Indian Contract Act Lesson

Lesson 1
1.1 INTRODUCTION
The Indian Contract Act was passed in the year 1872 and it also came into force on
the 1st day of September, 1872. The Act extends to the whole of India except the
State of Jammu and Kashmir. It consists of 238 sections. It has been divided into 10
chapters. Chapter VII of the Act is wholly repealed by the India Sale of Goods act,
1930 (vide section 65). The Act deals with particular contracts in separate chapters.
The provisions of the Act do not apply to contracts made before the Act came into
force. Broadly speaking, The Indian Contract Act deals with all facets of contract
more particularly the stages of formation of a contract, the elements of a contract, the
performance of the contract, the breach of the contract and also the available remedies
when there is a breach of contract.
A contract in which two or more countries are involved in respect of its performance,
questions arise as to the law of which country would govern such a contract. In the
first instance, the law which would govern such a contract would be the law expressed
by the parties themselves in the contract. In the absence of an expressed intention, the
rule to apply is infer an intention from the terms and nature of the contract and the
general circumstances of the case. Such circumstances may be (i) the country in
which the Contract was entered into or (ii) where the payment was to be made. In
such a contract, if a payment is to be made, it should be of the legal tender governing
the country in which payment is to be made. [Principle of LexLoci i.e. the law of the
land]

1.2 MEANING AND DEFINITION OF CONTRACT
The meaning and definition of a contract are discussed below with references to some
eminent jurists.
1.2.1 Meaning
An agreement enforceable by law is a contract. An agreement is an accepted proposal.
Thus it can be said that a contract is an agreement; an agreement is a promise and a
promise is an accepted proposal. Every agreement in its ultimate analysis, is the result
of proposal from one side and its acceptance by the other. Hence it is a bilateral
transaction.

Illustration 1: If Prem offers to sell Pummy twenty-five pens for Rs. 20 each to be
delivered on Saturday and Pummy agrees to the deal. It is a valid contract. If one
party fails to offer something of benefit to the other, there is no contract.
1.2.3 Definition
Section 2 (h) of the Indian contract Act of 1872 defines a contract as an agreement
enforceable by law.
According to Section 2(h) of the Act there are mainly two aspects of contract -
(a) An agreement
(b) Agreement enforceable by law
Some eminent jurists have also made an attempt to define the term contract which are
useful for interpretation of the various provisions of the Contract Act. These
definitions are given below:-
• Sir John William Salmond: “An agreement creating and defining obligations
between the parties”.
• Halsbury: “An agreement between two or more persons which is intended to be
enforceable at law and is constituted by the acceptance by one party of an offer made
to him by the other party to do or abstain from doing some act.”
Thus in law a contract means the following:
• Existence of two parties
• Existence of an agreement between two or more parties
• Existence of a legal obligations between parties who enter into an agreement
1.2.4 What is an Agreement?
An agreement is defined in section 2 (e) of the Indian Contract Act of 1872. It states
that every promise and every set of promises forming the consideration for eachother
is an agreement.
1.2.5 What is a promise?
Section 2 (b) of the Indian Contract Act of 1872 defines a promise as: A proposal
when accepted becomes a ‘promise’.
Under section 2 (c) the person who makes the proposal is called the ‘promisor’. The
‘promisee’ is the person that accepts the proposal.
Illustration: Rani makes an offer to sell her plot of residential land for Rs. 50 lakhs
to Malthi. If Malthi accepts this offer, then after the offer is accepted, the acceptance

becomes a promise. The promise between Rani and Malthi is an agreement.Therefore,
agreement consists of offer and acceptance or it can be stated as:
Agreement = Offer / Proposal + Acceptance of Offer / Proposal
When the two parties make an agreement, they have to perform their promise. If
either party defaults in carrying out its obligation there will be a breach of contract if
it is enforceable by law.
Under section 2 (g) an agreement that is not enforceable by law is void.
What is enforceability of agreement?
An agreement can be enforceable by law only if there is some legal obligation.
 The law of contracts does not take into consideration any agreement in which
there is no legal obligation.
 An obligation is to do, or to restrict, a certain act or activity. The Contract Act
deals with only those agreements where there is an intention to create a legal
obligation.
 When there is an agreement that involves some business or commercial contracts
it creates a legal obligation because the parties to the contract have the intention
to create a legal obligation.
However, the parties entering into a contract in domestic, social or religious events
that do not have the intention to create any legal obligations cannot be called as a
legal obligation unless proved otherwise.
1.3 CHARACTERISTICS OF A CONTRACT
Section 10 of the Indian Contract Act, 1872 enumerates certain essential elements of a
valid contract. These are given below:
1.3.1 Agreement:
An agreement constitutes a contract. It consists of two elements. These are:
An offer, or proposal, by a person and acceptance of the offer, by another. Thus a
contract must have two parties. One, who proposes or makes an offer, and another
that accepts the offer.
1.3.2 Legal Relationship
The intention of the two parties should be to create legal relationship. While deciding
if the contract is valid or not, attention should be made to look into the objective and
not subjective nature of the intention to create a legal relationship. It should also take
into consideration what would be a reasonable intention of the person who enters into

a contract. A domestic, religious or a social agreement where there is no intention to
create a legal relationship cannot be called a valid contract. It is presumed that
business dealings and commercial agreements are made with the intention to create a
legal relationship. However social agreements can be enforceable if legality of
relationship is intended and established. Similarly business dealings may not establish
a legal relationship in an agreement and are therefore not enforceable.
Case Law 1

Mr Balfour was a civil engineer, and worked for the Government as the Director of
Irrigation in Ceylon (now Sri Lanka). Mrs Balfour was living with him. In 1915, they
both came back to England during Mr Balfour's leave. But Mrs Balfour got rheumatic
arthritis. Her doctor advised her to stay, because a jungle climate was not conducive
to her health. As Mr Balfour's boat was about to set sail, he promised her £30 a month
until he came back to Ceylon. They drifted apart, and Mr Balfour wrote saying it was
better that they remain apart. In March 1918, Mrs Balfour sued him to keep up with
the monthly £30 payments. In July she got a decree nisi and in December she obtained
an order for alimony. At first instance, Sargant J held that Mr Balfour was under an
obligation to support his wife.

Judgment
There is no such contract here. These two people never intended to make a bargain
which could be enforced in law. The husband expressed his intention to make this
payment, and he promised to make it, and was bound in honour to continue it so long
as he was in a position to do so. The wife on the other hand, so far as I can see, made
no bargain at all. That is in my opinion sufficient to dispose of the case.
1.3.3 Free Consent
Section 14 of the Indian Contract Act states there should be free consent between the
parties making an agreement. The consent is considered to be free when there is no
coercion, undue influence, mistake, fraud, or misrepresentation in the agreement
prepared by the parties. If the consent is not free, the contract is not valid. Amit gets
his parents to sell the house to his friend forcibly. This is not a valid contract, as the
agreement was not made with free consent. When a contract is made both parties must
understand and agree on all the same thing or all material facts of the agreement. It is
called consensus ad idem when there is a meeting of minds of both the parties. They

should have agreed on all the terms and conditions without any undue influence or
mistake in understanding of the product.
Illustration: Mr. Rajhans is selling his blue sports model car to his secretary.
However his secretary Rita thinks that she is buying the new red sports model car.
There is no meeting of minds and hence there is no valid contract.
1.3.3 Capacity of Parties
The parties entering into a contract should be competent to make an agreement.
According to section 11 of the Act they should have (i) attained the age of majority,
(ii) They should be of sound mind, (iii)They should not have been disqualified to
enter into a contract.
Illustration 1: Meera is a lunatic and gets attacks of lunacy at intervals. Is she
competent to contract? Meera can enter into a contract in those periods when she is
not suffering from lunacy. She is competent to contract when she is not under the
influence of lunacyattack.

1.3.4 Status of other Entities
Any company is competent to enter into a contract according to the legislations under
which they are governed. In this case the Memorandum of Association and Articles of
Association of the company will provide further guidelines in addition to provisions
of Indian Contract Act. Partners are allowed to enter into contracts under Partnership
Act of 1932. Associations of persons are competent to contract subject to their
agreement.
1.3.5 Lawful Consideration
According to Section 2(d), 23 and 25 of the Act a valid contract must have a
consideration. The person making a promise must receive something in return for it. It
may or may not be an adequate return but there has to be some value and it should not
be fraudulent, unlawful, immoral or opposed to public policy. The agreement is
legally binding and enforceable when both parties to an agreement give something
and also get something in return. Consideration may not be in cash only. It can be in
kind. It can also be an act or abstinence from doing something. It can be a promise to
do or not to do something.
Illustration 1: Ali sold 5 fountain pens for Rs. 125 each to Megha with a promise
to receive 12 red roses in return instead of the money in cash. Is this lawful

consideration? This is a lawful consideration as Megha gives roses instead of cash.
Some consideration is being given to Ali. The consideration may not be of equal
value.

