UNIT III

THE INDIAN CONTRACT ACT, 1872 – INTRODUCTION

The word CONTRACT is common to all of us and virtually no business transactions can take
place without any contracts. The Indian Contract Act, 1872, deals with various types of contracts
entered into by various people and defines the extremely important aspects of business transactions
relating to contracts. In business dealings offers for sale are made and accepted, consideration is
agreed, and conditions of sale are specified. Disputes arise when an offer or acceptance is violated,
consideration is unpaid, and conditions of transactions are violated.

The Indian Contract Act 1872 takes care of all these matters and provides remedies for all such
disputes. Before enactment of The Indian Contract Act,1872 the courts in India used to apply
English Common Laws as suited to Indian conditions, customs and usages. Some difficulties were
noticed in using English Common Laws. Accordingly, later on the courts started deciding cases
based on Hindu personal laws and Muslim personal laws. But the same were still not found fit to
address the then business complexities. Accordingly, a separate The Indian Contract Act, 1872
was enacted. This Act is based on English Common Law which is to a large extent made up of
judicial proceedings. Before 1930, the Act contained provisions relating to contract of sale of
goods and partnership. Section 76 to 123 relating to Sale of Goods were deleted from the Indian
Contract Act, 1872 and enacted in another act, The Sale of Goods Act, 1930. Similarly, section
239-266 relating to partnership were repealed in 1932 and separate act, The Indian Partnership
Act, 1932 was passed. The Indian Contract Act,1872 is not an exhaustive Act as it does not cover
all branches of the law of contract. There are other acts to deal with other types of contract like the
Sale of Goods Act for Sales of Goods, Partnership Act for Partnership Contract, Transfer of
Property Act for contract relating to Sale of Immovable Property, etc. Again, it does not deal with
all types of agreements, it deals with only those agreements which are enforceable by law or which
give rise to legal consequences.

Social agreements wherein the parties do not intend to create legal obligations to be enforceable
by law, like promise to attend marriage ceremony, promise to throw dinner etc are outside the
ambit of the Indian Contract Act, 1872.

NATURE OF CONTRACT AND ESSENTIALS OF VALID CONTRACT

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Definition of contract
Section 2(h) of the Act defines the term contract as an agreement between two or more parties
enforceable by law. This definition of contract is influenced by the definition of contract given by
Pollock who define contract as “Every agreement and promise enforceable at law is a contract”
Another definition of Contract given by Salmond is “contract is an agreement creating and defining
obligations between the parties.”
From the above analysis of the definition of contract, it is clear that contract is based on
enforceability of an agreement. So, agreement and its enforceability are two essential components
of a contract. If either of these two is missing there is no contract.
Will all agreements give rise to a contract?
An agreement to become a contract must give rise to a legal obligation. Agreement can be social
obligation or legal obligation.
An agreement giving rise to social obligation is not a contract. That is why it is said that the term
agreement is a wide term it includes both social and legal obligations but only those agreements
which the parties intend to enforce legally culminates into contract.
An agreement is regarded as a contract when it is enforceable by law.
Legal obligations arise to make an agreement, a contract. It means that an agreement must give
rise to legal obligations. There must be an intention to create legal obligation. In case of agreement
regulating business relation it is assumed that the parties intended legal consequences. Thus,
Agreement = Offer + Acceptance
Contract = Agreement+Enforceability at Law
Essential Elements of a Valid Contract
(i) Agreement: In order to constitute a contract, there must be an agreement in first place.
An agreement in turn is composed of two elements-offer and acceptance. Thus, there
must be at least two parties-one making the offer and another accepting it. The terms
of offer must be definite and the acceptance must be absolute and unconditional.
(ii) Free Consent: According to Sec 14, ‘Consent is said to be free when it is not caused
by coercion, undue influence, fraud, misrepresentation or mistake. If consent is not
free, then no valid contract comes into existence.
(iii) Lawful consideration: The agreement must be supported by a lawful consideration.
Consideration means ‘something in return’. ‘Something in return’ may be an act or
abstinence. But it must be real and lawful.
(iv) Parties are competent: The parties to an agreement must be capable of entering into
a contract. A person is considered competent if he is (a) eighteen years of age (b) of
sound mind (c) not disqualified from contracting by any law to which he is subject.
Existence of free consent implies the consent of the parties must be free and genuine
i.e. not induced by coercion, undue influence, fraud or misrepresentation.

