CA Foundation

CA Foundation Business Laws Study Material Chapter 5 Free Consent

WHAT IS CONSENT?

Section 13: “Two or more persons are said to consent when they agree upon the same thing in the same sense ”.
Consent involves a union of the wills and an accord in the minds of the parties. When the parties agree upon the same thing in the same sense, they have consensus ad idem. If there is no consent, there is no contract. Salmond states it as error in consensus.

WHAT IS FREE CONSENT?

Section 14 lays down that consent is not free if it is caused by

1. coercion,
2. undue influence,
3. fraud,
4. misrepresentation, or
5. mistake.

If the consent is not free then it is known as error in cause.
The effect of absence of free consent on contract depends on various factors as mentioned in this chapter. Let us see them all one by one.

WHAT IS COERCION?

Coercion is defined by section 15 of the Act as follows: Coercion is the:

1. committing or threatening to commit, any act forbidden by the Indian Penal Code or
2. unlawful detaining, or threatening to detain, any property
3. to the prejudice of any person whatever
4. with the intention of causing any person to enter into an agreement.

Explanation – It is immaterial whether the Indian Penal code is or is not in force in the place where the coercion is employed.
Whether threat to commit suicide amounts to coercion?
The Madras High Court in Amiraju v Seshamma (1918) held by majority that threat to commit suicide amounts to coercion. The Court observed that though suicide was not punishable by IPC, yet it was one forbidden by the IPC, since an attempt to commit suicide is punishable. In this’ case a person threatened to commit suicide if his wife and son did not contract with his brother to release certain disputed property in his favour. The court held that the contract was caused by coercion.

Consequences of coercion
A contract brought about by coercion is voidable at the option of the party whose consent was so caused. [Sec. 19],

WHAT IS UNDUE INFLUENCE?

A contract is said to be induced by undue influence where:

1. one of the parties is in a position to dominate the will of the other and
2. he uses the position to obtain an unfair advantage over the other Sec. 16(1).

Section 16(2) provides that a person is deemed to be in a position to dominate the will of another where:

1. Where he holds a real or apparent authority over the other (For ex- master & servant, ITO & Assessee)
2. Where he stands in a fiduciary relationship to the other. Fiduciary relationship means a relationship of mutual trust and confidence. Such a relationship is supposed to exist in the following cases – father and son; guardian and ward; solicitor and client; doctor and patient; preceptor and disciple; trustee and beneficiary etc.
3. Where a party makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress.
4. Where the contract is apparently unconscionable (i.e.; unfair). Ex.: an unfair money lending transaction.

The following relationships usually raise a presumption of undue influence, viz:

1. Parent and child,
2. guardian and ward,
3. trustee and beneficiary,
4. doctor and patient,
5. lawyer and client,
6. spiritual guru and disciple. This list, however, is not exhaustive.

There is no presumption of existence of a power to dominate the will of another in the following cases:
(a) Landlord and tenant,
(b) Creditor and debtor,
(c) Husband and wife.
It has been held by judicial decisions that in all these cases, the party alleging undue influence must prove that undue influence existed.
Example I. A, a man enfeebled by disease of age, is induced by B’s influence over him as his medi-cal attendant, to agree to pay B an unreasonable sum for his professional services. B has employed undue influence.
Example II. A, being in debt to B, the money-lender of his village, contracts a fresh loan on terms which appear to be unconscionable. It lies on B prove that the contract was not induced by undue influence.
Example III. A applies to a banker for a loan at a time when there is stringency in the money mar-ket. The banker declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms. This is a transaction in the ordinary course of business, and the contract is not induced by undue influence.

Burden of Proof. Section 16(3)
“Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscio-nable, (unfair, unreasonable) the burden of proving that such contract was not induced by undue influence shall be upon the person in a position to dominate the will of the other.” Thus, in case of unconscionable transactions, the dominant party is under the burden to prove that undue influence was not employed. (In other cases, the burden of proof is on the weaker party to prove that undue influence was employed.)
The presumption of undue influence can be rebutted by the dominant/stronger party by showing that:

1. All material facts were disclosed to the party who is alleging exercise of undue influence.
2. The consideration was adequate.
3. The party alleging exercise of the undue influence was in receipt of independent advice and was free to exercise it.
4. The transaction was fair.

Pardanashin women: A pardanashin woman is one who, by virtue of the custom of her community, is required to live behind a veil and is totally secluded from ordinary social interaction. Any contract made by such a women is under the presumption of undue influence.

Effect of Undue Influence
(a) According to Section 19 of the Contract Act, when a contract is induced by undue influence, it is voidable at the option of the aggrieved party, i.e., the party whose consent is obtained by undue influence.
(b) According to Section 19A, any such contract may be set aside by the Court absolutely. However, if the aggrieved party has received any benefit thereunder, it may be set aside upon such terms and conditions as are just in the eyes of the Court.
Example: A, a money-lender, advances Rs. 10,000 to B, a farmer and by undue influence, induces B to execute a bond for Rs. 20,000 with interest at 48 percent per year. The court may set the bond aside, ordering B to repay Rs. 10,000 with such interest as may seen just.

Difference between Coercion and Undue Influence

 WHAT IS MISREPRESENTATION?

Representation is a statement or assertion, made by one party to the other, before or at the time of the contract, regarding some fact relating to the contract. Misrepresentation arises when the representation made is untrue but the person making it believes it to be true. There is no intention to deceive. Misrepresentation is misstatement of facts by one, which misleads the other.
Section 18 of the Contract Act classifies cases of misrepresentation into three groups as follows:

(a) Unwarranted Assertion
When a person makes a positive statement of material facts honestly believing it to be true though it is false, such act amounts to misrepresentation.
Example: X while selling his car to Y, informs him that the car runs 18 kilometres per litre of petrol. X himself also believes this. Later on, Y finds that the car runs only 12 kilometres per litre. This is a case of misrepresentation by X.

(b) Breach of duty
“Any breach of duty, without an intent to deceive, which brings an advantage to the person committing it, by misleading another to his prejudice amounts to misrepresentation”. Under this heading would fall cases where a party is under a duty to disclose certain facts and does not do so and thereby misleads the other party. Such a duty exist between the insurer and the insured; banker and customer; landlord and tenant; seller and buyer; and all contracts of utmost good faith. In English law such cases are known as cases of “constructive fraud.”
Example: X while selling his land to Y, told him that all the farms on the land were fully let out. But he negligently omitted to inform him that the tenants had given notice to quit. Here, X is liable for misrepresentation.

(c) Innocent Mistake
If one of the party causes the other, however, innocently, to make a mistake as to the nature or substance of the agreement, it is considered misrepresentation.
Example: In a case, X chartered a ship to Y, which was described in the charter-party (lease or hire contract), and was represented to him as being not more than 2,800 tonnage registered. It turned out that the registered tonnage was 3,045 tons. Y refused to accept the ship in fulfil¬ment of the charter-party (i.e., an agreement between a ship owner and merchant for the use of a ship). It was held that Y was entitled to avoid the charter-party by reason of erroneous statements as to tonnage (The Ocean Steam Navigation Co. v. Soonderdas Dhurumsey, 1890, 14 Bom. 241).

Consequences of Misrepresentation
In case of misrepresentation the aggrieved party can:

1. avoid the agreement, or
2. insist that the contract be performed and that he shall be put in the position in which he would have been if the representation made had been true. But if the party whose consent was caused by misrepresentation had the means of discovering the truth with ordinary dili-gence, he has no remedy. [Sec. 19]

“Ordinary diligence” means such diligence as a reasonably prudent man would consider necessary, having regard to the nature of the transaction.
Example: A informs B that his estate is free from encumbrance. B thereupon buys the estate. In | fact, the estate is subject to mortgage, though unknown to A also. B may either avoid the contract | or may insist on its being carried out and the mortgage debt redeemed.

WHAT IS FRAUD?

The term “Fraud” includes all acts committed by a person with a view to deceive another person. | “To deceive” means to “induce a man to believe that a thing is true which is false”. Fraud is a false | statement or wilful concealment of a material fact with an intent to deceive another party.
Section 17 of the Contract Act states that “Fraud” means and includes any of the following acts:
(i) False Statement
“The suggestion as to a fact, of that which is not true by one who does not believe it to be true”. A false statement intentionally made is fraud.
Example: X while selling his car to Y says that it is of the latest model and brand-new knowing fully well that it is a used car of old model. His representation or statement amounts to fraud.

(ii) Active Concealment
“The active concealment of a fact by one having knowledge or belief of the fact.” Mere non-disclosure is not fraud where the party is not under any duty to disclose all facts. But ! active concealment is fraud.
Example: X, a scooter dealer, showed a scoQter to Y, X knew that its handle and body are cracked which he had repaired in such a way as to defy detection. The defect was subsequently discovered by Y. Hence he refused to buy the scooter. Here, the contract could be avoided by Y as his consent was obtained by fraud.

(iii) Intentional non-performance
“A promise made without any intention of performing it”.
Example: Purchase of goods without any intention of paying for them.

(iv) Deception
“Any other act fitted to deceive”.
Example: X, with an intention to deceive Y, makes a false statement to him that the sales from his shop are to the tune of Rs. 2,000 per day, although X is aware that they amount to Rs. 1,000 per day only. Y is induced to buy the shop. Here, the statement of X amounts to fraud.

(v) Fraudulent act or omission
“Any such act or omission as the law specially declares to be fraudulent”. This clause refers to provisions in certain Laws, which declare certain acts or omissions to be fraudulent.
Example: Thus, under section 55 of the Transfer of Property Act the seller of immovable property is bound to disclose to the buyer all material defects. Failure to do so amounts to fraud. In the insolvency legislations, the fraudulent preference to creditors is not allowed.
Note: A deceit which does not deceive is no fraud. This means that if the promisee is not deceived or did not rely on the representation then there is no fraud. Fraud must have been made with an intention to deceive and must actually deceive the other party. Also, the party subjected to fraud must have suffered some loss.

Consequences of Fraud.
A party who has been induced to enter into an agreement by fraud has the following remedies open to him. [Sec. 19]

1. He can avoid the performance of the contract.
2. He can insist that the contract shall be performed and that he shall be put in the position in which he would have been if the representation made had been true.
3. The aggrieved party can sue for damages.

Can Silence be Fraudulent?
“Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, if the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself equivalent to speech”. [Explanation to sec. 17]
Example I: H sold to W certain pigs. The pigs were suffering from fever and H knew it. The pigs were sold “with all faults”. H did not disclose the fever to W. Held :There was no fraud [ Ward v. Hobbs (1878) A. C. 13],
Example II: A sells by auction to B, a horse which A knows to unsound. A says nothing to B about the horse’s unsoundness. This is not fraud by A. Mere non-disclosure is not fraud. If there is no duty to speak.
Example III: A and B, being traders enter upon a contract. A has private information of a change in prices which would affect B’s willingness to proceed with the contract. A is not bound to inform B.
From the above, following rules can be deduced:

1. The general rule is that mere silence is not fraud.
2. Silence is fraudulent, “if the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak”. The duty to speak, Le. disclose all facts exists where there is a fiduciary relationship between the parties (such as in father and son; guardian and ward, etc, and also in the insurance contracts, marriage contracts, partnership contract etc which are contracts based on good faith [contracts of uberimae fidei]). The duty to disclose may also be an obligation imposed by statute.
   Example: A sells by auction to B, a horse which A knows to be unsound. B is A’s daughter and has just come of age. Here the relation between parties would make it A’s duty to tell B if the horse is unsound.
3. Silence is fraudulent where the circumstances are such that “Silence is in itself equivalent to speech”.
   Example: B says to A – “If you do not deny it, I shall assume that the horse is sound.” A says nothing. Here A’s silence is equivalent to speech.

Difference between Misrepresentation and Fraud

 WHAT IS MISTAKE? WHAT IS THE EFFECT OF MISTAKE ON CONTRACT?

Mistake may be defined as an erroneous belief concerning something. It may be of two kinds:

1. Mistake of Law
2. Mistake of Fact.

(1) MISTAKE OF LAW
Mistake of law may be of two types—
(a) Mistake of general law of country
Every one is deemed to be conversant with the law of his country, and hence the maxim “ignorance of law is no excuse.” Mistake of law, therefore, is no excuse and it does not give right to the parties to avoid the contract. If a mistake of law leads to a formation of contract, section 21 enacts that a contract is not voidable because it was caused by a mistake as to any law in force in India ’’.
A person cannot get any relief on the ground that he had entered into a contract in ignorance of law.
Illustration: A and B make a contract grounded on the erroneous belief that a particular debts is barred by the Indian law of limitation; the contract is not voidable.
(b) Mistake of Foreign Law: 
Mistake of foreign law is treated as ‘mistake of fact’. Here the law relating to factual mistakes will apply.

(2) MISTAKE OF FACT
Mistake of Fact may be of two types:—
(a) Bilateral mistake
In case of bilateral mistake of essential fact, the agreement is void ab-initio. Section 20 pro-vides that “Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement is void.’’ Thus for declaring an agreement void ab-initio under this section, the following three conditions must be fulfilled:

1. Both the parties must be under a mistake.
2. Mistake must relate to some fact and not to judgment or opinion etc. An erroneous opinion as to the value of the thing which forms the subject-matter of the agreement is not to be deemed a mistake as to a matter of fact (Explanation to Section 20).
3. The fact must be essential to the agreement i.e., the fact must be such which goes to the very root of the agreement.

