CHAPTER I

Offer and Acceptance

(Sections 3 - 9)

We
apcl
in the preceding
the essential elements of a valid contract
lawful offer
party
Oy On
asCussing there must be
a
step in making of a "will you Duy my
contract.
as a tirst to B,
nt other narty Thus A says
acceptance of the offer by the
coract 1s
and a
dda ul is accepted
RS. 80,000?". This is an offer. If B savs
"Yes" the offer
Car ror
formed
OFFER or PROPOSAL which reads
Contract Act,
is defined in Sec. 2(a) of the Indian
tem offer or porposal
ne
as under to abstain rom aoing
to do or
when one person signifies to another his willingness act or abstinence,
ne is said
such
anytning WIth a view to obtaining the assent of that other to
to make a proposal". Ihe person
offeror or promisor
offer is called proposer,
nE person making the proposal or or offeree.
When the oITeree
tO whom the offer or proposal is made is called the proposee
with proposal. An
the offer, he is called promisee or acceptor. An offer is synonymous
accepts
offer has two parties.
and
(a)A promise by the offeror to do or to abstain from doing anything,
from doing somethingin
(6) A request by the offeror to the offeree to do or to abstain
return.
An offer is simply a request by the offeror to the offeree. There can be no proposal by a

person to himself.

How An Offer is Made

Sec.of the Act the manner in which an offer may be made. Further Sec. 9 of
gives us
the Act states. "In so far as the proposal or acceptance of any promise is made in words, the
promise is said to be express. In so far such proposal or acceptance is made otherwise than in
words, the promise is said to be implied". Thus an offer may be express as well as implied.
An offer which is expressed by words, written or spoken, is called an express offer. The offer
which is expressed by conduct, is called an implied offer.
Examples: (1) A says to B, "Will you purchase my scooter for Rs. 8.0002 This is an express
offer
(2) A writes a letter to B offering to sell his car for Rs. 60,000 to him. This is an express
offer.
(3) KSRTC runs special buses on a particular route. There is an implied offer from KSRTC
to carry the passengers on the route who are prepared to pay the
specified fare. This is an
implied offer.

12
OFFER AND ACCEPTANCE

13
An offer may be
specific or
a Specific person. A specific offer isgeneral. It is not necessary that an
one which is made to
offer should be made to
is one which is an ascertained
offer not made to person. And a general
specific person, but to the
a
public large.
at
Examples: () Mr. A
makes an offer to B to
made to a detinite person, i.e., sell his car for Rs. 50,000. The offer has been
B. And B alone can accept it. This is a
specitic ofter
(2) Carlill V's.
Carbolic Smoke Ball
In the above case, the Carbolic
Company (1893)
Smoke Ball Company issued an
offered to pay t 00 to advertisement in which the Company
any person who contracts influenza, after
three times daily for two having uscd their smoke balls
weeks, according to the printed directions. It was also
added that
are deposited with the
Alliance Bank showing the 1000
the smoke balls according to the sincereity of the
Company. One Mrs.
Carlill usea
printed dircctions. But she subsequently suffered from
promised reward, and it was held that thc Company wasinfluenza.
She sued the Company for the
l1able to
the reward. Thus the case is
important as it lays down the following principles.
1. An offer may be made to
the general public in which case it can be accepted by any
particular individual.
2. It was not a mere advertising puff and the deposit in the bank showed the sincereity in
the promise.
3. It was argued that a notification of the
acceptance should have been made to the Company.
But on this point, it was held that in such cases "the performance of the conditions is the
acceptance of the offer".
4. An advertisement need not always be a mere invitation to offer but may in certain cir-
cumstances amount to an offer.

Essentials and Legal Rules for a Valid Offer

The following are the legal rules for a valid offer:

1. The offer must be communicated to the other party

An offer is effective only when it is communicated to the offeree. A person cannot accept
made known to the
an offer unless he knows of the existence of the offer. Until the offer is
offer is completed only when it has
offeree, there can be no acceptance and no contract. An
without its knowledge, does not confer
been communicated to the offeree. An offer accepted
communication of a
to Sec. 4 of the Act, "The
any legal rights on the acceptor. According to whom it is made.
proposal is when it comes to the knowledge of the person
complete
Example : Lalman Shukla Vs. Gauri Dutt (1913).
was in his service in search
of his missing nephew. Later
The defendant sent the plaintiff who
discovered the missing boy would be,given
a
on the defendant
announced that anybody, who
reward. When the
discovered the boy without knowing the
reward of Rs. 501. The plaintiff the defendant to recover
the reward, he brought an action against
plaintiff came to know about could not accept the offer, unless he
dismissed on the ground that he
the same. His suit was
had knowledge ofit.

must be Definite and Clear

2. The Terms of the Offer Anson
certain and not vague or ambiguous.
The terms of an offer should be definite and contract for
contract: it will not make a
the parties to make their own
says The law requires
down
indefinite or illusory". Further Sec. 29 of the Act lays
which are void".
them out of terms
capable of being made certain,
are
of which is not certain, or
"Agreements, the meaning to complete it except acceptance.
definite and requires nothing
The offer must be reasonably
Examples: Montreal Gas Co. Vs. Vasey (1900).
(1) customer the
satisfied with him as a
clause that if the company were
The plaintiff relied on a
consider an application for renewal of the
contract". The court

company would
"favourably
nothing in these words to create legal obligation.
held that there was
 BUSINESS LAW

14
proves lucky. X
(2) Tanlor l's Portington (I8S5) another, l the irst one

to buy
Y and promised agreement It being loosc and vaguc.

Purchased horse from cnlorce the

could not which
second horse Y There is nothing to show
eiscd to bn the 45,000.

to R for Rs 40,000 or Rs, as it IS not clcar. Thus,

no
( ) A offered to selI his
ear cannot he acceplcd
This ofler
was to bhe given.
of the two prices
this offer
contract will result from

Creating Legal
Relationship
Ofer he Capahle of
valid offer in
The must

rise to legal consequences, it is not a

intend to give contract. The
If the offer does not that wien accepted it
will result in a valid
be such
must invitation
the eve of law An ofter A social party or an
of creating a legal relationship.
is capable
offer must be one which in the case of agreements regulating
is not a legal
relationship. Generaly speaking,
to pla cards
inference that the parties do not
intend to create legal relations,
it natural
social relations. is
business
the
relations, the inference is
that parties
while in the case of agreements, regulating
relations.
intend to create legal
Balfour Is Balfour (1919) (See Chapter I)
Examples: (1)
the parties never
The agreement was only an arrangement between husband and wife, and
intended to make a bargain.
(2) Rose and Frank Co. s. Crompton & Bros Lid. (1925)
do not intend
Sometimes the parties to a business transaction may deliberately state that they
to enter into any legal relationship. The plaintiffs, an American firm, were the constituted selling
under written agreement. It
agents in North America for the defendent, an English Company a
contained the following clause: "This arrangement is not entered into nor is this memorandum
written. as a formal or legal agreement, and shall not be subject to legal jurisdiction in the
Law Courts". it was held that the agreement was not legally binding contract. The intention
of the parties as expressed in the written document was respected by the court.

The Offer must be Made with a View to Obtain Acceptance

When a person is making an offer it means that he is making it with a view to obtain
the consent of the offeree. Sec. 2 (a) of the Act lays down, "When one person signifies to
another his willingness to do or to abstain from doing anything, with a view to obtaining the
assent of that other to such act or abstinence, he is said to make a proposal." The terms of an
offer should be clear so that there is no con fusion whether it is a valid offer or a mere statement
of intention. A declaration by a
person that he intends to do something gives no right of action
to another.
An offer must be
distinguished
from an "invitation to receive offer or as it is sometimes
expressed judicial language as "invitation to treat". If an advertisement is made a
in
that it has stock of books to sell or houses to by company
let, there is no offer to be bound by any contract.
Such advertisements are "offers to
negotiate" or "offers to receive offers" or "offers to chaffer".
Advertisements are generally assumed to constitute
"invitations to trade". The trader
indicates that he is willing to consider an offer made merely
inviting an offer and not making one. by a buyer on these terms.
That is, he is
Catalogue and Price List: A
price catalogue or a list of
isonly an invitation to receive offer from his customers. shopkeeper is not an offer. It a
The trader merely indicates that he is
willing to consider an offer made by a buyer on the terms.
not making one. A That is, he is inviting an offer and
Thus the buyer
shopkeeper cannot be
compelled sell his goods as per the printed
to
only gives an offer, which may or price.
Deciaration of Intention: may not be accepted by the
Sometimes, a shopkeeper.
person declares that he has the intention
something and this does not amount
to an offer. Such a declaration to do
will be made or invited
in future. means only that an offer
 15
OFFER AND ACCEPTANCE

