Study Material on the Indian Contract Act – Vol I
UNIT 1
- When we set out to study the Principles of Contract, the first and the most basic question is, what is a contract?
Answer to this basic question lies in section 2(h) of the Indian Contract Act. It is this: An agreement enforceable by law is a contract.
- The next question then is what is an agreement?
The answer to this question is available in Section 2(e) of the Contract Act in the following terms: Every promise (and every set of promises forming the consideration for each other) is an agreement.
- We now need to know, what is a promise?
As per section 2(b), a proposal when accepted becomes a promise.
- So then, we need to next know, what is a proposal and when is it said to have been accepted?
Section 2(a) of the contract act says:
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, he is said to make a proposal.
Section 2(b) provides that when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.
- We also need to know, what is a consideration?
Section 2(d) provides the answer:
When, at the desire of the promisor,
the promisee has done or does or promises to do something,
such act or promise is called a consideration for the promise.
- Having known what is an agreement, the next question is, what are the characteristics of that agreement which is enforceable by law?
Answer to this question lies in Section 10. This section lays down 5 conditions on the fulfilment of which an agreement can be said to qualify to be termed a contract. These 5 conditions are:
- The agreement must have been made by parties competent to contract
- It must have been made by the free consent of these parties
- It must be for a lawful consideration
- It must be with a lawful object
- It must not have been expressly declared to be void under the contract act.
- The first requirement of an agreement to be a contract therefore is that it must have been made by parties “competent to contract”. Which are these parties?
Section 11 lays down 3 conditions for a person to be competent to contract:
- He must have attained the age of majority according to the law to which he is subject.
- He must be of sound mind.
- He must not have been disqualified from contracting by any law to which he is subject.
CASE STUDY
Case 1: Mohori Bibee v. Dhurmodas Ghose 1903 PC
Facts:
- Dhurmodas Ghose was a minor when he executed a mortgage in favour of a moneylender from whom he borrowed some money.
- The moneylender obtained a written declaration from him that he had attained majority.
- At the same time, the moneylender was informed in writing by an advocate that Dhurmodas had not attained majority.
- The mother and guardian of Dhurmodas filed an action for a declaration that the mortgage was void and inoperative on account of the minority of Dhurmodas.
Issues:
- Whether an agreement entered into by a minor was void?
- Whether the rule of estoppel as enshrined in section 115 of the Evidence Act was applicable to a minor?
Decision:
- An agreement entered into by a minor is void.
- The question whether a contract is void or voidable presupposes the existence of a contract within the meaning of the Act and such question cannot arise in the case of a minor.
- In such a case there never was and never could have been any contract.
- The rule of estoppel does not apply to a case like the present where the statement relied upon is made to a person who knows the real facts and is not misled by the untrue statement.
- A false representation made to a person who knows it to be false is not such a fraud as to take away the privilege of infancy.
Necessary ingredients of a binding contract:
- Proposal or offer
- Acceptance of the offer
- Intimation of the acceptance
General Rule:
If the offeror receives no intimation, a contract may not result even if the offeree has resolved to accept the offer.
Exception to this Rule:
When a contract is made by post, the acceptance is complete as soon as the letter is put into the post box.
This exception engrafted upon the rule is applicable only in respect of offers and acceptances: by post, by telegrams
Case Study
Case 2: Haridwar Singh v. Begum Sumbrui 1973 SC
Facts:
- August 7: Auction was held by the Divisional Forest Officer
- Highest bid of Rs. 92,000 was accepted even though the reserved price was Rs. 95,000
- This acceptance by the DFO was subject to confirmation by the government
- October 26: Highest bidder communicates to the government his willingness to pay the reserve price of Rs. 95,000
- November 3: He revokes this offer
- November 27: Government accepts the offer of Rs. 95,000 of the highest bidder
- November 28: Telegram sent by government to Conservator of Forests confirming the auction sale to the highest bidder at the reserve price
- No intimation was received by the DFO, so no communication made to the highest bidder
- Meanwhile, another person offers Rs. 101,000 to the government
- The government accepts this offer and cancels the earlier confirmation made to the highest bidder
- Telegram sent to the DFO and he communicates to the said third party
Issues:
- Whether there was a completed contract between the highest bidder and the Government
- Whether want of communication of the confirmation by the government to the highest bidder stands in the way of there being a concluded contract
Decision:
- It is not the want of communication of the confirmation which stands in the way of there being a concluded contract
- It is rather the want of confirmation itself
- What the government did on November 27 was not to confirm the acceptance made by the DFO but to accept the offer made by the highest bidder in his communication dated October 26
- There was thus no confirmation of the provisional acceptance made by the DFO
- The telegram sent by the government to the Conservator of Forests cannot be considered as a communication of the acceptance
- In fact, the acceptance of the offer was not even put in the course of transmission to the highest bidder
- Therefore, there was no concluded contract between the highest bidder and the government
UNIT 2
Section 16:
- Unconscionable: Not right or reasonable; unreasonably excessive
- Fiduciary: Law involving trust, especially with regard to the relationship between a trustee and a beneficiary
- Urgent need of money has not been considered to be a situation in which the lender can be said to be in a position to dominate the will of the borrower. This is what the Privy Council held in Sunder Koer v. Sham Krishen:
Their Lordships are not prepared to hold that urgent need of money on the part of the borrower will itself place the parties in that position.
