Law of Contracts

Avanish Kar
NALSAR, Hyderabad
AIR 101 in CLAT’21 and AIR 44 AILET’21
Success Boat
 Introduction
Learning
• Meaning of a Contract in General Outcomes:
Parlance
• Need for Contracts- Law of Obligations
• Definition of a Contract in ICA- Section 2(h)
 Elements of a Contract
• Proposal: 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.
• Acceptance of Proposal = Promise: When a person to whom the proposal is made signifies his
assent thereto, the proposal is said to be accepted. A proposal when accepted, is called the promise.
• Consideration= 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 abstain from doing,
something, such act or abstinence is called a consideration for a promise.
• Promise + Consideration = Agreement
• Agreement Law= Contract.
Enforceability of Contracts- Valid, Voidable,
Void
• Valid Contracts: perfectly legal contracts which satisfy the elements
contained in Section 2 of the Indian Contract Act. If the contract is
enforceable by law, it is said to be a valid contract.
 Voidable Contracts
• These types of Contracts are defined in section 2(i) of the Act: “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.”
• Suppose a person A agrees to pay a sum of Rs. 1,00,000 to a person B for an antique chair. This
contract would be valid, the only problem is that person B is a minor and can’t legally enter a
contract.
• So this contract is a valid contract from the point of view of A and a “voidable” contract from the
point of view of B. As and when B becomes a major, he may or may not agree to the terms. Thus
this is a voidable contract.
• A voidable contract is a Valid Contract. In a voidable contract, at least one of the parties has to be
bound to the terms of the contract. For example, person A in the above example.
Conditions for contracts to become voidable

• Failure by one or both parties to disclose a material fact

• A mistake, misrepresentation, or fraud
• Undue influence or duress
• One party's legal incapacity to enter a contract (e.g., a minor)
• One or more terms that are unconscionable
• A breach of contract
 Void Contracts Agreements
• Section 2(g) of Indian Contract Act refers to Void Agreements- “agreements not
enforceable by law” – VOID AB INITIO
• Section 2(j): Agreements which cease to be enforceable become void. –
Subsequently become void.
• A agrees to pay B a sum of Rs 10,000 after 5 years against a loan of Rs. 8,000. A
dies of natural causes in 4 years. The contract is no longer valid and becomes void
due to the non-enforceability of the agreed terms.
• This type of contract can’t grant any rights or considerations to any of
the involved parties.
 When are agreements said to be void
• Contracts with Bilateral Mistake- Section 20
Eg. A agrees to buy from B a certain horse. It turns out that the horse was dead at
the time of the bargain , though neither party was aware of the fact . The
agreement is void.
Agreements which have unlawful consideration and objects are void.(Section 23 &
24) :- The consideration or object of an agreement is unlawful if it is forbidden by
law or of such a nature that if permitted , it would defeat the provisions of any law or
is fraudulent or involves injury to the person or property of another or court regards
it as immoral or opposed to public policy.
 Proposal or Offer: Express vs. Implied
• The proposal is the starting point of the contract. Section 2(a) defines proposal as- 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.
• In the first place an expression of the offeror’s willingness to do or to abstain from doing
something. Secondly, it should be made with a view to obtaining the assent of the offerree to
the proposed act or abstinence.
• Who makes the proposal- promisor or “offeror”
• Person to whom it is made- “proposee” or “offeree”
• When he accepts it- “promisee.”
 Question-1
• A conveys to B on 4th January his willingness to sell a PS5 for Rs. 50,000.
On 5th January, B discusses with his wife C whether he could proceed with
this purchase. C gets agitated at this proposition and refuses to talk to B for a
week. B calls A and describes the situation and on 13th January, A reaches
their home in order to mediate the situation and also sell his PS5. A
convinces C by conveying to B that if B purchases the PS5 he shall give him
a Laptop for free along with it. C agrees and B agrees instantaneously.
Identify the Promisor(s), Proposee(s)/offeree(s), and the promisee(s). Also
identify the date on which they became the same.
 Communication of Proposal
• The process of making a proposal is completed by the act of communicating
it to the other party.
• For example, by words of mouth, writing or even by conduct.
• Implied proposals- need not always be formal, neither does the law of
contract, nor of sale of goods require that consent to a contract must be in
writing.
• Section 9- proposal made in words- express. Other than in words, implied.
• Meeting of the minds- consensus ad idem is a requirement.
 Question 2
Ramu enters a “Aam hi aam ghutlio ke daam” auction house. The standard
practice at auction houses is that if one raises the placard kept on the table in
response to the auctioneer’s calls, he is deemed to have placed a bid(an
offer). Ramu being from a rural background is unaware of this practice, and
seeing others cheer for people raising their placards, he starts raising the one
on his table too. When no other person raises his placard on a call for Rs.