for a job or inviting tenders

Advertisement: Newspaper advertisements inviting applications who reply t0
work is not an offer. It is only an invitation to makc offers. Applicants
for some
advertisement are the offerors.
the
Following are other example of invitation to make an offer:
them in showcase.
(1) Goods exhibited with price on a label stuck to
(2) Menu card in a restaurant. debentures.
for shares or
(3) Prospectus of a company inviting public to subscribe
or a post.
(4) An advertisement inviting applications for situation
) An advertisement for sale of goods by auction.
(6) Railway timetable, etc.
Examples:
(1) Harris Vs. Nickerson (1873)
travelled a distance to attend
In this.case an auction sale was advertised whereupon the plaintiff
the sale with a view to buy the article. On his arrival he
found that the sale was cancelled on
that the advertisement was
which he sued the auctioner for breach of contract on the ground
the court held that the advertise-
an offer made to the public which he acc-pted by travelling,
ment was merely a declaration of intention and that there could not be an acceptance.

(2) Pharmaceutical Society Vs. Bots Cash Chemists (1953)

them out on shelves in
Where a shopkeeper displays goods in a shop window, or even puts
an offer to sell.
a self-service store, that is to be constued as an invitation-to treat and not as
it to the cashier's desk
When a customer picks up an article in a self-service store and takes
offer to sell but is an ofer
to pay for be said to be an acceptance of
it, his action cannot an

to buy which the shopkeeper may or may not accept.

5. An Offer may be Positive or Negative

Sec. 2 (a) reads as under:

"When one person signifies his willingness to do or abstain from doing something,..
do something. An offer to do something,
Thus, an offer may be to do something or not to
is offer.
is a positive offer. And an offer not to do something, negative
6. The offer should not Contain any term the Non-compliance of which
Amounts to Acceptance
communicated upto a certain date, the
Thus an offeror cannot say that if acceptance is not
there is
accepted. If the offeree does not reply:
no
offer would be presumed to have been
of
contract, because n0 obligation to reply can be imposed on him, on the grounds justice
7 Terms and Conditions of the Offer be Communicated
Special
terms, before or at the time
If the acceptor or the promisee had no knowledge of special
of the contract, they are not binding upon the acceptor.

Example Henderson Vs. Stevenson (1875)

On the face of it the words, "From
The plaintiff purchased a ticket from steamship company.
a
some conditions exonerating the
Dublin to Whitehaven" were written. On the back there were
company from liability for loss
or injury to the passenger or his luggage. The plaintiff had no
for the loss, it
knowledge of this condition. His luggage was lost. ln suit claimingldamages
a
was held that the plaintiff was not debarred by the condition of which he had no knowledge.

If the acceptor or the promisee had the knowledge or may be presumed to nave the knowl-
edge because a reasonably sufficient notice has been given to him by suitable words on the
document of special terms, before or at the time of the contract, the terms are binding upon
the acceptor whether he has read them or not is immaterial.
 BUSINESS LAW
16

EXample : Parker V's South Eastern Railway (o. (18/). acknowledgement

Station. The
at a Railway
bag in the cloakroom of the conditions
Passenger deposited a
the words "Sec back". One
bore, on the face of it. to £ 10. The bag
ptgIven to him for any package
on the back limited the liability of the Railways that he had not read the con-
med valuc, pleading
claimed £ 24 S 10, its conditions printed
s lost, and passenger Held. the passenger was bound by the
Otions on the back of the receipt. as to the conditions
face of the receipt
On the back as the company gave
reasonable notice on the

at the back of the document.

8. Two ldentical Cross-Ofers do not Result ina Contract

other's offer,
make identical offers to each other,
in ignorance of each
When two parties of one's offer by the other
the offers are cross-offers. Cross-offers do not constitute acceptance
and as such there is no completed agreement.
Example: Tinn ls. Hoffmann (1873).
of iron at a particular
The defendant wrote to the plaintiff offering to sell a certain quantity
the same quantity of
price. The same day the plaintiff worte to the defendant offering to buy
iron at the same price. Unknown to each other the letters crossed in post. the plaintifi claimed
that there was a contract. It was held that mere cross-offers made in ignorance of cach other

would not create a contract.

Essentials of a Valid Offer

I. It must be made with a view to obtain acceptance.

2 It must be intended to create legal relations.
3. The terms of the offer must be definite and certain.
4 The offer must be communicated to the offeree.
5. An offer may be express or implied.
6. t must be distinguished from "nvitation to offer" or "declaration of
7. The special terms of the offer must be communicated.
intention"
8. The offer should not contain any terms the
non-compliance of which amounts to
acceptance.
9 Two identical cross-offers do not result
in a contract.
10. An offer may be or general specific.

Agreement to Agree in Future:

Agreement to make a future contract does not create any

cannot be made to make
another contract. If the obligation. Therefore, a contract
contract but have made an parties have not
agreed upon the terms of their
agreement to agree in
future, there is no contract.
agreement to agree in future becomes Subsequently,
conditions for future cannot be contradictory.
Such agreement is not
possible as the
decided.

Sec. 2 (b) defines ACCEPTANCE

assent thereto, the acceptance as "When one whom the proposal is made
person to
proposal is said to be
accepted. proposal, when accepted
A signifies his
Who can Accept? becomes a promise"
An offer can be
offer made to accepted only by the person or
particular person can only be
a persons for whom the offer is
intended to accept. intended. An
But, an offer made to the accepted by him because he is the
whatsoever. To constitute a
valid
world at large can be only person
acceptance the assent must be accepted by any person
communicated to the offeror
OFFER AND ACCEPTANCE
17
Example : Boulton Vs. Jones (1857).
Mr. A sold his business to his
manager B without disclosing the fact to his customers. C, a
customer, who had a nunning account with A, sent an
order for the supply of goods to A by
name. B received the order and executed the
same. It was held that there was no contract
between B and C because C never made any offer to B.
In the suit by the plaintiff
against the defendant for the price of the goods, it was held that
Jones was not liable, since Boulton knew that the
offer was not addressed to him.
Kssentials and Legal Rules for a Valid Aceptance:
The acceptance of an offer to be legally effective must satisfy the following requirements:
Acceptance must be Absolute and Unqualified (Sec. 7 (1))
In order to be legally effective it must be an absolute and unqualified of all
the terms of the offer. Even the slightest deviation from the terms of the acceptance
offer makes the
acceptance invalid. Acceptance should be in toto and without any condition. Thus an
acceptance
with a variation is no acceptance. A qualified or a conditional acceptance is no acceptance at
all. In fact, it is only counter-offer. A counter-offer puts an end to the original offer and it
cannot be revived by subsequent acceptance.
Example: Hyde Vs. Wrench (1840).
The defendant offered to sell his farm to the
plaintiff for £ 1000. Plaintiff made a reply offering
to purchase it for £ 950. It was refused
by the defendant. Then, the plaintiff wrote that he was
prepared to pay £ 1000. It was held that the plaintiff's letter expressing his willingness to purchase
for £ 950 was not an acceptance. The court held that the offer to buy at £ 950 in response to the
offer to sell for £ 1000 was only a counter-offer, which amounted to rejection of the óriginal offer
and it was not possible to revive the original offer. Hence, there was no contract
between the parties.
2 Acceptance must be Communicated to the Offeror

The acceptance is completed only when it has been communicated to the offeror. Until
the acceptance is communicated it does not create any legal relations. A mere mental
acceptance
is no acceptance. A mere mental acceptance means that the offeree is assenting to an offer in
his mind only and has not communicated it to the offeror.
Example: Brogden Vs. Metropolitan Railway Co. (1877).
A draft agreement relating to the supply of coal was sent to the manager of a Railway Company
for his accepance. The manager wrote the word "approved" and put the draft in the drawer of his
table intending to send it to the Company's solicitor for a formal contract to be drawn up. By
some oversight the document remained in the drawer. Held, there is no contract.