1.3.6 Object of an Agreement
According to section 23 of the Indian Contract Act 1872 the object of an agreement
should be within the purview of law. It should not be fraudulent or be forbidden by
law. The object should be legal, moral and according to public policy. It should not
have any legal flaws otherwise it will not be enforceable by law (Section 23).
1.3.7 Formalities of an Agreement
The agreements under the Indian Contract Act may be oral or in writing. Whenever an
agreement is a valid contract and it is made in writing it should be complete with all
legal formalities. If the legal formalities are not complete, law cannot enforce it. The
contract will become void. Some contracts have to be made in writing otherwise they
will not be valid. In the following cases contracts have to be in writing:
• Cheques, bills of exchange, promissory notes and other negotiable instruments.
1.3.8 Valid Agreement but not Enforceable: In many cases even a valid
contracts may not be enforceable by law. If a country declares an agreement void it
cannot be enforced. Hence it is important to know the law of the country in which the
agreement is made otherwise the legal rights cannot be exercised (Sections 24 to 30
and 56).
1.4 CLASSIFICATION OF CONTRACTS
The Indian Contract Act classifies contracts into different categories. Contracts can be
categorized from the point of view of (i) enforceability/legal validity (ii) according to
formation, (iii) according to performance and (iv) according to obligation.
1.5 (A) CLASSIFICATION: ACCORDING TO
ENFORCEABILITY
A contract that is enforceable can be classified under different categories. Such
contracts may be valid contracts, voidable contracts, void agreements, void contracts,
agreements discovered to be void, unlawful or illegal agreements and unenforceable
contracts.
1. Valid Contract: A valid contract is one, which satisfies the essential elements
described in section 10 of the Indian Contract Act. It must be an agreement in which
an offer is made and accepted. It should have the intention to create legal relations.
There should be lawful consideration and the object should be legal. It should have

clear terms with free consent of both the parties. When all the essential elements are
complete in all respects it is a valid contract and it is enforceable by law.
2. Voidable Contract: If one party to the contract has the option of enforcing a
contract by law, but not at the option of the other or others, it is a voidable contract. In
those cases when the consent is not given freely but coercion has been used the party
has the option to continue with the contract or rescind it. Another example of a
voidable contract is when a person has promised to deliver certain goods on a certain
date and he does not deliver it, it is the option of the buyer to continue or to rescind
the contract (section 55).
Illustration 1: Ruhi wanted to buy a gold chain for her mother’s birthday. The
goldsmith promised to deliver it on the 20th of May. On the due date the chain was
not ready. Ruhi rescinded the contract and decided to buy something else. The
goldsmithwanted compensation. Is he right? The goldsmith is not correct. If he did
not deliver the goods on time Ruhi has the right to rescind the contract.
Thus in a voidable contract the aggrieved party can take benefit of the situation.
He/she may decide to go ahead with the contract as well. Thus in a voidable contract a
flaw can create a benefit for a party. However if the party decides to continue with the
contract, the terms and agreements will continue to be valid and the contract will also
be a valid one.
3. Void Contract: These contracts are enforceable when the agreement is made but
due to certain lapses they become unenforceable at a later date. The agreement
becomes unenforceable for the following reasons:
• According to section 56 if a contract is illegal or impossible to conduct it becomes
void.
• The contract becomes void if it is voidable in nature and the party who could
exercise the option of avoiding it decides to do so.
• Any contract, which has a contingency clause and it, becomes impossible to conduct
it either on the happening or not happening of a particular event is a void contract.
This is explained in (section 32).
Illustration 1: Anil made an agreement with Suman to sell house no P-21 in
Sushant Lok in Gurgaon. The terms and conditions were finalized. Before the due
date for the transaction to take place there was an earthquake and the house fell
down. Anil could not keep his promise because the house did not exist any more. This

contract is void because the agreement was made on the basis of the house in
possession. Since Anil did not have the house after the natural calamity it was a near
impossibility to deliver the goods to Suman.
4. Void agreement: Section 2(g) describes void agreements as those that are
unenforceable from the inception of the agreement. In other words these agreements
are void ab initio. . A mistake between the two parties to an agreement of a material
fact makes the agreement void. Therefore void agreements do not create any legal
rights between the parties to the contract. It also does not create any obligations.
There is a flaw in the agreement itself. The most common example is that of a minor
who does not have the legal rights to enter into an agreement. If he/she does, the
agreement is null and void ab initio.
1.5.1 Void Agreement and Void Contract: Distinction
A void agreement is void ab inito from the beginning of the contract. A void contract
is valid when it is made but due to certain lapses it becomes unenforceable by law
subsequently.
A void agreement will have the following effects:
• It will be unenforceable by law
• If both parties know that the agreement is void money will not be recoverable
if already paid.
• Collateral transaction will be legal unless the agreement itself is illegal.
• All legal promises are enforceable if the agreement can be proved to be
severable.
1.5.2 Void Agreement and Voidable Contract: Distinction
The difference between void agreement and void contract can be discussed on the
basis of (i) enforceability (ii) Compensation and restitution and (iii) the effect on
collateral agreement.
Enforceable: Void agreements are not enforceable from the time of their formation.
They are said to be void ab initio. Void contracts are enforceable when they are
formed but they become unenforceable if the party who has the option to rescind the
contract does so. It is a valid contract if it is not repudiated.
A void agreement is not enforceable at all but a void contract can be enforced if the
parties agree to complete the contract and exercise the option accordingly.

Compensation and restitution: In a void agreement there is no compensation
because the agreement is not enforceable by law. In a voidable contract the person
who exercises the option of rescinding the contract can get compensation if he has
rightly taken the option of not going ahead with the contract.
It follows therefore that restitution is allowed in a voidable contract unless the parties
knew of the illegality of the agreement at the time of formation.
Collateral agreement: An agreement that is void due to illegality has an effect on
collateral agreements as well. Such agreements will be correspondingly void because
of illegality in consideration or object in the agreement.
A voidable contract however has no effect on collateral contracts.
1.6 B. CONTRACTS: ACCORDING TO MODE OF CREATION
Contracts on the basis of mode of creation refer to Express Contracts, Implied
Contracts and Quasi Contracts.
1. Express Contract: When an offer is made in words or in writing and another
person accepts it an express contract is formed. Promise is considered to be express
when it is made in words written or spoken.
Illustration 1: Priya writes to Prem offering to sell her car for a price of Rs.1,00,000.
Prem accepts the offer by responding through an email. This is an express Contract
2. Implied Contract: A contract is said to be implied when it has to be inferred from
the action, gestures or conduct of the parties. It is not a verbal or a written contract. It
has to be implied from circumstances of the case. In the agreement some terms may
be implied or the complete agreement is implied.
Illustration 1: Janaki attended an informal meeting of a company. The company was
glad to receive her suggestions and accepted her presence and took some of her
suggestions. There is an implied contract that Janaki should be paid for her services
because the company allowed her to attend the meeting and also used her suggestions
for the benefit of the company.
The contracts can be of mixed type as well. They can be express and implied contracts
both. Some part of the combination may be express and parts of it may be implied.
Illustration: Ram offers to buy an I pod from Tilak for Rs 10,000. Tilak accepts the
offer by sending the I pod to Ram. Ram’s offer acceptance is implied by his conduct.
It is a mixed type of contract. It combines the characteristics of both express and
implied mode of creation.

3. Quasi Contract: Contracts which are not in actual fact either express or implied but
there is circumstantial evidence to support that they are actually contracts are called
Quasi Contracts or semi contracts. There is actually no contract between the parties as
there is no agreement between the parties but the obligations cited in sections 68 to 72
of the Indian Contract Act provide legality to them.13 These are known as “certain
relations resembling those created by contracts”.
Illustration: Arti leaves her computer in Monica’s house. Monica treats it as her own
and begins to use it for her official purposes. Arti has no agreement with Monica. She
should pay for the use of the computer, which was kept with her for safe- keeping. 1.7
CONTRACTS ACCORDING TO PERFORMANCE
Contracts can be classified according to performance measures. Such contracts are
called executed contracts, executory contracts, unilateral contracts and bilateral
contracts.
1. Executed contract: An executed contract is one where both the parties have
performed and completed their obligations. The contract is completed and executed.
No responsibilities remain from either side of the contract.
Illustration: Rajesh goes to Westside store and buys a shirt for himself. He pays Rs
1450 and the shirt is packed and delivered to him. He leaves the store as the contract
is executed. The obligations of both the parties are complete.
2. Executory Contract: In a contract sometimes one party may carry out his/her
obligation but the other has still to conduct his/her obligation. This obligation will be
performed in future. This type of a contract, which is not yet complete, is called an
executory contract. In some executory contracts both parties decide to complete their
contract in future because of certain important reasons.
Illustration 1: Minna sells her computer to Zara . Immediately Zara sends the
payment for it. Minna has to still deliver the computer. This is partly executed and
partly an executory contract.
3. Unilateral Contract: In some contracts one party has already completed
his/her obligation but now the other party is left to complete his/her part of the
contract. When the other party executes his/her part of the contract that, is still
outstanding, it is called a unilateral contract. These contracts are also called contracts
with executory consideration. When the contract is formed, there is an obligation of
only one party to perform.

Illustration: Murli’s dog was lost while he was taking a morning walk. He offered
a reward of Rs 1,00,000 for bringing back his dog safely. Sashi found the dog and
returned it to the owner. The owner now has a unilateral contract to perform of paying
the reward money as the dog has been found.
4. Bilateral Contract: If both parties to a contract have outstanding obligations
when the contract is formed, it is called a bilateral contract. The contract has been
formed but the obligations will be performed on a future postponed date. The date of
execution is not material for determining the validity of the contract.
Illustration: Puran makes a promise to sell 100 pen-drives to Kamla. The
understanding is that the price will be paid only on delivery of the material required.
This is a bilateral contract. The contract was settled but both delivery and price paid
for it will be made at a future date.

OFFER AND ACCEPTANCE
2.1 WHAT IS AN OFFER / PROPOSAL?
An agreement consists of two parties where one party makes an offer to the other
party and the other party either accepts the offer or rejects it. If the offer is accepted
then only it becomes an agreement otherwise it doesn’t.
Section 2(a) of the Indian contract act defines an offer / proposal as follows: “When a
person signifies to another person his or her willingness to do or abstain from doing
anything, with a view to obtaining the assent of that other to such act or abstinence, he
or she is said to make a proposal.”
Illustration: Savita makes an offer to Priya, she says “Priya would you like to buy my
gold necklace?” Priya rejects the offer thus there is no agreement. If Priya had
accepted the offer to buy the necklace then an agreement would have been formed.
An offer consists of two parties:
1 Offeror- The person who makes an offer or a proposal
2 Offeree- The person to whom the offer or proposal has been made.
Illustration1: Ram says to Raghu ‘Will you buy my bicycle for Rs 3000?’ In this Ram
is an offeror and Raghu is an offeree.
2.11 How is an offer made?
An offer can be made in two ways:
1 Express – Offer is made orally or in written.
2 Implied – Offer is made by conduct of the parties or circumstances of the case.

