a statement in a contract is a
representation or a contractual term is based upon the intention
of the parties, which is to be identified in the totality of the
evidence collected. As for example, take the following instances.
Raman offered hops for sale to Rahim. Rahim asked him whether,
sulphur has been used in the treatment of that years growth as
brewers were refusing hops contaminated with sulphur. To
this enquiry Raman said no. Rahim was very particular about
the condition and said that he would not even ask for the price
if sulphur was not used. On Ramans saying no, the parties
determined the price, and Rahim agreed to purchase the hops
based upon the sample given to him. After that the hops were
delivered to his warehouse, weighed and the amount due on
purchase determined. Rahim afterwards repudiated the contract
on the plea that the hops contained sulphur. It was proved that,
sulphur had been used over 5 acres, though the entire growth
consisted of 300 acres. It was proved that, Raman did not make
the false statement wilfully, because he forgot that sulphur was
used in only 5 acres.
In this example it is clearly shown that Rahim wanted to purchase
the hops only if sulphur was not used in the growth. Therefore,
Ramans assurance was a contractual term on which the contract
was specifically made, hence Rahim was justified in refusing the
contract.
Anson stipulates four probable factors in determining such a
representation or contractual terms. According to him, time is a
very important factor in determination of representations. If
interval between the time of making the statement and the final
manifestation of the agreement is a long one, it point to
representation instead of a contractual term. Secondly,
importance of the statement in the minds of both the parties
indicates the status of the statement. Thirdly, if the statement
was followed by the execution of a formal written contract it will
probably be regarded as a representation if the statement is not
incorporated in the written document. Finally, where the maker
of the statement is in a better position to ascertain the accuracy
of the statement, according to Anson, courts will tend to regard
it as a contractual term.
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5.3 CONDITIONS AND WARRANTIES
Terms of contract, has various grades of importance. Parties to
the contract may regard some of these terms as vital and others
as subsidiary or collateral to the main purpose of the contract.
As for example, A wants to purchase a car from B. B makes a
statement that the identified car goes 15 Km/Lt. After the deal
was entered into, A finds that the car goes only 12Km/Lt. Here,
the statement of B migh have been relied by A, which finally
motivated him to select the car. This situation can be
distinguished from the following fact. Here, A approaches B
to purchase a car, stating that he did not want to purchase any
car giving less than 15 Km/Lt. Now if B identified a particular
car and suggests that it would go 15 Km/Lt which prompted A
to finalise the contract. A afterwards comes to know that the
car goes only 12 Km/Lt, could rescind the contract. Here, the
statement of B, that the car goes 15 Km/Lt was a vital statement
for the formation of the contract. In the earlier instance, the
statement was a collateral one.
A term which is essential and vital to a contract, the denial of
which would entitle the innocent party to treat himself from
any liability is known as condition. But, the term which is
only collateral or subsidiary to the contract is known as
warranty ; its failure can only give rise to an action for such
damages as is actually suffered by a party on the failure of the
term.
In Glaholm v. Hays [(1841)2 M.N.G. 257], a vessel was
chartered to go from England to Trieste, and, there load a cargo.
The charter party contained this clause: the vessel to sail from
England on or before 4th of February next. The vessel did not
sail for some days, after the 4th Feb. and on its arrival at Trieste,
the charterer refused to load the cargo and repudiated the
contract. While holding the action of the charterers as justified,
the Court of Common pleas, held that, whether a particular clause
in a charter party shall be held to be a condition upon the non
performance of which by one party .... or it amounts to an
agreement only is the breach whereof is to be recompensed, to
be collected ... depends upon the intention of the parties to the
contract as specified in the terms of the contract.
Conditions maybe promissory conditions, contingent
conditions, condition precedent or a condition subsequent.
A promissory condition is one which is an essential undertaking
in the contract, whereby one party promises to the other. If it is
not made good, not only will the other party be entitled to treat
as discharged, but it can also sue for damages for breach.
A contingent condition is a provision, that a contract shall not
take effect unless and until the condition is fulfilled. In Trans
Trust S. P.R. L. v. Danubien Trading Co. Ltd [(1952)2 Q.B.
297], the distinction between promissory and contingent
conditions was brought into by Lord Denning. In this case, a
stipulation concerning the sale of goods relating to the opening
of the buyer of the bankers estoppel credit in favour of the
seller. Lord Denning held, sometimes it is a condition precedent
to the formation of a contract, i.e., it is a condition which must
be fulfilled before any contract is concluded at all. In those
cases the stipulation subject to the opening of credit is rather
like a subject to the contract. If no credit is provided, there is
no contract between the parties. In other cases, a contract is
concluded, and a stipulation for credit is a condition which is an
essential term of the contract. In those cases, the provision of
the credit is a condition precedent, not to the formation of a
contract, but to the obligation of the seller to deliver the goods.
If the buyer fails to provide the credit, the seller can treat himself
as discharged from any further performance of the contract, and
can sue the buyer for damages for not providing the credit.
Condition is subsequent when the parties agree that the contract
is to be immediately binding, but on happening of certain events
either the contract would cease to bind or one party is to have
the option to cancel the contract.
Warranty on the other hand, is collateral or subsidiary term, not
as vital as a condition. For example, suppose B enters into a
contract with G a director of an opera, to sing in the Opera
concerts for a period of 3 months. Suppose, one of the terms of
the contract is that B has to report to Bombay, 6 days before the
commencement of engagement for rehearsals. Now if B arrives
only 2 days before for the rehearsals, can G refuse to go with
the contract?
In a similar case, the court held that, in such a contract the term
is not a condition, but merely a warranty, its breach does not
operate as discharge of contract, but only entitles the party to
demand compensation for damages.
5.4 IMPLIED TERMS
Sometimes in a contract, many of the contractual terms remain
implied. As for example, in the business world, there are many
customs of trade. These customs are not required to be
repeatedly stated in the contract. Such customs require express
stipulation for exclusion. In sale of goods, there are implied
conditions such as (a) implied undertakings as to the title to the
goods to be sold; (b) in a sale of description, goods shall
correspond to the description; (c) goods have quality or fitness;
(d) bulk of goods correspond to the sample and description; (e)
if the purpose is stated, the goods are suitable for the purpose;
(f) goods are marketable. An example can be taken from Wallie
v. Russel [(1902)2 I.Rep.585]. A girl brought from a fishmonger,
two nice fresh crabs for tea. The crabs were not fresh; indeed
they were highly poisonous. The fishmonger was held liable for
damages for breach of this implied condition. Similarly in Gotley
v. Perry [(1960)1 WLR 9], a 6yr. old boy brought from a retailer,
a plastic toy catapult. It was made of cheap, brittle polysterene,
and while the boy was fixing a stone from it, the catapult
fractured, and he lost the sight in one eye. In an action by the
boy against the retailer for damages, the court held that there
was a breach of implied condition as to merchantable quality.
5.5 CONSTRUCTION OF TERMS
The court has a responsibility of construction of the contractual
terms in accordance with the intention of parties. It means that,
the court has to discover the intention of the parties by looking
at the terms of the contract. In a written contract, the task is
easier. The court generally explains the terms of the contract in
plain and literal meaning. In the event that two meanings are
possible, court takes that meaning which would make the
instrument valid, and avoids one which would make the
28
instrument void or ineffectual. Where there is an express mention
in the instrument of a certain thing, it would exclude any other
thing of similar nature [expressio unius est exclusio Alterius].
5.6 EXEMPTION CLAUSES
Often in commercial contracts we find a party taking shelter
under an exemption clause, express or implied. Exemption
clause is one which stipulates one party to be exempted from
certain liabilities in certain events. This type of exemption
clause is evident in standard form contract.
Anson very rightly suggested that one of the most important
developments in the sphere of contracts during the last 100 years,
has been the appearance of standard form contracts or
contracts of adhesion as it is sometimes called. These types
of contracts have clear provisions delimiting the liabilities of
the parties. Each time an individual travels on a bus/train, takes
his clothes to the dry cleaners, receives gas, electricity, water
from the municipal supply, deposits his luggage in the railway
cloakroom, takes the lease of a house/flat, he will receive a
standard form of contract. He has to either accept it in toto or
go without it. He does not have any other alternative. The court
in such situations applies ordinary principles of contract law
and examines the fairness and reasonability of the stipulation.
An unfair stipulation is struck down, and all reasonable
considerations are taken for the purpose of protecting
consumers interests.
If the terms are written in a contract and parties to it sign the
document, they are bound by the terms, even though they have
not actually read the stipulations. The problem is where the
document is not signed by the customer, but it has merely been
delivered to him. In such cases problem arises, as to whether
the terms of the contract were adequately brought to his notice
or not, at the time of entering into contract. In Ouey v.
Marlborough Court Ltd. [(1949) 1 K.B. 532)] the plaintiff and
her husband, were accepted as guests in a hotel. They paid
their weeks board and lodging in advance as required by the
rules of the hotel, over the counter. After that they were given
the key of the room. In the room, they found another notice
which stipulated that the proprietors of the hotel would not be
liable for articles lost or stolen from the room. Owing to the
negligence of the hotel staff a thief gained access to the room
and stole some articles. The Court of Appeal held that, the
notice in the room did not form part of the contract, since the
plaintiff could not have seen it until after the contract was made.
A previous course of dealings between the parties generally
does not validate an implied exemption clause. In British
Crane Hire Corp. v. Ipswich Plaint Hire Ltd. [(1974)2 WLR
856], it was observed that an exemption clause may be implied
where each party has led to the other reasonably to believe that
he intended that their rights and liabilities should be ascertained
by reference to the terms of a document which had been
consistently used by them in previous transactions.
Notice of such exemptions is strictly interpreted, with a view to
objectively determine whether the parties to the contract arrived
at a consensus with full knowledge. If a customer of a dry
cleaning shop receiving the receipt, did not see or note that
there was anything written in the receipt, he is not bound by the
condition. But if he knew or believed that exemption clauses
were contain or conditions were specified in writing though he
himself did not read it, he is bound by the clause. As for example,
A deposited his bag in the cloakroom of a railway station. He
received a paper ticket which said on its face vide reverse and
on the backside there were a number of printed conditions
including a clause limiting the liability for the loss of any package
to $ 20. If As bag is lost, he can claim only
$ 20.
The notice must be reasonable. Whether a notice is reasonable
and adequate or not is a matter of fact. In Union Steamship v.
Barnes [(1956)5 DLR 2 535 (Canada)], the plaintiff tendered the
passage money to a steamer company and purchased a ticket.
The ticket was folded and given back to the plaintiff. The plaintiff
knew that something was written on the ticket, but did not open
the ticket to see it. One of the conditions was limiting the
companys liability for any lost/damaged goods to $ 100. The
court held that sufficient notice was not given because the ticket
was delivered in a folded condition, and conditions were
obliterate in part by a stamping red ink.
Exemption clauses are very strictly interpreted. In most of the
cases, consumer forum interprets these exemption clauses in a
very narrow sense to give adequate protection to the consumer.
One of the hotly debated issues is whether the defendant can
exclude himself from tortious liability for negligence. According
to common law, the defendant can protect himself, his servants
and agents, with a clear provision of exemption. In Rutter v.
Palmer [(1922) 2 K.B.87], the plaintiff left his car at the
defendants garage for sale on commission. One of the terms of
the contract was that, defendants drivers would drive the run
test if required by the customer. On such a test run, there was
a collision and the car was damaged. It was held that the
defendant was not liable to pay compensation because of the
clear terms of the contract.
One of the fundamental principles of common law is that a third
party can not acquire any right on a contract. In Scrutions Ltd.
v. Midland Silicones Ltd. (1962 AC 446), a drum of chemicals
was shifted from New York to London, was consigned to the
respondents upon the terms of bill of lading which exempted
the carriers from liability, in excess of $ 500 per package. In the
course of being handled in a warehouse, the drum was damaged
by the negligence of the appellants, a lim of Stevedores employed
by the carriers and the damage amounted to $ 593 (or nearly $
2500). Though the appellants were not a party to the bill of
lading, not expressly mentioned therein they claimed to be
entitled to the benefit of the clause limiting liability. The majority
of House of Lords held that, the appellants could not claim the
benefit of an exemption clause in a contract to which they were
not a party. Of course Lord Denning, in his minority judgement,
considered that the appellants were protected since the
respondents had assented to the limitation of liability.
29
SUB-TOPICS
6.1 Introduction
6.2 Essential assumptions in a contract
6.3 Critical review of assumptions
6.4 Conditions in the changing society
6.5 Contract in changing society
6.6 Concluding remarks
6.1 INTRODUCTION
According to Sir Henry Maine the progressive society has
developed from status to contract. Friedman took this argument
further by stating that as against a legal status determined by
ties and conditions outside personal decisions, contract allows
the individual to change his country or employment (Law in
the changing Society, 1996). A feudal Society of serfs and
slaves was a static society where things used to be determined
by status of the individual. In order to evolve a progressive
society an ideological conflict was inevitable, which we find
evident in the American civil war when South tried to defend
a farm society of serfs and slaves and the North aspired for a
free economic society to develop commerce and industries.
According to a section of sociologists the domination of caste
and class in Indian society, is a point in evidence of Indian
society being backward, static, immobile and feudal. A mobile
society always aspires for change and progress. It demands
freedom of every individual being to determine his/her course
of action.
6.2 ESSENTIAL ASSUMPTIONS IN A CONTRACT
A contract-society is one which is based on certain essential
assumptions. Some of these basic assumptions are:
1. Equality of status Unless there is a freedom of contract an
individual does not have the liberty of determining his economic
destiny through the contractual process. Thus, equality and
freedom of contract are interchangeable assumptions of a
contract society. Friedman opined that lack of freedom, to make
or unmake a contract, or to bargain on his terms, also implies
lack of equality (1970 - 93). In a contract society the fundamental
issue, therefore, is that each party to the contract must be equal
to the other party in so far as his or her bargaining ability and
stipulating terms are concerned. It is, therefore, necessary that
there shall be no social or political restraints which may stand in
the way of individual contractors to assume a position of
equality. According to John Stuart Mill every human being has
the right to determine what he should do and what he should
not do. Bentham in his Utilitarian thesis explained the
contractual ability of a person through his/her relative
understanding of marginal utility of the fruits of his action. The
Constitution of India has guaranteed this right to equality in so
far as dealings of the state with the citizens is concerned.
Ofcourse this concept of equality has undergone several
6. CONTRACT IN THE CHANGING SOCIETY
interpretations in an open market and a socialist economic
transactions. But the basic issue of equality of the parties and
their right to determine terms and conditions in the contract on
different considerations, specially the economic consideration
of transaction costs, is presumed in democratic functioning of
the state.
2. Freedom of choice Economists are of the view that essential
conditions of success in a contract society depends upon its
market conditions. A market which cannot be determined either
by an individual buyer/seller achieves perfection of a contract
society. Such a market condition therefore essentially requires:
(a) alternate actions; and (b) freedom of choice. A buyer may be
compelled to buy a thing at a dictated price because of the
absence of either of the conditions or both. Such a structure
leads towards the status, more than the ability. This is an anti-
thesis to a contract society.
3. Free exchange Contract envisages exchange through
volition. The concept of exchange has of course undergone a
systematic change from the days of barter-economy to the
present days of money economy. Presently exchange is
circuitous i.e., commodities/services are exchanged for money,
and money in turn is exchanged for commodities/services. Any
regulative mechanics preventing exchange either in the stage
for money or for goods tends to create an obstacle to the
development of a contract society.
6.3 CRITICAL REVIEW OF ASSUMPTIONS
1. Equality A contract society is growingly made equivalent
to capitalism, whereas, a regulated society is termed as
socialistic. This political overtone on economic relations may
not always signify the truth. In a capitalist society of high
industrial growth, the equality of bargaining between an
employer and employee becomes a myth, specially in the context
of populace developing countries. (In any country number of
employers are less than the number of employees seeking jobs.)
However, employees uniting themselves may strengthen their
bargaining capacity; and so may the employers unite themselves
to create a monopoly. In several countries anti-monopoly or
anti-trust laws prohibit any attempt of creating monopoly and
cornering of the market. The same logic is now growingly used
against the state action of allowing trade unionism. If the state
does not allow trade unionism and also does not stipulate the
minimum wages, the inequality of status in fact between the
employer-employee especially in the developing world will reduce
the wages to be paid to the employees to sub human levels. It
would further encourage the unethical competition of wage
reduction between existing employees and unemployed people
(the unemployed persons in their eagerness to become
employed, would be willing to accept very low wages, and, the
employers would be in a position to exploit this situation to
their own advantage, paying scant regard to the rights of the
employees). It is true that in a democratic country with a free
economy the state has to confine its role in regulating activities
30
by (1) recognising all players; (2) ensuring the rule of the
game; (3) seeing that all possible unevenness in playing
conditions are avoided; and (4) strictly policing so that none
can disturb the situation.
It is, therefore, argued that creating unevenness in the field of
contract by prescription of minimum wages or payment of bonus
etc amounts to disturbing the economic operations and
conditions of inequality. These in fact, as argued by some,
prevent employers from increasing the productivity and creating
job opportunities.
Therefore two different types of arguments are clear. Firstly,
that equality itself becomes a myth in economic operations like
employer-employee relationship. The mere capital movement
itself creates inequality in the playing conditions which the state
cannot overlook. Secondly, state cannot allow the economically
weaker section of its population exploited by stronger section
of its population in any manner, whatever be the form of
exploitation i.e., social, economic or political. Based on these
two arguments, a third opinion emerges. That is, the state has
to ensure minimum public welfare and a sound public policy.
The concept of contract as a vehicle of exploitation cannot be
allowed in a democratic set-up.
On the other hand protagonists of colonialism argue, firstly that
the state intervention in the freedom of contract violates the
basic moral and political issues of democratic governance.
Secondly, it effects the efficiency of the economic system by
increasing the transaction cost (one of the noble bureaucrat of
recent times has attributed credit to system of slavery in rising
American economy.) Thirdly, state intervention in the area of
freedom of contract prevents growth and restricts employment
opportunities. Fourthly, social welfare must not be confused
with hard-core economic rules, which regulate the price for
factors of production on demand and supply. More supply of
labour would reduce the cost of labour, encourage more
investment creates more job opportunities and ultimately
increase the wage structure, thus, striking a balance of
investment, productivity and employment.
In fact the dynamics of society revolves around this question
of balancing the interests of various sections of society.
Accordingly over the years we see the change in the nature and
formation of contract itself from individual contract i.e.,
parties to the contract determining terms & conditions, we
entered into a concept of the state regulating terms & conditions,
i.e., a third party directing the conditions of contract. This brings
into various forms of contract as well as principles, for example,
the standard form of contract is one in which all terms and
conditions are stipulated by one party either on its own (since it
is in fact the powerful party) or because of the state intervention
(since the state is concerned in protecting the public interest).
The other party to the contract has to submit to it. A basic
principle has arisen out of this form of contract which ideally
suits mass production in an industrial setup. The principle is
that the seller cannot stipulate different prices for similar
products to different customers. In some countries this principle
is covered under unfair trade practices and in some other
countries it is taken as against business ethics.
2. Choice Freedom of choice is dependent upon many
macro-level policy concerns of the state, for example, the people
want more choice in motor cars, more import of machineries
and technology is needed, as well as need for more roads. So
where the capital of the country is limited and there are multiple
needs it may be necessary for the state to regulate the capital
deployment to some avenues more than the other. Necessarily,
therefore, in short supply choices are restricted. In a socialist
society, private satisfaction does not take a leading role specially
because supply of the essential commodities is limited and free
choice would lead to disaster. Free choice is possible when
there are several alternatives, each having sufficient supplies
and all people have contracting abilities (according to Marshall
need is not demand. A person having the purchasing power
and ability to go to the market and to place the order according
to his/her ability for the product, is the demand). State as the
friend of the people determines what is the essential need of
the people, how to meet the essential need and what amount of
capital is to be deployed in producing that.
In the changing society which tends to globalize economists of
the free market variety, argue that state is not required to be
engaged in the production and distribution level operations.
Free entrepreneurs from any part of the globe shall look after
the peoples interest and design their standard of living.
According to them, choice is not merely to be free in the national
context, it has to be free in the international context. The
question, therefore, shall influence the building up of
international transactions and regulations at the cost of the
national system. The concept of freedom is itself questionable.
Even where choice is unlimited like the choice of hire and fire,
raises many questions of wider interest. Some people argue
that having such a policy of hire and fire only because there is
an abundant labour supply can become dangerous to a country.
It may create huge unemployment which the national economy
cannot absorb. It will encourage destabilization and ultimately
lead to de-industrialization. Open market protagonists on the
other hand argue that conditions of efficiency can only be
maintained by providing freedom of choice. State interference
in this area will lead to an immobile society. The question of
choice has not remained an individual issue any longer. Choice
involves a risk. Suppose A chooses to purchase a couple of
bullocks for his cultivation it bears a risk to the life of the
bullocks. It means that people having similar choice run a
similar risk. In modern times this risk sharing amongst all those
who have similar choice has become an essential part of the
transaction. It is even absorbed in the cost of an article.
3. Free exchange This is seldom allowed totally in any
country. Lack of foreign exchange, adverse balance of payment,
regulated imports, all these are evidences of restrictions imposed
on exchanges. In a chronically short supply of market price
regulation by the state is often practised. Restrictions on free
exchanges are often recognised by the common law courts in
various parts of the world. Restrictive covenants are generally
held valid in sale of business good-will.
31
6.4 CONDITIONS IN THE CHANGING SOCIETY
Friedman has mentioned four factors that are mainly responsible
for transformation in the function and substance of the contract
(Changing Society, p.97). They are:
(1) Localization of Industry, trade and commerce with
corresponding urbanization and standardization of life.
This results in a standard form of contract or a contract of
adhesion;
(2) Increasing collectivisation. This results in collective
bargaining, consumer movement and various forms of
interference by the state;
(3) Tremendous expansion of welfare and social service
functions of the state. This results in multitude of statutory
terms of contract, wide expansion of government
departments for regulation and control; and
(4) Economic security aspects of contract de-emphasized in
the wide range of state interference. This results in
frustration of contract and extension of legal excuses for
non performance.
The society is growing very fast. The above four factors
responsible for transformation of the substance of contract in
one direction especially in the post war free world. In the
nineties we are experiencing some other factors in the socio-
economic and political movement requiring transformation of
function and substance of contract in the opposing direction.
They are :
(i) Globalization of market. This requires unrestricted free
movement of capital which will necessarily require the
dismantling of the national regulatory system and exposing the
national interest to be subjective to the global regulation. It
may, therefore, herald a new era of international regulations
and practices influencing the national system. This will weaken
the public control on terms and conditions of contract, dismantle
public authorities for regulation of contracts, and reduce
national authority to its police role ;
(ii) Prolific growth of Multi-National Corporations [MNCs]
and adaptation of different techniques of MNC functioning.
Transnational and multinational companies are gradually
gaining ground and the days are not far off when these Trans-
National Corporations [TNCs] and MNCs will take over a
significant control of the economic affairs of the global
economy. This will change various forms of contracts between
holding - subsidiary relations and other organisational and
managerial techniques. The growth of their occupation in
relation to agriculture shall necessarily commercialise the whole
area of land-tenancy system, production structure, seed,
patenting and the like. Growing strength of these TNCs and
MNCs shall weaken the role of state in contractual situations.
It will, therefore, mean de-emphasizing public interest and
reduce the realm of contract as essential instrument of
determining private interest ; and
(iii) Wide scale de-regulation of public control. In the last
fifty years the argument of public policy and consequently the
public control were built up both statutorily as well as through
judicial pronouncements. In India the activist judiciary started
expanding the right to life and including in it almost everything
under the sun like health, education, shelter, etc., (Olga Tellis,
Mohini Jain, Asiad Workers case, M.C. Mehta (environment
case). This has necessarily developed a system of government
with a distinct policy of governance. This policy of governance
can be said to be social policy of the government. As a result
there have been several implications of this type of governance
specially effecting the realm of contract in the following manner:
(a) Government used to regulate the terms and conditions of the
contract to protect the disadvantaged groups and the interest
of the public. For eg., a wage structure was imposed through
Minimum Wages Act. The collective bargaining of the workers
was strengthened by encouraging trade union movement, the
prices were determined by a strong price policy etc.;
(b) If countries like India being predominantly agricultural formed
a very strict regulatory land holding and tenancy system, any
type of land alienation through contract affecting this
fundamental policy was made unconstitutional and illegal.
Commercialization of land holdings was prevented at all costs;
(c) Workers and employees were considered as protective area
of the state and therefore, several regulatory and welfare statutes
were passed directly the employer to ensure their statutory
obligations;
(d) There was a growing tendency of private agreemments being
scrutinised through public law arguments. Questions like
reservations were taken into the functioning of all government
companies and corporations discharging only commercial
functions. The concept of instrumentality of State was
growingly used by the judiciary and as a result the responsibility
of the state became all pervasive; and
(e) The state took the responsibility on itself to regulate control
and involve itself in the capital movement and had built up a
strict regulative framework through license, permissions and
certification.
Consequently many public authorities were constituted to
oversee the legal regime as well as its economic operations. A
mixed economic model started being managed on the principle
of public enterprise leadership.
Presently under the globalization scheme the whole structure
of this public control mechanism is debased involving
deregulation, delicensing, de public sector monopolisation,
depublic control and obviously dismantling the public interest
logic.
6.5 CONTRACT IN CHANGING SOCIETY
In the above paragraphs we have attempted to explain that the
function and substance of contract changes with the changing
society. No human society is static in nature - even status
society like a nomadic society was never static in character.
Similarly a contract society could also develop certain static
characters. This is a sociological and anthropological question
and not within our realm of discussion.
32
Function and substance of contract in early industrial
civilizations were based upon the assumptions already discussed
i.e., equality of status, freedom of choice and free exchange.
But soon it was realized that all were not equal, all do not have
absolute freedom of choice and liberty of exchange is also
controllable. With this understanding both trade union
movements and cartelisation of organisations started to wriggle
out power. After all money begets power, therefore, those who
were employers were more powerful. In order to counteract
them, trade union movements started collective bargaining.
Initially discounted, rejected and confronted by the state,
ultimately the state had to yield to the movement for the sake of
promoting welfareism. Gradually welfare state started dictating
terms to both the parties in the democratic setup of governance.
Prescription of minimum wages by the state which was declared
as ultra-vires, was ultimately accepted as a norm of good
governance. The welfare state, therefore, enforced conditions
in a contractual relationship between parties in the name of
social welfare, public policy and equity. Free market contracts
were taken over by public distribution system contracts i.e.,
freedom to choose customers/sellers, commodities and price
was substituted by fair price shop, rationing definite quantity
at definite price. Freedom of contract is substituted by direction
and order. An offer is replaced by a petition and an acceptance
by license. The performance of contract became equal to
execution of an order. Though the society in that welfare state
did not become a society full of status in the form of capitalists
and labourers, the state nevertheless brought itself within the
interactive centre for capital and labour. State became
essentially a friend of the people against all types of exploitation.
In India we followed mixed economy for more than 40 years and
developed a system of governance with restrictive control and
rigid administration. Naturally we established a legal regime for
the function and substance of contract as indicated below:
1) Government contracts outnumbered the private contracts,
courts started interpreting the government contracts with
increasing reliance on natural justice disregarding the freedom
of contract. In one of the leading cases the court held that in a
contract where one party was the government or any
instrumentality of the State, conditions of natural justice must
be observed upto the threshold of the contract. This has been
explained in a later chapter on government contracts;
2) Public policy has been attempted to be enshrined even in
private contracts. An agreement between a money lender and
a farmer could be struck down on the grounds of public policy.
Sale of land to a non-agriculturist was stipulated as unlawful.
The public policy became so much dominant that a form of
standardization started developing in contracts; and
3) Various public control systems that are regulatory in nature
were introduced. Necessarily the private law area of contract
was increasingly challenged by public law reasoning. This was
most evident in cases on frustration of contract. Before the war
the common law courts used to apply the principle of frustration
in order to what is just and reasonable in the new situation. But
as Lord Denning would say the courts went to exercise their
power even when there was no frustrating event but only an
uncontemplated turn of events took place. Friedman tried to
explain this transaction as the mixture of heterogenous factors
that make up the complex picture of modern contract and have
turned it into something, rather different from chief commercial
guarantee of a private enterprise society, which is best illustrated
by problem of sanctions. The controversy whether the primary
sanction of contract is actual performance or a promise to make
preparation for non-performance is of old standing. Holmes
long ago proposed a view the only universal consequence of a
legally binding promise is that of the law making the promisor
pay damages if the promised even doesnt come to pass. This
view has been widely criticised, mainly on the ground that the
law does not leave the promisor, the freedom to choose between
performance and the payment of damages where he is able to
perform. The history of common law tends to support Holmes
view...... (Changing society, p.113) in both common and civil
laws only in a very few contracts where equity demands an
additional or alternative remedy to damages like specific
performance/injunction is awarded. The proportion of public/
private elements in a contract determines the degree to which
traditional sanctions of contract apply..... (ibid p.114). In a contract
where public are substantially interested like the Bethelham Steel
Case (315 US 289), the US government alleged that the contract
was exploitative in character on account of war time emergency
and the government was compelled to accept the terms of the
countrys leading ship builders. In a minority judgement
Frankfurter J., held that the court should not permit Bethelham
steel to recover these unconscionable profits thereby making
the courts instruments of injustice. This 1942 dissenting
judgement became a landmark guide afterwards in the judicial
history for computation of public interest.
The situation is again rapidly changing in favour of an argument
for the state to withdraw from all economic transactions on the
argument of achieving pareto optimanity. It shall mean that in
future, state shall not take any active role in regulating,
controlling, devising, any terms of contracts. Freedom of contract
shall be allowed on the presumption of equality of status between
the contracting parties. State shall not interfere in hire and fire
principles of TNCs and MNCs. In the name of reducing the cost
of governance and increasing democracy a lot of area considered
under public interest and hence susceptible to regulation shall
now become open to the private players to mutually bargain.
Forms of contract, therefore, change, with the changes in society.
6.6 CONCLUDING REMARKS
It can therefore be seen very clearly that the course of form and
substance of contract has not been same and straight throughout
the course of history. Though contract is an instrument for
determining private rights and obligations it cannot always
remain mutually exclusive from the domain of public interest.
As a result not only the methodology of contract started
changing throughout the course of history but its functions and
impacts have also been constantly subjected to review under
public policy. At times of course the degree of such public
policy scrutiny varied. In the coming ages the free market
advocates are going to de-emphasize the states role and
emphasize freedom for the MNCs to globally operate on
agreements of efficiency and lowering costs.
33
Section 2 : Interpretation-clause:- In this Act the following words
and expressions are used in the following senses, unless a
contrary intention appears from the context :-
(a) When one person 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 or abstinence, he is said
to make a proposal;
(b) When the person to whom the proposal is made signifies
his assent thereto, the proposal is said to be accepted. A
proposal, when accepted, becomes a promise;
(c) The person making the proposal is called the promisor,
and the preson accepting the proposal is called the
promisee;
(d) When, at the desire of the promisor, the promisee or any
other person has done or abstained from doing, or does or
abstains from doing, or promises to do or to abstain from
doing, something, such act or abstinence or promise is called
a consideration for the promise;
(e) Every promise and every set of promises, forming the
consideration for each other, is an agreement;
(f) Promises which form the consideration or part of the
consideration for each other, are called reciprocal promises;
(g) An agreement not enforceable by law is said to be void;
(h) An agreement enforceable by law is a contract;
(i) An agreement which is enforceable by law at the option of
one or more of the parties thereto, but not at the option of
the other or others, is a voidable contract;
(j) A contract which ceases to be enforceable by law becomes
void when it ceases to be enforceable.
Section 3. Communication, acceptance and revocation of
proposals- The communication of proposals, the acceptance
of proposals, and the revocation of proposals and acceptances,
respectively, are deemed to be made by any act or omission of
the party proposing, accepting or revoking by which he intends
to communicate such proposal, acceptance or revocation, or
which has the effect of communicating it.
Section 4. Communication when complete- The communication
of a proposal is complete when it comes to the knowledge of the
person to whom it is made.
The communication of an acceptance is complete, -
as against the proposer, when it is put in a course of transmission
to him, so as to be out of the power of the acceptor;
as against the acceptor, when it comes to the knowledge of the
proposer.
7. RELEVANT PROVISIONS OF THE ACT
The communication of a revocation is complete, -
as against the person who makes it, when it is put into a course
of transmission to the person to whom it is made, so as to be out
of the power of the person who makes it;
as against the person to whom it is made, when it comes to his
knowledge.
Section 5.- Revocation of proposals and acceptances.- A proposal
may be revoked at any time before the communication of its
acceptance is complete as against the proposer, but not
afterwards.
An acceptance may be revoked at any time before the
communication of the acceptance is complete as against the
acceptor, but not afterwards.
Section 6. Revocation how made- A proposal is revoked -
1. by the communication of notice of revocation by the
proposer to the other party;
2. by the lapse of the time prescribed in such proposal for its
acceptance, or, if no time is so prescribed, by the lapse of a
reasonable time, without communication of the acceptance;
3. by the failure of the acceptor to fulfil a condition precedent
to acceptance; or
4. by the death or insanity of the proposer, if the fact of his
death or insanity comes to the knowledge of the acceptor
before acceptance.
Section 7.- Acceptance must be absolute.- In order to convert a
proposal into a promise, the acceptance, must -
1. be absolute and unqualified;
2. be expressed in some usual and reasonable manner, unless
the proposal prescribed the manner in which it is to be
accepted. If the proposal prescribes a manner in which it is
to be accepted, and the acceptance is not made in such
manner, the proposer may, within a reasonable time after the
acceptance is communicated to him, insist that his proposal
shall be accepted in the prescribed manner, and not
otherwise; but if he fails to do so, he accepts the acceptance.
Section 8. Acceptance by performing conditions, or receiving
consideration.- Performance of the conditions of a proposal, or
the acceptance of any consideration for a reciprocal promise
which may be offered with a proposal, is an acceptance of the
proposal.
Section 9. Promises, express and implied.- In so far as the
proposal or acceptance of any promise is made in words, the
promise is said to be express. In so far as such proposal or
acceptance is made otherwise than in words, the promise is
said to be implied.
34
8. CASE LAW
1. Balfour v. Balfour [(1919) 2 KB 571]
Mr. & Mrs. Balfour residents of Ceylon moved to London when
Mr. Balfour was on leave. On expiry of his leave Mr. Balfour
returned to Ceylon whereas Mrs. Balfour remained in England
on medical advice. Mr. Balfour promised to send 30 every
month. Mr. Balfour did not send the money. Later on they
decided to live apart. Mrs. Balfour sought to recover the promise
money in the court of law. The main issue for decision was,
whether a promise of domestic nature between a husband and
wife could be binding ? It was held that, the promise between
the parties was not intended by them to be legally binding.
Hence, Mrs. Balfour could not enforce the payment.
2. Jones v. Padavatton [(1969)2 All ER 616]
The daughter of a Trinidad resident was employed at a
satisfactory salary with pension rights. Though unwilling to
do so, she accepted the offer from her mother to leave her job,
go to England and study for the Bar with an intention of
practising in Trinidad. In return her mother promised to pay
her fees & a monthly allowance; but nothing was recorded in
writing of the arrangement and of the period of arrangement.
After sometime the daughter was asked to purchase a house for
her own residence as also for taking in lodgers, the rent from
which could be applied towards her maintenance. Once again,
nothing was put in writing. The mother paid off the cost of the
house in several instalments. The daughter moved in, took in
lodgers and rents started arriving. The mother never received
any rent nor was she supplied with accounts. After about 2
years she issued summons claiming possession of the house
from the daughter, who counter claimed for 1,655 18s 9d.
said to have been paid in respect of the house. The main issues
involved were : 1. Could the daughter claim that the arrangement
between herself and her mother was to continue indefinitely;
and 2. Could the mother be presumed to have waived all her
rights over the house only because of the fact that the daughter
was in possession of the house and was the person receiving
rents? It was held that, the mother was entitled to the house as
against her daughter, because (1) the arrangement between the
two of them was throughout a family arrangement depending
on the good faith of the parties in keeping the promises made
and not intended to be a rigid binding agreement & the
arragnment was far too vague and uncertain to be enforceable
as contract; 2. a reasonable time was implied for the original
agreement of payment of allowance, because completion of
daughters study for Bar could not possibly exceed 5 years, the
daughter could not claim to be entitled to anything beyond that
period.
3. Carlill v. Carbolic Smoke Ball Co [(1893)1QB 256]
The defendants issued an advertisement in the newspapers,
offering a reward of 100 to any person who contracted
influenza, cold etc. after using their smoke balls thrice a day
for 2 weeks according to the printed directions. It was further
stated that, 1000 has been deposited in the Bank showing our
sincerity. The plaintiff used the balls as per the directions, but
still contracted influenza. She filed a suit claiming the reward
announced by the company. The defendants argued that as it
was an offer made to the public, there was no contract between
the plaintiff and themselves and hence they were not liable.
The main issues involved were, is notification of acceptance to
the offeror essential to constitute a binding offer? And what
was the consideration for this contract? It was held that, a
person who makes an offer in an advertisement impliedly
indicates that he does not require notification of the acceptance
of the offer. In such cases performance of the condition is
sufficient acceptance without express notification of it. Further,
the very fact that the plaintiff took the trouble of using the smoke
balls was enough consideration to support the contract. The
plaintiff was entitled to the reward.
4. Lalman Shukla v. Gauri Dutt [(1913) 11 ALJ 489]
The defendants nephew absconded from home and could not
be traced. The plaintiff who was his servant, was sent to
Haridwar to look for the boy. Meanwhile the defendant offered
a reward of Rs. 501/- to the finder of the boy. The plaintiff
traced the boy, and wired the defendant, who went and brought
the boy back; giving some money to the plaintiff as a reward
who did not ask for more. The plaintiff was dismissed six
months later, and he then filed a suit claiming the remaining
reward amount. It was held that, as the plaintiff was in the service
of the defendant at that time, and having incurred the obligation
to search for the missing boy he could not claim the reward;
because when there is a subsisting obligation performance of
an act cannot be regarded as a consideration for the defendants
promise.
5. Household Fire Insurance Co v. Grant Court of Appeal
[(1879) 4 Ex.D 2161]
Kendrick was the agent of a company in Glamorgan. The
defendant handed to him an application in writing for shares in
the company, which stated that the defendant had paid to the
bankers of the company 5, being a deposit of 1s. per share,
and requesting an allotment of 100 shares. Kendrick forwarded
the application of the plaintiffs in London and the secretary of
the company made out a letter of allotment in favour of the
defendant and posted it addressed to the defendant. The letter
never arrived. The defendants name was entered on the register
of shareholders. The company then went into liquidation and
the liquidator sued for 94.15s. being the balance due upon
the 100 shares. The main issue involved was, whether a contract
by correspondence could be deemed to have been concluded
even though the letter of acceptance was not received by the
offeror? It was held that, the contract is actually made when the
letter is posted, and not when it is received, because, the
acceptor, in posting the letter, puts it out of his control and
does an extraneous act which clinches the matter and shows
beyond doubt that each side is bound. Grant was thus held
liable for the unpaid amount.
35
6. Jawaharlal Barman v. Union of India [AIR 1962 Supreme
Court 378]
The respondent Union of India, filed a petition against the
appellant. M/s. J. Burman and Co., through its proprietor
Jawahar Lal Burman under Ss. 33 and 28 of the Act. The
respondent alleged that a concluded contract had been entered
into between the parties on August 31, 1949, for supply of 170/
2 Cwt. of coconut oil by the appellant to the respondent. The
respondent had advertised in the Indian Trade Journal for the
said supply and the appellant had submitted its tender No. SM-
1/104524. This tender was accepted by the respondent which
concluded a contract between the parties. The respondents
case was that the said contract was governed by general
conditions of contract Form WS.B. 133. These conditions
included an arbitration agreement. Disputes arose between the
parties regarding the said contract and so, in pursuance of the
arbitration agreement they were referred to the two arbitrators
appointed by the parties. After the arbitration proceedings had
gone on for a considerable time before the arbitrators the
appellant objected to their jurisdiction on the ground that there
was no concluded contract between the parties. This plea made
it necessary for the respondent to move the court for decision
on the question about the existence and validity of the arbitration
agreement. It was on these allegations that respondent in its
petition claimed that it may be held that there was a concluded
contract between the parties containing a valid arbitration
agreement. The petition having been made under S.28 along
with S.33 the respondent prayed that suitable extension of time
be granted to the arbitrators for making the award. The appellant
pleaded in defence that no concluded contract had been made
between the parties and that there was no jurisdiction of the
court to grant extension under S.28. It was held that the general
conditions of the contract prescribed by Form W.S.B.133 were
made part of the tender, and the contract itself was intended to
be executed expeditiously. The tender shows that the appellant
represented that the earliest date by which delivery could be
effected would be within twenty days from the date of the receipt
of the order and it also said that full quantity of coconut oil
required was held by it. Therefore, to begin with the tender
treated the security deposit as a subsequent condition, the
contract was for the immediate supply of goods and the
acceptance purports to be in accordance with the relevant
government rules. Therefore reading the letter as a whole it
would not be possible to accept the appellants argument that
the letter was intended to make a substantial variation in the
contract by making the deposit of security a condition precedent
instead of a condition subsequent.
7. M/s Suraj Besan and Rice Mills v. Food Corporation of
India [AIR 1988 Delhi 224]
The plaintiff firm is registered with defendant. It is alleged that
under this registration, the annual requirement of the plaintiff
has been assessed at 1500 M.Ts. As such plaintiff can quote
only for this registered quantity. Regional Office of defendant
at Chandigarh invited tenders for the purchase and removal of
damaged food grains declared fit for cattle/poultry feed etc.
Plaintiff submitted their tenders, but it was not signed by all the
partners. The tenders were opened on 29.06.83. The tender of
plaintiff was not valid if accepted beyond the annual assessed
capacity of 1500 M.Ts. However, the tender of plaintiff was
accepted and an acceptance telegram was issued by defendant
on July 22, 83 which was received by plaintiff on July 24, 83. It
is alleged in the plaint that plaintiffs offer was only for 1500
M.Ts, but to the surprise of plaintiff, telegram dated July 22, 83
placed an order for stock of about 6200 M.Ts of damaged paddy
for purchase. According to plaintiff, the aforesaid acceptance
did not bring about a valid, legal, and binding contract between
the parties, as it was a counter offer to the original offer of the
plaintiff for 1500 M.Ts. As there was no binding contract
between them the plaintiff did not furnish the security deposit.
There was a threat on behalf of the defendant for selling the
stocks of 6200 M.Ts of damaged paddy at the risk and cost of
plaintiff and to take steps for the cancellation of the certificate
and various benefits and privileges which plaintiff has been
enjoying. The main issue in this case was, whether the contract
entered between the parties as per the tender dated 28-6-83 is
valid and binding on the plaintiff? If so, to what effect? It was
held that, under law the plaintiff was entitled to withdraw or
modify their offer before the communication of the acceptance
was complete as against the plaintiff. Thus, the letter dated July
8, 1983 amounted to modification of offer. Hence acceptance
issued by telegram on 22.7.1983 did not result in a concluded
agreement between the parties as, there was no offer in existence
at the time when defendant accepted tender of plaintiff. Hence
there is no legal and binding contract for the sale and purchase
of 6,176.790 M.Ts of damaged paddy as per the telegram of
22.7.83.
36
Tenders can be obtained from the office of Chief Engineer, 6th
floor, WCL H.Qrs, Civil Lines, Nagpur - 10. Completed tenders
may be sent by post, deposited in the box kept outside the Chief
Engineer's Office before 3.00 pm on 2.5.94. WCL reserves the
right to accept/reject any or all of the tenders.
The above tender accepted in 8 national newspapers on 15.4.94.
In response to the notice, Mr. Chawla sent a draft for Rs.230/-
drawn in favour of WCL, Nagpur alongwith an application for
a set of tender documents on 16.4.94. The application was
received on 20.4.94 and the documents were duly dispatched
to him at 4.00 pm on the same day. This fact is recorded in the
dispatch register. Mr. Chawla deposited the duly filled
documents at 2.50 pm on 2.5.94, and as the rates quoted by him
were the lowest he was awarded the tender on 4.5.94 a formal
letter was sent to Mr. Chawla informing him that his tender had
been accepted and that he was required to deposit a Bank
Guarantee for Rs.5,00,000/- within 30 days from date of letter.
This letter failed to reach Mr. Chawla, WCL meanwhile after
waiting the prescribed 30 days, decided to start legal proceedings
against Mr. Chawla on ground of non-receipt of Bank Guarantee
and failure to start the work resulting in a breach of contract.
Structure arguments for and against WCL based on the above
facts, taking into consideration one additional fact, viz : that in
response to a Government regulation forbidding the undertaking
of any work over the value of Rs.5,00,00/- till the end of 1994,
the Chief Engineer has instructed the Supdt. Engineer to keep
the decision in abeyance even though Mr.Chawlas tender had
been formally accepted.
9. PROBLEMS
Instructions for answering Problems:
While answering problems in any module, the student should
thoroughly read and ascertain important facts. Then
1. he/she should narrate brief facts of the case;
2. identify relevant issue/s in the problem;
3. discuss about the position of law as per relevant statute/s
and judicial decision;
4. apply the above position of law to the facts and
circumstances of the case/problem in hand; and
5. finally give the decision on the issue/s.
Besides the above, one should refer basic text (both Indian and
English), hint cases (if any given), important Journals and
Reports for ascertaining the law on given issue/s.
The answering in each subjects should be neatly typed
computerised and should be sent in a spiral bound format.
1. Western Coal fields of India Limited
Tender Notice
T.Mo. 486/94-95 : Sealed, superscribed tenders are invited from registered civil contractors for the following
Job Description Approx EMD Time of Tender Tender Tender
Value Completion Cost Availability Opening
Construction of Rs.80 Rs. 1 Yr. from Rs.200 From 20.4.94 2.5.94
600 Type B Qrs Lakhs 80,000 date of Rs.30/- to 1.5.94 at
Kamptee Colliery tender extra between 3.00pm
opening if 10.00 am
required to 1.00 pm
by post
2. In the above fact situation presume that the letter from WCL
reached Mr.Chawla on 10.5.94. In the meanwhile Mr.Chawla
has written a letter dated 4.5.94 revoking his offer which reached
the WCL office on 12.5.94, WCL now wants to start a breach
of contract proceeding against Mr.Chawla. Argue for and
against WCL.
3. M/s Mosegay & sons, manufacturers of a nasal spray
advertised that, any patient from any kind of respiratory
problems, would be cured for life provided he used the spray
as per directions. The spray was to be used once a day
continuously for two months. It was specifically stated that the
spray was to be used only after sunset and in open air. A reward
of Rs.1,00,000 was announced for any person whose disease
continued after the use of spray in the recommended manner.
A patient of chronic asthama, started using the spray as per the
directions. After about a month, he suffered a mild attack of
flu and was confined to his room for a few days, but he continued
the use of the spray. After the scheduled 2 months, he found
that his asthma was still very much there and that in addition he
has developed a permanent rash around his nose. He sues the
company for the announced reward and Rs.3,00,000/- in addition
as damages for the rash. The MD of the company has come to
you with the case. Advise him, taking support from decided
cases.
4. A the owner of four thoroughbred horses, employed two
trainers to look after them. Of these horses Toofan a 3 year
old Stallion was the pride of the stable. Being in dire financial
straits, A decided to sell Toofan, and accordingly informed
37
his trainers to look out for prospective buyers. B approached
the first trainer and offered Rs.1,50,000/- for Toofan. This
price was telegraphed to A on 1.4.94. On 12.4.94 A sent a
reply that he wont accept less than Rs.4,00,000/-, which was
received on 15.4.94. On 17.4.94 B telegraphed his acceptance
of the price. Meanwhile on 12.4.94 the other trainer sent another
offer of Rs.4,25,000/- which reached A on 19.4.94. A had
already sent a letter of acceptance to B on 18.4.94, so he sent a
telegram dated 19.4.94 revoking his acceptance and another to
his other trainer accepting the second offer. B didnt receive
the telegram but the other party did. Now both of them claim
that they have a right to buy Toofan. Decide.
5. A proclamation by the government offered a reward for
information leading to the arrest of certain murderers and a
pardon to an accomplice who gave the information. A saw the
proclamation in January 1992. On Feb. 6th he gave false
information to protect the murderers. On March 10th he gave
information which led to their conviction. He admitted that his
only object in doing so was to clear himself of a charge of murder
and that he had no intention of claiming the reward at that time.
However, after a considerable period of time, A filed a suit
against the government for the reward. Decide in the light of
Indian and English cases.
6. A carried on business at Ludhiana under the style A & Co.
dealing in motors and accessories. R of Bangalore wrote to A
asking him to send a complete catalogue of motors and
accessories and also full particulars of an electric machine and
oil engine shown in an old catalogue published by A. In reply
to this letter of R, A wrote on July 14, 1992 giving him full
particulars of an electric machine which he had at hand. The
closing passage of his letter was as follows :
All the above things are ready for fittings ; price Rs.7500 only,
nett, for the outfit including all the articles mentioned above. I
recommend you the above outfit very strongly so if you are to
have it, kindly wire me at once to reserve it for you. I have got
only one set left.
R sent a telegram to A stating Reserve the set for me. A s
telegram followed :
Send Rupees one thousand in advance for balance will send
engine dynamo complete by V.P.
R sent Rupees one thousand. A sent in due course the machine
packed by rail. R took delivery of the packet from the railway.
R, thereafter, found that the machine was broken when it arrived
and that it was second hand and did not answer the description
given by A. R filed a suit for a breach of contract in the
Bangalore Munsif Court. A pleaded that the suit was not
maintainable at Bangalore. Decide the case giving reasons as
to place of completion of offer and acceptance and
maintainability or otherwise of the suit. Critically review the
Indian law on the issue both statutory and judicial decisions.
7. On 14th December, 1992, the Indian Express carried the
following Tender Notification.
NATIONAL MINERAL DEVELOPMENT
CORPORATION LTD.
10-3-311/A CASTLE HILLS
MASAB TANK HYDERABAD - 500 028
No. HqMM/III/Ferro Silicon/92 26.11.92
GLOBAL TENDER NOTICE
Sealed tenders in triplicate are invited from manufacturers on
their agents for supply of around 100 tonnes per year of Milled
Ferro-Silicon meeting the following standards and specifications
for use in 50 TPH Heavy Media Diamond Mining Project,
Panna, Madhya Pradesh State (Nearest Rly. Station : Satna).
SPECIFICATIONS :
Silicon : 14-16%
Carbon : 1.3 Max
Iron : 80% Min
Sulphur : 0.05% Max.
SIZE DISTRIBUTION
Micron : WT%
106 : 0.1
75 : 0.3
Tender must be accompanied by Earnest Money Deposit of
Rs.25,000/- or US $ 1,000 by way of demand draft or bank
guarantee in favour of N.M.D.C. Ltd., Hyderabad, payable at
Hyderabad & valid for six months from the date of tender
opening. Tenders not accompanied by EMD are liable for
rejection.
The offer should be valid for six months from the date of tender
opening and should clearly specify all technical details
(pamphlets/catalogues), basis of price, tax structure, showing
prevailing rates, packing and forwarding, delivery time
(preferably by April 1993), clients list (to whom already
supplied), payment terms and other commercial details.
Tender superscribing the tender notice number, date and date
of opening should be addressed to Chief Materials Manager,
NMDC Ltd., 10-3-311/A, Khanji Bhavan, Masab Tank,
Hyderabad - 500 028, so as to reach on or before 2P.M. of the
date of tender opening. Tender will be opened on 20.1.1993 at
3.00P.M. in the presence of tenderers who choose to be present.
Only authorised representatives of the tenderers will be allowed.
The Corporation reserves the right to accept (in full or in part)
or reject any or all the tenders without assigning any reason
thereof.
CHIEF MATERIALS MANAGER
38
M/s.ABC Ferro Alloys Corporation, Bangalore, in response to
the above tender notification, have applied for a tender
application through their letter dated 16.12.92 (vide Ref.No.
118A/Ten./92). The Chief Materials Manager received their
letter on 25.12.92 and immediately the tender application was
posted to M/s. ABC Ferro Alloys Corporation. After two days,
they have posted the filled in application to the Chief Materials
Manager. On 20.1.93, the Chief Materials Manager, after
perusing all the filled in tender applications, in view of the fact
that many tenderers have quoted the same price, has reserved
his decision. After waiting a period of over 3 months, M/s.ABC
Ferro Alloys Corporation in their letter dated April 10, 1993
(Ref.No.219B/Ten./93) posted on April 12, 1993 addressed to
the Chief Materials Manager have enquired about the fate of
their tender application. They have also demanded for refund
of E.M.D. if their tender application is rejected. After receiving
this letter, the Chief Materials Manager made some trade
enquiries about the commercial credibility of M/s. ABC Ferro
Alloys Corporation and decided to accept their offer. Thereafter
he instructed his officer to send the acceptance letter to M/s.
ABC Ferro Alloys Corporation. Accordingly, he posted the
letter of acceptance dated April 23, 1993. Around that time,
M/s. ABC Ferro Alloys Corporation, as they have not received
any reply to their letter dated April 10, 1993, decided to revoke
their offer. Thereafter on April 24, 1993, they have posted their
letter of revocation, which reached the Chief Materials Manager
on April 26, 1993. When the Chief Materials Manager read
the contents of the letter, decided not to reply, as they have
already posted the letter of acceptance which has reached M/s.
ABC Ferro Alloys Corporation on April 25, 1993. After
perusing the contents of the letter of acceptance, M/s. ABC
Ferro Alloys Corporation, decided not to reply, as they have
posted their letter of revocation by that time. The Chief
Materials Manager, after waiting a period of 21 days has initiated
legal proceedings against M/s. ABC Ferro Alloys Corporation
on the ground of non-supply of materials.
You are required to write a brief for and on behalf of both the
parties, namely, the Chief Materials Manager, N.M.D.C. Ltd.,
Hyderabad and M/s. ABC Ferro Alloys Corporation, Bangalore,
in the light of the following issue also. (Besides the issue raised
in the text).
Assuming that M/s. ABC Ferro Alloys Corporation have
submitted the filled in tender application without depositing
EMD/Bank Guarantee as given in the tender notification and
was accepted by the Chief Materials Manager by waiving the
clause of EMD. After receiving the letter of acceptance, in
view of the steep increase in the market price of the materials,
(much more than the price quoted in the tender), M/s. ABC
Ferro Alloys Corporation have decided to invoke their offer,
particularly on the ground that their offer was not in accordance
with the terms of the tender, thereby no valid acceptance could
be made by the Chief Materials Manager.
8. The following tender notification has appeared in the Deccan
Herald dated December 13, 1993.
KARNATAKA ELECTRICITY BOARD
TENDER NOTIFICATION
Sealed tenders in duplicate in the prescribed forms subscribing
the name of the work on the cover, duly signed by the registered
contractors, are invited from the party/firm upto 4 P.M. on
24.12.93 along with the previous experience certificate. Sl.No.1:
Name of the work : Providing experience K.V. S.C. Tap line for a
distance of 11.6 K.M. for 66.11 K.V. Halavagalu Power
Distribution Station, Harpanahalli taluk, Bellary District.
Approximate amount put to tender : Rs.14.00 lakhs. E.M.D. :
at 2.5% : Rs.35,000/-. Time limit for completion of work :
three months. Sl.no.2 Name of the work : Erection of Station
Towers and Laying foundation for them at 220KV power
receiving station at Lingasugur. Approximate amount put to
tender : Rs.3.29 laksh. E.M.D. at 2.5% Rs.8.225/-. Time limit
for completion of work : Three months.
Cost of tender form per set (non refundable) : Rs.216/- for the
work at Sl. No. 1 and Rs.108/- for the work at Sl.No.2. The party/
firm who have previous experience certificate may submit
requisition for blank tender documents to this office from
20.12.93 to 22.12.93 upto 4 P.M. E.M.D. may be paid by cash
at the undersigned office or furnished in the form of Demand
Draft drawn in favour of the Executive Engineer (Electrical)
M.W. Division, KEB, Raichur. Tenders not accompanied by
E.M.D. will be rejected. Further details may be obtained from
the office of the undersigned during office hours. The competent
authority reserves the right to accept or reject any or all tenders
wihtout assigning any reason.
RAICHUR
Executive Engineer
K.E.B.
a) M/s. ABC Contractors, Bangalore have obtained the
relevant tender documents from K.E.B with a view to
respond to the tender notification. After hectic discussions,
they have decided to apply only for the work given under
Sl.No.1. Accordingly, they have filed their tender
documents with K.E.B. in time. After about one month,
M/s. ABC Contractors received a letter from Executive
Engineer, K.E.B, stating that their application has been
rejected on the ground that their application was not
absolute. M/s. A.B.C. Contractors seek your advice.
b) Assuming that the tender application filed by M/s. ABC
Contractors has been selected and both the parties entered
into a formal contractual relation. With a view to expediate
the work progress, M/s. ABC Contractors have appointed
M/s. XYZ Co. as sub-contractors to conduct part of the
agreed work. However, the construction work could not
be completed owing to certain problems. Thereafter
Executive Engineer, K.E.B. filed a suit against M/s. XYZ
39
Co. for failure to complete the work within a stipulated
period of three months. Advise M/s. XYZ Co.
c) Assume that there is a valid contractual relation between
Executive Engineer and M/s. ABC. & Co. The party could
not complete the construction work because of acute
shortage of raw material. In view of recurring power failure
and continuous labour unrest, the production of raw material
for the construction activity has been severely hampered.
Executive Engineer files a suit against M/s. ABC Contractors
for non-completion of work.
Identify the issues with regard to above fact situation. Advance
arguments for and on behalf of both the parties and decide.
d) At the time of construction, Executive Engineer, K.E.B, has
realised that M/s. ABC Contractors is not a registered
contractor. He seeks your advice to rescind the contract.
9. H brought a horse from T. The contract of sale provided
among others, these two terms: that the horse was warranted to
have been hunted with the Bicester Hounds, and that if it did
not answer to its description, I should have the liberty to return
it by the evening of the fourth day of sale. The horse did not
answer to its description and had never been hunted with
Bicester Hounds. It was returned on the day mentioned in the
contract, but in the meantime, the horse had been injured
accidently through no fault of H. T demanded the price for the
horse, or an adequate compensation for the injury to the horse.
Decide explaining the nature of the condition. Give reasons.
[Note: Specify your name, ID No. and address while sending answer papers]
40
1. Avtar Singh, (1989) Law of Contract, Eastern Book Co.,
Lucknow.
2. Anson, (1984), Law of Contract, English Language Book
Society & Oxford University Press, London.
3. Athiya, P.S. (1986), Essays on Contract, Oxford University
Press, London.
4. Cheshire and Fiefoot, (1986), Law of Contract, Butter
Worths, London.
5. Cheshire and Fiefoot, (1977), Cases and materials on
Contract, Butter Worths, London.
6. Friedman, (1996), Law in the changing society, University
Book House, Delhi.
7. Joga Rao, S.V. (1991), Cases and materials on contract, NLSIU
Publication.
10. SUPPLEMENTARY READINGS
8. Kronman and Posner, (1979), Economic analysis of contract
law, 13 Stanford L.R.
9. Llewellyn, (1941), Nature and functions of contract, 13
Standford L.R.
10. Macneil, Economic analysis of contractual relations, 13
Standford L.R.
11. Puri and Ponuswamy, (1974), Cases and materials on
contract, Eastern Book Co., Lucknow.
12. Trietal, G. H. (1966), Law of contract, Steven & Sons,
London.
13. Venkatesh Iyer, (1987), Law of contract, Asia Law House,
Hyderabad.
41
Master in Business Laws
Law of Contracts
Course No : I
Module No : II
CAPACITY AND CONSIDERATION
Distance Education Department
National Law School Of India University
(Sponsored by the Bar Council of India and established
by Karnataka Act 22 of 1986)
Nagarbhavi, Bangalore - 560 072
Phone: 3211010 Fax: 080-3217858
E-mail: mbl@nls.ac.in
42
Materials prepared by:
Ms. Sudha Peri, M.A., LL.M.
Prof. N.L. Mitra, M.Com., LL.M., Ph.D.
Materials checked by:
Prof. P.C. Bedwa, LL.M., Ph.D.
Materials edited by:
Prof. T. Devidas, LL.M.
Prof. V. Vijayakumar, M.A., LL.M., M.Phil.
National Law School of India University
Published By:
Distance Education Department
National Law School of India University,
Post Bag No: 7201
Nagarbhavi, Bangalore - 560 072
43
Instructions
In module I we have discussed how a contract is entered into. A contract is an agreement enforceable by
law. In fact, if you read module I carefully, we have discussed how an offer being accepted makes an
agreement. Now, if this agreement is enforceable by law, it becomes a contract. Contract is a design
through which persons create rights and duties through promise. One may wonder, if contract is a private
realm, why State has to spend so much of resources to settle private disputes! Of course, some political
scientists argue that State has to provide the facility to arbitrate in all dispute resolution situations. This
is a sovereign function of the State. As such, whether an agreement is enforceable by law or not is a decision
State has to take on the basis of certain objective conditions. Moralists argue that giving the consent is
enough consideration for making the contract enforceable by law, unless the agreement is against the public
morality. But those who argue that law is a norm, formulate some objective conditions validating the
norm. Utilitarians like Bentham and Mill argued that morality is a matter of individual judgement for
evaluation of utility of anything beneficial to the individual. As such, utilitarians gave much emphasis on
certain assessment criteria in justifying the legal enforcement. Anyway, excepting the classical moralists,
all other legal theoreticians stipulate some objective criteria for legal enforceability of an agreement.
In the next two modules we shall examine these objective criteria for enforcing an agreement. In some
countries the need for legal enforceability is a judicial policy. But in India, objective conditions are
prescribed in the Statute itself. As for example, according to Section 10 of the Indian Contract Act an
agreement in order to be legally enforceable nust be: (a) entered between parties competent to enter into
a contract as per this provision of Sections 11 and 12, (b) for a lawful object as per Sections 23-24, (c)
against a valid consideration as per Section 25, (d) both the parties having consented freely as specified
in Sections 13 to 22 and (e) not otherwise invalid under expressed statutory provision specified in Sections
26-30. With these, some common law basic principles are also attached like parties must intend to create
legal relation, a social agreement being kept out of the jurisdiction of law of contract.
The present module shall deal with the role played by capacity and consideration in an agreement. Issues
on capacity may be both factual and legal. As for example, mental capacity is a factual question but issue
like insolvency is a legal question. We shall try to explain exhaustively all possible factual and legal
situations. But, it is always advisable to refer to some of the supplementary readings for comprehensive
understanding. Similarly, we have discussed consideration in all its theoretical and practical details. But
it would be encouraging if you could resort to some extra-readings specially some American text books
in order to compare the position there with the present Indian Legal Situation. I am sure you will take
maximum advantage from this basic material.
Dr. N. L. Mitra
Course Co-ordinator
44
Capacity and Consideration
Topics
1. Essential conditions of a valid contract........................................................................... 45
2. Capacity.............................................................................................................................. 47
3. Consideration..................................................................................................................... 61
4. Case Law............................................................................................................................. 71
5. Problems............................................................................................................................. 73
6. Supplementary Readings.................................................................................................. 74
45
SUB TOPICS
1.1 Introduction
1.2 Essential elements of a contract
1.3 Intention to create legal relations
1.1 INTRODUCTION
In module 1 we have come to understand that an agreement
enforceable by law is a contract (Sec.2h). We have also noted
that an agreement is made when an offer is accepted. As such
when an offer or a proposal made by one party is accepted by
another party, the agreement is made by the parties. The offer
(or proposal) and acceptance can take place in three ways i.e.,
it may take the form of a promise by one party against a promise
made by another; a promise by one party against an act by
another; an act by one party for an act of another. In the first
case, a set of promises forming the consideration for each other
form the agreement. In the second case, it is a promise against
an act of another, called as unilateral promise like promising a
reward for finding a lost dog. In this case, the acceptance takes
the form of an action. In the third case, i.e, bilateral action one
acts in a manner expecting from another person a definite act,
like plying of a bus on a public route by one person, and another
1. ESSENTIALS OF A VALID CONTRACT
getting into it. Once the agreement is formed, then one has to
see whether the agreement is enforceable by law or not. Sec. 10
of the Contract Act stipulates the conditions that makes the
agreement lawfully building and hence a contract. These
conditions are essential to make the agreement binding in law.
1.2 ESSENTIAL ELEMENTS OF CONTRACT
So, basically there are two essential elements of a contract, viz.
1. An agreement (under section 2b)
2. Enforceability by law (under section 10)
Two essential elements of an agreement are:
- an offer (2a); and
- an acceptance (2b)
According to Sec 10 of the Act the following conditions must
be fulfilled by an agreement to make it a contract:
- parties are required to be legally competent to enter into the
agreement (Ss 11 & 12);
- parties must have exercised free consent (Ss 13-22)
- there must be lawful object and consideration (Ss 23-25)
- the agreement must not be otherwise void (Ss 26-30)
Otherwise
not void
(ss. 26-30)
Lawful
object
(ss. 23-24)
Free consent
(ss. 13-14)
Consideration
(ss. 23-25)
Capacity
(ss. 11-12)
Minor
(s.11)
Unsound mind
Lunatics
Legal incapacity
(under particular laws like
Insurance, Company Law
Banking etc.)
An agreement :
A promise or set of promises [s 2b]
An Offer Acceptance (s 2b)
Enforceable by law (s. 10)
Contract (s 2h)
Coercion
(s. 15)
(s.16)
Undue
Influence
Fraud
(s.17)
Misrepresentation
(s. 18)
Mistake
(s.20)
of both parties
(s.20)
of law
(s. 21)
of fact
(ss.20,22)
of one party
(s.22)
in restraint of marriage
(s. 26)
in restraint of trade
(s.27) (s.28)
in restraint of legal
proceedings (s.2a) ambiguous agreement
to do impossible act (s. 36)
Wagering agreement (s. 30)
Flow Chart
Essential Elements of a Contract
Given below is a flow chart enumerating the essential elements of a contract as per the definitions given under
sec. 2(b) and sec. 10 of the Act.
46
1.3 INTENTION TO CREATE LEGAL RELATIONS
The making and performance of agreements flourish in our
society. Consider how many agreements a person is a party to
at any given moment. Generally a person has an agreement
with his employer, with his land lord, and so many others.
The reason why agreements are so widespread in our society is
complex. One explanation is specialization of labour, which
because of its efficiency creates the need for exchange
behaviour. As individuals specialize, they become less self-
sufficient and more dependant on others goods and services,
which they must secure through agreements. [Summers,
Hillman, p.31]
But this does not mean that all agreements one enters into are
contracts. Consider, an agreement to go to a movie with a friend.
Is this a contract ? If your friend does not go with you, can you
go to the court claiming damages for breach of contract?