3. The Acceptance must be in the Prescribed Manner

Where the offeror prescribes a particular mode of acceptance then the acceptor should
follow that mode. However, where acceptance is not made in the prescribed mode, the proposer
may, within a reasonable time after the acceptance is communicated to him, insist that his
proposal shall be accepted in the prescribed mode, and not otherwise. But if he fails to do so,
he accepts the defective acceptance.
In case no mode of acceptance is prescribed by the proposer, then the acceptance must be
according to some usual and reasonable mode.
4. The be in Offer
Acceptance must Response to

There can be no acceptance without offer. Acceptance cannot precede offer. For example:
no allotment of shares in a company can be made unless the allottee has applied for them
beforehand. As such, acceptance should follow the offer and no precede it.
 BUSINESS LAW
18

The Acceptane must hr hy the Oeree Is made. A valid

or persons
to whom i
by the person authority accept. to
An C a n be nccepted only person
who has the
communicated by a relationship.
only il acceptance is create any legal
aTises person, it will not
1 unauthorised
by
Commnicated
any

Powrl l's Ire (/098) the appointin

Eample: He was
selected by
in a school One ol tnc
lleadmaster to him.
Aapplied for the post ofa communicated
was not member
his appointement But this
Rt the decision of appointment.
him of his
r e s

informed indivIdual

o the appointing
commitlee
the decision in his
C ' s
communicatcd
the decision Ie A brought a legal
selection. Mr.
communicale
authorised to
cancelled his
as hol

the appointing authority

observCd,
court and it
was
apacSubscquently,
was rejected by thc
hreach of contract. His action in some way. ntor
On to thecontracting party
be notice of acceptance from behind the door
nat
Thee must
as overhcaring from
person is as insufficicnt
maron from an unauthorised

or is Revokea
T h e 4cceptance must be given hefore the Offer Lapses
time limit, if any,
effective acceptance must be given within the specifiedtime. The term, rea-
To be legally reasonable
must be given within a
and 0 time isstipulated. acceptance case.
circumstances of each
sonable time depends upon the facts and
Example: Ramsgate lictoria Hotel Co. Vs. Montefiore (1866)"
(acceptance)
company in
June. The allotment
The defendant applied for shares in the plaintiff His refusal to accept
refused to take shares.
of shares was made in late November. Defendant shares as the
bound to accept the
the shares led to the dispute. It was held that he was not
allotment of shares was not within reasonable time

Acceptance may be Express or Inplied

is express accep called
An expressed by words, written or spoken,
acceptance, which is
tance. The acceptance, which is expressed by conduct, is called an implied acceptance
Essentials of a Valid Acceptance
1. It must be absolute and unqualified.
2 It must be communicated to the offeror.
3. It must be in the prescribed manner
4. lt must be made within reasonable time.
5. It must be by the oferee.
6. It must be in response to offer
7 It must be made before the offer lapses.
8 It cannot be implied from silence.

COMMUNICATION OF OFFER AND ACCEPTANCE

Communication of Offer

An offer can be communicated by any act or omission of the offeror by which he intends
to communicate it (Sec. 3). The offer can be communicated in any way which has the effects
of laying before the offeree, the offeror's
willingness to do or abstain from doing something
The communication of an offer is
complete when it comes to the knowledge of the person
towhom it is made (Sec. 4). When an offer is made
by post, its communication will be complete
when the letter containing the offer reaches the
offeree.
Example: Mr. A offers by a letter to sell his house to B at a certain price. The communication
of the offer is
complete when B receives the letter.
 OFFER AND ACCEPTANCE 19

Communication of Acceptance

The acceplance can be communicated by any act or omission of the acceptor by whicn
he intends to communicate it or by any act or omission vhich has the cffect of communi

cating it (Sec. 3).

The communication of an acceptance is complete as against the proposer when it is put in a
course of transmission to him so as to be out of the power of the acceptor. As against the acceptor
the communiecation of an acceptance is complete when it comes to the knowledge of the prop0ser
The completion of communication of acceptance has two aspects, vIz.,
(i) as against the proposer, and
() as against the acceptor.
The comnmunications of acceptance is complete:
a s against the proposer, when it is put into a course of transmission to him, so as to
be out of the
power of the person who makes it;
(i) as against the acceptor, when it comes to the knowledge of the proposer.
Example: A proposes, by a letter to sell his house to B at a certain price. B accepts A'S
proposal by a letter sent by post. The communication of acceptance is complete.
()as against A when the letter is posted;
() as against B, when the letter is received by A.

Revocation of an Offer

Section 6 has described the modes in which an offer lapses. An offer comes to an end,
and is no longer open to acceptance under the following circumstances
1. By Notice: An offer may be revoked any time before acceptance but not afterwards.
An offer lapses when a notice of revocation has been given any time before its acceptance is
complete as against the offeror.
2. By lapse of time : When the proposer prescribes a time within which the proposal must
be accepted, the proposal lapses as soon as the time
expires.
3. After expiry of reasonable time If no time has been
: prescribed, the proposal lapses
after the expiry of a reasonable time. What is reasonable time will depend on the circum-
stances of the case.
4. By Death or
Insanity: The offer lapses by death or insanity of the offeror provided
that the offeree comes to know about it before
acceptance.
5. By non-fulfilment of conditions: If the offeree fails to fulfil a condition precedent to
acceptance, the offer lapses.
6. By Counter-offer: An offer also
lapses, if a counter-offer is made to it.
7. By rejection by offeree: When offeree
rejects the offer, it comes to an end. Similarly,
a proposal once refused is dead and cannot be revived by its subsequent
acceptance.
Revocation of Acceptance
"Anacceptance may be revoked at any time before the communication of the
1S complete acceptance
as
against the acceptor but not afterwards" (Sec. 5). In fact, revocation of acceptance
amounts to withdrawal of the
acceptance to a proposal by the offeree himself.
Example: A proposes, by a letter sent by post, to sell his house to B. B
by a letter sent by post. B may revoke his accepts the proposal
it reaches acceptance any time before the letter communicating
A but not afterwards.
According to English law, an acceptance once
necessarily irrevocabie for it is acceptance that bindscomplete
cannot be revoked.
Acceptance is
both the parties. Anson has said, "Ac-
 Consideration
(Sections 2 (d), 10, 23 25)

Introduction

Consideration is one of the most important essentials of a valid contract. In simplest terms,
consideration is what a promisor demands as the price for his promise. Consideration is which
for what something that a person gives for something he receives.
In Currie Vs. Misa (1875), consideration was defined as a valuable consideration in the
sense of the law may consist either in some right, interest, profit or benefit accruing to one
suffered or undertaken by
party. or some forbearance, detriment, loss or responsibility given,
the other."
In simple words, the consideration is the price of the promise. This term is used in the
sense of quid-pro-quo ie., something in return. This something may be some benefit, right,
the
interest or profit or it may also be some forbearance, deteriment, loss or responsibility upon
other party.
Section 2 (d) of the Indian Contract Act defines consideration as follows: "When at the
from doing, ôr
desire of the promisor, the promisee or any other person has done or abstained
such act
does or abstains from doing, or promises to do or to abstain from doing something,
or abstinence or promise is called a consideration for the promise"
the
The analysis of this legal definition shows that followings are the essential parts of
consideration
(a) The consideration isact, or abstinence.
an

(6) Such act, or abstinence should be done at the desire of the promisor.
other person.
(c) Such act or abstinence may be done by the promisee or any
of execution
(d) Such act or abstinence is either already executed, or is in the process
or

may still executory.

The meaning of consideration becomes clear from the following examples:
Examples: (1) A ágrees house to B for Rs. 1,00,000. For A's promise, the consideration
to sell a

is Rs. 1,00,000. For B's promise, the consideration is the house.

B's promise to pay the amount
(2) A agrees to sell his scooter to B for Rs. 8,000. In this case,
scooter. And A's promise to sell
of Rs. 8,000 is the consideration for A's promise to sell the
Rs. 8,000.
the scooter is the consideration for B's promise to pay the amount of
A Rs. 1,000 per month for the
(3) A promises to maintain B's child and B promises to pay
is the consideration for the promise of the other party.
purpose. Here the promise of each party
month. The monthly wage is the
(4) A engages B as a clerk in his office for Rs. 2,000 a
consideration received by A.
consideration received by B; the services of B constitute the

21
 BUSINESS LAW
22

Sentials and legal Rules for a Valid Considerafio

of consideration to an agreement
respect
the legal ules
in
consideration or
Ssentials of
are as under
Promisor:
The Consideration mmst m o v e
at the desire of the
or abstinence, which forms consideration:for the
that an act
Indian Contract Act says
of the prom isor. That
done according to the desire
promise. must be done or promised to be is done at the desire of the
for a prom ise unless it
IS, an be a
shall not good consideration of third party, will
rendered voluntarily, or at the desire
act

promisor Thus acts done or services

a contract.
consideration so as fo support
not amount to valid
on lire and helps in cxtinguishing it. B
did not ask for his
Eamples: A sees B's
Mr hours
help. Thus A cannot demand payment for his services.

