Contractual Capacity of parties

Minors Contracts
Absolutely void: Mohori Bibi Vs Dharmodas
Ghose(1903 Privy council judgment)
Minor can be a beneficiary of the contract
Minors liability for necessaries: Section 68

Persons of unsound mind

What is unsound mind: Section 12: requirements
Capability

to understand the nature of the contract,

and
Capability to form a rational judgment as to its
effect on ones interests

Mohori Bibi Vs Dharmodas

Ghose(1903) Privy Council Court
A minor mortgaged his house in favour of a money
lender to secure a loan of Rs 20,000/-.
In accordance with the contract the moneylender
paid a part of the loan, i.e., Rs 8,000/- to the
minor.
The minor then filed a suit to cancel the mortgage
on the ground that the contract on which the
mortgage was based was void since he was a
minor at the time of making the contract.
The Court by its order,cancelled the mortgage and
even rejected the moneylenders prayer for refund
of his money, saying that the minors agreement is
absolutely void ab initio ( from the very
beginning)

Capacity of parties II
Sound Mind: a person is said to be of sound
mind if
he is able to know the nature of the contract and
to form a rational judgment as to the effects of the
contract on his interests

Contracts of persons of unsound mind: void

Only persons of sound mind can enter into
contracts
Persons occasionally of sound mind can enter
into contract only when they have sound mind
Persons occasionally of unsound mind cannot
enter into contract when they have unsound
mind
Persons under the influence of drinks or drugs:
temporary incapacity

Free Consent and voidability

Consent: Section 13: consensus ad idem
Free Consent: Section 14: Consent not
caused by any of the vitiating elements
Vitiating elements: Coercion, Undue
influence, Misrepresentation, Fraud,
mistake
Agreement without consent: void
Agreement without free consent: voidable
contract

Coercion
Meaning: Use of force or threat of such use
But in terms of Contract Act, Coercion is :
Committing or threatening to commit any act forbidden
by the Indian Penal Code
Unlawful detaining or threatening to detain any
property

The above acts/threats must have been done with

the intention of causing any person to enter into a
contract

Coercion-examples
A threatens to publish a defamatory article about
the father of B unless B contracts to sell his
factory to A at a throw-away price. B makes the
contract as desired by A. The Contract is voidable
on the ground of coercion at the option of B.
During a case ongoing between A and B, C who is
As neighbour, approaches A and tells him that he
will give false evidence in favour of B unless A
gives him interest free loan of Rs 3 lakhs. A agrees
to give the loan. the contract is vitiated by
coercion and can be set aside by court at the suit
of A.

Undue Influence
Relations between the parties are such that
one party is in a position to dominate the
will of the other party
Dominating party uses that position to
obtain unfair advantage out of contract
The transaction is unconscionable( shocks
the conscience/is unethical)

Undue Influence
Presumption of Dominating position:
One party holding Real or apparent authority over the
other: (parent-children, Teacher-student, Doctorpatient, Spiritual advisor-devotee etc)
Parties stand in a fiduciary relationship where one party
reposes faith and trust in the other party
One of the party is having affected mental capacity

 Examples:
Moneylenders signing unconscionable loan
contracts with illiterate labourers
Professionals influencing their clients and
obtaining gifts/sale deeds etc

Misrepresentation
It is a false statement or information made
or given during negotiations by one of the
parties to contract
Misrepresentation is a false statement made
without knowing it to be false or believing
it to be true
Thus there is no intention to cheat the other
party to make him enter into contract

Fraud
Aggravated form of misrepresentation
Misrepresentation is a false statement innocently or
carelessly made
Fraud is a false statement intentionally made

Fraud includes any of the following acts made by

a contracting party with intention to induce the
other party to enter into contract:

Intentional False statement made:

Active concealment of a fact
Promise made without the intention of performing it
Any kind of deceit or cheating
Any act declared as fraudulent by any law

Fraud..
Mere silence or not giving any information
to the other contracting party is not fraud
unless
There is duty to speak considering the relations
between the parties,
Silence itself amounts to speech

Uniclel Ltd. And Anr. vs The State Trading

Corporation (1978): Fraud or no fraud?
A offered to sell to B by a letter of 26th May, 1970
staple fibre at 46.5 $ per Kg. containing the
following called the "fall clause" :-"A agrees that
in case business is concluded by B by the end of
July 1970 with any reputable manufacturer at a
lower price, A will be bound by that lower price."
The offer was accepted along with the "fall clause"
by B by letter dated 29th May, 1970. B had also
received an offer from C firm for the supply of the
same quality of staple fibre on 25th May, 1970 at
the rate of 44.65 $ per Kg and had accepted the
same day, but the contract with C firm was entered
to on 29th June, 1970. The goods against the said
contract were actually received on 3rd July, 1970.

 B, thereupon claimed the difference of 57094.23

from A being the difference in the price charged by
A and the price at which business was concluded
by B with C. A failed to pay the said amount.
A contended that B suppressed the fact that B
received an offer from C on 25th May 1970 and
thereby induced A to enter into an additional
clause relating to reduction in price and therefore
the contract was induced by fraud. A contended
that A was under a duty to speak- to inform about
the offer already received from C.

 Judgment:
Surely, there was no duty on the part of B to tell
A that the "fall clause" offered by A should be
withdrawn by it because C had already offered
the same goods to B at a lower price and B had
decided to accept that offer.
The duty to speak does not extend to tell the
offerer that his offer was too good and that the
offerer should revise the offer to make it not so
good.

