Law of Contract – I (LLB I Semester)

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These are notes prepared by a student based on classroom conversation. While it has been vetted, inaccuracies may exist. It is advised that readers perform their own due diligence from official sources. Author is not liable for any loss or damage arising out of using these notes.

Unit-I: Definition and Essentials of a Valid Contract

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Definition and Essentials of a Valid Contract

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A contract is a legally binding agreement between two or more parties. To be valid, a contract must have the following elements:

• Offer: A proposal made by one party to another indicating a willingness to enter into a contract. English law calls it an offer but in Indian law we call it Proposal.

  • Section 2(a)
  • 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: Unqualified and complete consent to the terms of the offer.

  • Section 2(b)
  • Acceptance: When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.
  • Promise: A proposal when accepted becomes a promise.
  • Section 2(c)
  • Promisor: The person making the proposal is called the promisor.
  • Promisee: The person accepting the proposal is called the promisee.

• Consideration: Something of value exchanged between the parties. It can be money, services, or an object.

  • Section 2(d)
  • 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 or promise is called a consideration for the promise.

• Intention to create legal relations: The agreement should be such that it is enforceable by law.

  • In an agreement, both the parties should have the intention to create a legal relationship (at the time of creating the contract, not at the time of dispute) and this intention can be gathered on the basis of the facts. There is no particular test to examine the particular intention. The test is objective but not subjective. In all commercial and business agreements, presumption is that the parties intended to create a legal relationship and this presumption is rebuttable.

  • In all other agreements, such as social agreements, domestic agreements or a charitable agreement, burden lies on the parties to prove this element.

  • Cases:

    • Balfour vs Balfour (1919): Mr. Balfour works in Sri Lanka. Mrs. Balfour also resides with him in Sri Lanka. They are from England. For vacation, they visit England. During the vacation, Mrs. Balfour fell sick. Mr. Balfour left Mrs. Balfour at her parent’s house promising to pay her GBP 30 per month for her sustenance. After paying for some months, Mr. Balfour stops paying. After several months, Mrs. Balfour sues Mr. Balfour for the arrears. It was held that a promise between husband and wife amounts to a domestic obligation and not a legal obligation; furthermore, there was no intent to create a legal relationship, and is not enforceable in court. Plaintiff could not succeed in this case as the parties did not have an intention to create legal relationship, therefore, the contract was not enforceable.
    • Jones vs Padavatton (1969): There was nothing to indicate that there was an intention to create legal relationship between the parties as is evident from the fact that neither the agreement was reduced to writing nor the duration for which she was to be maintained had been mentioned.
    • Meritt vs Meritt (1970): In this case, it was held that parties intended to create a legal relationship as is evident from the agreement between them which was in writing and therefore ex-husband was bound by the contract.

  • Section 2(e)

  • Agreement: Every promise and every set of promises forming the consideration for each other is an agreement.

  • Section 2(f)

  • Reciprocal Promises: Promises which form the consideration or part of the consideration for each other are called reciprocal promises.

• Capacity: Parties must have the legal ability to enter into a contract (they should not be minors or disqualified by law).

  • Section 2(g)

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

  • Example: An agreement with a minor is void. An agreement without consideration is void.

    • Mohori Bibee vs Dharmodas Ghose (1903): The case dealt with a minor’s capacity to contract.

  • Section 2(h)

  • An agreement enforceable by law is a contract.

• Free Consent: The agreement must be made without coercion, undue influence, fraud, or misrepresentation.

  • Section 2(i)
  • Voidable Contract: 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.
  • Example: A agrees to sell his car worth ₹1 crore to B for ₹20 lakhs. If B has used coercion and A can prove the same, the court will set aside the contract as voidable.

• Lawful Object: The object of the contract must be legal.

  • Section 2(j)
  • Void Contract: A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.
  • Example: Contracts with alien enemies.

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Definition of Contract

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• Various jurists have given definitions for contracts.
  • Pollock: Every agreement and promise enforceable at law is a contract.
  • Sir William Anson: A legally binding agreement between two or more persons by which rights are acquired by one or more to acts or forbearances (abstaining from doing something) on the part of others.
  • Salmond: Contract is an agreement creating and defining obligations between the parties.

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Section 10 - Essentials of a Valid Contract

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• Which agreements are contracts?
  • All agreements are contracts if they are made by the free consent of parties, competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.
  • The following are considered to be the essential elements of a valid contract i.e., an agreement must have the following elements:
    1. Two or more parties.
    2. Offer and Acceptance - Section 2(a), 2(b)
    3. Intention to create legal relationship
    4. Lawful consideration - Section 2(d), 23, 25
    5. Capacity of Parties - Section 11, 12
    6. Free and Genuine Consent - Section 14
    7. Lawful object - Section 23
    8. Agreements not declared to be void - Section 24-30, 56
    9. Certainty and Possibility of Performance - Section 29
       • Terms of an agreement must be mentioned by the offeror with definiteness, clarity i.e., there should not be any ambiguity or they should not be vague.
         • Example: A agrees to put life in a dead person. B promises to pay an amount of ₹1 lakh. - Such an agreement is void.
       • Certainty: There must be a clear offer. Price and other elements must have no ambiguity.
       • Possibility of Performance: Any agreement
    10. Legal formalities - Section 10 para 2
        • Depends upon the contract.
        • Some contracts are required to be reduced to writing.
        • Some contracts require stamping.
        • Gifts: Donor and Donee. Donee needs to accept.
          • Gift Deed
            • Executant
            • Claimant
            • Two witnesses who will attest to the fact that the Executant has signed with free consent.
            • Any item above ₹100 is subject to registration according to the Registration Act, 1908.

Kinds of Contracts

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Validity/Enforceability

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• Valid contract under Section 2(h).
• Voidable contract under Section 2(i):
  • Until the contract is rescinded by the party entitled to do so, it is a valid contract.
  • A contract becomes voidable in the following cases:
    • When the consent of one of the contracting parties to the contract is obtained by coercion, undue influence, misrepresentation, or fraud - Voidable at the option of the aggrieved party under Section 19 or 19A.
    • When a contract contains reciprocal promises and one party prevents the other from performing his promise - Voidable at the option of the party so prevented. Section 53.
    • When a party to a contract promises to do a certain thing within a specified time but fails to do it - Voidable at the option of the promisee if the intention of the parties was that time should be the essence of the contract. Section 55.
  • Consequences of rescission of voidable contract:
    • Section 64 lays down the rights and obligations of the parties to a voidable contract after it is rescinded.
      • When a person rescinds a contract at his option:
        • (a) The other party need not perform any promise in which he is a promisor.
        • (b) If the party rescinding a voidable contract has received any benefit from the other party to such contract, he must restore such benefit.
      • Section 64 aims at placing both parties on the same footing after rescission.

Void contract under Section 2(j)

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• A void contract is one that, at inception, is enforceable by law. At the time of the contract, it fulfilled the elements of a valid contract. If Section 56 is invoked, it becomes void. If a supervening impossibility happens, the contract would be void.
  • Void means not binding in law. It has no legal effect and is a nullity.
  • Reasons for turning a valid contract into a void contract:
    • Section 56: Supervening impossibility arises subsequent to the formation of the contract.
      • Example: A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract to marry becomes void and ceases to be enforceable.
    • Section 56: Subsequent illegality - A agrees to sell B 100 bags of wheat at ₹650 per bag. Before delivery, the government bans private trading in wheat - contract void as it ceases to be enforceable. If A chooses to supply wheat, it would be illegal.
    • Repudiation of a voidable contract - When the party whose consent is not free repudiates the contract, it becomes void as it ceases to be enforceable.
    • In the case of a contract contingent on the happening of an uncertain future event, if that event becomes impossible.
      • Example: A promises to pay B ₹1000 if B marries C. However, C dies before B could marry C. Therefore, the contract becomes void.