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(v) Legality of object: There must be legality of object and consideration failing which it
will not be a valid contract. This will be discussed in detail subsequently.
(vi) The parties must intend to create a legal relationship. Agreements of social or
domestic nature do not contemplate legal relationship, so they are not contracts.
Example: A husband promising his wife to buy her a ‘necklace’ on occasion of her
birthday is not a contract.
(vii) The agreement not expressly declared void or illegal by law.
(viii) The terms of agreement must be certain and capable of performance. Example: D
agrees to sell C garments. The type, quality, value etc are not discussed. The agreement
cannot be enforced as terms are uncertain. Similarly, if A promises B to bring rainfall
through magic. Such agreement cannot be enforced.
(ix) Legal formalities: Where nature of agreement is such that it requires compliance of
certain formalities, such requirements should be fulfilled. A contract may require
registration in addition of being in writing. However as regards to legal effects, an oral
contract has same effect as a contract in writing.
Classification of Contract:
Contracts can be classified in terms of their enforceability or form or extent of performance.
Based on Enforceability
(i) Valid Contract: An agreement enforceable by law is a valid contract. In other words,
it satisfies all the requirements of a valid contract as laid down in section 10. If any of
the essential requirements is missing it becomes a void contract.
(ii) Void agreement: An agreement not enforceable by law is said to be void. A void
agreement has no legal consequences. A void agreement is void from the very
beginning; it is null from the very beginning.
(iii)Voidable contract: An agreement which is enforceable at the option of one or more
parties thereto but not at the option of other or others is a voidable contract. Example:
A threatens to shoot B if he does not sell his goods to him at the price offered by A. B
agrees to sell the same. This contract is voidable at the option of B.
(iv) Void contract: A Contract which ceases to be enforceable by law becomes void when
it ceases to be so enforceable. Void agreement and void contract are different. Void
agreement is void ab-initio but void contract is a valid contract at the beginning but
subsequently becomes void when it ceases to be enforceable.
(v) Unenforceable contracts: These are the contracts which cannot be enforced in a court
of law because of some technical defects, these contracts become fully enforceable if
the technical defects are removed. According to Sir William Anson ‘an unenforceable
contract is one which is good in substance through by reasons of some technical defect;
one or both of the parties cannot be sued on it. For example, a contract may be good,
but incapable of enforceable because it is not evidenced by writing as required by
statute. The defect may be curable e.g. the subsequent execution of written agreement
may satisfy the requirements of the law and render the contract enforceable.

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(vi) Illegal agreement: An illegal agreement is destitute of any legal effect from the very
beginning. All illegal agreements are void agreements but all void agreements are not illegal.
According to section 23 an agreement is illegal or unlawful if its object or consideration (a) is
forbidden by law or (b) is of such nature that if permitted would defeat the provision of law or
(c) is fraudulent or (d) involves or implies injury to the person or property of another or (e) the
court regards it as immoral or opposed to public policy. Example: Sale of smuggled goods is
illegal so an agreement to sell smuggled goods is an illegal agreement. As an illegal agreement
is one which is against a law in force in India. It is also void-An agreement to commit robbery,
murder, smuggling etc are illegal agreements.
Based on method of formation
(i) Formal contracts: This term is usually found in English laws. Validity of these
contracts depends upon their form. They are valid even if they lack consideration.
These contracts are of two types; Contract under seal and Contract of Records. Contract
under seal are in writing and signed by the parties to them. Contract of Records includes
the court judgments and recognizance; obligations in such cases arise out of judgment
and not under the contract.
(ii) Simple Contract: All contracts other than formal are called simple contracts or parole
contracts
Based on extent of performance
(i) Executed contracts: An executed contract is one which has been totally completed by
both the parties. An agrees to supply some goods to B and B agreed to pay for the price
thereof. A supplied the goods and B paid the price. This is an executed contract as both
the parties have fulfilled their contractual obligations.
(ii) Executory contracts: It is a contract which is wholly unperformed. If one party has
performed his part of obligation but the other party has not yet completed his obligation
on the contract, the contract still remains executory contract. Example: A agree to sell
some goods to B and B agrees to pay after ten days. A delivered the goods but is yet
to pay the price. This is an executor contract as one party has performed his obligations
whereas other party is yet to perform its part of obligation.
(D) Based on Obligation.
(i) Unilateral contract: Under this type of contract there is an obligation only on the part of
only one party when the contract is concluded.
(ii) Bilateral Contract: Here there is an obligation on both the parties to the contract.
(iii) Multilateral Agreements/Contract: Contract or agreement need not be confined to two
parties, it may spread over to more than two parties each not only bind itself to other
parties but also bind other parties to itself. If three parties are involved in the contract
it is known as tri-parties’ agreement. When more than three parties are involved in an
agreement it is called Multilateral Agreement. Most-commonly such Multi-lateral

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 agreements assume international character and are entered into between sovereign
Governments.
(E) On the basis of mode of creation:

Express contract: According to section 9, in so far as the proposal or acceptance of any promise is
made in words, the promise is said to be express. Therefore, the contracts entered into between the
parties by words spoken or written are known as express contracts.