1,00,000 for an antique wrist watch, Ramu is declared to have won the bid.
Ramu now refuses payment. Decide.
 Upton-on-Severn RDC v Powell
• A fire broke out in the defendant’s farm. He believed that he was entitled
to the free services of Upton Fire Brigade and, therefore, summoned it.
The Brigade put out the fire. It then turned out that the defendant’s farm
was not within the free service zone of Upton, which therefore, claimed
compensation for the services.
 Ruling of the Court
“The truth of the matter is that the defendant wanted the services of Upton,
in response to that request, provided services. Hence the services rendered
were rendered on an implied promise to pay them.”
 Communication when complete
• Section 4 of the Indian Contract Act- communication of a proposal is
complete when it comes to the knowledge of the person to whom it is
made. Obviously, therefore, an offer cannot be accepted unless and until it
has been brought to the knowledge of the person to whom it is made.
• Landmark case: Lalman Shukla vs. Gauri Dutt
 Lalman Shukla vs. Gauri Dutt
• Defendant’s nephew absconded from home. He sent his servant in search
of the boy. When the servant had left, the defendant by hand bills offered
to pay Rs. 501 to anybody discovering the boy. The servant came to know
of this offer only when he had already traced the missing child. He
however, brought an action to recover the award.
 Ruling of the court
• Banerji, J: “In my opinion, a suit like the present one can only be founded
on a contract. In order to constitute a contract, there must be acceptance of
an offer and there can be no acceptance, unless there is knowledge of the
offer.”
• 1868- a US judge remarked: “How can there be consent or assent to that
of which the other party has never heard?”
 Intention to Contract
• No provision in the Indian Contract Act requiring that an offer or its
acceptance should be made with the intention of creating legal relations.
But in English law, it is a settled principle that “to create a contract, there
must be an intention to enter into legal obligations.”
• Landmark case: Balfour vs. Balfour
 Balfour vs. Balfour
• The defendant and his wife were enjoying leave in England. When the
defendant was due to return to Ceylon, where he was employed, his wife
was advised, by reason of her health, to remain in England. The defendant
agreed to send her an amount of 30 Pounds a month for the probable
expenses of maintenance. He did send the amount for some time, but
afterwards differences arose which resulted in their separation and the
allowance fell into arrears.
 Ruling of the Court
• The wife’s action to recover the arrears was dismissed.
• Lord Atkin: “There are agreements between parties which do not result in
contract within the meaning of our law. One of the most usual forms of
agreement which does not constitute a contract appears to be
arrangements made between husband and wife. These arrangements do
not result in contracts at all, even though there may be what would
constitute consideration for the agreement. They are not contracts, because
parties did not intend that they shall be attended by legal consequences.”
• However, this does not mean that in family or social arrangements, there cannot
be a legally binding contract. All that the law requires is that the parties must
intend legal consequences. McGregor v McGregor- husband and wife withdrew
their complaints under an agreement by which the husband promised to pay an
allowance and she was to refrain from pledging his credit, the agreement was
held to be a valid contract.
• But, mere opening of joint account between a man and his wife or the man
promising to buy her a car in an effort to improve their strained matrimonial
relationship has been held to be a purely domestic relationship.
• Banwari Lal v Sukhdarshan Dayal- In an auction sale of plots of land, a
loudspeaker was spelling out the terms, etc of the sale, one of the
statements being that a plot of certain dimensions would be reserved for a
Dharamshala. Subsequently, that plot was also sold for private purposes.
Chandrachud, J held: “Promises held out over loudspeakers are often
claptraps of politics. In the instant case, the announcement was, if at all, a
puffing up of property put up for sale.
 General Offers
Offer may be made to the world at large. But the contract is not made with
all the world.
Landmark case: Carlill vs Carbolic Smoke Ball Co.
A company offered by advertisement to pay 100 pounds to anyone “who
contracts the increasing epidemic influenza, colds or any disease caused by
taking cold, after having used the ball according to the printed directions.” It
was added that “1000 pounds is deposited with the Alliance Bank showing
our sincerity in the matter.” Plaintiff used the smokeball, still got influenza.
 Ruling of the Court
• Intention to enter into legal relations present- “Was it intended that the
100 pounds should, if the conditions were fulfilled, be paid? The
advertisement says that 1000 pounds is lodged at the bank for the purpose.
Therefore, it cannot be said that the advertisement was a mere puff.”
• “Why should not an offer be made to all in the world which is to ripen
into contract with anybody who comes forward and performs the
condition?”
 Offer and Invitation to Treat
• An offer should be distinguished from an invitation to receive offers.
When a man advertises that he has got a stock of books to sell, or houses
to let, there is no offer to be bound by any contract. Such offers are offers
to negotiate- offers to receive offers-offers to chaffer.