Obviously not. So how would you differentiate an agreement
leading to a contract and an agreement not leading to a contract?
The basic ingredient which converts an agreement into a
contract is the intention of the parties to create a legal relation.
It is only when the parties to an agreement intend their agreement
to become legally enforceable that a contract comes into picture.
In the absence of such an intention, an agreement remains a
mere agreement and recourse to the courts cannot be had on
its breach. For example, in Balfour v. Balfour [(1919)2 KB 571]
Mrs & Mr. Balfour residents of Ceylon moved to London when
Mr. Balfour was on leave. On expiry of his leave Mr. Balfour
returned to Ceylon whereas Mrs. Balfour remained in England
on medical advice. Mr. Balfour promised to send 30 every
month for her expenses. He did not send the money after a few
months. Later on both of them decided to live apart. Mrs.
Balfour sought to recover the promised money in the court of
law. The main issue for decision was, whether a promise of
domestic nature between a husband and wife could be binding?
The court held that, the promise between the parties was not
intended by them to be legally binding. Hence Mrs. Balfour
could not enforce payment.
47
SUB TOPICS
2.1 What is capacity
2.2 Physical incapacity
2.3 Mental Incapacity
2.3(A) Minors
2.3(B) Unsound Mind
2.4 Legal Incapacity
2.4(A) Of Natural Persons
2.4(B) Of Legal Persons
2.1 WHAT IS CAPACITY?
According to Sec.10 of the Act, an agreement made between
parties competent to enter into a contract shall be enforceable
by law provided certain other conditions are fulfilled. Persons
may be either person in fact i.e., natural person or person in
law i.e., legal person or juristic person. Whereas natural
persons have unlimited power of capacity to enter into contract,
2. CAPACITY
the juristic persons capacity is limited for the purpose and object
for which the personality is conferred on a group of individuals
to constitute a distinct legal personality through registration or
incorporation under various statutes like company law, trust
law, society law or special law passed by the legislature.
Therefore in the case of a natural person there is no question of
ultravires but in case of a legal person the first issue that the
other party to the contract has to ensure is whether the juristic
person has the capacity to enter into the contract for a particular
purpose, else the contract becomes ultravires for the juristic
person.
In case of natural persons incapacity may be either latent or
patent. A latent incapacity is one which is due to inherent
incapacity on account of various reasons like infancy,
unsoundness of mind, lunacy etc. Patent incapacity may be
due to application of laws like insolvency law nationality laws
etc. The following flow-chart shall depict various types of
incapacities to which a person may be subjected to in the realm
of contracts.
Contract is the main instrument through which acquisitive market
society acquires and distributes wealth and income. As such
the limitations on the capacity has to be very rigidly constituted.
The essential ingredients of a contract are freedom of choice,
consideration and exchange. In most of the developing world,
limitations caused by way of certain physical disabilities like
illiteracy and very low economic capacity are apparent. As
such, a vast majority of people remain outside the parameter of
the freedom of contract. As a result of this, contract as an
instrument of right - duty correlation can operate within a very
limited portion of the population. These physical restrictions
on capacity necessarily restrict the area of operation of contract.
Even if freedom of contract is available to everybody the market
remains limited. This is one of the reasons why foreign
investment is not opening up in India in the desired manner.
According to the Act capacity of a natural person in its latent
sense means that the person who enters into an agreement has
to understand the nature of the agreement and be able to form a
rational judgement as to whether what he is doing or is about to
do is to his interest. Though minority is fixed by statute but the
basic philosophy of incapacity lies in the explanation to Sec.12
Legal reasons Mental reasons
Of Natural Person
due to
Physical
reasons
Ultra Vires
Unsoundness of
mind
Due to Drugs/Alcohol
Visually
impaired
Oldage Pardanashin Woman
Insolvency Foreign National Alien enemy
Lunacy
Minor
Incapacity
Of Juristic Person
due to
Winding Up Any other
disease
48
of the Act. Legal incapacities of a natural being are all laid down
by specific statutes.
Juridical persons have a fixed capacity the jurisdictional limits
of which are stipulated in the constitutional documents of the
body. The common law courts very strictly interprets the vires
specifically created by the constitutional document of the
concern. Anything which is not mentioned in this document is
taken to be something the person is not authorised to do. This
principle is known as the doctrine of ultra vires. Of course
the present tendency of the corporate courts throughout the
world is to liberally interpret the vires and extend it as far as is
reasonably possible to facilitate wider range of activities
beneficial to carry on the main objective of the juristic person.
This matter is widely discussed in module-2 of the Corporate
Law. A contract entered into by a representative of a juridical
person, which is ultra vires does not bind the juridical person
but may be enforced against the representative in his personal
capacity. The various incapacities to which a natural or juristic
person is subjected to in the realm of contract are discussed
below.
2.2 PHYSICAL INCAPACITY
In general a physical incapacity does not act either as a privilege
or a burden for a person entering into a contract. The Contract
Act itself does not impose any disability on a physically
handicapped person [section 11]. But in certain situations, law
may have to extend a special protection to such persons to see
that because of their handicap they are not taken advantage of
by some unscrupulous persons. Some of such handicapped
persons to whom law extends a helping hand are discussed
below.
1. Visually Impaired Person
Blindness or weak eye sight by itself is no bar to enter into a
contract. But a blind person may be placed in a disadvantageous
position if the other party to the contract intentionally misleads
the person as to the nature of transaction. In such cases the
defence of non est factum enables a person who has signed a
contract to say that it is not his document because he signed it
under some mistake. This defence was evolved by the courts
to relieve illiterate or blind people from the effect of a contract
which they could not read and which was not properly explained
to them. For example, in Foster v. Mackinnon [(1869)LR
4CP 704] a person was induced to sign at the back of a paper,
the face of which was not shown to him, and he was told that it
was an ordinary guarantee the like of which he had signed before
and under which no liability attached to him, when, in fact, the
paper was a bill of exchange and he was sued by a holder in
due course as an indorser. The court held, that the defendant
never intended to sign that contract or any such contract. He
never intended to put his signature to any instrument that then
was or thereafter might become negotiable. He was deceived
not merely as to the legal effect, but as to the actual contents of
the document. It was as if he had written his name on a sheet of
paper for the purpose of franking a letter, or in a ladys album,
or an order for admission to the Temple or Church, or on the fly
leaf of a book, and there had already been, without his
knowledge, a bill of exchange or a promissory note payable to
order inscribed on the other side of the paper. Explaining the
principle governing such cases, Byles J. held, It seems plain,
on principle and on authority, that, a blind man, or a man who
cannot read, or who for some reason (not implying negligence)
forbears to read, has a written contract falsely read over to him,
the reader misreading it to such a degree that the written contract
is of a nature all together different from the contract pretended
to be read from the paper which the blind or illiterate man
afterwards signs; then, at least if there be no negligence, the
signature so obtained is of no force. And it is invalid not merely
on the ground of fraud, where fraud exists, but on the ground
that the mind of the signer did not accompany the signature; in
other words, that he never intended to sign and therefore in
contemplation of law never did sign, the contract to which his
name is appended.
2. Aged Person
Sometimes old age may result in a physical incapacity due to
lack of strength and resultant loss of mobility. A person so
enfeebled may have to depend more and more on others for the
discharge of their day to day functions. Such dependance may
result in an unscrupulous persons taking advantage of the
feebleness of the old person. In such cases, the old person can
avoid the contract, by taking the plea either of undue influence,
non est factum, or fraud etc. For example, in Wajid Khan v.
Raja Ewaz Ali Khan [(1891)18 IA 144] an old and illiterate
woman, incapable of any business, conferred on her confidential
managing agent, without any valuable consideration, an
important pecuniary benefit under the guise of a trust. It was
held by the Privy Council that, all the facts of the case go to
show that there was active undue influence. The onus is on the
grantee to show conclusively that the transaction is honest,
bonafide, well understood the subject of independent advice
and free from undue influence.
This protection is generally needed where old age is coupled
with illiteracy, so that the person is totally at the mercy of one
on whom he or she reposes confidence.
3. Pardanashin Women
At the very outset it should be clarified that being a woman
(even a pardanashin woman) is not deemed to be a handicap
under the Indian law especially in the realm of Contract law.
There is absolutely no bar in our legal system prohibiting any
woman from entering into a contract. Further, a pardanashin
woman cannot be technically called a physically incapacitated
person' but for the sake of better understanding this topic is
being dealt here.
Though the legal status of the women in India may be equal to
the men, their social status is something entirely different. A
large number of women in our society are so brought up and
conditioned that they are incapable of independent thought
and action or of exercising a rational judgement in their own
best interest. It is to protect this section of women from persons
49
wanting to take advantage of their position, that law makes
special provisions.
Under sec.16 of the Act, a prima facie presumption of undue
influence arises in any contract entered into with a pardanshin
woman. She can avoid the contract unless the other party can
show that it was her intelligent and voluntary act. There is,
however, no statutory definition of the term pardanashin
woman and to understand the term recourse will have to be
taken to judicial interpretation of the word. In Shaikh Ismail
v. Amir Bibi [(1902) 4 Bom LR 146], a lady appeared before
the Registrar for registration of certain documents, that she stood
as a witness in the box in a suit, that she put in tenants and fixed
and recovered rents from them in respect of her house. The
Court held that, she could not be treated as a pardanashin lady.
A woman does not become pardanashin simply because she
lives in some degree of seclusion. The concept probably means
a woman who is totally secluded from ordinary social
intercourse.
Once it is shown that the contract was entered into with a
pardanashin woman, the law presumes undue influence. The
burden lies on the other party to show that no undue influence
was used, that the contract was fully explained to her and that
she had freely consented to it. The entire scope of this concept
was explained by the Privy Council in Kalibaksh Singh v. Ram
Gopal Singh [(1913)41 IA 23]. In this case, about two months
before her death, a Hindu widow (who was a pardanashin
woman) gifted half of her landed properties to the son of her
paramour, who was also the manager (mukhtar) of her estate.
It was contended that combined with the fact that she had no
independent advice, was sufficient to show that the gift was the
result of the influence the mukhtar had over the lady. Their
Lordships held, In the first place, the lady was a pardanashin
lady, and the law throws around her a special cloak of protection.
It demands that the burden of proof shall in such a case rest, not
with those who attack, but those who found upon the deed, and
the proof must go so far as to show affirmatively and
conclusively that the deed was not only executed by, but was
explained to, and was really understood by the grantor. In such
cases it must also, of course, be established that the deed was
not signed under duress, but arose from the free and independent
will of the grantor. The possession of independent advice, or
the absence of it, is a fact to be taken into consideration and will
be weighed on a review of the whole of the circumstances
relevant to the issue of whether the grantor thoroughly
comprehended, and deliberately and of her own free will carried
out the transaction. If she did, the issue is solved and the
transaction is upheld.
The protection afforded to pardanashin women can be extended
to ladies of similar class who though not pardanashin technically
are similarly placed in that they are illiterate and sometimes old
and sick and have lack of understanding and appreciation of
the transaction without independent advice and are helpless and
thus exposed to the danger of entering into unfair deals. The
emphasis should be on the factual understanding of the
transaction entered into and not the disability presumed in the
case of pardanashin ladies on the ground of mere status [K.M.
Vati v. K. Raghunath Singh (1976) A.H. P.41]
2.3 MENTAL INCAPACITY
It has to be understood in the very beginning itself that when
we talk of mental incapacity we do not use the word in the
medical sense. A person may be medically sound, but the law
may presume him to be lacking in the mental capacity necessary
to enter into a contract (ex: a minor). So, the term mental capacity
or incapacity in this section is used to denote the legal
incompetence of the person rather than his medical fitness.
Section 11 of the Act, lays down that, every person is competent
to contract who is of the age of majority according to the law to
which he is subject, and who is of sound mind ..... Thus, the
Contract Act disqualifies two categories of persons from
entering into a contract, viz:
(a) the minors; and
(b) those of unsound mind. Each of these will be dealt in detail.
2.3 (A) MINORS
POSITION IN INDIA
The term minors is nowhere defined in the Contract Act. But
taking into consideration the wordings of the section, a minor is
a person who has not attained the age of 18 years. The age of
majority of a person is regulated by sec.3 of the Indian Majority
Act, 1875. But where a guardian has been appointed to the
person or property of a minor by a court or when the minors
property is under the supervision of a Court of wards, the age of
majority of such a person is 21 years and not 18 years.
Sec.11 of the Act expressly forbids a minor from entering into a
contract. The effect of this express prohibition is that, any
contract entered into by a minor is void ab initio regardless of
whether the other person was aware of his minority or not.
Prior to 1903, it was felt that the proposition, no person is
competant to contract who is not of the age of majority .....
was capable of two interpretations, viz:- (i) that a minor is
absolutely incompetent to contract, in which case his agreement
is void ab initio; or (ii) that he is not liable on the contract only
in the sense that he is not liable on the contract though the
other party is, in which case there is a voidable contract.
Formerly, the Indian courts favoured the second interpretation
and it was held that just as in England, even in India, a minors
contract was voidable at his option.
But in 1903 in the case of Mohoribibi v. Dharmodas Ghose [30
IA 114:30 Cal 539 (1903)], the Privy Council ruled that, the Act
makes it essential that all contracting parties should be
competent to contract, and especially provides that a person
who by reason of infancy is incompetent to contract cannot
make a contract within the meaning of the Act. It was accordingly
held that a mortgage made by a minor was void, and a money-
lender who has advanced money to a minor on the security of
the mortgage is not entitled to repayment.
50
Any other rule would have made the law asymmetrical, leaving
it to the whim of a child to pick and choose between agreements
made by him as to which he will and which he will not enforce.
A child may show poor judgement in making a particular
contract, and it is a protection against his own ignorance and
immaturity - not merely fraudulent manipulation by others -
that the law affords. The general presumption that every man
is the best judge of his own interests is suspended in the case of
children [A.T. Kronman, p.786]
The law dealing with minors agreements is based on two
principles, viz:
(i) that the law must protect the minor against his own
inexperience, which may enable an adult to take unfair
advantage of him, or to induce him to enter into a contract
which, though in itself is fair, is simply imprudent [for ex: if
the minor for a fair price buys something which he cannot
afford]; and
(ii) that the law should not cause unnecessary hardship to adults
who deal fairly with minors [Trietal, p.416].
In modern society, it does not seem possible and much less
desirable for law to adhere to the categorical declaration that a
minors agreement is always absolutely void. Minors are
appearing in public life today more frequently than ever before.
A minor has to travel, to get his dresses tailored, or cleaned, to
visit cinema halls and deposit his cycle at a stand. He has to
deal with educational institutions and purchase so many things
for the facility of life and education. If, in any one of these
cases, the other party to the contract could brush aside the minor
on the ground that the engagement is void, the legal protection
against contractual liability would be too dear to minors.
Keeping in mind this fact, even the Privy Council changed its
stand latter to a more equitable one. For example, in
Srikakulam Subrahmanyam v. Kurra Subha Rao [ILR 1949
Mad 141 PC], in order to pay off the promissory note and the
mortgage debt of his father, the minor son and his mother sold
a piece of land to the holders of the promissory note in
satisfaction of the note and he was also able to pay off the
mortgage debt, and regain possession of the land. Afterwards
the minor brought an action to recover back the land. It was
found as a fact that the transaction was for the benefit of the
minor and the guardian (his mother) had the capacity to contract
on his behalf. Lord Morton said that, section 11 and the
Mohoribibi case leave no doubt that a minor cannot contract
and that if the guardian had taken no part in this transaction it
would have been void. But, the contract being for the benefit
of the minor and within the power of the guardian was held to
be binding upon him.
Effects of Minors Agreement
A minors agreement being void, ordinarily it should be wholly
devoid of all effects. If there is no contract, there should, indeed,
be no contractual obligation on either side. Consequently all
the effects of a minors agreement must be worked out
independently of any contract.
1. No Estoppel against a Minor
If a minor procures a loan or enters into any other agreement by
representing that he is of full age, is he estopped by sec.115 of
the Indian Evidence Act, 1872 from setting up that he was a
minor when he executed the mortgage? In other words, can he
be precluded from disclosing his true age in any subsequent
litigation resulting from the contract? The point was raised but
not decided in Mohoribibis case, where the Privy Council said,
the Courts below seem to have decided that this section does
not apply to infants; but their Lordships do not think it necessary
to deal with that question now. They consider it clear that the
section does not apply to a case like the present, where the
statement relied upon is made to a person who knows the real
facts and is not misled by the untrue statement. There can be
no estoppel where the truth of the matter is known to both the
parties, and their Lordships hold, in accordance with English
authorities, that a false representation, made to a person who
knows it to be false, is not such a fraud as to take away the
privilege of infancy. There were later many conflicting
decisions on whether a minor could be estopped by a false
representation as to his age. But the point has been settled in
Sadik Ali Khan v. Jai Kishore [AIR 1928 All P.C.152], where
the Privy Council observed that, ` a deed executed by a minor
is a nullity and incapable of founding a plea of estoppel. The
principle underlying the decision being, `there can be no
estoppel against a statute.
Thus, the position now is, that even if a minor has entered into
a contract by misrepresenting his age, he can at any later stage
plead minority and avoid the contract. Minority in India is a
fact and not a privilege (as in England) and this fact can be
proved at any stage of the proceedings, regardless of the
surrounding circumstances.
2. No Liability in Contract
A minors agreement is of course, in principal devoid of all
legal effects. A minor is in law incapable of giving consent,
and, there being no consent, there could be no change in the
character or status of the parties [Padma Vithoba v. Mohd.
Multani, AIR 1963 SC 70]. In England, as early as in 1665 in
Johnson v. Pye [2 ER 1091] it was held that, an infant who
obtains a loan of money by falsely representing his age cannot
be made to repay the amount of loan in the form of damages for
deceit.
3. No ratification
A minors agreement being void ab initio, there can be no
ratification of the agreement on his reaching the age of majority.
Ratification can only be of acts which are valid in law at the
time of commission and also at the time of ratification. Since
an agreement entered into by a minor, during his minority is
not valid in law, he cannot on his reaching the age of majority
ratify it - as in the eyes of law the agreement does not exist at all.
4. Limited application of restitution
If a minor obtains property or goods by misrepresenting his
age, he can be compelled to restore it, but only so long as the
51
same is traceable in his possession. This is known as the
equitable doctrine of restitution. Where the minor has sold the
goods or converted them, he cannot be made to repay the value
of the goods, because that would amount to enforcing a void
agreement. So also, the doctrine will not apply where the minor
has obtained cash instead of goods. In Leslie (R) Ltd v. Sheill
[(1914) 3 KB 607] a well known authority on this issue, it was
held that, .... the money was paid over in order to be used as
the defendants own and he has so used it and, suppose, spent
it. There is no question of tracing it, no possibility of restoring
the very thing got by the fraud, nothing but compulsion through
a personal judgement to repay an equivalent sum out of his
present and future resources .... I think this would be nothing
but enforcing a void contract.
Section 41 of the original Specific Relief Act, 1877 authorised
the courts to order any compensation that justice required to be
paid by the party at whose instance a contract was cancelled.
The first landmark case decided under this section was
Mohoribibis case where it was held that, This section no
doubt gave a discretion to the court; but the court of first instance
and subsequently the Appellate Court, in the exercise of such
discretion, came to the conclusion that under the circumstances
of this case justice did not require them to order the return by
the respondent of the money advanced to him with full
knowledge of his infancy, and their Lordships see no reason
for interfering with the discretion so exercised.
Second landmark case on this issue was Khan Gul v. Lakha
Singh [AIR 1928 Lah 609], where the defendant while still a
minor, fraudulently concealing his age, contracted to sell a plot
of land to the plaintiff. He received the consideration of
Rs.17,500 and then refused to perform his part of the bargain.
The plaintiff prayed for recovery of possession or refund of
consideration. There could be no question of specific
enforcement, the contract being void ab initio. The only
question therefore was : Can a minor who has entered into a
contract by false representation refuse to perform the contract
and at the same time retain the benefit he may have received
therefrom? The court held that, ..... There is no real difference
between restoring the property and refunding the money, except
that the property can be identified but cash cannot be traced ....
It must be remembered that, while in India all contracts made
by infants are void, there is no such general rule in England.
There should therefore be a greater scope in India than in
England for the application of the equitable doctrine of
restitution.
Referring to sections 39 & 41 of the Specific Relief Act, 1877,
the court further said : The doctrine of restitution is not however
confined to cases covered by those sections. The doctrine rests
upon the salutory principle that an infant cannot be allowed by
a court of equity to take advantage of his own fraud. The
court therefore ordered the refund of the money.
The Law Commission of India, in its 9th report also supported
this view. The matter now is codified in section 33 of the new
Specific Relief Act, 1963. The net result of the amendment is
as follows :
(i) Where a void or voidable contract has been cancelled at
the instance of a party thereto, the court may require him
to restore such benefits as he has received under the
contract and to make any compensation to the other party
which justice may require; and
(ii) Where a defendant successfully resists any suit on the
ground that the contract, by reason of his being
incompetent, is void against him, he may be required to
restore the benefits, if any, obtained by him under the
contract, but only to the extent to which he or his estate
has benefited thereby.
But the court will not compel any restitution by a minor even
when he is a plaintiff, where the other party was aware of the
minority so that he was not deceived [Bhim Mandal v.
Mangaram Corain, AIR 1961 Pat 21] or where the other party
has been unscrupulous in his dealings with the minor [Mohd.
Said v. Bishamber Nath, AIR 1924 All 156] or where the
other party lays no material before the court for coming to the
conclusion that justice requires return of the money paid to the
minor [Kampta Prasad Singh v. Sheo Goapl Lal, (1904) 26
All 342] etc.
Section 33(1) of the Specific Relief Act, 1963, does not alter
the earlier law. If the minor comes to the court as a plaintiff, he
can be compelled to disgorge his gains under the agreement.
Sub-section (2) however makes this difference that if a minor
is brought before the court as a defendant, he can be compelled
to account for such portion of the money or other benefits
received by him as has gone to benefit him personally, such as
education or training or has resulted in an accretion to the estate.
Effect of Contracts Beneficial to Minors
The law declared in Mohoribibis case that a minors agreement
is absolutely void has been generally followed, but it has
been growingly confined to cases where a minor is charged
with obligations and the other contracting party seeks to enforce
those obligations against the minor [Raghavachariar v.
Srinivasa (1916) 40 Mad 308]. It was further held in the same
case that, what is meant by the proposition that an infant is
incompetent to contract or that his contract is void is that the
law will not enforce any contractual obligations of an infant.
Thus, a minor is allowed to enforce a contract which is of some
benefit to him and under which he is required to bear no
obligation. In the above case, a full bench of the Madras High
Court unanimously decided, that, a mortgage executed in favour
of a minor, who has advanced the whole of the mortgage money,
is enforceable by him or any other person on his behalf.
This and a number of later cases proceeded on the principle
that the minor has already given the full consideration to be
supplied by him and there is nothing that needs to be done by
him under the contract. He is now a mere promisee and prays
the court for recovering the benefit stipulated. But where the
contract is still executory or the consideration is still to be
supplied, the principle in Mohoribibis case would thwart any
action on the contract. For example, in Raj Rani v. Prem Adib
[AIR 1949 Bom 215], the plaintiff, a minor, was allotted by the
52
defendant, a film producer, a role in a film. The agreement was
made with the father. The defendant subsequently allotted that
role to another artist and terminated the contract with the
plaintiffs father. It was held that, neither the plaintiff nor her
father could sue on the promise. If it was a contract with the
plaintiff, she being a minor, it was a nullity. If it was a contract
with her father it was void for being without consideration.
The promise of a minor girl to serve, being unenforceable against
her, cannot furnish any consideration for the defendants promise
to pay her a salary.
The Indian Apprentices Act, 1850 provides for contracts in the
nature of contracts of service which are binding on minors.
The Act was passed, as the preamble shows: For better
enabling children, and specially orphans and poor children
brought up by public charity to learn trades, crafts and
employments, by which, when they come to full age, they may
gain a livelihood. Section 9 of the Act requires such contracts
to be made by a guardian on behalf of the minor.
Another contract which is prima facie for the benefit of the
minor, is a contract of his/her marriage. It is customary amongst
most of the communities in India for parents to arrange
marriages between their minor children and the law has to adapt
itself to the habits and customs of the people [Khimji Kuverji
v. Lalfi Karamsey, AIR 1941 Bom 129]. It is therefore well
established that, while the contract of marriage could be
enforced against the other contracting party at the instance of
the minor it cannot be enforced against the minor.
A minor has the option of retiring from a contract in beneficial
nature on attaining majority provided that he exercises the option
within a reasonable time.
Liability of Minor for Necessaries
Section 68 of the Act provides for the liability for necessaries
supplied to persons incompetent to contract as: If a person
incapable of entering into a contract, or any one whom he is
legally bound to support, is supplied by another person with
necessaries suited to his condition in life, the person who has
furnished such supplies is entitled to be reimbursed from the
property of such incapable persons.
This section is applicable only to the supply of necessaries,
but this term has not been defined any where in the Act. To
ascertain the meaning of the word necessaries, we may turn
to the judicial decisions to determine its meaning and scope.
For example, in Chappel v. Cooper [(1844)13 M & W 252] :
Things necessary are those without which an individual cannot
reasonably exist. In the first place, food, raiment, lodging and
the like. About these there is no doubt. Again, as the proper
cultivation of mind is as expedient as the support of the body,
instruction in art or trade, or intellectual, moral and religious
education may be necessary also ..... Then the classes being
established, the subject and extent of the contract may vary
according to the state and condition of the infant himself. His
clothes may be fair or coarse according to his rank, his education
may vary according to the station he is to fill; and the medicines
will depend on the illness with which he is afflicted, and the
extent of his probable means when of full age ... But in all these
cases it must first be made out that the class itself is one in
which the things furnished are essential to the existence and of
reasonable advantage and comfort of the infant contractor. Thus
articles of mere luxury are always excluded, though luxurious
articles of utility are in some cases allowed.
Thus, What is necessary is a relative fact to be determined
with reference to the fortune and circumstances of the particular
minor. Hence an article (for ex : a Gold Watch) may be an
article of necessity in one case and an item of luxury in another,
depending on the status of the minor. The importance of making
this differentiation is that, the seller would be able to recover
the cost of the watch in the first case and he will have to suffer
a loss in the second case, i.e., the seller cannot recover the cost
of (merely) luxurious items.
Even when the cost is awarded, he can recover it only from the
property of the minor. A minor, in India, can never be made
personally liable for any goods supplied to him. If he does not
have property sufficient to satisfy the debts, the seller will have
to suffer a loss.
To render a minors estate liable for necessaries two conditions
must be satisfied, namely:
(i) the contract must be for goods reasonably necessary for
his support in his station in life; and
(ii) he must not have already a sufficient supply of these
necessaries.
The supplier thus has to prove, not only that the goods supplied
were suitable to the condition in life of the infant, but that he
was not sufficiently supplied with the goods of that class. This
principle was laid down in Nash v. Inman [(1908)2 KB 1],
where an undergraduate in Cambridge University, who was
amply supplied with proper clothes according to his position,
was supplied by the plaintiff with a number of dresses, including
eleven fancy waist coats. The price was held to be irrecoverable.
Status of Minor in Certain Other Indian Laws
Just as the Indian Contract Act has made special provisions
relating to a minor, certain other laws in force in India have
also made certain provisions for minors either confering some
benefits or special privileges on them or prohibiting them from
entering into certain transactions. Some of these provisions
are discusssed below.
Minor as a Shareholder
Under the Indian Companies Act, a minor is barred from holding
any shares in his own name. Even if his name is entered in the
register of members, he will not be treated as a member and his
name will be struck off from the register. But a guardian can
purchase shares on behalf of a minor, which he will then hold
as a trustee for the minor.
Minor as a partner
Under section 30 of the Indian Partnership Act, a minor can be
made a partner to the benefits of a firm, with the consent of all
the partners. A minor partner is entitled to a specified share of
the profits but cannot be made liable for the partnership losses.
53
Within six months of his attaining majority or his becoming
aware of his status as a minor partner firm whichever is later,
he is required to elect from two options : whether he would like
to continue as the partner of the firm or else would like to opt
out. If he decides to opt out, then he ceases to be a partner from
the day of the election and would no longer be entitled to the
share in partnership profits.
If he decides to continue as a partner, then his decision will
have a retrospective effect i.e., he will be deemed to be a full
fledged partner from the day he had first entered the firm (as a
minor). He then becomes liable for all the acts and losses of
the firm during this period.
This retrospective effect seems to be against the spirit of contract
Act, since in effect it means that the minor had entered into a
valid contract of partnership during his minority. This is in
conflict with sec.11 of the Contract Act, which specifically lays
down that a minors contract is void ab initio. This anomaly is
extremely unfortunate and may have arisen because the Indian
Partnership Act follows the English Partnership Act to the dot,
and in England unlike India a minors contract may be valid,
void or voidable depending on the nature of the contract. The
legislature in framing this section seems to have failed in taking
notice of this basic difference between the contract laws of these
two countries.
Minor as a transferee
Under the Transfer of Property Act, 1872, Ss 13, 14 and 127
deal with transfer of property for the benefit of a minor. Ss 13
and 14 deal with the rule against perpetuity and state that
property can be transferred to an unborn person via the media
of a living person i.e., first the property goes to a person living
at the time of transfer and after his death to a person who is
unborn at the time of the first transfer. This (unborn) person
should be atleast conceived at the time when the first interest
comes to an end and he acquires full interest in the property on
his attaining majority.
Section 127, deals with onerous gift to a minor person. An
onerous gift is one which has both burden and benefit attached
to it (for ex: a mortgaged house). In such cases the minor is
given an option on his attaining majority either to accept the
gift or to reject it. If he accepts the gift, he will be liable for the
burdens attached to the gift, but if he rejects it then he cannot
be made liable for any obligations arising out of the gift. A
minor has to make his election within a reasonable time of his
attaining majority.
Minor as a Trade Union Member
A minor over the age of 15 years but below 18 years can be a
member of a registered trade union, and can enjoy all rights
and privileges available to such members. But a minor cannot
form a registered trade union, though there is a proposal to the
effect that minors should be allowed to form their own trade
unions and to get it registered as this would help in a better
protection of their rights.
Minor Under Insolvency Act
A minor in India cannot be declared insolvent or bankrupt, nor
can his properties be attached.
Minor under various Labour Laws:
Under the Factories Acts 1948 (sec 67); Mines Act 1952 (Sec
40) and Plantation Act 1951 (sec 25) a minor above the age of,
14, 18 and 12 years (since withdrawn by Amemdment Act,
1986) can be employed as factory, mines and plantation worker
respectively. These provisions seem to be in conflict with the
Contract Act. In order to make a minor a worker at that age
requires a contract of employment. Does it mean that a minor
above the age as mentioned earlier in those respective industrial
legislations, can enter into a valid service contract as is
prescribed in England? Or does it mean that the minor at that
age could be a worker on the basis of a contract made between
the minors guardian and the occupier of the Factory/Mines/
Plantation Unit? The former course of action is more logical
than the latter because the agreement relates to services of the
minor in person. As such, the occupier shall be liable to pay
the minor worker personally and not through the guardian.
Though the law relating to a minor in India and his/her position
vis-a-vis a contract, is not based upon the Common law in
England but in some cases as above, it may be necessary to
refer to English law. So, let us examine the English law in this
regard.
POSITION IN ENGLAND
Till recently persons below the age of majority were called as
infants. But now the term minors is generally used to
describe persons who are below the age of 18 years [sec.1 of
Family Law Reform Act, 1969]. Contracts made by minors
are governed by the rules of common law as altered by the
Infants Relief Act, 1874 and Minors Contracts Act, 1987.
The Infants Relief Act, 1874 declares the following categories
of minors agreement to be absolutely void :
(i) agreement for repayment of money lent or to be lent; or
(ii) agreement for goods supplied or to be supplied (other than
necessary); and
(iii) agreement for accounts stated.
Apart from the above three categories, the rest of the categories
of contracts entered into by minors may be either valid contracts
or voidable contracts depending on the subject-matter of the
contract.
Valid Contracts
Under certain circumstances the agreement entered into by a
minor is deemed to be a valid contract. Some of these situations
are discussed below.
(1) Necessaries
A contract for necessaries is binding not for the benefit of the
tradesman who may trust the infant, but for the benefit of the
infant himself [Ryder v. Wombwell (1868)L.R.4 Ex.32]. It
54
is assumed, rightly or wrongly, that the tradesman would not
give credit to the minor unless the law imposed liability. It
should be noted, that parents are not liable on their childs
contract unless the child acts as their agent [Blackburn v.
Mackey (1823)1 C & P.1], and that in English law a minors contract
cannot be validated by the consent or authorisation of his
parent or guardian.
Necessaries include goods supplied and services rendered to a
minor. He is only bound by a contract for necessaries if it is on
the whole for his benefit; not if it contains harsh and onerous
terms. Nor is he bound by an indivisible contract comprising
of necessaries and non-necessaries [Stock v. Wilson [1913] 2
KB 235].
(2) Service Contracts
A minor is bound by a contract of service if it is on the whole
for his benefit, though some of the clauses of the contract be to
his disadvantage.
In deciding whether a service contract is on the whole beneficial,
the court is entitled to look at surrounding circumstances. For
example, a service contract with a minor may contain a covenant
in restraint of trade, such a covenant, if otherwise valid, does
not invalidate the contract if the minor could not have got work
on any other terms. But it would invalidate a service contract
with a minor if it was of a kind that was not usually found in
service contracts in that trade and locality. These principles
also apply to contracts connected with service contracts. Thus
they determine the validity of contracts to carry minors to work,
of compromises of industrial injury claims, and of agreements to
dissolve service contracts. These principles also determine the
validity of contracts under which a minor makes a living by the
exercise of some profession, ex: as an entertainer or author or
athlete.
Voidable Contracts
Under four different circumstances, a minors contract is voidable
i.e., it binds both parties but the minor can escape liability by
repudiating before majority or within a reasonable time thereafter,
but the other party can never repudiate it. These cases are:
1. Contracts concerning land
A lessee who is under age is liable for rent unless he repudiates
it. The same principle applies to purchase of freehold land,
letting or sale of land by a minor, whether the terms of
conveyance be advantageous to him or not.
2. Shares in a Company
A minor who agrees to subscribe for shares in a company or
buys shares which are not fully paid, is liable for calls unless
he repudiates. A mere plea that he has not ratified the transaction
does not relieve him from liability [North Western Railway v.
M Michael, (1850) 5 Ex.114]. Once he repudiates he ceases
to be liable and can have his name removed from the companys
register.
3. Partnership
A minor can become a partner and is to some extent bound by
the partnership agreement. He cannot be sued during minority
by persons who give credit to the firm, or be made liable for its
losses. But he is liable if after attaining majority fails to put an
end to the partnership. He is not entitled to any share in the
profits or assets of the partnership until its liabilities have been
paid off.
4. Marriage Settlements
Formerly it was thought that a marriage settlement by a minor
was binding to the extent to which it benefitted him; but was
not otherwise binding unless ratified after majority [Simon v.
Jones (1831) 2 Russ & Rly. 365]. The present view is that all
such settlements bind the minor unless he repudiates it [Duncan
v. Dixon (1890) 444 Ch.D 211].
A voidable contract can be repudiated during minority but such
a repudiation can be withdrawn by the minor before, or within
reasonable time on attaining majority. If he repudiates during
minority itself, he needs to take no further steps to escape
liability on reaching full age.
If the minor does not repudiate during minority, he must do so
within a reasonable time on reaching full age; even if he did not
know of his right to repudiate, and even if his obligation under
the contract had not yet matured. In Edwards v. Carter
[(1893)A.C. 360] it was held that a settlement could not be
repudiated nearly five years after the majority of the settlor,
although he was far most of that time ignorant of his right to
repudiate.
Before the Minors Contracts Act 1987, a minor could be held
liable to restore certain benefits received by him under a contract
which did not bind him. Such liability was imposed in equity if
the minor was guilty of fraud, and at common law in certain
cases of quasi-contracts. Section 3(1) of the 1987 Act now
gives the court a discretion to order the minor to transfer to the
adult party any property acquired by the minor under such a
contract, or any property representing it.
Section 3(2) of the Act, provides that nothing in section 3 shall
be taken to prejudice any other remedy available to the adult
party to the contract : thus in cases which fall outside
sec. 3(1), or in which the court declines to exercise its discretion
under that sub-section, it remains open to the adult to seek
restitution under the old rules of equity or common law.
DISTINCTION BETWEEN THE INDIAN LAW AND
ENGLISH LAW
a) Nature of minors contract
In India, any agreement with a minor is void ab initio under all
circumstances.
In England, a contract with a minor may be valid, voidable or
void depending on its contents.
55
b) Liability for necessaries
In India, a person who has supplied necessaries to the minor
can be reimbursed from the property of the minor only [Sec.68].
In England, the minor is personally liable for the necessaries
supplied to him, because a contract for necessaries is a valid
contract.
c) Insolvency proceedings
In India, a minor cannot be declared insolvent. In England, a
minor can be declared insolvent for trade debts.
d) Service Contracts
In India, a minor cannot enter into any contract. However, it has
been seen earlier that industrial laws in India, by and large,
provide for young workers above 15 years of age. This indicates
that a service contract is valid. In England, a service contract
with a minor is a valid contract.
In conclusion it may be said that the basic difference between
the Indian and English Law with respect to the law relating to
minors is that, in India minority is a fact which is treated as
law. Hence, the protection granted to a minor is absolute and
extends to all situations regardless of his duplicity in the
transaction. (eg: misrepresentation of his age). But in England,
minority is a privilege which is granted to the minor only in
certain situations. Hence, the protection granted is conditional
or restricted and depends upon the subject matter of the contract.
All the remaining differences in the treatment of a minors
contract follow naturally from this fundamental difference.
AMERICAN POSITION
Under the American Law, those below the age of majority
[18 in most jurisdictions, 21 in some] are responsible for their
torts and crimes, but are allowed to disaffirm the contracts they
make. To disaffirm, the minor simply indicates (even in an
informal way) that he or she no longer wants to be bound by
the contract. If the minor reaches majority, the period of
disaffirmation continues for a reasonable period of time and
even thereafter unless the other side relies on the infants
apparent `ratification of the contract.
The minor (sometimes called infant) may not disaffirm a contract
for necessaries [i.e., food, clothing, shelter etc.] nor one signed
by the infants legal guardian. In all jurisdictions special statutes
deprive infants of the power to disaffirm certain contracts: bail
bonds, military service, bank accounts etc.
All the states in America hold the view [either by application
of statute or Common Law principle] that the infants must return
the consideration they received from the other side if it is
possible to do so. In some of the states, there seems to be a
definite leaning towards holding an infant liable for benefits
received even though they are not necessaries and even though
the benefits cannot be returned in kind. In Porter v. Wilson
[106 N.H. 270] the New Hampshire court, stating this rule cited
with approval a passage from Williston on Contract : In some
states the ordinary rule prevailing in regard to necessaries has
been extended so far as to hold an infant bound by his contracts,
where he fails to restore what he has received under them to the
extent of the benefit actually derived by him from what he has
received from the other party to the transaction. This seems to
offer a flexible rule which will prevent imposition upon the
infant and also tend to prevent the infant from imposing to any
serious degree upon others.
Though this rule requiring the minor to account for any benefit
he has received, may be the minority opinion there is a growing
feeling in the States that this is definitely a better rule. The
reason for this changed opinion has been well stated by the
Court of Appeals of Ohio in Haydocy Pontiac Inc. v. Lee
[19 Ohio App. 2d1 217] at a time when we see young persons
between 18 and 21 years of age demanding and assuming more
responsibilities in their daily lives; when we see such persons
emancipated, married, and raising families; when we see such
persons charged with the responsibility for committing crimes;
where we see such persons being sued in tort claims for acts of
negligence; when we see such persons subject to military
service; when we see such persons engaged in business and
acting in almost all other respects as an adult, it seems timely to
re-examine the case law pertaining to contractual rights and
responsibilities of infants to see if the law as pronounced and
applied by the courts should be redefined.
Despite this and other decisions of a like nature, the general
opinion relating to a minors contract is that, he is liable (i.e.,
personally) on contracts for necessaries but on others he is not.
This position of a minor seems to be analogous to the position
of a minor in England where also a minor can be made
personally liable on some contracts, whereas on others he cannot
be held liable at all.
Concluding Remarks
One can only speculate on the reasons as to why in India a
minors agreement is treated as void ab initio [so much so that
even for the supply of necessaries, it is only his property which
can be made liable and not the minor himself] whereas, both in
England and America a minors contract may be valid or void
depending on the nature of the contract. One of the plausible
reasons may be the difference in the social and cultural
environment between India and the other two countries. Here,
till the child is married he/she remains under the effective control
of the parents (in general) regardless of his age and earning
capacity. So also, we do not find parents encouraging their
children (below 21 years) to take independent decisions in
matters concerning them. Right from what the child should
eat, wear etc..... to what he should study and where, is decided
for the child by the parents. It maybe this over protective attitude
towards our children, which finds a reflection in our Contract
Act also. In contrast, in the West, a child is encouraged to take
independent decisions from an early age, so that the child is
able to act more naturally and independently as compared to
his counterpart in the east. This attitude of imposing
responsibilities on a child from an early age is reflected in the
Contract Acts of UK & USA. After all, law for the most parts
is a reflection of social norms and ideals.
56
2.3(B) UNSOUND MIND
Section 11 of the Act specifies that, every person is competent
to contract .... who is of sound mind. Thus, unsound mind is
a disqualification which would if proved make the contract void
ab initio. Unsoundness of mind maybe either temporary or
permanent and may occur due to numerous reasons. Some of
the categories of persons who may suffer from unsound mind
are :
a) Persons with an advanced age or illness affecting mental
ability
b) Person under the influence of alcohol and drug
c) Persons having mental incapacity on account of attacks of
lunacy
Each of these, will now be dealt in brief.
Aged persons
Old age may not necessarily result in senility or diminished
mental capacity, but it may. When an old persons mental
faculties weaken, law throws a protective cloak around him, to
prevent any unscrupulous person (generally someone close to
such old person, maybe a relative, or his doctor or a friend)
from taking undue advantage of the person.
A contract entered into by such an old person may be avoided
on any one of the following two grounds, viz:
a) Undue Influence
Such contracts can be avoided under sec.16 of the Act provided
that the old person could prove that the other party to the contract
was in a position to unduly influence his decision. For example,
in Abdur Rauff v. Aymona Bibi [1937 A. Cal.492], an aged
father executed deeds of gift and a wakfnama at a time when he
was in a weak state of mind as the result of a long drawn out
illness. These transactions were brought about at the instance
of his son and had the effect of depriving the other members of
the family of their just share of the inheritance. As it was proved
that the son was in a position to dominate the will of the father
and that he used that position to his own advantage, the deeds
of gift and the wakfnama were set aside.
Once undue influence is pleaded the defendant has to prove :
(i) that no undue influence was used; (ii) that the contract was
fully explained to the plaintiff; and (iii) the plaintiff freely
consented to the transaction.
If undue influence is proved, the contract becomes voidable
and can be rescinded at the option of the aged person but not at
the option of the other party to the contract.
b) Unsound mind
The second ground on which an aged person (or someone on
his behalf) can avoid a contract is by proving, that at the time
the contract was entered he (i.e., the old person) was not in
possession of his full mental faculties, as a result of which he
was unable to grasp the full consequences of his act. If
unsoundness can be proved to the satisfaction of the court,
then the contract is treated as void ab initio.
Drunkards
The second part of section 12 says : a person who is usually of
sound mind, but occasionally of unsound mind, may not make a
contract when he is of unsound mind.
A person under the influence of alcohol, drugs or such other
intoxicating substances, is presumed for the purposes of
Contract Act to come under this definition of occasionally of
unsound mind. If it can be proved that at the time when the
plaintiff had entered into the contract he was so intoxicated
that he had no control over his mental faculties and was
incapable of understanding it and of forming a rational
judgement as to its effects upon his interest, the agreement he
has entered into may be declared by the Court as void ab initio,
regardless of whether the defendant was aware of the plaintiffs
state of intoxication or not. It is interesting to note that this
part of the section is given in a negative proposition though the
former part is in positive form. It is because here the court
presumes that the person has a sound mind, and hence the
agreement valid. Anyone challenging this presumption must
prove mental incapacity by proving beyond doubt that at the
time of entering into the agreement the person was so intoxicated
that he/she could not understand the personal benefit, only in
that case the agreement can be negatived. [Prove negation of
mental capacity to negate the agreement]. So the proposition
is negative.
The English law relating to contracts, with drunkards is different
from the Indian Law. In England, if a person enters into a
contract while drunk, he may, when sober, elect to avoid the
contract or to affirm it [Mathews v. Baxter, (1873) LR 8Ex
132]. Thus, under the English Law, a contract with an intoxicated
person is merely voidable at his option and not absolutely void
as in India.
Lunatics
Whenever a person is incapable of forming a rational judgement
in his best interests, we call him jurisprudentially insane or
legally insane. In medical science, insanity is a disease of mind
which impairs the mental faculty of a human being. It may
have various grades and stages but at all these grades and stages
a person is not necessarily incapable of forming judgments in
his own interest. As for example, mental obsession is a disease
and therefore may come within the scope of medical terminology
of insanity, but in such cases the person is not necessarily
incapable of forming judgments in his best interests and as such
will not be jurisprudentially insane. Any impairment of
cognative faculty which injures the capacity of reason comes
within the medical definition but not the jurisprudential one.
But if the cognitive faculty is so damaged as to render the person
incapable of understanding the nature and consequences of his
act, the insanity is said to be jurisprudential. In Q.E. v. Keder
Nasayer Shah [(1896)23 Cal 604] the Calcutta High Court
explained the jurisprudential insanity as one, which materially
impairs the cognitive faculties of mind so much so that it would
make the person incapable of knowing the nature of the act.
In civil laws the test is whether the person can form a rational
57
judgement as to his interest in the given situation, say in case of
contract - in case of the given contract.
In case of criminal law the test is even more rigid. In order to get
an exemption under criminal law such impairment of cognitive
faculties of the accused should be such that the accused has
become incapable of knowing the nature of his act, and that he
does not understand that what he is doing is wrong or contrary
to law. For long Indian criminal courts used to apply
McNaghtens rule [State v. McNaghten (1833)10 Clark &
Finnelly 200] which prescribed that, the accused in order to
get exemption from criminal responsibility on the ground of
insanity, must prove that, owing to a defect of reason, due to a
disease of mind, he did not know the nature and quality of his
act, or, if he did know this, that he did not know that he was
doing wrong. The civil court on the other hand does not apply
this test. In other words, the civil court applies a test of rational
judgement in the interest of the self. In both the cases, however
the origin of `insanity is taken as 'sane i.e., impairment of
cognitive domain which injures the faculty of reasoning. For
obvious reasons the degree of test in criminal law is tougher
than in civil law, though the methodology is almost the same.
Section 12 of the Contract Act specifies the meaning of sound
mind for the purposes of contracting as:
A person is said to be of sound mind for the purpose of making
a contract if, at the time when he makes it, he is capable of
understanding it and of forming a rational judgement as to its
effect upon his interests.
A person who is usually of unsound mind, but occasionally of
sound mind, may make a contract when he is of sound mind.
A person who is usually of sound mind, but occasionally of
unsound mind, may not make a contract when he is of unsound
mind.
This section consists of three different parts .
First Part : This lays down the general principle for competence
to contract. A person may enter into a contract if he, (a) is
capable of understanding the full import of the contract; (b)
anticipates the effect of the contract on his interests; and (c)
exercises a rational judgement keeping in mind all the
circumstances.
It has to be noted here, that law only wants the person to fully
understand the consequences of his action before undertaking
it. If a person voluntarily and with full understanding enters
into a contract which may not be in his best interest, the law
will not interfere to save him from his own folly. For example,
A freely and voluntarily wants to sell his house worth
Rs.1,00,000/- to B who is a friend for a mere Rs.25,000/-. In
the absence of other vitiating factors (like coercion, undue
influence etc) law will not interfere with this transaction. The
sale is perfectly valid, though the price is much below the market
value. In such cases, A is deemed to be the best judge of his
interests.
Second Part : There are certain persons who are usually of
unsound mind i.e., they do not normally fulfil the criteria of
sound mind given in first part of sec.12. The unsoundness of
mind may be due to any reason (for ex: genetic disorder,
psychotic disorder, congenital diseases etc). It is the fact of
unsoundness which is important and not the cause of it. A
contract entered into by such persons is void ab initio, unless it
can be proved that at the time when the contract was entered
into he was of sound mind i.e., he was capable of understanding
the consequences of his act and to exercise a rational judgement.
It is interesting to note that the construction of this second part
is positive in character though that of the third part is negative.
This has something to do with the presumptive character and
the burden of proof. Suppose, a lunatic who was in an asylum
during January to September and then again between
November-December of the same year contracts of marriage in
the month of October. He can enter into the contract in the
month of October provided that he is of sound mind during that
period. Here anyone who is inducing the court to believe that,
the person attained a lucid interval (excepting in congenital
lunacy in all other types of insanity there are strikes of attack of
insanity from time to time. The interval between two strikes is
known aslucid interval when the person attains clear
understanding just like a normal man and his cognitive domain
functions properly) during the month of October has to prove
that the person at that time could take a conscious resolution
about his interest. On his proving that fact the court shall validate
the marriage. Therefore the general presumption is that the
person is unsound and the agreement invalid. On proving
the soundness of mind, the validity of the agreement shall be
declared. This is known as proof-positive i.e., to take a positive
conclusion. The positive structure of the law indicates a leaning
towards this burden of proof and presumption. Generally
speaking in an adversorial system (we follow in India the
common law adversorial system) a person who goes to the court
(i.e., the plaintiff) must prove his case. But here, the person
who induces the court to believe that the insane person had
attained a lucid interval has to prove that assertion whether he
be the plaintiff or the defendant.
Third Part : The last part (as already discussed above) applies
to those who are usually of sound mind but may suffer from
occasional unsoundness of mind (may be due to emotional
shock, alcohol, drugs etc.)
A contract entered into by such persons is valid, unless it can
be proved that at the time, when the contract was entered into
he was of unsound mind i.e., he was incapable of either
understanding the consequences of his act or of exercising a
rational judgement. If he can prove the unsoundness the
contract would then become void ab initio.
A person may have temporary unsoundness of mind due to
several reasons. It may be on account of mental pressure, or
addiction, or pressures of age, or on account of impulses. This
is therefore a temporary phenomenon. As for example, A who
signed a promissory note challenging the validity of it on the
ground that he had made it while his mental faculties were
impaired on account of drunkenness. In such a situation, the
person has to prove that the consumption of liquor was so high
58
that the cognitive faculty of mind was impaired, during which
time he had signed the promissory note. The proof over here is
of a negative character, i.e., the person pleading the unsoundness
has to conclusively prove the absence of soundness, in order to
obtain a decision about the absence of a contract. The general
presumption is that a person is of sound mind and the contract
valid. Only on proving the negation is the agreement negated.
It is also to be noted, that though the third proposition is written
in a negative form but the proposition is written in a particular
negative form using the phrase may not. If this phrase may
not is used in a particular sense it may mean that some may
enter into the contract. This construction is inconsistent and
incongruent. Therefore, the word may in the negative form
has to mean must. Thus, though the proposition apparently
in this particular negative form, it really means a universal
negative construction - meaning thereby, that persons with
occasional unsound mind must not enter into a contract when
the mind is unsound. Therefore, any agreement made when
the mind is unsound is invalid.
Inder Singh v. Parmeshwardhani Singh [AIR 1957 Pat. 491]
is a case which deals with the scope and extent of sec.12. Here,
a property worth Rs.25,000/- was agreed to be sold by a person
for Rs.7000/- only. His mother proved that he was a congenital
idiot, incapable of understanding the transaction and that he
mostly wandered about. Holding the sale to be void, Sinha J.
held, According to this section, therefore, the person entering
into the contract must be a person who understands what he is
doing and is able to form a rational judgement as to whether
what he is about to do is to his interest or not. The crucial
point, therefore, is to find out whether he is entering into the
contract after he has understood it and has decided to enter into
that contract after forming a rational judgement in regard to his
interest .... It does not necessarily mean that a man must be
suffering from lunacy to disable him from entering into a
contract. A person may to all appearances behave in a normal
fashion, but, at the same time he may be incapable of forming a
judgement of his own, as to whether the act he is about to do is
to his interest or not. In the present case (he) was incapable of
exercising his own judgement.
In England, a person of unsound mind is competent to contract,
although he may avoid his contract if he satisfies the court that
he was incapable of understanding the contract and the other
party knew it. The contract is only voidable at his option and
not void ab initio as in India.
2.4 LEGAL INCAPACITY
Apart from the Indian Contract Act, there are certain other laws
which impose partial or total restrictions on a persons right to
enter into a contract. Some of these laws are discussed below.
2.4 (A) OF NATURAL PERSONS
The contractual capacity of natural persons is sometimes
subjected to reasonable restrictions imposed by various laws
of the land. In general, these restrictions apply to a person
placed in special circumstances. Some of these laws which
limit the contractual capacity of an individual are discussed
below.
Insolvency Act
An insolvent person cannot enter into any contract, especially
into contracts relating to his property. In general, there is no
prohibition against a contract by an insolvent after the
insolvency proceedings have commenced but before
adjudication. Insolvency does not determine a contract, nor
per se operate as rescission thereof [Rama Raju v. Official
Receiver, (1964)A.Ap.299]. Once a person has been adjudged
an insolvent, his property vests in the Official Receiver. This
vesting of property is for the benefit of the creditors and so
does not purport to affect the transactions between the insolvent
and other persons except in so far as they affect the
administration of the insolvents estate for the benefit of the
creditors. As far as the parties to the transaction are concerned
the transaction is binding on them.
Prison Laws
In some countries, a convict cannot enter into a contract under
the prison laws of that country. In India, there is no such
prohibition imposed on the convicts. The Contract Act itself
specifies in section 11 that, Every person is competent to
contract who is of the age of majority according to the law to
which he is subject, and who is of sound mind, and is not
disqualified from contracting by any law to which he is subject.
Thus, it is seen that there is no express bar on convicts entering
into a contract.
Despite this, certain limitations do come in the way of a convict
wanting to contract. Every letter which he writes or every deed
he executes is only with the express permission of the jailor
and these documents are subject to the jailors scrutiny. Under
these circumstances, the concept of freedom of contract is
negated as the convict is not free in the real sense of the word,
to enter into any contract he wants, with whoever he wants to
and on whatever terms and conditions which he wishes. His
will (to contract) is subject to the jailors wish. Though no
express bar is laid down on a convict entering into a contract,
restrictions by implications are definitely imposed.
Alien Enemy
A person can enter into a contract with any person he wants to,
regardless of whether the other party to the contract is a citizen
of India or not. But this freedom of contract with aliens is
available only during the times of peace. Once a war is declared,
any contract between the citizens of the warring countries comes
to an end. This provision is present (either through express
statute or by means of judicial interpretation) in almost all the
countries of the world. The embargo on contracts imposed
during war time is as a matter of public policy, and it is felt that
in the interest of the nation, an individuals private right to
freedom of contract must be sacrificed. Once the war comes
to an end, the freedom of contract is either restored (fully or
partially) or completely suspended depending on the
governments policy.
2.4 (B) OF LEGAL PERSONS
There are a number of bodies, organisations associations of
persons, objects (ex: idols) etc. on which law throws a cloak
59
of humanity and treats them as persons for certain limited
purposes. These artificially created persons are known as legal
or juristic persons. The rights and liabilities to which these
legal persons are subjected to are prescribed and proscribed by
law itself. We would now consider the limits imposed on the
contractual capacity of some of these legal persons.
COMPANIES
A company registered under the relevant company law assumes
a separate legal personality distinct from the persons forming
or running the company. In the guise of this legal personality a
company can enter into a contract in its own name, and can sue
or be sued on such contracts. But this power of the company to
enter into a contract is not an absolute one but a restricted one.
The restrictions on the contractual capacity of a company can
be imposed through the object clause of the memorandum or
during the winding up procedure, as discussed below.
Limitation through Memorandum
A company can enter into a contract only within the scope and
powers set out within its memorandum of association, or within
such powers as are reasonably incidental to or consequential
upon the operation that it is authorised to perform. Section 13
of the Companies Act provides that in the case of companies to
be registered after 1965, the object clause must state separately:
(a) Main objects - to be pursued by the company on its
incorporation and objects incidental or ancillary to the
attainment of main object.
(b) Other objects - all other objects which have not been
specifically stated in the above clause.
If a company enters into a contract which is beyond its powers,
then, such a contract is void ab initio as being ultra vires its
powers. Such contracts cannot be validated even by the
unanimous consent of all the shareholders of the company.
This doctrine of ultra vires was firmly established in the case
of Ashbury Railway Carriage Co. v. Riche [(1875)LR 7 HL
653]. Here, the objects of the company as stated in the
memorandum was to make, sell or lend on hire, railway
carriages and wagons, and all kinds of railway plant, fittings,
machinery and rolling stock; to carry on the business of
mechanical engineers and general contractors; to purchase, lease
and sell mines, minerals, land and buildings; to purchase and
sell as merchants, timber, coal, metals or other materials and to
buy and sell any such materials on commission or as agents.
The directors of the company agreed to assign to a Belgian
company a licence which they had bought for the construction
of a railway line in Belgium. It was held that, as this agreement
related to the construction of a railway, a subject matter not
included in the memorandum, was ultra vires and that not even
the subsequent assent of the whole body of shareholders could
make it binding. Therefore, an action brought by the Belgian
company to recover damages for breach of contract necessarily
failed.
At present, however, this doctrine of 'ultra vires has become
practically obsolete, because of the ingenious manner in which
the memorandums are formulated. What is now done is that the
clause (ii) of the object clause is broadly phrased that it is able
to cover almost any activity. Hence whatever activity is
undertaken by the company can never be ultra vires as it is
never beyond the objects and powers of the company.
Limitations during winding up
The term winding up of a company means the end of a
companys affairs and operations. All the assets of the company
are sold and debts are paid out of the proceeds. If there is any
surplus left it is divided among the different members of the
company in proportion to the interest they hold in the company.
Winding up may be one of the following kinds :
(i) Compulsory winding up under the order of the court
(Sec.433)
(ii) Voluntary winding up by the members or creditors (sec.484)
(3) Winding up subject to supervision of the court.
Once a company goes in for winding up, the assets of the
company are taken control of by the liquidator of the company
appointed either by the court or by the company itself. The
powers of the Board of Directors is terminated. No suit or
legal proceeding pending against the company can be proceeded
with after the order of winding up without the leave of the court.
Any debts payable in future become immediately payable on
the issue of the winding up order. The only contracts which
can be entered into during this period are for the sale of the
companies assets, or realization of debts etc., and only the
liquidator of the company has the power to act on behalf of the
company and he has to exercise this power in a manner which
he feels would be in the best interest of all parties concerned.
Idols
It is a unique feature of Hindu law that when property is
dedicated to debutter it is not the dedicated property which is
personified but it is the deity, the idol, the principal part of the
endowment, which is personified as a legal person and it is the
deity which stands as the material symbol and embodiment of
the pious purpose of the debutter to which the settlor intended.
In 1888 West, J. observed in the case of Manohar v. Lakshmi
[ILR 12 Bom 247] Hindu law recognises not only corporate
bodies with rights vested in the corporation apart from its
individual members but also juridical subjects or persons called
foundations":
An idol as a juristic person embodies the following
characteristics, viz:
(a) since ownership in the primary sense connotes the capacity
to enjoy and deal with property at ones pleasure, a deity or
idol cannot hold and enjoy property like a human being,
the deity is not the owner of the dedicated property in the
primary sense.
(b) Ownership to the deity is attributed in the secondary and
ideal sense. This is a fiction of law but not a mere figure of
speech; it is a legal fiction - else the deity cannot be
described as an owner even in the secondary sense.
60
(c) The fictitious ownership imputed to the deity is either based
upon or conferred by the express intentions of the founder,
that is to say, the dedicated property cannot be made use of
for any purpose other than that which is indicated by the
founder.
(d) The actual possession and management of the debutter
property, vests in a human agency who is variously called
as the shebait, dharmakarta, or manager of the debutter.
This manager has to use the property in accordance with
the wishes of the founder. He can alienate or transfer the
property only in the following two cases:
(i) for legal necessity; and
(ii) for the benefit of the endowment
An alienation made for any other purpose is not binding and an
alienee who does not make proper and bonafide inquiries is not
protected. Such an alienation is voidable during the lifetime of
the manager but becomes void on his death.
61
3. CONSIDERATION
SUB TOPICS
3.1 Consideration: A definitional understanding
3.2 Why consideration? The theoretical base.
3.3 No consideration no Contract
3.4. Adequacy of consideration
3.5 Role of a third party in consideration
3.6 Past consideration
3.7 Promissory Estoppel
3.1 CONSIDERATION : A DEFINITIONAL
UNDERSTANDING
The English Common law of contract historically grew out of
actions of 'debt' and 'assumpsit'. In the former the plaintiff could
succeed only on the proof of a quid pro quo and in the latter
the plaintiff could succeed if he had undertaken some charge
i.e., suffered some detriment in reliance of the defendants
promise. Thus grew a definition of consideration in Carrie v.
Misa [(1875)LR 10 Ex 153 at p.162], A valuable consideration,
in the sense of the law, may consist either in some right, interest,
profit or benefit accruing to the one party, or some forbearance,
detriment, loss or responsibility given, suffered or undertaken
by the other. Thus the common law took a turn from the
complete moral Roman Code of pacta sunt servanda. A word
given must be performed. Consideration cannot be the reason
for performing the contract. Carrie v. Misa assimilated the moral
approach of Roman Code with utilitarian approach. The
definition conceptualises both the aspects. As such, the
nineteenth century moralists who attached obligation in the form
of consideration, extended their logic of assumpsit by
emphasising the idea of detriment with which one buys the
promise from the other party. On the other hand, the political
economists emphasised the structure of right acquired from
the promise. It is argued that the basis of contract is mutual
benefits for both the parties in relation to their earlier position.
Consideration is gain in absolute terms and, as such, through
contract, social wealth of a country has to increase.
American realists turned to the 'law merchant' to build up their
theory of bargain and a definition of consideration accordingly.
s71 of the Restatement (second) defined consideration as
follows: (1) To constitute consideration, a performance or a
return promise must be bargained for. (2) A performance or
return promise is bargained for if it is sought by the promisor in
exchange for his promise. (3) The performance may consist of:
(a) an act other than a promise, or (b) a forbearance, or (c) the
creation, modification, or destruction of a legal relation. (4)
The performance or return promise may be given to the promisor
or to some other person. It may be given by the promisee or by
some other person.
The historical developments and needs of the early colonists in
USA compelled the settlers to resort to more practical and
universal law merchants instead of the common law. As a
result, the overtone of the moralist obligation thesis did not
cloud the American understanding of consideration as the basis
of contract.
In comparison, the utilitarian approach to consideration in
Indian law is quite understandably nearer to the American
defintion. According to Sec. 2(d) of the Indian Contract Act
consideration means, when at the desire of the promisor, the
promisee or anyother person -
(i) has done or abstained from doing, or
(ii) does or abstains from doing, or
(iii) promises to do or abstain from doing, something,
such act, or abstinence or promise is called a consideration for
the promise. The Indian definition conforms to the two basic
characteristics of consideration as enunciated by Lord
Mansfield. According to him consideration was only
evidentiary and that the existence of a previous moral
obligation was sufficient. The Indian definition emphasised
the functional character of consideration in the form of act,
abstinence or promise and not the substance of it through right,
benefit or duty. The nearness of the Indian definition to the
American approach is evident; both are evidential, both are
relationally direct and both are positive in character. But the
American definition emphasised bargain and the Indian
definition still has the moralist code of assumpsit. As such,
in Indian definiton, the act, abstinence or promise is to be
done at the instance of the promisor.
A positive legal structure requires a causal relation. Every
contract must be based on consideration (i.e., the answer to the
question why a person enters into a given contract). But a
Common law culture asks for a moral base of human behaviour
because the Common law tradition is built up on the citadel of
canonical laws. Definition of a legal proposition is related to
deeper theoretical understanding of the need for consideration.
3.2 WHY CONSIDERATION? : THE THEORETICAL
BASE
Contract is the legal means of enrichment with cause. Through
contract individuals may increase their world of rights and
duties. Through contracts a human being, as an economic
rational entity, can possess, own, dispossess, disown and dispose
of any economic substance, in exchange of what the economic
entity indicates. This is the way in which economic activities
originated and survived in the world. As such, in the economic
and social relation the means of exchange has become the
focal point. According to Anson at an early stage in the history
of the action of assumpsit, there must have been some
speculation as to whether all promises were binding, even if
gratuitous, but the exact origin of consideration is by no means
clear. The first step out of the canonical code was taken by
Lord Mansfield when he emphasised on the evidential
exposition of a moral obligation in 1756. In 1778 Justice
Skymer,E.B took a further positive step in Rann v. Hughes
62
[(1778), 4 Brown PC.27] requiring consideration in every contract.
According to him It is undoubtedly true that every man is by
the law of nature bound to fulfil his engagements. It is equally
true that the law of this country supplies no means nor affords
any remedy, to compel the performance of an agreement made
without sufficient consideration. Such an agreement is nudum
pactum ex quo non oritur actio; and whatsoever may be the
sense of this maxim in the civil law, it is the last mentioned sense
only that it is to be understood in our law ......
It is really difficult to understand the subsistence of a contract
without consideration in law of nature as understood by
Western philosophers to be reason which cannot be self-
destructive. In fact in debt the Roman Law prescribed quid
pro quo which fits well with consideration principle to subsist
mercantile contracts. In fact contract is the legal base in
attempting maximisation of utilities in a society. It is quite
understandable that judges of a positive economic society
would discover a satisfactory theory of consideration in order
to submit contracts because consideration only can provide a
positive legal base for the realm of contracts. For a few centuries
British judges tried to continue with the moral base of assumpsit
but this had to be abandoned because the thesis could not
provide the minimum political economic input necessary for a
legal structure in a positive framework. Ultimately British judges
come to the conclusion that consideration is necessary for the
formation of every single contract.
Professor Braucher of USA built up an alternative but
complementary thesis to assumpsit. According to him, the
requirement that a promise or performance must be bargained
for (emphasis added) benefits the community by providing
opportunities for freedom of individual action and exercise of
judgment and as a means by which productive energy and
product are appropriated in the economy. In USA this bargain
theory is the generally accepted idea of consideration. This
concpet of bargain is formulated in the application of practical
reasoning in reality by O.W. Holmes. According to Holmes the
root of the whole matter is the relationship of conventional
inducement, each for the other, between consideration and
promise.