On the basis of judicial decisions, the mistakes which may be covered under this condition may broadly be put into the following heads:

• Mistake as to the existence of the subject-matter of the contract.
  Ex.: A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void.
• Mistake as to the title of the subject-matter.
  Ex.: A believed that she had inherited rights over a fishery from her father. B, her cousin brother, also believed in A’s rights. B agreed to take the fishery on lease from A. Actually the fishery belonged to B. The agreement, caused by mistake as to title, was held to be void (Cooper v. Phibbs (1867) LR HL 149).
• Mistake as to the quantity of the subject-matter.
  Ex.: P wrote to H inquiring the price of rifles and suggested that he might buy as many . as 50. On receipt of the information, he telegraphed “Send three rifles.”But because of the mistake of the telegraph authorities, the message transmitted was “Send the rifles. ” H dispatched 50 rifles. Held: There was no contract between the parties. However, P could be held liable to pay for three rifles on the basis of an implied contract [Henkel v. Pape (1870) 6 Ex. 7].
• Mistake as to the quality of the subject-matter.
  Ex.: X agreed to sell to Y an antique item believed by X to be of the 18th Century. What Xpossessed was actually of the 20th century. So the bilateral mistake about quality of the subject-matter makes it a void agreement.

(b) Unilateral Mistake
Where only one of the contracting parties is mistaken as to a matter of fact, the mistake is a unilateral mistake. Regarding the effect of unilateral mistake, on the validity of a contract, sec. 22 provides that “A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact”.

Law regarding unilateral mistake
(1) Contract Valid: As a rule, a unilateral mistake is not allowed as a defence in avoiding a contract Le., it has no effect on the contract and the contract remains valid.
(2) Contract voidable: If the unilateral mistake is caused by fraud or misrepresentation etc., on the party, the contract is voidable and can be avoided by the injured party.
(3) Agreement void ab-initio; In the following two cases, where the consent is given by a party under a mistake which is so fundamental as goes to the root of the agreement and has the effect of nullifying consent, no contract will arise even though there is a unilateral mistake only.

(a) Mistake as to the identity of person contracted with, where such identity is important. If A intends to contract with B only, but enters into contract with C believing him to be B, the contract is void.
Example:

• In Cundy v. Lindsay & Co., (1878) 3 App. Cas. 459., A company (Lindsay & Co.) had regular dealing with a firm Blenkiron & Co., having office in Wood Street. Another person with a similar name, Blenkarn, maintaining an office in the same street, sent an order on its printed letter head to the company for purchase of some goods. The company were led to believe that the order came from the famous firm they knew. They sent the goods. The fraudulent Blenkarn sold the received goods down to Cundy. In a suit by Lindsay against Cundy for recovery of goods, it was held that as Lindsay never intended to contract with Blenkarn, there was no contract between them and as such even as innocent purchaser of the goods from Blenkarn did not get a good title, and must return them or pay their price.
  Further, “Mistake as to the identity” of a party is to be distinguished from “mistake as to the attributes” of the other party. Mistake as to attributes, for example, as to the solvency or social status of that person cannot negate the consent. It can only vitiate consent. It therefore, makes the contract merely voidable for fraud.
  Thus, where X enters into a contract with Y falsely representing himself to be a rich man, the contract is only voidable at the option of Y. Again where the identity of the party contracted with is immaterial, mistake as to identity will not avoid a contract. Thus, if X enters a shop introduces himself as Y and purchased some goods for cash, the contract is valid.

Example:

• Philips v. Brooks (1919) 2 KB 243 – In this case a man, N, called in person at a jeweller’s shop and chose some jewels, which the jeweller was prepared to sell him as a casual customer. He tendered in payment a cheque which he signed in the name G, a person with credit. Thereupon N was allowed to take away the jewels which N pledged with B who took them in good faith. Held, the pledge, B, had a good title since the contract between N and the jeweller could not be declared void on the ground of mistake but was only voidable on the ground of fraud. Horridge, J. held that although the jeweller believed the person to whom he was handling the jewels was G, he in fact contracted to sell and deliver to the person who came into his shop. The contract, therefore, was not void on the ground of mistake but only voidable on the grounds of fraud.

(b) Mistake as to the nature and character of a written document. The second circumstance in which even an unilateral mistake may make a contract absolutely void is where the consent is given by a party under a mistake as to the nature and character of a written document. The rule of law is that where the mind of the signatory did not accompany the signature; i.e., he did not intend to sign; in contemplation of law, he never did sign the contract to which his name is appended and the agreement is void ab-initio.
Example: In case of Foster v. MacKinnon (1868) LR 4 CP 704, an old illiterate man was made to sign a bill of exchange, by means of a false representation that it was a guarantee. Held: the contract was void.

MULTIPLE CHOICE QUESTIONS:

1. If there is no consent the agreement is:
(a) Void
(b) Voidable
(c) Illegal
(d) Valid

2. If consent in not free due to coercion, undue influence, fraud, and misrepresentation then the agreement is:
(a) Void
(b) Voidable
(c) Illegal
(d) Valid

3. If the agreement is made by obtaining consent by doing an act forbidden by the Indian Penal Code, the agreement would be caused by:
(a) Coercion
(b) Fraud
(c) Misrepresentation
(d) Undue influence

4. A buys an article thinking that it is worth Rs. 100 when in fact it is worth only Rs. 50. There has been no misrepresentation on the part of the seller. The contract is:
(a) Valid
(b) Void
(c) Voidable
(d) Unenforceable

5. Where a person is in a position to dominate the will of another person and uses that position to obtain on unfair advantage it is called:
(a) Fraud
(b) Coercion
(c) Undue influence
(d) Misrepresentation.

6. An agreement caused by unilateral mistake of fact is:
(a) Void
(b) Voidable
(c) Illegal
(d) Valid

7. Unlawfully detaining or threatening to detain any property, to the prejudice of any person making him to enter into an agreement amounts to:
(a) Threat
(b) Coercion
(c) Undue influence
(d) Misappropriation

8. An agreement made under mistake of fact, by both the parties, forming the essential subject matter of the agreement is:
(a) Void
(b) Voidable
(c) Valid
(d) Unenforceable

9. “Active concealment of fact” is associated with which one of the following?
(a) Misrepresentation
(b) Undue influence
(c) Fraud
(d) Mistake

10. Lending money to a borrower, at high rate of interest, when the money market is tight renders the agreement of loan:
(a) Void
(b) Valid
(c) Voidable
(d) Illegal

11. When a person, who is in dominating position, obtains the consent of the other by exercising his influence on the other, the consent is said to be obtained by:
(a) Fraud
(b) Intimidation
(c) Coercion
(d) Undue influence

12. With regard to the contractual capacity of a per-son of unsound mind, which one of the following statements is most appropriate?
(a) A person of unsound mind can never enter into a contract
(b) A person of unsound mind can enter into a contract
(c) A person who is usually of unsound mind can contract when he is, at the time of entering into a contract, of sound mind
(d) A person who is occasionally of unsound mind can contract although at the time of making the contract, he is of unsound mind

13. While obtaining the consent of the promisee, keeping silence by the promisor when he has a duty to speak about the material facts, amounts to consent obtained by:
(a) Coercion
(b) Misrepresentation
(c) Mistake
(d) Fraud

14. ‘A’ threatened to commit suicide if his wife did not execute a sale deed in favour of this brother. The wife executed the sale deed. This transaction is:
(a) Voidable due to under influence
(b) Voidable due to coercion
(c) Void being immoral
(d) Void being forbidden by law

15. A threatens to shoot B, if B does not agree to sell his property to A at a stated price. B’s consent in this case has been obtained by
(a) Fraud
(b) Undue influence
(c) Coercion
(d) None

16. A master asks his servant to sell his cycle to him at less than the market price. This contract can be avoided by the servant on grounds of:
(a) Coercion
(b) Undue influence
(c) Fraud
(d) Mistake

17. If A sells, by auction to B a horse which A knows to be unsound and A says nothing to B about the horse’s unsoundness, this amounts to:
(a) Fraud
(b) Not fraud
(c) Unlawful
(d) Illegal

18. Silence is fraud when silence is, in itself equivalent to speech. This statement is:
(a) True
(b) False
(c) Untrue in certain cases
(d) None of these

19. A person is deemed to be in a position to dominate the will of another if he:
(a) Holds real or apparent authority
(b) Stands in a fiduciary relationship
(c) Both (a) and (b)
(d) Either (a) or (b)

20. If both the parties to a contract believe in the existence of a subject, which infact does not exist, the agreement would be
(a) Unenforceable
(b) Void
(c) Voidable
(d) None of these

21. When both the parties to an agreement are under a mistake as to a matter of fact essential to an agreement, the agreement is:
(a) Void
(b) Valid
(c) Voidable
(d) Illegal

Answers:

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. A threat to commit suicide does not amount to coercion.
2. A deceit which does not deceive is no fraud.
3. Consent obtained by fraud makes the agreement void.
4. A person who is usually of unsound mind but occasionally of sound mind can always enter into contract.
5. Mere silence as to facts likely to affect the willingness of a person to enter into contract is not fraud.
6. A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact.
7. In the absence of consent, there can be no contract.
8. A threat amounting to coercion must necessarily proceed from a party to the contract.
9. Undue influence involves use of moral pressure.
10. Undue influence can be exercised only by a party to the contract.
11. If there is no damage, there is no fraud.
12. In case of fraud, the aggrieved party loses the right to rescind the contract if he had the means of dis-covering the truth by ordinary diligence.
13. Undue influence can be exercised only between the parties who are related to each other.
14. A promise made without any intention of performing it amounts to fraud.
15. If one of the parties to a contract was under a mistake as to the matter of fact, the contract is voidable.
16. Ignorance of foreign law is put on a same level with ignorance of fact.
17. A contract is not voidable only because there is a mistake of Indian law.

Answers:

CA Foundation Business Laws Study Material Chapter 4 Capacity of Parties

WHAT DO YOU MEAN BY CAPACITY TO CONTRACT?

An essential ingredient of a valid contract is that the contracting parties must be ‘competent to contract’ (Sec. 10). Section 11 lays down that “Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind and is not disqualified from contracting by any law to which he is subject.”Thus the following persons are incompetent to contract.

1. Minors
2. Persons of unsound mind
3. Persons disqualified by law from contracting.

LAW RELATING TO MINOR’S AGREEMENTS

According to section 3 of the Indian Majority Act, 1875, a person, domiciled in India, who is under 18 years of age is a minor. Accordingly, every person who has completed the age of 18 years becomes a major. In two exceptional cases a minor attains majority when he completes 21 years of his age:
(a) a guardian is appointed by court, for the minor to look after his person or property or both;
(b) a Court of Wards has been appointed for the superintendence of minor’s property.

1. An agreement with a minor is void ab initio
An agreement with a minor is absolutely void and inoperative. This rule was established by the Privy Council in the famous case MohiriBibiv. Dharmodas Ghose ( 1903) LR 30 Cal 539. In this case, Dharmodas Ghose, a minor, mortgaged his house in favour of the defendant. Mohiri Bibi, to secure a loan of Rs. 20,000. A part of this amount was actually advanced to him. Subsequently, Dharmodas Ghose approached the Court for the cancellation of mortgage since he was a minor. It was held j by the Privy Council that agreement with a minor is absolutely void and the money lender is not i entitled even to repayment of the money lent because he had given the loan with full knowledge j of the minority of the borrower.

2. No restitution
Restitution means ‘restoring’ (i.e. giving back) of something to its proper owner. A minor cannot be j directed to return benefit obtained under a void agreement (because sections 64 & 65 which deal with restitution do not apply to a minor). However, according to the doctrine of equitable restitution, the goods and property which are still in possession of minor can be recovered from him, if so required with the condition that it does not involve any personal liability of the minor.
However under section 33 of the Specific Relief Act, 1963 where the minor misleads the other person into believing him to be of majority age, restitution shall be available to the deceived party.

• Where minor is the plaintiff (complainant) and has requested the court to cancel his agreement and get his money or property restored from the other party, the court will demand from the minor either the restoration back of what he himself obtained from the other party, or if this was not possible, to compensate him suitably. This is based on the view ‘ One who seeks equity must do equity himself too’. Thus, the Court will compel restitution by a minor when he is a plaintiff. For example, if a minor sells a house for ? 5 lakhs and later on files a suit to set aside the sale on the ground of minority, he may be directed by the Court to refund the purchase money received by him.
• Where the other party himself is unscrupulous towards the minor, or is not influenced by the false representation by minor, or the court has no reason to believe that restitution is necessary in the interest of justice, minor may not be asked to restore back anything.
• In case, the person is aware of or has reason to be aware of the minority age of the opposite party, then no restitution whatsoever, shall be granted to that person.

3. Minor can be a beneficiary
The Court protects the rights of minors. Accordingly, any contract, which is of some benefit to the minor and under which he is required to bear no obligation, is valid. In other words, a minor can be a beneficiary e.g., a payee, an endorsee or a promisee under a contract. Thus, money advanced by a minor can be recovered by him by a suit because he can take benefit under a contract. Generally contracts for the benefits of minor are made by guardian on behalf of the minor. It should be how-ever be noted that all contracts made by guardian on behalf of a minor are not valid. For example, a guardian cannot empower himself to bind the minor by a contract for the purchase of immovable property unless such contracts are sanctioned by the Court.

4. No ratification
A minor’s agreement being a nullity and void ab initio has no existence in the eye of law. It cannot be ratified by the minor on attaining the age of majority, for, an agreement void ab initio cannot be made valid by subsequent ratification (Mohendra v. Kailash).