Void agreement under Section 2(g)

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• An agreement not enforceable by law is said to be void. Whenever there is an absence of one or more essential elements as laid down under Section 10 (except that of free consent), it is considered a void agreement.
  • Example:
    • Agreement with a minor is void ab-initio.
    • Agreement without consideration.
    • Agreements expressly declared void:
      • Agreement in restraint of trade, marriage, legal proceedings, or by way of wager (betting).
  • Obligation of a person who has received an advantage under a void agreement or a contract that became void - Section 65 is applicable:
    • Any person who has received any advantage under such agreement or contract is bound to restore it or make compensation for it.
  • Section 64 (voidable contracts) and Section 65 (void agreements and void contracts) deal with restitution. Section 65 provides for restitution in cases like:
    • When an agreement is discovered to be void.
    • In case of an agreement caused by bilateral mistake of essential facts.
    • In case of an agreement with a minor who commits fraud by misrepresenting his age.

Unenforceable Contract

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• If the contract does not have the necessary legal formalities, it is unenforceable.
  • Example: A sale deed that is not registered. In some cases, the court gives the option to register at that time.

Illegal agreement

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• When the object of an agreement is illegal, e.g., a contract to murder.
  • All illegal agreements are void, but not all void agreements are illegal.
  • Any collateral transaction to an illegal agreement is also void.
    • Example:
      • A asks B to murder C and agrees to pay B ₹1 crore - Illegal agreement.
      • A borrows money from D to pay B for murdering C. The agreement between A and B is illegal, and the collateral agreement with D becomes void unless D proves lack of knowledge of the illegal agreement.

Formation/Mode of Creation

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Express contract

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• An express proposal and acceptance lead to an express contract. These may be in writing or spoken words. The burden lies on the party to prove the same in court.

Implied contract

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• An implied contract is one where the contract results from an act, conduct, or circumstances.
  • Examples:
    • Shoe shiner: A boy polishes your shoes without objection, and you are obligated to pay.
    • Weighing machine: Inserting a coin in a weighing machine implies a contract.
    • RTC bus: Boarding a bus implies a contract to pay the fare.

Quasi contract or Constructive contract

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• Obligations imposed when a person takes responsibility without a formal contract.
  • Example: Finding a valuable item and taking steps to find its owner.

Execution/Performance

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Executed

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• Unilateral.
• Bilateral.

Executory

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• Unilateral.
• Bilateral.

Offer and Acceptance

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Offer/Proposal

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• There must be two parties in an agreement where one party offers and the other accepts. The terms of the offer must be definite and laid down with certainty.
  • Section 2(a) defines a proposal: the person making the offer is known as offeror, proposer, or promisor. The person to whom it is made is known as offeree, proposee, or promisee.

Legal Rules Relating to an Offer

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• An offer may be express or implied.
• It may be a general offer or a specific offer.

General Offer

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• Carlill v. Carbolic Smoke Ball Co. 1893
• Invitation to offer and offer are not the same:
  • An invitation to offer is not an offer. It is only an invitation through which persons are called to make an offer.
  • Examples of invitation to offer:
    • Announcement of scholarship examination by any college.
    • Advertisement for sale of goods by auction does not amount to an offer to hold such sale (Harris v. Nickerson 1873).
    • Pharmaceutical Society of Great Britain v. Boots Cash Chemists Ltd 1952: Viewing goods in a store does not constitute an offer; only when the cashier accepts the price paid does it amount to an offer.
    • Bank of India v. Swarnkar: Announcement of a voluntary retirement scheme by a nationalised bank is an invitation to offer, not an offer.

Specific Offer

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• Any offer given to a particular party is known as specific.
  • Boulton v. Jones

Characteristics of an Offer

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• An offer must be capable of being accepted and giving rise to legal relationships.
  • Examples of impossible offers: A promises B ₹1 crore if he can run 100 km/h.
• Terms of the offer must be definite, unambiguous, and certain.

Communication of Offer and Acceptance

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• Communication of an offer or acceptance can be through various modes like verbal, written, or electronic. The timing of communication (when it is effective) is essential for determining when a contract is formed.
  • Lalman Shukla v. Gauri Dutt 1913: The court held that since there was no communication of the offer, the servant could not claim the reward.
  • Doing anything in ignorance of the offer is not acceptance. It applies to both specific and general offers (Carlill v. Carbolic Smoke Ball Co. 1893 is an exception).
  • An offer must be made with a view to obtaining assent.
  • Offer should not contain a term the non-compliance of which would amount to acceptance.

Types of Offers

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• Cross Offer:
  • Tinn v. Hoffman 1873: Offers made by two persons containing similar terms that cross in post cannot be considered acceptances to each other.
• Counter Offer:
  • Hyde v. Wrench 1840: When an offer is accepted with modifications or conditions, it becomes a counteroffer. A counteroffer never results in a contract.
• Standing Offer:
  • Example: Calling for tenders or quotations.
• General and Specific Offer

A Statement of Price is Not an Offer

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• Harvey v. Facey

Communication of Special Terms in a Proposal

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• Special terms in a proposal must be communicated before or at the time of the contract’s formation to be binding.
  • Olley v. Marlborough Court Ltd 1949: A couple hires a room in a hotel, and the special terms were not communicated at the time of the contract.
  • Parker v. S.E. Rail Co. 1877: Limitation of liability in cloakroom.
  • Henderson v. Stevenson 1875: Train ticket with exempted liability.

Exceptions to Special Terms

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• Misrepresentation or fraud.
• Insufficient notice of terms.
• Lack of clarity leading the purchaser to believe there are additional terms.

Contract Formation Methods

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• Mutual Negotiation
• Standard Form of Contract
• Promissory Estoppel

Acceptance

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Definition of Acceptance

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• Section 2(b) defines acceptance as: When the person to whom the offer is made signifies his assent thereto, the offer is said to be accepted. An offer, when accepted, becomes a promise.
• Acceptance may be express or implied. In case of implied acceptance, there must be some overt act by the offeree.

Who Can Accept?

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• Specific Offer: Only the person to whom the offer is made. Boulton v. Jones
• General Offer: Any person may accept if the offer is made to the world at large. Carlill v. Carbolic Smoke Ball Co. 1893

Legal Rules as to Acceptance

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• Must be absolute and unqualified.
• Must be communicated to the offeror.
  • Felthouse v. Bindley: The offer had not been accepted, and therefore there was no right of action.
  • Brodgen v. Metropolitan Rail Co. 1877: No contract as acceptance was not communicated to the plaintiff.
• Communication may be dispensed with when performance or conditions are fulfilled under Section 8.
  • Carlill v. Carbolic Smoke Ball Co. 1893: Using the smokeball according to the directions amounted to acceptance.
• Must be in the mode prescribed, or if none is prescribed, in a reasonable mode.
  • If not in the prescribed or reasonable mode, the offeror may demand proper communication within a reasonable time.
  • If the offeror does not inform the offeree of the improper mode, he is deemed to have accepted under Section 7(ii).
• Mental acceptance is not valid; communication must reach the offeror.
  • Powell v. Lee 1908: Absence of authorised communication invalidated the contract.
• Must be given within a reasonable time.
  • Ramsgate Victoria Hotel v. Montefiore 1866
• Acceptance cannot precede an offer.
• Must be made before the offer lapses or is withdrawn.
• Cannot be implied from silence.

Revocation of Offer or Lapse of Offer

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Revocation Methods

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• By notice of revocation before acceptance is complete. Section 6(i).
• By lapse of time. Section 6(ii).
• By non-fulfilment of a condition precedent by the offeree. Section 6(iii).
• By death or insanity of the offeror, provided the offeree knows of it before acceptance. Section 6(iv).
• If a counteroffer is made, the original offer is considered revoked. Hyde v. Wrench 1840
• If acceptance is not according to the prescribed mode. Section 7(ii).

Communication of Offer, Acceptance, and Revocation - Section 5

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Communication of an Offer

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• Face-to-Face: Complete the moment the offeree hears the words of the offeror.
• By Phone: Complete when the offeree hears the words of the offeror.
• By Post: Complete when the letter reaches the offeree. Example: Letter posted on 20th October 2024 and reaches the offeree on 25th October 2024. Communication is complete on 25th October 2024.

Communication of Acceptance - Section 4

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• As against the offeror:
  • By Post: When the letter is posted (sufficiently and properly addressed).
• As against the offeree:
  • By Post: When the acceptance reaches the offeror. Example: A sends an offer to B. B posts a letter of acceptance on 25th October 2024, and it reaches A on 30th October 2024. Communication of acceptance as against the offeror is completed on 25th October 2024. As against the offeree, it is completed on 30th October 2024.