• Catalogues and display of goods, announcement to hold auction, free
distribution of articles.
 Acceptance
• Section 2(b) of the Indian Contract Act talks about the acceptance of an offer.
According to the Section, the person to whom an offer is made to do or abstain
from doing an act with a view to obtain the assent of such a person, if he gives his
assent thereto, is said to have accepted the offer.
• Implied acceptance: Acceptance which is not explicitly made by means of speech
or writing but, by the conduct of the person to whom an offer is made.
• Express acceptance: Acceptance which is made by means of words, oral or written
is known as an express acceptance. For example, A offers B his watch for sale
through a email and B replies in positive to the offer by email
 Question-3
• Principle: An agreement does not result from a mere state of mind: intent to accept an offer or
even a mental resolve to accept an offer does not give rise to a contract. There must be some
external manifestation of that intent by speech, writing or other act.
• Facts: B had been supplying coal to a railway company without any formal agreement. B
suggested that a formal agreement should be drawn up. The agents of both the parties met
and drew up a draft agreement. It had some blanks when it was sent to B for his approval. He
filled up the blanks including the name of an arbitrator and then returned it to the company.
The agent of the company put the draft in his drawer and it remained there without final
approval having been signified. B kept up his supply of coals but on the new terms and also
received payment on the new terms. A dispute having arisen B refused to be bound by the
agreement. Decide.
 Ruling of the court in Brogden v.
Metropolitan Railway Co
• The conduct of the company’s agent in keeping the agreement in his
drawer was an evidence of the fact that he had mentally accepted it. But
he had not expressed his mental determination and retention of the
agreement was not a sufficient acceptance. But the subsequent conduct of
the parties was a conduct that evidenced or manifested their intention. The
final acceptance was “clearly given”, Lord Cairns said, “when the
company commenced a course of dealing which is referrable only to the
contract and when that course of dealing was accepted and acted upon by
B in the supply of coals.”
 Question-4: Mode of Communication
• Principle: Acceptance should be made in prescribed manner. Acceptance has
to be made in the manner prescribed or indicated by the offeror. An
acceptance given in any other manner may not be effective, particularly
where the offeror clearly insists that acceptance shall be made in the
prescribed manner.
• Facts: A offered to buy flour from B requesting that acceptance should be
sent by the wagon which brought the offer. B sent his acceptance by post,
thinking that this would reach the offeror more speedily. But the letter
arrived after the time of the wagon. Decide.
 Ruling of the court
• A was held to be not bound by the acceptance.
• Effect of departure from prescribed manner- A departure from the manner does not of
itself invalidate the acceptance. A duty is cast on the offeror to reject such acceptance
within reasonable time and if he fails to do so, the contract is clinched on him and he
becomes bound by the acceptance.
• Calcutta HC ruling- where an offeror requires that the acceptance should be sent to a
particular person, it has to be read in a reasonable and in a sensible manner. There was
no violation when the offeree, instead of writing to the particular person, met him
personally to communicate his acceptance. The defendant was bound by the acceptance.
 Communication when complete
• Section 4- 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.
 Question-5 CLAT 2021
• Section 4 of the Indian Contract Act, 1872 reads as follows: 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. Thus, the
provision makes no difference in the position of the offeror. The offeror becomes bound when a properly addressed
and adequately stamped letter of acceptance is posted. The acceptor does not become bound by merely posting his
acceptance. He becomes bound only when his acceptance comes to the knowledge of the proposer. The contract is
concluded at the place from where the proposal is accepted and communication of acceptance is dispatched, i.e., the
address at which the proposal was sent. The court at that place would have jurisdiction to entertain a cause of action
under the contract. This rule, that the communication of an acceptance is complete as against the proposer when the
letter is posted, is probably intended to apply only when the parties are at a distance and they communicate by post.
“Where, however, the parties are in each other’s presence or, though separated in space”, they are in direct
communication, as, for example, by telephone, no contract will arise until the offeror receives the notification of
acceptance.
• Part A: ‘S’ wanted to purchase shares of a company and communicated his offer to buy shares on
March 1, 2021. A letter of allotment of shares addressed to ‘S’, which is an acceptance of the offer
to purchase shares, was posted by the company on March 10, 2021, but the letter never reached ‘S’
and was lost in transit. In the given situation, which of the following statements is true?
• (A) Communication of acceptance is not complete as against ‘S’ and hence, there is no valid
contract between ‘S’ and the company.
• (B) Communication of acceptance is complete as against ‘S’ however not complete as against the
company.
• (C) Communication of acceptance is complete as against the company however not complete as
against ‘S’.