Example: A send a letter to B offering to sell his car to him for ` 50,000. B by written letter conveyed
his acceptance of the offer. This is an express contract.

Implied or inferred contract: As per section 9, in so far, such proposal or acceptance is made
otherwise than in words, the promise is said to be implied. Thus, the contracts which are made by an
act or conduct of the parties and not by words are termed as implied contract. Example: When a
person enters DMRC Metro station there is an implied offer and acceptance thereof between DMRC
and the commuter once he enters the platform. This is a case of implied or inferred contract.

E-contract: This is a kind of contract formed in the course of E-commerce by interaction of two or
more person competent to contract using electronic means, such as e-mail. This involves interaction
of an individual with an electronic agent, such as computer program or interaction of at least two
electronic agents that are programmed in such a way to generate contract. This contract is
conceptually akin to the traditional paper contract and requires all the essential requirements of a
valid contract like free consent, capacity of the parties, consideration and legality of objects and
consideration.

OFFER

INTRODUCTION

A proposal is defined as, ‘when one person signifies to another his willingness to do or 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.’[Sec 2(a)]

The term proposal used in the Indian Contract Act is like the term “offer” used in English laws. The
person making proposal or offer is called the promisor or offeror and the person to whom offer is
made is called the offeree and the person accepting the offer is called the promisee or acceptor. An
offer may be made either by words or by conduct. An offer, which is made by words, is called express
offer and the one, which is inferred from the conduct of a person or the circumstances of the case, is
called an implied offer.

An example of implied offer is “Delhi Metro Rail running Metro Rail on different routes to carry
passengers at the scheduled tariff rates. This is a case of implied offer by DMRC and once a person
board in the DMRC train he is said to have accepted the offer by his act/conduct.”

Similarly, an offer is different from an invitation to offer.

In the case of invitation to offer the person sending out invitation does not make an offer but only
invites the other parties to make an offer. An advertisement for sale of goods by auction, quotations,

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catalogues of prices or display of goods at show room with price tag etc is invitation of offer rather
than offer.

The main difference between an offer and an invitation to offer is that in the case of former there
should be expression of willingness to do or to abstain from doing with a view to obtaining the assent
of the other party, while in the later one, the party without expressing his final willingness, proposes
certain terms on which he is willing to negotiate, he does not make an offer, he only invites the other
party to make an offer on those terms. As already stated above in the preceeding para the display of
goods in a shop window is not an offer to sell but simply an invitation to treat. The person who
responds to the invitation to offer makes the offer which may or may not be accepted by the person
inviting the offer. Invitation to offer also occurs for instance when tenders are invited, Advertisement
for tender is merely an invitation to offer. The tender constitutes the offer which can be accepted or
rejected. Simply putting goods up for auction, catalogue of goods, a prospectus of a company,
invitation for jobs, invitation for public subscription etc are merely invitation to treat and not an offer.

Offer can be specific or general. An offer is said to be specific when it is addressed to a definite person
or persons. Such offer can be accepted only by the person or persons to whom it is made. A general
offer on the other hand is addressed to public in large and may be accepted by anybody fulfilling the
terms and conditions.

Legal Rules for a Valid Offer:

1. Offer must be made with an intention to create legal obligations; an offer must give rise to
legal relationship; if it does not create legal obligations it is not a valid offer.
2. Offer can be expressed or implied: an offer which is made in words written or spoken is called
an express offer and an offer which is made by an act or conduct of the offerer is called an
implied offer. As per section 9 “in so far as the proposal or acceptance of any promise is made
in words, the promise is said to be express.
3. The terms of offer must be definite and must not be vague. All the terms and
conditions of the offer must be definite and certain at the time of making offer.
Therefore, an agreement to agree in future is not a valid offer due to uncertainty of
terms.
4. Silence cannot be prescribed as a mode of acceptance. An offeree cannot put silence
as a mode of acceptance as, if nothing is heard from the other party by a given time the
offer will be deemed to have been accepted.
5. If no time is fixed by the offeror within which the offer is to be accepted, the offer
does not remain open for an indefinite period. Where no time is specified, then the offer
is to be accepted within a reasonable time. What is a reasonable time being a question
of fact and would depend upon the circumstances of each case.
6. Two identical cross offers do not result into a contract: When two persons make
identical offer in gross ignorance of offer of other party, there is no contract due to lack
of acceptance on the part of either party.
7. Offer may be general or specific:
8. Offer must be expression of willingness to do something or abstain from doing
something; it can be willing to do some positive thing or willingness to abstain from
doing something in which it is called negative.
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 9. Offer is different from invitation of offer
10. Communication of special terms and conditions: Special terms and conditions
attached to an offer must also be communicated to make the acceptor bound by them.
The courts have laid down the following rules in this regard.
(a) There must be reasonable notice of the special terms and conditions.
(b) The notice of communication must be contemporaneous with the contract.
(c) Unreasonable or illegal terms are excluded from the contract.
(d) An exemption or exclusion clause or a similar provision in a contract should be
construed as not applying to a situation created by a fundamental breach of contract
because in a standard form of contract exemption clauses are generally laid down
in extravagantly wide terms.
Acceptance of Offer
Once an offer has been made, it has to be accepted to make a valid contract.
Section 2(b) defines acceptance as “When the person to whom an offer is made signifies his assent
thereto the proposal is said to be accepted, A proposal when accepted becomes a promise.”
An offer can be accepted by only the person or persons for whom the offer is intended. An offer
made to a particular person can only be accepted by him alone, on the other hand an offer made to
a class of persons can be accepted by any member of that class of persons. An offer made to the
world at large can be accepted by any person whatsoever.
What are essential elements of a valid acceptance?
1. Acceptance must be absolute and unqualified; it must conform to the offer. As per
section 7 in order to convert a proposal into a promise, the acceptance must—Be absolute
and unqualified; if the parties are not ad idem on all matters concerning the offer and
acceptance, there is no contract.
2. An invitation with variation is no acceptance, it is simply a counter proposal, which
must be accepted by the original proposer before any contract is made. A counter offer puts
an end to the original offer and cannot be revived by subsequent acceptance unless it is
renewed.
3. Be expressed in some usual and reasonable manner, unless the proposal prescribes 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 a manner, the proposer may, within a
reasonable time after the acceptance is communicated to him, insist that his proposal shall

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 be accepted in the prescribed manner, and not otherwise; but if he fails to do so, he accepts
the acceptance.
4. Specific offer can be accepted by the person to whom it is made, whereas general offer
can be accepted by anyone competent to contract and meeting the conditions of offer.
5. Acceptance may be express or implied: As per section 9 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. It can be inferred from the conduct of the parties. When a person boards in Metro
Rail it is an implied acceptance.
6. Acceptance should be of the whole proposal and not in part; Acceptor should accept
the whole proposal in total and not in parts. Part acceptance is no acceptance binding upon
the proposer.
7. Acceptance should be according to the mode prescribed or usual and reasonable
mode; acceptor cannot accept the proposal in a manner different from the manner
prescribed in the offer. If no such mode is prescribed it should be usual and reasonable
mode. Silence cannot be a mode of acceptance.
8. Communication of acceptance is must; a mental determination to accept unaccompanied
by any external indication will not be sufficient acceptance. To constitute an acceptance
such acceptance must be communicated to the offeror or his authorized agent.

CONSIDERATION

One of the essential elements of a contract is consideration. Consideration means something in

return. When someone promises to do or not to do something for somebody else he also in turn
needs some reciprocal gesture from other party in return which in common parlance we mean
consideration. It may be either some benefit conferred on one party or some detriment suffered by
other. It may be an act or abstinence or promise. For Example, if A agrees to sell goods to B for a
price of ` 20,000/-, the amount is the consideration for A for parting with the goods similarly the
consideration for B to pay ` 20,000 is goods sold by A.

Section 25 of the Indian Contract Act provides that “An agreement made without consideration

is void” thus consideration is life blood of a valid contract. According to Salmond and Winfield
“A promise without consideration is a gift, one made for consideration is a bargain.”

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Sec.2(d) defines consideration as, ‘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.’

An agreement without consideration is not enforceable and therefore is void. The reason why law
enforces only those promises which are made for consideration is that gratuitous or voluntary
promises are often made rashly and without due deliberation. To prevent the parties seeking legal
recourse for dispute arising due to non-fulfillment of such rash contractual obligations which lack
consideration, it is essential to put consideration as once of the essential element in order to be
construed as a binding contract.

Legal Rules Regarding Consideration:

1. It must move at the desire of the promisor. Any act or abstinence at the desire of third
party is not consideration. If the act is not at the desire of the promisor it will not be a good
consideration.
2. It may move from the promisee or any other person. Even a stranger under the Indian
Law may furnish consideration.
3. Consideration must be something of value. Consideration must be something of some
value in the eyes of law. consideration shall be something which not only the parties regard
but the law also regards as having some value.
4. It must be real and not illusory. If the consideration of some value in the eyes of law the
court will not enquire whether it was equivalent to the promise which the party gave in
return.
5. It may be an act, abstinence or forbearance or a return promise. An act i.e. doing of
something is an affirmation of doing something is a positive consideration and is good
enough to support any promise.
6. It may be past, present or future which the promisor is already not bound to do. Past
consideration: When consideration for the present promise was given in the past, it is said
to be a past consideration. Present consideration: When consideration is given
simultaneously with promise, at the time of promise, it is said to be a present consideration.