5. The rule of estoppel does not apply to a minor
The ride of estoppel does not apply to a minor ie., a minor is not estopped from pleading his infancy in order to avoid a contract, even if he has entered into an agreement by falsely representing that he was of full age. In other words, where a minor represents fraudulently or otherwise that he is of age majority and thereby induces another to enter into a contract with him, then in an action v founded on the contract, the infant is not estopped from setting up infancy.
But if anything is traceable in the hands of minor, out of the proceeds of the contact made by I fraudulently representing that he was of full age, the court may direct the minor to restore that | thing to the other party, on equitable considerations, for minors can have no privilege to cheat men.

According to the rule of estoppel, if a person has, by words or conduct, led another to believe in a state of facts as true and induced him to act on that faith, such a person will be stopped by law from denying those facts later even if the facts presented earlier were untrue. In simple words, rule of estoppel means one cannot deny his previous conduct. This principle does not apply against a minor. So, if a minor misleads the other party to believe that he is of majority age, and then acquires | some benefit from him under an agreement, he will be permitted to deny later the fact that he was of majority age. Thereby, he will have no liability towards the other party.

6. Minor’s liability for necessaries
A minor is not personally liable for the necessaries supplied to him but his property is liable for payment to the other person.
The case of necessities supplied to a minor is governed by Section 68 of the Contract Act which provides that “if a person, incapable of entering into a contract, or any one whom he is legally bound | to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person”.
Illustration: A minor is ill and needs urgent medical attention. N, a neighbour, arranges for his treatment and spends his money. He is entitled to be paid out of minor’s property. Necessaries would include such items as food, clothing, accommodation, expenses on education,
medical treatment, funeral ceremonies, etc. and not items of comfort or luxury. It would depend on socio-cultural status of the minor.

7. Minor cannot bind his parents or guardian
If there is no express or implied authority, a minor cannot bind his parents or guardian, even for necessaries. Parents will be held liable only if the child acts as an agent for parents.

8. Contract by a major and a minor
In case when a major and a minor enters jointly into a contract, then only major person will be liable and not the minor. As held in Sain Das v. Ram Chand, when a contract for purchase is entered f into by a major and a minor, the seller could enforce the contract against the major purchaser and not the minor.

9. No Specific performance
Since an agreement by a minor is absolutely void, the court will never direct ‘specific performance’ of such an agreement by him.

10. Minor Partner
A minor being incompetent to contract cannot be a partner in a partnership firm, but under Section 30 of the Indian partnership Act, he can be admitted to the ‘benefits of partnership’ by an agreement executed by his guardian on his behalf, with the consent of all the partners.

11. Minor Agent
A minor can be an agent (Sec. 184). He shall bind the principal by his acts done in the course of such an agency, but he cannot be held personally liable for negligence or breach of duty. Thus in appointing a minor as an agent, the principal runs a great risk.

12. Surety for a minor
In case of a contract of guarantee when a major stands as a surety for a minor then the surety is primarily liable as if the contract was entered by him with the third party.

13. Minor and insolvency
A minor cannot be adjudicated an insolvent, for, he is incapable of contracting debts. Even for necessaries supplied to him, he is not personally liable, only his property is liable (Sec. 68)

14. Minor as a shareholder
A minor can become a shareholder of fully paid of shares through transfer, if he applies for registration of transfer through his guardian. However, if a minor makes application for shares, the company will refuse to allot him shares because being incompetent, he will have no liability to pay the amounts due on the shares.

15. Minor’s liability for torts
A tort can be described as a civil wrong. A minor is liable for the torts which do not arise from a contract. For example, a minor was held liable when he failed to returned certain goods which he has hired and passed them to his friend instead.

PERSONS OF UNSOUND MIND

As per Section 11 of the Contract Act, for a valid contract, it is necessary that each party to it must have a ‘sound mind’..
What is a ‘sound mind’? Section 12 of the Contract Act defines the term ‘sound mind’ as follows. “A person is said to be of sound mind for the purpose of making a contract, if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effects upon his interest. ”

According to this Section, therefore, the person entering into the contract must be a person who understands what he is doing and is able to form a rational judgment as to what he is about to do, is to his interest or not.
Section 12 further states that:

1. “A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. ” Thus a patient in a lunatic asylum, who is at intervals of sound mind, may contract during those intervals.
2. “A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind. ” Thus, a sane man, who is delirious from fever, or who is so drunk that he cannot understand the terms of a contract, or form a rational judgment as to its effect on his interest, cannot contract whilst such delirium or drunkenness lasts.

DISQUALIFIED PERSONS

The third type of incompetent persons, as per Section 11, are those who are “disqualified from contracting by any law to which they are subject.” These are:
(a) Alien enemies
An alien (a person of a foreign country) living in India can enter into contracts with citizens of India during peace time only, and that too subject to any restrictions imposed by the Government in that respect. On the declaration of a war between his country and India, he becomes an alien enemy and cannot enter into contracts. Alien friend can contract but an alien enemy can’t contract.
A contract entered into with an alien enemy before the declaration of war shall be suspended until the war is over. However, the existing contract can be revived after the completion of war or with the approval of the central government.

(b) Foreign sovereigns and ambassadors
One has to be cautious while entering into contracts with foreign sovereigns and ambassa- dors, because whereas they can sue others to enforce the contracts. They cannot be sued in the Indian Courts, except in the following two cases:
(a) Where they voluntarily submit themselves to the Court.
( b) Where the person intending to sue them obtains the approval of the Central Government. Thus they are in privileged position and are ordinarily considered incompetent to contract.

(c) Convict
A convict is one who is found guilty and is imprisoned. During the period of imprisonment, a convict is incompetent (a) to enter into contracts, and (b) to sue on contracts made before conviction. On the expiry of the sentence, he is at liberty to institute a suit and the Law of Limitation is held in abeyance during the period of his sentence.

(d) Insolvent
An adjudged insolvent (before an ‘order of discharge’) is competent to enter into certain types of contracts i.e. he can incur debts, purchase property or be an employee but he cannot sell his property which vests in the Official Receiver. Before ‘discharge’ he also suffers from certain disqualifications e.g., he cannot be a magistrate or a director of a company or a member of local body but he has the contractual capacity except with respect to his property. After the ‘order of discharge’, he is just like an ordinary citizen.

(e) Joint-stock company and corporation (Example: LIC, RBI, SEBI, etc.)
A company/Corporation is an artificial person created by law. It cannot enter into contracts outside the powers conferred upon it by its Memorandum of Association or by the provisions of its special Act, as the case may be. Again, being an artificial person (and not a natural per-son) it cannot enter into contracts of strictly personal nature e.g., marriage.

MULTIPLE CHOICE QUESTIONS:

1. For necessaries supplied to a minor
(a) he is personally liable
(b) his parents are liable
(c) his estate is liable
(d) the contract is valid under Indian law

2. A minor is a person who has not attained the age of:
(a) 15 years
(b) 18 years
(c) 21 years
(d) 25 years

3. An agreement with a minor is :
(a) Void
(b) Voidable
(c) Valid
(d) Illegal

4. A contract for the benefit of the minor is :
(a) Valid
(b) Void
(c) Voidable
(d) Illegal

5. Minor’s contract is
(a) Voidable
(b) Voidable at the option of the minor
(c) Illegal
(d) Void

6. A supplies B, a lunatic, with necessaries suitable to his condition in life. A is
(a) Not entitled to be reimbursed from B’s property
( b) Entitled to be reimbursed from B’s property
(c) Personally liable
(d) None of these

7. A mortgage executed by minor is ……………………
(a) Void
(b) Voidable
(c) Both (a) and (b)
(d) Neither (a) nor (b)

8. ……………… is the most extreme form of mental un-soundness?
(a) Lunacy
(b) Incapacity
(c) Minority
(d) Idiocy

9. A minor
(a) Can be a promisee
(b) Cannot be an agent
(c) Can be a principal
(d) Can ratify a past contract entered during minority

Answers:

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. A minor can be a promisee in a contract.
2. A person, who is usually of unsound mind but occasionally of sound mind, can always enter into a valid contract.
3. A minor can be a partner in a firm.
4. A minor can ratify his contract after attaining majority.
5. Minor can be held personally responsible for the necessaries supplied to him.
6. A person who is usually of unsound mind cannot enter into a contract even when he is of a sound mind.
7. Contracts with a lunatic during lucid intervals are valid.
8. A minor can be declared as an insolvent.
9. A minor can be an agent.
10. Husband and wife cannot enter into a valid contract.
11. A contract to take a loan by a boy of sixteen years of age from a money lender of 50 years old is a valid contract.
12. A promissory note duly executed in favour of a minor is void.
13. A person who is usually of sound mind, but occasionally of unsound mind cannot enter into contract when he is of unsound mind.

Answers:

CA Foundation Business Laws Study Material Chapter 3 Consideration

WHAT IS CONSIDERATION?

• Consideration is an essential element in a contract. It is the normal ‘badge of enforceability’. Subject to certain exceptions, an agreement is not enforceable unless each party to agreement gets something. This “something” is called consideration. It is also called as “quidpro quo”
• A promise without consideration is called nudum pactum. The law will not enforce a bare promise (nudumpactum) but only a bargain ie. promise supported by consideration.
• According to Pollock “Consideration is the price for which the promise of the other is bought”. Consideration is also defined as the ‘element of exchange in a contract’.
• In the English case, Curie v. Misa (1875) L.R Ex. 153 consideration was defined as “some right, interest, profit or benefit accruing to one party, or some forbearance, detriment loss or responsibility given, suffered or undertaken by the other”. In simple words, consideration is ‘a benefit to one party or a detriment to the other’.
• Section 2(d) of the Contract Act define consideration as follows:
  (a) “When, at the desire of the promisor,
  (b) the promisee or any other person
  (c) has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something,
  (d) such act or abstinence or promise is called a consideration for the promise. ”

ESSENTIALS OF VALID CONSIDERATION

1. Consideration must move at the desire of the promisor
The act or abstinence must be done at the desire of the promisor. If it is done at the instance of a third party or without the desire of the promisor, it is no consideration. In Durgaprasad v. Baldev 1880 3 ALL 221, the plaintiff, baldev, at the desire and request of the collector of the town expanded money in the construction of a market in the town. Subsequently the de-fendants, Durgaprasad & ors. Occupied the shops in the market. Since the plaintiff had spent money for the construction of the market, the defendants in consideration thereof, promised to pay to plaintiff, a commission on the articles sold through their (defendants) shops in that market. Defendants however, failed to pay the promised commission, the plaintiff brought an action to recover the promised commission. It was held that they were not bound to pay as it was without consideration and hence void)

However, consideration need not be to the benefit of the promisor. In Kedarnath v. Gorie Mohamed (1886) ILR 14 Cal 64, on the strength of the promise of the defendant to give donation the plaintiff started the construction of town hall. It was held that the defendant was liable to pay as the construction work started by the plaintiff was done at the desire of the defendant (the promisor) so to constitute consideration. However, if the plaintiff that is promisee did not incurred any liability on the promise of the donation then the defendant is not liable (Abdul Aziz v. Masum Ali, 1914).

2. Consideration may move from the promisee or any other person
Consideration may be supplied by the promisee or any other person. But the stranger to the consideration will be able to sue only if he is a party to the contract. The leading case is of Madras High Court in Chinnaya v. Ramaya (1882) 4 Mad 137.
An old lady (A) had a highly valued estate. She made a contract with her daughter (R) that the whole of the property shall be gifted to R if R agrees to pay annuity to C (C was the sister of A). R made a contract with C agreeing to pay C annuities. After the death of A, R stopped the payment of annuities on the ground that no consideration had passed from C to R and therefore agreement between C and R was void. The Court held that the consideration had been furnished to R (since the property was gifted to R at the desire of R). It was immaterial that A had furnished this consideration. As long as there is consideration in a contract, it is immaterial as to who has given this consideration.

3. Consideration may be an act or abstinence
A person may promise to do something or not to do something for a promise. To do or not to do something in return is consideration. If A promises to give Rs. 10,000 to B, if B stops smoking, it will be a good consideration.

4. Consideration may be past, present or future
When the consideration of one party was given before the date of the promise, it is said to be past. Past consideration means the consideration for a promise given by a party before the promise is made. It is the consideration given earlier by a party and the promise is made thereafter. Such a consideration given by a party must be at the desire of the promisor. Past voluntary services rendered by a party cannot be said to be the past consideration.
Example: A requests B to search out his lost cow. B searched out and deliver the cow to A. thereafter A promises to pay B Rs. 500 as a reward. Here, the efforts to B at the request of A constitutes a valid past consideration for the promise by A to pay 1500 to B. The consideration by B was given before the promise to pay is made by A.

Consideration which moves simultaneously with the promise is called present or executed consideration. Cash sales are good examples of present or executed consideration. The seller delivers the articles sold and the buyer simultaneously pays the price of them.
When the consideration is to move at a future date, it is called future or executory consideration.
Example: X promise to deliver to Y certain electric appliances as soon as he receives them from the wholeseller at Bombay and Y promises to pay Rs. 5,000 against the delivery of the articles. Here is future consideration which is to be performed by both the parties when supplies are received from Bombay.

5. Consideration need not he adequate
Consideration need not be adequate nor equivalent to promise.
Illustration: A agrees to sell his horse worth Rs. 1,000 for Rs. 10 only. The consideration is valid though inadequate, as there is something of value to be given by the buyer (Attached to Sec. 25).
However, Sec. 25 (Explanation 2) provides that inadequacy of the consideration may be taken into account by the Court in determining the question whether the consent of the promisor was freely given.