Express Offer can be of two types:
1 Oral Offer - Offer is made by words spoken.
2 Written Offer - Offer is made in writing
Oral offer can be made in person
Oral offer can be made through a telephone and mobile.
Written offer can be made through letters, telegrams and emails.
Implied offer is not made in words. It is implied from the conduct of the parties or
circumstances of the case. The offeror does not make the offer to the offeree in the
usual mode. That is he/she neither makes an oral offer nor a written offer. The offeror
makes the offer silently by his/her conduct.
Illustration1:
A Metro train in Delhi runs on a particular route. There is an implied offer from the
metro train to carry passengers on the route who pay the specified fare.
2.12 To whom can offer be made?
An offer can be made to a definite person or to the public at large. In the former case
it is called specific offer and the latter is called general offer.
Specific offer: Offer made to a specific person or a particular person and only this
person can accept the offer.
Illustration: Devendra says to Chaitali ‘will you buy my Laptop for 40 thousand
rupees?’ In this case Devendra has made a specific offer and only Chaitali can accept
the offer.
General Offer: Offer is made to the public in general and anyone in the public can
accept the offer.
Illustration: Gangadhar had his son Pankaj missing from school. He placed an
advertisement in the Hindustan Times, which said, anyone who finds my son will be
rewarded with 5 lakh rupees. This is a case of general offer wherein anyone who reads
the paper and finds Gangadhar’s son is entitled to the reward.
Case Law 1
Carllil vs. Carbolic Smoke Ball Co.
In this case A Company by the name of Carbolic Smoke Ball Company prepared a
medicine for influenza. The medicine was called ‘The Carbolic Smoke Ball’ and an
advertisement was paced in a newspaper and magazine saying that anyone who
contracted influenza after having used the medicine according to the printed

directions would be offered hundred pounds. A lady Mrs Carllil bought the medicine
and used it according to the printed directions but she was attacked by influenza. She
sued for hundred pounds and won the case. She won the case because the offer made
by the company was a general offer and anyone who read the advertisement could
accept the offer. As the medicine did not fulfill the condition offered by the company
therefore it was bound to compensate Mrs Carlill.

2.2 CONDITIONS FOR VALID OFFER
There are various rules for valid offer. These rules are mentioned below:
! Offer must give rise to legal relations: The intension of the offeror must be to
create legal relationship with the offeree. An offer, which does not create legal
obligation, does not form a contract. For instance a social invitation even if accepted
will not result in a contract.
Illustration: Sati invited Rati on her birthday party and Rati accepted the invitation.
This is not a valid offer because if Rati fails to attend the birthday party sati cannot
take any legal action of breach of contract.
1 Offer must be definite and certain: The terms of an offer must not be ambiguous
and vague.
2 Offer is different from a mere declaration of intension: A declaration
of intension is a statement made by a person indicating his or her willingness to
make an offer in future.
3 Offer is different from invitation to offer: When a person proposes certain terms
for negotiation with the other party and thereby invites the other party to make offer
on those terms.
4 The offer should not contain a term the non-compliance of which would
amount to acceptance: The person who makes an offer cannot say to the offered that
if he or she does not communicate acceptance by a certain time the offer will be
considered as accepted.
5 Offer must be communicated: An offer must be communicated to the offeree
because acceptance by the offeree can be given only after he or she has come to know
of the offer.
Case Law 8
Lalman Shukla vs. Gauri Dutt

A person sent his servant to trace his missing nephew. After the servant left he
announced that anybody who traced his nephew would be entitled to a reward of
rupees five hundred and one. The servant traced the nephew in ignorance of the
reward. Subsequently when he came to know of the reward, he claimed it. The Court
held that there can be no acceptance unless there is knowledge of the offer and since
the servant did not know about the reward when he found the boy therefore he was
not entitled for the reward.
6 A statement of price is not an offer: A statement of price is just information and
not an offer.
Case Law 9
Harvey vs. Facey22
Harvey sent a telegram to Facey which said ‘will you sell us your Bumper hall Pen?
Telegraph lowest cash price.’ To this Facey sent a telegram which said ‘lowest price
for Bumper Hall Pen Nine hundred pound.’ Harvey again sent a telegram to Facie,
which said ‘ We agree to buy Bumper hall Pen for the sum of nine hundred pound
asked by you.’ Held there is no contract because the first telegram sent by Harvey to
Facie had two questions out of which Facie replied to only one question regarding the
price. He did not reply to the other question, which was for his acceptance to sell.
Thus Facie in his telegram only gave information to Harvey regarding the price of the
product he neither made an offer not accepted the offer made by Harvey.
2.3 WHAT IS AN ACCEPTANCE?
Section 2 (b) defines acceptance as ‘ When the person to whom the proposal is made
signifies his assent thereto, the proposal is said to be accepted.’ Thus acceptance is the
expression of assent for the offer/ proposal. The proposal when accepted becomes a
promise23.

2.31 Who can accept?
Only the person to whom the offer has been made has the right to accept. Thus it is
only the offeree who can accept the offer made by the offeror. The person to whom
specific offer is made can only accept the offer on the other hand a general offer made
to the public at large, can be accepted by anyone having knowledge of the offer.
Case Law Boulton vs. Boulton
A sold his business to B without disclosing this fact to his customers. J a customer of
A was not aware of the sale and in ignorance placed an order for the supply of goods.

B supplied the goods. J refused to pay for the goods and so B sued him. It was held by
the Court that J was not liable since J had made an offer to A and not to B and B knew
very well that the offer is not made to him therefore he was not capable of accepting
the offer.
2.4 CONDITIONS FOR VALID ACCEPTANCE
There are various rules for valid acceptance. These rules are mentioned below:
1 Acceptance must be absolute and unqualified: The offeree should accept the
whole of the offer. Accepting few terms of an offer is not a valid acceptance. The
offeree must accept the offer without putting any conditions. Conditional acceptance
is not a valid acceptance. If acceptance is conditional it leads to counter-offer which
may or may not be accepted by the original offeror.
Illustration: Hari offered to sell his car to Ravi for Rs 40,000. Ravi told hari that he
is ready to buy the car for rupees 35000. Ravi’s acceptance is not a valid acceptance
because it is not accepted fully and unconditionally. Instead it is a counter-offer,
which he makes to Hari.
2 Acceptance must be in the mode prescribed or some usual and reasonable
mode: If the offeror prescribes a mode in which the offer has to be accepted and the
offeree uses a different mode of acceptance then the offeror can within a reasonable
time insist that the offer be accepted in the prescribed manner and not otherwise. If
the offeree still does not follow the prescribed mode of acceptance then in that case
the offeror may choose not to be bound by the acceptance.
Illustration: Aruna sends a letter of offer to Awadh Raj asking him to buy her flat
in Delhi for rupees 20 lakhs. She also mentions that if the proposal is acceptable to
him he can send his acceptance through post. Awadh Raj after receiving the offer sent
his acceptance through an email. Aruna on receiving the email insisted that Awadh
Raj send his acceptance only by post and not any other mode. Awadh raj did not send
his acceptance by post. Hence Aruna was not bound by Awadh raj’s acceptance. In
case the offeree follows a different mode of acceptance from the prescribed mode and
the offeror does not insist then the offeror is deemed to have accepted the deviated
acceptance.
3 Silence cannot be a mode of acceptance: The offeror cannot impose on the
offeree a condition like: If you do not reply within a reasonable time then Ishall

consider the offer to be accepted. The offeror cannot take the offeree’s silence as
acceptance of offer.
Illustration: Nisha a seminar coordinator sends an invitation for the seminar to
Ravi through an email. The email also said that if Ravi does not reply within a weeks
time it will assumed that he has accepted the invitation. Ravi does not reply. Hence
Nisha cannot assume that Ravi has accepted the invitation.
4 Acceptance must be given within the time prescribed or a
reasonable time: Acceptance by the offeree must be given within the period
prescribed by the offeror or if the period is not specified then the acceptance must be
given within a reasonable time.
Illustration: Venkat offers to sell his scooter to Rehman and tells him to reply within
a weeks time. Rehman does not reply within a week hence the offer lapses.
5 Acceptance cannot precede an offer: An offeree can give acceptance only
after the offer has been communicated to him / her. A leading case on this point
Illustration: Anita sends a letter of offer to sell her lap top to Geetha for rupees thirty
thousand. Geetha writes a letter of acceptance to buy the lap top but by mistake
forgets to post the letter. Hence the agreement has not been formed.
2.5 COMMUNICATION OF OFFER AND ACCEPTANCE
A contract comes into existence only after the offer has been accepted by the offeree
that is when the acceptance of the offer has been communicated by the offeree to the
offeror. Communication of offer and acceptance is instantly done when the offeror
and the offree are face-to-face. The problem of communication arises when the parties
are separated due to distance. If the parties are at a distance and the offeror makes the
offer through a telephone the contract is concluded as soon as the offror hears the
acceptance from the offeree.
2.51 Communication of Offer
According to Section 4 communication of offer or proposal is complete when it
comes to the knowledge of the offeree that is the person to whom the offer is made. In
case the communication is made by post the communication of offer is complete
when the letter containing the offer reaches the offeree.
Illustration: Neha in Gwalior offers by a letter on 18th June 2008 to sell her house to
Aparna in Delhi for rupees ten lakh. The letter reaches aparna on 21st June 2008.
The communication of offer is complete on 21st June.

2.52 Communication of Acceptance
Communication of acceptance is complete against the offeror and the offeree in two
stages, which are as follows:
Communication of acceptance is complete against the offeror (proposer) when the
letter of acceptance is put in course of transmission by the offeree (acceptor) to the
offeror so as to be out of the power of the offeree (acceptor) to withdraw it.
Illustration: Aparna after receiving the letter of offer from Neha has readily agreed
to accept the offer to buy the house therefore she writes a letter of acceptance to Neha
and posts the letter on 23rd June 2008. The communication of acceptance against the
offeror (Neha) is complete on 23rd June.
Communication of acceptance is complete against the offeree (acceptor) when the
letter of acceptance comes to the knowledge of the offeror.