• (D) Communication of acceptance is complete against both ‘S’ as well as the company
• Part B: A’, who is in Mumbai, makes an offer for supply of goods to ‘B’, who is in
Delhi, via a mobile phone call. During the same call, A’s offer is absolutely and
unconditionally accepted by ‘B’. According to the terms agreed between ‘A’ and ‘B’,
goods are to be supplied at Pune and payment is to be made electronically. In the given
situation, where is the contract concluded?
• (A) Neither Mumbai, Delhi nor Pune as it is a telephonic contract
• (B) Pune
• (C) Delhi
• (D) Mumbai
• Part C: X’, who is in Gandhinagar, makes an offer for sale of second-hand luxury car to ‘Y’, who is
Jammu, via an e-mail sent on January 15, 2021 at 2:03 pm. X’s offer is absolutely and unconditionally
accepted by ‘Y’ via an e-mail sent on January 15, 2021 at 4:04 pm. The e-mail communicating
acceptance is read by ‘X’ on January 15, 2021 at 7:05 pm. In the given situation, when is the contract
concluded?
• (A) As against ‘X’, on January 15, 2021 at 4:04 pm and as against ‘Y’, on January 15, 2021 at 7:05
p.m.
• (B) As against ‘Y’, on January 15, 2021 at 4:04 pm and as against ‘X’, on January 15, 2021 at 7:05
p.m.
• (C) January 15, 2021 at 4:04 p.m.
• (D) January 15, 2021 at 7:05 p.m
• Part D: ‘X’, who is in Agra, makes an offer for sale of second-hand luxury car to ‘Y’, who is
Jammu, via an e-mail sent on January 15, 2021 at 2:03 pm. However, the e-mail did not reach
‘Y’ due to some technical error at the server which is located in Delhi. Thereafter, ‘X’ makes a
mobile phone call to ‘Y’ on January 15, 2021 at 4:04 pm and makes him the same offer as was
made in the e-mail. In the same mobile phone call, the offer is absolutely and unconditionally
accepted by ‘Y’ at 4:10 pm. In the given situation, where is the contract concluded?
• (A) Delhi
• (B) Jammu
• (C) Agra
• (D) Neither Delhi, Jammu nor Agra as it is an electronic contract.
• Part E: “When the words of acceptance are spoken into the telephone, they are put into the course of
transmission to the offerer so as to be beyond the power of the acceptor. The acceptor cannot recall them.” In
light of the given proposition, which of the following statements is/are true?
• I. The communication being instantaneous, the contract immediately arises.
• II. The communication being instantaneous, the communication of acceptance is immediately complete as
against the proposer as well as the acceptor.
• III. The communication being non-instantaneous, the communication of acceptance is complete as against
the acceptor when the words of acceptance are spoken into the telephone.
• IV. The communication being non-instantaneous, the communication of acceptance is complete as against
the proposer when the words of acceptance are spoken into the telephone.
• (A) Only I (B) I and II (C) III and IV (D) Only II
 Absolute and Unqualified Acceptance
• Acceptance to be legally enforceable must be absolute and unqualified. Section 7(1) of the Indian
Contract Act provides that in order to turn an offer into an agreement the acceptance to the offer must be
absolute and unqualified. The logic behind the principle that the acceptance to the offer must be absolute
and unqualified is that when acceptance is not absolute and is qualified it results into a counter offer
which leads to the rejection of the original offer made by the offeror to the offeree. If the offeree makes
any variations in the original terms of the contract proposed to him and then accepts the contract, such an
acceptance would result in the invalidity of the contract.

• For example, if A offers to sell his bike to B for Rupees 10,000. But B persuades A to sell him the bike
for 7,000 rupees to which A denies and if B at any later point of time agrees to buy the bike for 10,000
rupees. Then A is under no obligations to sell him the bike as the counteroffer made by B puts an end to
the original offer.
 Question 6- Counter Proposals
• Principle: “Any departure from the terms of the offer or any qualification
vitiates the acceptance unless it is agreed to by the person from whom the
offer comes. In other words, an acceptance with a variation is no acceptance;
it is simply a counter proposal, which must be accepted by the original
promisor before a contract is made.”
• Facts: A offered by a letter to sell certain claims to B at a specified rate. B in
turn offered to buy at a little less rate which A did not accept, but he did not
withdraw his original offer. Then B accepted the rate as originally offered.
This also A did not accept and B sued him for breach of contract.
 Ruling of the Court
• Counter offer to buy at a reduced rate impliedly rejected A’s original offer
and there was no contract.
 Question 7- Partial Acceptance
• Principle- Acceptance should be of the whole of the offer. The offeree
cannot be a part of its terms which are favourable to him and reject the
rest. Such an acceptance is another kind of counter-proposal and does not
bind the offeror unless he agrees to the qualified acceptance.
• Facts: An application for certain shares in a company was made on the
condition that the applicant would be appointed cashier in a new branch of
the company. The company allotted him some shares without fulfilling the
condition and claimed the share money.