6. Consideration must be real and not illusory
Consideration must be real or of some value in the eyes of law. It should not be physically impossible or illegal or illusory for e.g. to make a dead man alive.
Instances of good consideration:

1. Forbearance to sue;
2. Compromise of disputed claims
3. Composition with creditors
4. To avoid disputes in future

7.Consideration must be lawful
Consideration given for an agreement must be lawful one. Consideration must not be illegal, immoral or opposed to public policy.

8. Consideration must not be a pre-existing obligation or duty.
Consideration must not be something, which a person is already bound by law to do. Discharging of pre-existing obligation is no consideration. A person may be bound to do something by law, e.g. to give evidence when called by the Courts. Performance of a legal obligation is no consideration for a promise and therefore the witness cannot demand money to give evidence.

‘NO CONSIDERATION NO CONTRACT’ – EXCEPTIONS TO THE RULE

The general rule is “an agreement made without consideration is void” (Opening words of Sec. 25).
Thus where A promises, for no consideration, to give to B Rs. 1000 this is a void agreement.
However, sec. 25 also mentions some exceptions to the general rule. These exceptions are given below:

A. Agreement made on account of natural love and affection [sec. 25(1)]
An agreement made without consideration is enforceable if it is

1. made on account of natural love and affection,
2. between parties standing in a near relation to each other,
   expressed in writing, and
3. registered under the law.

In Rajlakhi Debi v. Bhootnath Mukerjee case (1900) 4 Cal WN 488, a husband promised to pay to his wife, after constant quarrels between them, a fixed monthly amount for her maintenance and separate residence without any consideration. The promise was in writing and registered. When he refused to pay, the wife filed a case. She was not allowed anything by court on the ground that the j exception was not applicable as there was no natural love left between them.

B. Agreement to compensate for past voluntary service [sec. 25(2) ]
A promise made without consideration is also valid, if it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or done something which the promisor was legally compellable to do. The following two situations are covered by this section:
(A) Voluntary Services:
When there is a voluntary act by one party and there is a subsequent promise to pay compensation to the former. E.g. A finds B’s purse. B promises to give him Rs. 500 this promise is enforceable.
(B) Legally Compellable Duty:
Another situation covered by the exception is where the promisee has done something for the promisor, “which the promisor was legally compellable to do”.
A subsequent promise to pay for such an act is enforceable. E.g. T supports the son of E F promises to pay the expenses to T. Here T has done something, which the promisor was legally bound to do. This is a valid contract.

C. Agreement to pay a time-barred debt [sec. 25(3)]
Where there is an agreement,

1. made in writing and
2. signed by the debtor, or by his authorised agent,
3. to pay wholly or in part a debt barred by the law of limitation, the agreement is valid even though it is not supported by any consideration.

A time barred debt is one which remains unpaid or unclaimed for a period of 3 years, hence it can-not be recovered under the Indian Limitation Act and therefore a promise to repay such a debt is without consideration, hence the importance of the present exception.

D. Completed Gift
Gift is transfer of property without consideration. In order to be valid a gift does not require consideration. As per Explanation 1 to section 25, gifts given by donor to donee are valid. Once a gift has been actually given, the donor cannot demand it back on the ground that there was no consideration.
Promise for a donation is not a gift. As such a promise for a donation is invalid for want of consid-eration.

E. Contract of Agency
Sec. 185 of the Contract Act lays down that no consideration is necessary to create an agency.

F. Bailment
Sec. 148 of the Contract Act lays down that no consideration is necessary in case of a gratuitous bailment.

G. Remission.
Sec. 63 of the Contract Act lays down that where a person agrees to receive less than what is due to him, such an agreement is said to be an agreement of remission. No consideration is required for a contract of remission.

H. Guarantee
Sec. 127 of the Contract Act lays down that under the contract of guarantee, no consideration is received by the surety, even then the contract of guarantee is valid.

I. Charity
If the promise undertakes the liability on the promise of the person to contribute to charity, there the contract shall be valid as held in Kedarnath v. Gorie Mohammad.

CAN A PERSON WHO IS NOT A PARTY TO A CONTRACT SUE UPON IT?

The doctrine of Privity of Contract: According to the doctrine of privity of contract only a party to a contract is entitled to enforce a right created by the contract. No one is entitled to or bound by the terms of a contract to which he is not an original party. A third party (stranger to contract) has no locus standi in a contract, he is debarred from interfering with the contractual rights or obligations of the parties. Only a person who is a party to a contract can sue on it. The doctrine of privity of contract prevent imposition of contractual obligations upon a person without his consent.
D bought tyres from Dunlop Rubber Co. and sold them to S, a sub-dealer, who agreed with D not to sell below Dunlop’s list price and to pay to Dunlop co. $ 5 as damages on every tyre he undersells. S sold two tyres at less that the list price, and thereupon, the Dunlop co. sued him for the breach. Will the Dunlop Co. succeed?
No. Dunlop Co. cannot claim the benefit of the contract as against S, a sub-dealer. There is no privicy of contract between the two.

Difference between the right of a stranger to a contract and of a stranger to the consideration.
A stranger to a contract, Le., one who is not a party to it, cannot file a suit to enforce it. A contract between P and Q cannot be enforced by R. But a stranger to the consideration can sue to enforce it provided that he is a party to the contract. A contract between P, Q and R whereby P pays money to Q for delivering goods to R can be enforced by R although he did not pay any part of the con-sideration.
Upon A’s marriage his father and father-in-law entered into a contract to contribute a certain sum of money to be given to A after his marriage. A’s father paid his contribution but his father-in-law failed to pay. Held: A could not sue his father-in-law since he (A) was a stranger to the contract [Tweddle v. Atkinson (1861) 1 B. & S. 393],

Exceptions – There are certain exceptions to the rule that a stranger to the contract cannot sue upon it.
They are as follows:
1. Beneficiaries in the case of trust
An agreement to create a trust can be enforced by the beneficiary (though he was not a party to the contract between the settlor and the trustee). S agrees to transfer certain properties to T to be held by T in trust for the benefit of B. B can enforce the agreement though he was not a party to the agreement.
In Khwaja Muhammad v. Hussaini Begum (1910) 32 ALL 410, A and B made an agreement that A’s son S, and B’s daughter D, would be married, both being minors at the time. In con-sideration of this marriage, A promised to B that he will give to D, his daughter-in-law, an amount in perpetuity as, what is a traditional payment, ‘kharcha-e-paan daan’. He even made his immovable property liable for the payment. After the marriage, S and D separated on ac-count of some quarrel. D filed a case against A for the recovery of the promised amount.
In spite of A’s argument that D was a stranger to his contract with B, court allowed D to recover the amount because A had specifically charged his immovable property for the liability. This charge did not amount to creation of a trust, but the seriousness of the situation was found to be similar to that of the trust.

2. Family settlement
When family disputes are settled by mutual agreement and the terms of settlement are writ¬ten down in a document it is called a Family Settlement. Such agreements can be enforced by members of the family who were not originally parties to the settlement.

3. Assignee of contract
In case of assignment of a contract, when the benefit under a contract has been assigned, the assignee can enforce the contract for e.g., S sell goods to B and is entitled to receive the price. S may by giving notice to B assign his right to receive the price in favour of third party X. X, the assignee, may then sue B for the price of goods. The assignee of an insurance policy can sue even though he was not party to it.

4. Provision for marriage or maintenance.
At the time of partition of property of a joint family, the male members may agree that a certain portion of property shall be kept aside for the benefit of, for example, some elderly person or the education and marriage of a female child. Such beneficiaries may not be party to the arrangement. But, they have been held entitled to enforce the agreement for their benefit (Sundararaja v. Lakshmi Ammal( 1914) 38 Mad 788).

5. Contracts entered into through an agent
The principal can enforce the contracts entered into by his agent provided the agent acts within the scope of his authority and in the name of the principal.

6. Acknowledgement
The person who becomes an agent of third party by acknowledgement or otherwise, can be sued by such third party. (If the promisor acknowledges his liability to the third person, then such a third person can file a suit to recover the benefit.)
Example: X gives to Y Rs. 5,000 again to be given to Z. Y informs Z that the holding the money for him. Later on, Y refuses to pay the money. Z is entitled to recover the money from Y (Lily v. Hays, 1886, HIER 1272).

7. Covenants attached with the land
In case of covenant running with the land, the person who purchases land with the notice that the owner of the land is bound by certain duties affecting the land, the covenant affecting the land may be enforced by the successor of the seller.

MULTIPLE CHOICE QUESTIONS:

1. If there is no consideration, then
(a) The agreement is void
(b) The agreement is valid
(c) The agreement is illegal
(d) The agreement is voidable

2. A valid consideration has the following essential elements :
(a) It must move at the desire of the promisor
(b) Consideration may be supplied by the promisee or any other person
( c) Consideration may be past, present or future
(d) All the above

3. The latin term “quidpro quo” refers to :
(a) Something in return
(b) Stranger to consideration
(c) Something sensible
(d) Something valuable

4. A promise to pay a time-barred debt must be :
(a) Oral
(b) Written and signed
(c) Registered
(d) Written and registered

5. A stranger to a consideration
(a) Can file a suit
(b) Cannot file a suit
(c) Can file, only with consent of court
(d) Is similar to stranger to a contract

6. A stranger to a contract
(a) Can file a suit
( b) Can file a suit only with permission of court
(c) Can file a suit, if contract is in writing
(d) Cannot file a suit

7. An agreement not supported by consideration is called :
(a) Consensus ad idem
(b) Ignoratia juris non execuset
(c) Ab initio
(d) Nudum Pactum

8. Past consideration means
(a) Money received in the past without making even a proposal
( b) The price which is more than the promisee’s expectation
(c) A past act done before the promise is made
(d) None of the above

9. In India, a person who is stranger to the consideration
(a) Can sue on the contract, if he is a party
(b) Cannot sue the contract
(c) Depends on the parties
(d) Depends on the circumstances

10. A promise to pay a time barred debt is enforceable, if some conditions are fulfilled. Which of the following conditions is not required?
(a) It must be signed by the promisor
(b) It must be definite and express
(c) It must be in writing
(d) It must be registered

11. X promised Y, a priest, to pay Rs. 10,000 as charity. The priest on X’s promise incurred certain liabilities towards the repairing of the temple to the extent of Rs. 7,500. Y, the priest, can recover from X
(a) Rs. 10,000
(b) Rs. 7,500
(c) Nothing
(d) Rs. 7,500 plus damages

Answers:

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. Inadequacy of consideration does not affect the validity of a contract.
2. A stranger to the contract can enforce the contract.
3. Consideration need not be material and may even be abstract.
4. Consideration must move simultaneously with promise.
5. A stranger to the consideration can enforce the contract.
6. Forbearance to sue or compromising disputed claim is no good consideration.
7. Consideration is essential for the validity of a contract in all cases.
8. Adequacy of consideration is essential for validity of a contract.
9. No consideration is required to create agency.
10. Past consideration is no consideration
11. According to the doctrine of “Privicy of contract”, a stranger to a contract, if he is beneficiary cannot enforce the contract.
12. Inadequacy of consideration cannot be taken into account by the court in determining whether the consent was given freely.
13. The manufacture of goods can enforce conditions imposed upon the dealer against the sub-dealer.
14. In the Indian Law, consideration must move from the promise only.
15. In discharge of the whole claim, a party to the contract agrees to accept a lesser amount than due, from the other party is a valid contract inspite of inadequate consideration.
16. Consideration may move even from a person who is not a party to the contract.
17. A promise to pay a time barred debt is not enforceable.

Answers:

CA Foundation Business Laws Study Material Chapter 2 Offer and Acceptance

INTRODUCTION

The offer or proposal is the starting point in the formation of a contract. The parties through negotiation & bargaining may strike a deal resulting into acceptance of offer, thereby creating a contract.
However in the modern times, due to enormous increase in the commercial transactions, ‘standard form’ of contracts is used. For example, the insurance company prints the terms of insurance contract in advance on a standard form and the insured person has to simply sign on the dotted lines indicating his acceptance. These terms are not open for discussions or bargaining and the other party has to either ‘take it or leave it’.
Such standard forms of contract containing the various conditions and terms are also called as ‘adhesive contracts’. These contracts have become the order of the day.

WHAT IS AN OFFER?

The Indian Contract Act uses the term proposal, instead of offer. However the words proposal and offer are synonymous and are used interchangeably. Section 2(a) of the Indian Contract Act defines a proposal as:

“When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence he is said to make a proposal”.

The definition of proposal has two elements:

1.  It must be an expression/declaration of the willingness to do or to abstain from doing something. For example, A says to B, will you buy my car for Rs. 2 lakh? This is a declaration j to sell the car.
2. This declaration is made with a view to obtain the assent of the other person to such act or abstinence. Thus a casual statement that “I may sell my Maruti car if I can get Rs. two lakh for it” is not a proposal, because this expression is not made with a view to obtain assent of the other person.

The person who makes the offer is called the ‘offeror’or ‘promisor’and the person to whom the offer is made is called the ‘offeree’or ‘promisee’. [Sec. 2(c).]

Illustration – The case of Harveyv. Facey( 1893, AC 552) illustrates nicely the concept of offer. Harvey sent a telegram to Facey “Will you sell us your Bumper Hall Pen? Telegraph lowest cash price”. Facey replied also by telegram, “Lowest price for Bumper Hall Pen pound 900”. Harvey immediately sent second telegram “We agree to buy Bumper Hall Pen for the sum of pound 900 asked by you”. There was no reply from Facey.
Hence, there was no concluded contract between Harvey and Facey. In the first telegram, Harvey asked two questions, first as to willingness to sell and second as to the lowest price. Facey answered only the second question and gave the lowest price. He reserved his answer to the willingness to sell. Thus he made no offer. The second telegram sent by Harvey was an offer to buy, but that was never accepted by Facey. Mere statement of lowest price at which the vendor would sell contains no implied promise to sell at that price to the person making the enquiry.