Many sociologists attribute the historical reasons for the
emphasis given to the bargain theory. In his History of American
Law, Professor Lawrance Friedman suggested that the colonists
brought considerably less of the Common law to America than
is usually supposed. Instead, many turned to the bargain
oriented customs and practices of the law merchant, which had
not yet been fully absorbed in the Common law. Economic
growth and sustenance was the conscious objective during the
period in the land far away from the mother lands of the
colonists. The contract as a bargain process was used as an
important means to that end. According to R.E. Scott & D.L.
Leslie (Contract: Law and Theory, p.33) as an operating
principle, the bargain theory of consideration (1) provided a
natural formality to channel human conduct and ensure
deliberation ; (2) protected and structured the important market
transaction; (3) extended legal protection by supporting the
executory exchange, a promise for a promise, and shielding the
creative or idiosyncratic bargainee from later claims that the
agreed exchange was disproportionate ; and (4) permitted fully
a development of remedies that protected the plaintiffs
expectation interest that is the value to the plaintiff of the agreed
exchange.
In the common law explanation of consideration there is an
approximation between the subjective moral base and objective
indebitous reliance, and hence a confusion as well. As for
example, English courts will not ask whether the thing which
forms the consideration does in fact benefit the promisee or a
third party, or is of any substantial value to any one. It is enough
that something is promised, done, forborne, or suffered by the
party to whom the promise is made as consideration for the
promise made to him (Anson, p.63). The bargain theory does
not have any such difficulties. It is in consonance with the
natural instincts and behaviour of human being though
apparently it looks only of limited import.
As such, section 25 of the Indian Contract Act, stipulated the
general Common law principle an agreement without
consideration is void. But the definition of consideration in
Sec. 2(d) of the Indian Contract Act, more appropriately fits
with the bargain concept than the common law principle of
assumpsit. According to the Indian definition, consideration is
either an act, or promise or forbearance which provides
subsistence to the promise given.
Ancient Indian philosophy created a different structure or legal
order based upon obligation. As such, even in a private
relational affair, a social view would have been taken consistent
with the moral code. The British rule had to ultimately introduce
British Common law principles in India but in a codified form
because the framers of Indian Codes were utilitarians and
followers of Benthem. Besides a Code was necessary to protect
the mercantile interest in India.
3.3 NO CONSIDERATION, NO CONTRACT
In English Common law a contract can either be made under
seal or for consideration. Seal is required only in the case of a
gratuitous promise. The validity of the contract under seal is
due to its form and the seal. The most important example of a
contract under seal is a Deed. A deed is required to be in
writing in a form and written or printed on specified paper or
parchment. It is done between parties by being signed, sealed
and delivered. The deed is written in contractual form in definite
paper with stamps and the Court allows its seal to validate the
document and the transaction. Initially a ceremony was attached
to it but presently such ceremonies are matters of the past. The
delivery may be conditional on the fulfilment of which the
document is delivered. Gift or gratuitous payment to some
charity are common examples of contract under seal. In India,
the law of contract does not provide any special groups of
contract to be allowed under seal. As such, according to
Indian law, all contracts must have consideration. According to
63
Sec.25 of the Indian Contract Act, all agreements without
consideration are void ab initio.
Contracts with considerations may either be in writing or orally
made. According to English Common law the following
contracts are bound to be in writing according to statutes:
(a) negotiable instruments;
(b) marine insurance;
(c) credit agreements like lease, hire purchase, loan agreements;
(d) a bill of sale;
(e) a guarantee agreement; and
(f) sale or disposition of immovable properties under the
Property Act.
In these agreements the validity of the contract does not depend
on the consideration but it depends upon the form in which the
contract is to be made and allowed. In India, under the Stamp
Act certain agreements must be put into writing and registered
under the law in force and the written document must bear
specified stamp duties. According to the Negotiable Instrument
Act and the Stamp Act, all negotiable instruments must be in
writing and adequately stamped. All contracts relating to
transfer of property under the Transfer of Property Act must
also be made in writing. The Insurance Act provides for all
insurance agreements (indemnity contracts and life assurance)
to be in writing and to be adequately stamped. Unlike English
law, Indian law of Contract does not require a contract of
guarantee to be in writing.
In India, all contracts, whether in writing and registered or orally
made, require consideration for its validity. Exceptions are
specified in sec. 25 only as follows:
(a) It is expressed in writing and registered under the law for
the time being in force for the registration of documents,
and is made on account of natural love and affection
between parties standing in a near relation to each other.
(b) It is a promise to compensate, wholly or in part, a person
who has already voluntarily done something which the
promisor was legally compellable to do.
(c) It is a promise, made in writing and signed by the person to
be charged therewith, or by his agents generally or specially
authorised in that behalf, to pay wholly or in part a debt of
which the creditor might have enforced payment but for
the law for the limitation of suits.
(d) According to sec.185 no consideration is necessary to create
an agency.
An agreement without consideration is void
Beside the above four exceptions all agreements require
consideration to be enforceable by law. A purely gratuitous
promise has no legal force. A promise for donation is a gratuitous
one and not enforceable. A mere moral duty to perform a promise
given to a party does not constitute consideration [See, Goapal
Co. Ltd v. Hazarilal Co. AIR 1963 MP 37]. In Kirksey v. Kirksey
[8 Ala 131] the defendant wrote to his sister-in-law, the plaintiff
- If you come down and see me, I will let you have a place to
raise your family and I have more open land than I can tend, and
on account of your situation and that of your family, I feel like I
want you and the children to do well. The plaintiff on those
words left her home and moved her family to the residence of
the defendant who gave her the house and the land only to
request her to leave after two years. The court held that her
leaving her place with her family was not a consideration against
the defendants promise to give house and land. It was only a
gratuitous promise and not binding.
Sometime litigation arises on account of complicated questions
of law as to what constitutes a forbearance worth being called a
consideration. Can a cause of action to which there is a complete
defence, be of any value in the eye of law? Suppose a man
bargains for an amount in consideration of his abandonment of
such a cause of action, is it a good consideration? It is not
enrichment without any cause. On the otherhand, if an
intending litigant bona fide forbears a right to litigate a question
of law or fact which it is not vexatious or frivolous to litigate,
he does give up something of value. It is already a settled
principle that a duty which is created under a general law or by
a specific obligation, a promise to discharge that duty cannot
be a consideration. A person served with a subpoena is legally
bound to attend and give evidence in a court of law, and a
promise to compensate him for loss of time is void for want of
consideration.
Exception I : Natural Love and affection
A promise made on the basis of natural love and affection is
binding though there is no consideration provided the promise
is (1) written and (2) registered under the law - the Registration
Act. In Poonoo Bibee v. Fyez Buksh [(1874)15 B.L.R. App
5] a registered promise to give his earnings to his wife, was
held to be written under Sec.25(1). In Rajlukhy Dubee v.
Bhootnath [(1900)4 CWN 488], a hindu husband executed a
registered deed in favour of his wife, whereby after refering to
quarrels and disagreement between the parties, the husband
agreed to pay for a separate residence and maintenance, and
there was no consideration moving from the wife. The recitals
of the promise made clearly show that the agreement was not
based on natural love and affection. Hence the Calcutta High
Court held the agreement void on account of absence of
consideration. A, the husband, promises to give his property to
his wife. The agreement is registered. This agreement is binding
because, the promise is made between parties standing in a near
relation to each other and obviously on the basis of natural
love and affection. The formal requirement of the agreement
being in writing and registered under the law in force is also
fulfilled. Now suppose A proves that B used to have a relation
with C before marriage and was keeping the illicit connection
even after marriage, A can certainly make a plea that the
instrument is not valid because there is lack of natural love and
affection. Natural love and affection is a two way traffic. As
such, if it can be proved that the husband or the wife, as the
case may be, is not faithful at the time of making the promise,
the instrument is unenforceable. Such a promise must be made
on the basis of natural love and affection between the parties.
64
The nearness of relation is again a matter of contention. A
blood or social relation is only a proof of near relation unless
proved otherwise. Nearness of relation and natural love and
affection both must co-exist in such types of agreements.
Where the relation is near, natural love and affection can be
presumed unless otherwise proved. It is not necessary that this
nearness of relation is to be found only in blood or marital
relation. A friend may be a near relation of a friend.
Exception 2: Compensation for voluntary services
This exception came out of the Common law principle of equity.
The person who has voluntarily done something which the
promisor was bound to do, requires an equitable treatment
for what he has done voluntarily. In Raja of Venkatagiri v.
Sri Krishnayya [50 Bom. L.R. 517] X agreed to give his son
in adoption, if Y agreed to advance money to defray the expenses
of defending any suit challenging the adoption. There was a
challenge to the adoption and Y advanced money towards the
expenses incurred. After Ys death his son advanced money to
the adopted son against which the adopted son issued a
promissory note on the assurance that if the adopted son fails
to succeed in the Privy Council, the Note would not be enforced.
When the adopted son succeeded in the Privy Council, demand
was made against the Note. On the refusal of payment against
the note, Ys son filed a suit to realise the money against the
loan. It was held that the promissory note did not have
consideration and the payment by Ys son was not voluntary
but was paid due to the undertaking made by Y in the original
contract. In Sindhia v. Abraham [(1895)20 Bom. 755] the
court explained the necessary conditions as where a person
without the knowledge of the promisor or otherwise than at his
request does the latter some service, and the promisor undertakes
to recompense him for it.
Exception 3: Promise to pay time barred debt
A barred debt is a good and valued consideration of a promise
to pay the debt. But the debt must be valid and payable to the
promisor in the absence of application of law of limitation. But
a debt which is not binding on account of any reason of
invalidity, even without application of law of limitation cannot
be the basis of a promise validating a time barred debt. As
such, a loan given to a minor cannot afterwards be promised to
be paid on attaining majority. In such a case the debt does not
subsist. A debt subsists even when its payment is not legally
compellable due to application of the law of limitation. As
such, a promise to pay such a debt is a good consideration. A
christian son has no pious obligation. So a pro-note executed
by the son for the debts due from the father is without
consideration and void. In Tulsi Ram v. Some Singh
[(1981)A.D. 165] it was held that two time barred pro-notes
were endorsed stating those were valid for three years, shall
not validate those notes under Sec.25(3). It requires specific
promise to pay. In order to be within apply Sec. 25(3) the
following conditions are required to be fulfilled :-
(i) there must be a debt which the creditor but for the
application of law of limitation, could have enforced;
(ii) there must be a clear promise to pay for the above debt;
and
(iii) such a promise is required to be in writing signed by the
debtor or his duly appointed agent.
According to Sec.18 of the Limitation Act, an acknowledgement
of the debt may also be a method of extending liability of the
debtor after the limitation period. Similarly a promise under
Sec. 25(3) also makes a barred debt binding. The difference
between the two provisions is that the acknowledgement is
required to be made in writing before the debt becomes barred
by limitation. But a promise under Sec.25 (3) is required to be
made in writing only after the debt becomes bad in law, on
application of limitation. An unconditional acknowledgement
is consistently held to imply a promise to pay for the purpose
of Sec.19 of the law of limitation. But promise under Sec.25(3)
is required to be clearly in writing; no implied promise is
sufficient [Giridharilal v. Bishnuchand (1932)54 All 506].
Promise to pay a debt, clearly means an ascertained sum of
money to be paid. Any promise to pay an unascertained sum,
like a promise to pay the amount that may be found due to the
arbitrator is not a promise to pay a debt under Sec. 25(3).
[Sheobachan v. Madhu Saran 1952 All 73] Another important
issue is required to be kept in mind. A promise to pay a debt
after an insolvent obtained his final discharge is not a promise
of paying time barred debt. This promise of paying a debt after
securing its discharge is a promise without consideration, and
hence void [Naoraji v. Kazi Sidick (1896) 20 Bom 636].
Exception 4: Appointment of an agent
According to Sec 185 of the Indian Contract Act, no
consideration is necessary to create an agency. A Common
law principle is that no consideration is necessary for reposing
any authority on another person. But it is a very questionable
proposition. A gratuitous employment or authority does not
require the agent to do anything.
Exception 5: Gift
According to Explanation 1 to Sec. 25, a gift actually made is
valid. Promise for a donation is not a gift. As such a promise
for a donation is invalid for want of consideration.
3.4 ADEQUACY OF CONSIDERATION
NEED CONSIDERATION BE ADEQUATE? According to
Ansons Law of Contract (p. 99) consideration need not be
adequate to the promise, but it must be of some value in the eye
of law. This basic principle of the common law system is
different from the Roman Law of Sale. In the Continental
system which is based on Roman Law, the price had to be a
fair and serious one. If the price is not a fair one, the seller
could rescind the contract unless the buyer was willing to come
upto the fair price. The principle of Laesio enormis does not
form part of Common Law. In Haigh v. Brooks [(1839) 10 A
& E 309] the consideration of a promise to pay certain bills
was the surrender of a document by way of a guarantee. The
document turned out to be of doubtful validity. The Court held
65
that doubt on the worth of the document could not be a defence
to an action on the promise.
The Indian legal position is based on the Common law principle
as provided in Explanation II of Sec. 25. According to the
provision an agreement to which the consent of the promisor is
freely given is not void merely because the consideration is
inadequate. Of course the inadequacy of the consideration may
be considered in determining the question of free consent.
This Explanation II to Sec. 25 gives two general principles of
the Common law:
(a) consideration need not be adequate; and
(b) inadequacy can be a ground to examine whether consent is
free or not.
In Grarely v. Barnard [(1874) 18 Eq. 518] it was observed
that, the Court is not a valuer and it will not inquire into the
adequacy of the consideration. It is enough, according to the
Court, if the consideration has some value. In fact, according
to Indian Law abstaining or promising to abstain by the
promisee is an adequate consideration for the promise.
Though American law of contract is also based on the common
law tradition, the bargain theory on consideration explains
assumpsit with more mercantile rationale than the customary
moral explanation supplied by the Common law principle.
Academicians in USA are divided on the question whether
nominal consideration should be sufficient to enforce a promise.
The conflict is quite vivid between two groups of academicians,
one lead by Fuller and the other Havighurst. Fuller emphasised
form which relate to the manner in which the promise was
made. According to him form served three functions, viz.,
(1) evidentiary, (2) cautionary and (3) channeling. According
to him, decision upholding nominal consideration is to be valid
because it would seem to be that the desiderata underlying the
use of formalities are here satisfied by the fact that the parties
have taken the trouble to cast their transaction in the form of an
exchange. Here according to Fuller form provides a means
to give a legally effective expression of intention [41 Colum
L.R. 806]. Havighurst on the other hand, stated that courts
usually do not enforce a contract for nominal consideration.
According to him if consideration is present as a natural element
in the transaction, it suffices. Havighurst argues this does not
suggest that the reasons for the requirements of consideration
and of form are similar.
Fuller emphasises the argument of private autonomy as the
power to bring about changes in their legal relations. The court
while enforcing the contract gives legal sanctions to rights and
duties already established by the parties. Patterson on the
otherhand refutes the argument. According to him that a
contract is binding upon a party because it expressed his will,
is wholy inadequate because it does not explain why he may
not will today the exact opposite of what he willed yesterday.
Intent of the party is not sufficient to enforce a contract. The
Court has to look for something more.
There must be a satisfactory answer to the question, why should
promises be enforced? This question is a part of the wider issue
'why should public institutions like, courts, indulge in the area
of private relations?' Private parties are free to create alternative
arrangements themselves. Cohen tries to conceptualise the
various possible answers. According to him, The simplest
answer is that of the institutionists, namely, that promises are
sacred per se, that there is something inherently despisable
about not keeping a promise, and that a properly organised
society should not tolerate this ...... But such an answer seems
to him inadequate though it may have certain truth. Cohen
argued No legal system does or can attempt to enforce all
promises. Not even the Canon law held all promises to be sacred
and when we come to draw a distinction between those promises
which should be and those which should not be enforced, the
institutionist theory, that all promises should be kept, gives us
no light or guiding principle [46 Harv. L. Rev. 572-74].
A nominal promise for illustrative purpose is put in an American
Law Review thus : A wishes to make a binding promise to his
son B to convey to B blackacre, which is worth $ 5000. Being
advised that a gratuitous promise is not binding, A writes to B
an offer to sell Blackacre for $ 1. B accepts. Bs promise to pay
$ 1 is sufficient consideration. This is Common law Blackacre
- for - a - dollar hypothetical. As a strategy to avoid the delivery
requirements of gift law, the purpose of nominal consideration
is understandable. But a modern lawyer is not satisfied with
such a contradictory of moral fabric. It is for this reason the
Court is rendering a decision on the enforceability of a promise;
it should advance some `social interest which conforms to the
ethical standard of that society (Murphy et al, 347). Havighurst
explained that in the absence of a satisfactory standard an
attempt was made by Common law courts to argue `indebitous
reliance. According to him these explanations ultimately
weakened ethical norms.
There is a lack of case law on the validation of nominal
consideration. But the debate on the question of adequacy of
consideration is still very strong in USA. The two opposite
opinions are quite visible, one arguing the traditional assumpsit
principle which relies on evidentiary, cautionary and channeling
arguments; the other arguing invalidity of institutionalism
because of weakness in the arguments. The 'bargain' theory of
consideration calls for adequacy of consideration; a nominal
consideration is invalid on this logic.
In India the law is made abundantly clear by the explanation II
of Sec. 25 which suggested that merely for inadequacy, a
consideration is not invalid. But inadequate consideration can
be argued in cases of absence of free consent. On account of
validation of promises without consideration in Sec. 25(1) the
contradictory moral argument of blackacre-a-dollar does not
arise in India. In a situation of bargain, inadequacy of
consideration or a very high consideration can be questioned
on the ground of absence of free consent. As such, if the price
is extra ordinarily high, it can be a ground of restrictive trade
practice. Similarly too low a price given by the creditor to the
share cropper is an undue influence or unconsionable gain.
66
CONSIDERATION MUST BE REAL
According to the Common law principle consideration may not
be adequate but must be real. It means that the consideration
must be something which is of some value' in the eye of law in
different ways. It is enough that something is promised, done,
foreborne or suffered by the party to whom the promise made
to him. In general, a waiver of any legal right at the request of
another party is a sufficient consideration for a promise.
In Hamer v. Sideray [124 NY 538] the promise of the uncle to
give $ 5000 to the nephew if he refrains from drinking, using
tobacco and playing cards or billiards for money until he
becomes 21 is questioned after the death of the uncle. The
court held that surrender of a right though it is beneficial to the
promisee himself, is a sufficient consideration. Consideration
must not be confused with motive. According to Anson
consideration must be given in return for the promise; but the
motive of the promisor must be to obtain a legally recognizable
return for the obligation incurred.
An act impossible in itself cannot be a valid consideration. As
for example, a covenant in a charter party that a ship would sail
on a date which was already past at the time of contract was
held to be void of unreality of consideration furnished (see
Anson p.102). Too vague a consideration is also not permissible.
An agreement to reserve a passage to moon in a possible flight
is invalid because according to the state of knowledge of the
day, the consideration is absurd. According to the definition of
consideration in sec.2(d), an abstinence (forbearance) is also a
good consideration. As such, a promise to forbear a suit on
claim, even for a shorter time, can be a valid consideration, at
the desire of the promisor.
Compromise is a very common transaction in which sometimes
consideration may apparently seem to be doubtful. As for
example, a cause of action not yet decided either way may be
only a probability. Sometimes the level of probability may also
be very low, if there is any. In such a case can there be a valid
consideration? Is it not really getting something out of nothing?
The answer to this question is that abstaining or promising to
abstain from doing anything which one would otherwise be
lawfully free to do or not to do is a good consideration. Every
man who honestly thinks he has a claim deserving to be
examined, and brings that before the proper court, can also
forbear to continue the litigation as a consideration for a promise
of compromise.
ACCEPTING LESSOR AMOUNT AS CONSIDERATION
Though consideration may not be adequate and the Common
law court does not enter into the question of valuation of
consideration, a part performance against the promise to accept
as full satisfaction, is not a sufficient consideration to support
the promise. The promisor can nevertheless insist subsequently
to perform the contract in entirety. This is established in the
Primel case (Anson, 111). Primel brought an action on a bond
against Cole for payment of 8-10s. Cole pleaded that on the
Primel promise of treating the payment in full and final payment
against the same debt, he paid 5, 2s 2d. The court held the
following promise of part performance to be treated as full
performance was no satisfaction. The creditor has the right to
enforce the full payment. But the Court held that the creditor
could have accepted in full satisfaction gift of a horse, hawk
or robe. The possible explanation is that the utility of the horse,
hawk or robe could be more beneficial to the creditor than the
money in respect of some circumstances. In Vanbergan v. St
Edmunds Properties Ltd [(1933) 2 KB 223] it was stated
that a new element cannot be introduced merely to oblige the
debtor and without any independent benefit to the creditor. It
may be noted that the common law courts continuously went
on deciding on debt cases against the interest of the debtor. A
promise not to sue if the principal amount is paid does not
preclude the creditor to subsequently claim the interest because
the promise does not have any corresponding benefit/interest
to the creditor.
While explaining this principle, Jessel M.R. observed in Couldery
v. Bartrum [(1881)19 Ch.D 394] that a creditor might accept
anything in satisfaction of his debt except a less amount of
money. He might take a horse ..... but ..... he could not take 19s
6d in the pound. The rigidity of the rule that a gratuitous
promise is not enforceable for want of consideration and that a
part payment cannot be accepted in full satisfaction of the debt
led to the equitable principle of promissory estoppel in the
twentieth century in clear terms.
3.5 THIRD PARTYS ROLE IN CONSIDERATION
Two basic principles determine the position of a third party in a
contract, viz.,
(i) Consideration must move from the promisee; and
(ii) Two persons cannot impose a liability on a third party by
their contract.
These two principles must not be confused. The first principle
is based upon the general principle of consideration and the
second upon the privity of contract. But both these principles
speak about the place of interest of the third party in a contractual
framework.
(i) Consideration must move from the promisee:
According to Ansons Law of Contract, (p.77) a party who
wishes to enforce a contract must be able to show that he himself
furnished consideration for the promise of the other party. In
Tweddle v. Atkinson [(1861)1B & S.393] H and W married.
After the marriage X and Y their respective fathers promised
that each would pay a sum of money to H and that H should
have power to sue for the sums. After the deaths of X and Y, H
sued the executors of Y for the money promised. It was held
that no action would lie because no consideration has moved
from H the promisee, and so the promise was gratuitous to him.
Though the consideration must move from the promisee, it need
not necessarily flow to the promisor. As such a guarantor
becomes liable to pay as soon as the bank advances the money
to the principal debtor. Though essence of consideration is
the detriment suffered by the promisee but the promisee may
confer a benefit to the promisor without having suffered any
67
detriment. In Boltan v. Madden [(1873)L.R 9 Q.B.55] the plaintiff
and defendant were subscribers to a charity and entitled to vote
on the disposition of its funds. The plaintiff promised to vote at
one meeting for a person whom the defendant wished to benefit
for a similar reciprocal promise by the defendant. In an action to
enforce defendants promise it was argued that there was no
consideration for the promisee as the plaintiff had incurred
neither trouble nor was he prejudiced. The Court rejected the
plea on the ground that the consideration moved from the
plaintiff simply because he had at the defendants request
conferred benefit at a third party.
In India according to Sec 2(d) consideration may move from the
promisee or any other person at the instance of the promisor.
One may notice the imprint of the principle laid down in Dulton
v. Poole [(1688)2 Lev 210]. In this case, a father was about to
fell timbers on his estate so as to provide a marriage portion for
his daughter. The eldest son at that time assured the amount to
be paid to her. On this promise the father did not proceed with
the cutting of timbers on his estate. On the death of the father,
the estate with timbers descended to the eldest son. But the
eldest son now refused to pay the promised amount to his sister
on the plea that no consideration had moved from her. It was
held in this case that the daughter could maintain an action
because having regard to the near relationship between the
plaintiff (daughter) and the party from whom the consideration
moved (father), the plaintiff might be considered a party to the
consideration. That is to say, a stranger to the consideration
could, by construction of law, be regarded as a party to it, if he
was closely related to the person from whom the consideration
actually proceeded. In Tweddle v. Atkinson, this principle was
overruled. But according to Indian Law, the rule in Dulton v.
Poole is quite evidently covered. At the instance of the promisor
consideration may move from a third party. As such the
`forbearance of the fahter could be justified consideration of
the sons promise to his sister. The principle laid down in Tweddle
v. Atkinson that third party cannot sue on a contract is a
confirmed common law principle in England which was followed
later on in several cases like Dunlop Pneumatic Tyre Co. Ltd v.
Selfridge & Co. [1915 AC 847] and Scruttons Ltd v. Midland
Silicones Ltd [1962 AC 446].
One can of course distinguish Dulton and Twiddle. In Dulton
the felling of timber was to provide marriage portion for the
daughter. As such fathers forbearing to do this was in fact an
injury to the daughter against which the son promised to pay
the amount. In Tweddle the son-in-law did not offer any other
benefit against the promise of the father-in-law. The promise
of the father-in-law was obtained against the promise of the
father. In India, of course, Common Law is not applicable
because of the clear provision of the Contract Act in Sec.2(d).
In Chinmaya v. Ramayya [(1881)4 Mad 137] A by a deed of
gift, made over certain property to her daughter with a direction
that the daughter should pay an annuity to her uncle, As brother.
The daughters refusal to pay after As death on the plea that no
consideration moved from the uncle, was not accepted by the
Court. It was held that consideration indirectly moved from
the brother. Privy Council refused to apply the Common Law in
promises connected with marriage under Muslim Law. In Khwaja
Muhammad v. Husaini Begum [(1890)37 1A 152] the father-in-
law promised to pay the bride Rs.500 for her betel-leaf expenses
(Kharcha-i-pandan) every month in perpetuity from the date of
marriage. She used to live with her husband till 1896 when she
left the husbands family and started living separately in
Muradabad. The payment was stopped. The Privy Council
noted that the betel-box expenses as a promise of personal
expenses of the bride was customary practice amongst
Mohamedan families. The Privy Council affirmed the decision
of the High Court holding that she had a clear right to sue under
the agreement. In Narayani Devi v. Tagore Commercial
Cooperation Ltd [AIR 1973 Cal 401] Calcutta High Court, of
course, made a cautionary remark. It was stated that even
though under the contract Act the definition of consideration is
wider than in English law, yet the Common law principle is
generally applicable in India with effect that only a party to the
contract is entitled to enforce the same. This is in fact more a
concept of privity than that a consideration to be moved
from the promisee.
(ii) Privity of Contract:
Two persons cannot by any contract impose liability upon a
third party. In Dunlop Pneumatic Tyre Co Ltd v. Selfridge
& Co Ltd [(1915)AC 847] the plaintiff sold a number of their
tyres to Dew & Co on terms that Dew & Co would not re-sell
them below certain scheduled prices and that, in the event of a
sale to trade customers, they would extract from the latter a
similar undertaking. Dew & Co sold the tyres to Selfridge &
Co, who, by their contract with Dew, undertook to observe the
restriction and to pay to M/S Dunlop the sum of 5 for each
tyre sold in breach of this agreement. Selfridge infact sold
two tyres to its customers at a lower price. Dunlop brought an
action against Selfridge for recovering two sums of 5 each as
liquidated damages. It was held that there was no privity of
contract between the plaintiff and the defendant. The plaintiff
cannot claim any enforceable right in the absence of any
contractual relation between them.
This principle of privity of contract is still binding. Of course
according to the 'Resale Prices Act 1964' in England, there has
to be compulsory registration by a supplier of goods of any
scheme which imposes resale price maintenance, i.e., fixed or
minimum prices to be charged on the resale of the goods, and
for the examination of the scheme by the Restrictive Practices
Court.
The doctrine of privity means that a third party cannot acquire
rights or be subjected to a liability under a contract to which he
is not a party. A rigid application of the rule may create many
legal and equitable dilemmas. As for example in Shanklin
Pier v. Detel Products Ltd [(1951) 2 KB 854] the plaintiff
employed contractors to paint a pier and instructed them for his
purpose to buy and use paint manufactured by the defendants.
The instruction was given in reliance on the representation made
by the defendants to the plaintiff that the paint would last for at
least seven years. The contractor purchased the paint from the
defendant and used it. In fact, it only remained for a few months.
68
The plaintiff sued for damages and the defendants plea was
absence of privity. In this case the Court applied the logic of
collateral agreement between the plaintiff and the defendant.
Same logic is applied in case of guarantee given by the
manufacturer, hire purchase agreement, agency contract, and
corporate agreements. Similarly in the following situations the
privity of contract is not applied.
(a) Contract relating to land : It was held in Tulk v. Moxhay
[(1848)2 Ph.774) that if a restrictive convenant is attached to a
land by its freehold owner, the convenant would bind all
subsequent owners. In fact, in land contracts, the convenant
attached to the land shall go with the land. No buyer
subsequently could plea that in so far as he is concerned, there
is no privity of contract.
(b) Charter party contracts: In Stratheonia Steamship Co. Ltd
v. Dominian Coal Co. Ltd [(1926) AC 108] the respondents
had a long term time charter-party of a ship. The owners sold
the ship which eventually came in the hand of the appellants.
They did not honour the agreement and took a plea that there
was no privity of contract between them. It was held that the
decision of the Courts in Nova Scotia granting the respondents
an injunction to restrain acts inconsistent with the charter party
should be affirmed. Where a man .... acquired a property from
another, with knowledge of previous contract, lawfully and for
valuable consideration made by him with a third person .... the
acquirer shall not ..... use and employ the property in a manner
not allowable to the giver or seller, Lord Bruce held. But the
principle decided in Stratheonia has a limited application. It
only applies `where there is actual knowledge of the subsequent
purchaser at the time of purchase of the Charters rights.
Charters right is to be ensured only by way of injunction and
not by way of specific performance.
(c) Accrued benefit to third party : Inspite of Lord Dennings
view that privity of contract was only a procedural plea which
could be overcome if the third party joins the promisee as a
party to the action, the House of Lords confirmed the rule that
no stranger to the contract could sue, unless it is qualified by
equity principle. [Beswick v. Beswick (1968) AC 58]. In this
case Peter Beswick, owner of a small business, wishing to retire,
transferred the business to his nephew, who would pay an
annunity of 5 a week to Beswick's widow. After his death the
nephew failed to honour the condition. The widow brought an
action against him in her personal capacity as a beneficiary and
also in her capacity as administrator of her deceased husbands
estate. The House of Lords held that although she was not
entitled to enforce the obligation in her personal capacity since
she was a stranger to the contract, she could, as personal
representative of her husband, obtain specific performance of
the promise. Of course, specific performance, as a remedy, has
limited application. It is allowed only when damages are
inadequate to compensate the loss.
(iv) Trust : The promisee may create a trust of the right either
at the time when he enters into a contract or thereafter, to which
he is entitled in favour of a third party (see 15 Harvard Law
Review, p.767). This right is enforceable in equity. In Re Flarell
[(1883)25 Ch.D 89] partnership articles provided that, in the event
of the death of one of the partners, his widow should be entitled
to the payment of an annuity out of the firms net profits each
year. It was held that the executors of the deceased partner
were trustees for the widow under the contract and that she was
entitled to be paid the promised sum.
(v) Third party insurance : Contract of insurance made for the
benefit of third party is valid if a trust is created. Of course,
this is now enforced under statutory laws.
(vi) Commercial practice : Bankers irrevocable credit
facilitates finance contracts for the sale of goods and under
commercial banking practices are binding. Similarly under
commercial practice, negotiable instrument bind the
promisor to all subsequent holders and holder-in-due
course.
The principle of privity of contract has been severly criticised.
In USA's law of Contract, 'privity of contract' is not relied on as
an important principle though the basic feature of contract that
parties to the contract create laws and obligations for themselves,
is still a valid proposition in an open economy. A rigid
application of this principle may create many misgivings in
rational application of law. As for example, what is the liability
of the manufacturer for his products; what is the responsibility
of a trustee; what legal duty should a mercantile agent perform
and what is his responsibility ? In course of time, we invented
product liability, equitable duty of a trustee or application of
estoppel in merchantile agreements. All these legal principles
are indirect derivation from the privity of contract, some in the
positive way and some in the negative.
According to Anson abolition (of the principles of privity) is
desirable because it is doubtful whether the doctrine serves any
useful function whatsoever. This is a practical solution of the
problem of third parties having interest in a contract, but it does
not negative the basic logic in the law of contract. Contract
cannot be a weapon to affix liability on a third party. To this
extent privity of contract has a decisive role. In case of
conferring right, a third party may be included as a necessary
party in the contract in equity. That will solve the problem of
third parties.
3.6 PAST CONSIDERATION
Another age-old Common law principle on consideration is that
consideration must not be past. Anson explained this principle
thus :
if A saves B from drowning, and B later promises A a reward,
A cannot rely on his action as consideration for Bs promise for
it is past in point of time.
A past consideration does not create any legal relation and as
such, parties are not bound by the promise. It is like a promise
without a consideration. But past consideration must not be
confused with executed consideration. Consideration may be
executory in nature, i.e., it is a promise for a promise. But in
the case of an act for a promise, the consideration has to be
executed. Suppose A promises to draw a picture of Bs wife
for which B promises to pay him a sum of money. It is a promise
69
for a promise. The promise of paying the sum is the consideration
on As promise of drawing the picture.
But suppose A declares a reward for finding his lost dog, one
can accept the promise only by finding the lost dog. As such,
here the consideration has to be executed in order to make the
promise a contract. An executed consideration, therefore, is a
valid consideration. An act done earlier or a forbearance made
on an earlier occasion cannot be turned into a consideration for
a promise made afterwards. There are only three exceptions to
this rule; viz.,
(a) acts done at the instance of the promisor may be made a
supportive consideration for a future promise. As for
example, X requests Y to secure a pardon for him from the
President. Suppose in doing so Y meets certain expenses
upto Rs.10,000/- for the trouble. This is a valid
consideration [See Astley Industrial Trust Ltd. v.
Grimston Electric Tools Ltd. [(1965) 109 SJ 149].
Similarly a journey undertaken by the plaintiff at the request
of the defendant on which defendant promises to pay an
amount, is a valid contract though the consideration is past.
In India sec.25(2) is based on this principle, though it is
shown as a contract valid without consideration.
(b) A time barred debt may validly form consideration of a
promise to pay the debt. In India sec.25(3) provides the
same principle but as if such a promise is without any
consideration.
(c) A negotiable instrument in the form of a bill may be valid if
it is drawn on the basis of an antecedent debt or a
consideration sufficient to support a simple contract. For
example, if A negotiates a cheque to his banker with which
A has an overdraft, the banker becomes a holder for value
of the cheque, as the debt of A to the bank is the
consideration for the instrument.
3.7 PROMISSORY ESTOPPEL
Justice Denning applied this principle in Central London
Property Trust Ltd v. High Trees House Ltd [(1947) KB
130]. The plaintiff company let a block of flats to the defendant
company for a nintynine years term at a rent of 2500 per
year. In 1940, during the war time, the plaintiff found letting
out of the flats very difficult and the plaintiff company agreed
to reduce the rent to 1250 p.a. In 1945 after the war was over,
the situation changed and flats were rented out in full. A receiver
for the debenture holders of the plaintiff company brought an
action claiming full original rent for the future starting from
last two quarters of 1945. Justice Denning held that the action
of the plaintiff should succeed. But the most interesting part
of the judgment lies in his contention that, had the plaintiff
sued for the full rent between 1940 to 1945, they would have
been estopped by their promise from asserting their strict legal
right to demand payment in full. A conventional Common
law court could have applied here the old Primel rule. This
how Justice Denning introduced Promissory estoppel.
Of course Justice Dennings decision attracted much criticism.
In Ansons Law of Contract (pp.114-115) two criticisms are levied
against the principle of promissory estoppel, viz.,
(a) that it violated the rule laid down by the House of Lords in
Jordan v. Money [(1854) HLC 185] which stipulated that
only a representation of existing or past fact, and not one
relating to future conduct, will ground as estoppel.
(b) that the dictum of Denning was inconsistent with the
decision of the House of Lords. Lord Cair described the
principle thus it is the first principle upon which all courts
of Equity proceed, that if parties who have entered into
definite and distinct terms involving certain legal results
- certain penalties or legal forfeiture - after by their own
acts or with their own consent enter upon a course of
negotiation which has the effect of leading one of the
parties to suppose that the strict rights arising under the
contract will not be enforced.
Accordingly, promissory estoppel is to be applied according to
the above two cases, only in representation to existing or past
facts. In order to apply it, the estoppel must be specifically
pleaded between parties who stand together in a contractual or
other similar legal relationship when one of them makes to the
other a promise to waive, suspend or modify his strict legal
rights.
Subsequently in a number of cases estoppel was applied.
Ansons Law of Contract explains five principles (pp.115-121)
for the application of promissory estoppel.
(i) The promise must be clear and unequivocal. No estoppel
can arise if the language of the promise is indefinite or not
precise [See Woodhouse (1972) AC 741]
(ii) It only applies to the modification or discharge of the
existing obligation, and not to the formation of a new
contract.
Lord Denning puts the principle thus:
Seeing that the principle never stands alone as giving a
cause of action in itself, it can never do away with the
necessity of consideration when that is an essential part of
the cause of action. The doctrine of consideration is too
firmly fixed to be overthrown by a side-wind. It is a `shield
and not a sword.
(iii) It must be inequitable for the promisor to go back on his
promise and insist on his strict legal right. In D & C
Builders v. Rees [(1966)2 Q.B. 617] the defendant owed
482 to the plaintiffs, a small firm of builders, in respect
of work done for him. He delayed payment for several
months, and then offered them 300, stating in effect that
if they did not accept this sum they would get nothing. As
the plaintiffs were in desperate financial straits, they
accepted the 300 in full settlement of the debt. They then
sued the defendant for the balance. Lord Denning took the
view that in the situation it was not inequitable for the
plaintiff to go back on their promise; the settlement was
not truely voluntary.
(iv) The promisee must have altered his position in reliance
on the promise made to him [McCathie v. McCathie
(1971) N.Z.L.R. 1126]. It must be shown that the person
70
to whom the representation is made, acted to his detriment
in reliance on it. It means if the promise is allowed to be
revoked or not applied, then the promisee shall be in distinct
disadvantage because the promisee has already been
prejudiced.
(v) Promissory Estoppel only serves to suspend, and not
wholly to extinguish the existing obligation; the promisor
may, on giving due notice, resume the right which he has
waived and revert to the original terms of contract.
Pomeroy in his A Treatise on Equity Jurisprudence (5th Ed;
p.180) explained promissory estoppel thus :
The vital principle [of equitable estoppel] is that he who by his
language or conduct leads another to do what he would not
otherwise have done, shall not subject such person to loss or
injury by disappointing the expectation upon which he acted.
Similarly in Dickerson v. Colgrove [100 US 578] the judge
defined it as a promise which the promisor should reasonably
expect to induce action or forbearance of a definite and
substantial character on the part of the promisee and which does
induce such action or forbearance is binding if injustice can be
avoided only by enforcement of the promise. Equitable
estoppel thus arises from the conduct of the party.
In Kedarnath v. Gorie Mohamed [ILR 14 Cal 64 (1887)] the
defendant signed his name in the subscription book agreeing to
subscribe Rupees hundred towards construction of Howrah
Municipal Town Hall. Based upon those promises the plan was
approved and the contract was given. On his refusal to pay the
plaintiff appellant filed a petition with the Small Causes Court.
The Small causes Court held the promise to be without
consideration, and hence void. On appeal the judge held that
the promise in effect could stand as follows: In consideration
of your agreeing to enter into a contract to collect the money to
pay up for it. It was held to be a good contract with
consideration. The best reason to decide the case perhaps would
be application of promissory estoppel. Since the plaintiff-
appellant undertook the liability to pay for the construction based
on the promise of the subscribers, they are bound to pay for it.
But had the liability not been undertaken in placing the contract
with the contractor, the promise of donation would be rightly
without consideration, and hence void. In Mckeon v. City of
Council Bluffs (206 lowa 556) it was held that estoppel can
never arise unless there has been reliance.
In USA charitable subscription is held binding on public policy
argument in many cases without requiring the showing of
consideration or a detrimental reliance. In Salsbury v.
Northwestern Bell Telephone Co. [(1994) 221 N.W. 609] it
was held that charitable subscriptions often serve the public
interest by making possible projects which otherwise could
never come about ..... However, where a subscription is
unequivocal the pledger should be made to keep his word.
71
4. CASE LAW
Chinnaya v. Venkataramaya, [ILR 4 Mad 137 (1881)]
An old lady, gave as gift certain lands to her daughter (the
defendant in this case). One of the terms of the registered gift
deed was, that, an annuity of Rs.653 should be paid every year
to the plaintiff, who was the old ladys sister. The defendant on
the same day executed an Iqrarnama in favour of the plaintiff,
promising to give effect to the stipulation. The annuity was
however not paid, and the plaintiff sued to recover it.
Here, the only consideration for the defendants promise to pay
the annuity was the gift of certain lands by the old lady to the
defendant. So, the defendant contended that the plaintiff had
furnished no consideration.
It was held that, the failure to keep the promise would deprive
the plaintiff of an amount which she was already receiving,
and it is a legal common parlance that if a promise causes some
loss to the promisee, that is sufficient consideration for the
promise. Thus, the plaintiff had given a consideration, and was
hence entitled to the annuity.
Cowern v. Nield, [1911-13 All ER Rep 425]
A minor was carrying on business as a hay and straw merchant.
He received a cheque from the plaintiff for the supply of clover
and hay. He delivered the clover which was rejected as bad,
and, he failed to deliver the hay. The plaintiffs action for
recovering back the amount of cheque failed. It was held that,
contracts which can be brought within certain categories and
are also for the benefit of the infant can be supported. A trading
contract does not come within any of these categories. The
only contracts of an infant which can be enforced are those
relating to the infants person, as contracts by which he provides
himself with clothes, food or lodging or contracts of marriage,
apprenticeship and service.
Dunlop Pnuematic Tyre Co. Ltd v. Selfridge & Co. Ltd,
[(1915) A.C. 847]
The plaintiffs sold a number of tyres to one D, on the condition
that D will not sell them below the scheduled price. D in turn
sold the tyres to the defendants on the same condition, and
further said that they would have to pay M/s Dunlop 5 for
each tyre sold below the scheduled price. The defendants sold
2 tyres below the price, and the plaintiff filed (this) suit to recover
10 as damages and also asked for an injunction to restrain the
defendants from further breach of agreement.
The main issue was, could Dunlop sue the defendants, though
they had furnished no consideration for the defendants promise.
It was held that, under English Law certain principles are
fundamental, viz : (1) only a person who is a party to the contract
can sue on it; (2) if a person, with whom a contract not under
seal has been made is to be able to enforce it, consideration
must have been given by him to the promisor or to some other
person at the promisors request ; and (3) a principal not named
in the contract may sue upon it if the promisee really contracted
as his agent and not on his own. Here, D was acting on his own,
in his capacity as a principal, he agreed to give the defendants
a discount on his own, and Dunlops were in no way involved in
the contract between D and the defendants. Hence, the plaintiffs
were held not entitled to sue on the contract.
Kedarnath Bhattacharjee v. Gorie Mohammed, [ILR 14 Cal
64(1887)]
A town hall was proposed to be constructed at Howrah, provided
sufficient funds could be generated. The municipality set about
the task by public subscription. The defendant signed his name
in the subscription book promising Rs.100/-. On the faith of
the promised subscriptions, the plaintiff entered into a contract
with a contractor for the purpose of building the hall. The
defendant failed to pay the amount. His main contention was
that there was no consideration for his promise.
He was held liable for the amount. It was held that, the promise
was, In consideration of your agreeing to enter into a contract
to erect, I undertake to supply money for it. Plaintiffs entering
into contract with the contractor was entered into at the desire
of the defendant (the promisor) so as to constitute consideration
u/s.2(d) of the Act.
Lampleigh v. Brathwait, [80 ER 255]
The defendant, having committed a murder, requested the
plaintiff to labour and to do his endeavour to obtain pardon
from the King. The plaintiff did his best to obtain the Kings
pardon, riding and journeying at his own expense. Afterwards
the defendant promised the plaintiff to give 100 and then
refused to pay. He was however held liable. The court observed:
A mere voluntary courtsey will not have consideration to uphold
as assumpsit. But if the courtsey were moved by a request of
the party that gives the promise, it will bind, for the promise,
though it follows, yet it is not naked, but it couples with the suit
before.
Note : Assumpsit is a form of action (now abolished) from
which the law of contracts originated.
M. Ramiah v. Sankaranarayana, [AIR 1958 Ker 246]
Three depositors of a bank refrained from demanding payment
of their deposits, although they had matured and become
payable, as the director of the bank had given them a written
agreement, undertaking personal liability to return the amount
with interest at 6% within 12 months.
This forbearance to withdraw the amount press for its repayment
was held to be sufficient consideration for the agreement within
the meaning of sec.2(d).
Mohori Bibee v. Dharmodas Ghose, [PC(1903)30 IA 114]
The respondent, a minor, had mortgaged his house in favour of
the plaintiff, a money-lender, to secure a loan of Rs.20,000. A
part of this amount was actually advanced to him while
considering the proposed advance, the money lenders attorney
72
received information that the defendant was still a minor.
Subsequently, the minor instituted this suit, stating that he was
under-age when he executed the mortgage, and the same should,
therefore be cancelled.
The plaintiff contended that: (1) as the respondent had
fraudulently misrepresented his age, the mortgage should not
be cancelled; and (2) even if it was cancelled, the respondent
should be compelled to repay the advance paid to him.
The Privy Council granted the cancellation of mortgage under
sec.39 of the Specific Relief Act, 1877. They further held that
restitution of any benefit accruing under a contract, arose only
in case of voidable contracts, and, not to contracts void ab
initio. Hence, the money lender was held not entitled to return
of the advance paid to the minor.
Smith et al v. River Douglas Catchment Board, [(1949)All ER
179]
The defendants had agreed with certain land owers adjoining a
stream, to improve the banks of the stream and to maintain them
in good condition. The land lords on their part paid proportionate
costs. Subsequently, one of the land lords sold his land to the
first plaintiff, who in turn sold it to the second plaintiff. There
was negligence on the part of the Board in maintaining the banks,
which burst and the land was flooded.
Both the plaintiffs were strangers to the agreement with the
Board, but even so the Court of Appeal allowed them to sue the
Board for breach of contract, for the whole arrangement was
for the benefit of the land owners whoever they might be and
not merely the parties to the agreement.
Tweddle v. Atkinson, [(1861),1 B & S. 393]
The plaintiff was to marry the daughter of one G, and in
consideration of this intendend marriage, G and the plaintiffs
father, entered into a written agreement, whereby each one of
them agreed to pay certain sums of money to the plaintiff, before
21-8-1855. This agreement was ratified by the plaintiff and his
wife. As neither G nor his executor had paid the agreed sum,
plaintiff filed the suit to recover the amount. The main issue
was, could a stranger to the consideration of contract sue a party
to the contract?
It was held that, consideration must move from the party entitled
to sue upon the contract. A person cannot be a party to the
contract for the purpose of suing upon it for his own advantage
and not be a party to it for the purpose of being sued. Hence
the action was held not maintainable.
73
5. PROBLEMS
1. Raj had given a promissory note for money his father had
lent him. When sued on the note by his fathers executor
he pleaded that he had just grounds to complain about his
fathers distribution of property among his children; and
that his father, admitting this, had promised that if Raj
stopped complaining he would discharge Raj from his
liability on the promissory note. Discuss the validity of
Rajs contention.
2. Mrs. Menon deserted her husband on 24.1.52 and on
26.4.52, they both signed a maintenance agreement having
the following three clauses : (i)Mrs.Menon will be paid
Rs.500/- pm so long as she continued to lead a chaste life ;
(ii) she would support herself out of this sum and further
indemnify her husband against any debts which may be
incurred by her in future; (iii) she shall not commence/
prosecute her husband under any matrimonial proceedings
(except for dissolution of marriage) so long as he was
regular in his payments, but if failed to pay her the
maintenance regularly she was entitled to pursue any
remedy available to her.
In October 1955 the divorce was made absolute. In this
proceeding she also claimed for maintenance @ Rs.500/-
pm for the period between September 54 (when he stopped
paying) to October 55. The husband disputes the claim on
the ground that there was no consideration for his promise.
Clause (ii) he says is worthless and (iii) unenforceable.
Decide.
3. A the commander of a ship Jalrani promised to pay his
seamen an additional amount of Rs.1000/- each, if they
would do some extra work and see to it that the ship reached
port safely. On reaching ashore, B a seaman filed a suit
against A for the promised sum. Decide.
4. Parties to the contract agreed that the plaintiff surveyors
would plan and supervise some alterations estimated to cost
some Rs.60,000/-, for a fee of Rs.3000/-. Later the
defendant decided to make the alterations more extensive
and the total cost was Rs.2,25,000/-. The plaintiffs
supervised the work and claimed an additional fee (in fact
a scale fee) of Rs.25,000/-. The defendant refused to pay.
Decide.
5. If in the above problem, on the plaintiffs broaching the
matter of additional fee, the defendant had agreed to pay
Rs.15,000/-, and then refused to pay it, would the decision
of the case differ.
6. Akshay had given Sandeep a promissory note for Rs.12,000/-
which he owed to Sandeeps brother. On Sandeeps death,
his wife took possession of the bond as his executrix. She
felt that Akshay had been badly treated, and frequently
stated that she would never enforce the bond, repeating
this particularly when Akshays prospective parents-in-law
expressed concern about his financial position. In reliance
on her statement, Akshay married, and then sought a
declaration that the debt owned by him to Mrs.Sandeep
was now abondoned, and a release from the promissory
note. Mrs. Sandeep resists the declaration. Decide.
7. Karan wanting to take possession of Sunils property plied
him with drinks, and while Sunil was under the influence of
alcohol made him sign the deed of transfer in his favour.
On realising what he has done, Sunil comes to you for
advice.
8. Mrs.Pillai suffers from periodic attacks of insanity. She had
a 32yr.old son Ravi who is a congenital idiot. Ravi sold of
his property worth Rs.1,00,000/- to Surya for Rs.25,000/-
only. On becoming aware of this, Mrs.Pilai filed a suit to
have the sale declared void. Surya resisted the suit on two
grounds :- (1) He was not aware that Ravi was a congenital
idiot; (2) Mrs. Pillai was suffering from an insanity attack
when she filed the suit and so the suit should be dismissed.
Decide.
9. The plaintiffs father entered into a contract of service on
his behalf with the defendant Mr. Kapoor who was a
renowned (stage) director. The plaintiff was a minor at the
time of contract, which provided that he should attend
rehearsals punctually whenever required, and in return he
would be paid Rs.2000/- pm for a period of 2 years.
Originally the agreement was made orally, but later reduced
to writing and signed by plaintiff, his father and the
defendant. The defendant stopped paying the promised
sum after a period of 6 months, and the plaintiff filed a
suit. The defendant contended that as the plaintiff was a
minor, the agreement was void and so unenforceable.
10. In the same fact situation above, would the decision differ
if the plaintiff had attained majority at the time of filing the
suit.
[Note: Specify your Name, Address and I.D. No. while sending your answer papers]
74
1. Avtar Singh, Law of Contract, (1985), Eastern Book Co. Lucknow.
2. Anson, Law of Contract, (1984), English Language Book Society and Oxford University Press, London.
3. Atiyah, P.S., Introduction to Law of Contract, (1986), Claendon Press, Oxford, London.
4. Cheshire and Fifoot, Law of Contracts, (1987), Butterworth, London.
5. Crandall T.D and Whaley D.J., Cases, Problems and Materials on Contracts, (1987), Brown & Company, Boston.
6. Joga Rao, S.V., Cases and Materials on Contract, (1991), NLSIU Publication, Bangalore.
7. Kromman, A.T., Paternalism and the Law of Contract, (1988)92 Yale LJ p.763.
8. Pollock and Mulla, Indian Contract and Specific Relief Act, (1986), J.L. Kapur (ed.), N.M. Tripathi Pvt. Ltd., Bombay.
9. Puri and Ponuswamy, Cases and Materials on Contract, (1974), Eastern Book Company, Lucknow.
10. Summers, R.S., & Hillman, R.A., Contract and related obligations: Theory, Doctrine and Practice, (1987), West Publishing
Co., St.Paul, Minnesotta.
11. Subrahmanyan, E.S., Law of Minors, (1968), Law Book Company, Allahabad.
12. Trietal, G.H., Law of Contract, (1966), Stevensons, London.
13. Venkatesh Iyer, Reprint, Law of Contract, (1987), Asia Law House, Hyderabad.
6 SUPPLEMENTARY READINGS
75
FREE CONSENT
AND PUBLIC POLICY
Master in Business Laws
Law of Contracts
Course No: I
Module No: III
Distance Education Department
National Law School of India University
(Sponsored by the Bar Council of India and Established
by Karnataka Act 22 of 1986)
Nagarbhavi, Bangalore - 560 072
Phone: 3211010 Fax: 3217858
E-mail: mbl@nls.ac.in
76
Materials Prepared By:
1. Mr. S.V. Joga Rao, B.Com., M.L., M.Phil.
2. Prof. N.L. Mitra, M.Com., LL.M., Ph.D.
Materials Checked By:
1. Ms. Sudha Peri, LL.M.
2. Mr. Suprio Dasgupta
Materials Edited By:
1. Dr. P.C. Bedwa, LL.M., Ph.D.
2. Mr. T. Devidas, LL.M.
National Law School of India University
Published by:
Distance Education Department
National Law School of India University,
Post Bag No. 7201
Nagarbhavi, Bangalore - 560 072
77
INSTRUCTIONS
Basic Readings
The materials given in this course are calculated to provide exhaustive basic readings on topics and sub-topics
included in the course. Experts in the area have collected the basic information and thoroughly analysed the same
in topics and sub-topics. Lucid/supportive illustrations and leading cases are also provided. Relevant legislative
provisions are also included. Care has been taken to communicate basic information required for decision making
in problems likely to arise in the course-area. The reader is advised to read atleast three times. In the first reading
information provided are to be selected by making marginal notes using markers. The first reading, therefore,
necessarily has to be very slow and extremely systematic. While so reading the reader has to understand the
implications of those informations. In the second reading the reader has to critically analyse the material supplied
and jot down in a separate note book points stated in the material as well as the critical comments on the same. A
third reading shall be necessary to prepare a Check List so that the check list can be used afterwards for solving
problems like a ready reckoner. (The reader is required to purchase a Bare Act and refer to the relevant sections at
every stage.)
Supplementary Reading
Several supplementary readings are suggested in the materials. It is suggested that the reader should register with
a nearby public library like the British Council Library, the American Library, the Max Muller Bhavan, the National
Library, any University Library where externals are registered for the purpose of library reading, any commercial
library or any other public library run by Government or any private institution. Readers in Metropolitan and other
big cities may have these facilities. It is advised that these basic materials be photocopied, if necessary, and kept
in the course file. Supplementary readings are also required to be read more than once and marginal notes, marking
notes, analytical notes and check lists prepared. Any reader requiring any extra readings not available in his/ her
place may request the Course Coordinator to photocopy the material and send it by post for which charges at the
rate of .50 paise per page for photocopying and the postage charge shall be sent either by M.O. or by Draft in
advance. The Course Coordinator shall take prompt action on receiving the request and the payment.
Case Law
The course material includes some case materials generally based upon decided cases. These cases are to be
studied several times for,
(a) understanding the issues to be decided (b) decisions given on each issue (c) reasoning specified
It is advised that while reading a case the reader should focus first on the facts of the case and make a self analysis
of the facts. Then he/she should refer the check list prepared earlier for appropriate information relating to law and
practice on the facts. Then the student should prepare a list of arguments for and on behalf of the plaintiff/
appellant. Keeping the arguments for the plaintiff/appellant in view of the reader should try to build up counter
arguments on behalf of the defendant/respondent. These exercise can take days. After these exercises are done
one has to prepare the arguments for or against and then decide on the issues. While deciding it may be necessary
often to evolve a guiding principle which also must be clearly spelt out. Subsequently the reader takes up the
decision given in the case by the judge and compare his/her own exercise with the judgment delivered. A few
exercise of this type shall definitely sharpen the logical ability, the analytical skill and the lawyering competence.
Though it is not compulsory, the reader may send his/ her exercises to the Course Coordinator for evaluation. On
receiving such request the Course Coordinator shall get the exercises evaluated by the experts and send the
experts comment to the students. Through these exercises one can build up an effective dialogue with the experts
of the Distance Education Department (DED).
Problems and Responses
After reading the whole module which is divided into several topics and sub-topics the reader has to solve the
problems specified at the end of the module. The module is designed in such a manner that a reader can take about
a weeks time for completing one module in each of the four courses. It is expected that after finishing the module
over a period of a week the student solves these problems from all possible dimensions to the issue. No time limit
is prescribed for solving a problem though it would be ideal if the reader fixes his/her own time limit for solving the
problem - which may be half an hour per problem - and maintain self discipline. While solving the problems the
candidate is advised to use the check list, the notes and the judicial decisions - which he/she has already prepared.
After completing the exercise the student is directed to send the same to Course Coordinator for evaluation.
Though there is no time stipulation for sending these responses a student is required to complete these exercises
before he/she can be given the certificate of completion to appear for final examination.
78
Free Consent & Public Policy
TOPICS
1. Free Consent: Meaning and Dimension ................................................................ 79
2. Coercion ..................................................................................................................... 81
3. Undue Influence ........................................................................................................ 83
4. Fraud ......................................................................................................................... 87
5. Misrepresentation ..................................................................................................... 88
6. Mistake ...................................................................................................................... 90
7. Role of Public Policy in Contracts ......................................................................... 96
8. Void Agreements ....................................................................................................... 101
9. Concluding Remarks ............................................................................................... 102
10. Bare Text of the Relevant Sections of the Act ...................................................... 103
11. Case Law ................................................................................................................... 105
12. Problems .................................................................................................................... 106
13. Supplementary Readings ......................................................................................... 107
79
SUB TOPICS
1.1 Introduction
1.2 Free Consent: scope and ambit
1.3 Consequences of the absence of free consent
1.1 INTRODUCTION
Having examined the nature and significance of contractual
obligations in a commercial or industrial society, rules relating
to the formation of contract and its select essential elements
like consideration and capacity of contracting parties in the
earlier modules, it is proposed to deal with the remaining
essentials namely, 'Free consent' and 'Public policy' in this
module. The objectives of this module are -
a. to examine the significance of 'Free consent' as an essential
ingredient in constituting a valid contract;
b. to examine the scope, ambit and interpretation of various
factors which vitiate free consent in the light of common
law perspectives, statutory principles and judicial decisions
of both English and Indian origin;
c. to critically analyse the statutory remedies;
1. FREE CONSENT: MEANING AND DIMENSION
d. to examine the scope and significance of 'freedom of
contracting parties and public policy notions'; and
e. to analyse the policy and judicial interpretation of statutory
provisions pertaining to 'Void Agreements' enshrined in
Sections 23-30 of the Indian Contract Act, 1872.
1.2 FREE CONSENT: SCOPE AND AMBIT
According to Section 10 of the Indian Contract Act, 1872
(hereinafter 'the Act') 'Free Consent' is an essential ingredient
required to constitute a valid contract. The expression 'consent'
is defined in section 13 which reads: "Two or more persons are
said to consent when they agree upon the same thing in the
same sense". According to Sec. 14 the consent is said to be
free, when it is not caused by-
a. Coercion (S. 15);
b. Undue Influence (S. 16);
c. Fraud (S. 17);
d. Misrepresentation (S. 18); and
e. Mistake (Ss. 20, 21 and 22)
A Flow Chart regarding Consent follows:
FLOW CHART ON CONSENT
Consent Not vitiated by
Coercion Undue Influence Misrepresentation Mistake
(S. 15) (S. 16) (Ss. 20, 21 & 22)
Innocent (S. 18) Fraudulent (S. 17)
of law of fact
Indian Law Foreign Law Private as to nature as to identity of as to subject
(ignorance (ignorance treated right of facts contracting matter of
not an excuse) as mistake of fact) parties contract
Existence Title Identity Price Quality Quantity
With regard to the significance of 'consent' late Lord Hannen in
Raffles v. Wichelhaus [(1913) 3 KB. 564] observed that: "It is
essential to the creation of a contract that both parties should
agree to the same thing in the same sense. Thus if two persons
enter into an apparent contract concerning a particular person
or ship and it turns out that each of them, misled by a similarity
of name, had a different person or ship in his mind, no contract
would exist between them". The expression 'same thing' occurring
in section 13 indicates the whole content of the agreement,
whether it consists wholly or in part, of delivery of material
objects or payment or other executed acts or promises. [Pollock
& Mulla, p. 134]
Mere consent is not enough to constitute a valid contract; it
should be free and voluntary, so that the contracting persons
can subject themselves to the binding obligations that are
created by the contract. Normally, whenever the consent is
vitiated the contract is void; the possible exception is, it would
result in a voidable contract. A voidable contract is an agreement
which is enforceable by law at the option of one party whose
consent is vitiated [Sec. 2(i)]. In other words, in a given
contractual relation if the consent is not free, it is upto the
aggrieved contracting party to decide about the future. If the
party decides in favour of enforcement, the agreement becomes
80
enforceable, thereby resulting in a valid contract; otherwise the
agreement becomes unenforceable.
In the case of other essential elements like consideration, the
statute itself declares that if there is no consideration, an
agreement is void ab initio, with certain exceptions. But in the
case of free consent, the law in its wisdom felt that it should be
left to the aggrieved party to decide, by exercising the right of
choosing either of the options, namely, to enforce the agreement
or to avoid it.
According to English law the foundation of a contract is upon
the 'privity of contract' between the parties. In Cundy v. Lindsay
[(1878) 3 App. C 459] and Bailley's Case [(1898) 1 Ch 110],
the Court held that the absence of a free consent vitiates the
fundamental basis of the contract. Since, through contract,
parties create their own rights and obligations, it is necessary
that the parties to the contract, agree upon the same thing in the
same sense, out of their own volition. Parties must have absolute
freedom to mutually assess their own interests, and, to make
appropriate promises. Such rational appreciation is not merely
vitiated by the incapacity of the parties i.e. on account of the
party being a minor or of unsound mind; it may also be vitiated
by the parties not consenting to the same thing in the same
sense.
1.3ABSENCE OF FREE CONSENT: CONSEQUENCES
Free consent is an essential element of a contract. Therefore, if
there is no free consent there should be no contract. But, in
fact, the law does not provide so. According to Sec. 19, if the
consent is vitiated by coercion, fraud or misrepresentation
perpetrated by one party over the other, the suffering party may
avoid the contract. Such contracts which are vitiated by coercion
etc. are only voidable in nature, and not void. Similarly use of
undue influence makes the contract voidable u/sec. 19(a). But,
according to sec. 20, a bilateral mistake of essential facts relating
to an agreement makes the agreement void. Under sec. 22, a
unilateral mistake does not make the contract voidable, merely
because it was caused by one of the parties to the agreement
being under a mistake of fact. Thus, the consequences of the
absence of free consent is as follows:
(a) In the absence of free consent due to coercion, fraud or
misrepresentation the contract is voidable at the option of
the suffering party (S. 19);
(b) In the absence of free consent due to use of undue influence,
the contract is voidable at the option of the party whose
consent was so induced [S. 19(a)];
(c) In the absence of free consent on account of bilateral
mistake of essential facts or of foreign law (if knowledge
of foreign law is essential), the agreement is void ab initio
(Ss 20, 21)
(d) a unilateral mistake added with some other vitiating factors
may make the contract voidable or void depending upon
the circumstances (S. 22).
Thus it is clear that, absence of free consent due to any one of
the several vitiating factors does not make the contract void ab
initio; it only creates a special right in favour of the party who
has already suffered on account of the compulsion of giving
the consent due to various circumstances as explained in
coercion, undue influence, fraud or misrepresentation. This
apparently seems to be a peculiar logic, because the two
statements free consent is an essential element of contract
and absence of free consent does not vitiate the contract ab
initio seem to be irreconcilable, but it is not so. If, in absence of
free consent, a contract is made void ab initio, the party
influencing the consent will not have any obligation of
performance. This is a situation of double jeopardy. An example
will make it clear. Suppose A has forced B to sell his land to A by
threatening to kidnap Bs son if B does not give his consent,
here Bs consent is vitiated by coercion. Now suppose after the
making of the contract, A comes to know that the land is going
to be acquired by the government, A may refuse to give the
money and take the land if the contract is made void ab initio.
Here, B suffers twice - firstly his consent is forcefully taken, and
secondly, he is not going to get the advantage of the price
stipulated by B for the land in case of evaluation of
compensation. One of the cardinal principles of law is that, the
law has to save parties from double jeopardy. As against Bs
double jeopardy, if the contract is made void ab initio, A can
derive double benefit. Firstly, he has obtained the consent by
force, and secondly, he himself pleading coercion gets out of it.
Law cannot allow this contradictory behaviour of a party and,
that is why in evidence we have the principle of Estoppel (sec.
115 of Indian Evidence Act). A person cannot be allowed to
exercise coercion in order to obtain consent, and then take a
plea that since there was use of coercion, he/she is not obliged
to perform the contract. Therefore, the law has created an
additional right in favour of the party who had already suffered,
to elect, either to abide by the contract or to avoid the contract.
On the other hand it has rigidified the obligation of the party
inflicting the vitiating factor on free consent by saddling him
with the obligation to performing the contract. Thus, the suffering
party has an additional right and the dominating party has an
extraordinary obligation. This makes the contract voidable at
the option of the party suffering from absence of free consent.
In this manner the law equates the position of the parties to the
contract.
In bilateral mistakes however, if the fact is essential, or knowledge
of foreign law is essential, mistake of such fact or foreign law
shall make the agreement void ab initio, i.e., such an agreement
does not attain the status of a contract at any stage.
81
2. COERCION
SUB TOPICS
2.1 Definition
2.2 Distinguished from duress
2.3 Subjective and objective elements in coercion
2.4 Burden of proof
2.5 Ex-territoriality
2.1DEFINITION
Section 15 defines coercion as 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 whatsoever, with the intention of
causing any person to enter into an agreement.
Consent is said to be vitiated by coercion, when it is obtained
by force or pressure exerted by either of the following methods:
a. committing or threatening to commit any act forbidden by
the Indian Penal Code or
b. unlawfully detaining or threatening to detain any property.
This externally manifested act has to be committed with a view
to causing prejudice to any person whatsoever, with an intention
of forcing him to enter into an agreement. .
2.2 DISTINGUISHED FROM DURESS
Duress is the English version of coercion. In Cumming v. Ince.
[(1947) l QB 112] it was decided that duress means and includes
actual or threatened physical violence to, or unlawful constraint
of, the person of the contracting party. In Latter v. Bradell
[(1981) 50 LJQB 448] a housemaid was ordered by her mistress
to submit to a medical examination on a suspicion of pregnancy
which turned out to be unfounded. She cried and protested, but
submitted to the examination. Her claim for damages failed,
because she had consented to the examination. Such a rigid
approach to duress, therefore, creates a situation where a threat
to prosecute the other contracting party for a criminal offence
does not amount to duress. Of course in equity a relief can be
given.