Revocation of Acceptance

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• If communication of acceptance and revocation reaches the offeror simultaneously, revocation takes effect.

Revocation of Acceptance under English Law

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• Once the letter of acceptance is posted, it binds both parties, and revocation is not allowed.
  • Adams v. Lindsell 1818
• Sir William Anson compared acceptance to a lighted matchstick igniting a train of gunpowder.

Consideration

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Definition of Consideration

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• Section 2(d), Section 23, Section 25:
  “Consideration is one of the essential elements to support a contract. Subject to certain exceptions, an agreement without consideration is nudem pactum (nude contract) and is void. Consideration is a technical term used in the sense of quid pro quo (something in return).”
  • According to Pollock, “consideration is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.”
  • Justice Lush J: “A valuable consideration in the sense of the law may consist either in some right, interest, profit, or benefit accruing to one party or some forbearance, detriment, loss, or responsibility given, suffered, or undertaken by the other.”
  • Justice Patterson: “Consideration means something which is of some value in the eye of the law. It may be some benefit to the plaintiff or some detriment to the defendant.”

Legal Rules as to Consideration

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• Consideration must move at the desire of the promisor: It must be furnished at the promisor’s desire, not due to voluntary action by the promisee or a third party.
• Consideration may be an act, abstinence, or forbearance, or a written promise:
  • Forbearance to sue: Choosing not to pursue legal action as consideration.
  • Compromise of a disputed claim: Settling a disagreement on mutually agreed terms.
  • Composition with creditors: Creditors accepting partial payment in settlement of a debt.

Salient Features of Consideration

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• Must be lawful, of value, and sufficient but need not be adequate.
• Quid pro quo: Something in return is necessary; a contract without consideration is void.
  • Consideration includes:
    • Act: Doing something (e.g., in a contract of guarantee).
    • Forbearance/abstinence: Not doing something.
      • Example: A promises B not to file a suit against him if he pays ₹500. A’s abstinence is the consideration for B’s payment.
    • Return promise: Mutual exchange of promises.
• Consideration must not be:
  • Unlawful, immoral, or opposed to public policy.
  • Illusory or uncertain.

Case Laws Related to Consideration

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• Abdul Aziz v. Masum Ali: Agreement without consideration is unenforceable.
• Kedarnath v. Gauri Mohammed: Plaintiff recovered money spent based on a promise for renovation despite no consideration.

Consideration Need Not Be Adequate

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• Courts are not concerned with the adequacy of consideration if it holds some value.
  • Exception: When undue influence vitiates a contract (e.g., teacher-student or guru-disciple relationships).

Situations Where Consideration is Illusory or Unreal

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• Physical impossibility: Example: Putting life in a dead person.
• Legal impossibility:
  • Example: A owes ₹100 to B. A promises ₹20 to C (B’s servant) if C discharges the debt. This is legally impossible since C cannot discharge A’s debt to B. Harvey v. Gibbons 1675
• Uncertain consideration:
  • Example: A engages B for a task but promises to pay a “reasonable” sum. Such a promise is unenforceable.
• Illusory consideration:
  • Stilk v. Myrick 1809: Extra wages promised for fulfilling duties already under obligation were deemed illusory.
• Pre-existing public duty: A promise to perform an existing public duty is not valid consideration (e.g., bribes to public servants).

Exceptions to Consideration

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• Love and Affection (S.25(1)):
  • An agreement expressed in writing, signed, and registered, made out of natural love and affection between parties in close relation is enforceable.
    • Example: A father promises to give ₹100 to his son, signs, and registers the agreement. Rajlukhy v. Bhoothnath: Agreement invalid as natural love and affection could not be proven.
• Compensation for Voluntary Services (S.25(2)):
  • A promise to compensate someone who has voluntarily done something for the promisor is enforceable.
    • Example: A finds B’s wallet and returns it. B promises ₹100. This is valid.
• Promise to Pay Time-Barred Debt (S.25(3)):
  • A promise to pay a debt barred by limitation is enforceable if in writing and signed by the debtor.
• Completed Gift:
  • A gift is valid and enforceable if:
    • Agreement is in writing, registered, and accepted by the donee.
• Charitable Subscriptions:
  • Enforceable if a detriment can be shown.
    • Example: Abdul Aziz v. Masum Ali: Unenforceable due to lack of consideration.
    • Kedarnath v. Gauri Mohammed: Renovation expenses were recoverable based on a promise.
• Agency (S.185):
  • Agency contracts are valid without consideration.

Doctrine of Privity of Contract

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Only the parties involved in the contract can sue or be sued.

Exceptions to the Doctrine of Privity of Contract

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• Beneficiary of a trust.
• Family settlements.
• Third parties in some cases (e.g., insurance contracts).
• Stranger to a contract cannot sue. There must be privity of contract.
• The assignee of rights and benefits under a contract not involving personal skill can enforce the contract, subject to equities between the original parties.
  • Example: Holder in due course of a negotiable instrument can realise the amount on it even though there is no contract between him and the person liable to pay.

Types of Contracts

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• Contract depending upon skill:
  • Depends on skill, volition, personal connection, etc.
  • Examples: Contract to sing, dance, or marry.
  • Rights under these contracts cannot be transferred to another person.
• Contract not depending upon skill:
  • Does not depend on skill.
  • Example: Creditor and debtor relationships.

Contract of Agency

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• An agent acts on behalf of the principal. The principal is held liable in case of agency.

Covenants Running with the Land

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• In the case of the transfer of immovable property, the purchaser of land with notice that the owner of the land is bound by certain conditions or covenants created by an agreement affecting the land shall be bound by them, even though he was not a party to the original agreement.
  • Tulk v. Moxhay

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Standard Form of Contracts

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Definition

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These are pre-drafted contracts where terms are generally not negotiable by the weaker party.

Examples

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• Contracts for mobile services.
• Contracts for utilities.

Unit-II: Capacity and Consent

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Capacity of the Parties

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Every person is capable of entering into a valid contract as long as they are of the age of majority, of sound mind, and not disqualified from contracting by any law to which they are subject.

• Who is competent?

  • Major (Above 18 in India).
  • Of sound mind.
  • Not disqualified by law.

• Who is not competent?

  • Minors:

    • As per Section 3 of the Indian Majority Act, 1875, a minor is a person who has not completed 18 years of age. If a guardian is appointed under the Guardians and Wards Act, 1890, they attain majority at 21 years of age.
    • Minors’ Agreements:
      • An agreement with or by a minor is void and inoperative ab initio.
      • Mihori Bibee v. Dharmodas Ghosh 1903: A minor mortgaged property, but the contract was deemed void as the minor lacked legal capacity. The court emphasized that a minor cannot be held liable under a contract.
      • A minor can be a promisee or beneficiary (e.g., creditor in a promissory note but not a debtor).
      • Minors’ agreements cannot be ratified upon attaining majority.
        • Example: If A (a minor) borrows ₹10,000 from B and promises to repay upon attaining majority, this promise cannot be enforced.
        • Exception: If C tutors D (a minor) and continues tutoring after D reaches majority, C may claim compensation for the entire period.
      • Specific performance cannot be enforced for agreements with minors.
      • Minors cannot enter into a partnership contract but can be admitted to the benefits of a partnership without liabilities.
      • Minors are liable for necessaries (S.68) but only out of their property.
      • Liability in Tort:
        • Tort not connected to a contract: A minor is liable.
          • Example: X (a minor) throws a stone and breaks Y’s window; X is liable.
        • Tort arising from a contract: A minor is not liable.
          • Example: A minor rents a car and causes damage; liability is void due to the void contract.

  • Persons of Unsound Mind (S.12):

    • Idiot: Permanent brain condition.
    • Lunatic: Temporary brain condition.
    • Drunkard: Under the influence of alcohol or intoxicants.
    • In Indian law, agreements with such individuals are void, while in English law, agreements with lunatics are voidable.

  • Other Persons Disqualified by Law:

    • Alien enemies.
    • Foreign sovereigns and diplomats (protected by immunity).
    • Insolvents.
    • Convicts.
    • Corporations (artificial/juristic persons registered under law).