2.6 COMMUNICATION OF REVOCATION / WITHDRAWAL
Communication of revocation is complete against the person who makes it and the
person to whom it is made in two different ways, which are as follows:
The person making the revocation: The communication of revocation is complete
against the person making the revocation (withdrawal) when he / she sends the letter
of revocation.
Illustration: Neha after posting the letter of offer feels that she no longer wants to
sell her house to Aparna and decides to withdraw her offer. She writes a letter of
revocation of offer on 19th June 2008 and posts it to Neha. The communication of
revocation of offer is complete against Neha on 19th June.
2.7 TERMINATION / LAPSE OF AN OFFER
An offer or proposal can either be accepted, rejected, revoked or it might just lapse.
The offer when accepted becomes a valid agreement. If the offeree does not like the
offer he or she may choose to reject the offer. The offeror also has an option to revoke
or withdraw the offer.
Section 6 of the Indian contract act deals with various circumstances in which the
offer lapses, which are as follows:
1 Rejection of offer: The offeree may choose to reject an offer if he or she does not
like the offer. Once the offer is rejected it comes to an end. The offer once rejected
cannot be revived by the offeree. It is only upto the offeror if he or she wishes to
renew the offer.

Illustration: Aradhna makes an offer to Sadhna she say “Will you buy my computer
for rupees twenty thousand?” Sadhna refuses to buy Aradhna’s computer. Thus the
offer is rejected
2 Counter-offer: This means an offer in response to an offer. Once an offer is made
by the offeror to the offeree it is upto the offeree to accept or reject the offer.
Sometimes the offeree neither accepts nor rejects the offer rather he or she makes his
or her own offer to the offeror. By doing this the first offer which was made by the
offeror lapses or comes to an end. If later the offeree decides to accept the offer he or
she cannot do so.
Illustration: Aradhna offers to sell her computer to Sadhna for rupees twenty
thousand. Sadhna makes a counter offer by saying that she is willing to buy the
computer if Aradhna sells it for rupees fifteen thousand. Thus the offer initially made
by Aradhna comes to an end and now it is upto her to accept or reject the counter
offer made by Sadhna.
3 Revocation of offer: An offer can be withdrawn anytime by the offeror before the
communication of acceptance of offer is complete against him. He cannot revoke or
withdraw his or her offer once the offeree has sent his or her acceptance. A general
offer must be revoked using the same channel and mode in which the original offer
was made.
Illustration: Aradhna offers to sell her computer to Sadhna for rupees twenty
thousand. But before Sadhna could accept the offer Aradhna decided to withdraw her
offer so she sent a notice of revocation of offer to Sadhna.
4 Offer not accepted in the prescribed mode: If the offeror has prescribed a mode
in which the offeree has to accept the offer and the offeree does not give his or her
acceptance in the prescribed mode then the offer comes to an end.
Illustration: Aradhna makes an offer for selling her computer for rupees twenty
thousand to Sadhna in writing and mentions in the offer that if the offer is acceptable
to her then she should give her acceptance in writing only. Sadhna however conveys
her acceptance through telephone. Thus the offer comes to an end.
5 Failure of the acceptor / offeree to fulfill a condition precedent to acceptance:
Sometimes the offeror may ask the offeree to fulfill certain conditions before
acceptance. If the offeree does not fulfill these conditions then the offer comes to an
end.
Illustration: Aradhna makes an offer of selling her computer to Sadhna for rupees

twenty thousand and mentions in the offer that if the offer is acceptable to Sadhna
then she should send an advance cheque of rupees five thousand. Sadhna does not
send the cheque. Thus the offer comes to an end.
6 Death or insanity of the Offeror: If the person who makes the offer dies or
becomes insane after making the offer, and the offeree comes to know of it before
accepting the offer then the offer automatically comes to an end. If the offeree accepts
the offer without the knowledge of the death or insanity of the offeror then the
acceptance is valid and the promise / offer will be executed by the Offeror’s executor.
The act is silent about the effect of death of the offeree. But if the offeree dies or
becomes insane the offer will end because it is only the offeree who has the right to
accept or reject the offer and not the offeree’s executor.
Illustration 1: Aradhna makes an offer to sell her computer to Sadhna for rupees
twenty thousand but before Sadhna could give her acceptance she comes to know that
Aradhna has turned insane. The offer comes to an end.
7 Lapse of time: A proposal may come to an end due to lapse of time. In case the
offeror has given duration within which the offeree has to accept the offer and the
offeree does not give the acceptance within the given duration then the offer will
come to an end. In case the offeror has not specified the duration for acceptance then
the offeree can give the acceptance within a reasonable time and if within the
reasonable time the offeree does not give the acceptance then the offer will come to
an end.
Illustration 2: Bata Shoes gave an advertisement in the newspaper in the month of
December that they are giving 50% discount on shoes for the New Year. Ram visits a
Bata showroom in the month of March and demands for a discount of 50%. He is not
given the discount. This is so because even though the exact duration of the discount
offer is not given but a reasonable period would be till the month of January or may
be the month of February. March is too late to be within the reasonable period to
avail the New Year discount.

CONSIDERATION
3.1 DEFINITION OF CONSIDERATION
Section 2(d) of the Contract Act defines consideration as “when at the desire of the
promisor, promisee of any other person has done or abstained from doing, does or

abstains from doing, or promise to do or abstain from doing, something, such an act
or abstinence is called consideration.”
Illustration: Manu promised to give Tina money to study. There was no
consideration attached to it. Manu can revoke the offer as it is not binding in law.
3.2 ESSENTIAL ELEMENTS OF CONSIDERATION
There are five essential elements of consideration.
1. Act or abstinence : Consideration is a promise to do something or to abstain from
doing something (according to section 2d).
Case Law
Curie vs Misa Consideration may be a promise to do something or not to do
something. It may be positive or negative. It is some right, interest, profit or benefit
accruing to one party corresponding to forbearance suffered or undertaken by the
other.
2. It is moved at the desire of the promisor.
The promisor must move the request for consideration. If it is moved at the desire of a
third person it will not form good consideration even if promisor desired it. Therefore
the promisor must first give consideration
Durga Prasad Vs Baldeo: On the order of the collector of a town built some shops
on his own expense in a market. The shopkeepers who occupied these shops promised
to pay to D commission on their sales. D sued the shopkeepers when he did not
receive the commission. The court held that the promise was not supported by any
consideration as the shops were built on the collectors order and not at the request of
the shopkeepers. Therefore there could not be a recovery.
3. It may move by the promisee or another person
When a promisor gives a promise, the promisee or any other person may provide a
valid consideration in return.
Case Law
Chinnaya vs Ramaya An old lady, made an agreement with her daughter that she
would gift her some landed property but the condition was that the daughter would
pay her sister some annual payment regularly as maintenance allowance. The
daughter promised her aunt (mother’s sister), the maintenance money. However,
later

on she did not pay the money to her aunt. The aunt filed a case for recovery of the
amount. The decision was in a perfectly genuine consideration. The promisee had
agreed to carry out the instructions of the promisor in return for receiving land.
4. Consideration can be past, present or future.
On of the important elements of consideration is that it can be past, present or future.
Past consideration: When consideration is provided before a person becomes a
promisor.it is called past consideration. Such a situation can arise when a person has
done some work that is desired by another but is compensated later on. He does not
receive the benefit immediately. English Law does not consider past consideration to
be good. However it accepts time barred debts as good past consideration.
Illustration: Sonam goes to a friend’s house. She suddenly has a severe stomachache.
A doctor in the neighbourhood examined her and administered some medicine. At
that
time there was no talk of compensation for services of the doctor. Later Sonam went
to the doctor’s clinic expressed her thanks to him and also gave him Rs 500 as his
fees for his services. This is past consideration. The doctor received the fees for
services that were rendered by him earlier.
Present consideration: When an agreement is made and consideration is paid for it or
a promise is made for that work at the time of making the contract it is called present
consideration. This situation arises when the promisor makes an offer and it is
immediately accepted with consideration at that particular time. This is also called
executed consideration.
Illustration Reena offers to sell her old computer to her friend Anjali if she pays Rs
7500 for her old computer at the time that she accepts the offer. Anjali brings the
money immediately and pays Reena the full money. Now Reena should deliver her
computer. Acceptance of the offer and consideration are both in the present.
Future Consideration: When promise is to be executed on a future date it is
called executory consideration or future consideration. In this the promisor makes an
offer for a future date and the promisee promises to accept and execute the contract
after that it is future consideration. In this manner both parties move the consideration
to a future date. The liability becomes outstanding on both parties on a future date.

Illustration: Ruhi promises to sell and deliver a new wristwatch to Rekha after a
week. Rekha accepts the offer and promises to pay after one month of receiving the
watch. This is executory or future consideration.
5. Consideration need not be adequate: Consideration means something in return.
This may not be equal to the value of of the promise that is given. As long as there is
some consideration courts support it and are not concerned about its adequacy. The
parties to the agreement should have been satisfied with the consideration when they
made the contract. The consideration may not be adequate but it should be lawful.
Illustration: Madhu sold her old car to Meera for Rs 25000. The value of the car was
Rs 2,00,000. The consideration was lawful and with the free consent of Madhu who
knew that the market value was much higher. Therefore it was a valid agreement even
though consideration was not adequate.
6. Consideration must be real and not illusory or impossible.
Real consideration means that the consideration should not be physically or legally
impossible. Consideration is not real in the following cases because of physical and
legal impossibility or uncertainty
7. Consideration must be lawful.
Consideration should be lawful otherwise the agreement becomes void. According to
section 23 considerations is not lawful in the following situations:
1 When it is fraudulent
2 When it is made of an act forbidden by law.
3 When it causes injury to a person or property of another person.
4 When it is declared as immoral or opposed to public policy.
When a part of the agreement is unlawful the whole agreement will become void
except in those cases when the unlawful part can be separated from the lawful one.
Then the unlawful part will become void and the other part can be carried out.
3.3 STRANGER TO CONSIDERATION AND STRANGER TO CONTRACT
Under the English Law, consideration has to move from the promisee and if any other
person moves it, the promisee becomes a stranger to consideration and cannot
enforce the promise. A person becomes a stranger to a contract when he is not a party
to a contract even though it is made for his benefit. He is a stranger to the contract and
cannot claim any rights under it.