The concept of coercion is much wider than duress. A
comparative analysis of the two is as follows:
a. Coercion may be aimed at any person, even a stranger (this
can be deduced from the words 'to the prejudice of any
person whatsoever' occurring in Sec. 15) and also against
goods, for example, 'unlawful detention'. However,
according to English law, duress must be aimed against the
contracting party or members of his or her family;
b. In the case of coercion, the scope is so wide that it may
proceed from any person meaning thereby even a stranger
to the contract. But English law mandates that it should
proceed from either the contracting party or members of
his or her family.
c. Coercion under Indian law does not require any immediate
violence, whereas for duress under English law it is
necessary to show that the act must be such as to cause
immediate violence.
2.3 SUBJECTIVE AND OBJECTIVE ELEMENTS IN
COERCION
It can thus be inferred from the definition that to constitute
'coercion', there is a requirement of both objective and subjective
elements, namely, externally manifested act (which includes
threat) and the prejudicing of any person thereby to enter into
an agreement. One without the other would not result in
coercion. For example, X threatens to assault Y (objective
element), with a view of causing him to enter into a particular
agreement. The crucial question at this juncture is whether the
externally manifested act which is forbidden by law, did in fact
influence or prejudice Ys mind (subjective element) or not? If
Y is not prejudiced, the mere fact that he entered into an
agreement, does not entitle him to exercise any option
subsequently. Similarly in a given fact situation, a particular
act may prejudice a persons mind but unless and until the act
is either prohibited by the Indian Penal Code [IPC] or amounts
to unlawful detention of property, or threat to detain property,
it does not amount to coercion.
It is quite pertinent here to refer to Ranganayakamma v. Alwar
Chetty under [(1889) 13 Mad 214] threat of preventing the body
from being removed for cremation. In this case, a young girl
aged 13 years was forced to give her consent under threat of
preventing the body from being removed for cremation to the
adoption of a boy to her husband who had just then died. In a
suit to set aside the adoption, the court had no hesitation in
holding that the consent was not a free consent but one induced
by coercion, within the meaning of Sec. 15 since any person
who obstructs a dead body from being removed would be guilty
of an offence under Sec. 297 of IPC.
In another landmark case Chikkam Ammiraju and others v.
Chikkam Seshamma and others [(1917) 41 Mad 33] a release
deed was obtained by a person from his wife and son under a
threat of committing suicide. In a suit to set aside the transaction,
the Court was divided as to whether the threat amounted to
coercion, since suicide was not an offence punishable by the
IPC. On Letters Patent Appeal two of the three judges held that
though suicide was not punishable under the IPC, yet it was
one forbidden by IPC since an attempt to commit suicide was
punishable. The reason why suicide was left without any
punishment was obvious for the dead could not be punished
and therefore, the consent obtained by such a threat to commit
suicide was one obtained by coercion.
2.4 BURDEN OF PROOF
In a plea of coercion, the same adversorial procedure of burden
of proof is followed in so far as the objective part of coercion is
82
concerned. Anyone going to the court and asking the court to
believe that coercion has been perpetrated is required to prove
the act of coercion, i.e., the act which is forbidden by IPC, or the
unlawful detention of property or the threat of such detention
of property. But in so far as the subjective part of coercion is
concerned, the burden of proof is negative and it swings back
to the defendant, who has to prove - (a) that such an act was not
intended for the purpose of obtaining consent; and (b) such an
act in fact did not influence the other party to give consent.
Here the quantum of time difference between the act of coercion
and of the actual consent given has an inverse relation to the
probity of subjective force, i.e., if the interval of time is short
or proximate there is a high probity of subjective force; on the
other hand if the interval of time is long and the distance between
force and consent is more, the probity of subjective force is
low. Performance of such a contract after the alleged coercive
act is lifted out of taint makes both the parties bound by the
contract. It means that the option of avoiding the contract must
be exercised as soon as, or very closely after, the coercive act
is done. If more and more time is allowed to elapse without the
plaintiff seeking redressal, especially after the coercive force is
lifted, it would make his case weak.
2.5 EX-TERRITORIALITY
Generally speaking, the Indian Contract Act applies to all
contracting parties provided the place of contract is in India,
or, where the place of contract is not in India, the parties agree
to be governed by Indian law. In view of the explanation given
to sec. 15 and the illustration given thereunder, it is clear that
sec. 15 has a global reach. The explanation provides that it is
immaterial whether the IPC is or is not in force in the place
where the coercion is employed. It means that the plaintiff has
only to prove that the act of coercion complained of is an act
prohibited by IPC. In order to substantiate his claim he does
not have to show that at the place of coercion the IPC was in
force. Illustration given to the section is as follows:
A on board an English ship on the high seas causes B to enter
into an agreement by an act amounting to criminal intimidation
under S. 506, IPC. Here, the high sea is beyond the territory
of India and so Indian law is not applicable there, and, since it
is an English ship English law is the law applicable between
the parties. In England, there is no criminal intimidation
equivalent to what is covered by Sec. 506 IPC. A afterwards
sues B at Calcutta for breach of contract and B pleads coercion,
and thereby seeks to avoid the contract. The decision is that A
had employed coercion and so B can avoid the contract. This
shows that if the parties are in India, or the property relating to
the contract is in India, an Indian court can admit a suit pleading
absence of free consent due to coercion, even though the place
of coercion is much beyond the normal jurisdiction of the lndian
courts. Sec. 15 therefore has an extra-territorial application.
83
3. UNDUE INFLUENCE
SUB TOPICS
3.1 Definition
3.2 Undue influence vis-a-vis coercion
3.3 Essential elements
(a) Position of domination
(b) Fiduciary relations
(c) Contracts with persons having impaired mental
capacity
3.4 Burden of Proof
(a) General
(b) For Pardanashin Woman
3.1 DEFINITION
The doctrine of undue influence under the Common Law was
evolved by the courts in England for granting protection against
transactions procured by the exercise of insidious forms of
influence, either spiritual or temporal. In the words of Sir
Frederic Pollock, undue influence means "any influence brought
to bear upon a person entering into an agreement, or consenting
to a disposal of property which, having regard to the age and
capacity of the party, the nature of the transaction, and all the
circumstances of the case, appears to have been such as to
preclude the exercise of free and deliberate judgement"
[Venkatesh Iyer, p. 201].
Lindley L.J. in his judgment in Allcard v. Skinner [(1887) 36 Ch.
D. 145] has stated in the following terms the object of the doctrine
of undue influence. "To protect people from being forced, tricked
or misled in any way by others into parting with their property is
one of the most legitimate object of all laws and the equitable
doctrine of undue influence has grown out of and been developed
by the necessity of grappling with insidious forms of spiritual
tyranny and with the infinite varieties of fraud. This is not a
limitation placed on the action of the donor, it is a fetter placed
on the conscience of the recipient of the gift and one which
arises out of public policy and fair play".
Section 16 defines Undue Influence as:
(1) A contract is said to be induced by undue influence where
the relations subsisting between the parties are such that
one of the parties is in a position to dominate the will of the
other and uses that position to obtain an unfair advantage
over the other.
(2) In particular and without prejudice to the generality of the
foregoing principle, a person is deemed to be in a position
to dominate the will of another
(a) where he holds a real or apparent authority over the
other, or where he stands in a fiduciary relation to the
other; or
(b) where he makes a contract with a person whose
mental capacity is temporarily or permanently
affected by reason of age, illness or mental or bodily
distress; or
(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 the
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.
According to clause (1) of Section 16, if the following two
conditions are fulfilled, the contract is said to be vitiated by
undue influence:
(a) where the subsisting relations are such that one party is in
a position to dominate the will of the other; and
(b) such person uses that position to obtain an unfair advantage
over the other.
3.2 UNDUE INFLUENCE VIS-A-VIS COERCION
According to Anson, the term undue influence has sometimes
been used by the courts to describe the equitable doctrine of
coercion. The distinction that makes undue influence different
from coercion remains in the character of force used. In case of
coercion, as we have already seen, one party uses a force
forbidden by IPC or that party confines or threatens to confine
property, in order to put an external pressure by force on the
mind of the other party to come to terms. In England of course,
the property element is not taken into consideration in duress,
i.e. confining of property or threat to confine property does not
constitute duress in the legal sense. Of course, Williams v. Bailey
[1866 L.R.I H.L. 200] was one case where the mortgage of a
property was set aside by the court as being made under duress.
Here, the defendants son forged his (fathers) signature on
several promissory notes in order to collect money from the
Bank. The banker made it clear to the defendant that the Bank
had the power to prosecute his son for forgery. In order to protect
his son from prosecution the defendant had to execute the
mortgage. This case, decided in equity, extended relief because
the contract was entered into because of one partys threat to
prosecute the other on a criminal offence. By and large, both in
India and England a criminal force, applied or threatened for
purpose of obtaining consent, constitutes coercion.
In undue influence, on the other hand, the force that is used by
one party is not a patent one (i.e., an obvious one) as used in
coercion, but it is a latent one (i.e. a hidden one) which emanates
out of the comparative position of the parties, one being in a
dominant position as compared to the other. The force used
here is more directly psychological and moral, rather than
external and physical. But the end result in both the cases is the
same, i.e., in both the cases one party dominates the will of the
other. In coercion it is done by a physical force, whereas in
undue influence it is done by a psychological force possible
because of the physical relation between the parties. In coercion
84
a physical force is required to be converted into a psychological
force which is termed as the subjective force in coercion. In
undue influence, however, that psychological force is directly
applicable. An example will make it clear. In the poem Do
Beegha Jameen [Two Beeghas of land] Tagore has given a
classical example of undue influence. According to the story,
the feudal Lord of the village (Babu) asks his tenant (Upen) to
sell his land to him (i.e. Babu) stating that, I shall purchase
that land. This makes the intention of the landlord very clear.
Here, the relation between the parties was such that one could
dominate the will of the other. But a modern landlord in Bombay
can engage a few mercenaries or goondas, to compel the tenant
to leave the house. Here, the psychological force is a derivative
one, which is patently created by an external force. This is
coercion. In the earlier example the psychological force is latent
in the relation between the parties.
Similarly, in coercion, undue influence has to occur. As has
already been said, unless the psychological force is created by
a physical force there is no coercion; mere use of objective
force is not enough. Once that psychic force is present the
position between the parties becomes such that the person
causing coercion is in a position to dominate the will of the
other. Therefore, in every coercion there is undue influence,
but the converse is not true, because in undue influence, there
is never any necessity for the use of criminal force; the
psychological and moral force is enough to constitute undue
influence.
To sum up, in coercion there is a patent force and in undue
influence there is latent force. In coercion, a party by virtue of
use of force becomes dominant over the other, whereas in undue
influence the relation between the parties is such that one can
automatically dominate the will of the other. In coercion, an
unconscionable gain is not essential, but in undue influence, an
unconscionable gain is necessary to shift the burden of proof.
But, the remedy available against the use of either force is based
upon the same philosophy, viz., of law being against the use of
any kind of force in the realm of contract.
3.3 ESSENTIAL ELEMENTS
According to Anson, the two situations in which an undue
influence may occur are:
(1) where the party charged to have exercised undue influence
in the sense of domination over the other party; or
(2) where there is an abuse of the duty of care and confidence
which may be imposed on one party towards another as a
result of a particular relationship which emerges from the
special circumstances of their association.
Anson further suggested that in the former, evidence of express
influence must be adduced by the parties seeking to impeach
the transaction, whereas, in the latter, undue influence is
presumed by the law in the absence of evidence to the contrary
[Allcard v. Skinner (1887) 37ChD 145].
(a) Position of domination
When can we say that in a given relationship one person is in a
position to dominate the will of the other? Normally, it is difficult
to say or generalise unless it is proved factually. However, taking
into consideration the object of 'undue influence and the need
for protecting innocent persons, the English Common Law
Courts have evolved a presumption to that effect in the following
relationships. The list is merely illustrative in nature:
a. parent and child
b. guardian and ward
c. trustee and beneficiary
d. solicitor and client
e. doctor and patient
f. spiritual advisor and disciple
Apart from the above mentioned relationships, there may be
infinite varieties of human relationships in which one person is
in a position to dominate the will of another [Rama Pattar v.
Manikkam (1934) 58 Mad 454]. As rightly pointed out by the
Privy Council in Poosathurai v. Kannappa Chettiar, AIR 1920
PC 65 "it is a mistake to treat undue influence as having been
established by a proof of the relations having been such that
the one naturally relied upon the other for advice and the other
was in a position to dominate the will of the first. Upto that
point influence has been made out; such influence may be
used wisely, judiciously and helpfully. But, both under the law
of India and the law of England, more than mere influence must
be proved so as to render the influence, in the language of the
law, "undue.
That is the reason why, unless and until it is shown that the
influence is exercised to obtain unfair advantage, such influence
does not amount to 'undue influence.
The leading case on this vitiating factor is that of Allcard v.
Skinner [(1887) 36 Ch.D. 145]. In 1862, the plaintiff Ms. Allcard
joined a sisterhood of which the defendant was the religious
superior. The plaintiff in course of time made several gifts to
the sisterhood and transferred to it the bulk of her properties. In
1879, the plaintiff left the sisterhood and in 1885 she repudiated
these transactions of gift and brought the suit. The court was of
the opinion that, the relationship between the defendant and
the plaintiff was such as to raise the presumption of undue
influence, but held that, in view of the plaintiff's conduct
subsequent to 1879 when she left the sisterhood down to 1885,
taking into account the period of time that had elapsed and also
the fact that during all this interval, she had independent and
disinterested advice, her conduct must be construed as an
election to affirm the gifts made by her. This case is an authority
on two points, namely:
(i) that a contract induced by undue influence is only voidable
and therefore could be affirmed expressly or by conduct.
(ii) that the party in such cases should seek to avoid the
transaction at the earliest possible point of time and could
succeed in doing so only if the parties could be restored to
their original position.
According to clause (ii) of sec. 16, in addition to the principle
enshrined under clause (i), a person is deemed to be in a position
to dominate the will of another
85
(a) if he holds real or apparent authority; or
(b) if he stands in a fiduciary relation to the other; or
(c) 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.
Undoubtedly, a person in authority would be able to dominate
the will of the other. For example, persons like income-tax
officers, police officials and advocates etc. belong to this
category of persons of real authority. This kind of authority
may either be conferred by a statute or by a contract. Apparent
authority means show of authority, which in reality does not
exist.
(b) Fiduciary relations
Whenever any relation is founded on trust, faith or confidence,
such a relation is known as fiduciary relation. While examining
the parameters of fiduciary relationship in a given fact situation
Scrutton L.J. in Moody v. Cox & Hatt [(1917) 2 Ch. 71] went
on record by saying:
"Generally when you have made a legal contract and
correctly expressed it in writing, and it has not been
obtained by any misstatement of facts, innocent or
fraudulent, the contract stands, and the fact that one party
or the other knows facts about which he says nothing,
which made the contract an unprofitable one to the other
party, is of no legal consequence. But there are certain
relations and certain contracts in which a higher duty is
imposed upon the parties and they must not only tell the
truth, but they must tell the whole truth so far as it is
material, and they must not only not misrepresent by
words, they must not misrepresent by silence if they
know of something that is material. Some of those cases
depend on the relationship between the parties, and,
generally speaking, are cases where the relation is such
that there is confidence reposed by one party and
influence exercised by the other. In that class of relation
of parties you may get the duty, first of all, that the party
who has the influence must not make a contract with the
party over whom he has influence unless he can satisfy
the Court that the contract is an advantageous one to the
other party".
This principle applies to every case where influence is acquired
and abused, where confidence is reposed and betrayed. Thus in
Tate v. Williamson [(1866) L.R. 2 Ch. App. 55], an Oxford
undergraduate, T, aged twenty-three, was being pressed to pay
his college debts, which amounted to some 1000. Being
estranged from his father, he asked his great-uncle to advise
him how he should find the means to pay. The great-uncle was
unable to advise in person owing to ill health, but he deputed
the defendant, his nephew, to do so. Conversations took place
between T and the defendant in which T expressed the desire
to sell part of his estate, upon which the defendant offered to
buy it for 7000. Before the sale was completed, the defendant
obtained a report from a surveyor on the property, and this
valued it at 20000. The defendant did not disclose this fact to
T but proceeded with the purchase. Excessive drinking led to
T's death one year later.
It was held that the purchase must be set aside. The defendant,
having been asked to give advice, stood in a confidential
relationship to T, and this prevented him from becoming a
purchaser of the property, without the fullest communication
of all material information which he had obtained as to its value.
(c) Contracts with persons having impaired mental capacity
Similarly, under sub-clause (c) of Section 16, a person is deemed
to be in a position to dominate the will of the other, if such
person enters into a contractual relation with another whose
mental capacity is temporarily or permanently affected by reason
of age, illness or mental or bodily distress. In fact, this clause
takes within its fold a wide range of circumstances wherein the
presumption plays a significant role. For example, a poor Hindu
widow, who was in great need of money to establish her right
to maintenance, was persuaded by a money lender to agree to
pay 100% rate of interest. The court did not hesitate to declare
this as an instance of undue influence exerted upon a person in
distress. In fact this clause takes within its fold the principle of
unconscionable bargain.
3.4BURDEN OF PROOF
(a) General
Clause (3) of Section 16 speaks about 'burden of proof'.
According to it, where a person who is in a position to dominate
the will of another, enters into a contract with him, and the
transaction appears, on the face of it or on the evidence adduced,
to be unconscionable the burden of proving that such contract
was not induced by undue influence shall lie upon the person
who is in a position to dominate the will of the other.
While examining the scope and ambit of burden of proof the
Madras High Court in P. Saraswati Ammal v. Lakshmi Ammal
alias Lakshmi Kantham [AIR 1978 Mad. 361] observed that:
"The primary ground on which the plea of undue
influence is founded is based on relationship. It is
axiomatic that mere proof of relationship, however near
it may be, is not sufficient for a court to assume that one
relation was in a position to dominate the will of the
other. Such bonds of kinship which are universally felt
should not be mistaken as equivalent to saying that one
kinsman could unduly influence the other in the circuit
of such bondage. Even if any advice is given it may be
influence but not undue influence. The important and
salient feature which ought to be established on materials
pleaded and acts established is that the bargain is tainted
by undue influence, and it is so unconscionable that it
could reasonably be said that the person sought to obtain
unfair advantage for himself and so as to cause injury to
the person relying upon his authority or aid. It is only
after such particulars are made available and a reasonable
proof thereof has been given, the onus probandi would
shift to the so called person of domination. Until then
the burden is on the complainant to establish it so.
86
According to Anson, in case of a special relationship emerging
out of the special circumstances attending the association of
parties, the burden of proof lies on the defendant. Lord Selborne
held in Earl of Aylesford v. Morris [1873 L.R. 8 Ch. 484 at
p.490] that "........ raise from the circumstances and conditions
of the parties contracting - weakness of one side, usury on the
other, or extortion or advantage taken of that weakness - a
presumption of fraud. Fraud here does not mean deceit or
circumvention; it means an unconscientious use of the power
arising out of these circumstances and conditions; and when
the relative position of the parties is such as prima facie to raise
this presumption, the transaction cannot stand unless the person
claiming the benefit of it is able to repel the presumption by
contrary evidence, proving it to have been in point of fact, fair,
just and reasonable.
(b) Pardanashin Woman
A Pardanashin Woman is one who is considered to be
secluded from ordinary social intercourse'. There is no statutory
definition to this effect. She enjoys a cloak of legal protection.
If any other person enters into a contract with a pardanashin
woman, the presumption of undue influence arises. In Kalibaksh
Singh v. Ram Gopal Singh [(1913) 41 I A. 23] the Privy Council
observed that, "In the first place, the lady was a pardanashin
lady, and the law throws around her a special cloak of protection.
It demands that the burden of proof shall in such a case rest, not
with those who attack, but those who found upon the deed, and
the proof must go so far as to show affirmatively and
conclusively that the deed was not only executed by, but was
explained to, and was really understood by, the grantor. In such
cases it must also, of course, be established that the deed was
not signed under duress, but from free and independent will of
the grantor".
Summing up, it can be stated that in the case of pardanashin
woman, there is a prima facie presumption of undue influence.
At this juncture one particular fact needs to be clarified. Namely,
sub-clause (c) of clause (iii) of Section 16 speaks only about
presumption about "persons position to dominate the will of
the other" in the light of select relationships, but in the case of
'pardanashin woman the presumption, though not statutory in
nature would deal with undue influence itself.
Justice Subba Rao in Kharbuja Kuer v. Jangbahadur Rai (AIR
1963 SC 1203), held that, "The burden shall always rest upon
the person who seeks to sustain a transaction entered into with
a paradanshin lady to establish that the said document was
executed by her after clearly understanding the nature of the
transaction. It should be established that it was not her physical
act but also her mental act. The burden can be discharged not
only by proving that the document was explained to her and
that she understood it but also by other evidence direct and
circumstantial".
The protection afforded to pardanashin ladies can be extended
to other ladies of similar class who though not technically
pardanashin are similarly placed in that they are illiterate and
sometimes old and sick and have lack of understanding and
appreciation of the transaction without independent advice and
are helpless and thus exposed to the danger of enmeshment
into unfair deals. The emphasis should be on the factual
understanding of the transaction entered into and not the
disability presumed in the case of pardanashin ladies on the
ground of mere status. The protection given to the pardanashin
extends to illiterate rustic village woman [Pollock & Mulla, p.
171].
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4. FRAUD
SUB-TOPICS
4.1 Definition and essential elements
4.2 Constituent elements of fraud
4.1 DEFINITION AND ESSENTIAL ELEMENTS
The Writ of deceit of the law of torts applied in a contractual
situation which ultimately results into a fraud, which gives a
party the right to demand and recover damages.
In English law fraud was defined in a landmark decision of
the House of Lords in Derry v. Peek [(1889) 14 App. Cases
337] which runs as follows:
Fraud is proved when it is shown that a false representation has
been made
1. knowingly, or
2. without belief in its truth, or
3. recklessly careless whether it be true or false.
In this case the established facts were: A Companys prospectus
contained a representation that the company had been authorised
by a special Act of Parliament to run trams by steam or
mechanical power. The authority to use steam was, in fact,
subject to the approval of the Board of Trade, but no mention
was made of this. The Board refused consent and consequently
the company was wound up. The plaintiff, having bought some
shares, sued the directors for fraud but they were held not liable
in view of their honest belief.
Section 17 of the Contract Act defines fraud. The analysis of
Section 17 reveal the following essential ingredients:
a. there should be a suggestion as to a fact;
b. the fact suggested should not be true;
c. the suggestion should have been made by a person who
does not believe it to be true; and
d. the suggestion should be made with intent either to deceive
or to induce the other party to enter into the contract.
4.2 CONSTITUENT ELEMENTS OF FRAUD
Thus Indian law very much resembles the British law of deceit
which is generally based upon the three basic principles:
(i) making a false statement knowingly, that the statement
made is not true which amounts to suggestio falsi. In Davis
v. London Prudence and Marine Insurance Co. [(1878) 8
ch. D. 469], it was held that a statement which is believed
to be true when made, and which is subsequently discovered
to be false by the party making the statement, will be
considered to be fraudulent, if the mistake is not
communicated to the other person before he acted on it.
(ii) The representation must be made with an intention to
deceive the other party, i.e. with an intention of obtaining
wrongful gain from or to inflict wrongful loss on another. In
Paul Hacel v. Walter [(1832) 3 B and A.D. 114], a
representation was made by the defendant that he could
accept the bill, knowing fully well that in fact he had no
such authority. The bill being dishonoured at maturity
would make the defendant liable to compensate the loss of
an endorsee who had given value for the bill on the strength
of the defendants representation.
(iii) Though mere suppression of a fact is not a fraud, but where
an oral statement is warranted, a suppression would indicate
a falsehood the knowledge of which is with the defendant.
Such a suppression also constitutes fraud. A suppresio veri
in such a case amounts to a suggestio falsi if not an allegatio
falsi.
Silence is not fraud
Under the common law system there is no general duty imposed
on one party to a contract, to apprise the other of facts unknown
to him and which might affect his inclination to enter into the
contract (Anson, 227). This principle is generally known as
caveat emptor. In Keats v. Lord Cadogan [(1851) 10 C.B 591],
the plaintiff sued the defendant demanding damages on account
of fraud because the defendant was aware while letting his house
that the plaintiff would want to occupy it immediately and that
the house was in a ruinous condition and therefore unfit for
occupation. According to Jervis, C.J., mere silence does not
constitute misrepresentation. Of course in some cases there may
be a duty of disclosure. As for example, if the parties to the
contract are so related that there is a duty of utmost good faith
[uberrimae fidei] like family relations, doctor and patient,
advocate and client, and so on, parties are bound to disclose
what they think to be of material importance for taking a decision
on a contract.
Explanation to sec. 17 of the Contract Act puts forth the Indian
position clearly. It states that mere silence as to facts likely to
affect the willingness of a person to enter into a contract is not
fraud unless the circumstances of a case are such that regard
being had to them, it is the duty of the person keeping silent to
speak, or unless his silence is in itself equivalent to speech, as
already suggested earlier in suppressio veri, suggestio falsi.
Misrepresentation to induce the contract
In order to establish fraud it must be shown that the
misrepresentation had in fact induced the other party to conclude
the contract. Lord Blackburn had said that "if it is proved that
the defendants with a view to induce the plaintiff to enter into a
contract made a statement to the plaintiff of such a nature as
would be likely to induce a person to enter into a contract, and
it is proved that the plaintiff did enter into a contract, it is a fair
inference of fact that he was induced to do so by the statement.
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5. MISREPRESENTATION
Misrepresentation in Common Law
In English Common Law negligent misrepresentation made by
a party also entitles the other party to rescind the contract as in
the case of fraud. After passing of the Misrepresentation Act of
1967, a party suffering from negligent misrepresentation may
now claim damages [Hadley Byrnes Case (1964) A.C. 465].
In this case the House of Lords extended liability for damages
to negligent misstatement and held that duty of care could exist
where there was a special relationship between the persons
making the statement and the person to whom it was made.
Innocent misrepresentation on the other hand could not be
pleaded as a defence or be made a ground of rescission in
Common Law. Of course the rigour of this Common Law
principle was softened by the application of equity and allowing
the party suffering from innocent misrepresentation to rescind
the contract. The following are the four principles of general
rule on misrepresentation in Common Law.
(i) Misrepresentation as to contractual terms: If the
misrepresentation relates to a term of contract which is not
a condition the injured party can only claim damages but
cannot rescind the contract. In case the contractual term is
a condition misrepresentation may empower the injured
party to rescind the contract.
(ii) Mistake: An innocent misrepresentation induces the other
party to the contract to commit a mistake. If such a mistake
happens to be related to an essential term or condition of
the contract the agreement is void, so that either party can,
on returning whatever gaoms he got under the contract
recover back had given.
(iii) Contracts uberrimae fidae: In contracts of insurance etc.
innocent misrepresentation or non disclosure are good
grounds of rescission, under Common Law.
(iv) Limited duty of disclosure: Where there is a limited duty
of disclosure failure to disclose is a good defence, and
rescission is allowed.
In fact the common law principle of contractual
misrepresentation giving rise to rescission, is a product of
equitable doctrine. As a normal rule rescission must be
communicated to the other party but where a seller of goods
has a right to avoid the contract for fraud or misrepresentation
and he sufficiently exercises his election at once on discovery
of the fraud or misrepresentation by taking all possible steps to
regain the goods a formal notice may not be insisted upon. In
Car and Universal Finance Co. Ltd. v. Caldwell [(1961) 1 QB
525], the defendant was fraudulently induced to sell a motor
car to a purchaser in return for a cheque. When the cheque was
dishonoured the defendant immediately informed the police and
the automobile association. The purchaser deliberately
absconded and could not be traced. He subsequently sold the
car to the plaintiff who bought it in good faith. The Court of
Appeal held that the defendant had effectively rescinded the
contract, though he could not communicate the notice of
rescission to the purchaser. The title to the car had vested in the
defendant on rescission and so the plaintiff had no claim to the
vehicle.
Indian law on Misrepresentation
Section 18 of the Contract Act defines Misrepresentation. It
means and includes:
a. When a person positively asserts that a fact is true when
his information does not warrant it to be so, though he
believes it to be true;
b. Any breach of duty which brings an advantage to the person
committing it by misleading the other to his prejudice.
Sometimes this is also called as constructive fraud.
c. 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.
It is now pertinent to note the distinction between fraud and
misrepresentation.
a. Basically fraud requires an intention to deceive, whereas
misrepresentation may be innocent.
b. Fraud in addition to rendering the contract voidable, is a
cause of action in tort for damages. Simple
misrepresentation is not a tort but under section 75 of the
Contract Act, a person who rightfully rescinds a contract
is entitled to compensation for any damage which he has
sustained through the non-fulfilment of the contract."
c. Lastly, a person complaining of a misrepresentation can be
met with the defence that he had, the means of discovering
the truth with ordinary diligence", but excepting in case of
fraud by silence, it does not lie in the mouth of the person
committing fraud to say that his victim was too easily
deceived or had the means of discovering the truth "Fools
have to be protected against knaves" [Venkatesh Iyer, p.
227].
Remedies
Before we take up the examination of the most significant of
the vitiating factors, namely, mistake, it is desirable to learn
about the consequences of such contract wherein the consent is
vitiated by coercion, undue influence, fraud or
misrepresentation. In this regard section 19 provides that, when
consent to an agreement is caused by coercion, fraud or
misrepresentation, the agreement is a contract voidable at the
option of the party whose consent was so caused (section 19A
specifically deals with undue influence). However, a fraud or
misrepresentation which is not the direct cause of the consent
given by the other party would not render a contract voidable.
Similarly, if such consent was caused by misrepresentation or
by silence which is fraudulent within the meaning of section
17, the contract nevertheless is not voidable, if the party whose
consent was so caused had the means of discovering the truth
with ordinary diligence. Section 19 also provides that, a party
89
to a contract, whose consent was caused by fraud or
misrepresentation, may, if he thinks fit insist that the contract
shall be performed, and that he shall be put in the position in
which he would have been if the representations made had been
true. Thus, basically, section 19 confers the right of rescission
on the party whose consent is vitiated. However, the right of
rescission in such cases is always subject to section 64 of the
Contract Act which recognises the concept of restitution.
According to section 64, when a person at whose option a
contract is voidable rescinds it, the other party thereto need not
perform any promise therein contained in which he is promisor.
The party rescinding a voidable contract shall, if he has received
any benefit thereunder from another party to such contract,
restore such benefit, so far as may be, to the person from whom
it was received. At the same time, S. 75 recognises a right to
claim compensation on the part of the person rescinding the
contract, provided he rightfully rescinds it.
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6. MISTAKE
SUB-TOPICS:
6.1 Mistake in Common Law
6.2 Mistake in Indian Law
6.3 Mistake of both the parties
6.4 Mistake of fact and law
6.5 Mistake of essential fact
(i) Nature and content of the promise
(ii) Identity of the parties
(iii) Mistake as to subject matter.
6.1 MISTAKE IN COMMON LAW
Unlike other vitiating factors of consent like coercion, undue
influence, fraud and misrepresentation, mistake attacks the very
root of the contract. In the other vitiating factors the vitiating
element is external either in the form of force, status or
intentional or non-intentional misrepresentation by one party
over the other. But mistake relates to internalities of the contract.
Therefore, the very foundation of privity of contract is
questioned. In Bell v. Lever Bros Ltd. [(1932) A.C. 161], the
respondent entered into two agreements with the appellants,
the first one being a service contract by which appellant Bell &
Snelling were appointed to the Board of the Niger Co., a
subsidiary of Lever Bros. for a period of 5 years at a salary of
8000 and 6000 respectively. The second agreement was a
compensation contract by which Lever Bros. promised to pay
a compensation of 30,000 and 20,000 respectively in the
event of the respondents been asked to retire before the expiry
of the service period. While in service Bell and Snelling secretly
entered on their own account into speculative transactions in
Cocoa, a course of conduct which would have given the Lever
Bros. the right to dismiss them without paying compensation.
It was in ignorance of this fact that Lever Bros had entered into
the compensation contract and paid the sum therein promised.
They now sought rescission of the contract and recovery of the
money on the ground that it had been paid under mistake of
fact. While delivering his judgement Lord Atkin observed: "If
mistake operates at all, it operates so as to negate or in some
case to nullify consent". Thus in Common Law mistake either
negatives the consent or nullifies it. In the first it negatives the
consent because there is no real consensus between the parties
and therefore, there is no basis for the contract. In the second, it
nullifies the consent because of an error in consent on account
of mistake in expression relating to the terms of contract. Of
course in both the cases the agreement is void.
In Lever Bros. Ltd., the majority decision of the House of Lords
posed some apparently contradicting and confusing
propositions. Before we go into that let us examine the case
from the trial stage. The facts of the case as examined by the
jury would reveal that Bell and Snelling did not have in mind
their breaches of duty while they entered into the compensation
agreement nor had the Lever Bros. contemplated that they had
the right to terminate the contract of service of the appellant
without paying compensation. The jury observed that there was
no fraud on the part of the appellants. Therefore the agreement
of compensation was a nullity from the beginning due to the
mistake and belief of both the parties. The Court of Appeal
upheld the contention that the agreement was void ab-initio.
The House of Lords reversed the decision holding by majority
that the contract was valid and binding.
The first proposition coming out of this decision is that there is
no such doctrine of mistake rendering a contract void ab initio.
Lord Denning explained this principle with more clarity in Solle
v. Butcher [(1951) K.B. 671)]. According to him "once a contract
has been made, i.e., once the parties, whatever their inmost states
of mind, have to all outward appearances agreed with sufficient
certainty in the same terms on the same subject matter, then the
contract is good unless and until it is set saide for failure of
some condition on which the existence of the contract depends,
or for fraud, or on all such equitable ground. Neither party can
rely upon his own mistake to say that it was a nullity from the
beginning, no matter that it was a matter which to his mind was
fundamental, and no matter that the other party knew that he
was under a mistake, a fortiori, if the other party did not know
of the mistake but shared it". The second proposition is that the
agreement is void in law only if some term can be implied in
both offer and acceptance which prevents the contract from
coming into operation. According to Anson this is a fiction.
But as Lord Atkin pointed out it takes us far in the enquiry to
establish whether a contract contains such a term. Though there
can be no test to be laid down to determine whether a situation
would thus arise, Anson marshalled the fact situation into four
categories where such a position may arise, preventing the
contract from coming into operation. Lord Atkin perhaps
covered these issues in nullity of contract.
(a) mistake as to existence of the subject matter of the contract;
(b) mistake as to title,
(c) mistake as to the quality of the thing contracted for; and
(d) a false and fundamental assumption going to the roof of
the contract.
(a) Mistake as to the existence of the subject matter:
In Lever Bros Lord Atkin observed: "the agreement of A and B
to purchase a specific article is void if in fact the article had
perished before the date of sale. In this case, though the parties
in fact agreed about the subject matter, yet a consent to transfer
or to take delivery of something not in existence is deemed
useless; the consent is nullified. It is not difficult to see that
such non-existence of the subject matter is a total failure of a
consideration.
(b) Mistake as to title:
According to Lord Atkin "Corresponding to mistake as to the
existence of the subject matter is mistake as to title in cases
where unknown to the parties, the buyer is already the owner
91
of that which the seller purports to sell to him. Suppose A agrees
to take from B a lease of land of which, contrary to the belief of
both parties at the time of contract, A is already tenant-in-tail,
the agreement is void for absence of title with the seller. An
agreement on a mistaken belief of the title of the seller is a
valid contract and the seller is liable to pay damages for not
having the title; it is only where the buyer agrees to purchase
his own property there can be no warranty and the agreement is
a nullity.
(c) Mistake as to the quality of the thing:
This type of mistake has much more complexity. Such a mistake
generally does not affect the contract unless the mistake is of
both the parties and as to some quality which "makes the thing
without the quality essentially different from the thing as it was
believed to be". As for example, F buys from K a car which
both believe to be a 1948 model but actually it is 1939 model
and very much less valuable. There is no mistake at common
law as held in Oscar Chess Ltd. v. Williams [(1957) 1 W.L.R.
370]. Similarly, if A agrees to buy from B '100 bales of Calcutta
Kapok, Sree brand', both the parties believe that this particular
brand is pure Kapok consisting of Sree cotton. On a subsequent
discovery that the Kapok contains an admixture of bush cotton
and is commercially inferior, the contract cannot be avoided.
[Harison and Jones Ltd v. Bunten and Landcaster Ltd. [(1953)
l Q.B. 646].
(d) False and Fundamental Assumption
Where in the contract both the parties entered into the agreement
on false fundamental assumptions going to the root of the
contract the contract may be void. Lord Atkin termed such type
of avoidance of as a nullity. In Sheikh Bros v. Ochsner [(1957)
A.C. 136], the appellant contracted with the respondent to grant
him a licence to cut, process and manufacture all sisal grown
on a particular estate in Kenya of which they were the lessee.
In return the respondent deposited a certain sum of money, and
undertook to deliver each month to the appellants 50 tonnes of
sisal fibre, manufactured by him. The estate was in fact not
capable of producing such requirement. It was held that the
agreement was void on the false fundamental assumptions.
6.2 MISTAKE IN INDIAN LAW
Indian Law on mistake is different from the Common law.
According to Sec. 20 of the Indian Contract Act mistake has
been defined as mistake of both the parties to an agreement on
a fact essential to the agreement : This mistake makes the
agreement void. Thus to be a mistake in Indian Law,
(i) it has to be mistake of both the parties,
(ii) it must be mistake of fact, and
(iii the fact must be essential and not incidental or subsidiary.
6.3 MISTAKE OF BOTH THE PARTIES
In order to make the contract void ab initio both the parties
must commit the mistake. As for example in Griffith v. Brymer
[(1903) 19 T.L.R. 434] an agreement for hire of a room overlooking
the route of Edward VIIs coronation procession was held void
because both the parties did not know the cancellation of the
procession. In India all mistakes to be covered under Sec. 20 to
make the agreement a nullity is required to be bipartite. A single
partys mistake cannot suffice.
Mistake of One Party: Whereas in England one partys mistake
can also make the agreement void ab initio subject to the
explanation of mistake as given by Lord Denning noted earlier,
unilateral mistake in India can result in a nullity under Sec. 22
of the Contract Act which stipulates that a contract is not
voidable merely because it was caused by one of the parties to
it being under a mistake as to a matter of fact. It means that if
mistake is compounded by some other vitiating factors unilateral
mistake can also become a ground for nullity. The position may
be intricate in the absence of any Indian law on the issue; It is
difficult to predict the attitude of Indian judiciary on this matter.
Take for example in Cundy v. Lindsay [(1873) 3 A. C. 459] one
Blenkarn by imitating the signature of a reputable firm called
Blenkiron & Co., induced Lindsay to supply him goods on
credit, which he afterwards sold to Cundy, an innocent purchaser
for value consideration. In a suit by Lindsay against Cundy for
recovery of the goods, the Court of Appeal held that as Lindsay
never intended to contract with Blenkarn, there was no contract
between them and even an innocent buyer of the goods from
Blenkarn did not get a good title and must return them to
Lindsay. The English court in this case relied on the principle
consensus ad idem, and therefore, mistake of Lindsay as to the
identity of the party with whom he was entering into the contract
vitiates the very foundation of the agreement and therefore the
agreement is a nullity. If there is a nullity of the agreement, a
party can take the plea of its own mistake. In Indian situation
perhaps the court has to read Sec. 22 with Sec. 17 or 18 and
make it as a compounding vitiating factor in which case the
court may make the agreement a nullity. In that event the position
of Cundy would be very interesting in India according to Indian
Law. He is a bonafide purchaser for valued consideration
deriving the possession of the goods from a merchant. As such,
with Secs. 2, 17 and 18 of the Contract Act the Indian court
may read Sec. 27 and 29 of the Sale of Goods Act as well. In
that case Cundy obtaining the possession of goods in a sale
transactions completed before the nullity of the basic agreement
between Lindsay and Blenkarn was declared by the Court will
have valid and continuing title. Therefore, Lindsay will not be
able to get back the materials from Cundy. Unless such a case
came up before the highest judiciary in India it is difficult to
predict all consequences arising out of compounding unilateral
mistakes. Another interesting case on impersonation is Philips
v. Brooks [(1919) 2 K.B. 243]. A man, North, called in person
at a jewellers shop and chose some articles of jewellery. On
some of the articles he made payment by a cheque signing as
Sir G.B. a person of credit. Thereupon the jeweller allowed
him to take away a valuable ring for which he promised to pay
soon. North thereafter pledged that ring to Brooks. In a suit for
recovery of the ring the court held that Brooks a pawn broker,
had a good title to the ring, because the contract between the
92
jeweller and North was good until the jeweller disaffirmed it.
Here in this case the judge applied the principle of fraud and
not the principle of unilateral mistake as to the identity of the
party contracted with. According to the court the impersonation
was made not at the stage of making the contract but only at the
stage of delivery of goods. The fraud did not compel the jeweller
to enter into the contract because at the stage of contracting,
the misrepresentation was not made. The jeweller was ready to
sell the goods to any person, unlike in Cundy v. Lindsay where
the misrepresentation started at the very beginning of the
agreement thus vitiating the very foundation of the agreement.
Therefore, in a compounding unilateral mistake the court has to
critically look into the fact situation and the stage at which the
mistake is committed. The Court has also to look into the role of
such mistake in the overall framework of the agreement. In every
fraud and misrepresentation there is a mistake on the part of the
suffering party. Therefore that does not automatically bring
fraud or misrepresentation under mistake.
6.4 MISTAKE OF FACT AND LAW
Mistake of the parties must relate to mistake of fact and not
mistake of law. Whereas mistake of fact is excusable, ignorance
of law is no excuse [Ignoratio juris non excusit]. According to
Sec. 21 of the Contract Act a contract is not voidable because it
is caused by mistake as to any law in force in India. As for
example, A and B make a contract grounded on the erroneous
belief that a particular debt is barred by Indian Law of limitation;
the contract is not void or voidable. Mistakes which relate to
the existence of a subject matter, title of goods, quality of the
thing contracted for, terms of contract and identity of the party
are mistakes of facts.
But often it is difficult to understand and distinguish the mistake
of fact from mistake of law. As for example, a debt barred by
limitation is apparently shown as a mistake of fact just as a bad
debt. But since the bad debt is due to application of law it is
considered as mistake of law. Whether a person is a minor or
not may be apparently a question of fact but since minority is
determined and protected by law the issue on minority is often
treated as matter of law.
Mistake of Law
It is already pointed out that a mistake relating to law is not a
mistake. There can be two questions involved - the first, what
is a mistake of law and the second, can the question of law be a
mixed question of law and fact?
According to Sec. 21, mistake of law of our country is
considered as mistake of law whereas mistake of foreign law
i.e. law of any foreign country is a mistake of fact. Mistake of
International law in India is considered as mistake of fact
because unless specifically adopted, international law does not
govern the relation of nationals. Of course there are countries
where international law is considered as superior law of the
land and hence mistake relating to that is mistake of law. But
the whole question on mistake of law or fact is not that simple.
On several issues, the line of demarcation between mistake of
law and fact is very thin. As for example, in the case of liquidation
of a bank the liability of the bank to pay off depends upon
whether the bank holds the fund as the agent for collection or
as a banker. This question is both of fact as well as of law. If the
agreement between the parties is clear on the issue the status of
the bank becomes a matter of fact. Often the relationship between
the banker and the customer determines their legal relation. In
such situations the matter is both a matter of fact as well as a
matter of law.
6.5 MISTAKE OF ESSENTIAL FACT
Mistake must relate to the essential and not an incidental or
subsidiary fact. Broadly speaking the following facts are
considered to be essential in every agreement:
(i) nature and content of the promise itself;
(ii) identity of the contracting parties; and
(iii) identity and nature of the subject matter.
(i) Nature and content of the promise
Normally, it is expected that the agreement reflects the intention
of the parties. However, the possibilities of gaps cannot be ruled
out. The decision of the Court of Appeal in Hartog v. Colin
and Shields [(1939) 3 All. E.R. 566] has appropriately
illustrated this point. In this case, the defendants contracted to
sell to the plaintiff 3000 Argentine hare skins, but by a mistake
they offered the goods at so much per pound instead of so much
per piece. The price per piece was roughly one-third that of a
pound. The negotiations preceding the agreement took place
on the basis of price per piece and that was also the usual practice
of the trade. The buyers sued for the goods. Singleton L.J.
observed that it was a mistake on the part of the defendants
which caused the offer to go forward in that way, and I am
satisfied that anyone with any knowledge of the trade must have
realised that there was a mistake. The offer was wrongly
expressed and the defendants by their evidence, and by the
correspondence, have satisfied me that the plaintiff could not
have reasonably supposed that the offer contained the offerors
real intention.
The Calcutta High Court in New Delhi Rubber Works Pvt. Ltd.
v. Oriental Fire & General Insurance Co. Ltd., [(1969) 1 Comp.
L. J. 153 (Cal)] followed the same principle. The facts in this
case were as follows: A policy of insurance, which had expired,
covered risks arising out of fire, riot and strike. The Company
sent a renewal form to the assured showing the premium for
the above risks. The assurance sent a lesser amount sufficient
to cover the fire risk only. The company issued a policy in the
usual terms covering the risks arising out of fire, riot and strike.
The factory was destroyed by fire due to riot. The company
contended that as the policy purported to cover the risks of riot
and strike also, it was void for mistake.
The court held that the defence of mutual mistake can be raised
even where the document had become redundant by reason of
the occurrence of the loss and there was nothing left to be
rectified, for otherwise the assured would in effect be allowed
to take advantage of a mistake, which if pointed out, would
have been rectified at the proper time.
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Defence of non est factum
The plea of non est factum (that is not my deed) was an ancient
common law defence to actions on specialities, permitted at a
time when illiteracy was frequent enough to demand special
protection. Not withstanding execution, the executant could
plead that the deed as executed was not his deed in the sense
that it did not represent his intention and was not what he had
in mind to do that in truth he did not consent to what he had
done. In modern times this plea has been extended to cases
other than illiteracy, as justification of this plea has been replaced
by want of consent as a justification. The intention of the
mistaken party became the crucial factor, not the means by which
the result was brought about. While for a long time the plea
was permitted only where the mistake related to the nature of
the document and not to its contents, the distinction is now
rejected. No matter what the document in question be;
negligence or carelessness on the part of the executant excludes
defence of non est factum.
In Gallie v. Lee, [(1969) 2 Ch 17] a leading case in this area, the
plaintiff Mrs. Gallic a widow of 78 years of age and issueless
decided to assign by way of lease her house to her nephew
Walter Parkin. The latter had an impecunious friend Lee. One
day Lee asked Mrs. Gallie to sign a document alleging that it
was a deed of gift assigning the lease to her nephew but which
in fact was a deed of sale to Lee. Mrs. Gallie did not read the
document as she had broken her glasses and signed it. Lee
mortgaged the house subsequently to Anglia Building Society
and used the money to pay off his own debts.
While responding to the defence of non est factum, Lord
Denning M.R. went on record by observing:
Whenever a man of full age and understanding who can read
and write, signs a document which is put before him for
signature ..... a document which it is apparent on the face of it
is intended to have legal consequences, then if he does not take
the trouble to read it but signs as it is, relying on the word of
another as to the character, contents or effect he cannot be heard
to say that it is not his document.
Lord Denning also rejected the distinction drawn between the
nature of a document and its contents as irrational and held that
a mistake as to the contents of the document may be no less
fundamental than one relating to the nature or character of a
contract.
(ii) Mistake as to Identity of contracting parties
In our ordinary buying and selling contracts, the question as to
who the supplier is or who pays for it is immaterial, provided
the supply is effected and payment made. But when the goods
are sold on credit, the identity of the buyer assumes importance.
In a credit sale, the seller parts with his goods only when he has
satisfied himself about the buyers honesty and financial
capacity to pay for the goods. The identity of the buyer assumes
particular importance where the rights of the innocent third
parties are also likely to be affected. For example, a person
may give a fraudulent name belonging to a person who is known
to be credit worthy and receive goods on credit under a contract.
Then he may sell the goods to an innocent third party who
purchases them bonafide. The seller after realising his mistake
as to the identity of the buyer, may try to recover either the
goods or the price from the third party. If the contract with the
impersonator is void, the innocent third party could not get any
title to the goods; but if it is voidable the third party could get a
good title to the goods. And the contract being voidable or void
depends on the identity of the buyer. Thus, the importance of
the 'identity of the contracting party' even when both the parties
to the contract are face to face cannot be overstated [1990
C.U.L.R., p. 33].
In view of the fact that Indian decisions are scanty in this regard,
select English judgments have been considered for analysis.
Hardman v. Booth (1863) 1 H & C 803
In this case, the plaintiffs meaning to deal with Thomas Gandell
& Sons, went to their office and took an order from a person
who represented himself to be a partner in the firm. He told the
plaintiffs that the goods should be sent in the name of Edward
Gandell & Sons. He received the goods, carried them away
and sold them to the defendant, a bonafide buyer. The plaintiffs
sued the defendant to recover their goods.
Pollock C.B. while explaining the principle observed that:
"There are some cases in which it is very clear that there
is no contract at all; and the present case seems to be
one of those cases. It is argued that the contract was
made personally with the particular individual who made
the communication, it is very true that the words were
uttered by and to him; but what they imported was a
contract with Gandell & Co., the facts being that he was
not a member of the firm, and had no authority to act as
their agent, and Gandell & Co, therefore, were not the
buyers; and consequently, at no time were there two
consenting minds drawn together to the same
agreement".
Phillips v. Brooks (1919) 2 ICB 243
In this case, a man, called North, entered the plaintiff shop and
selected some pearls and some rings worth 3000. He produced
a cheque book and wrote out a cheque for the amount. In signing
it he said "you see who I am. I am Sir George Bullough". The
plaintiff after referring to a directory and ascertaining that Sir
George Bullough did reside at the mentioned address, let the
defendant have a ring. He promised to come for the other articles
after the cheque was cleared. Before the fraud was discovered
he pledged the ring with the defendants who advanced money
bonafide, and without notice. The plaintiff sued the defendants
for the ring or its value.
On these it was held by Horridge J., that although the plaintiff
believed the person to whom he was handing the ring was Sir
George Bullough, he in fact had contracted to sell and deliver it
to the person who had come into his shop.
His intention was to sell to the person present, identified by
sight and hearing. The contract, therefore was not void on the
ground of mistake, but only voidable on the ground of fraud,
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and therefore the defendants had acquired a good title to the
ring.
This decision created an impression that there could be no
operative mistake as to identity of the contracting party in
contracts inter praesentes because when two parties contract
with each other face to face, the proper inference would normally
be that each one of them intended to contract with the other and
not with some one else [1990, CULR, p 33].
However, Prof. A.L. Goodhart [57 LQR, p 228] has questioned
the basic tenet of this decision, in the following words:
"Did the shop keeper believe that he was entering into a
contract with Sir George Bullough and did North know
this? If both answers are in the affirmative then it is
submitted that there was no contract. If a blind man
makes an offer to A, who is present, in the mistaken
belief that he is B, can A, who is aware of the mistake,
accept the offer?.... The law must have lost all touch
with reality if it holds that under such circumstances
there is a contract. Mere presence by itself cannot have
so remarkable an effect".
Ingram v. Little (1960) 3 All ER 332
In answer to an advertisement of a car being for sale, a swindler
called on two sisters who along with a third person were joint
owners of the car, and agreed with one of the sisters, E who
negotiated on behalf of the owners, to purchase the car for
717. On her categorically refusing to accept a cheque in
payment, he tried to convince her that he was a reputable person
and said that he was Mr. P.G.M. Hutchinson. While the
discussion was going on, the other sister went to the local post
office and returned to say that she had checked the name and
address in the telephone directory. They thereupon decided to
accept the cheque, on which the swindler wrote the name and
address of Hutchinson, and the owners gave the car to him.
The cheque was dishonored and the man, who was not Mr.
P.G.M. Hutchinson, disappeared. In an action by the owners to
recover the car or its value from a bonafide purchaser to whom
the swindler had sold it, within a few days of obtaining it, the
court held that the defendant was liable. In the opinion of the
court the decision must depend upon the intention of the ladies.
The question was with whom did they intend to contract, with
the man present in their drawing room or with real Hutchinson?
Did the identity of Hutchinson or the physical presence of the
man in the room preponderate? Can it be said that the prima
facie predominance of the physical presence of the false
Hutchinson identified by sight and hearing was over borne by
the identity of the real Hutchinson on the facts of the present
case? In answer to these questions the court said that there could
be no doubt that the offer which the plaintiffs made was one
made solely to, and one which was capable of being accepted
only by, the honest Hutchinson. So far as the rogue was
concerned there was no offer made to him and consequently
there could be no contract with him. His right to the car was no
more than that of a thief or a finder and he could not convey a
good title to the defendant.
Lewis v. Averay [1971] 3 All ER 907
Lewis a young man was a post graduate student of chemistry.
He had a car to sell. A man described in the judgment as "rogue"
came along and introduced himself as Richard Green, a famous
film actor. He tested and liked the car and offered a cheque.
The plaintiff was reluctant to give him the car till the cheque
was cleared, but the defendant managed to persuade him
otherwise. As a last resort, he demanded proof of identity. The
rogue produced a special pass of admission to a film studio
which showed his photograph and the official stamp. This
convinced the plaintiff and he allowed the car to be taken away
against the cheque. The rogue lost no time in selling off the car
to an innocent buyer, the defendant in this case. The worthless
cheque came back and the plaintiff sued the defendant to recover
his car.
Lord Denning M.R. held that: "For instance, in 'Ingram v. Little',
the majority of the Court suggested that the difference between
Phillips v. Brooks and Ingram v. Little was that in Phillips v.
Brooks, the contract of sale was concluded before the rogue
made the fraudulent misrepresentation, whereas in Ingram v.
Little the rogue made the fraudulent misrepresentation before
the contract was concluded. My own view is that in each case
the property in the goods did not pass until the seller let the
rogue have the goods. Again it has been suggested that a mistake
as to the identity of a person is one thing; and a mistake as to
his attributes is another. A mistakes as to identity it is said avoids
a contract, whereas a mistake as to attributes does not. But this
is a distinction without a difference. A man's very name is one
of his attributes. It is also a key to his identity. If then, he gives
a false name, is it a mistake as to his identity? or a mistake as to
his attributes? These fine distinctions do no good to the law....
As I listened to the arguments in this case, I felt it wrong that an
innocent purchaser (who knew nothing of what passed between
the seller and the rogue) should have his title depend on such
refinements. After all he has acted with complete circumspection
and in entire good faith; whereas it was the seller who let the
rogue have the goods and thus enabled him to commit the fraud.
I do not therefore accept the theory that a mistake as to identity
renders a contract void".
Thus, one would infer inconsistency as to judicial interpretation
with regard to 'mistake as to identity of contracting parties'.
(iii) Mistake as to subject matter
Similarly, mistake as to the subject matter also needs to be
examined as it would throw light on the presence of consensus
ad idem as to the subject matter in question. This kind of mistake
takes within its fold the following aspects:
(a) Different subject matters in mind:
If the parties to the agreement have different subject matters in
their mind while contracting, the agreement deserves to be
declared as void, for want of consensus ad idem.
For instance in Raffles v. Wichelhaus [(1864) 2 H & C. 906] the
defendant bought of the plaintiff a quantity of Surat Cotton "to
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arrive ex Peerless from Bombay". Two ships with the name
Peerless sailed from Bombay, one in October, which the defendant
had in mind and the other in December which the plaintiff had in
mind. On the ground of mistake as to subject matter, the court
held that there was no consensus ad idem.
(b) Existence of subject matter:
Mistake as to the existence of subject matter might prove fatal
to the creation of a valid contract. In Conturiev v. Hastie [(1856)
10 ER 1065], the contract was to purchase Indian corn described
as having been shipped from Salomica on board a chartered
ship to England. But a fortnight before the contract, the cargo
had become damaged owing to heat and had to be discharged
at an intermediate port and sold at the best price available.
Neither of the parties were aware of this fact at the time of the
contract. The court held that the contract was vitiated by mistake.
(c) Quality
Mistake as to quality of thing contracted for, raises much more
difficult questions. In Re Taylor [(1948) 11 Mod L.R. 257], it
has been suggested that distinction should be drawn between
mistake as to substance on one hand and mistake as to quality
on the other. A mistake of the former type would avoid the
contract whereas the mistake of the latter type would not. In
Kennedy v. Panama New Zealand and Australian Royal Mail
Co. Ltd., [(1867) L.R. 2 Q.B. 580], the plaintiff tool shares in a
further issue of capital by the defendant company, relying on a
statement in the prospectus that the defendant hand a contract
with the New Zealand Govt. for the carriage of mail. As a matter
of fact, the contract of the company was with an agent of the
New Zealand Govt. which the company generally believed to
be valid. Later on, after the agent had entered into the contract
with the company, the New Zealand Govt. refused to ratify it.
As a result the value of the shares fell greatly, and the plaintiff
filed a suit for rescission of the contract. The court held that the
contract was valid, as the plaintiff had got the very shares which
he had bargained for, and as his mistake did not affect the
substance of the whole transaction, the contract could not be
avoided. Similarly in Leaf v. International Gallaries [(1950) 2
K.B. 86] E bought from F a picture which both of them believed
to have been painted by Constable. Several years later, when E
tried to sell the picture he found that it was not painted by
Constable at all. The mistake though fundamental did not result
in avoidance of contract.
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SUB TOPICS
7.1 Introductory note
7.2 Application of public policy principles to contracts
(a) Forbidden by law
(b) Defeating the provisions of law
(c) Fraudulent
(d) Injurious to person and property
(e) Immoral
(f) Public policy of the State
7.3 Agreements void on account of public policy
(a) In restraint on marriage
(b) In restraint on trade
(c) Restraining legal proceedings
(d) Wagering agreements
7.1 INTRODUCTORY NOTE
The law of contract gives an opportunity of creating new rights
and obligations to every individual. Such rights and obligations
ex contractu create rights and obligating in personam. Contract
therefore creates a legal infrastructure for a capitalist and
mercantile society. In a capitalist framework each individual
has absolute freedom to design his or her rights and obligations
vis-a-vis other persons in the society, simply through the legal
instrument of contract. Thus contract subserves the principle
of private interest maximization. Generally speaking the
question of public policy cannot operate in the sphere of private
interests. The law of contract has to essentially operate within
the constitutional framework of a country, and hence the private
interest can not conflict with that higher constitutional public
interest. A few examples may not be out of place here. No
contract can be made between parties, with a view to obstructing
the discharge of the State functions, either Executive,
Legislative, or Judicial. A contract to opt out of the State
jurisdiction of the country is against public policy. Therefore,
parties to a contract can not prescribe that they shall be governed
by the English law, instead of the Indian law. Any private
contract, defacing any part of the constitutional regime is per
se void. Similarly, there cannot be a contract with unlawful
consideration, or for a criminal purpose. Public laws are always
considered to be the higher laws vis-a-vis the contract laws. As
such, while interpreting any contract, it has to be so interpreted,
that no part of the contract infringes on any public law, viz.
constitutional law, criminal law, or administrative law.
7.2 APPLICATION OF PUBLIC POLICY
TO CONTRACTS
It is evident that contract serves private interests. But it is the
responsibility of the state to see that while serving the private
interest through contracts, it does not conflict directly or
indirectly with any other private or public interests. It means
7. ROLE OF PUBLIC POLICY IN CONTRACTS
that, while individuals are free to create rights and obligations
in between themselves, it is always necessary for the state to
protect such new rights and duties of individuals, so as not to
affect the existing rights and duties towards the society or the
social interest. When an individual crosses that boundary, and
interferes with the rights of a third party or the society, such
agreements are specifically made void. Some of these public
interest policies, which invalidate any private agreement,
making them unlawful, are incorporated in Sec 23 of the
Contract Act. According to it, the consideration or object of an
agreement is lawful unless (a) it is forbidden by any law or (b)
is of such nature that, if permitted, it would defeat the provision
of any law or (c) is fraudulent or (d) involves injury to the
person or property of another or (e) the courts regard it as
immoral or opposed to public policy.
In each of these cases the consideration or object of an
agreement is said to be unlawful. Every agreement of which
the object or consideration is unlawful, is void.
At this stage it is proper to examine the meaning and scope of
illegal and void agreements. It is necessary to bear in mind that
in Sec. 23, the expressions like, unlawful or forbidden by law
etc. have been used. According to Anson, the subject of illegality
is one of great complexity and the effects of illegality are by no
means uniform. The reason for this is not hard to find. The
extent of illegality is not the same in all cases. Illegal objects
may range from those which are tainted with gross moral
turpitude e.g., murder, to those where the harm caused is
relatively small. It is not surprising, therefore, that there are
gradations in the degree of enthusiasm with which the judges
are prepared to assist a person who has an illegal object in view
or is a party to an illegal transaction. Attempts have been made
to distinguish between illegal agreement and void agreements.
In the former case, it is said that the law will refuse to aid in any
way a person who bases his cause of action upon such an
agreement. In the latter case, the law simply says that the
agreement will not have any legal effect. Undoubtedly some
agreements can be thus classified, but it is both impractical and
impossible to apply this classification to the whole subject.
Moreover, confusion is created by the fact that the judges have
on many occasions treated the terms as interchangeable. It seems
better to use the single word illegality, to cover the multitude of
instances where the law, either because of public policy or as a
result of an express prohibition, denies to one or both of the
parties the rights to which he would otherwise be entitled.
Let us now examine the interpretation of each clause of section
23 in the light of judicial decisions.
(a) Forbidden by law: According to this clause, the consideration
or object of an agreement becomes unlawful when it is forbidden
by law. Such unlawful agreements are void. For example, in
Bhikanbhai v. Hiralal [(1900) 24 Bom 622], the plaintiff was a
lessee of certain tolls under the Bombay Tolls Act, 1875. One of
the conditions of the lease was that lessee should not sublet
97
the tolls to any other person without the permission of the
collector. A of Rs. 200/- was payable for a breach of condition.
The plaintiff contracted with the defendant to sublet the toll to
him without obtaining the necessary permission. The question
was whether the agreement to sub-lease was void. The court
while negating such plea observed that, the object of statute
was not to forbid such transactions but only to regulate. As
such the transaction may be void as against the collector, but
between the parties it stands.
(b) Defeating the provisions of any law: In some cases the
enforcement of a particular agreement though not apparently
or directly forbidden by law, but would, if permitted defeat the
provisions of some law. For example, in Ram Sewak v. Ram
[AIR 1962 All 177] the agreement between the partners of a
firm to conceal income in certain respects so as to evade income-
tax has been held to be unlawful.
(c) Fraudulent: In a given agreement whenever an element of
fraud or intention to deceive creeps in, it would become a void
agreement. For example, A being an agent for a landowner,
agrees for money, without the knowledge of his principal to
obtain for B, a lease of land belonging to his principal. The
agreement between A and B is void, as it implies a fraud by
concealment, perpetuated by A on his principal.
(d) Injurious to person or property: If the object of an
agreement involves injury to a person or property, per se the
agreement becomes unlawful and thereby void. For example,
in Kanklal v. Pambayan (AIR 1927 Mad. 531) a bond to pay an
exorbitantly high rate of interest, in case the borrower left the
lender's service, has been held to be void.
(e) Immoral: While explaining the scope of the expression
'immoral' in Gherulal v. Mahadeodas (AIR 1959 SC 781) Justice
Subba Rao observed that: "The case law both in England and
India confines the operation of the doctrine to sexual immorality.
To cite only some instances, settlements in consideration of
concubinage, contracts of sale or hire of things to be used in
brothel or by a prostitute for purposes incidental to her
profession, agreements to pay money for future illicit
cohabitations, promises in regard to marriage for consideration
or contracts facilitating divorce are held to be void on the ground
that the object is immoral.
(f) Public Policy: According to this clause, whenever the object
of an agreement is opposed to public policy, it becomes a void
agreement. The crucial task of a judge in this regard is to
interpret what is public policy. In the words of Justice Subba
Rao in Gherulal's case.
"The doctrine of public policy may be summarised thus: public
policy or the policy of the law is an illusive concept, it has been
described as an 'untrustworthy guide', variable quality, 'untruly
horse', etc; the primary duty of a court of law is to enforce a
promise which the parties have made and to uphold the sanctity
of contract which forms the basis of society; but in certain cases,
the court may relieve them of their duty on a rule founded on
what is called the public policy; for want of better words Lord
Atkin describes that something done contrary to public policy
is a harmful thing; but the doctrine is extended not only to
harmful cases but also to harmful tendencies; this doctrine of
public policy is only a branch of common law, and just like any
other branch of common law, it is governed by precedents; the
principles have been crystallised under different heads and
though it is permissible for courts to expound and apply them
to different situations, it should only be invoked in clear and
incontestable cases of harm to the public; though the heads are
not closed and though theoretically it may be permissible to
evolve a new head under exceptional circumstances of a
changing world, it is advisable in the interest of stability of
society not to make any attempt to discover new heads in these
days".
The following heads of public policy have been consistently
invoked and interpreted by the Courts, in this regard.
1. Trading with an enemy.
2. Trafficking in public offices.
3. Interference with administration of justice.
4. Marriage brokerage contracts.
7.3 AGREEMENTS VOID ON ACCOUNT
OF PUBLIC POLICY
Several agreements are specifically made void on account of
public policy. As for example, an agreement in restraint of
marriage is against the natural rights of a person, i.e. the right
to family. None can deprive another by virtue of a contract to
have/not to have family relations. Even in the absence of a clear
positive prescription, agreements in restraint of marriage cannot
be held valid. Under Sec. 26 of the Contract Act, an agreement
in restraint of marriage of any person, other than a minor, is
void. Similarly, an agreement in restraint of trade, is totally
against the fundamental freedom of trade, commerce, industry
and profession. No one, including the State can take away these
rights by virtue of a contract. Under Sec. 27 of the Contract Act
such agreements are void. Some other agreements declared to
be void as being against public policy are discussed below.
Void agreements enumerated in sections 24-30
Sections 24-30 deal with specific void agreements. They are as
follows:
a. Agreements void, if considerations and objects unlawful
in part - (S.24)
b. Agreements without consideration - (S.25) (has been
explained in the earlier module)
c. Agreements in restraint of marriage (S.26)
d. Agreements in restraint of trade (S.27)
e. Agreements in restraint of legal proceedings (S.28)
f. Ambiguous agreements (S.29)
g. Wagering agreements (S.30)
Section 24 merely reiterates the principle enshrined in Section
23. The important feature of this provision is that, in case, if
98
part of the agreement only takes within its fold either unlawful
consideration or object, that part alone would become void,
provided in such agreements; such demarcation is possible.
(a) Agreements in restraint of marriage:
According to section 26, every agreement in restraint of
marriage of any person, other than a minor is void.