Test of Soundness (S.12)

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• A person is of sound mind if they:
  • Can understand the contract’s contents.
  • Can form a rational judgment about its effects on their interests.
• It is the duty of the contracting party to ensure the other party passes the test of soundness and is not disqualified by law.

Minors’ Liability for Necessaries (S.68)

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• A minor is liable out of their property for necessaries supplied to them or dependents (e.g., wife or parents).
• The claim arises under quasi-contractual obligations.
• Necessaries Include:
  • Necessary goods (e.g., food, clothing, shelter).
  • Necessary services (e.g., medical or legal services).
  • Loans to obtain necessary goods or services.

Contract of Service and Apprenticeship

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• Contract of Service: A minor cannot enter such contracts.
• Contract of Apprenticeship: A minor (14 years of age) with a guardian’s consent can enter and enforce such contracts.
• Raj Rani v. Prem Adib: Relevant case under apprenticeship agreements.

Free Consent

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Section 14 states: “Consent is said to be free when it is not caused by coercion, undue influence, misrepresentation, fraud, or mistake.”
When there is no consent, there is no contract (error in consensus). For a contract to be enforceable, the consent of the parties must be free.

Coercion (S15)

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• Coercion means committing or threatening to commit any act forbidden by IPC 1860, or unlawfully detaining or threatening to detain any property to induce a person to enter into an agreement.
• Jurisdiction does not matter (IPC need not be in force in the location where coercion is employed).
• Coercion may proceed from a stranger to a contract and can be directed against anyone.
• Includes fear, physical compulsion, or threats to goods.
• Case Laws:
  • Ranganakayamma v. Alwar Setti 1889: Preventing the removal of a corpse for cremation to obtain consent for a contract amounts to coercion.
  • Bansraj v. Secretary of State 1939: Threat to attach the father’s property for the son’s unpaid fine was coercion, and the payment was set aside.
  • Chikkam Ammiraju v. Chikkam Seshamma: Threat of suicide to obtain a release deed was held as coercion.
• Under S72, any money paid or goods delivered by mistake must be restored.

Undue Influence (S16)

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A contract is said to be induced by undue influence when the relationship between the parties allows one party to dominate the will of the other to gain an unfair advantage.

Who is in a position to dominate the will of another?

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1. Real or Apparent Authority:

   • Master and servant.
   • Teacher and student.
   • Doctor and patient.
   • Guru and disciple.

2. Fiduciary Relationships:

   • Father and son.
   • Solicitor and client.
   • Trustee and beneficiary.
   • Promoter and company.

3. Mental Capacity Affected:

   • Age, illness, or mental distress.
   • Example: A medical attendant influencing a patient.

Examples of Presumed Undue Influence

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• Guru taking property from a disciple.
• Parent taking undue advantage of a child.
• Fiduciary violations (e.g., trustee and beneficiary).
• Weak eyesight or old age exploited to sign a wrongful contract.

No Presumption of Undue Influence

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• Landlord and tenant.

• Creditor and debtor.

• Husband and wife.

• Effect of Undue Influence:

  • The contract becomes voidable at the option of the aggrieved party (S19A).

Misrepresentation (S18)

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A false representation of facts, whether innocent or intentional, amounts to misrepresentation.

Essentials of Misrepresentation

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• Representation of a material fact (mere opinions do not qualify).
• Made before the conclusion of the contract to induce the other party.
• Intended to be acted upon by the other party.
• Actually acted upon and subsequently turned out to be wrong.
• Made honestly, with the belief it was true.

Consequences of Misrepresentation

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• The contract is voidable at the option of the aggrieved party.
• The aggrieved party can insist on being placed in the position they would have been in if the representation was true.

Loss of Rescission

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1. If the aggrieved party affirms or takes benefits after becoming aware of the misrepresentation.
2. If restoration to the original position is impossible.
3. If the rescission is not claimed within a reasonable period.
4. If a third party acquires rights in good faith and for value.

Fraud (S17)

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Fraud refers to deception intended to gain a benefit, involving wilful misrepresentation.

Definition of Fraud

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Fraud exists when a representation is made with the intention to deceive the other contracting party. According to Section 17, fraud includes:

• Suggesting a fact as true when it is not true, and the person making the suggestion does not believe it to be true.
  • Example: A milkman claims milk is pure when he knows it is not.
• Active concealment of a fact by someone aware of the fact.
• A promise made without the intention of performing it.
• Any act fitted to deceive.
• Any act or omission declared fraudulent by law.

Examples

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• Caveat emptor: Buyer beware. For instance, if A buys a horse from B knowing nothing about its unsoundness, it is not fraud unless specifically asked.
• If A sells a horse to B (his daughter) without disclosing that it is of unsound mind, it is fraud due to fiduciary duty.
• If A asks B whether a horse is sound, and B stays silent despite knowing it is not, this amounts to fraud.

Essential Elements of Fraud

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1. A false representation or assertion.
2. Relates to a material fact.
3. Made before concluding the contract.
4. Made with knowledge that it is false.
5. Induced the other party to act upon it.
6. The other party relied on the statement and was deceived.

Consequences of Fraud

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• A contract induced by fraud is voidable at the option of the defrauded party.
• Remedies for the aggrieved party:
  • Rescind the contract.
  • Insist on contract performance, provided they are restored to the position they would have been in if the representation were true.
  • Sue for damages.

Does Silence Amount to Fraud?

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• As a general rule, silence does not constitute fraud.
  • Explanation to Section 17: “Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud.”
• Statutory Exceptions:
  1. When the person keeping silent has a duty to disclose (e.g., fiduciary relationships).
  2. When silence is equivalent to speech (e.g., buyer asks about the soundness of a horse, and the seller’s silence is considered fraudulent).

Mistake

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Mistake refers to an erroneous belief about facts or law.

Types of Mistake

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1. Unilateral Mistake:

   • Mistake made by one party.
   • Generally, the contract remains valid.
   • If induced, the contract becomes voidable due to lack of free consent.

2. Bilateral Mistake (S20):

   • Mistake made by both parties.
   • Renders the contract void.

Chart of Mistakes

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• Free Consent
  • Flaw in Consent
    • Coercion (S15).
    • Undue Influence (S16).
    • Misrepresentation:
      • Fraudulent (S17).
      • Innocent (S18).
    • Mistake:
      • Mistake of Law (S21):
        • Law of the country (binding).
        • Law of a foreign country (treated as a mistake of fact).
      • Mistake of Fact (S20):
        • Bilateral Mistake:
          • Mistake as to the Subject Matter:
            • Existence.
            • Identity.
            • Quality.
            • Quantity.
            • Title.
            • Price.
          • Mistake as to Possibility of Performance:
            • Physical impossibility.
            • Legal impossibility.
        • Unilateral Mistake (S22):
          • Generally valid, unless induced or affecting the root of the contract.

Exceptions to Unilateral Mistake

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1. Mistake as to Person:
   • Mistaken identity.
   • Boulton v. Jones, Cundy v. Lindsay, Brooke v.
2. Mistake as to Nature of Contract:
   • Example: Signing a contract under the mistaken belief it is a gift when it is a sale.
   • If a person signs a document believing it to be of a different character, the contract is void because the signer’s mind does not align with their signature.

Legality of Object

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Section 23: A contract must have a legal purpose. Contracts with immoral purposes or those against public policy (like illegal contracts) are void.
A contract must not only be based upon the mutual consent of competent parties but must also have a lawful object. Both object and consideration must be lawful for a contract to be enforceable.

Unlawful Consideration or Object under Section 23

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• Forbidden by Law:

  • Example: Smuggling of goods.
  • Example: A promises to obtain for B an employment in public service, and B promises to pay ₹1000 to A. The agreement is void as the consideration is unlawful.

• Defeats the Provisions of Law:

  • Example: A defaulter cannot participate in the auction of his own property. If he appoints B for the auction, it would defeat the purpose of the law.

• Fraudulent:

  • Example: A, B, and C agree to divide gains acquired by fraud. The agreement is void as the object and consideration are unlawful.

• Injury to Person or Property:

  • W.H. Smith & Sons v. Clinton 1908: An agreement to indemnify printers against libel consequences in a newspaper was held void.

