CSEET Notes - Legal Aptitude - Contract Act - Part 2 - Deep Gyan®
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CSEET Notes – Legal Aptitude – Contract Act – Part 2

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FLAWS IN CONTRACT

Following may be the flaws in a contract:

  1. Incapacity
  2. Mistake
  3. Misrepresentation
  4. Fraud
  5. Undue Influence
  6. Coercion
  7. Illegality
  8. Impossibility

INCAPACITY
According to Section 10, parties to a contract shall be competent to contract. According to Section 11, every person is competent to contract

  • who is of the age of majority according to the law to which he is subject, and
  • who is of sound mind, and
  • is not disqualified from contracting by any law to which he is subject.

Thus according to Section 11, following persons are not capable of entering into a contract:

  1. minors,
  2. lunatics, and
  3. persons disqualified from contracting by any law to which they are subject

Minors
According to the Indian Majority Act, 1875, a minor is a person, male or female, who has not completed the age of 18 years. In case a guardian has been appointed to the minor or where the minor is under the guardianship of the Court of Wards, the person continues to be a minor until he completes his age of 21 years.

Note:

  • In a case, Mohiri Bibi v. Dharmodas Ghose, it was held that a minor has no capacity to contract and minor’s contract is absolutely void. Therefore minor cannot be held liable under any contract.
  • But minor can be beneficiary in a contract.
  • If the minor has carried out his part of the contract, then, the Courts have held, that he can proceed against the other party.
  • Minor cannot held liable even under the Doctrine of Estoppel. It means minor cannot be estopped by his words or conduct.
  • If someone supplies necessaries to the minor or to someone else whom the minor is bound to support, minor’s estate can be held liable to pay a reasonable price for necessaries. Even in this case minor shall not be held personally liable.
  • A minor can be an agent, but he cannot be a principal nor can he be a partner. He can, however, be admitted to the benefits of a partnership.
  • Since a minor is never personally liable, he cannot be adjudicated as an insolvent.
  • An agreement by a parent or guardian entered into on behalf of the minor is binding on him provided it is for his benefit or is for legal necessity. An agreement for service, entered into by a father on behalf of his daughter
  • who is a minor, is not enforceable at law.
  • An agreement with a minor is void-ab-initio, such agreement cannot be ratified by the minor on attaining the age of majority.

Agreement by person of unsound mind
For the purposes of making contract, a person is of unsound mind if at the time when he makes the contract, he is incapable of understanding it and of forming rational judgment as to its effect upon his interests.

Any contract with lunatic is void.

A person may be considered as of unsound mind if he/she is:

  • suffering from heavy fever
  • drunk
  • under the influence of hypnotism
  • of very old age

Note

  • For necessaries supplied to a lunatic or to any member of his family, the lunatic’s estate (property), if any, will be liable. There is no personal liability incurred by the lunatic.
  • If a contract entered into by a lunatic or person of unsound mind is for his benefit, it can be enforced (for the benefit) against the other party (Jugal Kishore Cheddu)

FREE CONSENT

(a) Coercion
According to Section 15,
Coercion means

  • the committing or threatening to commit any act forbidden by the Indian Penal Code, or
  • unlawful detaining or threatening to detain, any property to the prejudice of any person whatever

with the intention of causing any person to enter into an agreement.

Note:

  • It has been held that mere threat by one person to another to prosecute him does not amount to coercion. 

(b) Undue Influence
According to Section 16(1)
A contract is said to be produced by undue influence

  • where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and
  • uses that position to obtain an unfair advantage over the other

According to Section 16(2),
a person is deemed to be in a position to dominate the will of another –

  • Where he holds a real or apparent authority over the other or where he stands in a fiduciary relation to the other, e.g., minor and guardian; trustee and beneficiary; solicitor and client. There is, however, no presumption of undue influence in the relation of creditor and debtor, husband and wife (unless the wife is a parda-nishin woman) and landlord and tenant. In these cases the party has to prove that undue influence has been exercised on him, there being no presumption as to existence of undue influence.
  • Where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily distress e.g., doctor and patient.