(A) Legal Rules Regarding Offer
1. An offer may be express or implied
When the offer is made in words, it is said to be express. An implied offer is one which is inferred from the act or conduct of the party or from the circumstances of the case. Sec. 9 states, “In so far as the proposal or acceptance of any promise is made in words the promise is said to be express. In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied”.
Examples:

• When MSRTC bus runs on specific routes there is an implied offer to carry passengers for a certain fare.
• A weighing machine at the railway station is an implied offer to use the machine by inserting the requisite coin. A person who inserts the coin accepts the offer.

2. An offer may be specific or general
When an offer is made to a specific person or a group of specific persons (for example an offer to doctors), is called a specific offer. When the offer is addressed to public at large, it is called a general offer. A specific offer can be accepted by the specific person only, while a general offer can be accepted by any member of the general public.
Examples:

• A advertises that whosoever finds and brings his lost briefcase to him shall be paid Rs. 500; it is a general offer and when B finds out the briefcase and brings it to A, it amounts to acceptance of the offer by B.
• The Carbolic Smoke Ball Co., issued an advertisement in which the Company offered to pay pound 100 to any person who contracts influenza, after having used their smoke balls three times daily for two weeks, according to the printed direction. Mrs. Carlill, on the faith of the advertisement, bought and used the balls according to the directions, but nevertheless suffered from influenza. She sued the company for the promised reward. The company was held liable. [Carlill v. Carbolic Smoke Ball Co., (1893) 10 B 256]

3. An offer must be made with a view to create legal relationship
If the offer is made to create only a social or moral obligation, the obligation shall not be legally binding. Mere invitation to dinner is no offer. An offer to go to a picnic or an offer by a father to give a mobile to his son on passing’ C.A. foundation exams are the examples where there is no intention to create legal relationship.

4. Offer must be distinguished from an invitation to offer
Invitation to offer or invitation to treat means supply of information so that the negotiations can start and the other person can be moved to make an offer. It is an indication that the inviter is willing to enter into negotiations but is not yet prepared to be bound. A response to invitation to treat does not lead to an agreement. In fact it generates an offer.
Preliminary negotiations, or expressions of interest will be regarded as invitations to treat, rather than as offers. Thus, a sales person issuing a catalogue or price list informs the customers about the available products and their prices, makes an invitation to offer. Any per¬son desiring to buy any of those products will be making an offer, which may or may not be accepted.
The distinction between an offer and an invitation to offer depends upon the intention of the parties and this must be judged objectively.

Examples:

• Catalogue of goods is not offer, but only an invitation for offer; so also statement of lowest price in answer to enquiry.
• Display of goods with price tags in a self-service shop is merely an invitation to offer, and when a customer picks up those goods and intends to buy them that amounts to an offer. The shop-keeper is free not to accept that offer.
• A letter from a prospective buyer asking for quotations from a merchant is an invitation for an offer.
• A tender notice does not amount to an offer; it is merely an invitation to contractors for making offers. An advertisement calling for tenders, therefore, is not a proposal within the meaning of the Contract Act. It only invites a proposal It is the submission of a tender which is in the nature of a proposal or an offer.
• A prospectus issued by a company to purchase its shares or debentures is an invitation to offer. Application for the shares amounts to offer to the company. Allotment of shares by the company amounts to acceptance of the offer.
• A menu card in a hotel is an invitation to offer. When the order for eatables is placed it amounts to offer.
• Newspaper advertisements are generally not offers. Thus a newspaper advertisement inviting applications for jobs is not an offer but an invitation to offer. However the newspaper advertisement may be drafted in such a way that they may constitute offer. For example an offer for reward published in a newspaper may constitute an offer and any person who performs the required act accepts the offer and creates an agreement.
• An advertisement inviting intending buyers of goods to come and make bids at the auction is merely invitation to offer. Each bid is an offer, and when a bid is accepted that amounts to acceptance of the offer and results in an agreement.
• A Railway time table is not an offer. The Railway time table usually contains a notice “Railways gives notice that they do not undertake that the trains will arrive at the time specified in the time tables nor will they be accountable for any loss, inconvenience or injury that may arise from the delays or detentions”.

5. An offer must be communicated to the offeree
There can be no acceptance of an offer until the communication of the offer has been made to the offeree.
Example:

• G’s nephew was missing from home. He sent his servant L in search of his nephew. After his servant had left, he announced a reward for anybody who would trace his nephew, L traced the nephew without knowing the announcement of the reward. When he came to know of the reward he claimed it. It was held that he could not recover the reward as the offer containing the reward was not communicated to him. (Lalmatt Shukla v. Gauri Dutt. 11 All j 489).

6. The terms of offer must be certain
The terms of the offer must be certain or capable of being made certain. They should not be vague or ambiguous. For example, A says to B “I will give you a reasonable price if you sell the car”. This is not an offer since it is vague. According to sec. 29, agreements the meaning of which is uncertain are void.

7. An offer may be conditional
An offer may be subject to terms and conditions. In such cases
(a) the conditions must be clearly communicated to the offeree,
(b) the conditions must be reasonable.
Examples:

• A landlord’s offer to rent his house only to a vegetarian family is a conditional offer.
• X delivered one new sari to a laundry for washing. On the back of the printed receipt it was stated that the customer would be entitle to recover only 15% of the market-price of the article in case of loss. The sari was lost owing to the negligence of the laundry. In a suit by X it was held that the term was unreasonable. Such a term would give a premium on dishonesty and is against the public interest. Lily White v. R. Munnuswami. AIR (1966) Mad 13.

8. An offer must not be “negative” in terms
An offer should not contain a term, the non-compliance of which would amount to acceptance. For example. X writes to Y “I shall buy your house for Rs. 20 lakh. If you do not reply I shall assume that you have accepted my offer” This is not a valid offer.

9. Two identical cross offers do not make a contract.
When two persons make an offer to each other on similar terms, without having the knowledge of the offer being made by the other side, it is known as cross offer. Such cross offer does not amount to acceptance of one’s offer by the other and therefore does not constitute a contract.

• E.g. X, by a letter, offers to sell his car to Y for Rs. one lakh. Y, by a letter, which crosses, X’s letter in the post, offers to buy it for Rs. one lakh. The offers are cross offers and no binding contract will arise. A contract can arise only when acceptance is given after
  the knowledge of the offer.

(B) Kinds of Offer
1. Express or implied Offer:
When the offer is made in words, it is said to be express. An implied offer is one which is inferred from the act or conduct of the party or from the circumstances of the case. Sec. 9 states. “Insofar as the proposal or acceptance of any promise is made in words the promise is said to be express. Insofar as such proposal or acceptance is made otherwise than in words, the promise is said to be implied”.

2. Specific or general Offer:
When an offer is’ made to a specific person or a group of specific persons (for example an offer to doctors), is called a specific offer: When the offer is addressed to public at large, it is called a general offer. A specific offer can be accepted by the specific person only, while a general offer can be accepted by any member of the general public.

3. Standing offer:
A standing offer is a continuous offer. It consists of an offer to supply goods as and when required during a certain period for a certain price. It usually takes the form of a tender. It creates a contract only when an order of specified quantity is given to the tenderer. Thus each order placed creates a separate contract. A Ltd. gives a standing offer to supply cement to Public Works Department (PWD) at Rs. 130 per cement bag for the period of one year with a minimum quantity of 1 lakh bags. This is a standing offer. PWD can place order anytime during the year and purchase cement for Rs. 130 per bag but they will have to buy minimum 1 lakh bags of cement.

4. Cross Offer:
When two persons make an offer to each other on similar terms, without having the knowledge of the offer being made by the other side, it is known as cross offer. Such cross offer does not amount to acceptance of one’s offer by the other and therefore does not constitute a contract.

5. Counter Offer:
It is necessary that the acceptance must match the offer. It must be a mirror image of the offer. If any alteration is made, or anything added, then this will be a counter offer, and will terminate the offer. A counter offer is an implied rejection of original offer. [Union of India v. Bahulal AIR 1968 Bombay 294]

Standard form of contracts:
In the modern times due to ever-increasing growth in trade & commerce, contracts are concluded in standardized forms. Organisation like LIC, GIC, Railways enter into thousands of contracts every day. It is not possible for them to draft separate contracts with every individual. They issue printed forms of contract, which contains a large number of terms and conditions in “fine print” which restrict and often exclude liability under the contract. The individual is bound to sign them whether he likes the terms or not. They are for him to take or leave, he cannot alter those terms or even discuss them. Previously the offerees of such printed forms were helpless against such giant organisations which availed the opportunity to exploit the weak individuals by imposing onerous terms upon them. However in the recent times, in order to protect the oppressed individuals the courts have evolved various modes of protection. In fact in England. The (English)Unfair Contract Terms Act, 1977 was enacted to protect the individuals from unreasonable terms in the printed contracts.

WHAT IS AN ACCEPTANCE?

A contract emerges from the acceptance of an offer. Section 2(b) states that “A proposal when accepted becomes a promise” and defines ‘acceptance’ as “When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.” Acceptance converts the offer into a promise and then it is too late to remove it. Acceptance is to offer what a lighted match is to a train of gunpowder. It produces something which cannot be recalled or undone.

(A) Legal rules regarding a valid acceptance
1. Acceptance must be absolute and unqualified [Sec. 7(1)]
A conditional or a qualified acceptance is no acceptance at all. There should be 100% acceptance of the terms of the offer. The acceptance must match with the offer. It should be a mirror image of the offer. An acceptance with a variation is no acceptance but is a mere counter proposal, which the original offer or may accept or not.
Merret offered to sell his land to Neale for 280 pounds. Neale accepted the offer and enclosed a cheque for 80 pounds only and promised to pay the balance 200 pounds by monthly instalments of 50 pounds each. Held there was no acceptance. [Neale v. Merret (1930) W.N. 189]

2. Acceptance must be given only by the person to whom the offer is made
In the case of specific offer, it can be accepted only by that person to whom it is made. (Boulton v. Jones (1857) ER 232). In the case of a general offer, it can be accepted by any one by complying with the terms of the offer {Carlill v. Carbolic Smoke Ball Co. (1893)}

3. Acceptance may be expressed or given by conduct.
Acceptance may be expressed in words, spoken or written or it may be implied by conduct.

4. Acceptance must be expressed in some usual and reasonable manner. [Sec. 7(2)]
(a) Acceptance in a prescribed manner. If the offeror prescribes a particular method or type of acceptance, it should be given in that manner. Ex: If the offeror insists that acceptance should be given by telegram, then that method should be followed.
(b) Acceptance in usual and reasonable rpannenli the offeror does not prescribe any particular method of acceptance in that case according to sec. 7(2), the acceptance must be expressed in some usual and reasonable manner.
(c) Consequences of not following the prescribed manner. If the offeree fails to follow the prescribed mode of acceptance, the offeror may accept or reject such acceptance. If the offeror wants to reject it, he must inform the acceptor within a reasonable time that he is not bound by acceptance because it is not in the prescribed manner. If he does not inform the offeree, he is deemed to have accepted the acceptance although it is not in the desired manner. For example; X offers to buy house from Y at a certain price asks Y to send a telegram, if he accepts Y writes a letter accepting the offer. X may insist on a telegram from Y; but if X does not insist, the acceptance is valid.

5. Acceptance must be communicated by the acceptor.
Acceptance is not complete unless and until it is communicated to the offeror (Pawell v. Lee, 1908). Mental acceptance is no acceptance. But the party entitled to get the communication of acceptance can waive that right expressly or impliedly. In the case of unilateral contracts such waiver can generally be assumed. For e.g. a reward for finding a lost bag. If the agreement is signed and kept in the drawer instead of sending it to the other party then there is no acceptance (Brogden v. Metropolitan Railway Co.)
When communication of acceptance not necessary? (Exceptions to the rule that acceptance must be communicated.)
Acceptance can be by conduct. Where an offer takes the form of a promise to pay money in return for an act, the performance of that act will constitute acceptance. For example when a trader sends goods on receiving an order from a customer it is a case of acceptance by conduct. Sec. 8 provides that “performance of the conditions of a proposal is an acceptance of the proposal Similarly the acceptance of any consideration for a reciprocal promise is also an acceptance of the proposal ”

Thus communication of acceptance is not necessary in the following cases: (i.e., acceptance is implied)

1. By performance of conditions:!! the offeree merely performs the conditions of an offer, he will be taken to have accepted it. (Carlill v. Carbolic Smoke Ball Co. (1893) 1 Q.B. 269).
2. By acceptance of consideration: Sometimes offeror may send consideration with offer. If the offeree accepts the consideration, he accepts the offer. A sends a cheque of X one lac to B and offers to purchase his car for X one lac. If B encashes the cheque, he accepts the offer of A.
3. By accepting a benefit or service : Where offeree enjoys or avails the benefits of goods or services.
4. By acceptance of an offer by conduct : E.g. of trader sending goods on receiving an order
5. By waiver of the communication of acceptance : Where the party entitled to get the communication of acceptance waives-the right.