• Immoral: Agreements regarded as immoral are void.

Agreements Opposed to Public Policy

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Public policy refers to the principle that no subject can lawfully do what is injurious to the public interest or against public good. Public policy is elastic and cannot be precisely defined.

Agreements Declared Opposed to Public Policy

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1. Trading with an Alien Enemy: Agreements made during wartime with enemies are void.

2. Agreements to Commit a Crime (Contract of Indemnity):

   • A promise to indemnify someone for consequences of their criminal act is opposed to public policy.
     • W.H. Smith & Sons v. Clinton: Agreement for indemnity for libel publication.

3. Interference with Administration of Justice:

   • Improper Influence: Agreements to use improper influence with judges or officers of justice are unlawful.
   • Stifling Prosecution:
     • It is unlawful to agree not to prosecute an offender. However, a compromise in a compoundable offence is valid.
   • Maintenance and Champerty:
     • Maintenance: Assisting another in litigation without having an interest in the matter.
     • Champerty: Assisting another to recover property/money in exchange for a share in the proceeds.
     • Indian Law: Such agreements are valid if the assistance is to make a reasonable claim and share proceeds fairly.

4. Agreements in Restraint of Legal Proceedings (S.28):

   • Agreements restricting enforcement of rights.
   • Agreements curtailing the period of limitation.

5. Trafficking in Public Offices and Titles:

   • Agreements to sell, transfer, or procure public offices, titles, or recognitions (e.g., Padma Vibhushan) for money are unlawful as they promote corruption and inefficiency.

6. Agreements Creating Interest Opposed to Duty:

   • Agreements requiring acts against professional duties are void.

7. Agreements in Restraint of Parental Rights:

   • Agreements restricting rights and duties of parents.

8. Agreements Restricting Personal Liberty:

   • Void agreements that limit a person’s freedom.

9. Agreements in Restraint of Marriage (S.26):

   • Agreements preventing marriage are void.

10. Marriage Brokerage Agreements:

    • Agreements for monetary consideration to arrange marriages are void.

11. Agreements Interfering with Marital Duties:

    • Agreements aimed at disrupting marital relationships are void.

12. Agreements to Defraud Creditors or Revenue Authorities:

    • Agreements intended to defraud creditors or evade taxes are void.

13. Agreements in Restraint of Trade (S.27):

    • Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd. [1894] AC 535: A restraint of trade is valid only if it is reasonable and protects legitimate interests.

Void and Voidable Contracts

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Void Agreements

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Void agreements are unenforceable by law.

Agreements Made Without Competence (S.11)

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• Contracts involving minors or persons disqualified by law are void.

Agreements Made Under Mutual Mistake of Fact (S.20)

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• Example: Bilateral mistakes regarding the subject matter render the agreement void.

Agreements Where Consideration or Object is Unlawful (S.23)

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• Contracts with unlawful consideration or object are void.

Agreements Where Consideration or Object is Partly Unlawful (S.24)

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• Partial illegality in consideration or object renders the agreement void.

Agreements Made Without Consideration (S.25)

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• Without valid consideration, the agreement is void.

Agreement in Restraint of Marriage (S.26)

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• Such agreements are opposed to public policy and are void.

Agreement in Restraint of Trade (S.27)

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• Restricting anyone from carrying on their trade is void.

Agreement in Restraint of Legal Proceedings (S.28)

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• Agreements restricting enforcement of rights or curtailing the limitation period are void.

Agreements Whose Meaning is Uncertain (S.29)

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• Example: If A asks for oil, and the merchant sends coconut oil while A meant groundnut oil, the agreement is void due to uncertainty.

Agreements by Way of Wager (S.30)

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• Definition: Agreements where one party promises to pay money or money’s worth based on an uncertain event.
  • Example: A and B agree that A will pay ₹1000 if it rains on Monday, and B will pay ₹1000 if it does not rain.

Essentials of Wagering Agreements

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• Promise to pay money or money’s worth.
• Uncertain event (future or past, provided the result is unknown to the parties).
• Each party stands to win or lose.
• No control over the event.
• No other interest in the event.

Examples of Wagering Agreements

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• Wrestling bouts.
• Lotteries.
• Horse races: Enforceable by law for amounts above ₹500.
• Crossword puzzles:
  • Skill-based: Enforceable.
  • Maker-prepared solutions: Void.

Difference Between Insurance Contracts and Wagering Agreements

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• Insurance contracts involve insurable interest, while wagering agreements do not.

Collateral Transactions

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• If A borrows money from C to pay B for a wagering loss, C can recover the money if the transaction is void but not if it is illegal.

Agreements Contingent on Impossible Events (S.36)

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• Absolute Contracts: The promisor is bound to perform without any conditions.
• Contingent Contracts (S.31-36):
  • A contract to do or not do something if a collateral event occurs or does not occur.
  • Example: A contracts to pay ₹10,000 if B’s house burns down.
  • S.31-S.35: All contingent contracts are valid unless impossible.
  • S.36: Agreements contingent on impossible events are void.
    • Example: A agrees to pay ₹1000 if two straight lines enclose a space.

Agreements to Do Impossible Acts (S.56)

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• If reciprocal promises involve legal acts alongside illegal acts, the illegal part is void.

Examples of Void Agreements

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• Agreement with a minor is void ab initio.
• Agreement without valid consideration.
• Agreement restraining trade (S.27).

Voidable Contracts

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Voidable contracts can be annulled by one party due to factors like coercion, undue influence, fraud, or misrepresentation.

Right to Annul

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• The aggrieved party may choose to rescind or affirm the contract.

Examples of Voidable Contracts

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• Coercion (S.15).
• Undue Influence (S.16).
• Fraud (S.17).
• Misrepresentation (S.18).

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Unit-III: Discharge of Contracts

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1. Discharge by Performance

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Contracts are generally discharged when both parties fulfill their respective obligations under the terms of the agreement. This is called discharge by performance.

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1.1 Types of Performance

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1. Actual Performance: When both parties have completely performed their respective duties, the contract is said to be discharged by actual performance.

   Example:

   • A contracts to sell 10 tons of rice to B for ₹2,00,000. Both A and B complete their obligations—A delivers the rice, and B pays the agreed price. The contract is discharged by actual performance.

2. Attempted Performance (Tender): If a party offers to perform their obligation and the other party refuses to accept it, the first party is discharged from further obligations under the contract.

   Example:

   • A agrees to paint B’s house. On the agreed date, A brings the required materials and arrives at B’s house to begin work. However, B refuses to allow A to start the work. A’s obligation is discharged by tendering performance.

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2. Contracts Which Need Not Be Performed

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1. Substitution, Rescission, or Alteration (Section 62): When parties agree to:

   • Substitute a new contract in place of an existing one.
   • Rescind (cancel) the existing contract.
   • Alter the terms of the existing contract.

   Example:

   • A agrees to supply 100 units of machinery to B by January 1. Due to logistical issues, both agree to substitute the contract for a supply of 50 units by March 1. The original contract is discharged by substitution.

2. Impossibility of Performance (Section 56): When the performance becomes impossible due to factors beyond the control of the parties.

   Example:

   • A agrees to supply goods to B from a specific warehouse. Before delivery, the warehouse burns down, and the goods are destroyed. The contract is discharged due to impossibility.

3. Dispensation or Remission by Promisee (Section 63): The promisee:

   • Dispenses with or remits (wholly or partly) the performance of the promise made to them.
   • Extends the time for such performance.
   • Accepts any satisfaction in place of the promised performance.

   Example:

   • A owes B ₹10,000. B agrees to accept ₹8,000 in full satisfaction. A pays ₹8,000, and the contract is discharged by remission.

4. Voidable Contract (Section 64): If a contract is voidable at the option of one party, the contract can be rescinded.

   Example:

   • A induces B to enter into a contract through fraud. Upon discovering the fraud, B rescinds the contract. The contract is discharged.

5. Neglect by Promisee (Section 67): If the promisee neglects or refuses to provide reasonable facilities for performance, the promisor is excused from fulfilling the obligation.

   Example:

   • A agrees to repair B’s machinery at B’s factory. B refuses to allow A access to the factory. A is excused from performance due to B’s neglect.