 Ruling of the Court
• The petitioner’s application for shares was conditional and he had no
intention to become a member of the company until he was appointed a
cashier in the office. Hence, the Company’s claim for share money was
rejected.
 Question 8-Condition subsequent
• Principle: If an acceptance carries a condition subsequent, it may not have
the effect of a counter-proposal.
• Facts: A said to B in response to the latter’s offer, “terms accepted, remit
cash down Rs. 25,000 by February 5, otherwise acceptance subject to
withdrawal.” On February 6, B fails to remit the cash and A refuses to
honour the agreement. Decide.
Question 9- Acceptance of counter proposal
• Principle: 1. Even where the acceptance of a proposal is not absolute and unqualified the proposer
may become bound, if, by his subsequent conduct, he indicates that he has accepted the qualifications
set up.
2. When a counter-proposal is accepted, a contract arises in terms of the counter-proposal,
and not in terms of the original proposal

• Facts: An application for shares was made conditional on an undertaking by the bank that the
applicant would be appointed a permanent director of the local branch. The shares were allotted to
him without fulfilling the condition. The applicant accepted the position as shareholder by accepting
dividends, filing a suit to recover it and by pledging his shares. He now contends that the allotment of
shares is void or that he has a right to be made a permanent director.
 Ruling of the Court
• He could not contend that the allotment of shares is void on the ground of
non-fulfilment of the condition as he had by his conduct waived the
condition.
• When a counter-proposal is accepted, a contract arises in terms of the
counter-proposal, and not in terms of the original proposal. Hence, he
does not have the right to be made a permanent director in the company
 Question 10- Provisional Acceptance
• Principle: An acceptance is sometimes made subject to final approval. A
provisional acceptance of this kind does not ordinarily bind either party until the
final approval is given. Meanwhile, the offeror is at liberty to cancel his offer.
• Facts: Where the conditions of an auction sale of liquor expressly provide that
the acceptance of the bid shall be subject to the confirmation of the Chief
Commissioner, there will be no complete contract till the acceptance of the
highest bid is confirmed by the Chief Commissioner and the person whose bid
has been provisionally accepted is entitled to withdraw his bid. A won the offer
provisionally, but now wants to withdraw his bid. Decide.
 Consideration-Definitions
• Consideration defined as “Recompense given by the party contracting to
the other.”
• Consideration means something which is of some value in the eyes of the
law.
• Section 2(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 abstain from doing, something, such act or
abstinence is called a consideration for a promise
 Characteristics of Consideration
• Consideration must be of some value in the eyes of the law.
1. For example, if A promises to give his new Rolls-Royce car to B,
provided B will fetch it from the garage. The act of fetching cannot be
called consideration- even if it was at the desire of the promisor.
2. Defendant owed money to his father and always complained of not being
treated equally with his siblings. Father promised to discharge him from
all liability in respect of the loan, provided he would stop complaining.
 Characteristics-contd.
• Value need not be adequate to the promise- Defendants who were newspaper
proprietors offered to answer inquiries from readers desiring financial
advise. Readers asked them to recommend a good stock broker. Editor
recommended a person, unknown to him to be an undischarged bankrupt.
Plaintiffs sent funds that were misappropriated. Question was whether there
was sufficient consideration for the offer of the advice.
• Answer- such publication might obviously have a tendency to increase the
sale of the defendant’s paper. Thus, the offer, when accepted, resulted in a
contract for good consideration.
 Question 11A- Promissory Estoppel
• Principle- The definition of consideration in Section 2(d) clearly emphasizes that an act or
abstinence which is to be a consideration for a promise must be done or promised to be
done in accordance with the desire of the promisor. Thus, an act shall not be a good
consideration for a promise unless it is done at the desire of the promisor.
• Question- The plaintiff, on the order of the Collector of a town, built at his own expense,
certain shops in a bazaar. The shops came to be occupied by the defendants, who in
consideration of the plaintiff having expended money in the construction, promised to pay
him a commission on articles sold through their agency in the bazaar. The plaintiff’s action
to recover the commission should be accepted or rejected?
Answer- The plaintiff’s action is rejected.
• Reasoning- The only ground for the making of the promise is the expense
incurred by the plaintiff in establishing the market, but it is clear that
anything done in that way was not “at the desire” of the defendants so as
to constitute consideration. The act was the result not of the promise, but
of the collector’s order.
 Question 11-B- Promissory Estoppel
• Principle: An act done at the promissor’s desire furnishes a good consideration for his
promise, even though it is of no personal significance or benefit to him.