Dhurga Prasad ls Baldeo (1880)

defendants, who
The plaintift constructed a market at the request of the District Collector. The
articles sold through shops,
occupied the shops. promised to pay the plaintiff a commission on
in consideration of the plaintifi having spent money on the
construction of the market. In a
suit by the plaintiff for the recovery of commission, it was held that the promise was not
supported by consideration. Held, the agreement was void being without consideration as plain-
did not construct the at the desire of defendant, but at the desire of the District
shops
tif
collector.

The Consideration may move from the promisee or any other person

Promisee is the person to whom the promise is made. Under the Indian Law, consideration
may move from the promisee or any other person. It means a person can sue on contract, even
f the consideration for the promise moved from a third party. While under the English Law,
consideration must move from the promisee only.
Example: Chinnayya Vs. Ramayya (1881)
In the case, A, an old lady, by a deed of gift, made over certain property to her daughter R,
with a direction that the daughter should pay an annuity to A's brother C, as has been done
by A. Accordingly, on the same day, R, the daughter, executed a writing in favour of her
maternal uncle C agreeing to
pay the annuity. Afterwards she declined to fulfil her promise
say1ng that no consideration had moved from her maternal uncle i.e., the promisee. It was held
that the words "the
promisee or any other person" in Sec. 2 (d) clearly show that a stranger
to theconsideration may maintain a suit. Hence the maternal
consideration was entitled to maintain the suit. uncle, though a stranger to the
But the English Law is
entirely different. According to English Law consideration must
necessarily from the promisee. The
move
party who wishes to enforce a contract must be able
to show that he himself has furnished
consideration for the promise of the other
3The Consideration may
party.
be past, Present or Future
Sec. 2 (d) defining
consideration clearly
makes it clear that it
future, as it states "....has done or abstained from doing may be past, present or
(present) or
promises to do or abstain from doing (past), or does or abstains from
doing
(a) Past Consideration: A past
(future)
something . Thus
consideration is something
before the making of the wholly done,
agreement. This is, present promise is based forborne or suffered
already taken place. on the
consideration
Example: A found B's
purse and gave it to him. B
Here for B's
promise, the act ofA in promised to give Rs. 100 as reward.
finding B's purse is the past consideration.
a
(b) Present consideration
(Executed). Consideration which moves
simultaneously with the prcm-
 CONSIDERATION 23

ise is called present consideration. Cash sales provide an excellent example of the present
consideration.

Example: A receives Rs. 50,000 in cash from B in return of his car which he promises to
deliver to B. It is present consideration for the promise to deliver the car.

(c) Future consideration (Executory) When the consideration from one party to the other 1s to
pass subsequently to the making of the contract, it will be future consideration.
Example : A agreed to sell his car after two wecks at an agreed price. B agreed to pay the
price on delivery. Here, as the amount and the car are to be transferred in future, therefore,
the consideration is future for both the
parties.
4. The Consideration need not be
Adequate
Consideration is something in return. This something in return need not, necessarily be
equal in value with something given. The consideration need not be adequate to the promise
for the val1dity of an agreement. The law only insists on the presence of consideration and not
on the adequacy of it. It leaves the people free to make their own bargains. nadequate con-
sideration does not render a contract void. The law requires that contract should be supported
by consideration. The adequacy of the consideration is for the parties to consider at the time
of making the agreement, and not for the court when it is sought to be enforced.
Sec 25, explanation 2
provides that "An agreement to which the consent of the party is
freely given is not void merely because the consideration is inadequat but the inadequacy of
the consideration may be taken account by the court in determining the question whether the
consent of the promisor was freely given."
Example: A agreed to sell his car worth Rs. 40,000 for Rs. 25,000 to B. A's consent to the
agreement was freely given. The consideration, though inadequate will not affect the validity
of the contract.

5. The Consideration must be Real and not

Illusory
Although consideration need not be adequate to the promise, it should be competent, real
and valuable in the eyes of the law. It should not be unreal or illusory. Where consideration is
physically impossible, illegal or illusory, it is not real and, therefore, shall not be a valid con-
sideration.
Example :If A promises to put life in the dead body of B's son for Rs. 50,000, the agreement
is void because of the
physical impossibility of the performance.
6 The Consideration must be Lawful
The consideration to a promise must be lawful. The consideration to an agreement is
unlawful if
(1) It is forbidden by law; or
(2) It is of such a nature that, if permitted, it would defeat the
or provisions of any law;

(3) It is fraudulent; or
4) It involves or implies injury to a person or property of another, or
(5) The court regards it as immoral or opposed to public
the consideration is unlawful is void. policy. Every agreement of which
7. The Consideration must be
Something which the Promisor is not already Bound to do
A person may be bound to do
the
something by law. Consideration should be more than what
promisee is bound to do either according to law or on the basis of contract. Where a
who by his official status or person,
by the operation of law is under public duty to act, the
discharging
 obligation is
of existing
24 performance
consideration.
In fact,
as
cannot be regarded
Tnat duty of
O consideration for a promise. witness on
behalf

Godefroy (1831)
no as a
trial Any person

Examples (1):
Collins Vs. to appcar
at a
troubles
taken.

for the
summon
Therefore,

received a couri.
of money in
the plaintiff
cvidence
sum
this casc,
promised
him a
bound to give
n The
defendant
court is legally
defendant.
attend the promise.
the
summons
to
consideration
for the
receiving no successful.
there was
held that suit w a s
it was
Kalu Raju (1877) if the the
Ramchander (
hintaman Vs. vakil an
additional
sum,

vakil w a s alrady
under

(2) to the as the Therefore,

therc
promise to pay consideration
contract.

case,
there was a without
his prior
In this
was
void being successful
under
The promise the suit
to make
Held:
do the best promise.
obligation to subsequent
for the conviction
consideration
the
was no
leading to
Davidson (1840) information
that the
England ls who
should give t was
contended

(3) reward to anyone

information.

and there was

offered a
such criminals
gave
The
defendant
police
constable
as
the arrest of the services
plaintifi. bound to
procure held that
of a thief. The constable
was and it
was
consideration.
police w a s rejected sufficient
being a The plca would be
plaintiff
the promise. duties, it
consideration
for his ordinary
the scope of
consideration.
no
outside constitute
were will
of the duty
rendered

acts done in excess

The Negative
Positive o r
either something.
Consideration may be abstain from doing
The or
8. to do something
be a promise something
positive or negative.
consideration may not to do
The do or C
consideration may
be an act to B agreed to do
so provided
is, on credit. the
That certain goods B. C guaranteed
to sell
A requested supplied to A by
B
Examples: (1) price of goods
consideration for C's
promise to
for the payment of is the
A
of goods by B
will give guarantee to
of the price. Here selling consideration.
payment This is a positive
the payment.
guarantee
Vs. Ram Dass (1941) to pay
(2) Debi Radha Rani On husband's agreeing
allowance.
maintenance forbear-
her husband for the wife's
A wife is ready
to sue forbears to sue. Held,
maintenance, she
way of
maintenance
allowance by for payment of
her a monthly consideration for husband's agreement
amounts to
ance to sue

allowance
Contract
Consideration and Stranger to
Stranger to
by third person, the promisee
the promisee but
a
is funished not by cannot
If consideration
person, who is
not a party to a contract
to consideration. Similarly, a
as stranger
becomes a stranger
is for his benefit. And such
a person is known
contract
claim rights, even though the
to contract. consideration
doctrine which means stranger to the
The privity of consideration is a
term the
other than the promisee. Under the English Law,
or consideration given by any person
If it is furnished by any other person,
consideration must be furnished by the promisee only.
cannot enforce the
the consideration and, therefore, he
the promisee becomes a stranger to contract. The
consideration in a contract cannot sue on the
promise. It means a stranger to that
to the Indian contract law, it is not necessary
validity of privity of consideration, according
That is, a stranger to consideration, in
the consideration should be furnished by the promisee.
India
a contract, has the However, doctrine of privity of contract is applicable in
right to sue.
also. This means a stranger to a contract cannot sue. In this regard both Indian and English
effect of a
Law are the same, i.e., under both, a stranger to a contract cannot sue as the legal
contract is confined to the contracting parties only.
cONSIDERATION 25