State Bank Of India vs Jagdish Talkies (2006)

MP High Court
A filed a suit against B, a theater owner, for some
money claim. In that suit C was appointed as the
Court-receiver of Bs properties. C was to collect
rents of Bs properties from third persons.
Accordingly C opened a Savings bank Account
and started depositing money received in his
official capacity in it.
The Bank initially credited interest as per rules to
that a/c but later when it came to know that C
opened the account in the capacity as receiver of
Bs properties, stopped paying interest and debited
the already credited interest amount. (Current a/c
generates no interest.)

Legal points
It was the contention of the Bank that C
should have opened current a/c as it was
with Bs money and in capacity as the Court
receiver C opened the account.
So C had played fraud by suppression of
this vital information from the Bank.

Judgment
"Savings Account" means a form of demand
deposit which is subject to the restrictions as to the
number of withdrawals as also the amounts of
withdrawals permitted by the bank during any
specified period.
"Current Account" means a form of demand
deposit wherefrom withdrawals are allowed any
number of times depending upon the balance in
the account or upto a particular agreed amount.

Judgment..
It is clear that it was not disclosed at any point of
time that the money in question did not belong to
C personally. Had there been an obligation on the
part of the customer to disclose about the nature
and/or source of money with which the account
was to be opened, it could have been successfully
said that C having failed to discharge his
obligation has committed fraud or
misrepresentation. Admittedly the money was not
disclosed by C as his own.
Thus, the contract of opening the Savings Bank
Account by the appellant Bank in favour of the C
is not found to have been vitiated due to
fraud/misrepresentation and/or mistake.

B.R. Chowdhury vs Indian Oil Corpn. Ltd. &

Ors: Supreme Court of India 2004
Indian Oil Corporation invited applications for
appointment of a dealer relating to a retail outlet,
on 22nd June, 1987. It was open to all but
preference was to be given to the unemployed
youth.
A was given the dealership as an unemployed
youth. In fact A was engaged as a Trainee
Professional Sales Representative with M/s. Denis
Chem Lab Limited from 23.2.1987 to 3.4.1989.
He wrote `NIL' against the relevant column
relating to employment.

 B, who had also applied for dealership, took

objection to As selection stating that A was
an employee and as such he was not entitled
to the benefit of preferential treatment.
Indian Oil Corporation accordingly
cancelled the dealership of A on the ground
of fraud. A filed a writ petition. The matter
went up to the Supreme Court.

Judgment
Statements made by the appellant in column
No. 8(c) and column No. 9 of the
application form for dealership amount to
suppression of material fact.
This apart, nothing prevented the appellant
from mentioning in column no. 9 of the
application as against the status of
employment at least as a trainee. But on the
other hand, in column 9 he has shown the
status of occupation as `Nil'.
The Court upheld the cancellation of
dealership.

Mistake
Mistake of fact and of law
Mistake of fact is some misunderstanding about an
important fact relating to the contract
Mistake of fact:
unilateral : only one of the parties being under a mistake
Bilateral: both parties under a mistake

Unilateral mistake: contract not voidable on this

ground
Bilateral mistake: Mutual mistake about material
fact relating to agreement: agreement becomes void
Mistake of law: a misunderstanding about some
legal provision is no excuse for avoiding the
contract

Cundy vs Lindsay(1878): mistake as

to identity: absence of consent
Facts
Lindsay & Co were manufacturers of linen handkerchiefs.
Blenkarn, a fraudster, hired a room at 37 Wood street,
Cheapside. This was in the same street that a highly
reputable firm called Blenkiron & Son traded. The
fraudster ordered 250 dozen handkerchiefs from Lindsay
disguising the signature to appear as Blenkiron.
Lindsay & Co knew of a reputable business of this name
which resided at 123 Wood Street. Believing the
correspondence to be from this company, Lindsay & Co
delivered to Blenkarn the handkerchiefs.

 Blenkarn then sold all the handkerchiefs to

an innocent third party, Cundy.
When Blenkarn did not pay, Lindsay & Co
sued Cundy for the goods.
Cundy claimed that he was innocent third
party who purchased the handkerchiefs
from Blenkarn, without knowledge of the
fraud committed by him

JUDGMENT
The highest court of appeal in England, the House
of Lords, decided in favour of Lindsay on the
ground that
Lindsay did not know any Blenkarn. They only knew
Blenkiron & co and were dealing with Blenkiron & co
There was no consensus of mind which could lead to
any agreement or any contract whatever.
So, there was no contract in the first place between
Lindsay and Blenkarn
Blenkarn, therefore, never became owner of the goods
and could not make Cundy the owner in any case

Effects of vitiating factors on

contract
Coercion,
Fraud,
Misrepresentation:

Undue

influence,

Contract becomes voidable at the option of the

party whose consent is affected/vitiated

In case of unilateral mistake the contract is

not voidable. In case of mutual or common
or bilateral mistake the agreement is void.

Void Agreements

Incapacity of parties
Mutual mistake of fact
Lack of consideration
Unlawful consideration or object
Restraint of marriage
Restraint of trade
Restraint of legal proceedings
Uncertain agreements

Unlawful consideration and

object
If the object or consideration is forbidden
by law or fraudulent or is immoral or is
opposed to public policy, the agreement is
void

Examples
A agrees to pay B and C Rs 50,000/- each if
they kill D. the agreement is void as object
of the agreement is an offence.
A agrees to pay B Rs 10 Lakhs which B
shall use for the purpose of gambling and
pay 70% of the profits, if earned out of this
business to A. the agreement is void as its
object is opposed to public policy.