Stranger to consideration and stranger to contract are called Privity of consideration
and Privity of contract. In India Privity of consideration is not applicable because
Section 2(d) has the provision that provides that the promisee or any other person can
move a contract. Accordingly in India a stranger to consideration can sue and enforce
an agreement if he is a party to the contract.
3.4 EXCEPTIONS TO THE RULE OF STRANGER TO CONTRACT
There are certain exceptions to the rule that a stranger cannot sue. In the following
cases the court does not prevent a stranger from enforcing a contract that is made for
his benefit but he is not a party to it.
a) Trust or a charge: In the case of a trust or a charge created in favour of another
person the beneficiary can enforce the rights conferred upon him by the trust even
though he is not a party to the contract between the settler and the trustee.
Illustration: Sunita made a trust for the benefit of her son Sushant and appointed Raja,
Mahesh and Arjun to be the trustees. Sushant was not being given the property by the
trustees. Can he claim all the propertyin his favour?He can claim that was given in his
favour even though he was not a party to the benefits created for him by his mother.
b) Marriage settlement partition or other family issues: When an agreement is
made relating to marriage, partition or any other family issues with some provision for
the benefit of any person, the beneficiary can enforce the agreement. This is possible
even though he is not a party to the agreement.
c) Acknowledgement of payment or estoppel: This is an agreement between two
parties that one of them would give a benefit to a third person. If the promiser
expresses or implies by words or actions and acknowledges that he has a liability
towards a third person it is sufficient for the third person to recover the benefit as his
right.
Illustration: Anu is the subtenant of Prem but she pays the rent directly to Anil. Anu
stops paying the rent. Anil has the right to recover the amount from Anu as this is an
exception to the law of privity of contract.
Contract through agents: The principal can enforce Contracts that are entered into by
agents on behalf of him if the agent has acted within the scope of his duty and in the
name of the principal. The rights of the principal are intact even though he is not party
to the contract.
Illustration. Mr. Jaiswal sold television sets on behalf of L.G. company. He sold 35
television sets to Reena and she did not pay the money. L.G. company went to court

because they could enforce their rights as Jaiswal had acted as an agent of L.G. even
though the company was not directly involved in the contract.
Agreements relating to land: When a person purchases land and he knows that
certain rights and obligations bind the seller, the buyer has to honour the
commitments of any covenants by which the seller is bound. The rule of privity of
contract does not apply in this case. The buyer may not be a party to the contract but
he is bound by the principles relating to immovable property.
Case Law
Smith and Snipe Hall Farm Ltd vs River Douglas Catchment Board: A board
agreed with landowners near the stream to improve the banks of streams and
maintain them in good condition. Landowners paid proportionate costs for
maintenance. Subsequently landowner sold the land to someone who further sold it to
another person. Due to negligence of the board the banks of the stream broke and the
land got flooded. The subsequent owners filed a suit against the board for negligence.
Though they were not party to the contract they were entitled to sue because they
were bound by the original owners agreement with the board.
3.5 “AN AGREEMENT WITHOUT CONSIDERATION IS VOID’-
EXCEPTIONS TO THE RULE
The general rule is “no consideration no contract” or “an agreement without
consideration is void” but there are exceptions to the rule. According to section 25, in
the following cases the rule does not apply
(a) Natural love and affection: A written and registered contract without
consideration, based on natural love and affection by two parties related to each other
is a valid contract. [section 25(1)]
Note: Closeness of relationship need not necessary mean love and affection.
Case Law
Rajlukhy Vs Bhootnath :A husband agreed to pay a fixed sum and maintenance to
his wife for living in a separate residence due to frequent quarrels between them. He
registered the written document. Since he did not pay the amount the wife went to
court .She was unable to get any relief because the agreement was not made with
natural love and affection.
This is an enforceable contract even though there is no consideration.

• Voluntary compensation: A promise to compensate a person wholly or partly for
services done voluntarily, or for doing voluntary services that are legally compellable
is a valid contract even without consideration.[Section 25 (2)]
Illustration: A thief snatched Leela’s gold chain. Meera, an onlooker, rushed to
help,retrieved the chain and gave it back to Leela. On receiving the chain Leela gave
Meera Rs 2000/-. This is a valid contract even without consideration.
Time barred debt: A written and registered document by the debtor signing himself or
his agent with a promise to pay a time barred debt, is a valid contract and does not
require any fresh consideration. [Section 25(3)]43 The intention should be clearly
expressed. It may be the full amount or part of the amount of the debt that is to be
returned.
Note: An oral promise is not acceptable.
Illustration: Sita took a loan of Rs 5000 from Geeta. She could not pay in time and it
became time barred under the Limitation Act. She made a signed and written promise
to Gita that she would return Rs 3000 on account of the debt. This is a valid contract.
No new consideration is required.
Agency: No Consideration is required to create an agency between the principal and
agent according to section 185. If a person volunteers to work on behalf of another
person as his agent without any remuneration, a relationship of agency will be created
even if there is no consideration. The agent can work on behalf of the principal and
bind the principal on any contracts that are taken by the agent on his behalf.
Note: Before the execution of the agreement the contract will be void since there is no
consideration.
Completed gift: No consideration is required between the donor and the donee of any
gifts already made. The person who receives the gift becomes its owner. a gift or a
donation already given cannot be undone on the grounds that there was no
consideration. There is no need for natural love and affection between the parties but
there should not be any prior agreement to give a gift.
Note A promise to give a gift, on a future date is void if it does not have any
consideration.
Illustration: Vibha has gifted a watch to Nirmalya on his birthday. This is a valid
contract even though there is no consideration.

Remission of a promise: A promise by the promisee to the promisor to give a
concession (section 63) in the performance of his obligations is called remission. This
remission of a promise can be without consideration.

CAPACITY OF PARTIES
In India people can make agreements with their friends, neighbors, colleagues but not
all agreements can be termed as contract. An agreement becomes a contract only
when it fulfills the requirements. One of the very important requirements is
competency to contract.
4.1 WHO IS COMPETENT TO CONTRACT?
Section 11 of the Indian contract Act provides that a person is competent to contract
if:
1 He or she is of the age of majority according to the law he or she is subject to
2 He or she is of sound mind
3 He or she is not disqualified by the law he or she is subject to.
Thus in order to enter into a valid contract one has to have all the three requirements
and if any of these requirements is not fulfilled then he or she is incapable to enter
into a valid contract, a contract to be recognized and enforceable by law.
We can now reverse the question and ask-
‘Who is not competent to contract?’
The people who are not competent to contract are:
(a) Minor
(b) Person with unsound mind
(c) Person disqualified by law
4.2 WHO IS A MINOR?
Section 11 of the Indian Contract Act provides that to be competent to contract a
person should be a major. However, section 11 does not say that a minor’s contract is
void. To put it in other words section 11 of the Indian Contract Act is silent about the
legality of minor’s contract. Privy Council in Mohiri Bibi vs. Dharamdas Ghose
clarified this position for the first time

4.2.1 WHAT IS THE POSITION OF AGREEMENTS WITH A MINOR?
The law is quite protective towards the minors. The position of agreements with a
minor are given below:

1 Void Agreement Agreement with a minor is void. An agreement with a minor is not
enforceable by law from the very beginning.
An agreement between two people who are both minors is void.
Both the parties cannot enforce the agreement in the Court of law.
Illustration: Geeta and Priyanka were classmates and Geeta did not have money to
buy her geography textbook so she borrowed rupees two hundred from Priyanka and
promised to return it in a week. After a week when Priyanka asked for her money
Geeta refused to return it. In this case Priyanka cannot sue Geeta for the breach of
contract because the agreement they had between them cannot be enforced in the
Court of law.
An agreement between two people of which one is a major and the other is a minor
is void
In such cases the minor can be a beneficiary or a promisee. The minor can enforce
the contract and if the minor has benefited from the other party then he or she may be
asked to restore (restitute) the benefits he/she has obtained from such agreement to the
other party. However restitution is allowed only if the money or property (benefit)
could be traced. For instance if the minor has borrowed money from a major and used
it all then he/she cannot be asked to restore it.
Illustration1: Ram a seven-year-old boy asked Raghuvansham a cricket coach to
give him coaching classes and Raghuvansham agreed to give coaching. Ram paid in
advance the tuition fee. Raghuvansham gave coaching only for a day and then
discontinued on the pretext that the agreement is void. Ram could enforce the
agreement though void for breach of contract. In this case Ram a minor was a
beneficiary / promissee and therefore had a right to enforce the agreement in the
Court of law
2. Partnership / company Minor cannot enter into a partnership agreement therefore
he / she cannot be made a partner but he / she can be admitted to the benefits of
partnership with the consent of all the partners. Similarly a minor cannot become a
shareholder in a company, as he is incompetent to enter into a contract. In case a
minor inherits shares (fully paid) then he can become a shareholder acting through a
lawful guardian. Here again a minor enjoys only the benefits of shareholding. He
cannot be made liable for payment of call money.
Illustration: Devendra run a business with four partners. Devendra died in a road
accident. A fifteen-year-old son Gajendra survived him. As Gajendra was a minor so

he could not be made a partner in place of his father but with the consent of all the
partners he was admitted to the benefits of the partnership firm. He was entitled to all
the benefits, which accrued to the firm but was not liable for any losses.
3 Ratification Ratification means approval or confirmation. If a minor has entered
into an agreement he or she cannot ratify the same agreement after attaining the age of
majority. It is because an agreement entered into by a minor is void and a void
agreement cannot be made valid after minor has attained the age of majority. If he or
she wishes to continue then they will have to make a fresh agreement with a fresh
consideration.
Illustration: Gajendra a fifteen-year-old boy was admitted into the benefits of
partnership after his father died. After attaining majority Gajendra cannot ratify
thesame agreement or continue with the agreement, which he had entered before
attaining majority. If Gajendra still wants to continue enjoying the benefits of
partnership then he will have to make a fresh agreement.
4 Agency Minor can be appointed as an agent. He is not liable for any of his / her acts
rather it is the principal who would be held responsible to the third party for the acts
of the minor
Illustration: Sylvia a six-year-old girl went with a piece of cloth to the tailor and
asked him to stitch a blouse for her mother. The tailor stitched the blouse but Sylvia’s
mother refused to pay the money on the pretext that the agreement was void. This was
not a void agreement but a contract of agency where the tailor could enforce the
agreement and Sylvia’s mother who was the principal would be liable to pay.
5 Negotiable Instrument Minor can draw a negotiable instrument and can enforce
instrument drawn in favour of him/her. He/she cannot be made personally liable thus
a minor can be a promisee or a payee and he /she can also become indorsee by
transfer of negotiable instruments.
lllustration: Shyam is a sixteen-year-old boy who has been hired by Krishna to clean
his cars every day in the morning. Krishna pays Shyam by drawing a cheque in his
name for rupees 1000. Shyam deposits the cheque in his bank and the bank dishonors
the cheque. Shyam can sue Krishna for dishonoring of the cheque and demand a fresh
one with compensation.
6 Necessaries The Person who has supplied necessaries to a minor or to his/her
dependents is entitled to be reimbursed from the property of the minor. According to
section 68 the term necessaries include goods and services, which are required to

maintain a person in a condition, state and a station in life in which he/she is. Station
in life means the standard of living the person has. Necessaries include food, clothing,
shelter, education and marriage of a female. Minor has to reimburse the supplies of
such necessaries and the loans for such necessaries. Claim for payment for necessaries
can be made against the minor’s property. Minor cannot be held personally liable for
such necessaries.