Fceptions to the Rule of Privity of Contract

The rule "A stranger to a contract cannot sue", is subject to the following exceptions

Beneficiaries in the case of trust

An agreement to create a trust can be enforced by the beneficiary. Under such a contract,
benefit is given to a person who is not a party to the contract. However, stranger must be
learly designated as a beneficiary and the tnust or charge in his favour must also be of some
specific property
Examples: () Amirullah Vs. Central Government (1959)
It was pointed out that the addressee of an insured article is the beneficiary under the contract
bctween the sender and the Central Government who is liable for compensation under Post
oice Act. for non-delivery. A trust of movable property is deemed to be declared by the
sender from the fact that he addressed the insured cover as deliverable to the addressee A
the
constructive trust having been created in
benefit as against the trustee, the Central
favour of the addressee, he is entitled to have
Government through the Post Office, and sue

() Khwaja Muhmmad Vs. Hussaini Begum (1909)

H sued her father-in-law K to recover Rs. 15,000 being the arrears of allowance called Kharcha-
-Pandan (Betal bOx expenses) i.e., pin money payable to her by k under an agreement made
to K's son D. Both H and D were
between K and H's father in consideration of H's marriage
be enforceable by H.
minors at the date of mariage. The Privy Council held the promise

Marriage Settlement, Partition and other Family Arrangement

Where a provision is made in a partition family arrangement for maintenance or marriage
or
the agreement, can sue on
expenses of
female members, such members, though not parties to
the contract.

Examples: () Shuppu Ammal Vs. Subramaniyan (1910)

shares certain sum
partition of joint properties, agreed
to invest in equal a
Two brothers, on a
her sons to
their mother. Held, she was entitled to require
of money for the maintenance of
make the investment.

(ii) Daropti Vs. Jaspat Rai (1905) into an agreement

because of his cruelty. Å entered
A, ill-treated his wife, B. She left him allowance to his wife,
He further agreed to pay monthly
with B's father to treat her properly. ill-treated A and was driven by
Subsequently, B was again
if he failed to treat her properly. made by A to her father, though she
entitled to enforce the promise
out of the house. She was
was not a party to it.

Acknowledgement of Liability
or
acknowledges the payment to a third party
of the parties to contract the
Sometimes one
of the third party. And that party acknowledges
himself as an agent third person, then the
otherwise constitutes
constitutes himself as an agent of that
or
payment to the third person party.
the amount from such
third person can recover
Nanat (1940)
Examples: Surjan Vs. of this receipt to C. C
to C and he admits
money from B to be paid over of C.
A receives some
shall be regarded as the agent
amount from A who
can r e c o v e r this

Vs. Man Gobinda

Panda (1933)
(i) Kshirod Behari Dult which B was paying
a tenant and B, a sub-tenant, under
agreement
between A, the rent to the landlord,
There was an
After some time, B stopped paying rent
the rent directly to the landlord. entitled to recover the unpaid
It was held that the landlord was

and the rent fell in arrear.

from B.
 26

4 Contracts through Agent can sue on t.

principal
by an agent, the
is entered into
Where a contract

Contrnct the contract

Assignee of a transfer his rights under
contract can
a party to a holder who has obtained
Under cetain
circumstances
instrument is a
of a negotiable He may the prior
sue
A holder in due course
consideration.
third party valuable
to faith and for
i n s t r u m e n t s in good
the negotiable
parties to the negotiable
instrument.

Rules Regarding Consideration

move at the desire of the promisor

Consideration must
other person.
move from the promisee or any
2. Consideration may
or future.
3 Consideration may be past, present
Consideration need not be adequate.
Consideration must be real and not illusory.
5.
Consideration must be lawful.
pre-existing obligation is not consideration.
Discharging of a

Consideration may be either positive or negative.

No Consideration No Contract" Exceptions to the Rule

General rule of law is that an agreement without consideration is void. Sec. 25 deals with
cxceptions to this ule where a contract, even though without consideration, is enforceable. They
are as follows

1 Natural Love and Affection

Sec. 25 (1) of the Indian Contract Act, which reads as under: "An agreement without
consideration is void, unless it is expressed in writing and registered under the law for the time
being in force for the registration of documents and is made on account of natural love and
affection between parties standing in near relation to each other."
The following conditions must be satisfied for the
application of this exception:
) The agreement is made by a written document.
(i) The document is registered
the time.
according to the law relating to registration in force at
(ii) The agreement ás made on account of
natural love and affection.
iv) The parties to the agreement stand in a
near relation to each other.
Example : Rajlukhy Debee Vs. Bhootmath (1900)
An agreement entered into by a husband with his
whereby the husband wife, during quarrels and
promised to give some
because, under the circumstances, there is property to the wife. The disagreement,
no natural love agreement
and affection between
is void
2. Voluntary Compensation the parties.
A promise
made without any
wholly or in
part, a person who has
consideration is valid if, "it is a
something which the promisor was already voluntarily done somethingpromise
to
for the
compensate
In other words, a legally compellable to do" promisor, or
without promise to pay for
past
consideration. The following voluntary services is
exception conditions must be satisfied forbinding even though it is
the
application of this
 CHAPTER V

Contractual Capacity
(Sections 10 12)

a valid
to make
Introduction to be competent
Contract Act requires
the parties the free
consent
Or
10 of the Indian are made by
ection
are contracts, if they competency makc to
10 states, "All agreements arises, what is the to
contract.Sec.
to contract." Thus, the question capability of the parties
the parties competent competence i.e., Indian
m e a n s the 11 of the
d contract" The "capacity
to contract" defined in Sec.
to contract" is
Cnter into a valid contract. The term "capacity
contract Act. which reads as under to the
of the of the majority according
to contract who is
age
Every person is competent from contractin8
and is not disqualified
who is of sound mind,
to which he is subject, and
law he is subject."
by any law to which :
competent to make
contracts except the following
words, all persons
In other are

1. Minors
2. Persons of unsound mind.
3. Persons disqualified by any law to which they are subject.
MINOR
A minor is a person who has not attained the age of majority. For the purposes of entering
into contract, "the age of majority" is eighteen years. The term minor is explained in Section
3 of the Indian Majority Act. 1875, which reads as under
"A minor is a person who has not completed eighteen years of age".
In the following two cases,
person becomes major on completion of 2I years
a

(a) Where a guardian of a minor's person or property has been appointed under the Guardi
ans and Wards Act 1890, and
(6) Where thesuperintendence of minor's property is assumed by a court of wards.
The age of majority is to be determined
In England, for all according to the law to which the minor is subject.
purposes, a minor is a person who is under the
age of eighteen years.
Law Relating to Minor

Infancy is said to
be a disability, but in
Courts. It has been rightly observed: practice it is really protection granted the Law
"The law protects their by
rights and estates, excuseth their laches, and 'assists (infants') persons; preserves their
Counsellors, the Jury are their servants and Law is them in their pleadings; the judges are their
Sec. 11 of the Act does their guardian"
and the legal effect of expressly say anything about the nature of a
such an minor's agreement
judicial pronouncements by Courtsagreement. It is,
therefore, necessary to fall
Dharmdas Ghose (1903) Courts of of Law. Till the historic judgement in back upon the
Law in India were not Mohri
unanimous regarding the bibee Vs.
nature of a
28
CONTRACTUAL CAPACITY
29
vord

ainor's agreement whether it is void or voidable. The controversy was finally resolved by the
iv Council in Mahori Bibee Vs.
Dharmdas Ghose (1903).
Mohri Bibee Vs. Dhamdas Ghose (1903)
In this case, a minor had executed a mortgage for the sum of Rs. 20,000 out of which the
lender had paid the minor only Rs. 8,000. The minor then filed a suit for setting aside the
mortgage. It was
contended that as the contract was voidable and the
minor was now repudiatin8
it the amount of Rs. 8,000 actually paid to the minor must be refunded under Section 65 of
the Indian Contract Act. The Privy Council pointed out that
minor as the contract was ab-
solutelyvoid no question of
refunding money could arise in these circumstances. Money ad
vanced to a minor cannot be recovered. Thus, from this it is clear that minor's agreement is
void ab-initio i.e., not existent from the very beginning, and is, therefore, absolutely void and
devoid of any consequences.