• Question: It was thought advisable to erect a town hall at Howrah, provided sufficient
subscription could be got together for the purpose. To this end, the Commissioners of
Howrah Municipality set out to work to obtain necessary funds by having public
subscription. The defendant was a subscriber to this fund for Rs. 100 having signed his
name in the subscription book for that amount. On the faith of the promised
subscription the plaintiff entered into a contract with a contractor for the purpose of
building the hall. The defendant failed to pay the amount and contended that there was
no consideration for the promise. Are the defendants liable to compensate the plaintiff?
 Answer- Held liable
• Persons were asked to subscribe knowing the purpose for which the money
was to be applied, they knew that on the faith of their subscription an
obligation was to be incurred to pay the contractor for the work.
Meaning of Promissory Estoppel: Promissory estoppel is the legal principle
that a promise is enforceable by law, even if made without formal
consideration when a promisor has made a promise to a promisee who then
relies on that promise to his subsequent detriment. Promissory estoppel is
intended to stop the promisor from arguing that an underlying promise should
not be legally upheld or enforce
 Question 12- Unilateral promises
• Principle: Unilateral promises are promises from one side only and
without any return promise.
• Facts: The defendant promised Rs. 500 to a fund started to rebuild a
Mosque, but nothing had been done to carry out the repairs and
reconstruction. The defendant refused to pay the said amount to the
plaintiff. Decide.
 Answer- Cannot be bound to pay
• Liability arises only when the promise has by doing some act, on the faith
of the promise, alter his position. Therefore, the subscriber is not liable.
 Privity and Third Party Beneficiaries
• Privity of Contract- The doctrine of privity of contract is a common law principle which provides that a contract
cannot confer rights or impose obligations upon any person who is not a party to the contract.
• Third Party Beneficiaries- Third parties that benefit from the contract between two parties
a) Intended Third Party Beneficiaries: It is intended under the contractual scheme to benefit the third party. In
these cases, it is the right of the third party to enforce the contract, only to the extent to which he is benefited.
The clearest example of a third-party beneficiary is found in life insurance contracts. An individual enters into a
contract with an insurance company that requires the payment of death benefits to a third party. That third party
does not sign the contract and may not even be aware of its existence, yet is entitled to benefit from it.
UK Law does not clearly recognize Third Party Rights, for example in Tweedle v. Atkinson. However, in
Nawab Khwaja Mohammad Khan v. Nawab Hussaini Begum, they were recognized.
b) Unintended Third Party Beneficiaries: Unintended Beneficiaries are treated as strangers to the contract and not
privy. Hence, they cannot sue for recoveries.
 Exceptions to Consideration- Section 25
• Natural Love and Affection- In case of a contract entered into between the relatives or on account
of natural love and affection is enforceable without consideration. The meaning of love and
affection is not judicially construed but parties who are nearly related would have instinctive love
and affection. However, this could be overruled with regards to some external circumstances, like
between the wife and husband who are compelled to live separately because of quarrelling. But a
settlement to be given to a man by the wife by way of maintenance could be enforced without any
consideration because it will result in peace and family harmony. This is applicable only when it
is in writing and is registered.
 Exceptions-contd.
• Past Voluntary Services- In Karam Chand vs Basant Kaur, the court held that even where
the promisor after attaining majority, promises to pay for the goods attained in minority
will also fall under this provision. The court said that although the promise made by a
minority is void but is the promise is made by a person of full age to the promisee who has
done something for him voluntarily when the promisor was a minor, then it will also attract
this exception.
• Time Barred Debt- A promise to pay a time-barred debt is enforceable and it should be
signed by the person or his agent. It could be to pay for the whole debt or in part. The debt
to be enforced could be paid except for the law of limitation. However, the person who is
under no obligation to pay to another person is under no obligation under this clause.
 Free Consent
• Definition- Section 14, ICA- ‘Free consent’ defined.—Consent is said to be free when it is
not caused by— —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.
 Coercion
• Coercion’ defined.—‘Coercion’ is the committing, or threatening to commit, any
act forbidden by the Indian Penal Code (45 of 1860) 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.”
• Example- By threat of suicide, a Hindu induced his wife and son to execute a
release in favour of his brother in respect of certain properties which they claimed
as their own.
• Effect of Coercion- Contract becomes voidable at the option of the party whose
consent was obtained by coercion.
 Undue Influence
• Section 16 of ICA states that ‘a contract is said to be induced by undue influence where the will of the
party consenting is able to be dominated by the other one due to the existence of the relation subsisting
between them’. One party influence the other while the contract is formed to get an unfair advantage
over the other. It further qualifies that a person is able to dominate the will of the other if he:
• Has a real or apparent authority arising out of fiduciary relations (relationship of trust) between them,
or
• Forms the contract with a person whose mental capacity, due to illness or age or due to mental distress
is temporarily or permanently affected.