6. Illegality: If the contract becomes illegal, it is discharged.

   Example:

   • A agrees to sell goods to B for export to a country. Before the goods are shipped, the government bans exports to that country. The contract is discharged due to illegality.

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3. By Whom Should the Contracts Be Performed?

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1. Promisor (Section 40): The person who made the promise is primarily responsible for its performance.

   Example:

   • A, a carpenter, agrees to build a table for B. A must personally perform the contract unless otherwise agreed.

2. Agent (Section 40): An authorized agent may perform the promise.

   Example:

   • A agrees to deliver goods to B. A’s authorized agent delivers the goods. The contract is discharged.

3. Legal Heir: If the promisor dies, their legal heir is bound to perform, but only if they have received a benefit from the contract.

   Principle: Actio personalis moritur cum persona—Personal obligations die with the person.

   Example:

   • A agrees to pay ₹5,000 to B. After A’s death, A’s heir, who inherited the estate, is bound to pay B.

4. Third Party: In some cases, performance by a third party may be allowed.

   Example:

   • A contracts to pay ₹10,000 to B. C, on behalf of A, pays the amount to B. The contract is discharged by performance through a third party.

5. Joint Promisors: If there are multiple promisors, all are collectively responsible.

   Example:

   • A, B, and C jointly promise to pay ₹30,000 to D. If A defaults, B and C are liable to contribute proportionately.

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4. Appropriation of Payments (Sections 59–61)

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When a debtor owes multiple debts and makes a partial payment, the following rules determine how the payment is applied:

1. Section 59: If the debtor specifies which debt the payment is for, the creditor must apply it accordingly.

   Example:

   • A owes B ₹5,000 for rent and ₹3,000 for groceries. A pays ₹3,000 and specifies it is for groceries. B must apply it toward the grocery debt.

2. Section 60: If no specification is made, the creditor may apply the payment to any lawful debt, including one barred by limitation.

   Example:

   • A owes B ₹10,000, one of which is time-barred. A makes a payment without specifying. B may apply it to the time-barred debt.

3. Chronological Order: If neither party specifies, payments are applied in the order of debt creation.

   Example:

   • A owes B ₹5,000 from January and ₹10,000 from February. A pays ₹5,000. In the absence of specification, it is applied to the January debt first.

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5. Clayton’s Rule (1816)

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Principle: For current accounts, payments are applied to discharge debts in the order in which they were incurred. This is based on the presumption that parties intend to settle older debts first.

Case Reference: Devaynes v. Noble (1816)—also known as Clayton’s Case.

• The case involved the account of a deceased banker and the application of funds deposited post-mortem. It established that payments are applied to the earliest outstanding debts unless explicitly directed otherwise.

Expanded Example:

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• A has a running account with B and owes ₹50,000 accrued over five transactions:

  1. ₹10,000 on January 1
  2. ₹15,000 on February 1
  3. ₹10,000 on March 1
  4. ₹5,000 on April 1
  5. ₹10,000 on May 1

• A makes a payment of ₹10,000 on June 1 without specifying which debt it is for. Under Clayton’s Rule, this payment will be applied to the January 1 debt first. Once that debt is cleared, any balance will be applied to the February 1 debt, and so on.

• If A specifies that the payment is for the May 1 debt, the creditor must apply it accordingly, overriding Clayton’s Rule.

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6. Assignment of Contracts

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To assign means to transfer. Assignment of a contract refers to the transfer of contractual rights and liabilities under a contract to a third party. This can happen with or without the concurrence of the third party. The assignment may take place in the following ways:

6.1 By Act of the Parties

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This occurs when the parties themselves initiate the assignment. The rules governing the assignment differ for obligations and rights.

1. Assignment of Contractual Obligations:

   • Obligations involving personal skill or ability cannot be assigned.
   • Example: A contracts to sing at B’s concert. A cannot assign this obligation to another singer.

2. Assignment of Contractual Rights:

   • Rights not involving personal skill can be assigned.
   • Example: A is entitled to receive ₹1,00,000 from B under a contract. A can assign this right to C, who can then claim the amount from B.

6.2 By Operation of Law

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1. Death:

   • Rights and liabilities pass to legal representatives.
   • Example: A contracts to sell land to B. Upon A’s death, the right to sell the land passes to A’s legal heirs.

2. Insolvency:

   • Rights and liabilities are assigned to an official receiver.
   • Example: A owes ₹5,00,000 to B. The court assigns A’s assets to a receiver for repayment.

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7. Discharge by Agreement or Consent (Sections 62–64)

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Contracts can be discharged by mutual agreement between the parties. This discharge can happen in the following ways:

7.1 Novation (Section 62):

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• Substituting a new contract in place of an existing one with the agreement of all parties.
• Novation can occur by:
  1. Substituting the parties to the contract.
  2. Changing the obligations under the contract.
• Example: A owes B ₹1,00,000. B agrees with A and C that C will pay the debt instead of A. The original contract between A and B is discharged, and a new contract between B and C is created.

7.2 Rescission (Section 62):

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• Canceling the contract through mutual agreement between the parties.
• Rescission occurs when neither party has performed, and both agree to terminate the contract.
• Example: A agrees to sell 100 books to B. Before performance, both agree to cancel the contract. The contract is discharged by rescission.

7.3 Alteration (Section 62):

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• Changing the terms of the contract with the consent of all parties.
• Alteration discharges the original terms and replaces them with new ones.
• Example: A contracts to build a house for B with a specific design. Later, both agree to change the design. The contract is discharged by alteration.

7.4 Remission (Section 63):

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• Acceptance of lesser performance than what was agreed upon or extension of time for performance.
• The promisee may dispense with or remit wholly or partially the performance of the promise.
• Example: A owes B ₹5,000. B agrees to accept ₹3,000 in full settlement. The contract is discharged by remission.

7.5 Waiver (Section 63):

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• Waiver occurs when one party voluntarily gives up a right under the contract, discharging the other party from their obligation.
• Example: A is obligated to deliver goods to B. B waives the delivery. The contract is discharged by waiver.

7.6 Accord and Satisfaction:

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• Accord is an agreement to accept a different performance than originally agreed.
• Satisfaction occurs when the agreed alternative performance is completed.
• Example: A owes B ₹50,000. They agree that A will instead transfer a car worth ₹50,000 to B. The transfer of the car discharges the debt by accord and satisfaction.

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8. Discharge by Impossibility of Performance (Section 56)

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8.1 Types of Impossibility

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1. Initial Impossibility (Pre-Contractual):

   • Exists at the time of entering into the contract.

   a. Known to the Parties:

   • The agreement is void ab initio.
   • Example: A agrees to discover treasure by magic for B. Such an agreement is void due to absolute impossibility.

   b. Unknown to the Parties:

   • The contract is void due to mutual mistake.
   • Example: A agrees to sell goods to B, unaware that the goods were destroyed before the agreement. The contract is void.

2. Supervening Impossibility (Post-Contractual):

   • Occurs after the contract has been entered into.

   a. Excusable Grounds:

   1. Destruction of Subject Matter:
      • Example: A contracts to sell a specific house to B. The house is destroyed in an earthquake. The contract is discharged.
   2. Non-Existence of a State of Things:
      • Example: A agrees to hold a concert in a hall. The hall is destroyed in a fire. The contract is discharged.
   3. Death or Incapacity:
      • Example: A agrees to paint a portrait for B. A dies before completing the work. The contract is discharged.
   4. Change of Law:
      • Example: A contracts to sell goods to B for export to a country. The government later bans exports to that country. The contract is discharged. Restitution is to be done to the other party.
   5. Outbreak of War:
      • Example: A contracts to trade with a country. War breaks out, and trade is prohibited. The contract is discharged.

   b. Non-Excusable Grounds:

   1. Difficulty of Performance:
      • Example: A contracts to supply goods but faces increased transportation costs. The contract is not discharged.
   2. Commercial Impossibility:
      • Example: A contracts to supply goods at a fixed price. Due to inflation, A incurs losses. The contract is not discharged.
   3. Failure of a Third Party:
      • Example: A contracts to supply goods to B but fails to procure the goods from a supplier. The contract is not discharged.
   4. Strikes, Lockouts, and Civil Disturbances:
      • Example: A contracts to deliver goods to B. A worker strike delays the delivery. The contract is not discharged.
   5. Failure of One of the Objects:
      • Example: A agrees to organize a festival, including a concert and an exhibition. The exhibition is canceled, but the concert proceeds. The contract is not discharged.
      • In case the objects are non-severable, the entire contract is discharged.