In the modern world contract may well be made by much more sophisticated means of communication than by the post. Telexes, faxes, and e-mail are all widely used, in addition to letters and telephones, as means of transmitting offers, counter-offer, acceptance and rejections. If one of these methods is used for an acceptance, when is it effective? (It takes effect at the point of receipt as held in Enstores Ltd. v. Miles Far East Corporation)

6. Acceptance must be given within a reasonable time and before the offer lapses and or is revoked.
The acceptance must be made when the offer is in force. If any time limit is prescribed in the offer, it should be accepted within that prescribed time limit. However if no time limit is  prescribed, it must be accepted within a reasonable time. What is reasonable time depends upon the facts of each case.

7. Acceptance must succeed the offer.
There is an offer first followed by its acceptance to create a contract. There can be no acceptance without offer. Acceptance in ignorance of the offer is no acceptance.

8. Rejected offers can be accepted only, if renewed
Once an offer is rejected it is dead. Only when the offer is renewed, that it can be accepted.

9. Acceptance cannot be presumed from silence
The acceptance of an offer cannot be taken as implied from the silence of the offeree. A mere silence or inaction of the offeree not evidenced by words or conduct, is in the eye of law no acceptance at all. For example, in Fellkouse v. Bindley (1862) F offered to buy B’s horse and added that if B did not reply within 2 weeks, F would be taken to have become the owner of the horse. The court held that no man can accept an offer by remaining silent.

COMMUNICATION OF OFFER AND ACCEPTANCE

When the contracting parties are face to face and negotiate in person there is instantaneous communication of offer and acceptance. But where services of the post offices are utilised for communication the following rules as laid down in sections 4 and 5 will apply.
Communication of offer (Sec. 4) :
The communication of offer is complete when it comes to the knowledge of the person to whom it is made.

Communication of acceptance (Sec. 4) :
The communication of acceptance has two aspects viz., as against the proposer and as against the acceptor. The communication of an acceptance is complete –

1. as AGAINST THE PROPOSER, when it is put in a course of transmission to him so as to be out of the power of the acceptor, and
2. as AGAINST THE ACCEPTOR, WHEN it comes to the knowledge of the proposer Le., when the letter of acceptance is received by the proposer.

Illustration : B accepts A’s proposal by a letter sent by post on 16th instant. The letter reaches A on 20th instant. The communication of acceptance is complete, as against A (proposer) when the letter is posted, i.e., 16th as against B on 20th Le., when the letter is received by A.
The acceptor becomes bound only when his acceptance comes to the knowledge of the proposer.
After the posting of the acceptance and before its delivery to the proposer, the acceptor has the right to rescind the contract by revoking his acceptance by speedier means.

Communication of revocation when complete Sec. 4

1. as against the person who makes it: When it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it.
2. as against the person to whom it is made: When it comes to his knowledge.

Illustration: A revokes his proposal by telegram. The revocation is complete as against A when the telegram is despatched. It is complete as against B when B receives it. B revokes his acceptance by telegram. B’s revocation is complete as against B when the telegram is despatched and against. A when it reaches him.

REVOCATION OF OFFER AND ACCEPTANCE: SEC. 5

Revocation of a proposal: It may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards (Sec. 5). This means that offer can be revoked at any time before the letter of acceptance is posted by the acceptor.
Revocation of an acceptance: It may be revoked a(any time before the communication of its acceptance is complete as against the acceptor, but not afterwards (Sec. 5). This means that an acceptance can be revoked at any time before the letter of acceptance is actually received by the proposer.

2.5 REVOCATION – HOW MADE/LAPSE OF OFFER: SEC. 6

An offer lapses or comes to an end

1. By notice of revocation.Tf the offeror gives notice of revocation to the other party, i.e., expressly withdraws the offer.
2. By passage of time:By passage of a stipulated time and if no time is stipulated, it lapses by the expiry of a reasonable time.
3. By death or insanity: By death or insanity of the offeror if the fact of the death or insanity is known to acceptor.
4. By failure of the acceptor to fulfil a condition precedent to acceptance.
5. By counter offer: An offer is revoked if a counter offer is made to it. A response to an offer which introduces new terms or conditions is a counter offer.
6. By rejection. When an offer is rejected it is dead and cannot be revived by its subsequent acceptance.

MULTIPLE CHOICE QUESTIONS:

1. Partial acceptance of offer result in
(a) counter offer
(b) unqualified acceptance
(c) binding contract
(d) none of the above

2. A tender is –
(a) an offer
(b) invitation to an offer
(c) acceptance of offer
(d) none of the above

3. Death or insanity of the proposer will revoke the proposal –
(a) Automatically.
( b) If the fact of the death or insanity is known to the offeree.
(c) The knowledge of death or insanity is irrelevant.
(d) Only if the family members of the proposer informs the offeree.

4. When counter offer is given, the original offer –
(a) Lapses.
(b) Remains valid.
(c) Is accepted and becomes a contract.
(d) The original offer can also be accepted.

5. For an acceptance to be valid, it must be –
(a) Partial & qualified.
(b) Absolute & unqualified.
(c) Partial & unqualified.
(d) Absolute & qualified.

6. Acceptance takes place as against the proposer, when –
(a) When the letter of acceptance is posted by the acceptor.
(b) When the letter of acceptance is received by the proposer.
(c) When the offeree, writes the letter of acceptance, but doesn’t post it.
(d) All the above.

7. An advertisement for sale goods by auction –
(a) Amounts to an invitation to offer.
(b) Amounts to an offer to hold such sale.
(c) Amounts to an implied offer.
(d) Amount to a general offer.

8. Communication of offer is complete when –
(a) It comes to the knowledge of the offeree.
(b) It is posted to the offeree.
(c) When the offeror writes the letter but does not post it.
(d) None of the above

9. An acceptance will be revoked at any time before the communication of acceptance is complete against the acceptor, but not afterwards –
(a) True
(b) False
(c) Acceptance once given cannot be revoked.
(d) Acceptance can be revoked at any time.

10. Acceptance once given cannot be revoked.
(a) True
(b) False
(c) Incomplete information.
(d) None of the above.

11. A tender and a bid at an auction sale are-
(a) Not offers.
(b) Offers.
(c) Acceptance of the offer.
(d) Invitation to offer.

12. A quotation is:
(a) Not offer.
(b) Offer.
(c) Acceptance of the offer.
(d) Invitation to offer.

13. If the offeree does not accept the offer according to the mode prescribed, then –
(a) The offeror may accept or reject such acceptance.
(b) The offer lapses automatically.
(c) It is a counter offer.
(d) Offeree commits a breach of contract.

14. Communication of offer is complete when –
(a) The letter is posted to the offeree.
(b) The letter is received by the offeree.
( c) The offer is accepted by the person to whom it is made.
(d) It comes to the knowledge of the offeror that the letter has been received by the offeree.

15. A bid at an auction sale is
(a) An implied offer to buy
(b) An express offer to buy
(c) An Invitation to offer to buy
(d) An invitation to come to bid

16. When the offers made by two persons to each other containing similar terms of bargain cross each other in post, they are known as
(a) Cross offers
(h) Implied offers
(c) Direct offers
(d) Expressed offers

17. When the proposal or acceptance is made otherwise than words, the promise is said to be
(a) Expressed
(b) Implied
(c) Accepted
(d) Rejected

18. The communication of an acceptance is complete as against the acceptor
(a) When it is posted by him
(b) When it is put in the course of transmission
(c) When it comes to the knowledge of the proposer
(d) None of these

19. Goods displayed in a shop window with a price label will amount to
(a) Offer
(b) Invitation to offer
(c) Acceptance of offer
(d) None of these

20. A promisee is
(a) A person who makes a promise
(b) A person who monitors the statement of intentions of two parties
(c) A person to whom the promise is made
(d) None of these

21. The person making the proposal is called
(a) Promisor
(b) Promise
(c) Participator
(d) None of these

22. Acceptance in ignorance of the offer is
(a) Valid
(b) Invalid
(c) Void
(d) Voidable

23. When the contract is perfectly valid in its sub¬stance but which cannot be enforced because of certain technical defects. This is called a
(a) Unilateral contract
(b) Bilateral contract
(c) Unenforceable contract
(d) Void contract

24. Is telegraphing lowest price on request a mere invitation for an offer?
(a) Yes
(b) No
(c) Not in normal cases
(d) None of these

25. In the case of proposal and acceptance by telephone conversation, contract is made at place where ………….. is received.
(a) Offer
(b) Consideration
(c) Proposal
(d) Acceptance

26. An offer does not lapse if the
(a) Offeror dies before acceptance
(b) The offeree dies before acceptance
(c) Acceptance is made by the offeree in igno¬rance of the death of the offeror
(d) Acceptance is made by the offeree with knowledge of the death of the offeror

27. When a person without expressing his final willingness, proposes certain terms on which he is willing to negotiate, he makes
(a) Counter offer
(b) Standing offer
(c) Offer
(d) Invitation to treat

28. A subscribed to the “Daily News” for one year. After the expiry of his subscription, the newspaper company continued to send him the paper by mail for 3 years. A continued to use the paper but failed to pay the bills.
(a) A is not liable to pay as non-renewal of the subscription is akin to non-acceptance
( b) Non-payment of bills by A can be construed as non-acceptance of the offer made by sending the newspapers
(c) A is bound to pay as his continued use of the newspaper was an acceptance of the . offer made by sending the newspaper
(d) A fresh contract is to be entered into after the lapse of the first year

29. Which one of the following falls into the category of offer?
(a) Newspaper advertisement regarding a sale
(b) Display of goods by a shopkeeper in his window with prices marked on them
(c) An advertisement for a concert
(d) Announcement of reward to the public

30. The big Corporations like LIC supply ready forms of Contract with all conditions printed; the offeree has either to take all or let go. Such contracts are known as
(a) Company contracts
(b) Corporation contracts
(c) Government
(d) Standard form contracts

31. A dress is displayed in the showroom of a shop with a price tag attached to the dress. A buyer interested in the dress and ready to pay the price mentioned in the tag approached the shopkeeper for purchasing the dress.
(a) The shopkeeper can refuse to sell the dress
(b) The shopkeeper cannot refuse to sell the dress as the buyer has accepted the offer
(c) In case of refusal, the shopkeeper will be liable for breach of contract
(d) The shopkeeper cannot refuse to sell the dress but may charge higher price

32. In one auction sale, ‘X’ is the highest bidder. The auctioneer accepts the offers not by speaking but by striking the hammer on the table. This amounts to
(a) Express acceptance
(b) Implied acceptance
(c) Future acceptance
(d) No acceptance

Answers:

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. Death or insanity of the proposer automatically revokes the proposal.
2. Crossing of letters of offer in the post for the sale & purchase of the same article constitute a valid agreement.
3. A proposal may be revoked by the proposer before the posting of the letter of acceptance by the acceptor.
4. If an offer is made in the form of a promise in return for an act, the performance of that act, even without any communication thereof, is to be treated as an acceptance of the offer.
5. Counter offer to an offer does not make the original offer lapse.
6. Acceptance can be made even without the knowledge of the offer.
7. A counter offer proposing different terms amount to rejection of the proposal.
8. When the promisee does not accept the offer of performance the promisor is not responsible for non-performance.
9. For an acceptance to be valid it should not be partial or qualified.
10. Acceptance takes place as against the proposer, when a letter is posted, not when it is received.
11. An advertisement for sale of goods by auction amounts to an offer to hold such sale.
12. Communication of offer is complete when it is posted to the offeree.
13. Performance of conditions of a proposal is an acceptance of the proposal.
14. An acceptance will be revoked at any time before the communication of the acceptance is complete against the acceptor, but not afterwards.
15. An offer need not be made to an ascertained person.
16. An agreement to agree in future upon terms to be settled afterwards between the parties is valid.
17. Acceptance once given cannot be revoked.
18. A tender and a bid at an auction sale are not offers.
19. A quotation and an answer to a question or inquiry are not offers.
20. A contract is formed when the acceptor has done something to signify his intention to accept, not when he has made to his mind to do so.
21. If the offeree does not accept the offer according to the mode prescribed by the offeror, the offer does not lapse automatically.
22. Communication of an offer is complete when the letter is posted though it has not reached the person to whom the offer is made.
23. Where the mode of acceptance is prescribed in the proposal, it need not be accepted in that manner.
24. A proposal when accepted becomes a contract.
25. Acceptance takes place when and where the message is received.

Answers:

CA Foundation Business Laws Study Material Chapter 1 Nature of Contract

WHAT IS LAW?

Law is a mechanism for regulating the human conduct in a society. It consists of rules and principles enforced by an authority to regulate people’s behaviour with a view to secure justice, peaceful living and social security.

WHAT IS MERCANTILE LAW?

• There are various branches of law such as civil law, criminal law, tax law, labour law, business law etc.
• Mercantile Law, Commercial Law or Business Law is that branch of law, which regulates business and commercial transactions. It includes the laws relating to Contract, Sale of Goods, Partnership, Companies, Negotiable Instruments, Insurance, Carriage of goods etc.

LAW OF CONTRACTS

• The law of contract forms the basis of the commercial/business law. It is concerned with enforceability of promises.
• For example, if a supplier ‘S’ has promised to supply goods to a manufacturer ‘M’ on a spe¬cific date, there is a binding contract. Based on this promise, the manufacturer M will plan his production schedule and accept orders from his customers. Now if the supplier fails to supply the goods in time. (i.e. commits a breach of promise) M can claim damages for the loss he has suffered. Thus the purpose of the Law of Contract is to ensure that the expectations created by promises of the parties are fulfilled and obligations created by agreements are enforced.
• In the absence of the Law of Contract it will be impossible to carry on trade and commerce. The businessman who has made a promise should fulfil it or else he will be liable to pay damages to the other party. The object of law of contract is to introduce certainty and defi¬niteness in business transactions. To quote Anson, “The law of contract is intended to ensure that what a man has been led to expect shall dome to pass; and that what has been promised to him shall be performed”.