It seems that the policy is in favour of discouraging agreements
which restrict freedom of marriage. In an earlier case i.e., Rao
Rani v. Gulab Rani (AIR 1942 All 351) there was an agreement
between two co-widows that if any of them remarried she should
forfeit her right to her share in their deceased husband's property.
This agreement was upheld, because as the Court pointed out,
no restraint on their remarriage had been imposed on either of
the widows. The restraint was only with reference to enjoyment
of property rights.
(b) Agreement in restraint of trade:
The basic public policy principle underlying this provision is
that, every person shall be given the liberty of trade, occupation
etc. so as to exercise his powers either for his own benefit or
for community interest.
In Nordenfelt v. Maxim Nordenfelt Guns & Ammunition Co.
[(1894) A.C. 535] the House of Lords for the first time
interpreted this principle. In this case the appellant, Nordenfelt,
was a maker and inventor of guns and ammunition. He sold his
business to the respondent company for 287,500 and entered
into a covenant (later to be repeated in a contract of service)
that he would not for twenty-five years 'engage... either directly
or indirectly in the trade or business of a manufacture of guns,
gun mountings or carriages, gunpowder explosives or
ammunities or in any business competing or liable to compete
in any way with that for the time being carried on by the
Company, but expressly reserved the right to deal in explosives
other than gunpowder, in torpedoes or submarine boats, and in
metal castings or forgings. After some years Nordenfelt joined
the business of a rival company dealing with guns and
ammunition, and the respondents sought an injunction to restrain
him from doing so.
It is clear that the restraint entered into by Nordenfelt was of a
general, and not merely of a partial, nature, since there was no
limit placed on the area to which it was to extend. Nevertheless,
the House of Lords held that this did not, of itself, mean that
the covenant was void. They were of the opinion that the
covenant not to compete with the company in any business
competing or liable to compete in any way with that for the
time being carried on by the Company was unreasonable, as it
attempted to protect not only the business as it was when sold,
but any future activities of the company, and it was therefore
void; but this clause was distinct and severable from the rest of
the agreement. As for the remainder of the restraining condition,
in so far as it was for the protection of the business actually
sold, it was reasonable between the parties, because Nordenfelt
not only received a large sum of money, but also by his
reservation retained scope for the exercise of his inventive and
manufacturing skill. Moreover the wide area over which the
business extended necessitated a restraint co-extensive with that
area for the protection of the respondents. Finally it could not
be said to be contrary to the public interest since it transferred
to an English Company, the manufacture of guns and
ammunition for use in foreign lands. The restraint was therefore
valid.
From the above judgement one can infer the following
propositions:
(i) All restraints of trade, in the absence of special justifying
circumstances, are contrary to public policy and therefore
void.
(ii) Whether special circumstances do or do not justify the
restraint is a question of law, and the court interprets it very
strictly.
(iii) The restraint can only be justified if it is reasonable
(a) in the interest of the contracting parties; or
(b) in the public interest.
(iv) The burden of proof relating to reasonableness of restraint
is on the person who pleads it.
According to Sec. 27 of the Contract Act every agreement by
which, any one is restrained from exercising a lawful profession,
trade or business of any kind, is to the extent of restraint void.
Accordingly in India all agreements in restraint of trade whether
general or partial, qualified or unqualified are void. As such
the Indian Law is different from Law in England. [See
Khemchand v. Dayal Das, AIR 1942 Sind 114]. In Sheikh Kalu
v. Ram Sharan Bhagat [(1909) 13 CNN 388], 29 out of 30
makers of combs in the city of Patna agreed with the defendant
to supply him all the combs manufactured by them, and not to
sell their combs to anyone else. But the defendant had the right
to reject the goods if he found that there was no market for
them in Patna, Calcutta, or elsewhere. The court held the
agreement to be void. So also, in case of an employer and
employee there cannot be a restraint of trade after the term of
the employment is over. In Oakes & Co v. Jackson [(1876)1
Mad 134], an employee of the company agreed not to employ
himself in any similar concern within a distance of 800 miles
from Madras after leaving the company service. The restraint
was held void. The Indian Court is not supposed to go into the
question of reasonableness or otherwise. Any restraint on the
employee after the tenure of service is void in India. In this
case however English Courts would also have come to the same
decision because of unreasonableness. Restriction can however
be imposed during the term of employment. As for example, if
A takes a whole time employment in B's factory the restriction
imposed upon joining another employment at the same time is
entirely valid. An agreement of service by which a person binds
himself during the term of employment from taking any other
service is valid. As for example, in Charles v. Mcdonald [(1899)
23 Bom 103], A agreed to become an assistant for 3 years to B
who was a doctor practising in Zanzibar. It was agreed that
during the term of agreement A was not to have his own practice.
After one year A left B's job and began to practise on his own.
99
It was held that the agreement was valid and A was restrained
by injunction from practising. But in case the employee is
wrongfully dismissed, the employee becomes free from the
restrictive covenant.
In this connection one has to examine the legality of cartelization
and trade agreements to form monopoly. Sec 27 of the Indian
Contract Act does not take away the right of a trader to regulate
his business according to his own discretion and choice.
In Daulat Ram v. Dharachand [1934 Lah 170] the court held
that an agreement for trade combination for the purpose of
avoiding competition is not necessarily unlawful. But where
the agreement is clearly not for the mutual benefit of the parties
but is an attempt to create a monopoly it would be void as against
public policy.
There are exceptions to this agreement in restraint of trade being
void. These are:
(i) Sale of goodwill: According to exception to sec 27, a buyer
of a good will may impose reasonable restrictions as to time
and place on the seller of good will of a business. As for example
A buys the right to ply ferries from B with a restriction that B
shall not start a ferry service within 10 miles for a period of 5
years. This restriction is reasonable and valid. [See Chandra v.
Mallik (1921) 48 Cal 1030].
(ii) Partners' agreements: (a) Under the Partnership Act
Partners may agree not to carry on any other business, other
than the firm business, while being a partner [Sec. 11(2)(b)]. A
retiring partner may agree not to carry on business, similar to
that of the firm within specified time period and local limits
[Sec. 36(2)(c)]. Partners may, upon the dissolution of the firm,
or in anticipation make an agreement not to carry on similar
business within given local limits or a specified time period
[Sec. 54(d)]. While selling the goodwill of the firm, a partner
may agree, not to carry on similar business within a specified
local limit and for the specified period [Sec. 55(3)].
(c) Agreement in restraint of Legal Proceedings
According to Sec. 28 any agreement by which a party is
restricted absolutely from enforcing his rights under or in respect
of any contract, by the usual legal proceedings, or which
decreases the time limit within which he may thus enforce his
rights is void to that extent. Right to legal remedies is a
constitutional right and therefore any restriction on it is against
public policy. As for example, if A agrees to buy B's plot of
land at less than the market value, further agreeing that he shall
not go to the court on B's failure to give a better title, the second
part of the agreement of not going to the court is void under
sec. 28. There are of course some exceptions to this rule. These
are:
(i) Parties agreement to refer a matter to arbitration and not to
have recourse to the courts shall not make the contract
invalid.
(ii) Similarly a contract to refer to the existing system of
arbitration is also valid, if the written agreement between
the parties, restrains them from taking recourse to the court.
Reference to M/s. Kerala Electrical and Allied Engineering
Co. Ltd v. Canara Bank and Others (AIR 1980 Ker. 151)
would not be out of place at this juncture. In this case a
clause in a bank guarantee is subjected to judicial scrutiny.
The said clause runs as follows:
"This guarantee will remain in force for a period of one
year from the date hereof and unless a suit or action to
enforce claim under the guarantee is filed against us within
six months from the date of expiry of (the guarantee) all
your rights under the said guarantee shall be forfeited and
we shall be relieved and discharged from all liability
thereunder"
While interpreting the clause in question, the court went on
record by saying:
"Section 28 makes two kinds of agreements void. What
we are concerned in this case is the second of the two kinds,
namely an agreement which limits the time within which a
party thereto may enforce his rights under or in respect of
a contract be the usual legal proceedings in the ordinary
tribunals. It is the limiting of the time within the rights are
to be enforced that is made void. So it goes without saying
that rights to be enforced under the contract should continue
to exist even beyond the shorter period agreed for enforcing
those rights, to make such an agreement void under the
section. If, for example, beyond the shorter period agreed
upon the rights under the contract cannot be kept alive, no
limiting of the time to enforce the rights under the contract
arises and hence the agreement putting a time limit to sue
will not be hit by S. 28".
(d) Wagering agreements
A wagering agreement is one in which there is a promise to pay
money or its worth upon the determination or ascertainment of
an uncertain future event. According to sec 30 of the Contract
Act, all agreements by way of wager are void and no suit shall
be brought for recovering anything alleged to be won by any
wager, or entrusted to any person to abide the result of any
game or other uncertain event in which a wager is made.
Hawkins, J., beautifully explained the term wagering in Carlill
v. Carbolic Smoke Ball Co. [(1892) 2 Q.B. 484], a wagering
contract is one by which two persons, professing to hold
opposite views touching the issue of a future uncertain event,
mutually agree that, "dependant on the determination of that
event, one shall win from the other, and that other shall pay or
handover to him, a sum of money or other stake; neither of the
contracting parties having any other interest in that contract
other than the sum or stake he will so win or loose, their being
no other real consideration for the making of such contract by
either of the parties. It is essential to a wagering contract that
each party may under it either win or loose ..... If either of the
parties may win but cannot loose but may loose and cannot
win, it is not wagering". Therefore the following are the
characteristics of a wagering agreement:
(i) It must be a promise to pay money or money's worth.
(ii) The promise is conditional on the happening of an uncertain
future event.
100
(iii) One party should win and the other should loose.
(iv) Both the parties cannot loose or both the parties cannot
win.
(v) Both the parties have an equal chance in the game.
(vi) There is no other consideration.
In Gherulal v. Mahadeodas (AIR 1959 SC 781) it was held that
a wagering agreement is struck down not on the ground of
public policy but because it is void under sec 30 of the Indian
Contract Act. The State, in which gaming or gambling is illegal,
a wagering agreement is also illegal. As for example wagering is
illegal in Bombay. In England wagering is both void and unlawful
on ground of public policy.
Sometimes it is very difficult to understand the distinction
between genuine commercial transaction and a wagering
agreement. Suppose A & B enter into an agreement of future
sale and purchase of wheat at Rs. 280/- per bag to be delivered
after three months it is very difficult to understand whether it is
a good commercial transaction with an object of delivering the
goods or it is a wagering agreement speculating on the price
and payment of the difference. In a wagering agreement neither
party would intend to perform the contract but pay only the
differences [Ram Krishan Das v. Musaddilal (AIR 1942 All
170)]. Option dealings in a stock exchange is not necessarily a
wager unless it can be positively proved that both the parties
intended not to give and take delivery. Of course recent
directions of SEBI prohibit option dealings in securities.
Lotteries are both void and illegal because of application of sec
294 A of IPC. Where the Govt. authorizes the holding of a
lottery, for developmental purposes, persons conducting the
lottery will not be punished, as the agreement is made valid by
prescription of law. Similarly prizes for horse racing or an
agreement to subscribe or contribute towards any plate, price
or sum of money of the value of Rs. 500/- or more shall not be
deemed to be unlawful.
101
8. VOID AGREEMENTS
SUB-TOPICS
8.1 Introductory Note
8.2 Grounds of Void agreement
8.3 Uncertain agreement
8.1 INTRODUCTORY NOTE
An agreement is void if it is unenforceable by law. A void
agreement is different from a void contract, in the sense that
void agreement is void ab initio. It is void per se and therefore
parties need not agitate over the issues in the court of law. A
void contract on the other hand is a contract becoming
unenforceable due to various reasons. As for example:
(i) By a decree of nullity in the court of law
(ii) Parties entitled to avoid opted for avoiding the contract
(iii) Due to change of circumstances, the performance of the
contract has become impossible. The performance of void
agreements may be necessarily be illegal. Only when the
performance would involve an illegal act, would it be a
punishable offence. A void agreement is merely
unenforceable, and not generally punishable.
8.2 GROUNDS OF VOID AGREEMENTS AT A
GLANCE
In the following cases an agreement is void ab initio:
(i) agreement entered into by a minor or a person incapable
of entering into it (secs. 11, 12)
(ii) an agreement vitiated by mistake of both the parties of an
essential fact (sec 20).
(iii) An agreement having unlawful object or unlawful
consideration (sec. 24)
(iv) An agreement without consideration (sec 25)
(v) An agreement in restraint of marriage (sec 26)
(vi) An agreement in restraint of trade (sec 27)
(vii) An agreement in restraint of legal proceedings (sec 28)
(viii) An uncertain agreement (sec 29)
(ix) An agreement by way of wager (sec 30)
(x) An agreement to do an act impossible in itself (sec 36)
Most of these agreements which are void ab initio as indicated
have already been explained in the previous topic. Some of the
other void agreements are discussed in module II concerning
consideration and capacity. Therefore, let us examine the one
which is left out, viz., uncertain agreements.
8.3 UNCERTAIN AGREEMENTS
An agreement which is uncertain is void. An uncertain
agreement means an agreement where any terms of an
agreement is not certain or capable of being certain. Some
illustrations of an uncertain agreement where some term is not
certain or capable of being certain can now be taken. A agrees
to sell to B 100 tonnes of oil. There is nothing to show what
kind of oil is intended. This agreement is void. But suppose A
agrees to sell 100 tonnes of oil with a brand name there is no
uncertainty; or suppose A who is a dealer in mustard oil only,
agrees to sell 100 tonnes of oil there is no uncertainty here as
well. A issues a cheque without specifying any amount. This is
not uncertain because the person who receives the cheque may
fill in the blank. This is simply empowering the payee to name
the amount. Suppose A wants to sell his white horse for Rs.
7000/- or Rs. 8000/- there is nothing to show as to the price he
actually wants. Therefore there is uncertainty and the agreement
is void.
102
When an agreement is void or the contract becomes void any
party receiving any benefit under such agreement or contract is
bound to restore it, to compensate the person from whom he
received it. Suppose A pays B Rs. 1000/- in consideration of B
promising to marry C, but C is dead at the time of the promise,
the agreement is void. So B must pay back Rs 1000/- to A. Or
say A gives B Rs. 1000/- for promising not to marry. The
agreement is void so B has to return the money to A. According
to Sec. 65 of the Indian Contract Act the person who has
received advantage under void agreement or void contract has
9. CONCLUDING REMARKS
the obligation of returning the advantage. This is known as
principle of restitution. Sec 65 is not applicable if the parties
are wholly incompetent to contract. A minor cannot be asked
to restore the benefit Mohori Bibi v. Dharmodas Ghose [(1903)
ILR 30 Cal. 539] but in Daviah v. Shivamma (AIR 1959 Mad
188), it was held that the court may on equitable grounds order
a minor representing himself to be a major while entering into
an agreement, to restore the benefit received. Where the benefit
cannot be restored the party must be asked to compensate.
103
Sec 13. "Consent" defined - Two or more persons are said to
consent when they agree upon the same thing in the same sense.
Sec 14. "Free consent" defined - Consent is said to be free
when it is not caused by -
(1) coercion, as defined in Section 15, or
(2) undue influence, as defined in Section 16, or
(3) fraud, as defined in Section 17, or
(4) misrepresentation, as defined in Section 18, or
(5) mistake, subject to the provisions of Sections 20, 21 and 22.
Consent is said to be so caused when it would not have been
given but for the existence of such coercion, undue influence,
fraud, misrepresentation or mistake.
Sec. 15 - "Coercion" defined - "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.
Explanation - It is immaterial whether the Indian Penal Code is
or is not in force in the place where the coercion is employed.
Sec. 16 "Undue influence" defined - (1) A contract is said to be
induced by "undue influence" where the relations subsisting
between the parties are such that one of the parties is in a position
to dominate the will of the other and uses that position to obtain
an unfair advantage over the other.
(2) In particular and without prejudice to the generality of the
foregoing principle, a person is deemed to be in a position
to dominate the will of another
(a) where he holds a real or apparent authority over the
other or where he stands in a fiduciary relation to the
other; or
(b) where he makes a contract with a person whose
mental capacity is temporarily or permanently
affected by reason of age, illness, or mental or bodily
distress.
(3) Where a person who is in a position to dominate the will of
another enters into a contract with him, and the transaction
appears, on the face of it or on the evidence adduced, to be
unconscionable, the burden of proving that such contract
was not induced by undue influence shall lie upon the
person in a position to dominate that will of the other.
Nothing in this sub-section shall affect the provisions of Section
111 of the Indian Evidence Act, 1872.
Sec. 17 "Fraud" defined - "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:-
(1) the suggestion, as a fact, of that which is not true, by one
who does not believe it to be true;
10. BARE TEXT OF THE RELEVANT SECTIONS
(2) the active concealment of a fact by one having knowledge
or belief of the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specifically declares to
be fraudulent.
Explanation - Mere silence as to facts likely to affect willingness
of a person to enter into a contract is not fraud, unless the
circumstances of the case are such that, regard being had to
them, it is the duty of the person keeping silence to speak, or
unless his silence is, in itself, equivalent to speech.
Sec. 18 "Misrepresentation" defined - "Misrepresentation"
means and includes -
(1) the positive assertion, in a manner not warranted by the
information of the person making it, of that which is not
true, though he believes it to be true;
(2) any breach of duty which, without an intent to deceive,
gains an advantage to the person committing it, or any one
claiming under him, by misleading another to his prejudice
or to the prejudice of 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.
Sec. 19 Voidability of agreement without free consent - When
consent to an agreement is caused by coercion, fraud, or
misrepresentation, the agreement is a contract voidable at the
option of the party whose consent was so caused.
A party to a contract, whose consent was caused by fraud or
misrepresentation, may, if he thinks fit, insist that the contract
shall be performed, and that he shall be put in the position in
which he would have been if the representations made had been
true.
Exception - If such consent was caused by misrepresentation
or by silence, fraudulent within the meaning of Section 17, the
contract, nevertheless, is not voidable, if the party whose consent
was so caused had the means of discovering the truth with
ordinary diligence.
Explanation - A fraud or misrepresentation which did not cause
the consent to a contract of the party on whom such fraud was
practised, or to whom such misrepresentation was made, does
not render a contract voidable.
Sec. 19A Power to set aside contract induced by undue influence
- When consent to an agreement is caused by undue influence,
the agreement is a contract voidable at the option of the party
whose consent was so caused.
Any such contract may be set aside either absolutely or, if the
party who was entitled to avoid it has received any benefit
thereunder, upon such terms and conditions as to the Court may
seem just.
Sec.20 Agreement void where both parties are under mistake
as to matter of fact - Where both the parties to an agreement are
104
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 to be
deemed a mistake as to a matter of fact.
Sec.21 Effect of mistake as to law - A contract is not voidable
because it was caused by a mistake as to any law in force in
India; but a mistake as to a law not in force in India has the
same effect as a mistake of fact.
Sec.22 Contract caused by mistake of one party as to matter of
fact - A contract is not voidable merely because it was caused
by one of the parties to it being under a mistake as to a matter
of fact.
Sec.23 What considerations and objects are lawful and what
are not - The consideration or object of an agreement is lawful,
unless -
it is forbidden by law; or
is of such a nature that, if permitted, it would defeat the
provisions of any law; or
is fraudulent; or
involves or implies injury to the person or property of another,
or the Court regards or it immoral, or opposed to public policy.
In each of these cases, the consideration or object of an
agreement is said to be unlawful. Every agreement of which
the object or consideration is unlawful is void.
Sec. 24 Agreements void, if considerations and objects unlawful
in part - If any part of a single consideration for one or more
objects, or any one or any part of any one of several
considerations for a single object, is unlawful, the agreement is
void.
Sec. 26 Agreement in restraint of marriage void - Every
agreement in restraint of the marriage of any person, other than
a minor, is void
Sec.27 Agreement in restraint of trade void - Every agreement
by which any one is restrained from exercising a lawful
profession, trade or business of any kind, is to that extent void.
Saving of agreement not to carry on business of which goodwill
is sold.
Exception 1 - One who sells the goodwill of a business may
agree with the buyer to refrain from carrying on a similar business,
within specified local limits, so long as the buyer, or any person
deriving title to the goodwill from him, carries on a like business
therein, provided that such limits appear to the Court reasonable,
regard being had to the nature of the business.
Sec. 28 Agreements in restraint of legal proceedings void -
Every agreement, by which any party thereto is restricted
absolutely from enforcing his rights under or in respect of any
contract, by the usual legal proceedings in the ordinary
tribunals, or which limits the time within which he may thus
enforce his rights, is void to that extent.
Saving of contract to refer to arbitration dispute that may arise.
Exception 1 - This section shall not render illegal a contract, by
which two or more persons agree that any dispute which may
arise between them in respect of any subject or class of subjects
shall be referred to arbitration, and that only the amount awarded
in such arbitration shall be recoverable in respect of the dispute
so referred.
Saving of contract to refer questions that have already risen.
Exception 2 - Nor shall this section render illegal any contract
in writing, by which two or more persons agree to refer to
arbitration any question between them which has already arisen,
or affect any provision of any law in force for the time being as
to references to arbitration.
Sec. 29 Agreements void for uncertainty - Agreements, the
meaning of which is not certain, or capable of being made
certain, are void.
Sec. 30 Agreements by way of wager void - Agreements by
way of wager are void; and no suit shall be brought for
recovering anything alleged to be won on any wager, or
entrusted to any person to abide the result of any game or other
uncertain event on which any wager is made.
Exception in favour of certain prizes for horse-racing - This
section shall not be deemed to render unlawful a subscription
or contribution, or agreement to subscribe or contribute, made
or entered into for or toward any plate, prize or sum of money,
of the value or amount of five hundred rupees or upwards, to
be awarded to the winner or winners of any horse-race.
Section 294A of the Indian Penal Code not affected - Nothing
in this section shall be deemed to legalize any transaction
connected with horse-racing, to which the provisions of Section
294A of the Indian Penal Code apply.
105
11. CASE LAW
Raghunath Prasad V. Sarju Prasad AIR 1924 PC 60
In this case, the defendant and his father were equal owners of
a vast joint family property over which they had quarrelled.
Consequently the father had instituted criminal proceedings
against the son. The defendant in order to defend himself,
mortgaged his properties to the plaintiff and borrowed from
him about ten thousand rupees on 24% compound interest. In
eleven years this rate of interest had magnified the sum covered
by the mortgage more than elevenfold. The defendant contended
that the lender had by exacting high rate of interest, taken
unconscionable advantage of his mental distress and, therefore,
there should be presumption of undue influence.
While negativing such plea, the court held that the borrower
failed to prove that the lender was in a position to dominate his
will. The only relation between the parties that was proved was
simply that they were lender and borrower. The first requirement
of section 16 was, therefore, not fulfilled and, therefore, the
borrower was not entitled to any relief.
Schroeder Music Publishing Co. v. Macaulay (1974) 1 WLR
1308
In this case there was an agreement between a young song writer
and a Music Publishing Co. The arrangement was to remain in
force for 5 years and was to be automatically extended for
another five years should the royalty from the boy's musical
work reached the figure of 5,000. The Company could
terminate the agreement at any time by giving a month's notice.
The boy had no such right and he wanted to get out of it. The
House of Lords ordered his liberation from the bond. The
contract was on the terms of Company's standard terms and
was, therefore, the result of the company's dictation.
Said v. Butt (1920) 1 KB 497
In this case the plaintiff knew that on account of his adverse
criticism of some members of a theatre, he would not be allowed
to be present at the first performance of a play at the theatre. A
ticket was obtained for him by his friends without disclosing
that it was for him. But the defendant, the managing director of
the theatre, refused him admission on the night in question.
The plaintiff sued him for inducing breach of contract.
It was held that there was no contract between him and the
theatre. While elaborating the court went on record by observing:
"The non-disclosure of the fact that the ticket was bought
for the plaintiff prevented the sale of the ticket from
constituting a contract, the identity of the plaintiff being
in the circumstances a material element in the formation
of the contract."
Gurumukh v. Amar Singh (1991) 3 SCC 79
In this case the court, held that where two bidders had agreed
to supplement one anothers' bids at an auction without any
intention to lower the price of the item or to defraud the
government, the object of the agreement was lawful and valid.
V. Parthasarathy v. Controller of Capital Issues (or the
Larsen Toubro Case) AIR 1991 SC 1420
In this case the court held that although a company may purchase
another's shares in the open market, if the transaction is done
surreptitiously, with a malafide intention and by using a public
financial institution in a clandestine manner, the transaction
would be void as contrary to public policy by reason of section
23 of Contract Act.
Reddiar v. Periara AIR 1991 Ker. 388
In this case an agreement for sale did not state the exact survey
numbers or precise limits of the property to be sold. The
agreement was thus challenged as void for uncertainty. The
court held that as there was only one item of property that could
be legally conveyed and this item of property approximated
that referred to in the agreement and so both parties were well
aware of the property to be conveyed, there was no uncertainty.
106
12. PROBLEMS
1. The appellant a jeweller was insured by a company against
loss by theft with the exception of jewellery "entrusted to a
customer". Mrs. E posing as the wife of a wealthy customer
made a few purchases from the appellant to inspire
confidence, and then was allowed to take away two pearl
necklaces of considerable value 'on approval' to show her
supposed husband. She made away with the necklaces and
the jeweller demanded compensation from the insurance
company. The insurance company refused stating that this
was covered by exceptions. Decide. Give reasons.
2. A plaintiff was induced to purchase a lorry by the
defendant's representation that it was in an excellent
condition. On the first journey after the sale, the dynamo
broke and the plaintiff noticed several other serious defects.
When the plaintiff informed this to the defendant he offered
to pay half the cost of repairs. On the next long journey,
the lorry broke down completely and the plaintiff realised
that it was in a deplorable condition. He claimed to rescind
the contract. Decide with reasons.
3. The Commonwealth Disposal Commission invited tenders
for the purchase of a wrecked vessel described as 'an oil
tanker on the Jurmaund Reef approximately 100 miles north
of Samarai in New Guinea'. The plaintiff Merae's tender
was accepted and he thereupon fitted out a salvage
expedition at considerable expense. He came to now on
this expedition that there was no oil tanker in the locality
indicated, nor was there such a Reef called as Jurmaund
Reef. The plaintiff brought an action claiming damages.
The defendant argued that the agreement was based upon
mutual mistake as to the existence of subject matter,
therefore, void ab initio as such the defendant was not bound
to pay any damages. Decide. Give reasons.
4. 'X' has entrusted cotton yarn for despatch to the 'Associated
Transport Corporation Ltd' to the identified consignee in
Delhi. The United India Insurance Company has covered
these assignments. The goods reached Delhi. But the
consignee refused to take delivery of 5 bales of cotton yarn
since they were found to be in a damaged condition. The
damaged yarn was re-booked through the Delhi office of
the carrier on the request of the consignor. They were taken
delivery off by the consignor in a damaged condition. The
damage was assessed by the surveyor. The consignor
submitted a claim to the insurer. The claim was settled at
Rs. 10,89480 and paid by the insurer. The insurer became
subrogated to the rights of the consignor. Thereafter, the
insurance company filed the suit for recovery of damages
from the carriers alleging negligence. The consignment
contained printed words 'subject to Bombay jurisdiction
alone' and also the following clause: "The goods required
to be collected from the depot within six months from the
date of arrival, otherwise the goods would be forfeited."
Examine the validity of these two clauses.
5. 'X' Company has entered into an agreement with M/s. ABC
& Co. a firm dealing with retail sales of certain products.
The agreement contains a clause which inter alia places
restriction on M/s. ABC & Co. to exclusively deal with the
products of X Co only for a minimum period of two years.
Decide the validity of the clause.
6. X & Co has entered into an agreement with Y & Co whereby
X was to supply a generating set. In the process of entering
into such agreement the Manager of X & Co observed that
his Company's generating set can work without any
mechanical defect for a continuous period of 5000 hours
from the moment of installation. In fact the set has no such
proven record. Assuming that Y & Co has agreed to
purchase, examine under what circumstances, Y & Co may
withdraw from the contractual relations.
7. 'X' has entered into an agreement with Y & Co. The object
of the agreement is to lobby the government, so that some
favourable decisions may be taken in favour of Y & Co.
The agreement provides for consultancy charges. Examine
the validity of such agreement.
8. X, a student of St. Xaviers College has entered into an
agreement with his own professor Y. The agreement is to
sell his motorbike for Rs. 25,000/-. However, his father
wants to challenge the contract. Advise him.
9. X took employment as clerk-cum-typist in a University and
agreed not to serve in that capacity for anyone else in any
part of India. Examine the validity of the agreement.
[ Note: Specify your name, ID no. and address while sending answer papers]
107
13. SUPPLEMENTARY READINGS
1. Avtar Singh (1985) Law of Contract, Eastern Book Co., Lucknow, pp. 126-158.
2. Anson (1984) Law of Contract, English Language Book Society and Oxford University Press, London, pp. 179-289.
3. P.S. Atiyah (1986) Introduction to Law of Contract, Claendon Press, Oxford, London.
4. Cheshire and Fifoot (1986) Cases and materials on Contract, Butterworth, London, pp. 129-225.
5. Cheshire and Fifoot (1987) Law of Contract, Butterworth, London.
6. A.L. Godhart, Mistake as to identity in the Law of Contract, 57 LQR, 1941, pp 221-235.
7. Joga Rao. S.V. (1991) Cases and materials on contract (NLSIU Publication).
8. Kesava Rao (1990) Contract Inter Praesentes - Mistake in Identity, C.U.L.R. 33.
9. Pollock and Mulla (1986) Indian Contract and Specific Relief Acts, J.L. Kapur (ed), Tripathi, Bombay, pp 126-166.
10. Puri and Ponuswamy (1974) Cases and materials on contract, Eastern Book Co., Lucknow.
11. Trietal, G.H. (1966) Law of contract, Stevensons, London, pp 107-235.
12. Venkatesh Iyer (1987), (Reprint) Law of contract, Asia Law House, Hyderabad, pp. 140-142 and 308-314.
108
PUBLIC & GOVERNMENT CONTRACT
ENGINEERING CONTRACT & QUASI CONTRACT
Master in Business Laws
Law of Contracts
Course No: I
Module No: IV
Distance Education Department
National Law School of India University
(Sponsored by the Bar Council of India and Established
by Karnataka Act 22 of 1986)
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109
Materials Prepared By:
1. Prof. V.S. Mallar
2. Prof. N.L. Mitra
Materials Checked By:
1. Ms. Sudha Peri
2. Ms. Archana Kaul
Materials Edited By:
1. Prof. P.C. Bedwa
National Law School of India University
Published By:
Distance Education Department
National Law School of India University,
Post Bag No: 7201
Nagarbhavi, Bangalore - 560 072.
110
Instructions
In the Third World Countries the government plays an important role in using contract for generating public goods
as well as distribution of the same. Even under capitalism state has a distinct role in economic operations. The
famous economist Keynes himself attributed a big role to the state, especially at the time of inflation or stagflation.
State has to take at that time a direct role in welfare activities, so that, money can percolate through the economic
system, in order to generate public response to the market. These are all done by the government in the name
of the state through the medium of contract. So whether it be in a developing economy or a developed economy
state makes various types of contracts and manages them.
An individual when he enters into a contract, is not accountable in any way for any thing outside the purview
of the contract. But that is not so in the case of government and public contracts. As a result, state bureaucracy
has to function within the framework of detailed rules and regulations because in the government contracts several
issues beyond the contract can be raised. As for example, authority to enter into the contract itself can be
challenged, the decision of finalising a specific party can be questioned, or the very methodology of the whole
exercise itself can be debated. That makes government and public contracts a special category of study by itself.
In this module, the intention is to acquaint you all with the basic framework of government and public contracts.
In many cases even the big private enterprises also follow a detailed procedure for big contracts, especially
engineering contracts. The main issue at this level is not the question of what is the contract, but relates to how
is the contract made? As such many management issues are also concerned. The general rule of contract can
explain things within the framework of a contract, because it is confined to the individual parties, who are
themselves masters in designing their rights and duties through the instruments of contract. But representative
contracts be it governmental or not, can be related to many constitutional issues, such as, authority, manner of
making the contract, principles of natural justice, so on and so forth. In representative contract therefore,
procedure plays a very important role at every stage, and hence it is our intention to bring out in preliminary orders
such procedures.
A paper on Contract Administration, by H.B. Mirchandani has been briefly referred to in this module. Many
other authors have also been referred to. It is advisable for those of you who want to know more details, and whose
job deals with government and public contracts, to refer to the books mentioned in the supplementary readings.
I am sure you will be benefitted by this module.
N. L. Mitra
Course Co-ordinator
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Public & Government Contract, Engineering Contract
& Quasi Contracts
TOPICS
1. Public & Government Contract .......................................................................................... 112
2. Engineering Contract ............................................................................................................ 123
3. Quasi Contract ........................................................................................................................ 130
4. Case Law .................................................................................................................................. 133
5. Problems .................................................................................................................................. 139
6. Supplementary Readings ...................................................................................................... 141
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SUB TOPICS
1.1 Introduction
1.2 Constitutional Framework
1.3. Constitutional Limits and Limitations
1.4. Personal Liability in Government Contract
1.5. Nature of Contractual Relation
1.6. Diverse Types of Contracts
1.7. Selection of Contractor
1.8. Public Law Remedy in Government Contracts
1.9. Statutory Discretion and Government Contracts
1.10. Financial Control
1.1 INTRODUCTION
It is true that Contract is the device through which people
create rights and duties privately in between themselves. In a
free market economy, the role of the state is limited to provide
facilities for creating and implementing these rights and duties
mutually agreed upon. Excepting that, state does not have any
other role. But, in case of a Welfare State, the state has the
power of intervention in order to ensure welfare of the people
and also to see that no private agreement stands in the way of
individual and societys interst. On the other hand, in a socialist
country, the state is a necessary party in all contracts between
two or more citizens. Any private agreement can be made
unenforceable on the plea of public interest. In a mixed
economy, contract as a method of creating private right and
duty, is accepted but the state creates a ring around the free
contract area. Only parties obtaining licence, quota or permit
from the appropriate authority can enter into the area of freedom
of contract.
1. PUBLIC & GOVERNMENT CONTRACT
Protective line
on the logic of
public policy &
public interest
<
Area of freedom
of contract
>
Entry through
licence, quota, and
permit
State itself is a corporate body and can enter into a contract in
order to carry on its functions. There are two types of contracts
entered into by a state. Firstly, in order to perform its external
obligations and protecting national interest, the state has to enter
into various bilateral and multipartite contracts. These contracts
are regulated by international bodies in international legal regime.
Secondly, in order to discharge sovereign functions of a State,
it has to enter into several types of contracts inside the state.
These contracts are formally entered into by the Government in
the name of the Sovereign (symbolic political sovereign). As
for example, according to Article 299 of the Constitution of India,
all contracts made in the exercise of the executive power shall be
expressed to be made by the President. These contracts are
generally known as government contracts. In a welfare State
or a Socialist State, state enters into many types of contracts.
India is theoretically a socialist state and, as such, state plays
an active role in regulating this private legal area in the name
of public duty and public interest. Besides, in India the
concept of State has been given a liberal interpretation by Article
12 of the Constitution. According to Art.12, the State includes
the Government and Parliament of India, and the Government
and the Legislature of each of the States and all local or other
authorities within the territory of India or under the control of
the Government of India. In the International Airport
Authority case, (AIR 1979 SC 1628) the Supreme Court has
given a very expanding meaning to state in order to include
all public sector bodies in the concept of local bodies and other
authorities. As such, the area of government contracts has
widened. A government company, under such an interpretation,
is an instrumentality of the State. Government contracts are
treated as public contracts. But all public contracts are not
government contracts. Various public bodies enter into contracts
which may not be governmental in character.
Sometimes, some contracts between private persons may
involve huge dimensions, so much so that interest of a large
number of people may be concerned, for example, several types
of engineering contracts or service contracts. Such huge
contracts require detailed procedure both at the formational stage
as well as implementation stage, so that interest of all parties
are adequately protected. These contracts are also of various
types like lump-sum contracts, commissioning contracts,
turnkey contracts, labour contracts, etc.
Sometimes, in a given situations, we have to construct a
contractual relation due to application of principle of equity
and justice. This construction of contractual obligation is known
as fictional, constructive or quasi contract.
1.2 CONSTITUTIONAL FRAMEWORK
The province of Government contract has become increasingly
significant in the modern world. The Government is constantly
impelled to deal with the public at large by giving employment,
by issuing license, entering into contract or some benefits.
Although contract is fundamentally a matter of private law, the
government contract partakes the dual character of administrative
and contractual powers. The Government contract has become
today a matter of public law. The Government has become
subject to public law discipline in the contractual arena and
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problems of estoppel, principles of natural justice, limitations in
terms of fundamental rights and the applicability of the writ
jurisdiction of the superior courts have increasingly been
considered in the context of giving a good-bye to the earlier
purely private law approach. The judicial approach has been to
emphasise administrative aspects more than purely contractual
aspects. The judicial shift from purely private approach to
functionally public law approach thereby implying the
applicability of the fundamental principles of administrative law
and the constitutional law has been both instructive and
interesting.
The Government, while exercising diverse commercial activities
will have to resort to numerous contracts. Thus, Governments
are parties to construction contracts, procurement contracts,
repairing contracts, research and development contracts,
licensing contracts and service contracts. The cardinal feature
of the governmental contracts consists in the public
accountability and constitutional responsibility in the
negotiation, formation, conclusion, performance and
termination. In India, for the purpose of power and capacity of
the government to enter into contract and essential preliminaries
for the formation of such contract the relevant article is Art.299
of the Constitution of India. Of course, Art 299 confines itself
to contract in the exercise of executive power of the appropriate
state. If Government enters into the contract in the exercise of
statutory power, the relevant statute also becomes the
appropriate guide for determining its validity.
No doubt, Art.299 specifies the triple conditions which the
contract made by the Government should fulfill:
1. Such contracts must be expressed to be made by the
President/Governor as the case may be.
2. Such contracts are to be executed by such a person in such
a manner as the President/Governor may authorise.
3. Such contracts are to be executed on behalf of the President/
Governor as the case may be.
Art.299 clearly lays down specific procedural essentials for the
exercise of the contractual power by the State. The fundamental
purpose and function of Art. 299 appear to be that the
Government should not be saddled with the consequences
arising from unauthorised contracts, for this would place public
funds in jeopardy. At the same time, it is extremely inconvenient
and practically impossible to insist that each and every contract
must be in the prescribed manner or in a particular form. The
judicial approach to Art. 299 has sought to balance the aforesaid
two competing interests. The Courts have held that Art. 299 is
mandatory and therefore there cannot be estoppel against
Government contracts or ratification of such contracts in
contravention of Art. 299. If such claims are entertained, it
would result in repeal of a paramount provision in the
constitution which is intended for protection of the public
interest.
It must be borne in mind that the power to enter into contract is
an exercise of executive power. Art.298 makes it abundantly
clear that the executive power extends to the making of
contracts. Art. 298 in its original form reads thus The executive
power of the union and each of the state shall extend, subject to
any law made by the appropriate legislature, to the grant, sale,
disposition or mortgage of any property held for the purposes
of the union or of such state, as the case may be, and to the
purchase or acquisition of property for these purposes
respectively and to the making of contracts. After the
amendment of Art.298 by the Constitution (Seventh
Amendment Act) 1956, the power of the appropriate
Government to enter into the contract is not conditioned by the
scheme of distribution of legislative power.
The exercise of the contractual power is as important as the
existence of such power. A party interested in contracting with
the government is deemed to be fully aware of the variety of
requirements as to the procedure and form of the contract. These
procedural requirements are in the nature of conditions
precedent for the constitutionality of a contract, the
contravention of which renders the contract invalid. These
procedural requirements are required to be distinguished from
the terms and the conditions of the contract which regulate the
performance of the contract after it is made.
The formal requirements embodied in Art. 299 of the
Constitution require some clarification:
1. The contract must be in writing: There are a number of
interpretations in this area of government contract as to
whether the written document should be formal or informal.
If a formal contract deed or contract culminates from the
consolidated correspondence and is not expressed through
a formal deed it would suffice. The preponderance of the
judicial decisions has been in favour of the proposition that
it should be valid and binding contract between the parties
despite the fact that it is not formally made and has been
entered through correspondence. The word execute in
Art.299(1) should not necessarily mean the execution of a
formal document of contract. It simply conveys the
meaning that it should be in writing. [K.P. Choudhury v.
State of MP AIR 1967 SC 203; Union of India v. N.K.
Pvt. Ltd. AIR 1972 SC 915].
2. The contract expressed to be made by the President/
Governor as the case may be: The aforesaid constitutional
requirements insist that the contract be expressed as having
been made in the name of the President/Governor. Hence
no valid document can be executed in the name of the
Central Government or State Government and such
contracts will not be valid and binding. It was held by the
Kerala High Court in K.N. Vidyadharan v. State of Kerala
[AIR 1980 Ker 212] that a contract made by the
Government of Kerala is not a contract made on behalf
of the Governor and therefore there is no valid contract in
the contemplation of the constitution.
3. The contracts must be entered into in such a manner as the
President/Governor may direct: No specific law, rule,
resolution or otherwise has been made to prescribe the
manner in which contract be executed. However, all the
114
requirements which are prescribed by the constitution
cannot be dispensed with or waived by any law made by
the Parliament or the State legislature or by the consent of
the parties to the contract. But, a supplemental law is not
however forbidden. A Parliamentary law or a law made
by the State legislature may provide for some more formal
requirements in addition to those already enumerated in
Art.299 sub clause (1) of the Constitution.
In Karamshi v. State of Bombay, [AIR 1964 SC 1714], a contract
between the Minister of Public Works Department (PWD) and
the appellant firm was repudiated by the Government of Bombay
on the solitary defense that the contract was not expressed in
the name of the Governor who constitutionally represents the
State. The reliefs sought by the appellant were specific
performance of the contract or in the alternative damages for
the breach of the contract. The Supreme Court dismissed the
appeal on the singular preliminary ground of the failure to comply
with the mandatory requirements of Art. 299(1).
The Courts have more often than not adopted a pragmatic
attitude in this area realising fully well that the insistence of too
rigid postures and observance of all the conditionalities
embodied in Art. 299 would be highly impracticable and greatly
inconvenient from the administrative point of view. Hence the
judicial approach to Art. 299 has sought to reconcile and
harmonize two conflicting requirements:
1. to safeguard the interest of the government from
unauthorised contracts.
2. to protect the bonafide contracting parties who enter into
the contracts with the governments without complying with
all or some of the formalities mentioned in Art. 299. A
strict and rigid compliance would result in inequitable
consequences as far as private parties are concerned. Hence
the courts have softened the rigours of the formalities
prescribed in Art. 299 by judicial interpretation taking into
account fact situations. This equitable protective umbrella
has been applied by the Supreme Court in respect of
government contracts in the following cases.
In the State of West Bengal v. B.K. Mandal, [AIR 1972 SC
77], the contract did not comply with the formalities found in
Art. 299 but the contractor was ordered to be restored back any
advantage received by the government applying Section 65 of
the Indian Contract Act 1872. Likewise, where the contract
for the supply of goods have been found to be void for non-
compliance of Art. 299 but goods had already been delivered
to the government by the contractor under such void contract
the statutory obligation under Section 70 of the Indian Contract
Act was applied with full vigor.
It is also suggested that the contravention of the Art. 299 would
nullify the contract. Consequently, therefore the acceptance of
the application of the doctrine of estoppel or recognition of
ratification of such contract have been refused by the Supreme
Court. Before 1968, the judicial view was expressed that
although informal contracts could not impose liability,
government by ratifying such contracts could accept
responsibility. But Mulam Chand v. MP [AIR 1968 SC 1218], the
Supreme Court adopted the rigid procedure and posture. No
doubt the judicial view vacillated between liberal and rigid
interpretation of Art. 299 depending upon the peculiar facts and
circumstances of the cases.
1.3 CONSTITUTIONAL LIMITS AND LIMITATIONS
Earlier the judicial tendency was to grant large amount of
discretion to the government, to choose the party with whom it
would enter into contractual relations, on the premise that the
government enjoyed the same freedom as the private party in
the matters of entering into contract. The Court shrugged its
shoulders when asked to interfere with the governmental
discretion in the matter of awarding contracts. This purely private
law approach of the Supreme Court could be seen in acute form
in an early case in C.K.Achuten v. State of Kerala, [AIR 1959 SC
490]. The petitioner in this case had contracts for the supply of
milk at the government hospital over a considerable period of
time. In 1957, the petitioner along with others submitted tenders
and the same was scrutinised and the tender of the petitioner
was accepted on 20th January 1958. After sometime, the
petitioner was informed that the policy of government in the
supply of milk to Government medical institutions was to be
given to the co-operative milk supply union. The government
invoked clause 20 of the conditions of the tender which
empowered it to cancel a contract after giving a months notice.
There upon the contract of the petitioner was cancelled. The
bone of contention in this case was not the rejection of tender
but a contract which was duly entered into. Hence a writ petition
was filed before the Kerala High Court challenging the
cancellation of contract as unconstitutional but the High Court
dismissed the writ petition on the ground that it was a case of
breach of contract if any, by the Kerala government, the
appropriate forum was ordinary civil court of competent
jurisdiction and the petitioner was advised to file a civil suit and
not to proceed under Art. 226. A letters patent appeal was also
dismissed. It is interesting to note that the petitioner instead of
approaching the Supreme Court through special leave petition
invoked the jurisdiction of the Supreme Court under Art. 32
raising the contention that he was denied equality before law
by subjecting him to hostile discrimination as regards third
respondent. He invoked the constitutional guarantees under
Articles. 14, 16(1), 19(1) (g) and 31.
With regard to Art. 14, the Supreme Court opined that there was
no substance in the allegation of discrimination because the
choice of the person to fulfil a particular contract must be left to
the government which like any other private individual could
prefer any contractor over another. Hence, claim for the
protection of guarantee under Art.14 was not well founded.
It was alleged by the petitioner that he was entitled to equal
opportunity of employment under Art.16 of the constitution.
The Supreme Court distinguished the contract for supply of
goods from a contract of employment and pointed out Art.16
(1) has reference to employment in service rather than as
contractors. There is no master and servant relationship between
115
the petitioner and the first respondent. Hence the second
contention with regard to attraction of Art.16 in the instant
case was rightly repelled by the Supreme Court.
The court further held that the rejection of a tender or for that
matter even the breach of contract does not tantamount to
deprivation of the right of the petitioner to practise any
profession or to carry on any occupation, trade, or business
contained in Art.19(1)(g) of the Constitution. It also refused to
invoke Art.31 to prevent the cancellation of the contract in the
exercise of powers conferred by the terms of the contract per
se. After all, a contractual right is not a property within the
meaning of Art.31. The rationale behind the holding of the
court seems to rest on the assumption, that the parties to the
contract must accept the burdens of the contract along with its
benefits. A mere breach of the contract cannot be remedied by
the courts under the supervisory or visitorial jurisdiction. Hence
in the Milk Supply case the Supreme Court refused to issue a
writ of Mandamus because the contract merely produces private
right and not public right.
The ratio in Milk Supply Case was affirmed in Punnan
Thomas v. Kerala, [AIR 1969 Ker. 81], where the question for
consideration was whether any contractor could be blacklisted
from submitting any tender or taking any government work for
ten years. The challenge of the contractor was negatived by
the Kerala High Court on the ground that no one had a
fundamental right to insist that the government should enter
into a contract with a particular person. The dissenting
judgement of Justice Mathew, which became a forerunner of
future judicial policy, struck down the government decisions
as invalid for failure to observe principles of natural justice.
The action of black listing not only involves economic loss but
also a loss of reputation and any democratic government should
not lay down arbitrary and capricious standards in the matter
of choice of person with whom alone the government would
deal.
The aforesaid judicial decisions distinctly and clearly conceded
extenuated powers to the Government in the matter of choice
of persons as the other party to the contract. The analogy
between Government and a private trader was over-emphasised.
Governmental contractual power was not subject to fair and
non-discriminatory norms.
In the province of the Government Contracts, nowadays, Art.14
is invoked frequently. Wrongful and arbitratory rejection of
tenders, arbitrary cancellation of tenders, tenders awarded by
showing undue preference to others, unfair and wilful
blacklisting of the contractors disabling them from entering into
a contract with government in future coupled with concomitant
result of considerable loss to the Exchequer are the usual
allegations raised under Art. 14. Originally, the court took the
view that the formation of the contract is a commercial function
and not governmental function and the question of
discrimination does not arise. The government like a private
party can enter into contract with any individual at its sweet
will and pleasure and the challenge under Arts. 14, 19 and 31
does not arise, all that an aggrieved party could do was to ask
the court to award damages or seek specific performance of the
contract. The affected person cannot complain of constitutional
contravention in the field of contract where there is no vested
rights in any person. The compulsion to the effect that the
government should enter into any contract with any particular
individual has been negatived by the Supreme Court in Milk
Supply case.
However, a ray of hope was seen in Eurasian Equipment case,
[AIR 1975, SC. 266] in which broad and all pervasive contractual
power was sought to be subjected to a salutary restriction viz.,
government is bound to give a fair hearing to a person who was
being blacklisted from entering into a contractual relation with
it. Failure to do so would attract Art.14. The Supreme Court,
rejecting the private law approach held that the public contracts
are subject to Art.14. In the instant case the order of blacklisting
contractor was served for the alleged reason that the contractor
had infringed some of the provisions of Foreign Exchange
Regulation Act, 1947 and the pendency of consequential
proceedings against him. The Supreme Court, rejecting the
private law approach, held that the public contracts are subject
to Art.14. The government has to follow equality before law
and cannot choose to exclude any person in a discriminatory
manner. The State need not enter into contract with any one,
but if it does, it has to be in accordance with fair procedure.
Hence the Supreme Court struck down the blacklisting order for
failure to issue the prior notice.
The above proposition was reiterated by the Supreme Court in
Vilangandan v. Executive Engineer, [AIR 1979 Supreme Court
1628], where blacklisting of a contractor was done without
observance of principles of natural justice which would prevent
the concerned person from advantage of a lawful relationship
with government for gain. Hence blacklisting under such
circumstances did raise problems under Art.14. But the
application of Art.14 was invoked only at the threshold of a deal
to protect the legitimate expectation of the citizen. It was
unfortunately not extended to the stage of termination of contract
by the government.
A writ petition is always tenable to flay discrimination at the
threshold when the contract is awarded as it inevitably involves
the question of infraction of Art.14. The government must act
fairly and impartially, granting equal opportunity to one and all.
In Radha Krishna Agarwal v. Bihar, [AIR, 1977 SC 1496], certain
forest lands were leased out for a specified period to collect and
exploit certain seeds, on payment of a royalty. The cancellation
of the contract for breach of certain conditions thereof was
sought to be questioned by the appellants through a writ
petition. The main plank of argument of the petitioners was that
the obligation imposed by Art.14 could not be avoided by the
State in the contractual field. The Supreme Court, rejecting the
writ petition, said that Art.14 would be applicable at the very
threshold or at the time of entering into a contract because at
this stage, the State exercised executive power, but once a
contract is created, the relations between parties would be
116
determined by the terms of contract and Art.14 does not hold
the sway under such circumstances. This ruling of the Supreme
Court kept away the application of Art.14 for the enforcement of
performance of the contract or its cancellation.
However, judicial attitude has undergone a sea change with the
epoch making decision of the Supreme Court in R.D. Shetty v
I.A.A.I. [AIR 1979 SC 1628] where the governments were
compelled to follow certain standards and norms which are
rational, relevant and reasonable in the matter of invitation of
tenders. In the instant case, the Supreme Court was highly
critical of the International Airport Authority of India, an agency
or instrumentality of the Government of India, for entering into
a contract for carrying on cafeteria at the airport with a person,
who admittedly did not fulfil the conditions contained in the
notification inviting tenders. The principle of reasonableness
and non-arbitrariness of governmental action was heralded by
the Supreme Court as the touchstone of Art.14. The public law
limitations in terms of Arts.14 and 19 could enter, where the
terms of the contract vest arbitrary and unreasonable power in
the state. Therefore, State is bound to give equal opportunities
to all those potential candidates who could offer themselves as
contracting parties.
The Supreme Court reiterated the same principle in Kasturilal
v. J&K, [AIR 1980 SC 1992] speaking through Justice
Bagawathi J. and held that there are two limitations imposed
by law on the discretion of the government to deal with the
public whether by way of entering into contract, or by way of
giving jobs or permitting any other category of largess: (1) the
terms and conditions on which largess might be granted; and
(2) parties might be recipients or beneficiaries of such largess.
The court is duty bound under the Constitution to assure and
ensure that the terms and conditions are not detrimental to the
public interest and choice of the party is not arbitrary and
unreasonable by denying equal opportunities for all those who
were potential competitors for government contracts.
The Supreme Court entered with vehemence into the
reasonableness and non-arbitrariness of terms of a valid contract
which determines the rights and obligations of parties inter se
in Central Inland Transport Corporation Ltd. v. Brojanth,
[AIR 1986 SC 1571], wherein a rule constituting a part of the
contract of employment between the corporation and its
permanent employees came under scrutiny. The Supreme Court
emphasized that it will not enforce and will strike down an unfair
and unreasonable clause in a contract entered into between the
parties because Art.14 is now considered as fountain head of
audi alterem partem. The perplexing problems of contractual
powers and its exercise in the context of constitutional
limitations came in for further formulation and elaborate
elucidation in Kumari Shri Lekha Vidhyarthi v. State of U.P
and others [AIR 1991 SC 537]. The immediate problem for
consideration in the instant case was the validity of an omnibus
circular which embodied the decision of the State Government
to terminate the engagement of all the Government counsels
engaged through the State of U.P. at the district level, however
so designated and it equally applied to all the Government
counsels irrespective of their tenure. In view of the formidable
effect of this Circular, the Additional Advocate General of the
State of U.P. strenuously contended on behalf of the State of
U.P. that the relationship of the appointees to the offices of the
Government counsel in the district, is purely contractual on the
terms of the contract and is in essence an engagement of a
counsel by a private party who can be changed anytime at the
sweet will and pleasure of the litigant, without there being a
corresponding right in the counsel to insist on continuance of
the engagement. Further, it was contended that the appointment
of a District counsel is only professional engagement terminable
at will on either side and not appointment to a post under the
government and hence, logically, there is a power vested with
the government to terminate the appointment at any time without
assigning any cause. This supra-distinction between
professional engagement and appointment to a post under
the government was deliberately made with a view to get out
of the constitutional limitations to which a power-holder is
subject to. The acceptance of the aforesaid attractive argument
of the Additional Advocate General would, in effect and
substance, involve unwarrantable assumption that the
appointment may be terminated even during currency of the
contract even without the existence of any cogent and
convincing cause. This construction would result in conferring
arbitrary power of termination to the government. The Supreme
Court went in depth into the facts of the case and after thorough
and threadbare analysis reached the following conclusion:
Applicability of Art.14 to the executive action of the State being
settled and for the same reason its applicability at the threshold
to the making of a contract in exercise of the executive power
being beyond dispute, can it be said that the State can thereafter
cast off its personality and exercise unbridled power unfettered
by the requirements of Art.14 in the sphere of contractual
arrangements and claim to be governed therein only the private
law principles applicable to private individual whose rights flow
only from the terms of the contract without anything more? We
have no hesitation in saying that the personality requiring
regulation of its conduct in all spheres by requirements of Art.14
does not undergo such a radical change after making of a
contract merely because some contractual rights accrue to the
other party in addition. It is not as if the requirements of Art.14
and contractual obligations are alien concepts, which cannot
co-exist.
The aforesaid statement clearly and categorically brings out the
judicial philosophy underlying the mandate of Art.14 is to be
attending not only at the threshold of entering into the contract
but also after the valid contract is entered into between a legal
entity and any agency or instrumentality of Government. This
is in view of the fact that an additional contractual obligation
cannot divest the claimant of the guarantee under Art.14 of non
arbitrariness at the hands of the State in any of its actions. The
Supreme Court therefore clearly and categorically pointed out
that once Art.14 is applicable, the existence of contractual
obligation cannot be an excuse for non-performance of
constitutional obligation.
117
Sterling Computers Ltd. v. M.N. Publishers [1993(1) SCALE
36], repeated and reiterated judicial dicta perceived in Kumari
Shrilekha Vidhyarthis case and expressed the limits and
limitations of the powers of the Government and the authority
of the courts to interfere and intervene in the exercise of the
executive power. The State takes into account objective
considerations of the interest of the State and the public, and
the Court cannot substitute its own decision for the decision of
the authority entering into contract, for the court is not an
appellate authority. However, Art.14 eschews arbitrariness and
if the contract clearly violates Art.14, the claim of the State for
some latitude or liberty in contractual matters cannot be upheld
on the plea that it tantamounts to an encroachment of the
exclusive right of the executive to decide one way or another.
A carspectus of catena of cases clearly demonstrate the judicial
policy that openness, impartiality and fairness are required to
be observed not only while entering into contract but also in
the terms and stipulations of the performance of contracts as
well as its breach.
1.4 PERSONAL LIABILITY IN GOVERNMENT
CONTRACT
Article 299 (2) exempts the President and the Governors of the
States from the personal liability in respect of the government
contracts made by the union of India or the appropriate State.
The personal immunity conferred on the President or the
Governor as the case may be does not confer any immunity in
the case of appropriate governments in respect of any
consequential proceedings against them as mentioned in Art.
300 of the Constitution. In fact, the Bombay High Court in
P.V. Rao v. Kushal Das [AIR 1949 Bom 277] held that
Governor and the state government are two different legal
entities. Hence immunity granted to the Governor cannot be
extended to the state government. Hence the Governor cannot
be held personally or vicariously liable. Merely because all
executive actions have to be taken in the name of the Governors
does not necessarily fasten them with personal liability.
As far as the personal liability of the contracting officers signing
on behalf of the state government is concerned Art. 299(2)
provides for exemption from personal liability in respect of such
contracts. In Chathurbhuj v. Moreswar [AIR 1954 SC 236]
the Supreme Court was indirectly concerned with application
of Section 230 (3) of the Indian Contract Act 1872 in respect of
a government contract which was not in proper form. Hence
difficulty arose as to whether the principal could be sued. The
question was whether Section 230(3) of Indian Contract Act is
applicable under such circumstances. The constitutionality of
the government contracts nor the attention of the court was
invited to the exemption of the personal liability embodied in
Art. 299(2). The government was also not impeded in this case
which arose out of an election dispute between two citizens.
Therefore, the observation of the Supreme Court in
Chathurbhuj v. Moreswar indirectly suggesting the invocation
of Section 230(3) of the Indian Contract Act can be considered
as not laying down the law correctly. A statutory provision
like Sec.233 of the Indian Contract Act cannot go contrary to
Art. 299(2) of the Indian Constitution. Hence a statute cannot
fasten a liability contravening the exemption accorded by Art.
299(2). If the contract is void and therefore legally
unenforceable against the government, Section 230(3) cannot
be given effect to. In State of U.P v. Murali Lal [AIR 1971
SC 2210], an attempt was also made to apply personal liability
on the strength of Section 235 of the Indian Contract Act. The
Supreme Court rightly rejected the contention and held that
Section 235 would be applicable only if a valid contract is in
existence. A void contract is incapable of ratification because
whatever is applicable to Section 230 will also with equal
strength be applied to Sec 235. Hence, from the aforesaid case
the conclusion emerges that the contracting officer will not be
liable personally in respect of a contract entered into on behalf
of the government whether or not requirements of Art. 299 are
complied with.
1.5 THE NATURE OF CONTRACTUAL RELATION
When government enters into the contract with governments
of other countries for various purposes, such contracts are made
in the exercise of sovereign power of State. Such contracts
need not be necessarily made only for the pursuance of
commercial activities, but also for the purpose of promotion of
general welfare, and protection of international peace. These
contracts are known as treaties or pacts which may be bi-lateral
or multi-lateral and such are governed by the principles of
international law.
There are also contracts made by the government in the exercise
of statutory powers. The government in India can carry on any
business or trade or acquire any property or enter into any
contract by making a law or without making a law. The power
to contract is expressly vested in Art. 298 of the Constitution.
Article 298 of the Constitution categorically makes it clear that
it is an exercise of an executive power. However, the
Constitution of India commands that under special
circumstances a law is required for the purpose of certain types
of exercise of executive power. Even without constitutional
commands, the legislature may enact a law to enable the
government to carry on avowed functions and consequently
regulate such function and any exercise of such function must
be in accordance with law. Any contract entered into in
accordance with such law is known as the contract made under
statutory power. For example, some of the State legislatures in
India, have enacted laws for sale or option of the right to collect
forest produce. The contract for aforesaid purposes made under
the statute or the prescribed rules are contracts made in the
exercise of statutory powers. Contract in order to be valid must
satisfy each and every provision in the statute. However,
Parliament has so far not made any law to regulate the contract
of the Union of India. Once contracts are made under a statute,
any infringement of statutory conditions can compel the
government to act in accordance with law at the instance of the
aggrieved party who might approach the court for the discharge
of statutory duty by way of writ of mandamus. The last type of
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contracts are those which are made in exercise of executive power
of the State. Most of the contracts of the government of India
fall under this category.
It must be clearly understood that Arts. 298 and 299 refer to
only government contracts namely contract made by union of
India or States which are the units of Indian Federation. A
statutory authority, local authority or any agency or
instrumentality of the government could be a State for the
purposes of the enforcement of fundamental right under Art.
12, but they are not subject to the procedural limitation imposed
by Art. 299.
The contractual relationship between the government and other
legal entities including individuals, comprehends a variety of
dealings. For the sake of clarity they can be conveniently
classified under the following heads:
1. Where the government acts as a supplier, manufacturer,
producer of commodities and services. The persons are
buyers or users and consumers. These include water,
electricity, telephone, carriage of passengers and goods by
railways, posts and telegraphs. Supplies and disposal of
commodities and services are controlled by appropriate
statutes. However, the supply of such services and
commodities are given effect to mostly through contracts
express and implied made between the consumers and the
government.
2. The governmental contracts may include contracts made
by them for the disposal of surplus goods and unserviceable
stores. Such contracts are generally made through the
process of auction. The sale of natural produce from the
forest comes under the same category. The right to collect
the produce from the forest as well as the right to catch
fishes are sold through process of auction. Some of the
States have made appropriate statutes and naturally
contracts entered by them do fall in the province of statutory
contracts.
3. The third category of contracts refers to cases where the
government itself is a consumer of goods and services and
therefore the biggest buyer. The following contracts come
under this category.
a. Procurement contracts : The modern government
purchases many things ranging from ordinary
stationery to supersonic jet. The contracts made for
the aforesaid purpose can be grouped under this head.
b. Construction contracts : These types of contract
include new construction, addition and alteration to
the existing property, replacement or remodelling of
bridges, buildings, roads etc. Although there are
Public Works Departments (PWD) at the government
levels they neither have the capacity nor sufficient
expertise for such massive construction and hence
they award contracts to the experts in the field for
which detailed procedure is followed.
c. Repairing contract : They are entered into for the
purposes of repairing, reconditioning, maintaining
buildings, plants, machinery, bridges and roads etc.
d. Development and Research contracts : Such types
of contracts are for the purpose of conducting studies
and research in the field of natural and applied
sciences, social sciences etc., which may have bearing
on the development of the State concerned.
e. Licensing contracts : These are contracts meant for
securing the performance of various services, running
liquor shops, fair price shops etc. The inability of the
government to carry on commercial activities by itself
necessitates the issue of license to the persons
concerned. All the ingredients of a contract could be
found in the license. The governments in order to
raise resources for the developmental activities are
constrained to issue securities and bonds. Although
these loans are governed by the respective statutes,
these bonds inevitably constitute the contractual
relations between the State and the citizens advancing
the money.
f. Service Contracts : It is highly doubtful whether a
contract of service with government, can under
ordinary circumstances be considered as a contract
between the person so employed and the government
and further whether such service contracts can be
declared void for non-compliance under the
provisions of Art. 299. This is because of the fact
that once a person is appointed to government service,
the government servant acquires a status, and his
rights and obligations are no longer determined by
the contract but by the statutory rules framed by the
government or law made by the appropriate legislature
and relevant constitutional principles. No formal
document is executed between the government and
the servant and issuance of the letter of appointment
by the government and acceptance by the servant is
the focal point of the commencement of the
government service and the view has developed that
such contracts are outside the scope of Art. 299.
1.6 DIVERSE TYPES OF CONTRACT
There are different varieties of government contracts. The nature
of supplies or services would determine what type of contract
is required in a given situation. The difficulties are heightened
because there is no statute or set of rules defining or regulating
the diverse types of contracts. In commercial practice the
following types of contract are in vogue.
(1) Single Transaction or Fixed Price Contract
Most of the government contracts fall under this category. It is
known as Fixed Quantity Contract or Lump-sum Contract.
Under this type of contract, the quantity of the materials to be
supplied and the price and the time are fixed. Generally, the
contractor is not entitled to raise additional expenses for any
reason whatsoever. But variation in the price of the goods by
the contractor may be permitted if there is escalation clause.
The remarkable feature of this type of contract is the inherent
incentive to the contractor to perform the contract as early as
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possible. It promotes efficiency. But the assessment of the
price must be realised; otherwise under assessment or over
assessment of the price might affect the contracting parties.
(2) Rate Contract
In a contract for supply of services for a sufficiently long yet
specified period of time this type of contract is usually resorted
to. In this category of contract an offer to supply goods at a
fixed rate by a party is accepted by the other. The acceptance is
not legal acceptance in the eye of the law. The offer is a standing
offer and an order is placed in response to that standing offer,
such order constitutes a fresh contract leading to and resulting
in a binding obligation between the parties.
(3) Running Contract
Under this contract the contractor is required to supply an
approximate quantity of goods at certain fixed intervals. The
price is fixed and it remains so throughout the pendency of
contract subject to price variation clause in which case increase
in the price is allowable. The purchaser agrees to purchase a
fixed minimum and the contract contains a clause permitting to
buy an additional quantity of the goods upto a fixed percentage.
During the currency of contract the condition forming part of
the contract would empower the contractor to increase or
decrease quantity of goods to be purchased under the terms of
the contract.
(4) Cost plus Percentage of Cost
Under this type of contract, contractor gets actual cost incurred
in the performance of the contract and the percentage of actual
total cost as profit or fixed amount as determined on some
rational basis. The actual cost would include the amount spent
by the contractor on raw materials, taxes, duties, labour charges,
depreciation and other establishment charges. If the contract is
for the supply of goods for a long period, actual cost will rise
with the increase in the inputs of different instalments, as the
same goods are liable to be priced in different way. To obviate
this difficulty the contract could provide for periodic revision
of the prices. There will be stipulation in these types of contracts
for the production of books of accounts for the inspection,
periodic submission of certificates with regard to prevailing
prices of raw materials etc. There is no incentive to the
contractor to perform contract in time.