• Examples: A spiritual adviser induced the plaintiff, a devotee, to gift to him the whole of his property to
secure benefits to his soul in the next world. Such a consent is said to be obtained through undue
influence.
 Question 13- Undue Influence-
Unconscionableness
• Principle: When one of the parties is in a position to dominate the will of the
other and the contract is apparently unconscionable, that is, unfair, the law
presumes that the consent must have been obtained by undue influence. The
burden is shifted to the party to prove that he did nothing to overbear the will
of the other.
• Question: An old an 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. What will the law
presume?
 Misrepresentation
• “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
of 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.
• 1. Unwarranted Statements: B told the plaintiff that one C would be the director of a company.
B had obtained this information not from C direct, but from another person, called L. The
information proved untrue.
• 2. Breach of Duty- The plaintiff having no time to read the contents of the deed, signed it as he
was given the impression by the defendant that it contained nothing but formal matters already
settled between them. The deed, however, contained a release in favour of the defendants.
• 3. Inducing mistake about subject matter- A second hand dealer attached a disclaimer to the
car under sale stating that the mileage reading was incorrect. The dealer knew the true mileage
of the car but did not disclose it. It was held that the dealer was bound to disclose the real
position because he knew it.
 Fraud
• Active concealment of fact.
• Mere silence is not fraud- unless circumstances are such that it is the duty of the person keeping
silence to speak
• Illustrations:
• A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the
horse’s unsoundness. This is not fraud in A.
• (b) B is A’s daughter and has just come of age. Here the relation between the parties would make it
A’s duty to tell B if the horse is unsound.
• (c) B says to A—‘‘If you do not deny it, I shall assume that the horse is
sound”. A says nothing. Here, A’s silence is equivalent to speech.
• (d) A and B, being traders, enter upon a contract. A has private
information of a change in prices which would affect B’s willingness to
proceed with the contract. A is not bound to inform B.
 Capacity to Contract
• Section 11- Following persons are deemed to be incompetent to contract-
• 1. Minors
• 2. Persons of Unsound Mind
• 3. Persons disqualified by law to which they are subject.
 Minors
• Age of majority is generally 18, except when a guardian of a minor’s person or property has
been appointed by the court, in which case it is 21.
• Landmark case: Mohori Bibee vs. Dharmodas Ghose- minor’s agreements are absolutely
void. Reasons- A child may show poor judgement in making a particular contract, and it is a
protection against his own ignorance and immaturity.
• However, in today’s society it does not seem to be possible, much less desirable, for law to
adhere to the categorical declaration that a minor’s agreement is always “absolutely void”.
Therefore, the The Privy Council- had to modify its earlier judgement, allowing minors to
contract in certain cases.
• Srikakulam Subhramanyam v Kurra Subba Rao-Contracts for benefits of minors are valid.
 Effects of minor’s agreement
• 1. No estoppel against minor in cases of fraud- Even if a minor fraudulently claims to be a
major and deceives a person to enter into a contract, he is not estopped from claiming the
defence of minority if an action of specific performance is brought against him.
• 2. No liability in contract or tort arising out of contract- A minor’s agreement is devoid of all
legal effects. Johnson v. Pye- a minor who obtains a loan of money by falsely representing his
age cannot be made to repay the amount of the loan in the form of damages for deceit. You
cannot convert a contract into a tort to enable you to sue a minor.
• 3. Doctrine 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 it is traceable in his possession. Minors
seeking relief to cancel their contracts- are compellable to restore the amount obtained by them.
 Question-12- Doctrine of Restitution in
Minor Agreements
• Principle: Doctrine 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 it is traceable in his possession
• Facts: A minor succeeded in deceiving some money lenders by telling them a lie about his age,
and so got them to lend him 400 pounds at 10% interest on the faith of him being an adult. The
money lenders wished to recover principal and interest for damages for fraud. Decide whether
they can:
• A. Recover the Principal Amount only
• B. Recover the Interest Amount only.
• C. Recover both the Interest and Principal
• D. Cannot recover any amount.
 Answer- Question 12
• The money lenders can recover only the principal amount as the doctrine
of restitution envisages to restore the parties to the position prior to
entering into an agreement deemed not to be valid as per the Indian
Contract Act. If interest amount is paid, that would amount to enforcing a
void agreement.
 Contracts beneficial to minors
• In cases where the minor has no obligations, and there is a benefit being conferred upon
him, the minor can enforce these agreements. The principle is that the minor has given
full consideration to be supplied by him and there is nothing that remains to be done by
him under the contract. He is now a mere promisee and there is nothing that remains to
be done by him under the contract. Some examples of these are:
• 1. The Bombay High Court rejected the defence of an insurance company that the
person on whose behalf certain goods were insured was a minor and allowed the minor
to recover the insurance money.