Education- A Necessity
Education is considered a necessity and therefore a minor is liable for such necessary
however he is not personally liable the payment for such necessaries are made against
his/her property.
Illustration: Priya who lost her parents in an accident studied in a School in Delhi.
She failed to pay her tuition fee for two consecutive months. She was liable to pay her
fee because education is a necessity. However she is not personally liable. She will
pay out of her property.
Medicine- A Necessity
A minor is also liable for any medicinal service he has procured. It can be the doctor’s
consultation fee or it can be the payment for medicines or the treatment .
Illustration: Cindia a fourteen-year-old orphan girl was suffering from appendicitis.
She was taken to the hospital and was operated upon. Cindia was liable to pay the
hospital charges as it was a necessity. Again she was not personally liable. Either her
guardians would pay or it would be paid out of her property.
Shelter- A Necessity
Home is very essential for any human being and a minor is not an exception. He/she
is liable for the payment for his/her shelter. If he/she has taken house on rent he/she is
liable for its rent.
Illustration: Srikant a seventeen-year-old native of Hyderabad came to Delhi and
took admission in Delhi University to do his graduation. Srikant had no hostel in his
college and did not have any relatives so he took a paying guest accommodation and
agreed to pay a monthly rent of Rs. 4000 to his landlady. After staying for three
months Srikant refused to pay the rent. Srikant cannot plead minority here because
home is a necessity and he is liable for the necessity.
7 Torts Minor is held liable for tort (civil wrong). A minor cannot be held liable under
a contract because an agreement with a minor is ab initio void. If a minor has been

negligent in a contract he/she cannot be made liable hence it cannot be treated as a
tort. Tort means a civil wrong whose formation is not on the basis of a contract.
Stealing, abusing and destroying public property is a civil wrong and therefore minor
is liable for it.
Illustration 1: Neha a sixteen-year-old hired a music system for her birthday party
from Ramesh. She promised to use the music system properly and return it to him
once the party was over. Neha used the system negligently and corrupted it. Neha was
not liable for tort.
8 Insolvency Minor can never be declared insolvent because he/she is not capable of
entering into a valid contract. Agreements with a minor are void therefore he/she does
not incur any liability under any agreement.
Illustration: Pradeep a fourteen-year-old boy had taken loan from Satish for paying
his school fees. As this was a necessity therefore he was liable to pay the loan money
back out of his property. He did not have enough property to pay the full amount so
he paid only partly. In this case Satish could not hold Pradeep personally liable for
the unpaid money and therefore Pradeep could not be declared insolvent.
4.3 WHO IS OF UNSOUND MIND?
Lets us first answer the question ‘Who is a person with a sound mind?’
According to section 12 a person is of sound mind when he / she is capable to
(a) Understand the terms of a contract
(b) Form a rational judgment about the effects of the terms of contract on his / her
interest
If a person does not satisfy both the above conditions then he or she is of unsound
mind
Unsoundness of mind can be
Permanent
Temporary
Permanent unsoundness of mind is found amongst
(1) Idiots
Temporary unsoundness of mind is found amongst
(1) Lunatics
(2) Drunkards / persons under intoxication
Who is an idiot?

As per the English dictionary an idiot is an utterly foolish or a senseless person. A
person, who lacks the normal power of thinking and is devoid of a healthy mental
development. He /she has a mental age below three years and generally is unable to
learn connected speech or guard against common dangers. This problem is generally
by birth and its recovery is almost impossible therefore it is considered to be a
permanent unsoundness of mind.
Illustration: Ram and Shyam were twin bothers who were mentally challenged. They
were twenty years old but their minds were that of a three-year-old child. They were
like this right from their birth. Only a miracle could have cured them otherwise in
normal circumstances they could never be cured. As a result they were permanently
incapable to enter into a contract. Any agreement with them would be void.
Position of agreements with an Idiot
An idiot is permanently of an unsound mind therefore he / she is incapable of entering
into any valid contract. Any agreement entered into with an idiot is void.
Illustration: Gyaneshwar a twenty-year-old man was born an idiot. He went to a five
star hotel and ordered a lavish dinner for himself. After the dinner he failed to pay
the
bill. Gyaneshwar could not be held liable because he was of unsound mind.
Who is a Lunatic?
As per the English dictionary a lunatic is a person who is mentally ill, dangerous,
foolish or unpredictable. He or she loses the normal power of thinking due to mental
strain, accident or a tragic incident in life. Lunatics are not born insane. They suffer
from intervals of sanity and insanity.
Illustration: Gayatri was a 54-year-old lady who lost her husband in a car accident.
Ever since she lost her husband she went into a depression. Her husband was a
businessman and so during that time she entered into an agreement with one of her
husband’s client. The agreement could be declared void because she signed it while
her mental condition was not normal.
Position of agreements with a Lunatic
A lunatic is incapable of entering into a valid contract. However Lunacy is a curable
ailment therefore after recovering from insanity he / she can enter into a valid
contract. A contract with a person before he / she turned a lunatic is a valid contract
and a contract with a person after he / she recovered from lunacy is also a valid
contract.

Illustration: Gayatri who had lost her husband in an accident went into depression
but after few months she recovered and entered into an agreement to sell her house to
Lakshman. The agreement with Lakshman was valid and was very mush enforceable.
Who is a Drunkard / Person under intoxication?
A drunkard is a person who is under the influence of alcohol and therefore cannot
properly think and make rational judgments. A person is said to be under intoxication

Illustration: Gyaneshwar a twenty-year-old man was born an idiot. He went to a five
star hotel and ordered a lavish dinner for himself. After the dinner he failed to pay
the
bill. Gyaneshwar could not be held liable because he was of unsound mind.
4.4 WHOM DOES LAW DISQUALIFY?
There are people who are physically and mentally sound yet they are disqualified by
law to enter into any valid contract. The people who are disqualified by law are the
following:
1 Alien enemy: An alien enemy cannot enter into a contract while his / her country is
at war with our country. A contract with a foreign national is valid but becomes void
as soon as the war starts. These contracts may again be revived after the war ends if
the central government is of the opinion that the contract is not against the public
interest of the country. A new contract can also be entered into with an alien enemy
after the war ends if it is not against public interest.
Illustration: Mir Zafar an Afghani businessman had an American business associate
by the name of Tom. They both entered into a business contract but before they could
execute the contract America attacked Afghanistan. As a result their contract became
void but after the war ended they could easily revive the old contract or could enter
into a new contract because they were no longer alien enemies.
2 Foreign Sovereign and Ambassador: Foreign Sovereigns and their representatives
are citizens of foreign countries. They can be tourists, ambassadors and delegates who
visit our country for a specific purpose and duration.
Illustration: Suzanne is a Canadian ambassador in India. While she was driving in
the streets of Delhi she happened to hit a motorcyclist. As Suzanne was a foreign
national she could not be tried in the Indian Court.
Foreign Sovereigns and Diplomats are free to enter into a valid contract in our
Country and can enforce those contracts in our Courts but the problem is that we

cannot sue them in our Courts without the sanction of the government unless they
wish to submit themselves to the jurisdiction of our Courts. If the foreign national has
entered into a contract through an agent residing in India then in that case the agent
can be held responsible and can be sued in the Court of law.
Illustration: John an American tourist came to India and stayed in a five star hotel
for five days but when he was leaving the hotel he did not have money to pay his bills.
As John was a tourist so he could not be tried in our Court. He could not be sued for
recovery of the bills.
3 Convict: Convict cannot enter into a valid contract while undergoing imprisonment.
As soon as the convict’s tenure of imprisonment finishes he / she is no longer
disqualified to enter into a contract.
Illustration: Radha was found guilty of crime of theft and was undergoing
imprisonment. During the years of imprisonment she was not competent to enter in to
any contract but as soon as her term in the prison gets over she will be competent
toenter into a valid contract.
4 Insolvent: The Court declares those people insolvent who are unable to discharge
their liabilities. Their debts exceed their assets therefore they are unable to pay their
creditors. After the Court declares them insolvent their property stands vested with the
official assignee or an Official receiver.
Illustration: Shambhu a businessman was running into huge losses for the past five
years. He was unable to pay his creditors and so his creditors sued him. The Court
declared Shambhu insolvent and his property was vested with the official assignee.
5 Company: The contractual capacity of a company is normally mentioned in the
object clause of the Memorandum of Association. Any act done outside the purview
of the memorandum is ultra vires and any agreement entered into for the execution of
such an act is void.
Illustration: Ram and Shyam Company was in the business of manufacturing leather
bags. The object clause in the Memorandum of Association provided that the
company is to manufacture leather bags. One day the director of the company entered
into an agreement with a buyer for selling them leather shoes. The agreement was
void because it was beyond the scope of business. The company as per its
memorandum was to sell only leather bags and not leather shoes. Therefore the
agreement was not valid.