(5) Cost plus Fixed Fee Contract
This is an innovative version of the above type of contract.
The actual cost incurred by the contractor is reimbursed whether
it be incurred for supply of the goods, or rendering of services
along with a fixed amount as fee. The profit of the contractor
in this case is not linked with the cost. It is a sum which is
mutually agreed and irrespective of the cost incurred he gets
the fee. In repair or maintenance work, this type of contract is
often pressed into service. Time is the only incentive for the
contractor. The earlier the performance the quicker he gets
money.
1.7 SELECTION OF CONTRACTOR
The two processes generally employed for the initiation of
government contracts are -
1. Competitive tendering
2. Negotiative or non-competitive tendering
The process of auction may also be resorted to. The choice of
a particular process in a given situation depends on diverse
considerations.
The 'competitive tendering' is the usual method of entering into
contract. Through the medium of competition, the supply of
goods and services is possible at the most economical price.
There is openness, impartiality and fairness in the selection of
contractor. But, sometimes in view of constant competition
prices are cut down and parties may try to avoid contractual
obligation at the slightest pretext and on flimsy grounds. The
quality may consequently suffer. But there are innumerable
instances where the contracts have not been awarded to the last
tenderer. There is not much rigid reliance on the rule of
acceptance of the last tenderer. The acceptance of the slightest
higher tender in genuine cases may result in increased cost. If
there are reasons for doing so, the court would be shy to interfere.
The competitive tendering is of two types :
a. Open competitive tendering
All invitation to tenderers are advertised, and everyone who
considers himself as competent can submit his/her offer.
Invitation to tenderers are issued to limited tenderers who are
on the approved list. Those who are not on the approved list
cannot submit tenders.
b. Non competitive tendering
The other method of entering into contract is known as non-
competitive tendering by process of negotiation. If a particular
brand of commodity or a product of the particular manufacture
is required this type of method is resorted to so as to ensure that
the price is fair and is not excessive. This is suitable for the
procurement of stores. In India, the sole manufacturers are
required to submit quotations. They are examined by the
designated officials who are empowered to visit the place of
manufacture to inspect the books of accounts and to gather such
information as they deem fit. Afterwards, taking overall factors
into consideration a tentative price is fixed. Then stage is set
for negotiation and a compromise price is arrived at. The
government has added in all these types of contract a concise
condition as to post costing rights which empowers the
government the right to refix prices under the negotiated contract
after the contract have been completed. The said condition has
become a part of the standard contract.
When the government has to sell certain goods, or the right to
collect the forest produce, catching of fishes in government
fisheries, tolls, excise and licence, the contract is entered into
through the process of auction. An auction sale may be either
'open competitive' or 'non competitive' depending on the mode
of conducting the auction. In an auction sale, where a
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government is not a party to the contract, a valid and binding
contract comes into existence vide S.64(2) Sale of Goods Act,
1930. This provision may be applicable in an auction sale in
which the government is the auctioneer or in an auction which
is conducted on behalf of the appropriate governments. Even
if after the hammer falls both the offer and acceptance are oral
and such oral agreement are beyond the purview of Art. 299 of
Constitution of India. Hence a critical and crucial question
which falls for consideration is as to when can a binding contract
be said to have concluded with the government through the
processes of auction.
This matter was considered by the Supreme Court in K.P.
Choudhury v. State of Madhya Pradesh & Others, [AIR
1967 SC 203], where the appellant, a forest contractor agreed
to bid for certain contracts for auction of diverse contract in
that division in pursuance of a notification issued by the
divisional forest officer. Every bidder was required to deposit
earnest money as a condition of auction. The appellant gave
bids for two contracts and his bid being the highest, the hammer
fell in his favour. The amount of contract being more than
what divisional forest officer could accept, the matter was
referred to the Chief Conservator of Forest. Before the Chief
Conservator could accept, dispute arose between the bidder
and the government. When the matter finally came on appeal,
the Supreme Court held that there was no contract between the
government and the appellant before he bid at the auction nor
was there any contract between them after the auction was over
as required under Art. 299 because Art. 299 in effect rules out
all implied contracts. In view of the above holding, an auction
is held on or behalf of government. A contract entered into
through auction comes into existence not at the fall of the
hammer but when it is signed by the competent authority. Hence
until it is approved by such competent authority no valid or
binding contract comes into existence. This is a definite
departure from the rule applicable to contract made through
auction between private individuals. [State of Assam v. K.P.
Singh, AIR 1953 SC 309]. It is also mentioned that if statute
provides for oral contract, a valid contract comes into existence
on the fall of the hammer. If however a contract is not made in
pursuance of statute, it must satisfy the provisions embodied in
Art. 299. This is on the assumption that Art. 299 will apply
only in respect of contracts entered into in the exercise of
executive powers and not those contracts made in the exercise
of statutory powers.
1.8 PUBLIC LAW REMEDY IN GOVERNMENT
CONTRACTS
The contractors are inclined to invoke writ jurisdiction to enforce
contractual obligation against the government. The writ of
Mandamus can be issued by the superior courts only if the
following conditions are cumulatively complied with: (1) the
petitioner must have a legal right to the performance of the
legal duty, (2) the legal duty must be of public nature (3) the
right must be subsisting on the date of the writ petition, and (4)
petitioner must have demanded the performance of the duty
and the authority must have refused to do so.
The Supreme Court in an appeal, refused to concede a writ
petition under Art.226 by holding that it is not maintainable to
enforce a liability arising out of the breach of the contract. A
contractual obligation cannot be enforced through a writ as the
violation of the contractual obligation is not a breach of duty
imposed by law. Any person affected by the exercise of a
constitutional or statutory power by the government alone can
seek redress by way of writ. The remedy lies some where else.
The problem of enforceability of contractual obligation through
the writ petition came in before the Calcutta High Court even
before the commencement of the Constitution in P.K. Banerjee
v. L.J. Simonds [AIR 1947 Cal.315]. In this case, the contract
of the petitioner was cancelled on some valid grounds. The
subject matter of the contract was the supply of iron scrap.
Auction of the said iron scrap was advertised in a news paper
subsequently, whereupon the contractor filed an application for
an order directing the government to forbear from advertising
for the sale of iron scrap. The attractive argument on behalf of
the contractor was that by entering into a contract, a statutory
duty had been created under S.31 of the Sale of Goods Act,
1930. And the refusal of the government to deliver the goods
of the appellant as per the statutory duty amounted to breach of
statutory duty imposed by Sec.31 of Sale of Goods Act, 1930.
The Court repelled the contention and said that the contractual
obligation cannot be enforced through a machinery created by
Sec.45 of the Specific Relief Act. The identical argument was
repeated with vehemence before the Calcutta High Court after
the commencement of the constitution in C.M.W.M. Co. v.
H.M.Jagtiani, [AIR 1952 Cal. 315]. It was contended in the
instant case that the writ jurisdiction of the High Court under
Art. 226 of the constitution is very wide. The writ could be
issued to any person and for any other purpose. Hence
writ of mandamus could be issued to enforce the obligation
arising out of the contract. The High Court held that the duty
imposed by the terms of the contract could not be considered
as a duty of a public nature and hence the remedy was refused.
If there had been a constitutional or statutory duty and there
had been a failure to discharge aforesaid duties, writ of
mandamus would be issued.
In Venkata Subbayya v. Government of A.P. [AIR 1965 A.P.
425], the State Text Book Committee selected Hindi Text Book
of the petitioner for the use of students. The Director of Public
Instruction communicated that the petitioners books have been
ordered to be prescribed during the year 1964-65 subject to the
fulfilment of twin conditions: (a) the deposit of specified sum of
money in the Government treasury; (b) execution of the
agreement by the petitioner in favour of the Government. After
some time D.P.I. informed the petitioner that the earlier
communication is to be kept in abeyance. Afterwards, a third
communication informed that the order prescribing the text
books was cancelled. The subject matter of judicial scrutiny
was the third communication. It was argued on behalf of the
petitioners that they had sufficient interest emanating to file a
writ as they have accrued a specific right by the first
communication from the respondent. The court came to the
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conclusion categorically that the concluded contract had not
come into being. An interest is something inferior to a right in
fact, it is merely a chance. It is inchoate right or incipient interest
which cannot be the foundation for the exercise of writ
jurisdiction under Art.226.
The legal proposition that a writ of mandamus will neither lie to
enforce the contractual obligation nor breach of contract is
subject to some exceptions. While making a contract or at the
time of breach thereof, if there is violation of the fundamental
rights of the contractor or violation of the statutory provision
under the pre-existing contract a writ of mandamus could lie.
Moreover rights and liabilities may owe its genesis to the
contract but may not be purely contractual but partly contractual
coupled with statutory flavour, a writ of mandamus might lie.
A breach of contract could take place in any one of the three
ways:
(a) where a contract is entered into in the exercise of the
statutory powers under certain enactments and/ or the rules
made there under and there is a reasonable allegation with
regard to breach of the aforesaid statutory conditions on
the part of the government;
(b) where there is a genuine grievance that there has been a
breach of promise or an assurance made by the government
in pursuance of which the other party has acted to his
detriment, but the agreement is short of Art.299 of the
Constitution of India; and
(c) where the contract entered into by the government and the
affected party is non-statutory in character and purely
contractual; the rights and the obligations are fully governed
by the terms and conditions of the contract and the breach
of the contract by the state is the subject matter of the
challenge.
In cases coming under the purview of the third category, no
writ is maintainable to prevent a breach of contract. The
remedies are the ordinary remedies either by way of suit for
damages or for an injunction to restrain the breach of contract.
In respect of cases covered by the second category the obligation
arising against the State out of its representation amounting to
a promise may be enforced ex-contractu by a person who acts
upon its promise. This is out of equity, the courts have issued
a writ of mandamus to compel the government to fulfil the
promise or assurance on the ground of equity. [Union of India
v. Anglo Afghan Agencies, AIR 1968 Sc. 718].
As far as the cases covered under the first category are
concerned, the problems may arise for the alleged violation of
the fundamental rights or statutory rights. In both the cases the
origin of the right is in a contract. In Rashbihari Panda v.
State of Orissa [AIR 1961 SC 108], the State of Orissa created
its monopoly in the trade, government with a view to implement
a monopoly scheme contemplated under the Act, entered into
with agreement for the sale of kendu leaves after inviting tenders
from the traders. One of the terms of the tender notice permitted
renewal of the appointment for one year on mutually agreed
terms and conditions between the parties. In 1968, the
government agreed to review the leases on fulfilment of the
terms. Under the scheme, the government offered these leases
to those who have worked satisfactorily in any previous year
and made no default in the matter of payment. The writ petitions
were filed challenging the legality of the fresh offers made by
the government on the ground that while inviting tenders the
government offered these leases only to certain old contractors
which in effect and substance shut out existing business men
and new entrants in the field. It was therefore ex facie
discriminatory and unreasonable. Hence the Supreme Court
refused to uphold the validity of the scheme and adjudged the
same in the light of Art.14 and 19(1)(g) of the Constitution.
Similarly the Allahabad High Court struck down an auction as
ultra vires Art.14 and 19(1)(g) for the property of the State cannot
be used in such a manner so as to enrich a particular category
of persons to the detriment of the other citizens. [Rajendra
Singh v. State of U.P. AIR 1973 All. 37]
In State of Assam v. Thulsi Singh [(1964) 1 SCJ. 42], a rule
framed under Northern India Ferries Act, 1878 provided that
the sale shall be through auction generally to the highest bidder,
and provided that there can be a deviation from the rule, if the
competent authority gives sufficient reasons to be recorded in
writing. Acting under the aforesaid rule, the Executive Engineer
was reported to have rejected the highest bid of the appellant
and accepted the next bid. The respondent challenged the order
of the Executive Engineer rejecting his bid. The question for
consideration before the Supreme Court on appeal was whether
the settlement of the ferry rights by the Engineer was in
accordance with the Act and the rules made thereunder. The
court held in this particular case it was merely enforcing a
statutory position and not an obligation arising out of contract.
Sometimes, the courts have issued a writ of mandamus to
provide succor to the harassed contractors. In Shaifulla v. State
of U.P. [AIR 1961 All. 485], the government proceeded to
recover the contractual dues as arrears of land revenue, which
was an exclusive remedy available to the government, in the
exercise of sovereign power and not as a contracting party. In
this case, admittedly there was no enforcement of any statutory
provision; but the court directed the government not to resort
to special provisions of revenue recoveries for recovering
damages for the breach of contracts, but merely to pursue the
ordinary remedies available to the contractors.
1.9 STATUTORY DISCRETION AND GOVERNMENT
CONTRACTS
The executive power of the government to make a contract is
not uncontrolled and unlimited. A contract can be varied or
even abrogated by the legislature acting within its plenary power.
It is a fundamental principle of law that a public authority which
is empowered by a statute with a discretionary power meant to
be exercised for the promotion of the public welfare by entering
into a contract in general terms, cannot fetter itself in the exercise
of such discretion. This is called the 'principle of non-fettering'
of statutory discretion by a contract. The rationale for the
aforesaid principle stems from the fact that the power of the
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legislature to make the law is plenary and such power cannot be
fettered.
The pertinent question is whether the government could incur
this ability by virtue of a contract which is statutory discretion
came in for consideration before the courts more than once. In
B.K. Das v. State of Assam, [AIR 1956 Assam 23], where the
appellant firm was appointed as a distributor of certain
controlled commodities including salt, subject to certain terms
and conditions contained in the letter of appointment. One of
the pre-conditions for the appointment was that of keeping in
stock a specified quantity fixed by the government for such
controlled commodity. The agreement could not be executed
in the formal form. The government, in the exercise of the
statutory power decontrolled the salt. Consequently the price
of the salt came down, and as a result the firm incurred a huge
loss which they tried to recover from the government. The
contentions before the High Court was that the distributor was
required to have a specified quantity of stock of salt till the date
of decontrol, and the decontrolling of commodity resulted in
the reduction of price and accumulation of loss. Rejecting the
contention the court held that agreement between two parties
could not control the statutory power of the government to
remove control over controlled commodity. It was done by the
governmen in different capacity. The power to control or
decontrol vested in the statute could be exercised at any time
by the government not withstanding any thing said in the
contract to the contrary.
This principle has been reiterated by the A.P. High Court in
Secretary to Government, P.W. & T Department, A.P. v.
Adoni Ginning Factory [AIR 1959 A.P. 538]. In this case the
government entered into agreements with consumers in the State
for supply of energy in bulk at specified rates for 10 years.
There was no provision in the agreement to enhance the rate
during the currency of the agreement. The government in
exercise of the powers vested in it by virtue of Sec.3 of Madras
Temporary Powers Act, 1949 issued two orders enhancing the
rate contracted between the parties and imposing fuel surcharge.
Being aggrieved by this action of the government, a consumer
who is the party to the agreement also objected to the unilateral
enhancement of the rate and challenged the legal validity of
action. But the Division Bench of the Andhra Pradesh High
Court held that enhancement of rate was done by the government
not in the exercise of executive powers but in the exercise of
statutory powers. The court further added that if the action of
the government had caused any detriment to contracting party,
the government will not be saddled with costs and
consequences. However, where the Electricity Board was given
a special statutory power to fix the tariffs by agreement with
the consumers by virtue of special circumstances, the Supreme
Court in Indian Aluminium Co. v. K.S.E. Board, [AIR 1975 SC.
1967], held that the Board could not override the terms made in
such agreement making use of the power to prescribe uniform
tariffs specified in another section of the Act.
The judicial scrutiny on contractual powers has expanded
considerably in view of inevitable fact that the government
contracts are standard forms of contract and are therefore one-
sided. In the normal commercial contracts the citizens have
hardly any discretion to settle the terms of the contract. If any
citizen would like to carry on commercial activities he will have
no option but to agree to the terms of the contract to be entered
into with the government.
1.10 FINANCIAL REGULATIONS
The Constitution of India provides for the government accounts
of the States and the Centre to be kept in three parts, viz.,
(a) Consolidated Fund
(b) Public Accounts Fund
(c) Contingency Fund
Expenditures from Consolidated Fund are stipulated in Art.
112(3). The expenditure relating to all contracts of supplies
and services are not a charge on the consolidated fund. These
are to be included in various estimates of the claims of respective
Ministries. Once the demands of grants are made and presented
to the House, these are admitted to voting. Due to enormous
increase in the governmental activities, effective direct
parliamentary control has become physically impossible. Many
of such activities are presently regulated by number of Standing
or Adhoc Committees. Some of such committees relating to
finance are Estimate Committee, Committee on Public
Undertakings & Public Accounts Committee. Finance Ministry
regulates the periodical needs. The Comptroller and Auditor
General is responsible for examining all financial transactions
in the country. The audit conducted by him ensures:
(a) that all expenditures are incurred according to the provisions
of the Constitution, laws and financial rules and regulations;
(b) that proper sanctions and authorities exist;
(c) that the expenditure is within the prescribed limit;
(d) that supported documents and vouchers are kept; and
(e) that the expenditure has been properly accounted for.
Again, Public Accounts Committee ensures that the amount
has been spent on the items for which it was granted. The
Committee has to satisfy itself that the money shown in the
accounts as having been disbursed was legally available for
and applicable to, the service or purpose to which they have
been applied or charged. As such all government and public
contracts are subjected to all forms of Parliamentary Control.
These are to be scrutinised by the Public Accounts Committee
and externally audited by the Comptroller and Auditor General.
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2. ENGINEERING CONTRACTS
SUB TOPICS
2.1 Introduction
2.2 Types
2.3 Stages of Engineering Contracts
2.4 Tender Procedure
2.5 Management of Engineering Contracts
2.6 Special Contractual Features
2.1 INTRODUCTION
Engineering contracts are given a special focus of study on
account of the importance of such types of contracts both in the
public as well as in the private sector. Most of the engineering
contracts either directly involve public interest or indirectly
touch the public interest. From the point of view of size, money
involved and the need for huge labour inputs, all engineering
contracts attract public notice in several ways. Everyday when
we open newspapers we find several notices, informations and
reports about these types of contracts. There are variety of
engineering contracts, namely civil engineering contracts,
mechanical, electrical and other types of installation contracts
and service and maintenance contracts. An engineering contract
can be defined as one where the promisor (builder contractor,
installer, architect) promises to construct building (civil
engineering) or install (mechanical / electrical/
telecommunication/electronics) a bridge, workshop or machine
against consideration, at the site of the promisee. Alfred
Hudson, Kings Counsel defined an engineering contract as one
under which .... a person .... called variously the builder or
contractor undertakes for reward to carry out for another person,
variously referred to as the building owner or employer, works
of a building or civil engineering character. In the typical case
the work will be carried out upon the land of the employer or
building owner ..... Following the example of the definition
any mechanical/electrical/telecommunication contract can also
be defined.
2.2 TYPES OF ENGINEERING CONTRACT
Engineering contracts may have different types in formulating
the contracts. Common types are:
(i) Item Rate Contract (measured contract)
(ii) Schedule Contracts (percentage rate contract)
(iii) Lump-sum Contract
(iv) Cost Plus Contract
(v) Cost Plus Fixed Fee Contract
(vi) Petty Labour Contracts
(vii) Turn-key Contracts
(viii) Sub Contract
(a) back-to-back sub contract
(b) other sub contract
Some of these types of contracts are explained in specific terms
in the chapter on government contracts in this module. You
have to take into account that explanation as well.
(i) Item Rate contract: This is one of the most common civil
contracts in India. In this system a schedule of items, quantities
and rates form the conditionalities in the tender form, keeping
rate column blank. The entire project work is broken into minutest
constituent items which are described in detail keeping no doubt
in work specification. The list is made in a schedule enclosed in
the tender documents. The tenderer has to only specify the
rate and then the total item-cost based on the rate. Since the
quantities in each item is accurately measured at the end of the
performance of the contract to make the final bill notwithstanding
the measurement given in the schedule, it is also known as
measured contract. This type of tender documents can only
be prepared by professional architect who can calculate itemwise
detail specification. If there is error in the specification the
result can be disastrous. An error in the load capacity calculation
may lead to irrepairable consequences.
(ii) Schedule contracts or percentage rate contract : This is a
type of item rate contract with a difference that in the schedule
an ideal rate per item and the cost calculated on that are specified.
The tenderer has to quote a certain percentage either above or
below the scheduled rate. Generally speaking, Public Works
Committee of the Central and the State government specifies
item-wise ideal rate within a local limit. These CPWD/PWD
rates are quoted item-wise in the tender document. The tenderer
has the information about the ideal rate as calculated by CPWD/
PWD so that he can quote his rate percent in view of his own
calculation. The rate percent may be specified item-wise or on
the overall calculation. Item-wise percentage quotation (either
above and below) requires itemwise calculation, whereas overall
rate percent is easier to calculate on the overall ideal cost
mentioned.
(iii) Lump-sum contract : In Lump-sum contract the whole
work is expressed in one single figure of cost. In this system,
the parties require to know the drawings of work including cross-
section drawings and all other general drawings of, minor
changes required. A schedule of deviation is also agreed upon.
In a lump-sum contract, parties are not engaged in controversies
on each step of the construction or installation which arise in
item-rate contracts. Lump-sum contracts are suitable in
stereotyped building works.
(iv) Cost Plus contracts : These contracts generally have two
components: (a) the cost of the work done, and (b) profits
stipulated in the contract. Whereas part (a) is based upon actuals,
part (b) may either be expressed in fixed amounts or as
percentage of the cost. Percentage of profits may be either
fixed or may be stipulated in a sliding scale [rate of profit is
variable depending on the cost of project]. This type of
contract is generally preferred by the contractors, because in
any case on account of increasing cost structure the contractors
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interest is not hampered. But, it is very difficult for the employers
to regulate this type of contract because higher the cost
involved, greater is the profit for the contractor. As such, there
is no auto regulation by the contractors to keep the cost at a
minimum.
(v) Cost plus fixed fee contract: This mode of contract is already
explained above. These are contracts where the profits remain
fixed regardless of any increase or decrease in the cost.
(vi) Petty Labour contracts: In case of minor construction or
maintenance works, the employer carries on the work under his
own supervision with the help of labour contracts. In such
contracts, the labour contractors who are also called Sardars
supply the labour, but the labour contractor is required to receive
a pre-determined portion of work either daily, weekly or
fortnightly. He is paid on the basis of actual measurement of
the work done on the basis of pre-determined rates. He is
personally responsible for paying the labourers. Although the
employer does not have any contract with the labourers on which
the employer-employee relationship depends, but for purpose
of many statutes, like Minimum Wages Act, Payment of Wages
Act etc, he is deemed to be the principal employer bound to
fulfil statutory requirements.
(vii) Turn-key contracts: Turn-key contracts are basically those
where the contractor is himself required to design the project
and execute the same. In all other forms of contract, the design
is the job of an architect, or consulting engineer, or a designer,
or of the in-house engineer. In turn-key contracts, the employer
does not prepare the design of the project in detail. It is left to
the contractor, either wholly or in bulk. As for example, in case
of a building contract, the employer prepares the site-plan and
an outline of the building, but leaves the detailed planning,
architecturing, and the execution to the contractor. Therefore,
in these contracts, the contractor is not only required to
construct the work, but he is also accountable as a project
expert, an architect and a designer as well. Turn-key
contracts are generally suitable for high value jobs and can be
done by highly professional and competent firms having multi-
disciplinary membership from various sections of engineering.
(viii) Sub contract: A sub contract is one where the contractor
enters into a further contract with another person known as a
sub-contractor for some part of the work undertaken or
sometimes even for the whole work. In the contract of agency,
the sub-contractors are called as sub-agents. Generally
speaking, an agreement of contract, authorises the contractor
to do a specific job. He may do it either by himself or by
appointing sub contractors. Unless specifically prevented in
all engineering contracts sub contracting is an accepted
phenomena. As for example, in the construction work there
are several specialized works to be done,which are done through
sub contractors, like plumbing, mosaic cutting wood work,
painting etc. Sub-contracts are generally of the following two
categories, viz :
(a) Back to back: These are those sub contracts in which the
prime contractor passes on the burden of execution of a specific
issue of the contract to the sub-contractor almost on the same
terms and conditions as exist between him and his employer. As
for example, in a building contract the job relating to plumbing
on the basis of item rate contract may be delegated to a plumber
almost on the same terms and conditions. Since the terms and
conditions are the same, this type of sub-contracting is known
as back to back.
(b) Other Sub contracts: There may be various other types of
sub contracts, on the basis of different conditions, for example,
item rate, lump sum, schedule plus or cost plus. In case of huge
construction or installation works the sub-contracting may even
be on turn-key basis.
2.3 STAGES OF ENGINEERING CONTRACT
Engineering contracts specially those in vogue in various
government departments as well as large private concerns have
the following distinct parts:
1) tender notice;
2) conditionalities in tender;
3) general and special specifications;
4) schedules for the purpose of billing;
5) payment schedule;
6) tender drawings; and
7) memorandum of agreement.
1) Tender notice
Tender notice is a simple notice published in newspapers or
sent individually to prospective tenderers. The notice may be
local, regional, national or global based upon the size,
importance and technology involved. The notice contains the
work descriptions and call for collection of tender form. Tender
documents are sold from a definite centre. Sometimes tender
notice includes along with the nature of the work some
information about the details of the work, time for completion,
and approximate value of the work. The tender notice is the
invitation to make an offer. But tender notice does not contain
details of the works to be completed and the rates and offered
amounts. The tender documents are obtainable by paying a
fee and contain all those details.
2) Conditionalities in tender
The tender documents contain three types of conditionalities
namely:
(i) Standard form conditionalities: Generally government
works as well as works of big private institutions have a standard
form contract with some uniform conditionalities either
expressed in some regulation or guidelines. The tender
documents may only refer to those rules, regulations or
guidelines without specifying those in the document itself. In
Jawaharlal Burman v. Union of India [AIR 1962 SC 378] it
was held that the reference to such rules and regulations in the
tender documents is enough for binding those conditionalities
against the contractor even though in reality a copy of such a
rule and regulation is not available.
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(ii) General conditionalities: Apart from standardised ones
which may include force majeure clause, escaclation clause,
security clause and arbitration clause.
(iii) Special conditions: These may be work specific location
specific and contract specific. Some of these conditions are
drawings, materials to be made available, special provisions
for payment, sale contracts, third party indemnity, and liquidated
damages. Some of these conditions require a brief explanation.
(a) Material issue clause
In some cases the contractor is supplied with some materials
on certain terms. The contractor is required to account for the
material according to the guideline issued, as for example, in
the cement issue clause it may be stipulated as to how much
cement to be issued to the contractor at what time and from
which site. The terms and conditions of issue of such materials
are stipulated in this clause.
(b) Force majeure clause
Force majeure clause protects the contractor from certain acts
of God and acts of human being. This force majeure clause
sometimes are specially designed for locational needs. As for
example, an earthquake Richeter scale 2 may be a force majeure
in Calcutta but may not be so in Garwal hills. Sometimes this
clause also includes protection against strike and lockout.
(c) Escalation clause
In engineering or supply contract there may be an automatic
adjustment provision in the contractual consideration based
upon the market price fluctuations.
(d) Bank guarantee clause
Construction contract requires long time for performance. As
such the employer often requires some kind of assurances for
the timely performance of the contract, financial stability and
security on the advance paid by the employer. This is often
done through bank guarantee. in which the banker certifies the
financial standing of the contractor. But such a bank guarantee
does not make the bank bound as a surety. In order to make a
specific guarantee a contract of guarantee is required to be
entered into by the creditor with the surety, according to which
the surety specifically undertakes to compensate the creditor in
case of failure of principal debtor. Sometimes for obtaining
bank guarantee of this nature some marginal money is required
to be deposited and kept in the bank.
(e) Recovery clause
Sometime the contract includes recovery clause empowering
the employer to withhold any amount of money on account of
failure of the contractor to perform certain warranties
(warranties are conditions but not essential for the purpose of
contract, the breach for which shall make the employer entitled
to claim compensation).
(f) Arbitration clause
In all inter-country agreements based on the issue of global
tender arbitration clause is to be compulsorily included in the
contract. But a local regional contract may not have the clause.
This is always advisible for the contracting parties to keep an
arbitration clause in order to create an alternative forum for
adjudication of disputes. If both the parties agree, they may
have one arbitrator named in the clause to whom all matters of
disputes between the parties are to be referred for decision.
Alternatively each party may retain the right of appointing a
separate arbitrator. In which case the arbitrator in their first
meeting shall appoint an umpire.
3) General and special specification
In engineering contracts there may be several general and special
specifications. These are based upon drawings of the super-
structure like framework, shuttering, centering etc. Sometimes
special specifications are given for the purpose of load bearing
capacity and terminal requirements.
4) Schedule of billing
This clause includes the schedule containing finally negotiated
and accepted rates of tenderer, and the modalities of periodically
billing sometimes based upon the progress of the work or on
the basis of time or both.
5) Schedule of payment
The schedule of payment indicates payment to be made at
various stages on the basis of schedule or bill of quantities
submitted.
6) Tender drawings
Tender drawings form the basis of contractors pricing.
Engineering contracts often cannot be communicated in
language. These are generally done through drawings. So the
employer expresses his demands to the tenderer through the
specification of drawings. Since the contractual rates and
calculations are based upon these drawings a strict observation
of the drawings is always necessary.
7) Memorandum of agreement
The memorandum of agreement is the summary of the agreement
reached between the employer and contractor which is required
to be signed by both the parties on acceptance of the tender.
2.4 TENDER PROCEDURE
An engineering contract can be entered into either through direct
negotiation between the parties or through tender. Tender is
infact a bidding process. The difference between tender and an
auction is that, an auction is an oral bidding in the hearing of
everybody whereas tender is a confidential bidding in writing
without having any knowledge about the other bidders bidding.
The tender notice as was already stated is an invitation to offer
as well as information for an offer. A tender is an offer by the
tenderer and the communication of acceptance of tender through
the memorandum agreement or otherwise is the acceptance.
Tendering is made in four stages as follows :
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(i) Preparation of tender documents;
(ii) Receiving tenders;
(iii) Processing and comparing the tenders; and
(iv) Selection and communication of acceptance.
(i) The preparations of tender papers is a very important task.
Based upon the types & nature of the tender, tender
documents are prepared as e.g., in item rate tender or
schedule contracts, detailed issues are laid down along with
plans, standard form drawings of the work standard
schedules are prepared; besides the standard form contract
special conditions are drafted in the tender document.
Tender may be open or limited. Where it is capable of being
responded to by any one it is open, where there are
prequalifications laid down and previous enlistment is
necessary the tender is said to be limited. In most of the
government contracts a previous enlistment is made on the
basis of capacity of investment, work experience and
technical competency. The enlisted contractors have
various grades and they are capable of submitting tender
within the capacity of listed grade of contractors specified
by the govt. order. Once the documents are prepared the
second stage of the work starts.
(ii) In the second stage a notice of tender is published in daily
newspapers as well through direct communication. Govt.
contracts require these notices to be published under Public
Notification Act, as such the tender notice is to be published
in at least two local dailies of which one must be in the
local language and the other in English. After the notice is
published tender documents are sold from a notified address
within the specified time period. The tenderers based upon
the type of tender submit their offer enclosed in a sealed
cover within the specified time and date. A receipt of
receiving the tender may also be given. Immediately after
the close of the tender, the tendering officer shall open the
tender letters in front of the tenderers present at the time.
The tender documents are checked, verified and signed by
the tendering officer. Sometimes prospective tenderers may
be required to visit the sight in order to effectively workout
the tender offers. With the opening of the tender the second
stage is complete.
(iii) At the third stage, details of the tender documents submitted
by the tenderers are checked and comparative tables
prepared. If it is turn-key project comparative tables are
prepared for each separate work required to be completed.
Sometimes a meeting is called in which a negotiation is
attempted by asking the tenderers their last turn. Such
meeting may be general or individual. This is known as
best bargain effort. The tenderer may withdraw his tender
at any time before the tender is accepted. At the completion
of the third step a complete comparative table is made based
on which the final decision is arrived at.
(iv) At the fourth stage the tendering officer takes a decision
which is commonly known as acceptance of tender. He
makes a decision on the most comparative advantage which
may be based on cost of the project, time of completion,
quality of the work, reliability of the firm etc. Generally
speaking, in govt. contract, best bargain is the lowest tender
but it is not always necessary that the lowest tender has to
be accepted. The deciding officer has to take an objective
view of the comparative advantage.
Once the decision is taken the contract paper is signed by the
parties and the work order given.
2.5 MANAGEMENT OF ENGINEERING CONTRACT
Once the contract is formulated, it is necessary that there is
complete internal and external control mechanism at various
stages. The following stages require a very careful
considerations :
1. arranging bank guarantee and drawal of advances;
2. receiving mobilisation and other grant advance;
3. site makeover and initial development of the site;
4. planning of the work in different phases;
5. monitoring turn over in different phases;
6. work assessment and quality monitoring;
7. change in the constitution of the firm or company of the
contractors (this is one of the most critical and litigative
situation which requires a very careful monitoring); and
8. engaging sub contractors.
Besides the internal control, there has to be on job controls, in
order to have a balanced progress. The management has to
identify the serious crisis points and locate insilnent failures.
Of course payment of dues is the most controversial and
litigative situation. In Hadley v. Baxendale it was decided
that in a situation where the contractor has performed a part of
the contract and he is unable to proceed further, he is entitled
to the proportionate payment for the job he has already
accomplished. This is known as quantum meruit.
In the engineering contract, there are interactions of several
line and vertical laws as for example, in order to construct a
factory, one has to be careful about not only the contract law
but also the Factories Act. A contractor is of course subjected
to many other laws like Minimum Wages Act, Payment of
Wages Act, Guarantee and Indemnity etc.
Stages of Management:
Given below are the various stages in the management of
engineering contracts.
(a) Work Plan
The task of preparation of a work plan for a contract has to
commence immediately after the award of the contract.
Depending upon the nature and scope of the contract, it is first
necessary to establish a task group to prepare the work plan.
This group is entrusted with the collection of all available data
relating to the work, the terrain, the environment, and all the
internal or external factors which may affect all the three. The
process of data collection and preparation of work plan is
interactive and continuous and may also continue throughout
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the execution of the contract. For large sized works, setting up a
small team to update the data and point out glaring discrepancies
from the initial data and its impact on the work plan is well worth
the effort and the expense involved.
The work plan has to be comprehensive and yet concise. A
typical plan for a large civil engineering work may contain the
following information (suitably abbreviated):
(a) Description and scope of work
(b) Mobilisation - phases
(c) Construction survey and detailed construction programme
(d) Preparatory works for installation of the plant complex
(e) Basis for plant selection and design
(f) Individual plants - description in brief
(g) Deployment of plant
(h) Production process of plant complex
(i) Sequence/methodology of work
(k) Quality assurance
(l) Safety programme
(m) Construction schedule, PERT net work.
(n) Drawings/plates
(o) Requirement of funds
This work plan becomes the basis for the mobilisation and
implementation of the contract.
(b) Records
The execution of a contract is a one-off activity, which varies
with each work depending upon its scope, location, environment
in which it is to be executed, and the personalities involved.
The term environment in this context includes the client's
organisation, distribution of functional responsibilities within
the organisation, working methods and procedure, and the
culture of the organisation, in particular, its decision making
process, and pace at which these decision are implemented in
practice.
Over the years, efficient record keeping techniques have been
evolved and implemented in large organisation. Good contract
administration depends upon data. For data to be useful, it must
be accessible and to be accessible, it must be recorded whether
on paper or on a computer. For this purpose, it is preferable to
derive check lists for critical aspects/issues and decide type of
records to be maintained. Useful records may be maintained as
under:
(a) A complete and up to date copy of the contract along with
all changes (finalised and in process) such as amendments,
variations, interpretations, or decisions given in terms of
the contract.
(b) Contract files - either a continuous file - containing the
correspondence in chronological sequence - with each page
numbered and in parts - each containing 100 pages.
(c) Topic wise files - dealing with different stages or topics,
such as, pre-tender, negotiations, agreement, mobilisation,
execution, price and cost estimates, bills - variation -
equipment - materials - manpower - schedules - record of
meetings held with client or the officer designated in the
contract.
Every contract manager tends to adopt his or her own system -
the key test being how quickly the required and correct data
and details can be produced for taking timely decisions at every
significant stage of the contract.
(c) Claims
As per L.J. Duncan Wallace, contractor's claims arise out of
two principle basis:-
1) Damages for breach of contract by employer (client)
These are sub-divided into:
(i) Breaches affecting the performance of the contract, which
nevertheless proceeds to completion;
(ii) Breaches resulting in termination or recision of the contract
before completion;
(ii) Breaches of employer's payment obligations.
(2) Additional Payment due under one or the other of contract
provision, sub-divided into:-
(i) Sums due to variations (referred to as 'Deviations' in India).
(ii) Sums due to measurement in unit-price contract.
(ii) sums due to miscellaneous provisions in contract under
changed physical conditions, variation in prices or other
compensatory clauses in the contract.
Mr. G.A.N. Rajan in his book - Law of Engineering Contracts -
Construction disputes and Remedies - analyses the relevant
provisions of a claim for damages as arising when:
a) A contract must have been broken by the other party.
b) The other party should have suffered a loss or damage on
this account. (if not, only nominal loss may be granted).
c) The losses and damages must have occurred in the usual
course of events from such a breach.
d) The parties knew at the time of the signing of the contract,
that in such a kind of breach, they would have to pay losses
and damages to the other party, who has suffered by the
said breach.
e) No loss or damage is to be paid for any remote or indirect
consequences.
f) The party claiming losses and damages should have taken
steps to minimise it in the given circumstances.
g) In case of termination or recision of contract by employer,
the contractor has to prove that this was unjustified.
Let us now refer to the categories given above and briefly
illustrate the possible basis of preparing the claim:
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Breach Likely causes Possible Scope of claim
1. Breach occurs, - Delay in handing - Increased costs
but work pro- over of site or arising out of
ceeds to completion change in site or the cause incl.
site conditions losses or damages
- Delay in fixing claimed by sub-
orientation or contractor/sub-
change in orientation supplier (if any)
- Late supply of design, - Idling of labour/
drawing of essential equipment
- Delay in clearances
- Delay by other
contractors
- Unreasonable rejection
of work
- Defects or shortage
of employer's supply
materials
- Suspension of work
for causes not attri-
butable to contractor
- Excessive quantity
variations
- Delay in payment
2. Breach occurs - Non-availability - Loss of profit
before the commen- of site which the contract-
cement and work - Non-payment of or would have
cannot be advance earned from the
commenced - Failure of employer contract
to obtain sanction to
start work, or
necessary funds
3. Breach occurs - stoppage of work - Fair and reasonable
during the work due to causes not value of work
and the contract attributable to executed plus loss
is terminated contractor suffered on account
of termination/
- unjustified recession
termination of
contract
- continuing
suspension or
force majeure
2.6 SPECIAL CONTRACTUAL FEATURES
Engineering contracts are of several types, such as
(i) civil construction contract;
(ii) supply contract;
(iii) erection contract;
(iv) mechanical/instrumentation contract like contract for testing
and commissioning a plant or machinery;
(v) maintenance contract, etc.
These contracts have several special features. Some of these
features are discussed below:
(a) Time is of essence to the contract : In engineering contracts
time of performance plays a very important role. Generally
speaking the stipulation is provided in the tender papers.
According to Sec.55 of the Contract Act if time is of essence
to the contract and the executing party does not fulfil his
part of the contract within the stipulated time, the balance
of the work not performed becomes voidable at the option
of the other party. In case, promisee accepts the
129
performance after the stipulated time, he is said to have
waived his condition and is not entitled to any other
compensation. But if the time is not essential according to
the intention of the parties to the contract, the promisee is
entitled to some compensation but cannot repudiate the
contract in case the contract is not executed in full within
the stipulated time. The standard form contract in
government departments, like Railway, CPWD, MES etc.
time is mentioned in the respective rules as essence of
contract with a proviso that authority may extend the time
in appropriate cases.
In Hind Construction Contractors v. State of Maharashtra
[AIR 1979 SC 720] the contract was for the construction of
an aquduct. The work was to commence on 5.7.55 and
completed on 4.7.56. Terms and conditions, inter alia,
included that (i) time shall be deemed to be of the essence
of the contract (ii) In case of failure to commence or complete
the work in time the contractor shall have to pay
compensation per diem. (iii) in case of compensation payable
by the contractors amounting to the full amount of security
deposit, or in case of abandonment of the work by the
contractor, the Executive Engineering shall be entitled to
rescind the contract. (iv) in pursuance of an application by
the contractor the time for performance could be extended
at the discretion of the Executive Engineer. The contractor
failed to complete the work within 4.7.56. The Executive
Engineer in a letter dated 27.8.56 rescinded the contract
w.e.f. 16.8.56 when the per diem compensation for delay
accumulated and exceeded the security deposit. In this
case, Court held that all the stipulations read together, and
regard being had to the provision for penalty course per
deim and the extension clause, the time was not intended to
be of the essence of the contract. The Court further held
that there was a case for extension due to onset of monsoon,
absence of proper road at the site and other reasons as
pleaded. A notice should have been given fixing a stipulated
time for completion of the work failing which the contract
could be rescinded. In the absence of the notice, the action
was arbitrary and illegal. In English law unless 'the time as
an essense of contract is clearly stipulated by the parties in
the contract, time is rarely held as essence in a building and
engineering contract. One may compare the position of the
above Supreme Court decision with another Supreme Court
decision in State of Maharastra v. Digambar Balwant
Kulkarni [AIR 1979 SC 1339].
(b) Bankers status report is not guarantee : A bankers
certificate of status report about a contractor is not to be
treated as a bank guarantee. According to Sec. 12 of the
Contract Act a contract of guarantee is one in which a party,
called the surety, undertakes to perform the promise of or
discharge the liability of the principal debtor to the promisee.
A bank guarantee is obtained against either a margin money
deposit kept with the bank or against an overdraft facility
with a limit. Sometimes bank also asks for counter-guarantee.
On the other hand, a status report is one in which bank
certifies the financial standing of the contractor with the
bank on a particular date. It contains no guarantee.
(c) Fair practice in acceptance :A contract is a method of
establishing private relationship through offer and
acceptance. An acceptor is free to accept any proposal he
has received against his offer notice. He is not accountable
generally to any one, far less the proposer, to explain why
he has accepted the particular proposal, but in a
representative status where an official takes the decision
of acceptance he is accountable to explain why he has
accepted a proposal to the institution or person whose
representative he is. It is therefore, understandable that a
public official having the responsibility of accepting a
proposal is accountable to the public to justify his stand on
certain objective criteria in order to show that his acceptance
is for the best bargain. This is quite understandable but in
govt. contract the public official accepting the proposal is
required to have a fair play while accepting the proposal
and he is bound to the proposer to explain absence of
arbitrariness and favouritism. In several writ applications,
courts have taken a position that there has to be a fair
practice on objective criteria in accepting a proposal.
Therefore govt departments, statutory undertakings, and
even big industrial houses lay down stringent rules and
procedures to ensure that there is a fair practice. In case of
deviations specially in the situations of not accepting the
lowest tender the bonafide of the decision has to be
established according to the procedure established by law.
d) Rules of Interpretations: Odgers construction of deeds
and statutes provided rules of construction of contracts,
specially engineering contracts. Supreme Court in Delhi
Development Authority v. Durga Chand recognised
Odger's rules of constructions listed below :
Rule 1 : Meaning of a document or of a particular part of it is
to be sought from the document itself.
Rule 2 : Intention of the parties shall be understood from the
document itself, unless otherwise clear.
Rule 3 : Words must be given literal meaning.
Rule 4 : Literal meaning depends on the circumstances of the
parties.
Rule 5 : The contract has to be construed as a whole.
Rule 6 : Technical terms will have technical meaning.
130
3 QUASI CONTRACT
SUB TOPICS
3.1 Theoretical Foundation
3.2 Indian Instances
3.3 Concluding Remark
3.1 THEORETICAL FOUNDATION
Quasi contract or contract in fiction is an equitable concept
arising out of the application of principle of equity in the realm
of interpersonal relations. Chapter V of the Indian Contract
Act relates to such type of interpersonal relations. The Chapter
heading indicates the character of this type of relation. The
heading of chapter V is of certain relations resembling those
created by contract. It therefore suggests that there may be
some situations when the law can construct a contract from the
similarity of the position of the parties with that of contractual
relations. This idea of fictional contract is a product of common
law jurisprudence in England. According to Anson (p.617)
circumstances must occur under any system of law in which it
becomes necessary to hold one person to be accountable to
another, without any agreement on the part of the former to be
so accountable, on the ground that otherwise he would be
retaining money or some other benefit which has come into his
hands to which the law regards the other person as better entitled
or on the ground that without such accountability the other
would unjustly suffer loss. The law of quasi contract exists to
provide remedies in circumstances of this kind. Anson of
course, did not think the term quasi contract to a happy one
though he is clear about the existence of such a situation where
justice demands creation of accountability by one to the other.
According to him distinctive marks of quasi contracts are:
(i) Such a right is always a right to money mostly a liquidated
sum though may not always be so.
(ii) It does not arise out of contract between parties, but is
imposed by law.
(iii) This right is unlike tort, right against only a specific person.
Anson has also examined the two views about quasi contracts.
The traditional view is that it rests upon a hypothetical contract
which is implied by the law. According to this view quasi
contract has to be a branch of Law of contract and hence subject
to some limitations. On the other hand modern view is that the
liability in quasi contract is not connected with contract at all.
Obligations are imposed by the law in the situation when one
person unjustly enriched himself at the cost of another. It cannot
be taken into the realm of tort because the remedy is not in rem.
Historically, the situation has arisen out of the action of Account.
The action was used against bailees, receivers and guardian in
soakages, as they were called upon to account for money or
other goods committed to their charge. The writ also came into
use where money had been paid under a mistake or upon an
executory consideration which had wholly failed or also where
it had been extorted by fraud or duress. In 1602, in Slades
Case [4 COREP 91] the full court of exchequer chamber held
that an indebitatus assumpsit could be brought in circumstances
in which the debt was really the proper action as for example
there can be a quantum meruit to be awarded against the person
who had not performed his contract.
Lord Mansfield is said to be the real founder of the modern law
of quasi contract. In his judgement in Moses v. Macferlan
[(1760)2 Burr 1005], Mansfield explained the judicial basis of
such an action. Moses received from Jacob four promissory
notes of 30s each. He endorsed these to Macferlan who, by a
written agreement, contracted that he would not hold Moses
liable on the endorsement. Subsequently Macferlan sued Moses
on the notes in a Court of Conscience. The Court refused to
recognise the agreement and Moses was forced to pay. Later,
Moses brought an action against Macferlan in the Kings bench
for the money. Lord Mansfield allowed the prayer holding this
kind of equitable action to recover back money, which ought
not in justice to be kept, is very beneficial, and therefore much
encouraged. It lies only for money which, ex acquo et bono,
the defendant ought to refund: It does not lie for money paid by
the plaintiff, which is claimed of him as payable in point of
honour and honesty, although it could not have been recovered
from him by any course of law; as in payment of a debt barred
by the Statute of limitations, or contracted during his infancy,
or to the extent of principal and legal interest upon an usurious
contract, or, for money fairly lost at play : because in all these
cases, the defendant may retain it with a safe conscience, though
by positive law he was barred from recovering. But it lies for
money paid by mistake; or upon a consideration which happens
to fail; or for money got through imposition (express or implied);
or extortion; or oppression; or an undue advantage taken of the
plaintiff situation, contrary to laws made for the protection of
persons under those circumstances. In one word, the gist of
this kind of action is, that the defendant, upon the circumstances
of the case, is obliged by the rules of natural justice and equity
to refund the money. This opinion of Lord Mensfield gave
rise to the modern theory of fiction of law which was finally
confirmed by Lord Haldane in Sinclare V. Brougham [(1914)AC
398] when he said so far as proceedings, in personam are
concerned, the Common law of England really recognises
(unlike the Roman Law) only actions of two classes, those
founded on contract and those founded on tort. When it speaks
of actions arising quasi ex contractu it refers merely to a class
of action in theory based on contract which is imputed to the
defendant by a fiction of law.
The next principle that is presented is known as restitution.
Any unjust enrichment at the cost of another is required to be
restituted. According to Anson, the principle includes the
tortious action of conversion and also a proprietory remedy by
which an owner can follow his property into the hands of any
person into which it may come. In equity, the principle of
restitution includes both a personal action similar to, but not
identical with, the action for money had and received (Re
Diplock [(1948)Ch 465] and also the proprietory remedy of
tracing.
131
3.2 INDIAN INSTANCES
The instances of quasi contract in Indian law are based upon
common law principles to a great extent. These are:
(1) Supply of necessaries : According to Section 68 of the
Contract Act (the Act) if a person is incapable of entering
into a contract or any one whom he is legally bound to
support, is supplied by another person with necessaries
suited to his condition in life, the person who has furnished
such supplies is entitled to be reimbursed from the property
of such incapable person. This provision is explained by
two illustrations:
(a) A supplies B, a lunatic, with necessaries suitable to
his condition in life. A is entitled to be reimbursed
from Bs property.
(b) A supplies the wife and children of B, a lunatic, with
necessaries suitable to their condition in life. A is
entitled to be reimbursed from Bs property.
The essense of this provision is protecting the interests of
the voluntarily supplier on the ground of equity without
making any personal liability as happens in the case of
contract. Essential ingredients are :
(i) incapacity of the beneficiary to enter into a formal
contract for the supply;
(ii) the supply must form necessary to the conditions of
the life of the beneficiary;
(iii) the supplier to be reimbursed from the estate of the
beneficiary.
This is known as a equitable compensation in the case of
the agreement being void on the ground of the incapacity
of the party. In England, this principle is applied in a very
wide context. This type of quasi contractual remedy is
available when the consideration totally fails or where the
agreement is void due to any reason. As for example, supply
has been made by the contractor in an agreement found
subsequently void. A supplier shall receive the money.
(2) Payment by an interested person : According to Section
69 of the Act a person who is interested in the payment of
money which another is bound by law to pay, and who
therefore, pays it, is entitled to be reimbursed by the other.
As for example, B holds land in Bihar, on a lease granted
by A, the zamindar. The revenue payable by A to the
government being in arrear, his land is advertised for sale
by the government. Under the revenue law, the
consequence of such sale will be the annulment of B's lease.
B, to prevent the sale and consequent annulment of his own
lease, pays to the government a sum due from A. A is
bound to make good to B the amount so paid. The
conditions of liability under this section may arise on the
fulfilment of following conditions :
(i) The plaintiff is not under legal compulsion to pay but
he has only interest in the payment. Under the
statutory provision court authorities are bound to pay
compensation to the injured workman employed by
its contractors. Under workman compensation Act
the contractor is liable to pay the compensation due.
In Port Trust Madras v. Bombay Co., [AIR 1967
Mad 318] the Port authority was statutorily held liable
to pay injured workman and had to pay him the
compensation. So, when the Port Trust asked the
contractor to reimburse the said amount, the Court
held that it could not recover from the defendant, the
contractor, whose negligence has caused the injury
because the Port authority was statutorily liable to
pay the compensation.
(ii) The defendant is lawfully bound to make payment.
As for example, in Govindram v. State of Gondal
[AIR 1950 PC 99] the buyer of the property from
Maharaja of Gondal had to pay the arrears of
municipal taxes in order to save the society from being
sold, it was held that he is entitled to the money.
(iii) Plaintiff must have paid the amount. The plaintiff must
have made the payments to another person. He himself
must not be the creditor or the claimant. He must be a
third party who has interests in the payment of money.
In Secretary of State for India v.Fernandes [(1907) 30
Mad 375], the government was a tenant of a land and
premises from a landlord who defaulted paying land
revenue to the government. The government realised
the amount from the rent payable to the owner. It was
held that the government cannot realise the amount
from the land lord.
(3) Liability to pay for non gratuitous acts : According to
Section 70 of the Act, where a person lawfully does
anything for another, or delivers anything to him, not
intending to do so gratuitously, and such other person
enjoys the benefit thereof, the latter is bound to make
compensation to the former in respect of or to restore, the
thing so done or delivered. As for example, A tradesman,
leaves goods at Bs house by mistake. B treats the goods
as his own. B is bound to pay A for them. According to
justice Gajendragadkar, there are conditions to be satisfied
for application of this provision. These conditions are:
(i) the person should lawfully do something for another
person or delivers something to him;
(ii) he must not intend to act gratuitously; The recipient
of the goods or service must himself be benefitted.
[See State of West Bengal v. B.K. Mandal & Sons'
AIR 1962 SC 779 for details].
(iii) the basic philosophy of this section is based upon
compensating an innocent supplier for his act of
subsistence.
It must be remembered at the same time that the receiver of the
benefit is not bound to accept the service or the goods. He has
every right to either reject the goods supplied or services
rendered or enjoy its benefits. Section 70 is applicable only
when a person enjoys the benefits. By accepting the enjoyment
of the goods or services, he has tacitly undertaken the obligation
132
of paying for the same. Therefore, it comes within the purview
of implied contracts. In Secretary of State v. G.T. Sareen &
Co. [ILR 11 Lah 37], it was held that a person without an
enforceable contract in his favour supplying goods to
government department is entitled to a money equivalent of
the goods delivered assessed at the market rate prevailing on
the date on which the supplies were made". So a Contractor
who has under oral instruction done something, he is entitled
to the money u/S 70 even though he fails to prove the oral
contract.
The services that are rendered, or the goods that are supplied
must be lawfully done. It must be remembered that Section 70
is based upon a principle of equity for compensating an innocent
supplier, therefore one who comes to the equity must come
with clean hands.
A person who has kept some goods of another and is not legally
competent to do so cannot demand compensation. As such a
finder of goods cannot ask for compensation for the goods kept
in the house of another person who used the same.
(4) Finder of goods: According to Section 71 of the contract
Act, a person who finds goods belonging to another and takes
them into his custody, is subject to the same responsibility as
the bailee. A finder of goods therefore becomes a bailee in
case of need. He is therefore responsible for the restoration of
the property to the owner. A finder has a better title on those
gods against everyone excepting the true owner of these goods.
(5) Mistake or Coercion: According to Section 72 a person to
whom money had been paid or anything delivered, by mistake
or under coercion, must repay or return it. As for example, A &
B jointly owe rupees 100/- to C, A alone gives the amount to C,
and B not knowing this fact pays rupees 100/- over again to C,
C is bound to repay the amount to B. Money paid under mistake
of law is also recoverable under this section as decided by the
Privy Council in Sri Sri Shiva Prasad Singh v. Maharaja
Srishchandra Nandi [(1949)76 I.A.44 (P.C)]. In English
Common law money paid under mistake of law is not
recoverable.
Money paid under coercion is subject to the option of the person
on whom the coercion has been perpetrated. If he elects to
avoid the contract, the money thus paid is refundable. Of course
the word coercion has a wider import in Section 72. Money
received in any condition of duress including under the pressure
of circumstances makes Section 72 applicable.
3.3 CONCLUDING REMARK
Quasi Contracts are instances of the application of equity
principles in certain factual situations in order to construct a
contractual obligation. Therefore, one who comes for equity
must come with clean hands. If no factual situation the person
who seeks equity shall be justified in one type of argument like
no one can be enriched without a cause. He has also to
substantiate the bona fide innocence, intention or justification
of self actions. In this sense, a quasi contract is different from
a tortious action. In quasi contract, a bipartite situation of benefit
flow and obligation process is required to be established as if
the benefit flows out of a constructive contract. As such, such
an obligation cannot originate from a violation of right in rem.
In such a case, the compensation question shall be related to
tort. By and large, Indian instances of quasi-contract are based
upon the same English common law principles.
133
4. CASE LAW
1) Charles Rickards Ltd v. Oppenheim [(1950) 1
All E.R. 420 C.A.]
By a contract made between the plaintiffs and the defendant,
the plaintiffs agreed to supply a motor car chassis to the
defendant and to have a body built on to it within seven months,
time being the essence of the contrct. The plaintiffs gave the
work of building the body to sub-contractors and authorised
them to accept instructions in regard to the work direct from the
defendant. The sub-contractors failed to complete the work
within the time stipulated. The defendant waived the original
condition in regard to time but some months later, he gave a
notice requesting delivery within a stated time. The car was
not delivered within the time stipulated by the notice and the
defendant cancelled the contract. The plaintiffs brought an
action against him, claiming the price of the body work and he
counterclaimed for chassis or its value.
The court held that as there was an initial stipulation making
time the essence of the contract, the defendant after waiving
that initial stipulation was entitled to give a reasonableness
notice making time the essence of the matter, whether the
contract was for the sale of goods or for work and labour. The
reasonableness of the notice had to be judged at the time at
which it was given, and it could not be held to be bad because,
after it was given, there were unanticipated difficulties in making
delivery.
The court further held that on the facts of the case, the notice
was reasonable, and it was good notice to the plaintiffs even
though it was given by the defendant only to the sub-contracts.
Waiver of the notice could be inferred only from conduct which
showed an intention to affect the legal relations of the parties
and therefore, the defendants failure to reply to a letter from
the plaintiffs in which they assumed that he would take delivery
of the car at a later date, did not amount to a waiver of the
notice, and the defendant was entitled to rescind the contract
and to receive the chassis or be repaid its value.
2) Fateh Chand (Appellant) v. Balkishan Dass,
(Respondent) [AIR 1963 SC 1405]
In this case, the leasehold rights in the land together with
building were sold to Balkishan Das (plaintiff). The plaintiff
contracted to sell his rights in the land and the building to Fetch
Chand (Defendant). The plaintiff received money and delivered
possession of the building and the land in his occupation to the
defendant, but the sale of the property was not completed before
the expiry of the period stipulated in the agreement. Alleging
that the agreement was rescinded because the defendant had
committed default in performing the agreement, the plaintiff
brought an action claiming a decree for possession of the land
and building and a decree for compensation for use and
occupation of the building.
The trial judge held that the plaintiff had failed to put the
defendant in possession of the land agreed to be sold and
therefore could not retain the money received by him under the
agreement.He accordingly directed that on the plaintiff
depositing Rs. 25,000/- less 1400/-(being the amount of mesne
profits prior to the date of the suit) the defendant do put the
plaintiff in possession of the land and the building, and awarded
to the plaintiff future mesne profits at the rate of Rs.140/- per
mensum from the date of the suit until delivery of possession.
In appeal, the High Court modified the decree passed by the
trial court and declared that the plaintiff was entitled to retain
out of Rs.25,000/- paid by the defendant under the sale
agreement, a sum of Rs.11,250/- being compensation for loss
suffered by him and directed that the plaintiff to get from the
defendant compensation for use and occupation. The defendant
filed an appeal to the Supreme Court.
The Supreme Court held that in the absence of any proof of
damage arising from the breach of the contract, the amount of
Rs.1000/- (earnest money) which has been forfeited and the
advantage that the plaintiff must have derived from the
possession of the remaining sum of Rs.24,000/- during all this
period would be sufficient compensation for him. The plaintiff
has separately claimed mesne profits for being kept out of
possession for which he has got a decree and therefore the fact
that the plaintiff was out of possession cannot be taken into
account in determining damages. The Court set aside the decree
passed by the High Court awarding Rs.11,250/- as damages to
the plaintiff. The Supreme Court modified the decree and
ordered that the plaintiff is entitled to retain out of Rs.25,000/-
only Rs.1000/- received by him as earnest money, and that he
is entitled to compensation at the rate of Rs.140/- per mensum
and interest on that sum at the rate of six percent as it accrues
due month after month till the date of delivery of possession
subject to the restriction prescribed by O20R12(1) of the CPC.
3) Gambhirmull Mahabir Prasad (Plaintiff) v. The Indian
Bank Ltd and another [AIR 1963 Cal 163]
Defendants 1 & 2 had their branch office at Rangoon. The
plaintiff instructed the defendant Bank in Calcutta (defendant
No.1) to arrange for the immediate re-shipment of the goods,
lying in Rangoon to Calcutta and if re-shipment was not possible
to arrange for insurance and storage of the goods. The
Defendant No.2 offered to re-ship the goods on receipt of a
deposit of Rs.400/- and certain documents. This letter was
handed over by the plaintiff to the Defendant Bank (Defendant
No.1) for further action. Thereupon the defendant bank wrote
to defendant No.2 to arrange for re-shipment through its agent
at Rangoon. Defendant No.2 agreed to reship the goods through
its Rangoon Agents upon the deposit being made. The defendant
bank paid to the defendant No.2 the said sum and accordingly
the defendant No.2 communicated to its Rangoon Agent
instructions for re-shipment. The plaintiff filed a suit against
the defendant bank alleging that the defendant bank committed
breaches of its agreement and of its duties as an agent of the
plaintiff and conducted the business undertaken by it negligently
and without skill and diligence.
134
The court held that it is essential to a cause of action that the act
complained of should be the real or effective cause of the injury
or loss sustained. The law disregards such subtleties and
niceties, as to causes and possibilities, and it acts upon the
intelligible ground that where there has been misconduct or
negligence in the agent, all losses and damages occuring
afterwards to which the property would not be exposed but for
such misconduct or negligence, are fairly attributable to it, as a
sufficiently proximate cause, although not necessarily the
immediate or nearest cause of the loss or damage. The doctrine,
too, may be vindicated upon the broader ground of public policy,
that no wrongdoer ought to be allowed to apportion or qualify
his own wrong; and that, as a loss has actually happened, whilst
his wrongful act was in operation and force, which is fairly
attributable to his wrongful act he ought not to be permitted to
set up, as a defence, that there was a more immediate cause of
the loss, acting upon the subject matter at the same time, or a
bare possibility of loss, if his wrongful act had not been done.
The measure of damages in an action by a Principal against his
agent for negligence or any other breach of duty by the agent in
course of the agency is the loss actually sustained by the
Principal, provided that it was the nature and probable
consequence of the breach or such loss as in the particular
circumstances the agent might reasonably have expected to
result from such negligence or breach of duty.
4) Jawahar Lal Barman v. Union of India [AIR 1962 SC 378]
The principal point which this appeal by special leave raises for
our decision related to the construction of Ss. 32 and 33 of the
Arbitration Act, 1940 (hereafter called the Act). The respondent,
Union of India, filed a petition in the Court of the First Class
Sub-Judge at Delhi against appellant M/s. J. Burman and Co.,
through its proprietor Jawahar Lal Burman under Ss. 33 and 28
of the Act. The respondent alleged that a concluded contract
had been entered into between the parties on August 31, 1949,
for supply of 1701/2 Cwt. of coconut oil by the appellant to the
respondent. The respondent had advertised in the Indian Trade
Journal for the said supply and the appellant had submitted its
tender No.SM-I/104524. This tender was accepted by the
respondent which concluded a contract between the parties.
The respondents case was that the said contract was governed
by general conditions of contract Form W.S.B. 133. These
conditions included an arbitration agreement. Disputes arose
between the parties regarding the said contract, and so in
pursuance of the arbitration agreement they were referred to the
two arbitrators appointed by the parties. After the arbitration
proceedings had gone on for a considerable time before the
arbitrators, the appellant objected to their jurisdiction to deal
with the disputes on the ground that there was no concluded
contract between the parties. This plea made it necessary for
the respondent to move the court for decision of the question
about the existence and validity of the arbitration agreement. It
was on these allegations that respondent in its petition claimed
that it may be held that there was a concluded contract between
the parties containing a valid agreement. The petition having
been made under S.28 along with S.3 the respondent prayed
that suitable extension of time be granted to the arbitrators for
making the award. The appellant pleaded in defence that no
concluded contract had been made between the parties and
that there was no jurisdiction in the Court to grant extension
under S.28.
The quetion as to whether there was a concluded contract
between the parties or not requires careful consideration. We
have noticed that in response to the advertisement published
by the respondent in the Indian Trade Journal the appellant
submitted its tender. It is common ground that the tender thus
submitted was subject to the conditions of contract governing
the Department of Supply Contracts which were set out in the
Government Publication Form W.S.B.133, Clauses 4(a) and (b)
of these conditions are relevant. They deal with the security
deposit. Clause 4(a) provides that on acceptance of the tender
the contractor shall at the option of the Secretary, Department
of Supply and within the period specified by him, deposit with
him a security deposit therein specified. Clause 4(b) provides
that if the contractor is called upon by the purchaser to deposit
security and the contractor fails to provide the security within
the period, such failure will constitute a breach of the contractor
and the Secretary, Department of Supply, shall be entitled to
make other arrangements at the risk and acceptance of the
contractor. It is thus obvious that the tender offered by the
appellant submitted to these terms and that on these terms
security deposit is a condition subsequent and not a condition
precedent is not disputed; but Mr.Din Dayal contends that this
position has been substantially varied by the Form in which the
appellants tender was accepted by the respondent. His
argument is that the material words used in the acceptance letter
changed the pre-existing position and made the security deposit
a condition precedent to the acceptance itself. If this contention
is right it would necessarily mean that there was no concluded
contract. Thus the decision of this point depends upon the
construction of the letter of acceptance issued by the respondent
to the appellant after receiving its tender.
In this letter written on August 31, 1949, the respondent stated
as follows :
Dear Sirs,
Ref : Your Tender No & Date Nil.
Your offer is hereby accepted for a quantity of 1704 Cwts & 2
qrs. of Coconut oil conforming to specification No.IM.1370(d)
at Rs.89/6- (Rupees eighty-nine and annas six only) per Cwt.
packed in non returnable sound, strong 45 gallon drums delivery
ex-godown at Calcutta by 30-9-49 or earlier possible subject to
your depositing 10 per cent as security.
The security money which comes to Rs.15,230/- should please
be deposited immediately into a Government Treasury in favour
of the Deputy Accountant General, I & S., Akbar Road, New
Delhi and the Treasury Receipt forwarded to this office. This
security money will be refunded to you after the completion of
the contract.
135
The contract is concluded by this acceptance and a formal
acceptance of Tender will follow immediately on receipt of
Treasury Receipt Kindly acknowledge receipt
Yours etc. etc.
The whole argument is founded on the use of the clause
subject to your depositing 10 percent as security. Prima facie
this clause may justify the argument that it is intended to make
the security deposit a condition precedent; but in construing
the true effect of this clause we must look at the whole of the
letter bearing in mind the fact that it has been written not by a
lawyer or in consultation with a lawyer but by a Government
officer in the ordinary course of the discharge of his duties. The
first sentence in the first paragraph clearly shows that the offer
was accepted for the quantity therein specified amount is
deposited immediately into the Government Treasury. This
paragraph is more consistent with Cl.4(a) of the general
conditions. It reads as if having accepted the tender the appellant
is reminded that it has to deposit the amount under the relevant
condition, and the letter ends with the categorical statement
that the contract is concluded by this acceptance. Mr. Din
Dayal is right when he contends that S.7 of the Contract Act
requires that the acceptance of the offer must be absolute and
unqualified, it cannot be conditional; but reading the letter as a
whole we do not think that the Courts below have erred in coming
to the conclusion that this letter amounts to an absolute and
unqualified acceptance of the tender or offer made by the
appellant. While dealing with this question it may be pertinent
to recall that the general conditions of the contract prescribed
by Form W.S.B 133 are made a part of the tender, and the contract
itself was intended to be executed expeditiously. The tender
shows that the appellant represented that the earliest date by
which delivery could be effected would be within twenty days
from the date of the receipt of the order and it also said that full
quantity of coconut oil required was held by it. Therefore, to
begin with the tender treated the security deposit as a
subsequent condition, the contract was for the immediate supply
of goods and the acceptance purports to be in accordance with
the relevant government rules and uses the expression that the
contract was concluded by the said acceptance. Therefore, in
our opinion, reading the letter as a whole it would not be possible
to accept the appellants argument that the letter was intended
to make a substantial variation in the contract by making the
deposit of security a condition precedent instead of a condition
subsequent.