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 Future or executor consideration: When consideration from one party to another is to
pass sometime in future it is said to be future consideration.
7. It must not be unlawful-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 it as immoral, or opposed to public policy. This is discussed
in detail under ‘Legality of Object and Consideration’.
8. Consideration need not be adequate: As we have already discussed above that
consideration is something in return. That something in return being offered need not be
adequate only condition to be satisfied is that it must be something having some real value.
So long as consideration exists, the courts are not bound to go into its adequacy or
otherwise. The issue of adequacy or otherwise arises when it is alleged that the consent of
one of the party to the contract was not free, only in such cases the courts may look into
the adequacy or inadequacy of consideration.
9. It must not be opposed to public policy: The consideration should not only be real but
also not be opposed to public policy. Where the consideration flowing from one of the
party to the agreement is unlawful the court will not allow any action on such agreements.
10. Pre-existing obligations: Consideration must be something more than what the promisee
is already bound to do by contract or by law. But doing or agreeing to do more than one’s
legal or official duty will serve as a consideration. However, it may be noted that pre-
existing contract with a promisor can be no consideration for promise.

No Consideration (Section 25)-Exceptions

The general rule is ex-nudo pacto non oritur action i.e. an agreement made without consideration
is void. For example, if A promises to pay B ` 1000 without any obligation from B. This is a void
agreement for want of consideration. However, the Act itself provides exceptions to this rule in
section 25 itself. As per section 25, an agreement made without consideration is not void in the
following circumstances:

1. Agreement without consideration void, unless it is in writing and registered: If an

agreement 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

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 between parties standing in a near relation to each other, it is valid despite being void of
consideration. The expression the parties standing in near relation to each other means the
parties are related to each other by blood relations. Nearness of relations does not always
mean natural love and affection
2. Or is a promise to compensate for something done: If it is a promise to compensate,
wholly or in part, a person who has already voluntarily done something for the promisor,
or something which the promisor was legally compellable to do, it is a good agreement
despite no consideration from other party.
3. Or is a promise to pay a debt barred by limitation law: If it is a promise, made in writing
and signed by the person to be charged therewith, or by his agent generally or specially
authorized 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.
4. Gift actually made: Explanation 1 to section 25 provides that absence of consideration
does not affect the validity of any gift between donor and done if actually made.
5. Creation of agency: Section 185 of the Act provides that no consideration is required to
create Agency.
6. Charitable subscription: No consideration is required where promise is for some
charitable purpose.

CAPACITY TO CONTRACT

Who are Competent to Contract? (Section 11)

One of the essentials of a valid contract is the competency of the parties to make contract. Law has
laid down certain rules as to who are competent to enter into a valid contract. As per Section 11
every person is competent to contract who is of the age of majority according to the law to which
he is subject, and who is of sound mind, and is not disqualified from contracting by any law to
which he is subject.

From the above provisions of the section it means the following types of persons are not competent
to contract:

(a) A person who has not attained the age of majority, i.e. minor.

(b) A person of unsound mind

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(c) A person who is disqualified from contracting by some law.

POSITION OF MINOR

As per section 3 of the Indian Majority Act of 1875, every person in India is a minor if he has not
attained the age of 18 years of age. However, in case of a minor of whose person or property or
both a guardian has been appointed under the Guardian and Wards Act, 1890 or whose property is
under the superintendence of any court of wards before he attains 18 years of age is 21 years.

The position of Minor’s agreement and effect thereof is as under:

1. An agreement with a minor is void ab-initio.

2. The law of estoppels does not apply against a minor. It means a minor can always his plead
his minority despite earlier misrepresenting to be a major. In other words, he cannot be
held liable on an agreement on the ground that since earlier he had asserted that he had
attained majority.
3. Doctrine of Restitution does not apply against a minor. In India the rules of restitution by
minor are similar to those found in English laws. The scope of restitution of contract by
minor was examined by the privy council in Mohiri Bibi case when it has held that the
restitution of money under section 64 of the Indian Contract Act cannot be granted under
section 65 because a minor’s agreement is not voidable but absolutely void ab-initio.
4. No Ratification on Attaining Majority. Ratification means approval or confirmation. A
minor cannot confirm an agreement made by him during minority on attaining majority. If
he wants to ratify the agreement, a fresh agreement and fresh consideration for the new
agreement is required.
5. Contract beneficial to Minor: A minor is entitled to enforce a contract which is of some
benefit to him. Minority is a personal privilege and a minor can take advantage of it and
bind other parties.
6. Minor as an agent: A minor can be appointed an agent, but he is not personally liable for
any of his acts.
7. Minor’s liability for necessities. If somebody has supplied a minor or his dependents with
necessities, minor’s property is liable but a minor cannot be held personally liable
8. A minor cannot be adjudged insolvent as he is incapable of entering into a contract.