Free Consent
5.1 MEANING OF CONSENT AND FREE CONSENT
Free Consent is one of the essential elements of a valid contract. The essence of this
requirement is that a person should enter into an agreement of is own interest with a
free as well as an open mind without any fear. If any one has not allowed the other
party the freedom of expression, the agreement will not be fair. No person under law
is compelled to enter into a contract and be bound by any obligations pertaining to it
without his / her free consent.
CONSENT
When two or more persons agree upon something it is said that there is a consensus
between them. According to section 13 this means that the people agree on the same
thing and in the same sense. It also means that there is consent on the acceptance of
an offer. When there is no consent, there cannot be a contract.
Illustration: Braj has two televisions. One is of L.G. make and the other is of Sony
make. His friend Ashu offers to buy the L.G. product. Braj thinks he is selling the
Sony television. This agreement is void ab initio because there is no consent since
both of them have not understood the same thing in the same way. There is no
agreement of minds.
FREE CONSENT
Section 10 of Indian Contract Act, states, that a valid contract should have the free
consent of both the parties, entering into the contract. This means that in a contract
not only should there be consent but it should also be free consent.
‘All agreements are contracts if they are made by the free consent of the parties.’
Free consent according to section 14 is when a contract is made without coercion,
fraud, undue influence, misrepresentation or mistake. Therefore, if a contract is
influenced by any of these elements there cannot be free consent. Salmond has
described this as an error in consensus.
An agreement, which is made by coercion, fraud, undue influence and
misrepresentation, is voidable at the option of that party whose consent was not free
(Section 19).
If there is a mistake in an agreement it becomes a void contract. It is not enforceable
by law. The reason for this is that a mistake means that there is no consensus between
the parties entering into a contract.

When consent is not free it is called error in causa. This makes the contract voidable
at the option of that person whose consent in the contract is not free. However, the
contract continues to be a valid contract until it is repudiated by the person who is
consent is not free.

According to section 15, coercion means to use force to make another person
agree to the terms and conditions while entering into a contract. A contract is caused
by coercion in the following cases:
1. When any act is done that is forbidden by Indian Penal Code.
2. Threatening to commit an act forbidden by Indian Penal Code
3. Unlawful detaining of property by using force or physical pressure on another
person.
4. Threatening another person for detaining the property.
Illustration: The gangster made the property owner sign the papers for his ownership
at pistol point. This is coercion it is forbidden by Indian Penal Code. The contract is
voidable at the option of the property dealer as force was used for obtaining
property.
When can coercion be exercised?
Coercion can proceed from any person. It can be directed against another person
including a stranger.
Illustration: Manju threatens to kill Muna, who is Rani’s son if Rani does not give
theentire property to her. The consent given by Rani is due to coercion by Manju. The
coercion is directed against Muna who is a stranger to the contract.

Effects of Coercion
Section 19 and 72 of the Indian Contract Act, deal with the effects of coercion.
According to Section 19 ‘when consent to an agreement is caused by coercion the
agreement is a contract voidable at the option of the party whose consent was so
caused’.
The effects of coercion can be summarized in the following:
! The aggrieved party can rescind the contract as it is voidable at his / her
option. (Section 19)
! The aggrieved party should be restored the benefits by the person who had used
coercion.(Section 64)

! If money has been paid on account of coercion the aggrieved party should be
returned the money by the person who had used coercion for taking it.
! The aggrieved party has to prove that coercion had been exercised and the consent
was not freely made by him / her.

5.3 UNDUE INFLUENCE
Undue influence means using superior power for obtaining the consent of the person
who is weak in position and physical ability.
Section 16 (1) of the Contract Act defines undue influence as
• The relation between parties where one of the parties is in a dominating position
over the will of the others.
• Using the dominating position to take an unfair advantage over the other.
Section 16 (2) of the Contract Act defines the position to dominate the will of the
other in the following manner.
6 Real or apparent authority: Where a person holds some real or apparent authority
over the other. This means that he / she is in some position where he / she has the
power to dominate over the will of another person.
Example:
6.1 Relationship of Employer and Employee
6.2 Relationship of Officer and Peon.
7 Fiduciary Relationship: Where a person is in a fiduciary relation to another. This
means that there is the relationship of mutual trust and confidence amongst the people
making the agreement.
Example:
(4) Relationship of doctor with his patient.
(5) Relationship of mother and daughter.
(6) Relationship of Father and son.
(7) Relationship of Trustee and beneficiary.
8 Agreement with another, having mental incapacity: Where a person makes a
contract with another, whose mental capacity is affected because of his age, illness,
mental or body distress temporarily or permanently.
Example:
! Relationship of normal person with a person temporarily in depression.

! Relationship of a young man with an old and sick person, who suffers from
dementia.
Illustration:
! Mr. Balram used his parental influence by making his son a party to dowry taken by
him at his wedding from the wife’s father. This is a case of undue influence exerted by
a father because of his fiduciary relationship with his son.

The relationships in which undue influence can be exerted over another are the
following.
! Teacher and student.
! Employer and employee.
! Doctor and patient.
! Mother and daughter.
According to law in the following cases there is no presumption of undue influence.
Therefore if someone has exerted undue influence it will have to be proved.
! Creditor and debtor.
! Landlord and Tenant.
! Husband and wife (when wife is not parda-nashin).
Presumptions of Undue Influence 16 (3)
In some cases it is presumed that there is undue influence. These are discussed below:
1. Unconscionable transactions: When it can be proved that the dominating party
entered into an unfair contract with a weaker party, it is assumed by law that undue
influence has been used to exert the contract. Unfair transactions between superior
and weaker party are called unconscionable transactions. An example of such
contracts is when a person makes an unusually high profit and the other party suffers
because of these contracts, in such cases when on the face of the agreement it appears
unconscionable it has to be proved that consent was taken by fair means by the
superior party.
2. Contracts with Parda-Nashin Women: Women who wear a burkha or cover
themselves and are in complete seclusion from the rest of the world are a separate
category in the eyes of the law. If a contract is made with pardanashin women, it is
presumed that undue influence is used. The court grants relief to any unreasonable
demands of the party using undue influence through its discretionary powers.

3. Money Lending Transactions: Unfair agreements are often made in money lending
transactions. Sometimes undue advantages are taken from people who have taken
loans. A high rate of interest charged shows unfair transaction. Also, when a money
lender executes a property in his favour when the borrower cannot repay is also or
transaction of undue influence.
In all the above cases the court presumes that undue influence has been used and
using its discretionary powers it can grant relief to the weaker parties.
Effects of Undue Influence
Under Section 19A, if a person has given his consent due to undue influence exerted
by another person the contract is voidable at the option of that party who had to give
consent under undue influence. Further, the court may also take the decision that a
refund has to be made to a person who is the aggrieved party. The court may also take
a decision to allow the aggrieved party to rescind a part of the contract or the whole
contract as the case may be.
Burden of proof
The burden of proof of undue influence will be on the person who is aggrieved and
wants relief from the court. The court also states that there is a difference between
persuasion and undue influence. A person can be persuaded to do a certain activity
but this does not necessarily mean that undue influence has been used. Therefore,
aggrieved party will have to prove that the superior party was able to influence him
due to his position to dominate his will.
Rebuttal of Presumption
When the weaker party makes a plea in the court that it did not use undue influence it
has to prove the following.
o That full disclosure was made to the weaker party before getting consent and
entering into a contract.
o That the price paid in the contract was in accordance with the requirement and it
was adequate.
o That the weaker party took advice from a competent person before finalizing the
contract with the so called superior party.
5.4 FRAUD
Fraud is false representation of facts made willfully to deceive another person.
Definition of Fraud

Section 17 of the Indian Contract Act states that if any of the following acts are
committed by any party to a contract or with his agent’s connivance, willfully
withintent to deceive or induce another person or his agent to enter the contract it will
result into fraud.
1. It is a suggestion of a fact which is not true by a person who does not believe that it
is true.
2. It is an active concealment of facts by a person who has knowledge or belief of the
facts.
3. It is a promise in which there is no intention of performance of the contract.
4. Any other action which has the intent of deceiving the other person.
5. Any act or omission which is declared fraudulent by law.
Essentials of Fraud
The above description of definition of fraud can be explained through the essentials of
fraud.
1. False Suggestions: Fraud must state facts which are false and the person making
the suggestion knows that he is making a false representation or false statement of
facts. The false suggestion is made intentionally to induce or deceive the other party
to enter into a contract. This is supported by the following case law:
2. Active Concealment of a Fact: Active concealment is when a person has the
knowledge or belief of the fact which he knows is not true. This amounts to fraud.
Passive concealment is when a person makes an incorrect statement thinking that the
statement is correct.
3. Making a Promise without Intention of fulfilling it: If a person makes a promise
but he does not intend to keep it. It is a clear case of fraud because at the outset the
intention was to make a false promise.
4. Any other act fitted to deceive: An act used to trick or chit someone by unfair
means is considered to be fraud. This is an act which is done with the intention of
committing a fraud.
5. Any other act considered by law to be fraudulent: According to the law it is
obligatory that all material facts are disclosed while selling an immovable property.
Otherwise it amounts to fraud.
6. The Party that is misled by Fraud should have suffered some loss: There cannot
be fraud without any damage. The loss must be in terms of money or money’s worth,
or loss of some tangible assets. Fraud without damage does not give rise to any deceit.