In the result the appeal fails and is dismissed with costs.
Appeal dismissed.
5) Union of India and Others v. Messrs. Bhim Sen Walaiti
Ram [(1963) 3 SCC 146].
An auction was held for the sale of licence of country liquor
shop in Bela Road, Delhi for the year 1949-50, on March 23,
1949. The respondent offered the biggest bid of Rs.4,01,000/-
for the shop. Under the Excise Rules, the bidder was required
to deposit one sixth of the price within seven days of the auction
but the deposit was not made by the respondent. In these
circumstances, the Chief Commissioner did not confirm the bid
of the respondent and resale of the Excise Shop was rendered.
On May, 3, 1949, the shop was again auctioned when Messr.
Daulat Ram Amar Singh offered the highest bid of Rs.2,20,000/
- which was confirmed by the Chief Commissioner on July 7,
1949. Holding the respondent liable for the loss of Rs.1,81,000/
- being the difference between the bid of the respondent and of
Messrs, Daulat Ram Amar Singh the Collector of Delhi started
proceedings for the recoveryof Rs.1,81,000/- Thereupon the
respondent filed a suit in the Court of the Senior Subordinate
Judge, Delhi, praying a permanent injunction restraining the
appellant from taking any proceedings to recover the suit
amount. The trial Judge decreed the suit holding that the sale
was subject to confirmation by the Chief Commissioner under
Clause 33 of the conditions of auction and since the auction in
favour of the respondent was not accepted by him there was no
concluded contract between the parties. The decree of the Trial
Court was upheld by the lower appellate court. In the second
appeal, Falshaw J of the Circuit Bench of the Punjab High
Court at Delhi, took the view that Clause 33 was not in
consonance with the statutory rules and the contract came into
existence when the bidding was closed in favour of the
respondent on March 23, 1949. The respondent therefore was
held liable to make good the loss which the Government
sustained in resorting to the resale of the excise shop. In the
Letters Patent Appeal, the decision of the single Judge was
reversed and that of the Trial Court. The appellant contended
that the respondent was under a legal obligation to pay one-
sixth of the price within seven days of the auction under Clause
21 of Rule 5.34 of the Excise Rules and it was due to his default
that a re-sale of the excise shop had to be ordered; and under
Clause 22 of Rule 5.34,the respondent was liable for the
deficiency in price and all expenses of resale which was caused
by his default.
This appeal is brought by certificate from the judgment of the
Division Bench of the Punjab High Court.
2. An auction was held for the sale of license of country liquor
shop in Bela Road for the year 1949-50" ExD-23 Clauses 31
and 33 of the conditions were to the following effect ;
31. The Chief Commissioner is under no obligation to grant
license until he is assured of financial status of the bidder. At
the conclusion of the auction an enquiry will be made into the
financial position of any bidder not known to the excise staff
and any such bidder shall if necessary be called upon to furnish
security for the observance of the terms of his licence as required
by sub-section (2) of Section 34 of the Punjab Excise Act 1 of
1949, as extended to Delhi Province.
33. All final bids will be made subject to the confirmation by
the Chief Commissioner who may reject any bid without
assigning any reasons. If no bid is accepted for any shop, the
Chief Commissioner reserves the right to dispose it off by tender
or otherwise as he thinks fit...
3. The respondent offered the highest bid of Rs.4,01000/- for
the shop, Under the Excise Rules the bidder had to deposit one-
136
sixth of the purchase price within seven days of the auction but
the deposit was not made by the respondent. In these
circumstances the Chief Commissioner did not confirm the bid
of the respondent and resale of the excise shop was ordered.
On May, 3, 1949, the shop was again auctioned when Messers
Daulat Ram Amar Singh offered the highest bid Rs.2,20,000/-
which was confirmed by the Chief Commissioner, on July 7,
1949. Holding the respondent liable for the loss of
Rs.1,81,000-. On July, 22, 1949, the respondent filed a suit in
the Court of Senior subordinate Judge, Delhi, praying for
permanent injunction restraining the appellants from taking any
proceedings to recover the amount. The trial judge decreed the
suit holding that the sale was subject to confirmation by the
Chief Commissioner under Clause 33 and since the auction in
favour of the respondent was not accepted by him, there was
no binding obligation between the parties. The decree of the
Trial Court was upheld by the lower appellant court. In second
appeal Falshaw J took the view that Clause 33 was not in
consonance with the statutory rules and the contract came into
existence when the bidding was closed in favour of the
respondent on March 23, 1949. The respondent was therefore
held liable to make good the loss which the Government
sustained in resorting to the resale of the excise shop. The
respondent preferred an appeal under Letters Patent. The
Division Bench allowed the appeal reversing the decision of
the Single Judge and restored that of the Trial Court.
Clause 21 of Rule 5.34 states:
A person to whom a shop has been sold shall pay one-sixth of
the annual fee within seven days of the auction (any deposits
already made shall be credited to future payments) by the 7th
of the month in which he begins his business under his license
and by the 7th of every subsequent month the licensee shall
pay one twelfth of the annual fee till the whole fee is paid. But
he may at any time pay the whole amount due if he wishes. If
the total amount due is less than Ra.100 it shall be payable in
one sum unless the Collector on special reasons, allows payment
to be made in instalments. If any person whose bid has been
accepted by the officer presiding at the auction fails to make
the deposit of one-sixth of the annual fee, or if he refuses to
accept the license, the Collector may resell the license, either
by public auction or by private contract, and any deficiency in
price and all expenses of such resale or attempted resale shall
be recoverable from the defaulting bidder in the manner laid
down in Section 60 of the Punjab Excise Act I, of 1914, as
applied to the Delhi Province.
Rule 22 states:
When a license has been cancelled, the Collector may resell it
by public auction or by private contract and any deficiency in
price and all expenses of such resale or attempted resale shall
be recoverable from the defaulting licensee in the manner laid
down in Section 60 of the Excise Act as applied to the Delhi
Province.
4. On behalf of the appellants it was contended by Dr. Syid
Muhammad that the respondent was under a legal obligation to
pay one sixth of the annual fee within seven days of the auction
under Clause 21 of Rule 5.34 and it was due to his default that a
resale of the excise shop was ordered. Under Clause 22 of Rule
5.34 the respondent was liable for the deficiency in price and all
expenses of such resale which was caused by his default. We
are unable to accept this argument. The first portion of Clause
21 requires the Person to whom the shop has been sold to
deposit one-sixth of the total annual fee within seven days. But
the sale is deemed to have been made in favour of the highest
bidder only on the completion of the formalities before the
conclusion of the sale. Clause 16 of Rule 5.34 states that all
sales are open to revision by the Chief Commissioner. Under
Clause 18, the Collector has to make a report to the Chief
Commissioner where in his direction he is accepting a lower bid.
Clause 33 of the Conditions, Ex D-28, states that all final bids
will be made subject to the confirmation by the Chief
Commissioner who may reject any bid without assigning any
reasons. It is, therefore, clear that the contract of sale was not
complete till the bid was confirmed by the Chief Commissioner
and till such confirmation the person whose bid has been
provisionally accepted is entitled to withdraw his bid. When
the bid is so withdrawn before the confirmation of the Chief
Commissioner the bidder will not be liable for damages on
account of any breach of contract or for the shortfall on the
resale. An acceptance of an offer may be either absolute or
conditional. If the acceptnace is conditional the offer can be
withdrawn at any moment until absolute acceptance has taken
place. This view is borne out by the decision of the Court of
Appeal in Hussey v. Hornepayne [1878(8)CHD670 at 676]. In
that case V offered land to P and P accepted `subject to the title
being approved by my solicitors. `V later refused to go with the
contract and the Court of Appeal held that the acceptance was
conditional and there was no binding contract and that V could
withdraw at any time until Ps solicitors had approved the title.
Jossel M.R., observed at p.626 of the report as follows:
The offer made to the plaintiff of the estate at the price was a
simple offer containing no reference whatever to title. The
alleged acceptance was an acceptance of the offer, so far as
price was concerned, 'subject to the title being approved by our
solicitors. There was no acceptance of that additional term,
and the only question which we are called upon to decide is,
whether that additional term so expressed amounts in law to an
additional terms or whether it amounts, as was very fairly
admitted by the counsel for the respondents, to nothing at all,
that is, whether it merely expresses what the law would otherwise
our solicitors appears to me to be plainly an additional term.
The law does not give a right to the purchaser to say that the
title shall be approved by any one, either by his solicitor or his
convening counsel, or any one else. All that he is entitled to
require is what is called a marketable title, or, as it is sometimes
called a good title. Therefore, when he puts in subject to the
title being approved by our solicitors, he must be taken to
mean what he says, that is, to make a condition that solicitors of
his own selection shall approve of the title.
137
It was submitted on behalf of the appellant that the phrase
Person to whom a shop has been sold in Clause 21 of Rule
5.34 means a person whose bid has been provisionally
accepted. It is not possible to accept this argument. As we
have already shown the first part of Clause 21 deals with a
completed sale and the second part deals with a situation where
the auction is conducted by an officer lower in rank than the
Collector. In the latter case the rule make it clear that if any
person whose bid has been accepted by the officer presiding at
the auction fails to make the deposit of one-sixth of the annual
fee, or if refuses to accept the license, the Collector may resell
the license, either by public auction or by private contract and
an deficiency in price and all expenses if such resale shall be
recoverable from the defaulting bidder. In the present case the
first part of Clause 21 applies it is not disputed that the Chief
Commissioner has disapproved the bid offered by the Clause
33 of Ex.D-23 the auction sale in favour of the respondent would
have been a completed transaction and he would have been
liable for any shortfall on the resale. As the essential pre-
requisites of a completed sale are missing in this case there is
no liability imposed on the respondent for payment of the
deficiency in the price.
5. For these reasons we hold that the judgment of the Punjab
High Court is correct and this appeal must be dismissed with
costs.
6) M/s. Timber Kashmir Pvt. Ltd v. The Conservator of Forests,
Jammu [AIR 1977 SC 151]
The Jammu and Kashmir Government had filed three
applications under Sec.20 of the Jammu and Kashmir
Arbitration Act, 2002, to refer disputes arising out of three
agreements between it and the appellant Company to arbitration
under the arbitration clauses of agreements between the parties.
The applications had been dismissed by the learned Single Judge
on the ground that the arbitration clause was, in each case, a
part of an agreement which was not duly executed in accordance
with the provisions of Section 122(1) of the Constitution of
Jammu and Kashmir which correspond to those of Article 299
(1) of the Constitution of India. The Division Bench had allowed
the appeals of the Conservator of Forests, Jammu Circle, after
holding that the provisions of Section 122 (1) of the Constitution
of Jammu and Kashmir could not be said to have been infringed
if contracts were signed by the Conservator of Forests in
compliance with an order of the Government.
The main stay of the case of the appellant company was an
instruction or rule contained in the book of Financial Powers
which reads as follows:
5.13. The power to sanction or cancel the terms of instruments,
leases, agreements is delegated in the following cases :
Sr. No. Nature of Power To Whom Delegated Extent
1 2 3 4
9. To sell forest produce Chief Conservator Upto Rs.7,000/- in
and to enter into of Forests. value in each case
contract for the same provided the highest
tender is accepted.
Conservators of Upto Rs.3,000/- in
Forests. each case provided the
highest tender is
accepted.
Divisional Forest Upto Rs.1,000/- in
Officer each case provided
the highest tender is
accepted.
This rule existed prior to coming into force of the Constitution
of Jammu and Kashmir. It may also be pointed out that this
rule deals with the powers to sanction or cancel leases,
agreements, and other instruments which was delegated to the
officers mentioned there with limitations on their powers
specified there. But, the Constitutional provision, relied upon
on behalf of the appellant, relates to the manner of the execution
of the formal document containing the contract after its sanction.
It is true that the contract could not be executed with out the
sanction. Nevertheless, if the sanction could be either expressly
or impliedly given by or on behalf of the Government, as we
think it could, and if some acts of the Government could fasten
some obligations upon the Government the lessee could also
be estopped from questioning the terms of the grant of the
sanction even where there is no written contract executed to
bind the lessee.
In this case, we have agreements from which the appellant
company has derived benefits. And, these are contracts validly
executed on behalf of the Government of Jammu and Kashmir
by the Conservator of Forests. It is true that, if the appellant
138
could take up the legal plea that the contracts were not duly
executed, in accordance with Section 122(1) of the Constitution
of Jammu and Kashmir, it could urge that they did not have any
effect at all as contracts whatever other legal consequences its
acts or conduct may have had. But this does not mean that, if a
party obtains benefits on the understanding that it would abide
by certain conditions, as the appellant company had done, it
could not be compelled to observe those condition to refer
disputes to arbitration.
The threee leases, containing the arbitration clauses which the
appellant wants to avoid, were executed on 27th February, 1963
and 28th February, 1963 and 19th March, 1963, after the
notification mentioned above. The leases were duly signed by
Conservators of Forests, who were expressly authorised, without
any limits imposed on the valuation of the leases, to sign and
execute them on behalf of the Government. The delegation of
power made prior to the Jammu and Kashmir Constitution
related to grants of sanction and their cancellation. It did not
expressly refer to powers to execute leases which is a separate
matter. The notification of 1957, however, is specifically related
to the execution of formal documents including leases. Hence,
it will cover the three leases before us even if the former rules
relating to the limits of the authority of Forest Officers to give
or cancel certain sanctions could be said to be in existence at
all after the enactment of the new Constitution of Jammu and
Kashmir and the notification of 23rd February, 1957, cited
above.
The Jammu and Kashmir Government had tried to remove the
doubts it entertained about the validity of past leases executed
by the Conservator of Forests. It, therefore, passed two orders:
one of 14th April, 1965, and the other of 29th April, 1971. The
order of 14th April, 1965, ran as follows :
In suppression of previous orders regarding signing of
lease agreement it is ordered that the Conservator of
Forests will sign agreements relating to all cases of
Forests leases and appropriation of forest products and
Chief Conservator of Forests will act as the arbitrator as
provided under Cl.44 of the agreement.
By order of the Government of Jammu and
Kashmir.
Sd/- Bharat Bhusan
Secretary to Govt. Forest Department.
The order of 29th April, 1971, runs as follows :
Government Order No.FST-31 dated 14-4-65 shall be deemed
to have taken effect from 29-1-63 and all actions taken by the
Conservators of Forests in executing the lease agreements by
virtue of the said order are hereby regularised.
By order of the Government of Jammu and
Kashmir.
Sd/- R.C. Bhargava,
Secretary to Government, Agricultural
Department.
7. The learned Chief Justice had observed that these orders,
purporting to ratify the leases which were valid, did not have
any legal effect whatsoever and were unnecessary. If there had
been any question to be decided as to whether the Government
had sanctioned the leases, its actions, apart from the execution
of leases, could be considered. But, once there has been a valid
execution of leases by duly authorised officers, the documents
would be the best evidence of sanction also. That was one of
the objects of prescribing a formal mode of execution of
instruments on behalf of the Government apart from the need
to protect its interests against mala fide and other unauthorised
acts of its servants or agents.
The only question which needed decision here was whether
formal execution of the leases by duly authorised officers had
been proved. We are of opinion that the Conservator of Forests
was, for the reasons given by us. duly authorised to execute
the leases. Accordingly we affirm the orders of the Division
Bench so that matters in dispute between the parties could be
validly referred to Arbitration under the appropriate clauses of
the agreements
These appeals are, therefore dismissed with costs.
139
5. PROBLEMS
1. Moti & Sohan Lal were bus owners who ran bus service
and carried passengers for hire on different routes in the
State of Uttar Pradesh. After the Constitution came into
existence some of the persons were denied the permit to
operate their buses on certain routes by the State transport
authorities. This was done in pursuance of the policy of
the State Govt. to run buses of their own on some of these
routes.
Does the exercise of the executive power of the Union and
the States under Art. 298 of the Constitution to carry on
any trade or business activity to enter into contracts require
any legislative sanction? Give reasons.
2. A tender was not accepted within a stipulated time. At the
request of the govt. the tenderer agreed to keep it open
upto 19.12.88. However on 30.12.88 he withdrew his tender
offer. The govt. after giving him an opportunity of being
heard, blacklisted the tenderer.
a) Can a contractor be blacklisted for committing a
breach of contract?
b) Can a tenderer be blacklisted if he is not informed
previously that such a penalty can be imposed if he
withdrew the offer?
c) Can govt. insert a new condition of blacklisting not
previously known to the tenderer with retrospective
effect in the invitation to tender?
3. A contractor had entered into a contract with the Union of
India for supply of certain goods. A dispute arose between
the parties and the same was referred to arbitration. Before
the arbitrator, the contractor claimed a sum of Rs. 2,35,000
from the Union of the India on account of breach of the
contract by it. The Union of India filed a counter claim
against the contractor for a sum of Rs. 2,28,000 on account
of loss suffered by it as general damages. When the matter
was pending before the arbitrator, the Union of India asked
the contractor to pay the said sum failing which, he was
threatened that it will be recovered from his pending bills
without any further reference to him. This action was
proposed to be taken pursuant to clause 12 of the conditions
of contract. The contractor approached the court under Sec.
41(b) of the arbitration Act, 1940.
a) Discuss the issue involved in the case.
b) Prepare a brief for the contractor.
4. Mr. Murthys firm is registered with Mr. Sohan. Under this
registration, the annual requirement of Mr. Murthy has been
assessed at 15,000 quintals. As such Mr. Murthy can quote
only for this registered quantity. Regional Office of Mr.
Sohan at Chandigarh invited tenders for the purchase and
removal of damaged food grains declared fit for cattle/
poultry feed etc. Mr. Murthy submitted his tenders through
Sri. Niranjan Lal in the prescribed form. The tender
submitted by Mr. Murthy, was not signed by all the partners
of his firm. Tenders were submitted and opened on June 29,
'93. However the tender of Mr. Murthy was accepted and an
acceptance telegram was issued by Sohan on July 22, '93
which was received by Mr. Murthy on July 24, '93. The
telegram dated July 22, '93 placed an order for stock of about
6200 M.Ts of damaged paddy for purchase. Mr. Murthy did
not furnish the security deposit sum.
Explain:
a) Whether the contract between the parties is valid and
binding on Mr. Murthy? If so, to what effect.
b) Whether Mr. Murthy could quote only for the
registered quantity of 1500 metric tonnes? What is
the effect of capacity assured for registration on the
contract entered into between the parties?
c) Whether the contract could be executed by an
authorised person on behalf of Mr. Murthy? If not,
why?
5. The Govt. of U.P. had grown a large quantity of bhabar
grass suitable for manufacturing paper. The Conservator
of Forest was authorised on behalf of the govt to sell the
grass and enter into contracts with regard to it on behalf of
the govt. The Conservator of Forests invited tenders for a
leased sale of the said grass. It was stated in the invitation
to tender that the exact terms of the contract will be subject
to settlement, but approximate terms can be ascertained
before submission of tenders. Devi Prasad submitted a
tender which did not reach in time. However the
Conservator of Forest invited Devi Prasad to submit a fresh
tender in which he offered to pay a royalty of rupees one
lakh per year and agreed to take the lease for a period of
ten years. He also agreed to deposit any amount by way of
security as may be mutually agreed upon. Thereafter, a
number of letters were exchanged between the parties
negotiating the various terms and agreeing on many of them.
Subsequently Devi Prasad without any valid reason refused
to execute the leased sale and proceeded against the govt.
for the recovery of security money which was forfeited.
a) Is Devi Prasad entitled to recover the security money
because it was a condition of the contract that a formal
deed would be executed later on embodying the
contract?
b) Did Devi Prasad have an option not to go on with it
as the contract was not complete until such deed was
executed?
6. Chief Director of purchases, Food Department. Govt. of
India invited tenders for selling the American cigarettes
lying with the department. Rallia Ram submitted his tender
offering to purchase the entire stock for Rs. 39 lakhs. Some
correspondence took place between the govt and Rallia Ram
and finally the tender of Rallia Ram was accepted by the
govt. Rallia Ram took delivery of about 30 thousand packets
of cigarettes and paid for the same. On inspection he found
140
that these cigarettes were mildewed and were unfit for use.
The govt of India appointed a Board of Survey who after
inspection reported that the cigarettes of the value of Rs.
6.5 lakhs wholly unfit for use and for the remaining
cigarettes the Board recommended a reduction of price at a
certain rate. Rallia Ram refused to accept the goods on the
revised terms. The Govt cancelled the contract and offered
to take back such cigarettes as were in the original packing.
Afterwards a dispute arose as to the loss suffered on the
cigarettes not in the original packing and interest. Matter
was referred to arbitration. Arbitrator gave award in favour
of Rallia Ram. Govt of India files an appeal on the ground
that the award is liable to be set aside as there was no valid
arbitration agreement in confirmity with Sec. 175(3) of the
Govt. of India Act, 1935 which authorised the umpire to
make his award. Decide.
7. There was an advertisement for the sale of govt property.
Mr. Joshi submitted his tender for the same. The govt.
issued the acceptance to Mr. Joshi by a telegram. The
telegram stated as follows:
..... your tender for purchase of Government Gram sanctioned
as follows(.) .... FOOD SUP.
Not to be telegraphed
Sd/- R.L. Soni,
for Director of Food & Civil Supplies
M.P.
Index 5.1.74
Is there a valid and binding contract between the parties?
Explain with reasons.
8. B agreed to erect a house for the plaintiff according to a
plan by certain date. The defendants were Bs sureties. After
partly completing, B ceased work, and the plaintiff, after
giving notice to the sureties, entered and completed and
sued the sureties for damages. Discuss with reasons if
plaintiff is entitled to any relief.
9. The plaintiff agreed to build a house for the defendant using
a special type of pipe. A different sort of pipe in fact was
used, and the defendant refused to pay the final instalment
of Rs. 50000/-. To replace the pipe would involve virtual
demolition of the house and the substitute pipe was just as
efficacious. Under this situation what is the liability of
defendant towards the petitioner?
10. The plaintiff agreed to erect certain buildings on the
defendants land for 1000. He failed to complete the
contract. The defendant there upon completed the building
himself using materials left at the site by the plaintiff. The
plaintiff brought an action to recover the value of the work
done and also claimed in respect of the building material
used. Explain the liability of the defendant.
[Note: Specify your name, ID No. and address white sending answer papers]
141
6. SUPPLEMENTARY READINGS
1. Avtar Singh, Law of Contracts, (1985), Eastern Book Co. Lucknow.
2. Anson, Law of Contract, (1984), English Language Book Society & Oxford University Press, London.
3. Agarwal Y.K., Government Contracts Law and Procedure, (1984), Eastern Book Corporation, Delhi.
4. Friedman, Law in Changing Society, (1984), University Book House, Delhi.
5. Iyer, Venkatesh, Law of Contract, (1987), Asia Law House, Hyderabad.
6. Jain M.P. & Jain S.N., Principles of Administrative Law, (1986), N.M. Tripathi Pvt. Ltd., Bombay, pp.808-889.
7. Rao, S.V.J., Contract Law, (General Principles) Cases and Materials, (1991), NLSIU, Bangalore.
8. Laxmi Narain and Murthy, B.S., Public Enterprises and Fundamental Rights, (1984), N.M. Tripathi Pvt. Ltd., Bombay.
9. Puri, K.K., Australian Government Contracts Law and Practice, (1978), CCH Australia Limited, North Ryde, N.S.W.
10. Puri and Ponnuswamy, Cases and Materials on Contract, (1974), Eastern Book Co., Lucknow.
142
DISCHARGE OF CONTRACT
Master in Business Laws
Law of Contracts
Course No: I
Module No: V
Distance Education Department
National Law School of India University
(Sponsored by the Bar Council of India and Established
by Karnataka Act 22 of 1986)
Nagarbhavi, Bangalore - 560 072
Phone: 3211010 Fax: 3217858
E-mail: mbl@nls.ac.in
143
Materials Prepared By:
Prof. S. Jagapathy, B.Com., (Hons), B.L., Advocate.
Materials Checked By:
Ms. Sudha Peri, M.A., LL.M.
Ms. Archana Kaul, B.Sc., LL.M.
Materials Edited By:
Prof. N. L. Mitra, M.Com., LL.M., Ph.D.
Prof. P.C. Bedwa, LL.M., Ph.D.
National Law School of India University
Published By:
Distance Education Department
National Law School of India University,
Post Bag No: 7201
Nagarbhavi, Bangalore - 560 072.
144
Instructions
According to H.L.A. Hart law is a rule and in a legal system there are structures of various types of rules. To him
the rule of governance i.e., rule of power management of the State craft is known as secondary rule of recognition
whereas people are bound by primary rule of conduct which make the society possible. This primary rule of
conduct is known as primary rule of evidence. There can be at least two types of primary rules of obedience. Firstly,
involuntary and autonomous primary rule and secondly, voluntary and individual specific primary rule of
conduct. Constitutional lawyers call the first as realm of public law of regulation and second as private law of
conduct. Contract falls under the second category. Here two individuals entering into a specific contract among
themselves create and determine mutual rights and obligations. Suppose A takes loan from B, A is obligated to
pay it back. This principle of obligation discharge which neutralizes the contractual rights and obligations is
covered in this module. The neutral position of the parties in the pre contract situation is shaped into a relational
obligation which is again neutralized by certain action or inaction of the parties, thus discharging the contract.
We have discussed various types and forms of contractual relations in the previous module. In this module we
shall discuss about various ways of discharging the contract and ending the contractual relationship. If A takes
loan from B, the easiest way is of course payment of the loan amount by A. But suppose B cannot be found despite
all reasonable enquiry how long should A be bound to pay. The contract may itself provide a time period. The
law of a country also provides a time period under the rule of limitations, at the expiry of which time the contract
is discharged. If the government prohibits the payment A need not pay and he is discharged. So these are several
of the ways through which the contractual obligations may be neutralized.
You have to first determine as to what is the type of the contract which you are examining, who are the involved
parties, what are their mutual rights and obligations either for demanding discharge or performing the role to
discharge the contractual obligations. Then only you can observe various ground rules for discharging the
contract. It is better for you to make a detailed marginal notes as you read the module and then prepare a check
list of information given stating the ground rule of discharge. The relevant sections of the Indian Contract Act
have to be analyzed in all cases.
N. L. MITRA
Course Co-ordinator.
145
Discharge of Contract
TOPICS
1. Discharge of Contract at a Glance ............................................................ 146
2. Discharge by Performance ........................................................................ 151
3. Discharge by Agreement ............................................................................ 159
4. Impossibility of Performance ..................................................................... 163
5. Bare Text of the Relevant Sections ............................................................ 171
6. Case Law ................................................................................................... 175
7. Problems .................................................................................................... 179
8. Supplementary Readings .......................................................................... 180
146
SUB TOPICS
1.1 Introduction
1.2 A Flow Chart
1.3 Types of Contracts
1.1 INTRODUCTION
As contract has been formed by the creation or sometimes
transfer of enforceable rights and obligations arising out of
agreement between or among parties, the legal relationship can
be brought to an end only by the Discharge of the Contract.
Discharge of contract terminates the vinculum juris or legal tie
that became the binding element between the parties.
Discharge of Contract may take place in various ways as follows,
by
1. Performance
2. Attempted Performance or Tender
3. Impossibility of Performance
4. Agreement
5. Breach of Contract
6. Operation of Law
7. Lapse of time
When contract is discharged fully, the original rights and
obligations get extinguished. However, different consequences
follow the different modes of discharge of contract. There is
cessation of legal ties in the more natural ways of discharge.
There is nothing more to it between the parties. But when
discharge takes place in certain other ways, the original rights
and obligations no doubt terminate, but other rights and
obligations arise between the parties out of the very process of
discharge. The law has to follow the logical consequences of
the new rights and obligations that have arisen even though the
original contract is at the end.
Let us illustrate this by antithetical examples : When contract
is discharged by Performance which is what the parties
originally intended, the mutual rights and obligations are
extinguished as they have been fulfilled. But, when contract is
discharged by Breach of Contract, or in other words when it is
broken by the promisor by non-performance, the original mutual
rights and obligations inside the contract are no doubt ended
but the law takes its course by foisting between promisee and
promisor, remedial rights and obligations of claiming damages
or specific performance, as the case may be.
The juridical basis of the last-mentioned situation is not limited
to contract. It rests on the fundamental legal principle that as
legal rights and obligations have to be enforced, their violation
should lead to some suitable remedial rights and obligations.
The general principle is expressed in the legal maxim, Ubi
jus ibi remedium - where there is a legal right, there is a
remedy : so far as law of contract is concerned, the breach of
1. DISCHARGE OF CONTRACT AT A GLANCE
contractual obligations will lead to the remedial rights to damages
or specific performance, as the case may be.
Taking an overview of the various ways in which discharge of
contract may take place:
Performance is the logical fulfilment of contractual obligations.
It is doing what the parties intended to do when they entered
into the contract and what they are bound to do under S.37 of
the Contract Act. Performance is actual performance when the
contractual obligations are fully and properly carried out. The
contract is discharged.
Attempted Performance or Tender will also discharge the
contract. It is the legitimate attempt on the part of the promisor
to perform his obligations under the contract at the proper time
and place and unconditionally. But if the promisee unjustifiably
either does not allow or accept the performance, the law treats
the attempted performance or valid tender as equivalent to actual
performance and deems the contract as discharged. This is the
effect of S.38. Any rights accruing to promisor against the
promisee inside the contract are not prejudiced by the discharge
of his own obligations. The word tender came to be
synonymous with attempted performance because of its
English law association with the actual payment of the money
in contract of debt by debtor to creditor.
When dealing with Performance, various aspects connected with
performance arise.
Who are the persons obliged to perform contracts? Primarily
they are the promisors. S.37 is the crucial enforcing section
in the Contract Act. However, under S.40, where suitable,
there can be vicarious performance by agents or other competent
persons. Promises also normally bind the legal representatives,
[see S.37]. They may have to perform such promises in case of
death of promisor. Sometimes there may be joint promisors
(Ss.42 to 44). Whether there can be assignment or transfer of
contractual obligation has to be considered.
Who are the persons entitled to claim performance? Prima
facie, promisees or their legal representatives in suitable cases.
A stranger to the contract cannot enforce performance except
in exceptional cases considered in the Module on
Consideration. There may be joint promisees under S.45.
There can be assignment or transfer of contractual rights subject
to certain conditions and the assignees can claim performance
from promisors.
Issues on time and place of performance are provided from
S.46 to S.50. When we are on sequence of mutual performance,
we turn aside and consider in this Module, the performance of
Reciprocal Promises treated from S.51 to S.58. The important
question as to when time of performance is deemed of the
essence has to be considered. It is dealt in S.55 of the Act.
This question has also special reference to commercial contracts
with its crop of case law. What is the effect of failure to perform
on time when time is of the essence? S.55 also treats of this. The
law of appropriation of payments found in Sections 59 to 61
147
adjoins this area because it is a mixed question of time and place
of performance.
From the point of view of performance contracts can be classified
generally in to absolute contracts including conditional contracts
and what are truly contingent contracts dependant on a
contingency, for example, a contract of insurance. The rules
relating to performance of contingent contracts are contained
in Sections 32 to 36 and the topic is considered adjoining
performance.
Discharge of Contract may take place by Agreement or Consent
including Waiver. As it is agreement which binds the parties
they can loosen themselves from it by another agreement which
may be express or implied or between them and a fresh party or
parties. This mode of discharge of contract vests on the legal
principle Eodem modo quo quid constitutor eodem modo
destruitur, - a thing may be destroyed in the same manner in
which it is constituted. Discharge by agreement are covered in
Indian law by Ss.62 and 63 of the Contract Act. S.62 deals with
Novation or the substitution of a new agreement in the place of
the old, S.62 also covers Rescission in which parties may agree
to cancel all or some of the terms in the contract. S.62 also
covers Alteration in which parties may agree to alter all or some
of the terms in the contract. S.63 deals with Remission in which
the promisee accepts a lesser fulfilment of the promise giving
up the balance or extends the time or accepts a lesser satisfaction
or wholly dispenses with the performance called Waiver such
that the parties rights are abandoned. The difference between
the English and Indian law is intricate, in this regard.
Discharge of contract may take place by Impossibility of
performance. Impossibility of performance may be - (a)
impossibility apparent on the very face of the contract, intrinsic
or absolute impossibility, as for example, an agreement to
discover a treasure by magic, which certainly must be taken to
be known to the parties themselves, so that the agreement is
void ab initio. The contract may be said to be still born. Or,
when making the agreement the parties may have been ignorant
of its impossibility, as in the case of mutual mistake of fact as
to the very existence of the subject matter when on discovery
of the impossibility, the contract becomes void. On other hand,
in practice, the more material kind of impossibility is that which
arises subsequent to the formation of the contract which is called
Supervening Impossibility or subsequent impossibility. S.56
of the contract covers both kinds of impossibility.
Supervening impossibility as a ground of discharge was evolved
by the English law on the basis of different sets of judicial
theories. The old rule of English law was that impossibility of
performance is no excuse as laid down in Paradine v. Jane
[(1647) Aleyn 26]. called the do or die theory. But the rigor
of such a view was modified by one line of judicial decisions
that courts may read into a contract an implied provision even
in the absence of an express one that the parties themselves
contemplated that under the circumstances that have arisen
rendering the performance of the contract impossible the
contract would stand discharged. This theory is known as the
doctrine of implied term. Another line of judicial decisions
in English cases developed the view that the doctrine of implied
term is really a positive rule of law which requires the court to
import into the contract, irrespective of the intention of the
parties, in the circumstances that have arisen a term that there
is such an impossibility that the contract justifiably is discharged.
This theory is known as that of a positive rule of law of
supervening impossibility. The English courts applied the
principle of frustration as the result of either theory to various
classes or categories of cases (reviewed in detail in the Module)
including frustration in commercial contracts. These classes
of cases are also recognised in Indian law.
However, there are limitations to the doctrine of frustration of
which the most important one is that frustration should be self-
induced.
The Indian law of supervening impossibility is grounded in
S.56 of the Act. It is closer to the second English theory of
doctrine of positive rule of law. The Supreme Court of India
held in the leading case of Satyabrata Ghose v. Mugneeram
Bangur & Co. [AIR 1954 SC 44] that S.56 lays down a positive
rule of law of supervening impossibility and it is the function
and duty of the court to come to a conclusion whether in the
changed circumstances on any of the recognizable grounds a
contract has been discharged by supervening impossibility.
What are the consequences of discharge by supervening
impossibility or frustration? The older position in English law
in Chandler v. Webster [(1904) 1 KB 493] was that any loss
must lie where it fell was overruled by the House of Lords in
Fibrose Spolka Akejsna v. Fairbairn Lawson Coombe
Barbour Ltd [(1943) AC 32], by holding that as far as may be
restitution had to be made as between the parties to a frustrated
contract. The English law was consolidated by the Law Reform
(Frustrated Contracts) Act of 1943. It is interesting to note
that the position reached in English law by the above statute is
already secured in the Indian law by S.65 of the Act with respect
to the consequences of frustration.
Discharge of contract by Breach will be treated in the next
module in detail as it has many ramifications.
It remains to briefly refer to discharge of contract by operation
of law and by lapse of time. It is not necessary to treat them in
any greater detail in this Module.
A contract may be discharged independent of the intention or
wishes of the parties by operation of law. This happens in the
following situations:
(a) Death: Death of party in a contract involving personal skill
or ability. It is only in other contracts the rights and liabilities
can devolve on the legal representatives.
(b) Merger: Merger takes place when rights accruing to a
party under a contract get absorbed into certain other rights
accruing to the same party under the same or some other
contract. For example, T holds property under a contract of
lease. Later, he enters into a contract with the lessor to buy the
same property and buys it and becomes its owner. Another
good example is when the acceptor of a bill of exchange
becomes its holder by a subsequent endorsement eventually.
148
(c) Insolvency: In Insolvency, when an order of discharge has
been obtained from the court, the insolvent is discharged from
all debts and contracts subject to certain exceptional debts. In
insolvency, the estate of the insolvent vests in the insolvency
authorities who also exercise all his rights ex-contractu, arising
from contract.
(d) Unauthorised Alteration in Contract Deed: Where a party
to a deed or contract in writing makes any alteration in it without
the consent of the other party, and the alteration is in a material
part of the contract which depends on the character of the
instrument, and it changes in a significant way the rights and
liabilities of the parties, the other party can avoid the contract.
According to S.87 of the Negotiable Instruments Act, a material
alteration of a negotiable instrument renders the same void
against persons who were parties thereto before such alteration
unless they have consented to the alteration. The Act exempts
in specific sections certain material alterations necessary for
the operation of instruments. For example, the crossing of
cheques.
A contract may get discharged by lapse of time. The law of
limitation which in India is codified in the Limitation Act, 1963,
lays down that a contract should be performed within a specified
period, failing which, if no action is taken by the promisee within
the period of limitation, the remedy at law is deprived. This, in
effect amounts to discharge of the contract. The period of
limitation for simple contracts, in India, is three years. S.5 of
that Act provides for extension of time in proper cases.
1.2 A FLOW CHART
Discharge of Contract
Types of Contract
Contingent Contract Reciprocal Contract Alternate Contract
(S.31) (S.51) (S.58)
Positive Contingency Negative Contingency
(S.32) (Ss.33-34)
Rule of Discharge
By performance By non performance
Who Where When How Appropriation
(Ss.37 (S.49) (Ss.46-48, (Ss.50 of payment
38,39) 55) -54,57,58) (Ss.59-61) By consent (Ss.62-65)
Single Joint
promisor promisor
(Ss.40,41) (Ss.42,45)
Novation Rescission Alternate Revocation of
Rescission
cannot be performed Breach of Contracts (Ss. 73-75)
(Supervening impossibility)
Destruction of Death War Change Constructive Actual
subject matter of circumstances Breach Breach
149
1.3 TYPES AND NATURE OF CONTRACTS AND
PERFORMANCE
The rule of discharge of contract is dependant upon the nature
and type of contract because these rules are to address both
general and specific situations and may be both substantive and
procedural. Substantive general principles as well as procedural
in case details regarding discharge of a contract are based upon
the following enquires:
1. What is the nature of the contract?
2. What are the conditionalities of the contract which
determine the performance of the contract by the promisor?
3. When is performance needed or not needed?
4. On what factors time and place of performance are
determined?
5. What regulates inter-personal relation between the promisor
and promisee, as well as between the joint promisor and
joint promisee?
6. In case of several contractual relation between the same
parties what should be the general or particular principle
in appropriation of advances and payments?
Therefore, the immediate necessity is to understand the nature
and time between the parties in order to appreciate rules of
discharge.
Contingent Contract
From the point of view of performance, a general classification
of contracts could be made as (a) absolute contracts and (b)
Contingent contracts.
An absolute contract is one in which the promisor binds himself
to performance without any condition external to the contract.
There may be a condition which is internal to the contract itself,
as for example, when the performance of one party is conditional
on the readiness or willingness to perform of the other party.
For instance, S agrees to deliver hundred bags of rice to B and
B agrees to pay the price afterwards. Here the performance of
B is conditional upon the performance of A. Nevertheless it is
an absolute contract.
But a contingent contract, as defined in S.31, is a contract to do
or not to do something, if some event, collateral to such contract
does or does not happen. Here, the condition for performance
is collateral to the contract. For example, N promises to pay the
value of the car of M if it is destroyed by fire. The contingency
on which performance is dependent is collateral and external
to the contract. Such a contingency may be an event in the
external world or even an act entirely within the will of the
promisor but not the mere will of the promisor. Thus, if A
promises to B that he will pay to him Rs.1,000 if A leaves
Madras for Calcutta, it is a contingent contract as going to
Calcutta is an act within the will of A. But if A promises to B
that he will pay Rs.1,000 if he so chose, it is not a contingent
contract because the contingency is the mere will of the
promisor. In fact there is no contract at all. Thus in Roberts v.
Smith [(1859) 4 H & N 315], there was a promise that for a
certain service the promisor will pay whatever he himself thinks
right or reasonable. Held, there was no promise.
Contracts of insurance, contracts of indemnity and contracts of
guarantee are all contingent contracts because the condition is
collateral to the contract. A wagering agreement is contingent
but unlawful. In Ranchhodas v. Nathmal Hirachand & Co
[(1949) 51 Bom. LR 491], there was a contract for a sale of
American parachute cloth by S to B. The goods were to be
delivered when they arrived. S failed to give delivery. B sued
for breach. S pleaded that the contract was a contingent one
and as the goods had not arrived there was no obligation to
give delivery. But, held the contract was not a contingent one
and the obligation was absolute.
Contingent contracts may be classified as follows :
(a) Contingent on future event happening. S.32
(b) Contingent on future event not happening. S.33
(c) Contingent on future event happening within a fixed time.
S.35
(d) Contingent on future event not happening within a fixed
time. S.35
(e) Contingent on the future conduct of a living person. S.34
(f) Contingent on impossible events. S.36
(a) Contingent on future event happening:
According to S.32, a contingent contract to do anything if an
uncertain future event happens cannot be enforced by law unless
and until that event has happened. If the event becomes
impossible, such contract becomes void.
Illustration: U agrees with N to pay her a sum of money when
she marries X. The sum becomes payable on N marrying X.
The agreement becomes void if X happens to die without
marrying N.
It should be noticed that the collateral condition is a positive
condition precedent to the enforcement. Thus in Anjali Das v.
Bidyut Sarkar [(1992)1 Cal LT 166], a sale was subject to
approval by a co-operative society in accordance with its by-
laws. On the happening of the approval, held specific
performance of the contract can be demanded.
If the event does not happen in the way contemplated by the
contract, the contract cannot be enforced. In V.P. Desa v. Union
of India, [AIR 1958 MP 297], a car was insured against loss
in transit. The car was damaged without being put in course of
transit. Held, the insurer was not liable.
(b) Contingent on future event not happening:
According to S.33, a contingent contract to do or not to do
anything if an uncertain future event does not happen can be
enforced when the happening of that event becomes impossible,
and not before.
Illustration: M agrees to pay O a sum of money if a certain ship
does not return. The ship is sunk. The contract can be enforced.
It may be noticed that there is a negative condition subsequent
to which the contract becomes enforceable.
150
(c) Contingent on future event happening within a fixed time :
According to S.35, a contingent contract to do or not to do
anything if a specified uncertain event happens within a fixed
time, becomes void if, within such fixed time such event has
not happened, or if, before the fixed time such event becomes
impossible.
Illustration: M promises to O a sum of money if a certain ship
returns within the year. The contract is enforceable if the ship
returns within the year. If, within the year, the ship is sunk
without returning, the agreement becomes void.
(d) Contingent on future event not happening within a fixed
time.
According to S.35, a contingent contract to do or not to do
anything, if a specified uncertain event does not happen within
a fixed time may be enforced by law when the fixed time is
over and such event has not happened or before such fixed
time it becomes certain that such event will not happen.
Illustration: M promises to O to pay a sum of money if a certain
ship does not return within a year. The contract may be enforced
if the ship does not return within the year or is sunk within the
year.
(e) Contingent on the future conduct of a living person:
According to S.34, if the future event on which a contract is
contingent is the way in which a person will act at an unspecified
time, such event shall be considered impossible when such
person does anything which renders it impossible that he should
so act within any definite time, or otherwise than under further
contingencies.
In Frost v. Knight [1872 LR 7 Exch 111], D promised to marry
P on the death of his father. D married X while the father was
still alive. Held, P can sue D for breach of contract.
(f) Contingent on impossible events:
According to S.36, Contingent agreements to do or not to do
anything, if an impossible event happens, are void, whether the
impossibility is known or not to the parties to the agreement at
the time when it is made.
Illustration 1: A and B agreed that A will pay Rs.1,000 to B if
he brings back to life a dead person C. The agreement is void.
Illustration 2: A and B agreed that A will pay a sum of money
to B if a certain ship returns to port. Unknown to both the
parties at the time, the ship is already sunk. The agreement is
void.
Reciprocal Promise:
A promise for a promise forming the contract is a reciprocal
promise (see S.8). Such a reciprocal promise may expressly
provide the order of performance. In some cases the nature of
the contract may indicate the order of performance. As for
example, A and B contract that A shall build the house of B at
a fixed price and at each stage of billing on the basis of
constructions work done, B shall pay 80% of the bill. Here, in
this contract, A shall first construct the building and B has to
pay later (S.52). Where in reciprocal promises both the parties
are required to simultaneously perform their promise, no promisor
need perform his promise unless other party is willing to perform
his promise. As for example, A agrees to supply B against
payment be made on delivery, A is not bound to deliver the
goods unless B is ready and willing to pay for the goods when
delivered (S.51). Where in case of reciprocal promise one party
prevents the other from performing his promise, the contract
becomes voidable at the option of the party who is so prevented.
He is also entitled to compensation from the other party for any
loss which he may sustain in consequence of the non
performance of the contract. As for example, A and B contract
that B shall execute certain work for A for Rs.1000/- B is ready
and willing to execute the work, but A does not allow to get the
possession of the land on which the work is to be done. B may
now rescind the contract and recover compensation from A for
any loss which he has sustained (S.53). Similarly, where in a
reciprocal promise one party cannot perform his promise until
the other performs his part or where the second party cannot
claim the performance from the first party unless he performs
his part, and the second party fails to perform it, the second
cannot claim performance of the reciprocal promise from the
first party and must make compensation for any loss which the
first party may sustain due to non performance. As for example,
A hires Bs ship to take in and convey, from Calcutta to
Mauritious, a cargo to be provided by B, B receiving a certain
freight for this conveyance. A does not provide cargo for the
ship. A cannot claim the performance of Bs promise, A must
make compensation to B for the loss which B sustains for the
non performance of the contract. Similarly suppose A contracts
B to deliver to him, at a specified price, certain merchandise on
board a ship which cannot arrive for a month, and B engages to
pay for the merchandise within a week from the date of contract.
B does not pay within a week. As promise to deliver need not
be performed and B must make compensation (S.54).
In a set of reciprocal promises, if one part is legal and other
illegal, the part which is legal is contract and the part which is
illegal is void. As for example, A and B agree that A sell B a
house for Rs.10,000/-, but, that if B uses it as a gambling house,
he shall pay a Rs.50,000/- for it. The first set of reciprocal
promise that is the selling the house for 10,000 is lawful and
the contract is valid but the second set is for unlawful object
making the agreement void (S.57). But in such cases those set
of reciprocal promises legal or illegal must be clearly
identifiable and divisible. If the whole set of reciprocal promises
has any unlawful element which is not separable the total
agreement fails.
Alternate Promise :
An alternate promise is one where parties have alternate options
either for alternate promise or for alternate consideration or
may be both. In such a case if one alternative is legal and the
other is illegal, the legal part is only enforceable. As for
example, A and B agree that A shall pay Rs.10,000/- to B for
delivering smuggled opium or failing, rice produced in his farm.
Here the agreement for delivery of rice is a valid contract but
not the opium. Here also the alternative must be clear, identified
and divisible, otherwise the whole agreement fails.
151
SUB TOPICS
2.1 Introduction
2.2 Persons obliged to perform
2.3 Who can demand performance
2.4 Time and place of performance
2.5 Appropriation of payment
2.6 Tender of performance
2.1 INTRODUCTION
Contract may be discharged by Performance. S.37 of the
Contract Act imbibes in itself the entire sanction behind the
law of contract by laying down:
The parties to a contract must either perform or offer to perform
their respective promises, unless such performance is dispensed
with or excused under the provisions of this Act, or any other
law.
Thus it is clear that the obligation of performance rests on
promisors except in certain extenuating circumstances, on
performance, the contract would stand discharged.
S.37 itself allows the promisor in the alternative to actual
performance to offer to perform which is called tender of
performance. Provided such offer to performance fulfils the
conditions laid down in S.38 to constitute a valid tender, it is
for the promisee to accept the performance. Failing which, the
promisor is not responsible for non-performance, the contract
having been discharged by attempted performance or tender,
nor does he thereby lose his rights under the contract. Tender
will be considered at its proper place.
About Performance itself various aspects arise as follows :
Questions arise by whom is a contract to be performed and
who can demand the performance of a contract, time and place
of performance and whether time is of the essence.
2.2 PERSONS OBLIGED TO PERFORM
1. Promisors, agents and legal representatives:
Prima facie, performance should be by the promisor (S.37),
and the obligation binds the legal representatives unless a
contrary intention appears (S.37). S.40 requires that if parties
intended that the promise should be performed by the promisor
himself, it should be performed only by the promisor himself.
For example, A promises to paint a picture for B. Obviously A
himself must paint it. According to S.40, in other cases the
promisor or his representative may employ a competent person
to perform it. This is called vicarious performance. S.41 goes
a step further and lays down that where a promisee accepts
performance from a third peron, he cannot afterwards enforce
it against the promisor.
According to S.37, unless a contrary intention appears from
the contract, promises build the representatives of the promisor
in case of death of the promisor before performance. A contract
2. DISCHARGE BY PERFORMANCE
involving the use of personal skill or which is founded on
personal considerations is ended at the death of the promisor
following the rule of law actio personalis moritur cum
persona, a personal action dies with the promisor. If the
contract is otherwise, the legal representative of the deceased
promisor is bound to perform it, unless a contrary intention
appears. For example, A promised to paint a picture for B.
Obviously, if A dies, his legal representative cannot be
compelled to do so. But if A had borrowed Rs.1000/- from B,
and A dies, B can recover the amount from the legal
representative of A from his estate. Here again, the liability of
a legal representative under a contract is limited to the value of
the property inherited from the deceased [New India Motors
(P) Ltd v. Smt. S.P. Duggal (1982) Comp Cas 352)].
2. Joint Promisors:
Sometimes there may be joint promisors. The Indian law laid
down in Sections 42 to 44 is at variance with the English law.
In English law, joint promise and joint and several promise are
two diferent things with respect to liability and devolution of
liability. But in Indian law, joint promise is also joint and several
promise.
According to S.42, unless contrarily intended, joint promisors
must jointly fulfil the promise. However, according to S.43,
unless contrarily intended, the promisee may compel any one
or more of several joint promisors to perform the whole of the
promise. For example, D1, D2 and D3 jointly promise to repay
a debt of Rs.3000 to C. Though they are bound to repay jointly,
C may compel all or any of them to repay the entire amount.
According to S.42, after the death of a joint promisor, unless
contrarily intended, his representative along with the survivors,
and after the death of the last survivor, the representatives of
all jointly must fulfil the promise.
S.43 gives the performing joint promisor the right to claim equal
contribution from the others. And where one of them defaults,
the others must bear the deficiency in equal proportion.
Illustration: D1, D2 and D3 have jointly promised to repay a
debt of Rs.3000 to C, C compels D3 to pay the whole. D1 is
insolvent but his assets are sufficient to pay half of his debts.
D3 may receive Rs.500 from D1s estate and Rs.1250 from
D2. According to S.44, the release of any joint promisor or
promisors by the promisee does not discharge the others from
the liability nor does it free such joint promisor or promisors
from liability for contribution.
3. Assignment of Contractual Liability:
Assignment of contractual right by the promisee to another
person has been fully discussed at its proper place. Here, we
are concerned with the question whether there can be an
assignment of contractual liability by the promisor to another
person. Assignment means transfer.
Both in English and Indian law, there cannot be an assignment
of a contractual liability by a promisor to another person without
the consent of the promisee.
152
In the leading English case of Robson & Sharpe v. Drummond
[(1831) 109 ER 1156], D agreed to take from S, coach builders,
carriages on hire for five years, S being bound to look to their
excellent conditon. After three years, S assigned his business
to R. D refused to be bound further by the contract. Held, S
cannot compel D to have the work done by R, D had entered
into the contract by virtue of personal confidence in S.
If, however, there is a transfer of a contractual liability by the
promisor to another person with the consent of the promisee,
there is really a Novation or a new contract shifting the liability
to another with the consent of the promisee. Venkatarama Iyer
J. of the Supreme Court explained this in Khardah Co. Ltd v.
Raymon & Co. Ltd [(1963) 3 SCR 183] thus: As a rule
obligations under a contract cannot be assigned except with
the consent of the promisee, and when such consent is given, it
is really a novation resulting in a substitution of liabilities.
Novation is discussed later.
According to S.40, where it is not the intention of the parties
that the promise should be performed by the promisor himself,
the promisor or his representative may employ a competent
person to perform it. Such vicarious performance is not
assignment. In such a case, the liability of the promisor subsists
and he is responsible for the performance by his agent. In
practice, this may be true of many contracts. This was
recognised by Lord Greene MR in Davis v. Collins [(1945) 1
AER 247], when he said, In many contracts all that is stipulated
for is that the work shall be done and the actual hand to do it
need not be that of the contracting party himself ; the other
party will be bound to accept performance carried out by
somebody else. The contracting party of course, is the only
party who remains liable.
It may also be mentioned that there is nothng to prevent the
parties to a contract themselves from making the liability under
it assignable if they so wish. Thus in Tolhurst v. Associated
Portland Cement [(1903) A.C. 414], the House of Lords
construed a contract as one between the parties named in it and
their respective assigns. Here, the assignment of liability arises
inside the contract itself and must be so distinguished from the
general position that the liability under a contract cannot be
assigned.
2.3 PERSONS ENTITLED TO CLAIM
PERFORMANCE
1. Promisee and legal Representatives :
Primarily it is the promisee who can demand performance under
a contract. This is so whether the promise is for the benefit of
the promisee or any other person. For example, A promises B
to pay Rs.1000 to C. It is only B who can enforce the promise
of A. In case of the death of the promisee, his legal
representative can enforce the promise in suitable cases.
It is a general rule of law of Contract that a stranger to a contract
cannot enforce the contract. This is known as the doctrine of
privity of contract. This rule and the exceptional cases in which
a person not a party to the contract namely not the promisee
may enforce a contract have already been discussed in the
module on Consideration.
2. Joint Promisees :
According to S.45 of the Contract Act when a promise is made
to more than one person jointly, unless a contrary intention
appears from the contract, the right to claim performance rests
with them during their joint lives and on the death of any of
them, with the representatives of such deceased person jointly
with the survivors, and after the death of the last survivor with
all the representatives jointly. Thus the devolution of joint rights
in contract is on the same principle as the devolution of joint
liabilities. The partners of a firm, the members of a Hindu joint
family, co-owners and mortgagees are all joint promisees with
respect to any debt in their favour.
3. Assignees of Contractual Rights:
Whether a contractual liability can be assigned, and if so, what
are the qualifications has been discussed earlier. Here, we shall
consider the assignment of contractual rights by promisees.
In English law, a contractual right is regarded as chose-in-action
as distinct from a chose in possession. It means it is a species
of movable property being non-corporeal over which lawful
possession can be exercised only by legal action and not physical
possession like a thing. A chose-in-action has been defined by
Channel. J. in Trokintan v. Magee [(1902) 2 K.B 427] thus -
A chose-in-action is a known legal expression used to describe
all personal rights of property which can only be claimed or
enforced by action, and not by taking physical possession.
Originally, in English common law, rights under a contract as
chose-in-action could not be transferred at all by assignment
but only by novation. If A owes 100 to B and B owes 100
to C, it may be agreed between all the three that A shall pay C
instead of B.
Only certain special contractual rights, or benefits, or rights of
action on contract, could be transferred by the customs and
usages of the Law Merchant, as for example, negotiable
instruments.
Equity permitted the assignment of chose-in-action including
contract rights. If the right was equitable, such as a share in a
trust, the procedure was direct and easy in a court of equity.
But if the chose was legal such as a contract right, the court of
equity required the assignor to lend his name to the action of
the assignee before it could enforce it. This position continued
down to the passing of the Judicature Acts in the latter nineteenth
century which unified common law and equity courts.
Equity as stated above, allowed the assignment of contractual
rights. No particular form was necessary. It need not even be
in writing. If the intention to assign a contractual right which
lends itself to such assignment is clear, it is valid in equity called
an equitable assignment. Thus in Brandts Sons and Co. v.
Dunlop Rubber Co. [(1905) A.C. 454.], A agreed with B
who funded him that the prices of all goods sold by A should
be paid to B. A sold some goods to X to whom B gave notice
to pay the price to him, B. and not to A. But X ignored it and
153
paid to A. Held, there was an equitable assignment of the price
in favour of B, and X was liable to B not withstanding his
payment of the price to A.
All rights ex-contractu except where personal confidence or
personal qualifications of one party was of the essence of the
contract could be assigned. Thus in Kemp v. Baerselman
[(1906) 2 K.B. 604], B undertook to supply K with all the eggs
he shall require for manufacturing for one year. K undertook
not to buy eggs elsewhere so long as B is ready to supply them.
Held, K cannot assign his right to be supplied with eggs to X.
Secondly, because of the rules in English law against maintenance
and champerty, a mere right to sue, for damages for breach of
contract, cannot be assigned.
Assignment of contractual right, was however, subject to certain
features affecting the rights of the assignee, as follows :
(a) As between assignor and assignee consideration was
necessary for an agreement to assign a chose-in-action, but
if it is transferred without consideration as a gift and the
transaction completed, the question of consideration does
not arise. In modern practice, the doubtful position whether
this would extend also to the assignment of a legal chose-
in-action provided it is completed, has been resolved in
favour of the better view that consideration is not necessary
between assignor and assignee whether the chose-in-action
assigned is equitable or legal. The view is adopted by
Alkinson J. in Holt v. Heather Field Trust [(1942) 2 KB1],
and supported by the court of appeal in Re Mc Andle (1951)
1 AER 905.
(b) The assignment will not bind the promisor until he has
received notice, not necessarily in writing although binding
assignor and assignee from the time made.
(c) The assignee takes subject to equities between the promisor
and the assignor. In other words, the assignor cannot give
a better title than what he has.
As seen above, the Judicature Acts in the latter nineteenth
century allowed statutory exception to the Common law rule
that a chose-in-action is not assignable. The Law of Property
Act, 1925, in S.136 re-enacted the statutory exceptions allowing
assignment of legal chose-in-action. The statute is
supplementary and does not supplant the existing law in equity.
Under the Act, the assignment must be (a) absolute and not by
way of charge, (b) must be in writing signed by assignor, (c)
express written notice must be given to the promisor, and (d)
the assignee takes subject to equities. The Law of Property
Act, 1925 substitutes the term thing in action for the term
chose-in-action.
Assignment of contractual rights may also take place under the
special laws of insurance, marine insurance and companies etc.
Assignment of contractual rights may also take place by
operation of law in intestate and testamentary succession,
bankruptcy, and in property.
The assignee of a contractual right is in a position to claim
performance from the promisor.
In Indian law, an actionable claim is defined in S.3 of the
Transfer of Property Act as, a claim to any debt, other than a
debt secured by mortgage or hypothecation or pledge, or a claim
to any beneficial interest in movable property not in the
possession, either actual or constructive of the claimant, which
the civil courts recognise as affording grounds for relief, whether
such debt or beneficial interest be existent, accruing, conditional
or contingent.
An actionable claim in Indian law is therefore similar in many
respects to a chose-in-action of English law. It includes most
contractual rights which are capable of being transferred. It
was held in Jaffar Mehar Ali v. Budge Budge Jute Mills Co.
[34 Cal 289] that the right to claim the benefit of the contract
or the right on certain conditions for delivery of goods in a
contract is an actionable claim being a conditional or contingent
beneficial interest in movable property.
An actionable claim can be assigned and transferred in Indian
law under S.130 of the Transfer of Property Act. It must be
made by an instrument in writing executed and signed by the
transferor or duly authorised agent. The assignment must be
absolute and not by way of charge and it should be of the entire
right. If debt, it should be of the whole debt. No registration is
necessary. The transfer may be made with or without
consideration. On such assignment, all the rights and remedies
of the transferor vest in the transferee whether any notice of
such transfer is given or not. However, notice to the promisor
has an important bearing on the transferees right because so
long as proper notice is not served the debtor is not directly
liable to the transferee and any payment or performance by
him to the transferor or other authorised person would be proper
discharge as against such transferee as also any other dealings
by him. S.131 requires every notice of transfer of an actionable
claim to be in writing signed by the transferor or his agent, or
by the transferee or his agent. According to S.132, the transferee
of an actionable claim takes it subject to all liabilities and equities
of the transferor.
Negotiable instruments are exempted from the chapter on
transfer of actionable claims for obvious reasons.
All contractual rights, in general, except where personal
confidence or personal consideration of parties are of great
importance, can be assigned. Rights under a contract are
assignable unless the contract is personal in its nature or the
rights are incapable of assignment either in law or under
agreement between the parties, according to the Supreme Court
in Khardah Co. Ltd. v. Raymon & Co. Ltd. [(1963) 3 SCR
183].
Rights under a contract can be assigned, but not the right to sue
for compensation or specific performance on breach of the
contract.
Assignment of contractual rights may also take place under the
special laws of insurance, bills of lading etc. Negotiable
instruments are transferable in the exceptional ways
contemplated under that Act.
154
Assignment of contractual rights may also take place not by act
of parties but by operation of law such as by devolution on
intestate or testamentary succession, or in insolvency.
It should not also be forgotten that even in India, equitable
assignment without recourse to the Transfer of Property Act,
may also take place in exceptional circumstances such as
creation of trusts and be enforced by courts of law.
2.4 TIME AND PLACE OF PERFORMANCE
Questions of time of performance arise in contracts. According
to S.46 of the Contract Act, where no time for performance is
specified and a promisor is to perform the promise without
application by the promisee, the promise must be performed
within a reasonable time. S.46 adds that what is a reasonable
time is, in each particular case, a question of fact. It may depend
on the intention of the parties, the usage of the trade or any
special circumstances of the case. A contract to keep a ship
insured was held broken by delay of three days but in a contract
of sale of shares two months time was held reasonable for
completion.
According to S.47 when a promise has to be performed on a
certain day, without application by the promisee, the promisor
may perform it during the usual hours of business on such day.
Where the day fixed happens to be a public holiday, so far as
the Negotiable Instruments Act is concerned, performance
should be offered on the prior day. In other cases it may depend
on the usages of the trade.
According to S.48, when a promise is to be performed on a
certain day and the promisee has to apply for performance, it is
the duty of the promisee to apply for performance within the
usual hours of business and at a proper place. Here again, what
is proper time and place is a question of fact in each particular
case.
According to S.49, where a promise is to be performed without
application by the promisee, and no place is fixed, it is the duty
of the promisor to apply to the promisee to appoint a reasonable
place and perform at such place. According to the illustration
to the Section, A undertakes to deliver a thousand maunds of
jute to B on a fixed day. A must apply to B to appoint a
reasonable place and deliver it at such place.
It is an ordinary rule of common law that a debtor should seek
the creditor and repay the loan.
In L.N. Gupta v. Taramani [AIR 1984 Delhi 49], a promissory
note stated that it would be payable at the place of its execution
or at any place in India. The payee settled at some other place
and demanded payment there. Held, under S.49 it was the duty
of the debtor to seek his creditor and pay him there.
According to S.50, the performance of any promise may be
made in any manner, or any time which the promisee prescribes
or sanctions. This section enables the parties to leave the entire
time and manner of performance to the promisee if they so
desired. An illustration to the section gives the following
examples. B owes Rs.2000 to A. A asks B to pay the amount
into As account with C a bank. B also has an account in the
Bank X. B directs C to transfer the amount from his account to
As account and this is done. Before A is aware of the transfer,
the bank C fails. There has been a good payment by B. Further
illustrations to the section state where two persons are mutually
indebted and agree to set off their debts and net balance is paid
by one to the other both stand discharged from their liabilities.
Performance of Reciprocal Promises :
According to S.2, promises which form the consideration or
part of the consideration for each other are called reciprocal
promises. Questions may arise of the sequence of performance
of such promises.
Lord Mansfield in Jones v. Barkley [4 Douglas 659] has
classified such promises as follows :
(a) mutual and independent
(b) mutual and dependent
(c) mutual and concurrent
According to S.52, where the order in which reciprocal promises
are to be performed is expressly fixed they shall be performed
in that order, and where the order is not expressly fixed they
shall be performed in that order which the nature of the
transaction requires. For example, if in a contract of sale B
agrees to pay the price of the goods on 10th and S agrees to
supply the goods on 20th. But if A and B agree that A shall
build a house for B at a contract price, A must build the house
before B has to make payment for it. Thus in Hashman v.
Lucknow Improvements Trust [(1927) 101 IC 847], a person
took a lease of land from a municipality on condition that he
will pay Rs.630 for levelling charges and possession was to be
given after levelling. When the question arose whether the
amount was to be paid before or after levelling, the agreement
being silent on the point, the Allahabad High Court came to the
conclusion in the ordinary course of business work is not
usually paid for before it is done.
According to S.51, where a contract consists of reciprocal
promises to be simultaneously performed, no promisor need
perform his promise unless the promisee is ready and willing
to perform his reciprocal promise. For example, S and B agree
that S shall deliver goods to B at a price by instalments the first
instalment to be paid on delivery. S need not deliver unless B
is ready and willing to pay the first instalment.
According to S.54, when a contract consists of reciprocal
promises, such that one of them cannot be performed, or its
performance cannot be claimed till the other has been performed,
and the promisor of the last mentioned promise fails to perform
it, he cannot claim the performance of the reciprocal promise,
and must make compensation for any loss sustained by such
non-performance. For example, A hires Bs ship to convey
from Calcutta to the Mauritius a cargo provided by A and B to
receive a certain freight. A does not provide the cargo. A
cannot claim performance from B. A must compensate B for
loss which B may sustain by the non-performance of A.
155
Thus in Ubroy Mohindar Singh v. State of Haryana [(1991)
2 SCC 362], a contract for quarrying off the river Yamuna, the
contractor was prevented from performing his part, because of
the failure of the Flood Control Department to give no objection.
Held, the contractor was entitled to refund the deposit money.
According to S.53, in a contract of reciprocal promises, if one
party prevents the other from performing his promise, the
contract becomes voidable at the option of the party so prevented
and such party is entitled to compensation from the other for
any loss as a result of the non-performance. Thus in Kleineri v.
Aboisso. Gold Mining Co [(1913) 59 SOL JO 45], an appeal
from the Gold Coast before the Privy Council, in order to get
his mine cleared of a rock, B had to supply a crusher. The
crusher supplied was inadequate. Held, A was prevented from
his performance and he was allowed to recover expenses and
loss of profits. The inadequacy of the crusher was sufficient
obstruction to performance.