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9. Discharge by Lapse of Time

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A contract may be discharged if the period prescribed for its performance expires and the promisee takes no action within the specified period. This is governed by the Indian Limitation Act, 1963, which stipulates a period of limitation (usually three years) for enforcing contractual obligations. Failure to act within this period deprives the promisee of their legal remedy.

Example:

• A agrees to repay B within three years. If A does not repay and B takes no legal action within the three-year limitation period, the debt becomes time-barred, and the contract is discharged.

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10. Discharge by Breach of Contract

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Breach of contract occurs when one party, without lawful excuse, fails to perform their obligations or makes it impossible to do so. The injured party may treat the contract as discharged and claim damages. Breach of contract may be classified as Actual Breach or Anticipatory Breach.

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10.1 Actual Breach

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Occurs when a party fails to fulfill their contractual obligation at the time of performance or during the performance of the contract.

1. At the Time of Performance:

   • The breach happens when the due date for performance arrives, and the promisor does not fulfill their obligation.
   • Example: A agrees to deliver goods to B on April 1 but fails to do so. This is an actual breach at the time of performance.

2. During the Performance:

   • The breach occurs midway through the execution of the contract.
   • Example: A agrees to construct a building for B but stops work halfway without justification.

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10.2 Anticipatory Breach

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Occurs when a party to an executory contract, before the due date of performance, indicates their unwillingness to perform the contract. This can be through:

1. Implied Repudiation:

   • The promisor’s actions make it impossible to fulfill their obligations under the contract.
   • Example: A agrees to deliver goods to B on May 1 but sells them to C before the delivery date.

2. Express Repudiation:

   • The promisor explicitly declares their intention not to perform the contract.
   • Example: A informs B on April 15 that they will not deliver the goods due on May 1.

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Rights of the Aggrieved Party in Anticipatory Breach

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In cases of anticipatory breach, the promisee or aggrieved party has the following options:

1. Treat the Contract as Discharged:
   The promisee may consider the contract terminated and absolve themselves from further performance.

2. Take Legal Action Immediately:
   The promisee may immediately sue for damages upon the breach or wait until the due date to take action.

Example:

• A contracts to deliver goods to B on May 1 but informs B on April 15 that the goods will not be delivered. B can sue A immediately or wait until May 1 to take legal action.

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11. Doctrine of Frustration (in English Law)

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The doctrine of frustration corresponds to the concept of supervening impossibility in Indian law. It applies when, after a contract is formed, unforeseen circumstances beyond the control of the parties render the contract impossible to perform or its purpose illegal. This discharges the contract.

Key Points:

• The doctrine is codified in Section 56 of the Indian Contract Act, 1872.
• It ensures that neither party is held liable for non-performance due to uncontrollable events.

Example:

• A contracts to rent a hall to B for a wedding, but the hall is destroyed by fire before the event. The contract is frustrated.

In England:
The doctrine of frustration is recognized under the common law and discharges a contract when the common object can no longer be achieved due to supervening impossibility or illegality.

Note: We don’t use the words Doctrine of Frustration in Indian law. It is known as supervening impossibility in Indian law.

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Unit-IV: Quasi-Contract and Remedies for Breach

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1. Quasi-Contracts

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Under certain circumstances, a person may receive a benefit to which the law regards another person as better entitled. Such relationships are termed as quasi-contracts. Although there is no contract or agreement between the parties, they are treated as if a contract exists. In Indian law, they are referred to as “certain relations resembling those created by contracts”.

• Principle of Unjust Enrichment: A quasi-contract rests on equity and prevents a person from unjustly enriching themselves at the expense of another. This is also known as the Law of Restitution.
• Quasi-contracts are not actual contracts (no intention, no offer, or acceptance). They are created by law.
• Example: You order groceries from Swiggy in Gachibowli. By mistake, the groceries are delivered to 301 instead of 201. If the person at that house consumes the groceries, they are bound to pay for them, even though there was no agreement.

Kinds of Quasi-Contracts (Sections 68–72 of the Indian Contract Act, 1872)

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1. Necessaries Supplied to Incapable Persons (Section 68):

   • A supplier can claim reimbursement for necessaries(food,shelter & clothing and other basic essentials) provided to incapable persons such as minors or lunatics.
   • Example: A landlord in Secunderabad provides food and shelter to a tenant’s minor child stranded during a family emergency. The landlord can claim reimbursement for these expenses from the estate of the minor. However, the minor is not personally liable.

2. Payment by an Interested Person (Section 69):

   • A person who pays money on behalf of another under a legal obligation can claim reimbursement.
   • Conditions:
     • Payment must be made in good faith for the protection of one’s interest.
     • Payment should not be voluntary.
     • Payment must be for an obligation that the other party was bound by law to pay.
   • Example: Ravi, living in Banjara Hills, pays the property tax on a house owned by his friend Srikanth, as Srikanth is out of the country. Ravi can claim reimbursement since it was a legal obligation.

3. Obligation to Pay for Non-Gratuitous Acts (Section 70):

   • A person who does a lawful act for another, without intending it as a gift, and from which the other benefits, can claim compensation.
   • Conditions:
     • The act must have been done lawfully.
     • The person doing the act must not have intended to do it gratuitously.
     • The person for whom the act is done must have enjoyed the benefit of the act.
   • Example: Suresh repairs a pipeline in a housing society in Jubilee Hills. The society benefits from the repair and is obligated to pay Suresh.
   • Damodar Mudaliar v. Secretary of State of India (1894) – The government repaired a tank in a village, and the Zamindar was held liable to reimburse the expenses as the state did not intend to do so gratuitously.

4. Finder of Lost Goods (Section 71):

   • A finder of lost goods has the same responsibility as a bailee and must:
     • Take reasonable care of the goods.
     • Not use them unauthorizedly.
     • Return them to the true owner when found.
   • Duties of Finder:
     • Search for the true owner.
     • Take care of the goods as a man of reasonable prudence would.
     • Not make unauthorized use of the goods.
     • Not mix the goods with their own.
     • Not sell the goods except under certain circumstances:
       1. The goods are in danger of perishing.
       2. The owner cannot be found despite due diligence.
       3. The owner refuses to pay lawful charges.
       4. The lawful charges incurred by the finder exceed two-thirds of the value of the goods.
   • Example: Lakshmi finds a gold chain at a park in Kukatpally. She puts up notices to find the owner. If the owner is not found, she may sell the chain if its maintenance becomes excessively costly.

5. Mistake or Coercion (Section 72):

   • Money paid or goods delivered under a mistake or coercion must be returned.
   • Example: Swetha, living in Kondapur, mistakenly transfers ₹10,000 to Ramesh’s bank account. Ramesh is legally obligated to return the money.

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2. Remedies for Breach of Contract

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Whenever a right is violated, the law provides a remedy (ubi jus ibi remedium). When a contract is breached, the injured party has the following remedies:

1. Rescission of Contract

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• The injured party may cancel the contract and refuse further performance.
• Courts grant rescission in cases of voidable or unlawful contracts.
• Examples where rescission is allowed:
  • A shopkeeper in Charminar supplies defective goods. The buyer cancels the contract.
  • A person sells property but misrepresents its legal status.
• Rescission is not granted when:
  • The plaintiff has ratified the contract.
  • Circumstances prevent restoring the original positions of the parties.
  • A third party has acquired rights in good faith.

2. Suit for Damages

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• Compensatory Damages: Compensation for losses caused by the breach.

  • Hobbs v. London & SW Rail Co. (1875) – Damages awarded for physical inconvenience and discomfort when a family was dropped at the wrong location and had to walk several miles on a wet night, leading to the wife falling ill.

• Example in Hyderabad: A cab driver agrees to drop you at Paradise Circle but instead takes you to Secunderabad Station. If this causes you harm, you can claim damages.