(a) Applicability to business community as well as others
The law of contract is applicable not only to the business community, but also to others. Every one of us enters into contracts day after day. When you buy a book, or keep your vehicle at the cycle/ scooter stand or travel in a bus, or take a DVD for home viewing, in all these transactions of daily life, you are entering into a contract.

(b) Sources of Law of Contract

• The law of contract in India is contained in the Indian Contract Act, 1872. The Act came into force on the first day of September, 1872 and it applies to the whole of India except the State of Jammu & Kashmir.
• It mentions elements necessary for a valid contract; it says which persons are capable of entering into enforceable agreements; it mentions the cases in which agreements are avoid-able; it declares certain kinds of agreements void; it deals with performance of contract and it prescribes remedies for breach of contracts.
• Apart from Indian Contract Act, 1872, the other sources of law of contract are: Judicial de-cisions or precedents; and customs and usages of trade. The decisions of the Supreme Court are binding on the lower courts. The judicial decisions constitute an important source of the law of contract, especially when the Act is silent on a point or there is ambiguity.
• Customs /usages refer to a generally accepted practice or behaviour among members of a business community. A custom or usage to be legally binding must not be inconsistent with statutory law and must be widely known, certain and reasonable.
• The Contract Act will prevail over any usage or custom of trade. However, any usage, custom or trade will be valid and binding as long as it is not inconsistent with the provisions of the Contract Act.

(c) The Act is not exhaustive
The Contract Act is not exhaustive. It does not deal with all the branches of the law of contract. There are separate Acts which deal with contracts relating to negotiable instruments, transfer of 8 property, sale of goods, partnership, insurance, etc. For example, if you are buying a house the law applicable will be the Transfer of Property Act while if you are buying a car, the governing law is g the Sale of Goods Act. The Partnership Act regulates the partnership agreements. The Contract Act thus, contains the general principles of contract and does not deal with contractual relationships H which are dealt under special statutes.

(d) What is the Scheme of the Act?
The scheme of the Act may be divided into two groups:
(a) General Principles of the law of contract (Secs. 1-75).
(b) Specific kinds of contracts, viz.;

1. Contracts of Indemnity and Guarantee (Secs. 124-147).
2. Contracts of Bailment and Pledge (Secs. 148-181)
3. Contracts of Agency (Secs. 182-238).

Sections 76-123 relating to Contracts of Sale of Goods were repealed in 1930 and a separate Act called the Sale of Goods Act was enacted. Similarly, sections 239-266 relating to partnership were repealed in 1932 when the Indian Partnership Act was passed.

(e) The subject matter of contract can be discussed under the following heads

• The Nature of contract.
• Formation of contract i.e., how a contract is made, what things are necessary for the formation of a contract.
• Operation of Contract, Le. whom the contract affects, and how the contract is performed.
• Discharge of contract, Le. when the rights and obligations arising out of a contract are extin-guished.
• Remedies for a breach of contract.

WHAT IS A CONTRACT?

According to Section 2(h) of the Indian Contract Act: “An Agreement enforceable by law is a con-tract”.
Thus a contract consists of two elements:

(a) An agreement
(b) Legal obligation Le. a duty enforceable by law.

(a) Agreement
An agreement is defined in section 2(e)
Every promise and every set of promises, forming the con-sideration for each other is an agreement”.
Now, what is promise?
Promise is defined as an accepted proposal, for section 2(b) says. “A proposal, when, accepted becomes promise ”. Thus an agreement is an accepted proposal  OR

      AGREEMENT = OFFER + ACCEPTANCE

The process of definition comes down to this:
An agreement comes into existence when one party makes a proposal or offer to the other party i=md that other party gives his acceptance thereto. Thus there should be exchange of promises. There must be two or more persons to make an agreement because one person cannot enter into an agreement with himself. There should also be consensus-ad-idem Le. both the parties must agree on the same thing in the same sense.
(b) Legal Obligation
For an agreement to become a contract, it must give rise to a legal obligation Le., a legal duty which is enforceable by law. The parties must have the intention to impose a duty on the promisor to fulfil the promise and bestow a right on the promisee to claim its fulfilment. This obligation must not be merely moral alone; it must be legal.

For example, A invites B to join his marriage party and B promises to do so. But B eventually fails to keep up his promise. In this case, there is a full-fledged agreement between A and B. But behind this agreement there is no intention on the part of the parties to impose a duty on the promisor (Le., A) and bestow a right on the promisee (Le., B) to claim the fulfilment of the contract. Therefore, the agreement is not enforceable by law.

ALL CONTRACTS ARE AGREEMENTS BUT ALL AGREEMENTS ARE NOT CONTRACTS

Agreement is the genus of which contract is the species. An agreement is a wider term than a contract. It may be a legal agreement (Le. enforceable by law) or a social agreement (Le. not enforceable by law). Agreements relating to social matters like an agreement to go to movie together or a visit to a hotel do not create legal obligations between the‘parties and hence are not contracts. Only those agreements grow into contracts, which create legal obligations.

DISTINCTION BETWEEN AGREEMENT AND CONTRACT

WHAT TYPE OF LEGAL OBLIGATIONS ARE DEALT WITH BY THE LAW OF CONTRACTS?
Obligations may arise from different sources. The law of contract deals only with such legal obli-gations which arise from agreements. Obligations which are not contractual in nature are outside the purview of the law contract. For example, obligation to observe traffic rules does not fall within the scope of the Contract Act.
The other sources of obligations are: obligations under the trust law or the law of tort or the fun-damental duties under the Constitution etc. They are outside the purview of the Contract law since they are not voluntarily created through an agreement. Salmond has rightly observed:

“The law of contracts is not the whole law of agreements, nor is the whole law of obligation.
It is the law of those agreements which create obligations and those obligations, which have their source in agreements.”

Contract creates Right in Personam
“The law of contract creates ‘right in personam’as against ‘right in rem. ”Right in personam means a right available against a particular person. For example, A buys TV from B for Rs. 20,000. B has a right to recover this amount. This right can be exercised only by B and only against A. This right of B is right in personam.

Right in rem
Right in rem means a right available against the whole world. If A is the owner of a house property he has the right of peaceful possession and enjoyment of the property against the whole world.

WHAT ARE THE ESSENTIAL ELEMENTS OF A VALID CONTRACT?

Section 10 provides “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 essential elements or essentials of a valid contract (or enforceable agreement) are:

• An offer or proposal by one party and an acceptance of that offer by another party resulting in an agreement.
• An intention to create legal relations or an intent to have legal consequence.
• Free consent between the parties.
• The parties to contract are legally capable of contracting.
• The object of the contract is legal and is not opposed to public policy.
• The agreement is supported by consideration.
• The agreement must not have been expressly declared to be void under the Act.
• The terms of the contract are certain.
• The agreement is capable of being performed, Le. it is not impossible to perform the contract.
• Where agreement is required to be in writing under any law it must be in writing; and where both writing and registration are required by some Act or Law, the agreement must be in writing and registered.

Offer and acceptance
There must be a “lawful offer” and a “lawful acceptance” of the offer, thus resulting in an agree-ment. The adjective lawful implies that the offer and acceptance must satisfy the requirements of the Contract Act in relation thereto.

Intention to create legal relations
There must be an intention among the parties that the agreements should be attended by legal consequences and create legal obligations. Agreements of a social or domestic nature do not con-template a contract. An agreement to dine at a friend’s house is not an agreement intended to create legal relations and therefore is not a contract.

Balfour Vs Balfour, 1919, 2 KB 571.
Mr. & Mrs. Balfour who were living in Ceylon went to England. Mrs. Balfour fell ill. Mr. Balfour had to come back to Ceylon to join his duties. However he promised to pay 30 pounds per month to his wife. On his failure to pay, Mrs. Balfour sued him for the recovery of the amount. It was held that it was a domestic agreement and the husband never intended to create any legal rela-tions out of it.
In commercial agreements an intention to create legal relations is presumed. Thus, an agreement to buy and sell goods intends to create legal relationship, and hence is a contract, provided other requisites of a valid contract are present.

Lawful consideration
Consideration means ‘something in return.’ An agreement is enforceable when each of the parties to it gives something and gets something in return. If A agrees to sell his house to B for Rs. 5 lac, the consideration for A’s promise is Rs. 5 Lac and B’s promise is a house. Thus consideration is the price paid by one party for the promise of the other. The payment of money is a common form of consideration. But it may also consist of an act, forbearance, and a promise to do or not to do something. Consideration must be real, valuable and lawful.

Capacity of parties
The parties to an agreement must be competent to contract; otherwise it cannot be enforced by a court of law. Every person is competent to contract who is
(a) of the age of majority,
(b) of sound mind and
(c) is not disqualified from contracting by any law. (Sec. 11)

Free consent
The consent of the parties must be free i.e. the parties should enter into contract voluntarily and free will. Section 14 lays down that consent is not free if it is caused by
(a) coercion,
(b) undue influence,
(c) fraud,
(d) misrepresentation or
(e) mistake.

Lawful object
The object of the agreement should be lawful. It should be authorised or sanctioned by law. The object of an agreement is unlawful if it is forbidden by law or is fraudulent or is immoral or opposed to public policy. For example a “supart” contract for unlawful recovery of money or a smuggling agreement is unlawful hence unenforceable.

Agreement not expressly declared void
The Indian Contract Act, 1872, has expressly declared certain agreements to be not enforceable at law, e.g. agreements in restraint of marriage, agreements in restraint of trade, wagering agreements etc. The parties to the agreement should ensure that their agreement do not fall in the category of these void agreements, otherwise the agreement will not be enforceable even if all the other essentials of valid contract are present.

Certainty
The terms of the contract should be certain and definite and not vague. Section 29 says “Agree-ments, the meaning of which is not certain or capable of being made certain are void.” For example, A agrees to sell B “a hundred tons of oil”. There is nothing whatever to show what kind of oil was intended. The agreement is not enforceable because it is vague and uncertain.

Possibility of performance
Yet another essential feature of a valid contract is that it must be capable of performance. Section 56 lays down that “An agreement to do an act impossible in itself is void.” If the act is impossible in itself, physically or legally, the agreement cannot be enforced at law. For example, A agrees with B to discover treasure by magic. The agr eement is void due to impossibility.

Writing and registration
According to the Indian Contract Act, a contract may be oral or in writing. An oral contract is as much enforceable as a written contract. However, if there is a provision in any law prescribing that contracts should be in writing/registered then, this formality of writing and registration should be followed.

For example, in certain special cases the Contract Act prescribes that the contract should be in writing or/and registered. Section 25 of the Contract Act requires that an agreement to pay a time barred debt must be in writing and an agreement to make a gift for natural love and affection must be in writing and registered.

Similarly, certain other Acts also require writing or/and registration to make the agreement enforce-able by law which must be complied with.
Thus

1. an arbitration agreement must be in writing as per the Arbitration Act, 1996,
2. an agreement for a sale of immovable property must be in writing and registered under the Transfer of Property Act, 1882 before they can be legally enforced,
3. for example, contract with the Government should be in writing. Article 299, Constitution of India.

KINDS OF CONTRACTS

On the basis of enforceability or validity a contract can be classified under following heads:
(a) Valid Contracts
(b) Void Agreement
(c) Voidable Contract
(d) Void Contract
(e) Unenforceable Contract
(f) Illegal or Unlawful Agreement

On the basis of Formation a contract can be classified as:
(g) Express Contract
(h) Implied Contract
(i) Quasi-Contract
(k) E.com. Contract

On the basis of performance it can be classified as:
(k) Executed Contract
(l) Executory Contract

Executory contract can further be classified as:
(m) Unilateral Contract
(n) Bilateral Contracts

(a) Valid Contract
A valid contract is one which contains all the essential elements of a valid contract. It is an agree¬ment which is binding and enforceable by law.

(b) Void agreement
“An agreement not enforceable by law is said to be void. [Sec. 2(g)]

Features
(a) A void agreement does not give rise to any legal consequences. It is void ab-initio, Le., from the very beginning. If any of the essentials of a valid contract, other than free consent, is missing, the agreement is void, Le., it cannot be enforced at courts of law. For example, an agreement with a minor or an agreement without consideration.
(b) Certain agreements have been expressly declared as void by the Indian Contracts Act, in sections 11, 20, 23-30 and section 56.
(c) There cannot be restitution of benefit under a void agreement and if something has been paid it cannot be recovered. However, when an agreement is discovered to be void or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it. (Sec. 65).
For example, A pays B Rs. 50,000 in consideration of B’s promising to sell his car to him. The car is destroyed in an accident at the time of the promise though neither party was aware of the fact. In this case the agreement is discovered to be void and B must repay A Rs. 50,000. It should be noted that when the agreement is known to be void, no restitution is allowed. Thus if A pays Rs. 10,000 to B to assault. C, the money cannot be recovered.

(c) 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.” [Sec. 2(i)].

Features

• A voidable contract is enforceable at the option of one party. For ex. if X is forced to sign a contract the contract is voidable at the option of X. X may either rescind (avoid or repudiate) the contract or elect to be bound by it.
• A voidable contract continues to be good until it is avoided by the party entitled to do so.
  The aggrieved party must exercise his option of rejecting the contract
  • within a reasonable time and
  • before the rights of third parties intervene, otherwise the contract cannot be repudiated.
• The party rescinding a voidable contract shall if he has received any benefit thereunder from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received (Sec. 64)

The various circumstances in which a contract is voidable are depicted by the following chart:

(d) Void contract
“A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable”. [Section 2(j)].