Minor's agreement
The law regarding minor's agreements may be summed up as under
1. An Agreement with a Minor is Void Ab-initio
Law acts as the guardian of minors and protect their rights because they don't possess the
capacity to judge what is good and what is bad for them. Thus, agreement with a minor is
void ab-initio, i.e., absolutely void and not merely voidable. An agreement with a minor does
not create any legal rights and obligations between the concerned parties.

2 The Rule of Estoppel does not Apply to a Minor

The rule of estoppel does not apply to a minor i.e., minor is not
estopped from pleading
his infancy in order to avoid a contract, even if he
has_entered into an agreement by falsely
representing that he was of full age. In other words, where an infant represents fraudulently or
otherwise that he is of age and thereby induces another to enter into a contract with him, then
in an action found on the contract, the infant is not estopped from
setting up infancy.
3 No Restitution Except in Certain Cases
A minor cannot be ordered to make compensation for a benefit obtained under a void
agreement, because Sections 64 and 65 of the Contract Act, which deal with restitution, apply
only to contracts between competent parties and are not applicable to a case where there is not
and could not have been any contract at all. Thus, when the minor receives the benefits of
money, he may be compelled to restore the same. This is based on the principle that he, who
secks equity, must do equity. In this regard the following observations of Allahabad High Court
are worth noting:
"Where persons, who are in fact under age, induce others to purchase property from them,
they are liable in equity to make restitution to the purchaser for the benefits they have obtained,
before they can recover possession of the property sold."
4. Minor's Liability for Necessaries
Minor is liable for 'necessaries' supplied or 'necessary services' rendered to him or his
minor dependents. In other words, if a person
supplies necessaries to a person who is incapable
of entering into a contract or to
anyone whom such incapable person is legally bound to support,
then he can claim reimbursement from the
property of such incapable person. For such contracts
he cannot be held liable
personally. His property or estate alone will be liable.
5. Minor's Liability in Tort
The infant is liable for his tort, i.e. a worng, unless the tort is in reality a breach of
contract. The tort must be separate from and independent of contract otherwise many contracts
would be enforced on minors in indirect For
an manner. example, an infant hired a horse for
 UTact is
1ae guilty of
on the
an infant in the course of doing what
ue an contract"
infant, In for "you negligencee, he cannot he made
liable
tort
In

to

NUmping and then another case an

cannot conve
contract
into
for riding
a

what was done he ent it infant hiredjumped

a
orse expressly
and killed
it.

WOwh he was by the infant was not an friend

to a the horse
who jump Who
contract, but
was the doing
ol

expressly forbidden bv theanowner

Aant was held liable abuse of
abuse
of the
to do me owner to with the
animal", and,
therefre,

for the tort

No Specific Performamce
Since an direct "specific
will never
agreement
4a by absolutely void,
minor is absoutely the court
a minor,
entered into, on behalf of
Minor
performance Such a
of such an agreement
v
But a contract
by his guardian or by reement by him. Bu binding on the minor and can
him. be specifically
the managar of
of his
his estate, is guardian
e estate, eact within the authority of the
contract is within
entorced by or
against the minor provided: (a) the au
O
manager, and () it is for the benefit of the minor
No. Ratificatiom approving. The doctrine
or
defined as the act of confirming
he term 'ratification' may be
made by a minor (during the period of minority)
no ratification' impkes that an agreement because minor's agreement is
void
This is so

cannot be confirmed by him on attaining majority.

ratification.
cannot be made valid by
ah-initto and. therefore,

A Minor can be a Bemeficiary

8 to bind himself by a
of a minor to enter
into contract means incompetency
Incompetency payee, an endorsee
which debars him from becoming beneficiary, eg.,
a
contract. There is nothing
can be enforced at his option,
but not at the option of the
or a promiseein a contract. Such contracts
benefit.
notregard him as incompetent acceptingheld
for a
other party. Thus, the law does
that minor may
Mohd (1924). The Rangoon High Court
a
In Shrafat Ali Vs. Noor promisee.
enforce a promissory note executed
in his favour. A minor may become a

9 Partnership by Minor

The partnership of partners results from their agreement. A minor, being incompetent to
enter into a contract, cannot be a partner in the firm. However, he may be admitted only to
the benefits of the firm. This provision is contained in Section 30 (1) of the Indian Partnership
Act. 1932, which reads as under:
"A person who is a minor, according to the law to which he is subject may not be
a partner in a fim, but with the consent of all the partners for time being, he may
be admitted to the benefits of patnership."

10. A Minor can be an Agent

An agent is merely a connecting link between his principal and third person. Therefore.a
minor be
can appointed as an agent. But he will not be personally l1adle tor any of his acts.
Sec. 184 of the Indian Contract Act reads as under
"As between the principal and third
persons any person may become an agent, but
no person who is not of the of
so as to be
age majority and of sound mind can became an agent
responsible to his principal".
1. Minor can be a Shareholder
A minor
can hold fully
paid up shares of a company. He cannot hold
he cannot be held liable for partly paid-up shares
calls. Since of a membership company arises on the basis of a
 31
ONTRACTUAL CAPACITY

to contract,
cannot be a member of A minor, heing incompetent
a company. or
minor transfer
a to register
nfract. can also refuse
contrac
cannot be
shareholder of the company. A company
shares in favour of a minor unless the
shares are fully paid
of
t
mission
r a n s

Declared Insolvent
12
AMinor cannot be contracting debts.
Even
cannot be adjudicated an insolvent, for, he is incapable of
A minor his is liable.
to him, he is not personally 1liable, only property
necessaries supplied
ne
for
Minor cannot be a Surety
13 compensate anything under a
cannot be a surety as he is not liable to pay or
A minor
contract

Posiion of Minor' Parents

14
contracts do not impose if the contracts are for
any liability on his parents even
Minor's him just
or the guardians of the minor may pay money borrowed by
essaries. The parents minor child
can be held liable when the
n e c e s s

al of moral obligations. But the parents or guardians

out

acting as an agent of his parents or guardians.

15 of Apprenticeship and Service

Contracts
valid and binding minor because such a contract
A contract of apprenticeship is upon a

case falls within the terms of that

Act.
protected by the APPrentices Act 1961, provided the
is and the
alia, provides that the minor must not be less than fourteen years of age
The Act inter
entered into on behalf of the minor by his guardian. The Act was passed, with
contract must be
to enabling children to learn trades, crafts and employments, by which,
when they come
a view

to full age, they

may gain a livelihood. A contract of service is not binding by or against a
minor.

Minor Under the English Law

Under the English Law, an infant (equivalent of minor under the Indian Law) is a person
who is below 18 years of age. Contracts entered into by an infant fall into one of the following
classes
1. Void Contracts
All contracts, whether by speciality or by simple contract, entered into by infants for the
repayment of money lent or to be lent, or for the payment of goods supplied or to be supplied
(other than contracts for necessaries), and all accounts stated with infants, are absolute void.
(Infants Relief Act 1874).

2. Infant's Voidable Contracts

When an infant enters into a contract of a continuing obligation, the contract cannot be
enforced against him during infancy. But after he attains majority, the contract is binding on
him unless he repudiates it within a reasonable time. Examples of these contracts are: tenancy
agreements, partnership agreements, agreement to take shares (which are not fully paid) and
mariage settlements.
3. Contracts binding on the infant
An infant is bound by contracts for (a) necessaries, and (6) education, training or beneficial
service..
4. Contracts Enforceable by the Infant but not Against him

All Contracts, other than void, voidable or binding contracts, of an infant are unenforceable
against him, either during or after infancy. But the infant can enforce such contracts.
 32 BUSINESS LAW

Position of Minor's Agreement

An agreement with a minor is void ab initin
The nile estoppel doee not apply to a minor
No restitution except in certain cases.
A minor 's estate is liable for necessaries supplied
A minor is generally liable for a tor
of his agreement.
Court
ne ver orders specific performance
His agreement cannot he ratificd on his attaining majority.
A minor can be a promisee or beneficiary.
A minor can be a partner, to the benefits of partnership.

10 A minor can be an agent.

11A minor can be a shareholder.
12 A minor cannot be declared insolvent.
13 A minor can not be a surety.
14 A contract of apprenticeship is binding on him.
15 A contract of service is not binding.
16 A minor is always allowed to plead minority.