• Mitigation of Damages: The injured party must take reasonable steps to reduce losses.

  • Example:If a spark from a train passing from a nearby railway track falls on your hay stack and catches on fire, you must ensure that the 2nd haystack next to the first one does not catch fire also. This is mitigation of damage i.e. making attempts to reduce future damage.

• Difficulty in Assessment: Even if damages are difficult to assess, courts will estimate the loss.

• Cost of Decree: The court may award the cost of the decree in addition to damages.

Liquidated Damages and Penalty

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• Pre-agreed upon damages in the contract.
• Section 74 governs liquidated damages and penalties in India:
  • Courts enforce only reasonable compensation, irrespective of the term used.
  • The sum is treated as a penalty if it is extravagant or unconscionable.
  • Payment of interest:
    • At a reasonable rate is not considered a penalty.
    • At a higher rate may be treated as a penalty.

3. Suit upon Quantum Meruit

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• Quantum meruit means “as much as earned.”
• Applicable when:
  • A contract is discharged, and some work is already done.
  • The other party prevents completion.
• Conditions:
  • The contract must be discharged.
  • It cannot be claimed by a party in default.
  • Specific scenarios include:
    • When an agreement is found to be void (Section 65).
    • When work is done without intending it gratuitously.
    • When services are rendered without agreed remuneration.

4. Suit for Specific Performance

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• The court directs a party to perform the exact terms of the contract.
• Granted in cases where monetary compensation is inadequate.
• Covered in detail in the Unit V - Specific Relief.

5. Suit for Injunction

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• A court order restraining a party from breaching the contract.

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Unit-V: Specific Relief

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1. Specific Relief Act, 1963

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• Originally enacted in England in 1877. These reliefs were developed by courts of equity in England in the year 1877. Hence, these remedies are known as equitable remedies.
• In India, the law relating to specific reliefs was enacted as the Specific Relief Act, 1963, passed in 1963.
• The Specific Relief Act, 1963 provides for specific reliefs, meaning exact, named, particular, fixed, identified, or determined relief.
• Specific relief is both remedial and protective in nature.
• While granting these remedies/reliefs, the courts follow the following principles of equity:
  • He who seeks equity must do equity.
  • He who comes to equity must come with clean hands.
  • Delay defeats equity.
• The Specific Relief Act, 1963 is a procedural law and deals with the following kinds of specific reliefs:

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2. Recovery of Possession of Property

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2.1 Immovable Property (Sections 5–6)

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Section 5:

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• For recovering specific immovable property, the plaintiff has to prove title under the Civil Procedure Code.
• The limitation period is 12 years.
• A suit against the government is possible.
• Appeal or review can be filed.
• A person failing in a suit under Section 5 cannot sue under Section 6.
• Example: Ramesh has title to a plot in Gachibowli but is illegally ousted by his neighbor. Ramesh can file a suit under Section 5 to recover possession.

Section 6:

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• Provides a summary remedy on the basis of possession.
• Mere proof of possession is sufficient.
• The limitation period is 6 months.
• A suit against the government is not possible.
• Appeal or review cannot be filed.
• A person failing in a suit under Section 6 can still file a suit under Section 5.
• Example: Lakshmi, living in Kukatpally, rents a flat. The landlord forcibly evicts her without proper legal procedure. Lakshmi can sue under Section 6, even if she has no title.

Differences Between Section 5 and Section 6:

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Aspect	Section 5	Section 6
Basis	Title	Possession
Limitation Period	12 years	6 months
Suit Against Govt.	Possible	Not possible
Appeal/Review	Allowed	Not allowed
Subsequent Suit	Not allowed under Section 6	Allowed under Section 5

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2.2 Movable Property (Sections 7–8)

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Section 7:

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• Plaintiff can file a regular suit under the Civil Procedure Code.
• Explanation 1: Suits can be filed by a trustee for the beneficiary.
• Explanation 2: A special or temporary right to possession of movable property is sufficient to support a suit.
• Example: Ravi lends his bike to a friend in Secunderabad for a week, but the friend refuses to return it. Ravi can file a suit under Section 7 to recover possession.

Section 8:

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• Deals with orders for delivery of movable property to a person entitled to immediate possession.
• Instances where this applies:
  1. When the thing is held by the defendant as a trustee or agent.
  2. When compensation would not adequately remedy the loss.
     • Example: A family idol with sentimental value.
  3. When it is extremely difficult to ascertain actual damages.
     • Example: A famous artist’s last painting before their death.
  4. When the property is wrongfully transferred.
     • Example: An agent takes away title deeds of property in Banjara Hills without permission.

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3. Specific Performance of Contracts (Sections 9–25)

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Meaning:

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• Specific performance means insisting on the actual performance of a contract.
• Prior to 2018, granting specific performance was discretionary. Post-2018, it is mandatory for courts to award specific performance unless exceptions apply.

Conditions for Granting Specific Performance (Section 10):

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• When compensation is inadequate:
  • Example: Ramesh contracts to buy a unique piece of ancestral land in Himayatnagar. If the seller breaches the contract, Ramesh can sue for specific performance as monetary compensation cannot substitute the value of ancestral property.
• When contracts relate to immovable property.
• When contracts are valid and enforceable under the Indian Contract Act, 1872.
• Principle of Mutuality: Both parties must be ready to perform.
• Exceptions (Movable Property):
  1. Property is not an ordinary article of commerce.
     • Example: A rare manuscript owned by a collector in Jubilee Hills.
  2. Property has special value or interest to the plaintiff.
     • Example: A family heirloom.
  3. Goods are not easily obtainable in the market.
     • Example: A custom-made diamond necklace.
  4. Property is held by the defendant as an agent or trustee.
     • Example: Title deeds wrongfully retained by a real estate agent.

Section 12:

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• The court does not generally grant specific performance for part of a contract.
• Exceptions:
  1. When the unperformed part is small.
     • Example: A builder in Kondapur completes 90% of a villa construction but delays landscaping. The court may order performance of the landscaping.
  2. Independent parts of a contract.
     • Example: Separate phases in a construction contract.

Section 20 (Post-2018 Amendment):

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• Courts must grant specific performance unless exceptions apply.
• Substituted Performance:
  • Aggrieved parties can hire a third party to perform and recover costs from the defaulting party.
  • Notice Period: A minimum of 30 days must be given to the defaulting party before seeking substituted performance.
  • Example: A contractor hired to build a house in Ameerpet abandons the project. The homeowner can hire another contractor and recover the cost.

Special Provisions for Infrastructure Projects:

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• Section 20A: Injunctions affecting infrastructure projects are prohibited to prevent disruption to public welfare.
• Example: Halting the construction of a metro station in LB Nagar could affect public transport and is not allowed.

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4. Other Reliefs

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Rectification of Documents (Section 26):

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• Correction of errors in written agreements to reflect the true intent of the parties.
• Example: A sales deed for a flat in Madhapur mistakenly mentions the wrong survey number. The court can order rectification.

Rescission of Contracts (Sections 27–30):

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• Canceling contracts due to misrepresentation, fraud, or other valid grounds.
• Example: Canceling a property sale agreement when the seller fails to disclose an existing mortgage.

Cancellation of Instruments (Sections 31–33):

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• Cancellation of documents that are void or voidable to prevent harm.
• Example: Canceling a fraudulent power of attorney.

Declaratory Decrees (Sections 34–35):

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• Declarations of legal rights or status.
• Example: Declaring ownership of disputed land in Banjara Hills.

Injunctions (Sections 36–42):

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• Preventive Reliefs:
  • Temporary Injunction: Granted before or during a trial.
    • Example: Preventing the sale of disputed property in Gachibowli.
  • Perpetual Injunction: Granted as part of the final judgment.
    • Example: Preventing a builder from encroaching on neighboring land permanently.
  • Mandatory Injunction: Compels a party to do something.
    • Example: Rebuilding a damaged boundary wall.
  • Prohibitory Injunction: Restrains a party from doing something.
    • Example: Preventing the cutting of trees on disputed land.
  • Injunctions for Negative Covenants: Prevents violation of contractual obligations.
    • Example: Restricting a singer from performing at a rival event in Hyderabad after agreeing to an exclusive contract.

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