- As regards the presumption of undue influence, this is what the Halsbury’s Laws of England has to say on situations described herein below:
- There is no presumption of imposition or fraud merely because a donor is old or of weak character.
- There is no presumption of undue influence in the case of a gift to a son or a grandson or a son-in-law, although made during the donor’s illness and a few days before his death.
Generally speaking, the relations of
- Doctor and patient
- Parent and child
- Trustee and censui que trust or beneficiary
- Spiritual teacher and devotee
- Advocate and client
are those in which such a presumption arises.
Judgment of the Privy Council in Raghunath Prasad v. Sarju Prasad delivered in 1923:
“Their Lordships think it desirable to make clear their views upon, in particular s.16, sub-s 3, of the Contract Act, as amended. By that section three matters are dealt with. In the first place the relations between the parties to each other must be such that one is in a position to dominate the will of the other. Once that position is substantiated the second stage has been reached—namely, the issue whether the contract has been induced by undue influence. Upon the determination of this issue a third point emerges, which is that of the onus probandi. If the transaction appears to be unconscionable, then the burden of proving that the contract was not induced by undue influence is to lie upon the person who was in a position to dominate the will of the other.”
Section 16(2)
A person is deemed to be in a position to dominate the will of another:
- where he holds a real authority over the other
- when he holds an apparent authority over the other
- where he stands in a fiduciary relation to the other
- where the other person’s mental capacity is temporarily or permanently affected by reason of
- age
- illness
- mental distress
- bodily distress
Section 17
Fraud means any of the following five acts:
- Suggestion as a fact
- of that which is not true
- by one who does not believe it to be true
- Active concealment of a fact
- by one having knowledge of the fact
- by one having belief of the fact
- A promise made without any intention of performing it
- Any other act fitted to deceive
- Any act or omission specially declared to be fraudulent by any law
These acts must be committed
- by a party to the contract, or
- with the connivance of a party, or
- by the agent of a party
These acts must be committed with the intention of
- deceiving another party
- inducing another party to enter into the contract
Q- When is mere silence a fraud?
Ans. Mere silence
about facts which are likely to affect the willingness of a person to enter into a contract
is normally not fraud.
However, it is fraud if
- i) it is the duty of the person keeping silence to speak
Illustration:
A sells his horse by auction to B, his daughter who has just come of age. A knows the horse to be unsound. If A says nothing about it to his daughter, it amounts to fraud because the relation between the parties here is such which makes it A’s duty to tell his daughter about the unsoundness of the horse.
- ii) his silence is in itself equivalent to speech
Illustration:
A says to B, “If you do not deny it I shall assume that the horse is sound”.
If B says nothing, his silence is equivalent to speech.
Section 19
A contract is voidable when consent to the agreement is caused by
- Coercion
- Fraud
- Misrepresentation
It is voidable at the option of the party whose consent was so caused.
However, the contract is not voidable if the fraud or misrepresentation did not cause the consent of the party on whom it was practised/made.
Section 19A
Where consent to an agreement is caused by undue influence, the agreement is a voidable contract.
Section 20
Where both parties to an agreement are under a mistake about a matter of fact essential to the agreement, the agreement is void.
It is however, neither void nor voidable if only one of the parties is under a mistake as to a matter of fact. (Section 22)
Section 21
A contract is not voidable if it caused by a mistake about any law in force in India.
However, if the mistake relates to a law not in force in India, it has the same effect as a mistake of fact, i.e. the agreement is void if both parties are under the mistake but it is neither void nor voidable if only one of the parties is under such mistake.
Case Study
Subhash Chandra v. Ganga Prasad 1967 SC
Facts:
- Prasanna Kumar makes a gift of some of his properties in favour of his only grandson Subhash Chandra.
- The gift deed was registered in 1944.
- He was about 90 years of age at that time.
- His other son Ganga Prasad files a suit in 1952 challenging the gift.
Issue:
Whether the gift was caused as a result of undue influence over the donor by the father of the donee?
Decision:
- No presumption of undue influence can arise merely because the parties were nearly related to each other.
- There is no presumption of undue influence merely because the gift was made to a son or a grandson or a son-in-law even if made during the donor’s illness and a few days before his death.
- There is no evidence in this case of the domination of the donee’s father over the donor at the time of the gift.
- The transaction is not of such a nature as to shock one’s conscience.
- A grandfather making a gift of a portion of his properties to his only grandson a few years before his death is not on the face of it an unconscionable transaction.
- It was, thus, a valid gift.