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9. Where a minor and an adult jointly enter into an agreement with another person the minor
is not liable and the contract can be enforced against the major person.
10. Liability for tort: A tort means a civil wrong other than a breach of contract and is
redressible by an action for unliquidated damages. A minor is generally liable in tort but
he cannot be made liable for what was a truth in a breach of contract.
11. Position of Minor’s Guardian: An agreement entered into by the guardian of a minor on
his behalf stands on a different footing from an agreement entered into by the minor
himself. An agreement with a minor is void but an agreement by his guardian on his behalf
is valid provided the obligations undertaken are within the powers of the guardian. The
powers of a guardian are determined by the personnel law of the minor and by the Guardian
and Wards Act. An agreement made by the guardian is binding on the minor if it is for the
benefit of the minor or is for legal necessity.
12. Minor as a shareholder: A minor cannot apply for public subscription of a company’s share
and hence cannot become a member or shareholder. If his name by mistake has been
recorded as a member of a company he can rescind the transaction and get his name
removed from the register of members. But where a minor was made member of a company
after attaining the age of majority and he received and accepted dividends, he will be
stopped from denying that he is a member.

What is a Sound Mind for the Purposes of Contracting? (Section 12)

A person is said to be of sound mind for the purposes 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.

Other Disqualified Persons:

The persons who are disqualified from entering into contract due to certain other reasons may
be from

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legal status, political status or corporate status. Some of such categories of persons are given
below:

(a) Alien Enemy: An agreement with an Alien Enemy is void. But agreement with an Alien
friend is perfectly valid and enforceable. When the Government of an Alien is at war with the
Government of India, the alien is called Alien enemy who cannot enter into any contract with
any Indian citizen without the permission of Government of India as the same is against the
public policy. Contract entered into with an alien before war is put into suspension during the
duration of war.

(b) Foreign Sovereign and Ambassadors: Foreign sovereigns and their representatives enjoy
certain privileges and immunities in every country. They cannot enter into contract except
through their agents residing in India. They can sue the Indian citizen but an Indian citizen
cannot sue them.

(c) Convicts: A convict cannot enter into a contract while he is undergoing imprisonment.

(d) Insolvents: An insolvent person is one who is unable to discharge his liabilities and
therefore has applied for being adjudged insolvent or such proceedings have been initiated by
any of his creditors. An insolvent person cannot enter into any contract relating to his property.

(e) Company or Statutory bodies: A contract entered into by a corporate body or statutory
body will be valid only to the extent it is within its Memorandum of Association.

FREE CONSENT

According to section 10 consensus ad idem or identify of mind is an essential requirement of

a valid contract. One of the essential elements of a valid contract is that there should be free
consent of the concerned parties to the contract. ‘Two or more persons are said to consent
when they agree upon the same thing in the same sense.’ [See 13]. If the parties have not
agreed upon the same thing in the same sense there is no real consent and hence no contract is
formed.

If the parties have not agreed upon the same thing in the same sense there is no real consent
and hence no contract is formed. According to Pollock and Mulla the expression “the same
things” means “the whole content of the agreement, whether it consists, wholly or in part or

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 Delivery of material objects or payment or other executed acts of promises” For formation of
a contract parties must agree upon the same things in the same sense, there must be real
consent. If there is no real consent the contract does not come into existence. When there is no
consent at all, Salmond describes it as ‘Error in Consensus” However, in certain cases there is
real consent but once the parties have given his consent, not out of his free will but due to
factors in the absence of which he might not have given his consent, consent so given is said
to be not free.

As per section 14 of the Contract act consent is said to be free when it is not caused by—

(1) Coercion (Sec 15), or

(2) Undue influence (Sec 16), or

(3) Fraud (Sec 17), or

(4) Misrepresentation (Sec 18), or

(5) Mistake, subject to provisions of Sec 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.