PERSONS OF UNSOUND MIND

In order to be competent to contract a person must be of sound mind (Sec. 11)
What is a sound mind?
Sec. 12 of the Indian Contract Act reads as follows
"A person is said to be of sound mind for the purpose of making a contract if, at the time
when he makes it, he is capable of understanding it and of forming a rational judgement as to
its effect upon his interests"
The section further states that:
) "A person who is usually of unsound mind, but occasionally of sound mind, may make
a contract when he is of sound mind." Thus a patient in a lunatic asylum who is at intervals
of sound mind, may contract during those intervals.
(i) "A person who is usually of sound mind, but occasionally of unsound mind, may not
make a contract when he is of unsound mind" Thus, a sane man, who is delirious from fever
or who is so drunk that he cannot understand the terms of a contract or form a rational judgement
as to its effect on his interests, cannot contract whilst such delirium or drunkenness lasts. Thus,
from the examples, soundness of mind of a person depends on two facts
(i) Capacity to understand the nature and the terms of the contract.
(i) Ability to form a rational judgement as to its effect on a person's interests.
Thus a person who does not satisfy these conditions, is of unsound mind and is incapable
of entering into a valid agreement. The agreement made by persons of unsound mind, like that
of minors, are also absolutely void. The reason for the same is that a valid agreement requires
the assent of two sound mind. Sec. 11 of the Indian Contract Act specifically declares that
persons of unsound mind are incompetent to enter into an agreement. If any person relies on
the unsoundness of mind of the other person, he must prove it to the satisfaction of the court.
Legal position of the persons of unsound mind, has been discussed as under

ldiots
An idiot is a person who has completely lost his mental faculties of thinking. Idiocy is a
congential defect caused by lack of development of the brain. He is incapable of entering into
a contract and, therefore, a contract with an idiot is void.
 33
CONTRACTUAL CAPACITY

disordered
due
ie.,
are
deranged may
whose mental faculties of thinking
person
of such
I u n a t i e s

Is a person ental powers hopelessly

Lunatic
s o m e other reasons.
However, the latter is
me mental
mer
strain or
h as the
in as much
intervals

lunatic differs from an idiot has lucid

lunatic
he completely lost.mind lucid intervals,
and has no
whereas a
with a lunatic
dlurnk
not
of unsound entered into
contract is would
perfectly sane. If, therefore,
a
his estate
mad

which he IS on him and

it is binding
hcid intenal, ie., when he was perfectly sand
his rwise the contract is void.
hable:
he
Person
or
Delirious
Drunkenness produces
prunken or drugs.
influence of drinks
1s a person who is under the intoxication. If a person
is so drunk,
Drunkard effect of
till the drunkard is under the effect of
incapacity, understanding the nature and
temp
mporary
from fever as to be incapable of his condition 1s
or delirious effect on his interest,
infoNicated rational judgement as to its
unsound mind
form a
an Agreement or to
as in the case
of person of
that of a lunat1c and on the same grounds lasts.
cimilar to or drunkenness
contracts whilst such delirium
enter into valid
he cannot

Agreements Made by Persons of Unsound Mind

Effects of unsound mind is treated on
the same footing
entered into by a person of void
An agreement
agreement by a person
of unsound mind is absolutely
minor's and, therefore, an
as that of derive benefit under it.
him but he can
and inoperative as against
LAW
PERSONS DISQUALIFIED BY
are not
are disqualified by
the law to which they are subject,
The following persons, who
to enter into a contract:
competent
1. Alien Enemies
aliens. An alien is a person who is a foreigner
All persons other than Indian citizens are of a
an 'alien enemy'. An alien (citizen
to the
land. He may be either an 'alien friend' or
enter into contracts with citizens of
India during peace time
foreign country) living in India can in that respect. On
to any restrictions imposed by the Government
only, and that too subject and India, he becomes an alien enemy and cannot
the declaration of a war between his country Contracts
enter into contracts. *Alien
friend can contract but an alien enemy can't contract".
and cannot be performed during
entered into before the declaration of the war stand suspended
the course of war, of course, they can be revived
after the war is over provided they have not
already become time-barred.

2. Foreign Sovereigns and Ambassadors

Foreign sovereigns and accredited representatives of a foreign state or ambassadors enjoy
special previlege, by which they cannot be sued in Indian courts. However, they can, if they
choose, enter into contracts and can enforce such contracts in Indian courts. Ex-kings are not
entitled to this previlege and, therefore, can be sued in Indian courts just as ordinary citizens.
In India, under Section 86 of the Civil Procedure Code previous sanction of the Central Gov-
ernment is to be obtained, for suing the rulers of foreign states, ambassadors and envoys.

3 Convicts
A convict is a person, who is sentenced by a competent court to the death sentence or
umprisonment. A convict cannot enter into a valid contract while undergoing sentence, nor can
sue. His
incompetency is over, when the period of his sentence is over or he is pardoned. Thus,
the competency right to
make a contract or sue is only suspended during the course of his
sentence and is not lost. Whenever he is
freed, he regains such rights.
 BUSINESS LAVw
34

Isolvens
vests in the Receiver o r Officiat
insolvent, his property
declared an
when a person is
his power to deal with
the property. Therefore, he he
And the insolvent is deprived of of a n insolven
A ssignee this disqualification ent
c o n t r a c t relating to
his property. However,
Cannot enter into a
an order of discharge.
removed when the coirt passes

Marricd Homen
and females. A
contractual capacity of males
hasmade anyy distinction regarding
not as a m a n . Whatever
the s a m e c o n t r a c t u a l capacity
Law
unmarried, enjoys
w o m a n , whether
married o r
o v e r it. She is free to deal with her
she has absolute ownership
propert a woman possesses,
husband is not at all responsible
for her contracts
she likes. Her
personal property in the way

Professional Persons
6 their clients for their professiona
barristers cannot s u e
It is only in England, where the himself enrolled as an
rule exists. In India, every barrister, who has got
such Bar Council
fees. In India, no
c a n s u e his clients
for his fees. Under Indian
Court
advocate of a n Indian High he c a n practise.
advocate is necessary before
Act 1927 enrolment of an

Corporations and Companies

under an Act passed by Parliament
Joint stock companies and a corporations incorporated cannot enter
law. A joint stock company
State legislature are persons created by
artificial
or Memorandum of Association
upon it by its
beyond its powers conferred outside
into contracts which are
the powers conferred on it by the
corporation cannot enter into contracts
Similarly a
w a s incorporated.
These artificial persons cannot enter
special Act under which the corporation
into contracts of marriage.

TIONIS
 CHAPTER VI

Free Consent
(Sections 10, 13 22)

Introduction

According to Sec. 10, "free consent' of all parties to an agreement is one of the essential
elements of a valid contract. The consent of the parties means that there is perfect identity of
mind of both the parties i.e., there is no misunderstanding between the parties regarding the
subject-matter of the contract. For enforceability of an agreement, it is not only necessary that
the parties to the agreement should have given consent but their consent should also be free.
The term 'consent' is defined in Sec. 13 of the Indian Contract Act, which reads as under
"Two or more persons are said to consent when they agree upon the same thing in the
same sense.