According to S.57, where persons make reciprocal promises,
firstly to do certain things which are legal, and secondly under
specified circumstances, to do certain other things which are
illegal, the first set of promises is a contract, but the second is
void. For example, A and B agree that A shall sell his house to
B for Rs.50,000, but if B uses it for a gambling club he shall
pay a price of Rs.1,00,000. The agreement to sell the house for
50,000 is a contract but the other agreement is void.
According to S.58, in the case of an alternative promise, one
branch of which is legal and the other illegal, the legal branch
alone is enforceable. For example, A and B agreed that A shall
pay Rs.1,000 and B shall deliver either rice or smuggled opium
of equal value. There is a valid contract only for the purchase
of rice.
When is time essence
As seen above parties to a contract may specify the time for its
performance. The parties are expected to perform at the
stipulated time. But if one of them failed to do so, the question
arises as to what is the effect on the contract. The answer
depends on whether it was the intention of the parties that time
should be of the essence.
According to S.55, when there is a promise to do a certain thing
or certain things at or before a specified time, and the promisor
fails to perform before the specified time, the contract or so
much of it as has not been performed becomes voidable at the
option of the promisee, if the intention was that time should be
of the essence of the contract. If such was not the intention, the
contract does not become voidable, but the promisee is entitled
to compensation for any loss. If, in such a voidable contract
the promisee accepts performance at any time other than agreed,
he cannot claim compensation for any loss unless at the time he
accepts performance he gives the promisor notice of his intention
to so claim.
Whether time is of the essence of the contract is a mixed question
of law and fact [Municipal Corporation of Delhi v. Jagan
Nath Ashok Kumar, (1987) 4 SCC 497].
Time is generally considered to be of the essence where the
parties expressly agreed so, or where delay operates as injury,
or where the nature and necessity of the contract requiries it to
be so construed.
In Indian law, Bhudra Chand v. Betts [(1915) 22 Cal. LJ 566 33
IC 347] is a well known authority. P stipulated with D to engage
his elephant for khedda operation to capture wild elephants and
that the elephant should be delivered on 1 October 1910. D
obtained an extension of time till 6 October 1910. Yet he did not
deliver the elephant till 11 Octover 1910. P refused to accept the
elephant and sued for damages for breach. Held, P was entitled
to recover as parties had intended time should be of the essence.
Mookerjee J. said, this conclusion is confirmed by the
circumstances that D obtained an extension of the time.
Commercial Contracts:
Generally, in business contracts which provide for performance
within a specified time, time is ordinarily presumed of the
essence. In commercial contracts time is ordinarily of the
essence [China Cotton Exporters v. B.R.C. Mills. AIR 1961
SC 1295]. In this case, A carrying on import business at
Bombay promised to supply to R a quantity of Italian staple
fibre cotton. The shipment was to be in October or November.
The contract contained a remark `this contract is subject to
import licence therefore the shipment date is not guaranteed.
A part of the goods was supplied but the rest not supplied in the
specified time. R wanted to avoid the contract. Held, the remark
that shipment date was not guaranteed was qualified by the
word `therefore in its natural grammatical meaning, and
remembering that in commercial contracts ordinarily time is of
the essence the shipment in October or November was any way
guaranteed apart from delay in import licence, and as failure
was due to sellers own failure to supply in time, R was entitled
to avoid the contract on the ground that time is of the essence.
Similarly, in Mahabir Prasad Rangta v. Durga Datt [AIR
1961 SC 1990], there was a contract to transport coal from a
colliery to the railway station. The colliery owner had to keep
the road in repair and arrange for petrol. He also had to pay for
the work done on the 10th of the next month. It was alleged
that these things were not done in time and the other party could
not go on with the work. He rescinded the contract and sued
for damages. The Supreme Court held that in commercial
transactions ordinarily time is of the essence. In this contract
the time of payment and the time of arranging other things was
so important that S.55 was invocable. It held the contract could
be rescinded and compensation claimed. In contracts for sale
or purchase of goods prices of which fluctuate rapidly, the time
of delivery, and payment are considered to be of the essence.
Time may be made of the essence even by a subsequent notice,
but such notice ought to fix the longest time that could
reasonably be required for performance of acts remaining to be
done [(Crawford v. Tooqwood, 13 Ch. 153]. It means the
subsequent notice making time of the essence ought to fix a
reasonably long time for the other party to perform.
In contracts of sale of goods, the time of shipment is of the
essence [Bowes v. Shand (1877) 2 AC 455 HL]. In a contract
of sale of rice to be shipped at Madras during March or April of
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a year by the ship Rajah of Cochin, the contract was held not
satisfied by shipment made a month earlier in February.
However, the matter depends upon the intention of the parties.
Even where a specific date is mentioned one has not to look at
the letter but at the substance of the contract to ascertain the
real intention of the parties. In Hind Construction Contractors
v. State of Maharashtra, [AIR 1971 SC 720], it was held that
where a contract includes clauses for extention of time or fine
or penalty for every day or week, the work remains unfinished
on the expiry of the time fixed in the contract, such clauses
render ineffective the express position that time is of the essence.
Any application for extension of time does not take effect unless
accepted, and extension may not amount to a waiver within the
meaning of S.53 of the right to insist on the stipulated time. In
a Gujurat High Court case,the undertaking was to ship by a
particular ship in August. The party failed to do so and requested
extension of time to September 10. The party failed to ship
even within the extended time. The other side repudiated the
contract. The defaulting party sued for breach. Bhagwati J.
held time of shipment was of the essence and it was the plaintiff
and not the defendant who had committed breach of contract.
The Supreme Court of the United States laid down in
Norrington v. Wright (1855) that, in the contracts of
merchants time is of the essence.
Construction Contracts :
Since construction is a commercial service, time may be of the
essence.
Land and Property Contracts :
When there is a contract for the sale of land or other immovable
property there is a presumption, that time is not of the essence.
This is the English law and many decisions of the Supreme
Court have held that the law under S.55 is not different. Though
if it is shown that the intention of the parties was that time
sould be of the essence it would be considered so [Indira Kaur
v. Sheo Jal Kapoor [AIR 1988 SC 1074]. The mere
incorporation of a clause imposing penalty in case of default
does not by itself show an intention to make time of the essence
[Gomathi Nayagam Pillai v. Palaniswamy Nadar [(1967) 1
SCR 227, 231-32]. In such cases the intention of the parties
has to be gathered from factors like the nature of the property,
the possibility of the price fluctuation, the need for the contract,
the conduct of parties before and after the contract and other
circumstances.
But the renewal of a lease, or an option for the purchase or
repurchase of a property must be exercised strictly within the
time limited for the purpose, otherwise it will lapse. The reason
is that such rights are privileges which must be exercised within
the limited time. In such cases, relief is not given in equity
except on very unusual ground like fraud, unavoidable accident,
inequitable preclusion by the lessor and the like.
Sale of Shares :
Sale of Shares is of a commercial nature. The time of completion
of the transaction is an important factor. According to S.113 of
the Companies Act 1956, every company shall within two months
after the application for the registration of the transfer of any of
its shares, debentures or debentures stock, deliver in accordance
with procedure laid down in the Act, the certificates of the shares,
debentures and debentures stock. But the Company Law Board
may on application by the company extend the period to a further
period not exceeding nine months if satisfied that it is not
possible for the company to deliver within the said period.
Transfer here means a valid transfer and excludes any transfer
which the company is for any reason entitled to refuse to register
and does not register. Thus in Company Law a statutory rule
regulates effective time of valid transfers of shares, debentures
and debentures stock.
Where there was an agreement for the sale of shares of unquoted
private companies trading in a violative market, it was held in
British and Common Wealth Holdings pie v. Quadres
Holdings [(1989) 3 AER 492 CA], that if a completion date
had been named in the agreement that would have been of the
essence provided a reasonable time.
Effect of Failure
According to S.55, where time is of the essence, and
performance fails, the contract becomes voidable at the option
of the promisee. But if it was not the intention of the parties
that time should be of the essence, the contract does not become
voidable but the promisee may sue for any loss caused by the
delay. If time is not of the essence delay by itself does not put
an end to the contract. The innocent party will have to accept
performance even if delayed but can sue the other party for
loss caused by the delay. This does not however mean the
performance can be indefinitely delayed. Such delay would
discharge the contract itself by lapse of time in case the
aggrieved party does not take action within the period of
limitation prescribed for such contracts by the law of limitation
which is codified in the Limitations Act, 1963. For example,
the price of goods sold without stipulation of credit should be
paid within three years of the delivery of the goods. If the
seller does not take action for recovery of price within the period,
the debt would become barred by time and irrecoverable. The
effect of this is to discharge the contract by lapse of time.
2.5 APPROPRIATION OF PAYMENTS
When considering questions of time and place of performance,
we may in fitness of context consider the law relating to
apropriation of payments since this is a mixed question of both
place and time of performance. The rule in common law is that
a debtor has to seek out the creditor and repay the debt which
rule thus has a bearing on place of performance. It has been
held even under S.49 that this rule of common law applies as to
place of performance. When a debtor owes several distinct debts
to a creditor and makes payment or payments insufficient to
discharge all the debts, the question arises to which particular
debt a payment is to be applied. Obviously this involves the
question of time of performance.
The rules are laid down in sections 59 to 61 of the Contract Act
and incorporates the law laid down in the leading English case
called Claytons case [(1816) 1 Men 572].
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157
According to S.59, where a debtor owing several distinct debts
to one creditor, makes a payment to him either expressly or under
certain circumstnaces impliedly intimating that the payment is
to be applied to the discharge of some particular debt, the
payment must be applied accordingly.
To illustrate, D owes to C among other debts some of which
were borrowed earlier, a sum of Rupees 567 borrowed on a
later date. D sends to C a sum of Rs.567 and directs that the
debt of that sum should be discharged. The payment has to be
applied accordingly. As Lord Campbell stated in Craft v.
Jumley [(1858) SE & B 648], there is an established maxim
of law that, when money is paid, it is to be applied according to
the expressed will of the payer, not of the receiver.
According to S.60, where the debtor has omitted to intimate,
and there are no circumstances indicating to which debt the
payment is to be applied, the creditor may apply it at his
discretion to any lawful debt due payable to him from the debtor
including any debt whose recovery may be barred by the law
of limitation for the time being in force.
The creditor has a right until he has declared the appropriation
to the debtor, to alter the appropriation [Simson v. Inqham
(1823) 2 B & Co 65]. However, the creditor cannot appropriate
to a disputed or unlawful debt. The creditor is not also bound
to appropriate the payment immediately. He may wait till a last
moment. He may appropriate even during the pendency of a
suit concerning the payment [Uthup v. Kathanar, 1960,
Ker.90].
It is generally also a rule, subject to contract to contrary, that a
payment when appropriated should first be applied to the interest
and after interest is fully paid off to the principal [Rulia Devi v.
Raghu Nath Prasad, AIR 1979 Pat. 115]. The procedure has
been extended to interest and costs also before application to
the principal [See for details (1970)1 SCR 523].
According to S.61, where neither party makes any appropriation,
the payment shall be applied in discharge of the debts in order
of time, whether barred or not by the law of limitation in force
for the time being. If the debts are of equal standing, the payment
shall be applied in discharge of each proportionately. It means
when neither the debtor nor the creditor appropriates the court
should appropriate the payment or payments towards one debt
after another in the order of time not withstanding that some of
them are barred by limitation. Where any debts are of equal
standing in such order of priority, the amount should be
distributed among them proportionately.
To illustrate, D owes to C the following debts, Rs.1000 due in
1990, Rs.2000 due in 1991, Rs.3000 and another Rs.6000 due
in 1992, and Rs.4000 due in 1993. In 1994 D makes the
following payments, Rs.2000, Rs.3000 and then Rs.4000.
Neither D nor C make any appropriation. The Court also finds
that the debt of Rs.1000 due in 1990 is barred by limitation.
The Court has to apply the payments as follows Rs.1000 out of
payment of Rs.2000 to the time barred debt of Rs.1000 due in
1990. The balance of Rs.1000 plus Rs.1000 from the second
payment of Rs.3000 to the debt of Rs.2000 due in 1991. The
balance Rs.2000 and the next payment of Rs.4000 have to be
applied as follows, Rs.2000 to the debt Rs.3000 due in 1992 and
Rs.4000 to the debt of Rs.6000 due in 1992. As a result, Rs.1000
in the debt of Rs.3000 due in 1992 and Rs.2000 in the debt of
Rs.6000 due in 1992 will remain unpaid. The debt of Rs.4000 due
in 1993 will also remain unpaid.
The rule has been applied to current accounts between banker
and customer as follows. The presumption is that the sum first
paid was drawn out, and the first item on the debit side is reduced
by first item on the credit side [Deeley v. Lloyds Bank Ltd
(1912) AC 756, see also Claytons case (1816) 1 Mer 529].
A firm of bankers had five partners. The senior partner died.
The surviving partners carried on the business of banking under
the same name. The executors of the deceased partner objected
to the use of his name in the firms name. After a year the firm
became bankrupt. Various creditors of the firm placed claims
against the estate of the deceased partner.
Clayton was one of those creditors who had continued to deal
with the surviving firm by making payments and receiving
payments. At the time of the death of the senior partner,
Claytons balance was 1,713. During the next few days he
withdrew several times and the balance was reduced to 453.
There after the surviving partners paid more than 1,713 to
him and subsequently his deposits exceeded the amounts
withdrawn by him. Thus his credit balance at the time of the
bankruptcy was larger than the amount due to him at the time
of the death of the senior partner. Clayton claimed that the
amount of 453 was due to him from the estate of the deceased
partner. His contention was, the withdrawals from the account
after the death of the senior partner were paid out of deposits
made in the same period and therefore the credit balance
standing at the time of that partners death was recoverable from
his estate.
Sir William Grant, Master of the Rolls, rejected the contentions
of Clayton and his claim and laid down the since famous Rule
in Claytons case as follows : this is the case of a banking
account where all the sums paid in blend in one fund the parts
of which no longer have any distinct existence. In such a case
there is no room for any other appropriations that which arises
from the order in which the receipts and payments take place
and are carried into the account. Presumably, it is the sum first
paid in that is first drawn out. It is the first item on the debit
side that is discharged or reduced by the first item on the credit
side.
This is the reason why banks close the old account of a firm
and open a new account in the name of any reconstituted firm.
There by the liability of any deceased, retired or insolvent
partner, as the case may be is determined at such time and the
bank may hold him liable for the same. Thus banks take care
to avoid the operation of the Rule in Claytons case.
2.6 TENDER OF PERFORMANCE
As seen, according to S.37, the parties to a contract must either
perform or offer to perform, their respective promises. Such
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offer to perform is called tender of performance or attempted
performance.
According to S.38, where a promisor has made an offer of
performance to the promisee, and the offer has not been
accepted, the promisor is not responsible for non-performance
nor does he thereby lose his rights under the contract. Thus
tender of performance is equal to actual performance and
discharges the contract. However, a valid tender requires certain
conditions to be fulfilled, as follows :
(a) Tender must be unconditional :
According to S.38(1), it must be unconditional. This means an
offer to perform must be completely in accordance with the
terms of the contract. For example, many cases have held that
tender of an amount less than what is due under the contract is
not an effective tender. Even payment by cheque will not
constitute valid tender unless the other party has agreed to such
payment. It is this aspect of valid tender of payment which
created historically the statutory rules of currency notes and
coins constituting legal tender money according to certain laws
of the land. A tender of a debt before the due date is not a valid
tender and will not prevent the accrual of interest on the loan.
(b) Tender must be at proper time and place :
The rule under S. 38(2) was established as early as Startup v.
Macdonald [(1843) 64 RR 810]. D brought from P 10 tons of
linseed oil to be delivered within the last 14 days of March. P
tendered on the last of the 14 days at 9o clock at night. D
refused to accept. But, held there was time for D to have taken
in and weighed the goods before mid-night. There was a valid
tender.
In Afovos Shipping Co. v. R. Pagnan [(1982) 1 Lloyds Rep
562 (CA)], in an international trade contract, the agreement
was that payment should reach on 14th of the month. Held, that
defendant should have waited upto the mid-night of 14th before
repudiating the contract.
(c) Tender must be of the whole quantity or of the whole
obligation according to the contract :
Further it must be under circumstances that the other party gets
a reasonable opportunity of ascertaining whether the person
tendering is able and willing to fulfil the whole of his obligation.
In case of tender of goods, there must be a reasonable
opportunity for the promisee to inspect the goods. According
to S.38(3), if the offer is to deliver anything, the promisee must
have a reasonable opportunity of seeing that the thing is what
the promisor is bound to deliver. Cases have held that if the
goods tendered are not of the contract description, the tender is
not valid. However, where the deviation from the terms of
contract is microscopic, that is, very negligible, Courts have
held the tender valid. in Shipton, Anderson & Co. v. Weil
Bros & Co. [(1912) 1 K B 574], a contract required delivery of
4,950 tons of wheat. The seller delivered 4,950 tons and 55
lbs. The buyer was not allowed to avoid the contract.
(d) Tender to one of several joint promisees has the same
effect as tender to all of them :
According to S.38(3), an offer to one of several joint promisees
has the same legal consequences as an offer to all of them. It
may be recalled here that, on the contrary, according to S.45
when a person has made a promise to two or more persons
jointly, unless a contrary intention appears, the right to claim
performance rests with them jointly during their lives. In this
regard there is a contrast between the right to claim performance
and the tender of performance with respect to contracts entered
with joint promisees.
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3. DISCHARGE BY AGREEMENT
SUB TOPICS
3.1 Introduction
3.2 Novation
3.3 Rescission and alteration
3.4 Remission
3.1 INTRODUCTION
As contract arises out of agreement of parties that binds them,
it may also be discharged by further agreement or consent
between them or between them and others. It may also be
discharged by the parties giving up their mutual rights and duties
by consent which is known as Waiver. Such process is based
on the rule of law Eodem modo quo quid constituiter codem
modo destruitur, that is, a thing may be destroyed in the same
manner in which it is constituted. Discharge by agreement may
be express or implied.
Discharge by agreement may be by (a)Novation, or by
(b)Remission or Waiver.
3.2 NOVATION
According to S.62, if the parties to a contract agree to substitute
a new contract for it, or to rescind or alter it, the original contract
need not be performed.
Lord Selborne explained novation in the well known case Scarf
v. Jardine [(1882)7 App Cas, 345], "there being a contract in
existence, some new contract is substituted for it either between
the same parties or between different parties, the consideration
mutually being the discharge of the old contract. A common
instance of it (occurs) in partnership cases. In this case a firm
consisted of A, B and C. C retired without notice to creditors.
A new partner D joined the firm. A creditor advanced money
to the firm after the retirement of C. He sued A, B, C, and D for
recovery. Held, that he could either on the principle of estoppel
sue A, B and C having no notice of the retirement of C Or, he
could sue A, B and D who now were the actual partners there
having been a novation by which the firm had become
reconstituted before he advanced the money.
Novation may take place by (a) a new contract being substituted
for an existing contract between the same parties, or (b) the
contract between the parties being rescinded in consideration
of a new contract on the same or similar terms between some
or all of the parties and a new party or parties.
Illustration: (a) D owes to C Rs.10,000. D enters into a new
contract with C by which he gives a mortgage of his estate of
Rs.5,000 to C in place of the previous debt. The new contract
extinguishes the old contract.
Illustration: (b) D owes Rs.1,000 to C. It is agreed between D,
C and N that D may repay this sum as a debt to N. By this new
contract the old debt of D to C is ended and a new debt of D to
N is created.
When novation takes place by substitution of a new contract
for the old, between the same parties, the original contract is
discharged and need not be performed. For such a novation
two things are necessary.
One is the original contract must be subsisting when the novation
takes place. Novation is not possible when the original contract
is broken. In an early case, Manohar Koyal v. Thakur Das
Nasker [(1888) 15 Cal 319], P sued D to recover Rs.1173 due
on a bond. After the due date P agreed with D to accept Rs.400
in cash and a new bond for Rs.700 payable in instalments.
Subsequently D neither gave Rs.400 nor the bond. P sued D
on the original bond. When novation was pleaded the Calcutta
High Court held that the original contract was discharged not
by novation but by breach and P was entitled to sue for such
breach of the original bond.
Secondly, the new agreement should be valid and enforceable.
Thus, where an existing mortgage was replaced by a new
mortgage which was not enforceable for want of registration, it
was held the parties were still bound by the original mortgage.
Novation betwen the same and the new parties often takes place
in reconstitution of partnership firms. Often a new partner is
admitted into an existing firm. Sometimes an old partner retires
and by public notice or agreement with creditors the liabilities
of the old firm are assumed by the new firm which has become
reconstituted. In this connection it may be pointed out that
according to the Partnership Act, 1932, a firm is reconstituted
by admission of a new partner, retirement, expulsion, insolvency
or death of a partner, or transfer of a partners share. A
dissolution of a firm takes place only where there is dissolution
of partnership between all the partners of the firm. In other
cases there is only a reconstitution of the firm which involves
an express or implied novation. Novation is not confined to
partnership. It may take place in any contest and it may be as
already stated express or implied. In re European Assurance
Society [(1876) 3 Ch D 391], a person insured his life with X
Co. Subsequently X Co. amalgamated with Y Co. A
memorandum was endorsed on the policy that Y Co. would be
liable for the policy. Held, there was novation and the policy
money could be recovered from Y Co. In this connection it
must be recollected that generally there cannot be an assignment
of a contractual liability except with express or implied consent
of the promisee which makes it really a novation.
3.3 RESCISSION AND ALTERATION
According to S.62, the parties to a contract may agree to rescind
or alter it, when the original contract will be discharged.
Rescission may take place by mutual consent of parties by which
they may cancel all or any of the terms of a contract. They may
also substitute new terms for some terms which are rescinded.
A party to a contract may also rescind it without prejudice to
his right to claim compensation for breach when the other party
fails in the performance of his obligations if the contract lends
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itself to such a rescission. For example, S agrees to supply
certain goods to B by 15th and B agrees to pay the price on
30th, S fails to supply the goods on 15th. B need not pay the
price and may procure the goods even the next day from any
other source and claim compensation for any loss that may have
been sustained. In Syed Israr Masood v. State of Madhya
Pradesh [(1981) 4 SCC 289], there was a contract for sale of
forest coupes. There was a substantial variation between the
quantity and quality of timber held out at the time of auction
and the timber actually available. The Supreme Court allowed
rescission under S.62 and allowed refund of his deposit to the
contractor. No compensation was allowed only because there
was a clause against such compensation in the contract.
According to S.67 if a promisee neglects or refuses to afford
the promisor reasonable facilities for the performance of his
promise, the promisor is excused by such neglect or refusal, as
to any non-performance, thereby.
Illustration: A agreed with B to repair Bs house. B neglects or
refuses to point out to A the places in his house requiring repairs.
A is excused for non-performance if caused by such neglect or
refusal. This means A is allowed to rescind the contract under
such circumstances.
According to S.66, the rescission of a voidable contract may be
communicated or revoked in the same manner, and subject to
the same rules, as apply to the communication or revocation of
a proposal.
According to S.64, when a person rescinds a voidable contract,
the other party need not perform any promise therein on his
part. The party rescinding a voidable contract, shall, if he has
received any benefit from any party to such contract, restore
such benefit, so far as may be, to the person from whom
received. The principle behind this section had been explained
in Clough v. L.& N.W.R. [(1871) L R 7 Ex 27], no man can
at once treat the contract as avoided by him ............ and at the
same time keep the money or other advantage which he has
obtained under it.
According to S.62, parties to a contract may agree to alter it. If
so the original contract need not be performed. Alteration may
be of all or some or any terms of a contract. The effect will be
accordingly. Alteration can be made only by mutual agreement.
There cannot be any unilateral alteration of a contract. In
Magnum Films v. Golcha Properties Limited [AIR 1984 Del
162], the parties had fixed by mutual agreement the rates of
hiring a cinema hall. One of them was not allowed to alter the
rates unilaterally. If any party makes any alteration which is
material in a contract without the consent of the other party, the
result would be that the other party would be discharged with
respect to the contract. The alteration should be material that is
one which alters the legal affect of the contract. Thus where
the date of a bond was altered, in an early case, the Calcutta
High Court held that the bond was avoided. Similarly an
alteration on a bill of exchange from Documents against
payment to Documents against acceptance was held to avoid
the contract. It may be noted here that under S.87 of the
Negotiable Instruments Act, a material alteration of negotiable
instrument will discharge persons who become parties to it prior
to such alteration subject to statutory exceptions under that Act.
3.4 REMISSION
According to S.63, every promisee may dispense with or remit,
wholly or in part, the performance of the promise, or may extend
the time for such performance, or may accept instead of it any
satisfaction which he thinks fit.
The Indian Law of Remission is at complete variance with the
corresponding part of the English law of contract where in the
doctrine of Accord and Satisfaction obtains in this regard.
According to the English law, consideration is necessary not
only for the information of a contract but as well as for the
discharge of a contract for all parol contracts which are not
specialities, namely signed, sealed and delivered by formal deed.
Accordingly, in English law where a promisee wants to waive
and discharge a promisor from performance, consideration is
necessary from the other side in order to sustain the promise to
waive. Otherwise, the waiver is not effective and he can still
hold the promissor liable for non-performance.
Even according to the English law if a contract is wholly
executory and subsisting as reciprocal promises, it can be
discharged by mutual waiver or consent because the waiver of
each is sustained by the consideration of the waiver of the other.
Thus the mutual promises to waive are locked in consideration
and satisfy the common law requirement that consideration is
necessary also for the discharge of parol or simple contract.
However, if a contract is executed by one of the parties having
done his part and the other remains liable, if the promisee were
to waive the obligation of the promisor, in simple and parol
contract a fresh consideration is necessary from the other side
to sustain the promise of waiver. There must be some new
satisfaction from the promisor. This rule of the English law is
called the doctrine of Accord and Satisfaction. Accord is the
consent to waive and satisfaction is some consideration to
support it. There must be some consideration or satisfaction be
it a pepper corn. Such waiver could be valid only if it were
reduced to a speciality. Otherwise if it were only simple and
parol, some satisfaction is necessary.
At one time in the English common law, it was also required
that accord executed is satisfaction but not accord executory.
This meant that the contract could be discharged by waiver
only if the promisor whose promise is to be remitted does
something else in return to make the release binding on the
promisee but if he only promises to do something else in return
the release would not be binding on the promisee and he may
nevertheless enforce the promise. But in modern cases this
question is regarded as only one of construction of the
agreement. In Morris v. Baron [(1918) A C 135], the House
of Lords held that the promise only, as distinct from the actual
performance of it, may be a good satisfaction and discharge the
contract which has been waived, if it clearly appears that the
parties so intended. The judgement of Lord Atkinson was
affirmed in British Russian Gazette v. Associated
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161
Newspapers [(1933) 2 K B 643]. English law stands modified
about this qualification to the doctrine of Accord and
Satisfaction.
However, there is another qualification to the doctrine known
as the Rule in Pinnels case [5 Co Rep117], which had laid
down that the part payment of a debt can never amount to a
satisfaction of the whole debt. If along with a part payment
anything of a different specie is delivered and accepted there
would be satisfaction and the waiver would be valid. It was
remarked thus in Pinnels case, the gift of a horse, a hawk or
a robe, in satisfaction is good ................ or otherwise the plaintiff
would not have accepted it in satisfaction. The rule in Pinnels
case was approved by the House of Lords in Foakes v. Beer [9
A C 605]. In this case the plaintiff who had previously accepted
from the defendent instalment payments of the principal amount
in full satisfaction of a decree for principal and interest
subsequently was held entitled to take out execution for the
interest.
The rule in Pinnels case has however been criticised especially
as running counter to commercial practice. When taken in
conjunction with the rule that the law will not go into the
adequacy of consideration, the result may be absurd. As Jessel
M.R. stated, a creditor might accept anything, any satisfaction
of his debt except a less amount of money. He might take a
tomtit if he choose, and that was Accord and Satisfaction; but
he could not take 19 s 6 d in the pound. There is a tendency to
circumvent the rule in recent cases by applying possible
principles of equity.
As stated above, S.63 allows a promise to dispense with or
remit wholly or partly the performance of a promise, or extend
the time for it or accept instead of it any satisfaction. Thus the
Indian law of remission has no place for the doctrine of Accord
and Satisfaction.
In Matthew Henry Abraham v. The Lodge Goodwill
[(1910) 34 Mad 156],P was the holder of a promissory note
executed in his favour by D and agreed to abandon his claim if
the Lodge Goodwill which was burnt was resuscitated. The
building was resuscitated. P made a subsequent claim upon
the promissory note. Dismissing the claim, the Madras High
Court explained that S.63 differs from the English law in that it
does not require consideration to support a release while under
English law a release without consideration is a nudum pactum.
Similarly in Manohar Koyal v. Thakur Dass Naskar [ILR
(1888) 15 Cal 319], the Calcutta High Court had already stated
that it is quite clear that S.63 not only modifies but is in direct
antagonism to the law in England. It was pointed out, they
said, in Foakes v. Beer [LR 9 AC 605] that for nearly 300
years it has been law in England that if A owes B 500 pounds
and B consents to take 200 pounds in payment of the debt there
is a nudum pactum and B can subsequently claim the unpaid
300 pounds. They said the law in this country is different by
virtue of S.63.
Thus, in Kapur Chand Godha v. Mir Nawab Himayatali
Khan [(1963) 2 SCR 168], there was a liability of above twenty
seven lakhs rupees before the princely state of Hyderabad was
taken over. A committee was appointed to clear certain matters
and it offered twenty lakhs to the creditor in full satisfaction
and he accepted it. Afterwards, the creditor sued for the balance.
S.K. Das J. of the Supreme Court held that the facts are
completely covered by S.63 and that the creditor having
accepted payment in full satisfaction of his claim was not entitled
to sue. Similarly, in Harichand Madan Gopal v. State of
Punjab [AIR1973 SC 381], where the Government had decided
to recover only forty percent and nothing more, held it would
amount to remitting a part of the debt due and the Government
cannot thereafter ask to recover more than forty percent. It is
not necessary that there must be some consideration for the
remission of a part of the debt. However, there must be proof
that the lesser sum has been accepted. In Union of India v.
Gangaram Bhagwandas [AIR 1977 MP 215], the railways
sent a cheque for an amount less than the claim by a party. The
party retained the cheque but did not issue any receipt that he
was accepting it in full satisfaction. Neither did he stop pursuing
the matter. It was held there was no agreement to accept a
lesser sum.
Under S.63, dispense with means waiver. Waiver is the
abandonment of a right or rights. In W.I.Alan & co. Ltd. v. El
Nasr Export and Import Co., [(1972) 2 Q B 189], Lord
Denning explained waiver as an application of estoppel. Waiver
may be implied. If a party, by his conduct leads another to
believe that strict rights arising under the contract will not be
insisted on, intending that the other should act on that belief,
and he does act on it, then the party will not afterwards be
allowed to insist on the strict legal rights when it would be
unequitable for him to do so. In this case, a contract for the
sale of goods contained a stipulation for bank credit for the
price in a certain manner. But the offer made by the confirming
bank varied in several respects with what the sellers were entitled
to require. For example, the bank offered sterling currency.
The sellers accepted by sending invoices and drafts. Afterwards
sterling was devalued but Tanzanian currency was not. The
sellers wanted to enforce their right to payment in Tanzanian
currency. But they were not allowed. it was observed that it
was not a concession which the sellers could thereafter
unilaterally abrogate any more than the buyers would have been
entitled to alter the terms of the credit if the relative values of
the currencies had changed in the opposite way.
There is a distinction between waiver and extension of time by
mutual consent. This distinction was sharply outlined in M.
Sham Singh v. State of Mysore [(1973) 2 SCC 303]. M was
granted state scholarship for higher studies in the United States
on a bond that he would serve the state on his return provided
the state offered him a job within six months of his return failing
which the bond was to be taken as waived. If M failed to comply
he was to refund the money. On his request, the state agreed to
extend his stay for one year for practical training. During this
year he came home on a domestic visit but was allowed by the
state to rejoin his practical training. On completion of training
he took up service in the United States. The state claimed refund.
M pleaded there had been a waiver by the state. The Supreme
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Court held there was nothing to show any such intention on the
part of the state and there was no waiver whatever. There had
only been an extension agreed mutually. M was liable to refund.
It may also be noticed that waiver of compliance with a
requirement of the contract may in some circumstances be
withdrawn by giving reasonable notice. In Charles Rikards
Ltd. v. Oppenheim [(1950) 1 A E R 420], there was a contract
to supply a car chassis and build a body on it within seven
months time stated to be of the essence. The body work was
directly entrusted to a third person who was to take instructions
directly from the buyer. There was no delivery within time.
The buyer extended time liberally but after about two months he
gave notice that if the car was not delivered in 4 weeks he would
not accept it. Delivery was offered 3 months afterwards but he
declined. Held, he had again by reasonable notice made time of
the essence after waiving it and he was now entitled to damages
for breach.
Under S.63, a promisee may before breach gratuitously release
the promisor from the obligation to perform the promise. The
promisee may also after breach gratuitously release the promisor
from his liability arising on such breach.
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163
SUB TOPICS
4.1 Introduction
4.2 General Principles of Frustration
4.3 Grounds of Frustration
4.4 Limitations of the doctrine of Frustration
4.5 Consequences of Frustration
4.1 INTRODUCTION
A contract may be discharged by impossibility of performance
which may occur at any stages of the contract. In a contingent
contract the parties may stipulate a contingency which may be
impossible itself and cannot happen. In section 36 it is provided
that where such a contingency is provided in the agreement,the
agreement is itself void. As for example, A agress to pay B
Rs.1000/- if two straight lines enclose a space. This is a void
agreement. Similarly certain contingency become impossible
to happen but parties to the agreement may commit mistakes
about such contingencies. Such an agreement is void due to
the mistake of parties. As for example, A agrees to pay B
Rs.1000/- if B will marry As daughter C, C was dead at the
time of agreement not to the knowledge of both parties.
Therefore the contingency is impossible to happen. Therefore
section 20 read with section 36 makes the agreement void ab
initio.
Sometimes an impossibility may be supervened after the
contract is entered into, but before its performance. In such
cases this impossibility may be either due to act of God or due
to change of circumstances on account of acts of a party
including a third party but not on the fault of anybody. It is
simply a situation of frustration that both the parties suffer from
either due to accident or an act of God called in law supervening
impossibility or due to act of any person including the act of
state but not due to the fault of the parties, known in law as
subsequent impossibility. The following flow chart shall give
a wider perspective of the doctrine of frustraton which is
substantively followed in India in absence of wide gap in the
Indian legal system. In India section 56 deals with such a
situation. According to this section a contract to do an act which,
after the contract is made, becomes impossible, or by reason of
some event, which the promisor could not prevent, unlawful,
becomes void when the act becomes impossible or unlawful.
The first part of the section indicates to the supervening
impossibility whereas the later part the subsequent impossibility.
But where in the agreement parties under a mistake of belief
stipulated a contingency on which the performance of the
agreement dependable, such agreements are void ab initio
provided the contingency is impossibility in itself from the very
beginning [S.36]. Again where one person promised to do
something knowing on reasonable diligence might have known
that it is impossible or unlawful to peform the agreement which
other party was not aware, the party aware of the impossibility
has to pay compensation for the loss sustained by the other
party. This is an equitable principle. As for example, A agrees
to marry B being already married to C and forbidden by law to
practice polygamy. Here A may compensate B for the loss
sustained by her due to non peformance of his promise. Out of
the four illustrations given in section 56 one relates to
supervening impossibility and two to subsequent impossibility.
Anyway the flow chart of the doctrine of frustration is as
follows:
Doctrine of Frustration
Impossibility at the beginning Impossibility of Per-
of the agreement formance
Contingency Mistake of Supervening Subsequent
impossible itself essential fact impossibility impossibility
(S.36) (S.20)
Death of a party Destruction of subject matter Incapacity
of parties by
accident
frustration War Non fulfilment of Change of Legislative or
through of conditions circumstances Executive
Commercial intervention
practice
4. IMPOSSIBILITY OF PERFORMANCE
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4.2 GENERAL PRINCIPLES OF FRUSTRATION
A contract may be discharged by Impossibility of Performance.
Impossibility of performance may appear on the face of the
contract, or may exist, unknown to the parties at the time of
making the contract, or may arise after the contract is made.
If an agreement contains a promise to perform something which
is ex facie impossible, it is void ab initio. The rule is based on
two legal maxims. One, lex non cogit ad impossibilia, that is
the law does not recognise what is impossible. Second,
impossibilium nulla obligato est, that is, what is impossible
does not create an obligation.
S.56 embodies these rules by laying down that an agreement to
do an act impossible in itself is void. Illustration: A and B
agree to discover treasure by magic. The agreement is void.
Sometimes, the contract may be impossible unknown to the
parties at the time of making the contract. This could happen,
for example, by mutual mistake of fact, as in Couturier v.
Hastie [(1856) 5 H L C. 673] : There was a contract between a
buyer and seller for a cargo of corn supposed to be on ship on a
voyage from Salonica to England. Infact, unknown to the
parties, the cargo had already become so heated that it was
unloaded at Tunis and sold for what is worth. Thus the
destruction of the subject matter unknown to the parties at the
time of contract resulted in rendering the contract void. In this
instance, it was a mutual mistake of fact which according to
S.20 would render contract void as it was impossible to perform
it though such impossibility was unknown to the parties when
they made the contract.
However, if when making the contract the promisor alone knew
the impossibility, he shall have to compensate the promisee for
any loss caused though the non-performance of such promise.
S.56 lays down the law in its third paragraph as follows- that
where a person promises to do something which he knew, or,
with reasonable diligence, might have known, and which the
promisee did not know to be impossible or unlawful, such
promisor must compensate such promisee for any loss caused
by non-performance of such promise. Illustration: A, already
married to C, promises to marry B who does not know of the
marriage of A to C. A is subject to the law against bigamy. A
must compensate B for the non-performance of the promise for
any loss caused.
Where parties have made a contract to do or not to do anything
if an uncertain future event happens, but such event becomes
impossible, such contract becomes void. This is laid down by
S.32 and is a contingent contract becoming void by
impossibility.
The law of discharge of contract has to deal with another kind
of impossibility of performance, namely supervening
impossibility or impossibility arising subsequent to the
formation of the contract. The modern English law has
meaningfully struggled to recognise such supervening
impossibility by different theories of construction of such a
contract including the application of supervening impossibility
to commercial contracts called frustration. The Indian law
though persuaded by these theories has found more direct
ground in the words of S.56 paragraph two as adumburated by
the Supreme Court in a leading decision. Both English and
Indian law has had also to deal with the consequences of
discharge of contract by supervening impossibility.
According to the earlier English law impossibility arising
subsequently to the formation of a contract does not excuse a
promisor from performance. The rule was laid down in
Paradine v. Jane K.B. [(1647) Aleyn 26]. Paradine sued Jane
for rent due upon a lease. Jane pleaded that a certain German
prince by name Prince Rupert an alien born enemy to the kins
and kingdom invaded the realm and with force entered on
possession and expelled the defendant and held him out of
possession so that he could not take the profit and pay the rents.
The Court held that this was no excuse. It said if there is a
covenant to repair a house, though it be burnt by lightning, or
thrown down by enemies yet he ought to have repaired it,
because he might have provided against it in the contract. This
rule came to be known as the do or die rule and was followed
in a line of English cases down to the early part of this century
whenever the Courts thought that the contract entered into by
the parties was an absolute one and gave no room to any express
or implied condition that it could be discharged by supervening
impossibility. As observed by Scrutton L.J. in Ralli Bros. v.
Compania Naviera etc [(1920) 2 K B 287], Impossibility of
performance, as a rule, is not an excuse for non-performance.
But subsequently the English law developed the theory that
even though parties to a contract have not expressly made a
condition that a supervening impossibility would discharge the
contract, there are cases in which though there is no such express
provision, the Courts will interpret the contract as containing
such a provision by implication. This is known as the doctrine
of implied term and was explained by Lord Loreburn in
Tamplin v. Anglo - Mexican Coys case [(1916) 2 AC 397]
A Court ought to examine the contract and the circumstances
in which it was made not to vary but only to explain it, to see
whether or not it can infer from the nature of the contract and
the surrounding circumstances that a condition which was not
expressed was a foundation on which the parties contracted
.............'if that happens, of course, it is over between us ......,
in most of the cases there was an implied condition in the
contract which operated to release the parties from performing
it ..................What, in fact, was the true meaning of the
contract?.
The exposition of the doctrine of implied term in Tamplin v.
Anglo Mexican Co., case is accepted by judicial opinion in
many latter English cases as the true principle underlying the
law of impossibility of performance. No court has an absolving
power but can infer from the nature of the contract and
surrounding circumstances that a condition which was not
expressed was a foundation on which the parties agreed that if
the altered circumstances are such that if the parties thought of
them they would have freed themselves from the contract and
that it is therefore a question of ascertaining the true meaning
of the contract. The theory was confirmed as latter as in British
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165
Movietone Ltd v. London and District Cinemas Ltd [(1957) 1
KB 190] by the House of Lords and the observation of Lord
Loreburn that no court has an absolving power was approved.
Viscount Simon said that the principle remains the same though
particular application of it may vary greatly. He said in his
view it is a question of construction.
But there has been another view and theory in English cases
that the doctrine of implied term was really a positive rule of
law requiring the court to import into the contract, irrespective
of the intention of the parties, in the circumstances that have
arisen a term that there is such an impossibility that the contract
is discharged. There is a line of English cases which emphasise
that the implied term is a legal fiction courts have to import as
a positive rule of law in the changed circumstances. Thus in
Russkoe v. Strik [(1922) 10 Lloyds L.R 214], Alkin L.j. stated
there are many positive rules of law imposed upon on contracts
quite independent of the intention of parties. According to him
when the contract is terminated consequences follow as a matter
of positive law and not from any express or implied agreement
of the parties.
Goddard J. took a similar view in Tatem v. Gamboa [(1939) 1
KB 132]. Lord Wright in Denny, Moth & Dickson v. Fraser,
[(1944) AC 275] thought the courts have formulated the rule
by virtue of their inherent jurisdiction just as they have
developed the rules of liability for negligence, or for the
restitution of the money where otherwise there would be unjust
enrichment. The theory of positive rule of law was also
supported by Denning L.J. (though unsuccessfully in the House
of Lords) in the British Moveitone Ltd case when he said the
court really exercises a qualifying power - a power to qualify
the absolute, literal or wide terms of the contract - in order to
do what is just reasonable in the new situation. The day is done
when we can excuse an unforseen injustice by saying to the
sufferer it is your own folly. As Lord Wright said in Joseph
Constantine Steamship Line Ltd. v. Imperial Smelting
Corporation Ltd, [(1942) AC 154] In ascertaining the
meaning of the contract and its application to the actual
occurrences, the court has to decide not what the parties actually
intended but what as reasonable men they should have
intended.
Thus there are two views of the doctrine of implied term in
English law. One that it is a question of construction of the
contract in the changed circumstances, the other that it is a
positive rule of law obliging the court to import such a term in
the changed circumstances. Whatever be the basis of theory,
the English courts have applied the theory of frustration to
various circumstances which have been classified as particular
classes of cases.
4.3 GROUNDS OF FRUSTRATION
The principle of impossibility of performance, or frustration of
contract is applicable to a great variety of contracts. It is
therefore not possible to lay down an exhaustive list of situations
in which the doctrine is going to be applied to excuse
performance. This view is expressed in the Harvard Law
Review. Yet certain grounds of frustration are well established
as follows :
1. Destruction of subject matter
2. Death or incapacity for personal service
3. Non-existence or non-occurrence of a particular state of
things
4. Intervention by legislative or executive authority
5. Intervention of war
6. Change of circumstances or of particular state of things
7. Frustration in commercial contracts
In this module it is only possible to examine a few authorities
for each variety of cases.
1. Destruction of subject matter of contract
In Taylor v. Caldwel [(1863) 3 B & S 826] D had agreed to
give P the use of a music - hall for certain concerts. The music
hall was destroyed by fire through no fault of D before the date
of the first concert. P sued D for breach of contract. Held, the
contract is subject to an implied condition that performance
become impossible if the thing perishes without default of the
promisor.
Similarly in Howel v. Coupland [(1876) A.B.D. 258] there
was a contract for sale of 200 tons of potatoes to be grown in a
particular field. The crop failed as it was destroyed by a disease.
Mellish L.I., excused a non-delivery of 126 tons.
In V.L. Narasu v. P.S.V. Iyer [ILR 1953 Mad 831] there was
a contract to exhibit a film in a cinema hall. On account of
heavy rains the rear wall of the hall collapsed and licence was
cancelled until the building was reconstructed to the satisfaction
of the authorities. The building was demolished. The picture
could be continued to be exhibited only if the building was
reconstructed which the owner was under no liability to do and
even if done as Venkatarama Iyyar J. pointed the attraction of
film being ephemeral it would lose it appeal. The Madras High
Court held the contract discharged.
2. Death or disablement of party to do personal service
The well known authority is Robinson v. Davison. There was
a contract between P and Mrs. Davision who was the wife of D
and an eminent pianist that she would play at a concert to be
given by P on a particular day. On that morning she was too ill
and informed P that she could not play. P lost a sum of money
by the postponement of the concert . P sued D for damages. It
was held that the illness of Mrs. Davison excused her from
playing and performing the contract.
In this connection Illustration (c) to S.56 of the contract Act in
the Indian law may be noticed. A contracts to act at a theatre
for six months in consideration of an advance by B. On several
occasions A is too ill to act. The contract becomes void on
those occasions.
In Stubbs v. Holywel Railway Co. [L.R. 2 Exch 311] it was
held that a contract for personal services was put an end to by
the death of the party. Martin, B. stated, the mans life was an
implied condition of the contract.
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On the otherhand, there could be circumstances when a contract
of service could be held not frustrated by illness and incapacity.
Thus in Storey v. Frulham Steel Works Co. Ltd [(1907) 24
TLR 89] S was employed as a works manager under a five
year contract. After two years he became ill and was absent
from work for five months. After four months absence the
company terminated the employment. S sued for breach of
contract. It was held a five year contract of service could not
be considered terminated by frustration by five months illness.
The application of the doctrine to industrial relations was
examined by the English National Industrial Relations Court
in Marshal v. Horland & Wolff Ltd [(1972) 2 AER 175]. M
was in the employment of a company since 1946. He fell ill in
1969 and did not attend till 1971. The company retrenched
him after giving usual benefits. M had still to undergo an
operation before he could resume work. The court held the
contract of service had not been frustrated. It said in considering
whether further performance has become impossible, regard
must be had to the terms of employment, the nature of the illness,
its duration and prospects of recovery, and the period of the
past employment. On the facts of this case for which the court
gave the details, it held the contract had not become frustrated.
3. Non existence or non occurrence of a particular state of
things
The rule of implied term laid down in Taylor v. Caldwell was
not limited to contracts de certo corpore where the existence
of a specific thing as subject matter was involved. It was
extended in Krell v. Henry [(1903) 2 KB 740], one of a series,
known as the Coronation cases, to the non existence or non
occurrence of a particular state of things forming the foundation
of a contract. D agreed to hire the rooms of P for June 26 and
27. The coronation of King Edward VIIth and the procession
was to take place but the contract contained no reference to it.
The coronation took place but the procession which was to pass
by that flat was cancelled by the illness of the King. P sued D
for the rents. The court came to a conclusion that it was obvious
that there were rooms to view the procession and as it did not
take place the substance of the contract the existence or
occurrence of a particular state of things was gone. It held the
contract discharged by frustration and no rents were payable.
However, unless the foundation of the contract has been
destroyed the rule cannot be applied. In Henry Bay Steam
Boat Co. v. Hutton [(1903) 2 KB 683 (CA)] also one of the
coronation cases, D chartered a steam boat for two days to take
out passengers for viewing the naval review and a cruise round
the fleet for a day. There was unpaid balance for hire. The
Royal Navy Review was cancelled. D had no use for the ship.
Yet the court held that in this case the naval review was not the
foundation of the contract. It is a little difficult to reconcile the
later decision with the earlier on the nice distinction that naval
review was not the real object of both the parties as basis of the
contract. It was held D was liable to pay the unpaid balance of
hire less the profit of the owner of the ship in the ordinary course.
4. Intervention by Legislative or Executive Authority
The performance of a contract is sometimes made impossible
by a change in the law or by executive action. The principle
was recognised in Baily v. De Crespingny [(1869) 4 AB 180].
P was lessee to D for a term of eighty nine years of a plot of
land. D retained the adjoining land and covenanted that neither
he nor his assigns would during the term erect any buildings on
it. A Railway Company acting under statutory powers took
the land compulsarily and built a station on it. P sued D on the
convenant. It was held Legislative compulsion had created a
new kind of assignee of the land for whose acts D could not be
held responsible.
In Metro politon Water Board v. Dick Kerr & Co. Ltd
[(1918) AC 119], there was a contract by a firm in 1914 with
the Water Board to construct a reservoir within six years. But
they were asked to stop the work in 1916 by a notice under the
Defence Acts and Rules. They claimed that the contract was
put an end to and could not be resumed after the War. The
House of Lords held that the interruption by the executive
authorities and its duration until the War ended was of such a
character that the contract if resumed would be a different
contract from the contract broken off and therefore it has been
discharged by impossibility.
In the Indian law, S.56 lays down in paragraph two a positive
rule of law on the discharge of contract by supervening
impossibility. This appears to be nearer the second and later
English theory of the doctrine of implied term being a positive
rule of law. The Supreme Court of India in a landmark decision
in the leading case of Satyabrata Ghose v. Mugneeram
Bangur & Co. [AIR 1954 SC 44] has clarified that the law of
supervening impossibility is self-contained in S.56 of the Act
as a positive rule of law and discharge by frustration is only an
interchangeable term and the English theories of implied term
need not concern us as S.56 lays down a positive rule of law.
Mukherjea J. in an illuminating judgement in the said case laid
down the following points of Indian law :
1. The Indian law of frustration which term is interchangeable
with supervening impossibility is embodied in S.56 as a
positive rule of law which does not leave the matter to the
intention of the parties and casts the duty on the court to
decide whether a contract is ended by frustration.
2. To the extent the Indian Contract Act deals with a particular
matter it is exhaustive and it is not permissible to import
English principles de hors the provisions in the Act. The
English decisions have a persuasive value but the several
theories of frustration of English law do not bind us.
3. When the whole purpose or basis of a contract is frustrated
by the intrusion or occurrence of an unexpected or change
of circumstances beyond contemplation of the parties, it is
the duty of the court to give relief and hold the contract
frustrated and ended as it is really a rule of positive law
under S.56.
4. As S.56 lays down a rule of positive law, not dependent on
the intention of the parties, the belief, knowledge and
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167
intention of the parties are evidence, but only evidence,
and the court has to form its own conclusion by examining
the contract and the circumstances.
5. When there is frustration, the contract is dissolved
automatically and does not depend on rescission or
repudiation or breach or choice or election of either party,
and the court has to decide expost facto.
The aforesaid point five is in direct line with the important
decision of the Privy Council in Hirji Mulji v. Chenoy Yue
Steamship Co. [(1926) AC 497] that once there is frustration
there is an automatic dissolution of the contract.
5. Intervention of War
Intervention of war or war like conditions have raised questions
of impossibility of performance of contract. A good illustration
is Horlock v. Beal [(1916) 1 AC 486], A ship owner engaged
a seaman under articles for two years. While the articles were
running, the ship was seized by Germany in a Belgian port and
the crew interned for an indefinite period. The contract was
held to be discharged and the ship owner under no obligation
to continue the payment of the seamans wages.
In an Indian case Basanti Bastralaya v. River Steam India
Navigation [AIR 1987 Cal. 271], in a contract of carriage by
river, the enemy seized the boat along with the cargo during
hostilities between India and Pakistan. The plea of impossibility
of performance was allowed.
But if war prevents only one of the many ways of performing a
contract, and that way was in the mind of one of the parties
only and had not been made the basis of the contract as known
to the other party, the doctrine of frustration cannot be invoked.
Thus in Twentsche Overseas Trading Co. Ltd. v. Uganda
Sugar Factory Ltd [AIR 1945 PC 144], there was a contract
for the supply of Krupps steel rails. The appellant claimed
that the rails specified were to be obtained from a German firm
and that firm only. They could not deal with alien enemies due
to the outbreak of the Second World War. The performance of
the contract became illegal and impossible. But the Privy
council held the reference to Krupps was merely a
specification of the rails. The appellants no doubt intended
Germany as the source of supply but it was not made the basis
or foundation of the contract as known to the other party. There
were other sources of supply. The appellant could not invoke
the doctrine of frustration.
Similarly, in Tskiorglou & co. Ltd. v. Noblee & thorl G. m.
b. H. [(1962) AC 93], the appellants agreed to sell three hundred
tons of Sudan groundnuts c.i.f. Hamburg. The usual and normal
route was the Suez canal. The shipment was to be in November/
December, 1956. On November 2, 1956, the Suez Canal was
closed because of the Anglo-French War with Egypt. It was
reopened only in April, 1957. The appellants said it was an
implied term that shipment should be through Suez. As that
was not possible, there was frustration. But the House of Lords
held that no such term could be implied. The customary or
usual route was no doubt closed, S.32 of the English Sale of
Goods Act required shipment by a reasonable and practical
route. The appellants might have been put to greater expense
to ship the goods via the Cape of Good Hope. But that was no
reason to claim frustration of the contract.
6. Frustration in Commercial Contracts
Originally, the doctrine of implied term was called frustration
of the adventure in commercial contracts and the term
frustration was reserved for such contracts. The modern usage
is to use the term frustration to cover all classes of cases of
subsequent impossibility. The principle was applied in Jackson
v. Union Marine Insurance Co. [L.R. 10]. Ps ship was
chartered to proceed to New Port and load a cargo for San
Francisco. On the way to New Port the ship ran aground. After
some weeks the charterers chartered another ship and P lost the
freight under the charter-party by perils of the sea. The question
of total loss depended on whether the charterers found the
contract impossible without waiting for the ship to be repaired
which would have taken a long time. Bramwell B. said, the
adventure was frustrated by perils of the sea. Both parties were
discharged. A loading of the cargo after repairing the ship would
have been a new adventure, a new agreement. In the result,
the insures had to pay a total loss to P.
In the case Bank Line v. Capel Co. Ltd [(1919) AC 535] the
ship had been chartered for twelve months. Before the ship
had been handed over, a few months earlier to the concerned
date, the ship was requisitioned by the Government but released
within the period of the charter. The charterers called on the
owners to deliver her or pay damages. The owners pleaded
frustration of the charter. Lord Summer discussed the principles
of frustration in a valuable way and said in cases of such delay
the question must be considered by the court as it had to be
considered by the parties at the time they came to know the
cause and probabilities of the delay and had to decide what to
do. He said, rights ought not to be left in suspense to hang on
the chances of subsequent events. The contract binds or does
not bind. The law ought to be that the parties can gather the
facts then and there. He held that the charter party was
discharged.
7. Change of Circumstances
As Lord Sumner remarked in the case Bank Line v. Capel,
the doctrine of frustration ought not to be extended but to cases
that really fall within the rule it must be applied as a matter of
course even under novel circumstances.
The courts have to apply the rule carefully to change of
circumstances which make the performance of the contract
impossible.
In Joseph Constantine Steamship Line Ltd. v. Imperial
Smelting Corporation Ltd. [(1942) AC 154], a ship was
chartered to load a cargo. But on the day before she could have
proceeded to her berth an explosion occurred in the auxillary
boiler. It was impossible for her to undertake the voyage at the
stated time. The House of Lords held that frustration had taken
place by the change of circumstances.
Though every change of circumstances cannot become
frustration as held in many cases especially regarding abnormal
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rises or falls in prices, or a sudden depreciation of currency, or
revision of prices, yet when the new circumstances are extreme,
a court may have to come to a conclusion of frustration. This
happened in Essan Engineering Co. Ltd. v. Fertilizers and
Chemicals (Travancore) Ltd. [AIR 1991 Mad. 158], where
certain transformers were to be supplied on a firm basis at certain
prices. Owing to a war there was a 40% escalation of prices.
The court held the contract ended.
However, there are changes of circumstances which may create
commercial hardship but cannot be recognised by courts as
frustrating and discharging a contract. A good illustration
occurred in Davis Contractors Ltd. v. Fareham Urban
District Council [(1956) AC 696 HL]. There was a contract
to build certain houses for the council for a fixed price to be
completed within eight months. Bad weather and labour strikes
intervened. It was completed in twenty two months at a cost
much more than contract price. The contractor claimed the
original contract was discharged by frustration by change of
circumstances. He claimed payment on a quantum meruit action
of the actual cost for the work done. The House of Lords did
not agree. Lord Radcliffe explaining the law of frustration said
that it occurs when the law recognises a contract becomes
impossible because without fault of either party change in
circumstances render performance of a thing radically different
from that undertaken. This must be decided from the terms
and conditions read in the light of the surrounding circumstances
and on the other hand the events which have occurred. It is not
hardship or material loss itself which calls the principle of
frustration into play.
The Supreme Court of India recognised the same principle in
Alopi Parshad & Sons Ltd. v. Union of India [(1960) 2 SCR
793], P acting as agents to the Government of India purchased
ghee for the army. P was to be paid on cost basis for the work.
The work was in progress. Second World War intervened. The
rates fixed in peace time were totally altered by the war time
conditions. The agents demanded revision of rates. They
received no replies. They kept up the supplies. The Government
terminated the contract in 1945. The agents claimed payment
at enhanced rates. They did not succeed. The Supreme Court
said there is no general liberty for the courts to absolve a party
from liability to perform the contract merely because on account
of an uncontemplated turn of events the performance may
become onerous.
Courts have taken the view that the alteration of circumstances
must be such as to upset altogether the purpose of the contract.
As Lord Loreburn said in the Anglo Mexican Co. case some
delay or some change is very common in all human affairs. So
commercial hardship will not by itself support frustration and
excuse performance. In Sachindra Nath v. Gopal Chandra
[AIR 1949 Cal 240], P let certain premises to D for a restaurant
at a higher rent as British troops were stationed in Calcutta. A
clause in the contract stated it will be in force so long as the
British troops remain in the city. D agreed to pay the higher
rent. After some months, the locality was declared out of bounds
for the British troops. Henderson J. at the Calcutta High Court
held that the situation like this is one of commercial hardship
and did not frustrate the contract.
The Madras High Court followed the same principle in Samuel
Fitz & Co. v. Standard Cotton Co. [AIR 1945 Mad 291], D
placed orders with P for supply of tapestries of a certain kind
stating they intended to sell them in Australia. But the Australian
Government prohibited the import of such goods. D lost the
market and therefore cancelled the orders. P sued for breach.
Horwill J. held that it was not possible to say that the foundation
of the contract was that the goods should be resold in Australia.
As Lord Simonds said in the Fareham Urban District Council
case, disappointed expectations do not lead to frustrated
contracts.
4.4 LIMITATIONS OF THE DOCTRINE OF
FRUSTRATION
There are the following limits to the doctrine of frustration apart
from the constraints imposed by the courts in particular classes
of cases:
Firstly, according to English law as the doctrine of implied term
was based on the presumed intention of the parties (see Anglo
Mexican Co case) no term can be implied which would be
inconsistent with any express terms of the contract. As Viscount
Simon L.C. stated in Constantine S.S. Line v. Imperial
Smelting Corporation [(1942) A.C. 163], there can be no
discharge by supervening impossibility if the express terms of
the contract bind the parties to performance not withstanding
that the supervening event may occur.
Secondly, according to English law doctrine of implied term,
the presumed intention must be common to both the parties.
The principle was illustrated in Blackburn Bobbin Co. v. Allen
[(1918) 1 K.B. 540]. There was a contract for the sale and
delivery at Hull of Finnish Birch Timber. The War broke out.
The vendor intended to ship the timber from a Finnish port to
Hull. The buyer was unaware that Finnish timber had to be got
only like this as timber merchants in England did hold stocks.
The out break of the War made it impossible for the vendor to
perform the contract. What had happened was an unforeseen
event but not provided for in the contract. It was held for the
contract to be dissolved there must have been a failure of a
basis which was in the intention of both the parties which was
not so in this case.
There must be a failure of something which was the basis of
the contract in the minds of both the parties but not in the mind
of only one of the parties. This was also demonstrated clearly
in Twentsche Overseas Trading Co. Ltd v. Uganda Sugar
Factory Ltd. [AIR 1945 PC 144].
Thirdly, and most important of all, it is well established that the
doctrine of frustration cannot be applied where the frustration
is self-induced. If the event alleged to frustrate a contract arises
from an act or election of a party, the doctrine cannot be applied.
In Maritime National Fish Ltd. v. Ocean Travelers Ltd.
[(1935) AC 524 (PC)], A hired Rs trawler, the St. Cuthbert
to be employed in the fishing industry. Both parties knew that
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169
the trawler could be used only under a licence from the Canadian
Government. A was using five trawlers. They therefore applied
for five licences. The Canadian Government granted three
licences and asked to A to name three trawlers. A named three
trawlers other than St.Cuthbert. When R sued for hire A
repudiated the charter and pleaded frustration. But the Privy
Council held that the frustration in this case was self-induced.
It was the result of As own choice of excluding Rs trawler
from the licences. Therefore, A was not discharged from the
contract.
However, self-induced frustration can come into play only where
the act of a party amounts to a breach of duty owed to the other
party under the contract. If such an act were not intentional but
merely negligent, it is unlikely to be construed as a self-induced
frustration. Anson, the authority on contract, thinks so, and the
dicta of Lord Russell in the Constantine S.S. Line case that
the default might range to the thoughtlessness of a primadonna
who sits in a draught and loses her voice, only confirms this
qualification.
Fourthly, the English law may be said to be still not finally
settled on the application of the doctrine of frustration to leases.
In the leading case Cricklewood Property and Investment
Trust v. Leightons Investment Trust [(1945) AC 221], the
House of Lords, on the facts of the case, held frustration cannot
arise in the lease which was for 99 years. A building lease was
executed for 99 years. More rent was payable after the erection
of certain buildings. But under the Defence Regulations the
building operations could not be continued. The lessors sued
for rent. The lessees pleaded that the lease had been frustrated.
But the House of Lords unanimoulsy held that as the lease had
still more than 90 years to run and the interruption may cover
only a small part of that period, there had been no frustration in
this case. Lord Russell pointed out that a lease is more than a
contract. It vests an estate in the land for the lessee. The contract
obligations are only incidental to the relation of landlord and
tenant. Even if some of them become impossible the lease
would remain. But Viscount Simon L.C also said that because
a lease is more than a contract and amounts to an estate it cannot
be said it can never end prematurely by frustration. He gave
examples of a complete natural calamity or a permanent
legislative preclusion making any operation of the lease
unlawful.
So the English law will allow frustration of a lease only in very
exceptional cases. Such a view was reiterated in National
Carriers Ltd v. Panalpina (Northern) Ltd. [(1981) 2 WLR
45 HL], A warehouse was demised to D for ten years. The
premises were not to be used for any other purpose except as
warehouse without consent of the lessors. The only access by
vehicles was by one street. The local authority closed the street
because of the dangerous condition of an old Victorian
warehouse opposite to the one under demise. The period
between the closure and opening of the street after the demolition
of the old warehouse was likely to be twenty months. During
such period the warehouse under demise was useless for D. D
refused to pay any further rent and claimed the lease as
frustrated. But D was held liable. According to the House of
Lords, the nature of the transaction and the duration after the
interruption did not significantly damage the contract and the
lease to apply the doctrine of frustration.
The law is the same in India. In Raja Dhruv Dev Chand v.
Raja Harmohiner Singh [AIR 1968 SC 1024], there was a
lease of agricultural land for one year. The rent was paid and
the lessee was given possession. Before any crops could be
raised the partition of the country left the land in Pakistan. The
parties migrated to India. The action was to recover the rent
paid. The Supreme Court took the view that S.56 of the Contract
Act is not applicable to rights and obligations of parties under a
transfer of property under a lease. They said completed transfers
are outside the scope of S.56. No recovery was allowed.
However, where the demise has not taken place but there is
only an agreement the principle of frustration can be applied.
Thus in Sushila Devi v. Hari Singh [(1971) 2 SCC 288], there
was an agreement to lease but the parties could not go to Pakistan
to give or take possession because of partition. The Supreme
Court held that the agreement came within the scope S.56 and
there was frustration of contract.
4.5 CONSEQUENCES OF FRUSTRATION
English law : The question arose in some of the coronation
cases (See Krell v. Heury) as to what are the remaining rights
of parties once there is frustration. It was decidecd in Chandler
v. Webster [(1904) 1 KB 493] that on frustraton any loss must
lie where it has fallen. In this case where the rent of the rooms
was payable in advance and 100 had been paid on account of
it was held that not only could it not be recovered back but the
balance due 141 sh 15 must also be paid. The reason given
by Romer L.J. was that the contract could not be considered
void ab initio. This line of decisions caused hardship.
But the House of Lords in the leading case of Fibrosa Spolka
Akeysna v. Fairbairn Lawson Combe Barbour Ltd [(1943)
AC 32] overruled Chandler v. Webster and the line of
decisions. English sellers agreed to make and deliver certain
machinery to Polish buyers, part of the price to be paid in
advance. 1000 was paid. Performance became impossible
as the Second World War broke out and Germany occupied
Poland. It was held the contract was frustrated and discharged
by War. Lord Russell of Killowen thought Chandler v.
Webster was wrongly decided. It was held that because of
total failure of consideration on a contract that had ceased to
exist, the action by the sellers for the recovery of the advance
sum paid was not an action on the contract, as supposed in
Chandler v. Webster. It was an action in quasi-contract and
the money was recoverable. Lord Simon drew a distinction
between a promise being consideration in the law of formation
of contract and in the law of discharge of contract by failure of
consideration and quasi-contract. The performance of the
promise being the consideration that has failed.
Even after the decision in Fibrosas case, the law was
considered unsatisfactory regarding the adjustment of rights of
parties of frustrated contracts. The party prepaid may have
incurred expenses or be left with goods of no value.
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Therefore, the Law Reform (Frustrated Contracts) Act of 1943
was passed. The Act provides that where a contract has become
impossible of performance or otherwise frustrated and the
parties are discharged from further performance:
(a) all sums paid or payable to any party before the discharge
shall if paid be recoverable as money had and received for
the use of the party who has so paid, or if payable cease to
be so payable,
(b) but if the party who has received such payment or to whom
payable, has incurred expenses before the discharge the
Court may allow him to retain or recover the whole or part
of it considers just,
(c) where a party has obtained a valuable benefit other than
money, before the discharge, the other party may recover
such sum not exceeding the value of the benefit, as the
court considers just,
(d) the Act will not apply if there is an agreement to the contrary,
(e) the Act does not apply to freight paid in advance under a
voyage charter party which is not recoverable by custom
even if the completion of voyage is frustrated.