Figure 1 Free consent

Coercion [Sec 15]

The term coercion has been defined in section 15 of the Act as “Coercion” is the committing or
threatening to commit, any act forbidden by the Indian Penal Code (45 of 1860), or the unlawful

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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 (45 of 1860) is or is not in force in
the place where the coercion is employed.
From the above definition of coercion given in section 15, consent is said to be caused by
coercion
when it is obtained by any one of the following;
(i) committing or threatening to commit any act forbidden by Indian Penal Code;
(ii) unlawful detaining or threatening to detain the property of another person.
Coercion may come from a person party to the contract or even third person not connected with
the contract directly.
Unlawful detaining also amounts to coercion: If a person unlawfully detains or give a threat to
detain any property to the prejudice of any person whatever with the intention of causing any
person to enter into an agreement amount to coercion.
Effect of coercion:
According to section 19 when the consent is caused by coercion, fraud, misrepresentation, the
agreement is avoidable at the option of the party whose consent was so caused. The aggrieved
party may opt to rescind the contract. If the aggrieved party seeks to rescind the contract he must
restore the benefit so obtained under the contract from other party.
Undue Influence [See 16]
Undue influence is another way of causing forced consent of the other party. It is said to be a subtle
species of fraud whereby mastery is obtained over the mind of the victim, by insidious approaches
and seductive artifices.
Section 16 of the Indian Contract Act defines undue influence as under:
(i) 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.
(ii) In particular and without prejudice to the generality of the forgoing 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.

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(iii) 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
Nothing in this sub-section shall affect the provisions of section 111 of the Indian Evidence
Act, 1872
(1 of 1872). There is presumption of undue influence in the following relationships:
(i) Parent and child
(ii) Guardian and ward
(iii) Doctor and patient
(iv) Solicitor and client
(v) Trustee and beneficiary
(vi) Religious advisor and disciple
(vii) Fiancé and fiancée
There is however no presumption of undue influence in case of relationship of— (i) landlord and
tenant
(ii) debtor and creditor (iii) husband and wife. The wife has to be pardanashin for such
presumption. In these relationships undue influence has to be proved.
Going through the definition of undue influence in section 16 we find that two elements are found
in undue influence:
(i) The relationship subsisting between the parties is such that one is in a position to dominate the
will of other and
(ii) He uses that position to obtain an unfair advantage over the other.
The person intending to avoid the contract on the ground of undue influence must prove both the
above two elements.
Effect of undue influence: Section 19 A provides that when the consent is caused by undue
influence, the agreement is avoidable at the option of the party whose consent was so caused. The
aggrieved party may opt to rescind the contract. If the aggrieved party seeks to rescind the contract
he must restore the benefit so obtained under the contract from other party, upon such terms and
conditions as to the court may seem just.

Fraud [See 17]

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Fraud is an intentional misrepresentation of a material fact which induces the other party to enter
into a contract. This happens when one person makes misrepresentation of material facts known
to him to be untrue or made with reckless indifference as to whether it is true or false with the
intention of causing other party to enter into a contract relying upon the same.

In the words of Lord Herschell in the case of Derry v Peek(1889)14 Ac 337 fraud is a false
statement made knowingly or without belief in its truth or recklessly whether it is true or false.

As per section 17 of the Contract Act: “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:

(i) The suggestion, as a fact, of that which is not true by one who does not believe it to be true;

(ii) The active concealment of a fact by one having knowledge or belief of the fact;

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

(iv) Any other act fitted to deceive;

(v) Any such act or omission as the law specially declares to be fraudulent.

As evident from the above statutory definition of the term fraud, the following are essential
elements of a fraud.

(a) The act must have been committed by a party to the contract or with his connivance or by his

agent. The fraud committed by a stranger to contract does not vitiate the contract.

(b) The act constituting fraud must have been committed with the intention to deceive the other

party.

(c) The act must have induced the other party to enter into a contract.

(d) The other party must have acted upon the statement and have suffered damages or loss.

(e) The act constituting fraud must be either of the following:

(i) A suggestion as to a fact by one of that which is not true who does not believe it to be true.

(ii) Active concealment of facts one having knowledge or belief of fact.

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

(iv) Any other act fitted to deceive.

(v) Any other act or omission as the law specially declares to be fraud.

Effect of Fraud: According to section 19 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.

Misrepresentation

A statement of fact which one party makes in the course of negotiation with a view to inducing the

other party to enter into a contract is known as misrepresentation. It must relate to some fact which
is material to the contract. It may be expressed by words spoken or written or implied from the
acts and conduct of the parties.

A representation when wrongly made either innocently or intentionally is a misrepresentation.

When it is made innocently or unintentionally it is misrepresentation and when made intentionally
or willfully it is fraud.