• 2. A gift of some property under a deed executed by the mother in favour of a minor
child was held to be binding on the mother.
 Necessaries Supplied to Minors and People
of Unsound Mind

• Section 68- Claim for necessaries supplied to person incapable of contracting, or on his account.—
If a person, incapable of entering into a contract, or any one whom he is legally bound to support,
is supplied by another person with necessaries suited to his condition in life, the person who has
furnished such supplies is entitled to be reimbursed from the property of such incapable person.
• Illustrations
• (a) A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be
reimbursed from B’s property.
• (b) A suplies the wife and children of B, a lunatic, with necessaries suitable to their condition in
life. A is entitled to be reimbursed from B’s property.
 Persons of Unsound Mind
• The agreement of a person of unsound mind is absolutely void.
• Definition in Section 12- What is a sound mind for the purposes of
contracting.—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 judgment 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.
• Illustrations
• (a) A patient in a lunatic asylum, who is, at intervals, of sound mind, may
contract during those intervals.
• (b) A sane man, who is delirious from fever, or who is so drunk that he
cannot understand the terms of a contract, or form a rational judgment as
to its effect on his interests, cannot contract whilst such delirium or
drunkenness lasts.
 Pledge
• Section 172- The bailment of goods as security for payment of a debt or
performance of a promise is called ‘pledge’. The bailor is in this case called the
‘pawnor’. The bailee is called ‘pawnee’.“
• Conditions of a contract of pledge:
• The property under pledge shall be delivered to the Pawnee.
• Such delivery shall be in the pursuance of the contract.
• This delivery shall be for the purpose of security.
• Also, delivery of articles shall be upon a condition to return.
 Rights of the Pawnee
• Pawnee has the following rights:
• Pawnee has a right to retain the goods pledged until payment of debt, interest and any
other expense incurred for maintenance of such goods. For example, X pledges his gold
jewelry for some loan from a bank. In such a case bank has all the rights to retain the
gold jewelry not only for adjustment of loan amount but also for payment of interest
accrued on such loan amount.
• Pawnee has a right to file a suit for recovery of debt while retaining the goods pledged as
security.
• He has a right to sue for the sale of goods pledged and the payment of money due to him.
 Rights of Pawnee- contd.
• Pawnee has a right to seek reimbursement of extraordinary expenses
incurred. However, he cannot retain goods with him in such a case.
• Pawnee has a right to sell the goods after giving reasonable notice and
time to pawnor. Pawnee can sue pawnor for deficiency, if any, after the
sale of such goods. Also, if there is any surplus on sale of goods pawnee
must return it to pawnor.
 Rights of Pawner
• Rights of Pawnor
• In case pawnee makes any unauthorized sale of goods pledged without
giving proper notice and time to pawnor than pawnor has following rights:

• Right to file a suit for redemption of goods by making payment of debt.

• Right to claim for damages and loss on the ground of conversion.
 Agency
• Agency can be defined as the relationship between two persons, wherein a
person has the authority to act on behalf of another, bind him/her into a
legal relationship with the third party. There are two parties in a contract
of agency – principal and agent
• In a contract of agency, the agent is not just the bridge between the
principal and the third party, but he can also make the principal
answerable for the acts performed by him. Here it must be noted that
while the agent is acting for the principal, he works in the capacity of
principal.
 Essential Requirements of Agency
• Principal must be competent to contract
• Competence of agent is not mandatory
• No consideration is necessary to constitute a contract of agency between
the principal and the agent
 Creation of agency
• A contract of agency may be created by the following modes:
• 1. Express Appointment-LIC Agents, etc.
• 2. By the conduct or situation of the parties
• 3. By necessity of the case-Mother authorizes son to drive her car
• 4. By subsequent ratification of unauthorized act.
 Question
Principle: Agency may be implied
Facts- A is a customer at Chili’s and B is a waitress there. B informs A that
he is entitled to receive a free drink. A consumes the free drink and then the
Management of Chili’s comes and informs A that he must pay for the drink.
They show the Menu which mentions nothing of the provision of such a free
drink as it had expired earlier. A refuses payment. Decide.
 Answer
• If you are at a restaurant and your waitress tells you that she can give you a free beverage if you
pay for an entree, she has made a contract with you on behalf of the business by which she is
employed. It is implied that she is given the authority to do so by the fact that she is the sole
employee of the business who has been designated to complete a transaction with you. (Whether or
not other employees ultimately get involved in your transaction is irrelevant, because it is expected
that ideally she is the only person required to complete your business.)

• Continuing the scenario, suppose that a manager were to come to your table and inform you that
your waitress has made a mistake; that the "free beverage w/ paid entree" offer has expired and that
you will be expected to pay for your beverage. At this point the business is in direct violation of a
legally enforceable contract made between you, the client, and their employee