Consent' means that the parties should have the identity of mind,
i.e., the parties must
understand the subject-matter of the contract in the same sense. Thus consent involves identity
of minds or consensus ad-idem i.e., agreeing upon the same thing in the same sense. When
there is no consent, there is no contract. When parties enter into an agreement concerninga
particular person or thing, but each has a different person or thing in mind then there is no
consent of the parties and no contract comes into existence between them.
Example: A had two cars, one is of green colour and the other is white. A offered to sell his
green car to B for Rs. 50,000. B accepted the offer believing it to be for the white one. In
this case, no contract arises beween A and B as there is no real consent of the
parties.
Free consent defined in Section 14 reads as follows
Consent is said to be free when it is not caused by:
(1) coercion, as defined in Section 15 or
(2) undue influence, as defined in Section 16, or
(3) fraud, as defined in Section 17, or
(4) misrepresentation, as defined in Section 18, or
(5) mistake, subject to provisions of Sections 20, 21 and 22.
When a consent is caused by mistake of both the parties, then the agreement is void. It
will, therefore, be observed that consent under the first four circumstances i.e., under coercion,
undue influence, fraud and misrepresentation, makes the contract voidable, while consent under
mistake of both the parties makes the agreement void. See the chart below:

When consent is not free and caused by |

Coercion Undue influence Fraud Misrepresentation Mistake

Agrement is voidable Agreement void
35
 36 BUSINESS LAW

Consent IK said to be so caused when it would not have been given but the CxIstence of
sheh coere ion, undue influence, fraud, misrepresentation or mistake.
In fact. where there is no consensus ad idem, there is no common intention or meeting
of minds of the parties, and as such no contract comes into existence. n the absence of 'free
consent the contract may turn out to be cither voidable or void depending upon the nature of
the flau in consent
When the consent is 'not free then the contract is voidable at the option of the party
whose consent is not free But in cases of 'no consent, no contract will come into existence,
it will be vod ab initio

COERCIOON
Coercton means foreibly compelling a person to enter into a contract. Coercion is threat
or
forve used by one party against the other for making him to enter into an
agreement.
Sec 15 of the Act defines
"'Coercion" is the committing or threatening to commit, any act forbidden
Penal Code. or the unlawful detaining, or threatening to detain,
by the Indian
any property, to the prejudice
of any
person whatever, with the intention of causing any person to enter into an
agreement."
Coercion implies a committing or
threatening to commit some act which is
contrary to
law According to the above definition of coercion, it may be in of the
(1) To commit an act forbidden
any following acts:
by the Indian Penal code; or
2) The threat to commit an act
forbidden by the Indian Penal Code; or
(3) Unlawful detention of any
property;
or
(4) The threat to unlawful detention
of any property.
However, it is necessary that
(i) The act, amounting to
coercion, must have been done with the intention of
any person to enter into an
agreement. and causing
(i) It does not matter, whether the Indian Penal Code is
where coercion is or is not in force at the
employed. place
Examples:(1) Renganayakamma Vs. Alwar Chetty (1889)
A
young widow of 13 years was forced to
to adopt a
threats of
preventing the dead body of her agree boy to her husband under the
widow adopted the husband from being removed for
boy and subsequently applied for cremation. The
induced by coercion. It was cancellation
consent was not free but of the
person who obstructed a dead
adoption.
held that coercion was Because her
Sec. 197 of the
Indian Penal
body from being moved would be employed as any
Code. guilty of an offence under
(2) Muthiah Chetiar Vs.
An agent refused
Karuppen Chetty (1927)
to hand over the
principal released him from account books of a
Madras High Court that liability in respect of all the business to the new agent unless the
the release deed was past transactions.
given under coercion. avoidable at the option of the It was held by the
(3) Bansraj Vs. the Secretary of State principal as it was
The Govemment (1939)
gave a threat of
a fine
due from B, the attachement against the
the fine. Held, property of A, for the recovery of
son of A, A
coercion and, A was entitledpaid
ment. therefore, to recover the
the payment of
fine was induced
money paid to remove by
hreat to File a Suit wrongful attach-
To threaten a
act forbidden criminal or civil
by the prosecution does not constitute
ercion, for such an actIndian Penal Code.
is forbidden
But a threat to coercion because it is not
file a suit on a
by the Indian Penal false charge
Code. constitutes
FREE CONSENT 37

Commit Suicide
Threat to
Sometimes, by threat to commit suicide, a person obtains the consent of the other. The
dubt arises hecause sicide though forbidden by the Indian Panel code is for obvious reasons
al punishable. A dead person cannot be punished But, since Section 15 declares that committing
no
threatening to commit suicide should obviously be so regarded (suicide heing forbidden).

Example Chikkam Ammiraju Vs Chikkam

Serthamma (1918)
In this case a person. by threat to commit suicide, induced his wife and son to execute a
release deed in favour of his brother in respect of certain properties which they claimed as
their own The transaction was set aside on the grounds of coercion It was stated by the
majority of judges that though 'a threat to commit suicide' was not punishable under the Indian
Penal Code. it must be deemed to be forbidden by that Code, as 'an attempt to commit suicide
was punishable under Sec. 309 of that Code. Their Lordships observed: "The term 'any act
forbidden by the Indian Penal Code' is wider than the term 'punishable by the Indian Penal
Code. Simply because a man escapes punishment, it does not follow that the act is not for-
bidden by the Penal Code. For example, a lunatic or a minor may not be punished. This does
not show that their criminal acts are not forbidden by the Penal Code"

Effect of Coercion
The effect of coercion is that it makes the contract voidable at the option of the party
whose consent is obtained by coercion, that is, such party can put an end to the contract if he
so chooses. The burden of proof that coercion was used lies on the party who wants to set
aside the contract on the plea of coercion. The effect of coercion is emphasised in Sections 19
and 72 of Indian contract Act.'
Section 19 states: "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"
Section 72 states: "A person to whom money has been paid or anything delivered under
coercion, must repay or return it."

Duress

In the English Law, the near equivalent of the term 'coercian' is 'duress'. The term coercion
in India covers much wider field than duress in England. Duress has been defined as causing,
or threatening to cause, bodily violence or imprisonment, with a view to obtain the consent of
the other party to the contract. In short, for duress the act or threat must be aimed at the life
or liberty of the other party to the contract or the members of his family. A threat destroy or
detain property will not amount to "duress'.

Duress Differs from Coercion on the Following Points

1. Coercion can be employed by any person whereas duress can be employed only against
the other party to the contract or the members of his family.
2. Coercion may be employed by any person, not necessarily by the promisee. Duress
can be employed only by the party to the contract or his agent.
3. Coercion is wider in its scope and includes unlawful detention of goods also. Duress
on the other hand, does not include unlawful detention of goods. Only bodily violence
or imprisonment is duress.

UNDUE INFLUENCE
The term 'undue influence"' means the unfair use of one's superior power in order to obtain the
consent of a person who is in a weaker position. In certain cases, the parties to an agreement are so
related to each other that one of them is in a position to dominate the will of the other. Sometimes
a party is compelled to enter into an agreement against his will because of an unfair persuation by
the other party. The term 'undue influence' is defined in Sec. 16 of the Indian Contract Act:
 BUSINESS LAW

38
'undue influence'
where, (i) the relations
contract is said
to be induced by to dominate the
a position
Sec 16 (1) "A
that one of the parties is in other."
the parties are such unfair advantage
over the
suhsisting hetween to obtain an
uses the position
will of the other, and (i) is clarified by the samme
dominate the will of the other"
to
The pharase "in a position
Secthion, under sub-section (2) thus to dominate
the will of another
deemed to be in a position
Section 16 (2) "A person is other"
over the
real or apparent authority
(a) "Where he holds a
servant
between master and
Example: Relationship
officer and accused.
Relationship between police
the other". to
(6) "Where he stands in a fiduciary relation
confidence.
relation of mutual trust and
Fiduciary relation means a
and son
Example: Relationship between father
between doctor and patient
Relationship
Relationship between trustee and beneficiary etc.
(c) "Where he makes a contract with a person whose mental capacity is temporarily or
affected by of age, illness or mental or bodily distress etc."
permanently reason

Example: Old illiterate persons.

Thus, there are the following three ingredients of undue influence
(a) That the relations subsisting between the parties are such that one of the parties is in
a position todominate the will of the other
(6) That the dominant party obtains an unfair advantage over the other: and
c)That the dominant party uses its dominant position to obtain that unfair
advantage.
Examples: (1) X
having advanced a sum to his son Y during his minority: upon Y
major, X using his parental influence gets a bond being
undue influence. signed for higher amount. It is a case of
(2) A, a man enfeebled by disease
attendant to agree to pay B an
or age is induced by B's influence over him as his medical
unreasonable sum for his
influence (Fiduciary position). professional service. B
employs undue
(3) A, a spendthrift and a
to his father-in-law weak-minded, just comes of age, conveys a share of his
for a nominal
consideration. Undue influence is family estate
exercised. presumed have been
to

Relationships which Raise a Presumption of Undue

Some
relationships are such in
Influence
nature that
viz, they raise a presumption of undue
(a) Parent and child influence,
(b) Father and son
(c) Guardian and ward
(d) Trustee and
(e) Doctor and beneficiary
patient
Teacher and student
(g) Religious adviser and
There is,however, no disciple, etc.
(a) Husband and presumption of undue influence in the
wife (not
(6) Creditor and
debtor
being parda-nashin) following cases
c) Landlord and
In these cases tenant
undue influence shall have to be
proved.