Misrepresentation has been defined in section 18 of the Act as under:

“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 anyone claiming under him;

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

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Effect of Misrepresentation:

As per section 19 when consent to an agreement is caused by misrepresentation, the agreement is

a contract avoidable at the option of the party whose consent was so caused. A party to a contract,
whose consent was caused by 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.

Mistake

Mistake means an erroneous belief about something. It has not been defined in the Indian Contract
Act.

Mistake can be -

(A) Mistake of law, or

(B) Mistake of fact

(A) Mistake of law: maybe (i) mistake of law of the country(ii) mistake of law of a foreign
country

(i) Mistake of law of the country: When a party enters into a contract, without the knowledge of
law in the country, the contract is affected by such mistake but it is not void. A contract is not
voidable because it was caused by a mistake as to any law in force in India. The reason here is that
ignorance of law is not an excuse at all. However, if a party is induced to enter into a contract by
the mistake of law then such a contract may be avoided.

(ii) Mistake of law of foreign country: Such a mistake is treated as mistake of fact and agreement
is such case is void.

(B) Mistake of fact: maybe(I)a bilateral mistake, or(II)unilateral mistake

(I) Bilateral mistake

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

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(a) Mistake must be mutual: Both the parties must misunderstand each other and should be at
cross purpose

(b) Mistake must relate to a matter of fact essential to the agreement: What is essential fact of
an agreement depends upon the nature of promise in each case.

The various types of mistakes falling under bilateral mistakes are as under:

(i) Mistake as to subject matter covers following cases:

(a) Mistake as to existence of subject matter: If both the parties are at mutual mistake as to
existence of the subject matter the agreement is void.

(b) Mistake as to identity of subject matter: It usually happens when both the parties have different
subject matter of contract in their mind. The contract is void due to mistake of identify of subject
matter.

(c) Mistake as to the quality of the subject matter: If the subject matter is something essentially
different from what the parties thought to be, the agreement is void.

(d) Mistake as to quantity of subject matter: Bilateral mistake as to quantity of subject matter
would render the contract void.

e) Mistake as to title of subject matter: The agreement is void due to bilateral mistake as to title of
the subject matter

(f) Mistake as to price of the subject matter: Mutual mistake as to price of the subject matter would
render the agreement void.

ii) Mistake as to possibility of performance of Contract. Impossibility may be:

(a) Physical impossibility: A contract is void if it is identified to be non-feasible due to physical

factors, like time, distance, height, etc.

(b) Legal impossibility: A contract is void if it provides that something shall be done which as a
matter of law cannot be done.

(II) Unilateral Mistake as to fact:

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As per section 22 a contract is not voidable merely because it was caused by one of the parties to
it being under a mistake as to a matter of fact. A unilateral mistake is not allowed as a defense in
avoiding a contract unless the mistakes brought about by another party’s fraud or
misrepresentation.

Legality of Object

In order to make a valid contract in addition to various other conditions like free consent,
competency of parties and existence of consideration other important requirement is legality of
objects and considerations. For the validity of a contract the object as well consideration must be
lawful.

Section 23 declares that the object and consideration of an agreement is not lawful in certain cases.

What considerations and objects are lawful and what are not lawful are provided in section 23 of
the Act. As per section 23 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 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.

From section 23 it is evident that the consideration or object of an agreement is unlawful:

(a) If it is forbidden by law: An act is forbidden by law when it is punishable by the criminal
law of the country or when it is prohibited by special legislation or regulations made by a
competent authority;
(b) If it is of such a nature that, if permitted would defeat the provision of any law.
(c) If it is fraudulent: An agreement made for fraudulent purpose is void
(d) If it involves or implies injury to the person or property of another person.
(e) If the court regards it as immoral: An agreement between husband and wife for future
separation is immoral hence void.
(f) Where the court regards it opposed to public policy

An agreement is unlawful for immorality in the following cases:

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(a) Where the consideration is an act of sexual immorality.

(b) Where the object of the agreement is the furtherance of sexual immorality lending money to a
prostitute to help her in her trade.

What types of agreements are opposed to public policy?

The following types of agreements are opposed to public policy:

(a) Trading with enemy.

(b) Agreement to commit crime.

(c) Agreements which interfere with the administration of justice.

(d) Agreements in restraint of legal proceedings.

(e) Trafficking in public offices and titles.

(f) Agreements tending to create interest opposed to duty.

(g) Agreements in restraint of parental rights.

(h) Agreement restricting personal liberty.

(i) Agreements in restraint of marriage.

(j) Marriage brokerage agreements.

(k) Agreements interfering with martial duties.

(l) Agreements to defraud creditors or revenue authorities.

(m) Agreements in restraint of trade.

Effects of Illegal or Unlawful Agreements:

The general rule is that no action is allowed on an illegal agreement.

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