8.1.6 Half Truths: When a person speaks a half truth, it means disclosing some
portions of relevant material leaving the other portion undisclosed. According to law a
half truth is worse than full falsehood as it misleads the other person. Therefore if a
person speaks he must give all the facts and not just half truth. Otherwise silence
amounts to fraud.
8.1.7 Change in Situation: Sometimes when a statement is made it is the truth but
circumstances bring a change in situation and when it is actually acted upon, it
becomes false. It becomes the duty of the person to immediately communicate the
change in situation. This is supported by the following case.
Remedies of Fraud
According to Section 19, when consent is taken by fraud from another person he has
the following remedies available to him.
o Rescind the Contract: The party whose consent was received by fraud has the right
to avoid the contract because it is voidable at the option of the person defrauded.
o Performance of Contract: The person defrauded can ask for completion of the
contract but with restitution which means that he would like to be put in that position
in which he would actually be in if the representations were true.
o Compensation: The defrauded party has the right to demand compensation for the
loss that is caused to him by fraud. He has the right to claim damages even if he opts
to continue with the contract.
5.5 MISREPRESENTATION
Misrepresentation is a false or misleading statement that a person honestly believes it
to be true. He makes this statement without any intention to cheat or mislead another
person. The false statement is serious but not as serious as fraud.
According to Section 18 of the contract act misrepresentation the meaning of the
misrepresentation is given below:
1. It is a positive assertion of information by a person which is not true but the person
believes it to be true.
2. It is a breach of duty without any intention to deceive. However, the person gains
an advantage by misleading another person.
3. The statement innocently causes a party to an agreement to make a mistake to the
subject of the agreement.
Misrepresentation occurs in the following cases:

1. Unwarranted Statements: When a party makes a positive assertion that the
information from which he is making a statement is trustworthy he means that he is
making a warranted statement. Unwarranted statement means information from
untrustworthy source. Therefore, when a person believes that the information is true
but it is incorrect. It is misrepresentation. This is supported by the case
Case Law 8
In Oceanic Steam Navigation Company V Soonderdas.61 The plaintiff from whom a
person chartered a ship stated that the ship was of 2800 tonnage register. However,
the ship was 3000 tonnage register. The plaintiff did not have any basis to believe the
fact stated by whom. The contract was the cancelled due to misrepresentation.
2. Breach of Duty: When a party does not intend to cheat another person but the
circumstances show that he has not done his duty correctly because of nondisclosure
of essential information. He has used the situation to his advantage thus bringing him
certain benefits. This type of situation is called constructive fraud. The party making
such statements will be guilty of misrepresentation. This is supported by the following
case.
Case law 9
Bannerman v White 1861.62 The plaintiff wanted to sell the defendant hops on the
understanding that sulphur was not used in their growth. The defendant was clear
that he was not interested in sulfa usage in cultivation of Hops. Although sulfa
wasused in 5 out of 300 acres the plaintiff had forgotten. The court held that the
contractcould be avoided on the ground of misrepresentation although representation
was no
3. Innocent Mistake: If one party leads the other one to make a mistake in the quality
or subject matter it is a case of misrepresentation. This clause includes the cases
where vital facts are suppressed and a mistake has been made.
Essentials of Misrepresentation
Misrepresentation as already stated is a false representation of facts which the person
makes without knowing that it is false. He makes the statements believing them to be
true. The following essentials elements represent misrepresentation.
I. Material Facts: Misrepresentation must be of those facts which are important in the
formation of a contract. Some expressions or passing statements that are not relevant
will not be enough for avoiding a contract.

II. Statement prior to executing the contract: The misrepresentation of facts must be
before the contract is executed by the parties to the contract.
III. Misrepresentation by a party to the contract: Misrepresentation of facts has to be
made by a party or his agent to the contract. A statement made by a stranger to the
contract does not have any effect on the validity of the contract.
IV. Objective of misrepresentation: The statements made by misrepresentation of
facts should be of the intention to deceive the other party and to induce him to enter
the contract.
V. Reaction of other party: As a result of the misrepresentation the other party in the
contract should have acted on the faith of the facts represented.
Effect of Misrepresentation
According to Section 19 of the Indian Contract Act if on the misrepresentation of
statements a person to the contract has been affected, he can avoid the contract
because it becomes a voidable contract at his option.
! The person whose consent has been taken by misrepresentation has the right to
rescind to the contract.
! He has a right to ask for completion of the performance of the contract and ! He can
also ask for being given the position which he would have if the representation of
facts was true at the time of asking for performance of the contract.
The right to rescind the contract is in the following three cases.
1 Time Period: The contract has to be rescinded within a reasonable time otherwise
the right to rescind the contract will be lost.
2 Affirmation: The aggrieved party should not make an affirmation to the contract
otherwise he will lose the right to rescind.
3 Third Party Rights: The aggrieved party should be careful to find out that third
party rights are not acquired while he asks for rescission of the contract.
Exceptions to the Right to Rescind the Contract
In the following cases the party whose consent was received by misrepresentation
cannot get relief of rescinding the contract.
1 Where the affected person had the possibility of finding out the truth with ordinary
diligence.
2 Where the affected party is ignorant that he gave his consent due to
misrepresentation of facts.

3 Where the affected party becomes aware of misrepresentation but still decides to
receive the benefits under the contract.
4 Where a third party innocently enters into benefits of the contract before the
contract was rescinded.
5 Where it is difficult to restore the rights of the affected party to the original position.
5.6 MISTAKE
Mistake can be defined as an incorrect statement which creates misunderstanding
between the parties. Such mistakes take place when the parties to the contract are not
aware of the terms of the contract in agreement with each other. An agreement
between two parties according to the Indian Contract Act is valid only when both the
parties agree upon the same thing and in the same sense. According to section 20 the
agreement becomes void when there is a mistake in agreement. In normal
circumstances law does not give the right to anyone to avoid a contract because he
was mistaken about some fact in the contract. However, some mistakes are
fundamental to the contract in such a manner that the very basis of the formation of
the contract becomes faulty and there is no contract at all. In such cases the agreement
is considered to be void due to consensus ad idem.
Types of Mistake
Mistake can be of two types. These are mistake of facts and mistake of law. (1)
Mistake of fact can be bilateral or unilateral and (2) Mistake of law can be mistake of
law in India and mistake as to foreign law.
1. Mistake of Fact
Mistake of fact can occur when both the parties to the agreement are under a mistake
or only one of the parties is under a mistake to the essential elements of the contract.
When both parties are under a mistake it is called bilateral mistake and when only
oneparty to the contract is under a mistake it is called a unilateral mistake.
" Bilateral Mistake: A bilateral mistake is made in the following cases:
(i) Mistake of existence of subject matter: The agreement is void if it is agreed upon
a subject matter which does not exist and the parties to the agreement do not have any
knowledge about it. This is bilateral mistake because both parties did not know this
material fact at the time of making an agreement.
(ii) Mistake of identity of subject matter: The agreement is void if two parties to the
contract have confusion about the identity of the subject matter. The agreement is
void due to want of consensus.

(iii) Mistake regarding quality / description of subject matter: When two parties
make an agreement they should understand that the quality of the product. If both
parties make a mutual mistake about the description of the product, it is bilateral
mistake and the agreement is void.
1. Mistake regarding title of the product: An agreement of sale is void if there is a
mistake of mistake over the entitlement of goods.
(iv) Mistake regarding substance of subject matter: If both parties to an agreement
make a mutual mistake of facts which is the essential part of the subject matter the
agreement is void.
(v) Mistake regarding quantity of subject matter: If two parties are mistaken about
the quantity of subject matter to be supplied, then the agreement is void. Quantity is
an essential fact of an agreement; if it is not correct the agreement to buy / sell can not
be held.
(vi) Mistake regarding price of the subject matter: Price is an essential feature in the
sale of a product. If there is a genuine mistake regarding price the agreement is void.
(vii) Mistake about possibility of performance: If there is a bilateral mistake
regarding the possibility of performance the agreement is void. Impossibility of
performance can be due to physical reason or legal impossibility.

Effect of Bilateral Mistake: When there is a bilateral mistake in
understanding the essential facts of the agreement, the contract becomes void ab
initio. This agreement is void from the beginning, does not have any legal
significance. It cannot be enforced at the option of any of the parties to the contract.

" Unilateral Mistake: According to section 22, unilateral mistake occurs when
one party to the agreement makes a mistake. The contract is not voidable because one
of the parties to it are under a mistake. However, there are certain exceptions to the
rule. These are due to the following reasons:
! Mistake of identity of a party: A very fundamental mistake occurs if an agreement
is made with a wrong person. When a party desires to deal with a certain person and
he does not do so due to false representation of another person it is an error in
consensus.
! Mistake about nature of transaction: If a person makes a transaction without
understanding nature of the transaction, it cannot be executed. This mistake is
possible when a person does not disclose to the other the true nature of the document

and induces the other person to sign the document which is not correct. The
agreement is null and void. Case law to support this
Effect of Unilateral Mistake: In case of unilateral mistake the contract becomes void.
Under Section 65 a person who has received benefits of the contract has to restore it
by compensating the person from whom the advantages was received. If a person has
received money or any item has been delivered by mistake then according to Section
72 he has to repay or return it.

LEGALITY OF OBJECTS
One of the essential elements of a valid contract is lawful object. The object is he
purpose for which two persons enter into an agreement. For an agreement to be a
contract it is important that the object be lawful. If the object is unlawful then an
agreement can never become a contract. The consideration is some act or abstinence
or reciprocal promise. The consideration should be lawful. An unlawful consideration
will not give rise to a valid contract. Both consideration and object of an agreement
must be lawful. An agreement having an unlawful object or an unlawful consideration
or both is void.
6.1 WHAT OBJECTS AND CONSIDERATIONS ARE UNLAWFUL?
According to Section 23 of the Indian Contract Act the following considerations and
objects are unlawful:
6.1.1 Forbidden by law an agreement to do what law has prohibited is unlawful. Such
acts are punishable either by the criminal law of the country or by a special
legislation. These agreements may also be called illegal agreements.

6.1.2 Defeat the provisions of law: An act may not be forbidden by law but if
permitted it may defeat the provisions of any law. It means that an agreement may not
be of an illegal nature and not directly forbidden by law but if allowed to be executed
it would indirectly violate the law.
Illustration: Rekha a resident of Delhi wanted to own a house in the state of Jammu
and Kashmir. The rule in Jammu and Kashmir is that only the residents of Jammu
and Kashmir can buy property in the state. No other person belonging to other states
of India is eligible to buy property in the state. Rekha asked Namita who was a
resident of Jammu to buy the house and later transfer the property to her. Rekha also
paid consideration to Namita. Later Namita refused to buy the house. Rekha claimed
the consideration back from Namita. Rekha cannot claim the consideration because

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