Features
a. The term void contract appears to be contradictory, but it is a nice way of describing a situation where a contract is valid in the beginning but becomes void subsequently. Note that a CONTRACT BECOMES VOID. IT IS NEVER VOID AB INITIO.
b. A void contract is one, which was valid when it was made but becomes void later on. For example, A agrees to supply liquor to B but before he gives delivery, the Government declares total prohibition. The contract becomes void. A void contract is not void from its inception and its valid and binding on the parties when originally entered but subsequent to its formation it becomes invalid.
c. Restitution of benefit allowed when contract becomes void: According to Section 65 when a contract becomes void, the party who received any advantage under such agreement, should restore or make compensation for it to the party from whom he received it. For example, A takes an advance of Rs. 1000 for singing at a concert for B. A is too ill to sing. A must refund to B the 1000 rupees paid in advance.

The reasons which transform a valid contract into a void contract as given in the Contract Act are as follows:

• Supervening impossibility (Section 56): A Contract becomes void if it becomes impossible to perform, after it is made. A and B contracted to marry each other. Before the time fixed for the marriage A goes mad. In this case the contract becomes void due to subsequent impossibility.
• Subsequent illegality (Section 56): A contract becomes void if it becomes illegal after it is made. A agrees to sell B 100 bags of wheat at Rs. 550 per bag. Before delivery, the government bans private trading in wheat. The contract becomes void due to subsequent illegality.
• Repudiation of a voidable contract: When a voidable contract is rescinded, the contract be¬comes void.
• Subsequent impossibility of contingent event (Sec. 32): A contingent contract to do or not to do something on the happening of an uncertain future event, becomes void, when the event becomes impossible.

The following are the points of differences between various types of contracts discussed above:

The legal effect of void agreements and void contract is the same. Both cannot be enforced in a Court of Law. Note that a contract cannot be void ab-initio and only an agreement can be void ab-initio.

(e) Unenforceable contract
An unenforceable contract is one, which suffers from some technical defect. It is valid in itself, but Is not capable of being enforced in a court of law because of non-observance of some technical formalities such as insufficiency of stamp, want of registration, attestation etc. In some cases such contracts can be enforced if their technical defects are removed, for example, the defect of under stamping can be removed by affixing the right value of stamps.

(f) Illegal or unlawful agreement
An illegal agreement is one, which is contrary to law. According to section 23 an agreement is illegal and void if its object or consideration.

1. is forbidden by law, or
2. is of such a nature that, if permitted, it would defeat the provisions at any law, or
3. is fraudulent, or
4. involves or implies injury to the person or property of another, or
5. the court regards it as immoral or opposed to public policy (Sec. 23)

An illegal agreement may attract punishment and prosecution under criminal law. An agreement which is collateral to an illegal agreement also becomes illegal. It is like an contagious disease and is fatal not only to the main contract but to collateral transactions as well.

Difference between Void & Illegal agreements 
a. Scope : An illegal agreement is narrower in scope than a void agreement. All illegal agreements are void but all void agreements are not necessarily illegal. E.g. an agreement with a minor is void, but not illegal.
b. Collateral Transactions : When an agreement is illegal, other agreements which are incidental or collateral to it are also tainted with illegality, hence void.
Example: India and Pakistan are playing test match in Nagpur. X of Nagpur, agrees to pay Rs. 1 lac to Y, if India wins. The match is won by India and in order to pay Y, X borrows 11 lac from Z, who is aware of the purpose.
The agreement between X and Y is void being wagering (betting) agreement and it is also illegal in Maharashtra. The agreement between X and Z being collateral agreement is also void because the main agreement is between X and Y is illegal.
c. Restitution: In the case of illegal agreement, no right/remedy is available to either party. Hence money paid under an illegal agreement cannot be recovered. Under sec. 65 if an agreement is discovered to be void any person who has received advantage/benefit must restore it or make compensation for it.
d. Punishment: In case of an illegal agreement the parties may be punished under the criminal law, in case of a void agreement (which is not illegal) there is no such punishment.

(g) Express contract
An express contract is created by the words of the parties, whether oral or written. Section 9 of the Act provides that if a proposal or acceptance of any promise is made in words the promise is said to be express. For example: A tells B that he offers to sell his house for Rs. 20 lakhs and B replies that he accepts the offer.

(h) Implied contract
An implied contract is created by implication of law or by the conduct of the parties. For example; A coolie in uniform picks up the luggage of Mr. S to be carried out of the railway station without being asked by S and S allows him to do so. Here, S is compelled to pay to the coolie for his services.
Tacit Contracts: Tacit means Silent. These are the contracts that are inferred through action of the conduct of the parties without any words spoken or written. For example; Mr. V steps into a bus to go to a certain location. V is bound to pay the fare, although he has not in words promised to do so. Other examples of Tacit contracts are obtaining cash from an ATM, sale by fall of hammer at an auction sale etc.
Tacit contracts are not separate forms of contracts but they fall within the scope of implied contracts.

(i) Quasi-Contract
Quasi contract is a contract in which there is no intention on the part of either party to make a contract but law imposes a contract upon parties. These are not actual contracts but they resemble a contract which is created by law under certain circumstances. Here, law creates legal rights and obligations when there is no real contract. For example; obligation of finder of lost goods to return them or liability of person whom money is paid by,mistake to repay it back.

(j) E-Com Contract
These are also known as e-commerce contracts, EDI contracts, Cyber contracts, mouse click con¬tracts or e-contracts. These contracts are created by parties using electronic means such as email. Different parties create networks which are linked to other networks through Electronic Data Interchange (EDI). When you buy a mobile phone from an online shopping website or through a mobile application, you enter into an e-contract.

(k) Executed contracts
An executed contract is one that has been performed by all parties. A buys a TV set from B for Rs. 20,000. A pays the price and B delivers the TV. It is an executed contract. Both the parties have performed their respective obligations.

(l) Executory contracts
An executory contract is one where both the parties have still to perform their respective contractual obligations. A contract may be partly executed and partly executory. For example: A contracts to sell and deliver a TV to B for Rs. 20,000 to be paid in 3 weeks. A delivers the TV. The contract is executed as to A, executory as to B, as B has not yet paid the agreed price.

(m) Unilateral contracts
In case of a unilateral contract, only one partly has to perform his obligation and the other party has performed his obligation at the time of formation of contract or before. If A buys a railway ticket for his journey from Nagpur to Bombay. A has performed his duty under the contract by paying the fare but the railways are yet to perform their promise ie. of carrying him from Nagpur to Bombay. A unilateral contract is partly executed and partly executory. Such contracts are also called as contracts with executed consideration or one-sided contracts.

(n) Bilateral contracts
A bilateral contract is one in which both the parties are yet to perform their respective obligations at the time of formation of contract. They are similar to executory contracts and are called as con¬tracts with executory consideration.

(o) Formal and simple contracts
This classification is made in the English Law.

FORMAL CONTRACT
Formal Contract is expressed in a particular form. Its validity depends on form alone. It is in writing. The signature is usually attested Le. witnessed. No consideration is necessary. The Indian Contract Act does not recognize these contracts since consideration is a necessary element in a contract subject to certain exceptions mentioned in Sec. 25.
Formal contracts can be sub-divided into:

(a) Contract of Record
(b) Contracts under seal

(a) Contract of Record: A contract of record consists of either a judgment of a court or recognizance. They derive their binding force from the authority of the Court.
A COURT JUDGMENT on being recorded is called a contract of record. It is an obligation imposed upon the parties by the court as a judicial authority. It is not a contract in the real sense since it is not based on any agreement.
RECOGNISANCE is conditional judgment arising in criminal proceedings binding a person to be of good behaviour or to appear as a witness, subject to a money penalty if the obligation is broken. It sort of a written acknowledgement to the State by an accused that on his default to be of good conduct etc. he is bound to pay to the State a certain some of money.

(b) Contract under seal: They are also called as specialty contracts or deeds. All the terms of such contracts are reduced to writing and then the contract is signed, sealed and delivered. Consideration is not essential to support a deed or a contract under a seal.

SIMPLE CONTRACTS
These contracts are also called as parol contracts. This class includes all contracts not under seal and for their enforcement they require the fulfilment of the essential elements of the contract Le. consideration, free consent etc. Simple contracts may be made orally or in writing.

Multiple Choice Questions:

Question 1.
Law of contract
(a) Is the whole law of obligations
(b) Is the whole law of agreements
(c) Deals with only such legal obligation which arise from agreement
(d) Deals with social agreements
Answer:
(c).

Question 2.
Social agreements are
(a) Enforceable in the courts
(b) Not enforceable in the courts
(c) Subject to legal obligations
(d) Made by social workers.
Answer:
(b).

Question 3.
All contracts
(a) Are agreements
(b) Are not agreements
(c) Do not have legal obligations
(d) Should be in writing
Answer:
(a).

Question 4.
Obligation between parties that form contract
(a) Are all kinds of obligations
(b) Are legal obligation which spring from agreements
(c) Are not voluntary in nature
(d) None of the above
Answer:
(b).

Question 5.
A contract means an agreement
(a) Which is enforceable by law
(b) Which is not enforceable by law
(c) Which creates social obligation.
(d) Which is in writing.
Answer:
(a).

Question 6.
Voidable contract
(a) are enforceable by law if they are not avoided
(b) are not enforceable by law
(c) can be enforced if the court directs
(d) can be enforced with prior permission of Court/ Government
Answer:
(a).

Question 7.
The terms of agreement
(a) must be certain
(b) must be capable of made certain
(c) unambiguous and clear
(d) all the above.
Answer:
(d).

Question 8.
All illegal agreements
(a) are not void
(b) are not void ab-initio
(c) are void
(d) none of the above
Answer:
(c).

Question 9.
A void agreement
(a) is illegal
(b) is not void ab-inition
(c) may or may not be illegal
(d) none of the above
Answer:
(c).

Question 10.
All kinds of obligations between the parties form part of the contract. This statement is
(a) True
(b) False
(c) Partially true
(d) None of the above
Answer:
(b).

Question 11.
A contract is made where:
(a) A buys a book from a shop
(b) X bids at a public auction.
(c) X agrees with Y to discover a treasure by magic.
(d) Z agrees to attend the birthday party of his friend.
Answer:
(a).

Question 12.
Right in rem implies:
(a) a right available against the whole world.
(b) a right available against a particular individual.
(c) a right available against the Government.
(d) none of the above
Answer:
(a).

Question 13.
A void contract
(a) is void from the very beginning.
(b) is valid in the beginning but becomes void later on.
(c) is enforceable at the option of one of the contracting parties only.
(d) none of the above.
Answer:
(b).

Question 14.
A void agreement is one
(a) which is forbidden by law
(b) enforceable at the option of one of the parties
(c) which is not enforceable by law
(d) enforceable by law
Answer:
(c).

Question 15.
An agreement created by words spoken or written is called
(a) express agreement
(b) execute agreement
(c) implied agreement
(d) voidable agreement
Answer:
(a).

Question 16.
Which of the following statements is false
(a) Law of contract is the whole law of obliga¬tions
(b) Certain contracts must be in writing
(c) All contracts are agreements
(d) All illegal agreements are void
Answer:
(a).

Question 17.
Parol contracts are also known as
(a) Simple Contract
(b) Format Contract
(c) Void Contract
(d) Conditional Contract
Answer:
(a).

Question 18.
A agree to sell to B a hundred tons of oil. There is nothing whatever to show what kind of oil was intended. The agreement is
(a) Valid
(b) Void for uncertainty
(c) Voidable
(d) Illegal
Answer:
(b).

Question 19.
A agrees to sell to B my white horse for Rs. 500 or Rs. 1,000. There is nothing to show which of the two prices was to be given. The agreement is
(a) Valid
(b) Void
(c) Voidable
(d) Unenforceable
Answer:
(b).

State Whether The Following Are True Or False:

Question 1.
An agreement and a contract are one and the same thing.
Answer:
False.

Question 2.
Law of Contract is the whole law of obligations.
Answer:
False.

Question 3.
Social agreements are enforceable in the Courts.
Answer:
False.

Question 4.
All contracts should be in writing.
Answer:
False.

Question 5.
A foreigner is not competent to enter into a contract.
Answer:
False.

Question 6.
All contracts are not agreements.
Answer:
False.

Question 7.
The Indian Contract Act, 1872 is a complete code on contracts.
Answer:
False.

Question 8.
Precedents (Judicial decisions) form an important source of mercantile law.
Answer:
True.

Question 9.
Voidable contracts are enforceable by law, if they are not avoided.
Answer:
False.

Question 10.
Mercantile law is applicable to businessman only.
Answer:
False.

Question 11.
An agreement the meaning of which is not capable of being made certain is void.
Answer:
True.

Question 12.
An unenforceable contract can be enforced if the technical defect is removed.
Answer:
True.

Question 13.
A contract is a contract from the time its performance is due and not from the time it is made.
Answer:
False.

Question 14.
A contract consists in actionable promise or promises.
Answer:
True.

Question 15.
An agreement with intention to create legal liability is not enforceable in law.
Answer:
False.

Question 16.
In an executed contract both parties have yet to fulfil their obligations.
Answer:
False.

Question 17.
All illegal agreements are void but all void agreements are not necessarily illegal.
Answer:
True.

Question 18.
All void agreements are illegal.
Answer:
False.

Question 19.
There cannot be a contract to make a contract.
Answer:
True.

Question 20.
All kinds of obligations between the parties form part of the contract.
Answer:
False.