Defence against presumption of undue influence
Where there is a presumption of undue influence, the presumption can be rebutted by showing that

  1. full disclosure of all material facts was made,
  2. the consideration was adequate, and
  3. the weaker party was in receipt of independent legal advice.

In case of lending and borrowing transactions

  • If the rate of interest is very high in a money lending transaction, in general, existence of undue influence shall not be presumed.
  • It has been held that urgent need of money on the part of the borrower does not itself place the lender in a position to dominate his will within the meaning of this Section.

Transactions with parda-nishin woman
A person who contracts with parda-nishin woman has to prove that no undue influence was used and that she had free and independent advice, fully understood the contents of the contract and exercised her free will.

(c) Wilful Misrepresentation or Fraud (Section 17)
Fraud is an untrue statement made knowingly or without belief in its truth or recklessly, carelessly, whether it be true or false with the intent to deceive. The chief ingredients of a fraud are:

  1. a false representation or assertion;
  2. of fact (and not a mere opinion),
  3. made with the intention that it should be acted upon,
  4. the representation must have actually induced the other party to enter into the contract and so deceived him,
  5. the party deceived must thereby be damnified, for there is no fraud without damages, and
  6. the statement must have been made either with the knowledge that it was false or without belief in its truth or recklessly without caring whether it was true or false.

Note:

  • Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless silence is in itself equivalent to speech, or where it is the duty of the person keeping silent to speak as in the cases of contracts uberrimae fidei – (contracts requiring utmost good faith)

Contracts Uberrimae Fidei
There are contracts in which the law imposes a special duty to act with the utmost good faith i.e., to disclose all material information. Failure to disclose such information will render the contract voidable at the option of the other party.

Contracts uberrimae fidei are:

  1. Contract of insurance of all kinds
    The assured must disclose to the insurer all material facts and whatever he states must be correct and truthful.
  2. Company prospectus
    When a company invites the public to subscribe for its shares, it is under statutory obligation to disclose truthfully the various matters set out in the Companies Act. Any person responsible for non-disclosure of any of these matters is liable to damages. Also, the contract to buy shares is voidable where there is a material false statement or non- disclosure in the prospectus.
  3. Contract for the sale of land
    The vendor is under a duty to the purchaser to show good title to the land he has contracted to sell.
  4. Contracts of family arrangements
    When the members of a family make agreements or arrangements for the settlement of family property, each member of the family must make full disclosure of every material fact within his knowledge.

(d) Misrepresentation (Section 18)
Misrepresentation may be either

  1. Innocent misrepresentation, or
  2. Wilful misrepresentation with intent to deceive and is called fraud.

The effect of innocent misrepresentation is that the party misled by it can avoid the contract, but cannot sue for damages in the normal circumstances.

But in order to avoid a contract on the ground of misrepresentation, it is necessary to prove that:

  1. there was a representation or assertion,
  2. such assertion induced the party aggrieved to enter into the contract.
  3. the assertion related to a matter of fact ( and not of law as ignorance of law is no excuse).
  4. the statement was not a mere opinion or hearsay, or commendation (i.e., reasonable praise). For example an advertisement saying, “washes whiter than the whitest”.
  5. the statement which has become or turned out to be untrue, was made with an honest belief in its truth. 

Damages for Innocent Misrepresentation
Generally the injured party can only avoid the contract and cannot get damages for innocent misrepresentation.

But in the following cases, damages are obtainable:

  1. From a promoter or director who makes innocent misrepresentation in a company prospectus inviting the public to subscribe for the shares in the company;
  2. Against an agent who commits a breach of warranty of authority:
  3. From a person who (at the Courts discretion) is estopped from denying a statement he has made where he made a positive statement intending that it should be relied upon and the innocent party did rely upon it and thereby suffered damages;
  4. Negligent representation made by one person to another between whom a confidential relationship, like that of a solicitor and client exists.

Difference between Fraud and Innocent Misrepresentation

  1. Fraud implies an intent to deceive, which is lacking if it is innocent misrepresentation.
  2. In case of misrepresentation and fraudulent silence, the defendant can take a good plea that the plaintiff had the means of discovering the truth with ordinary diligence. This argument is not available if there is fraud (Section 19- exception).
  3. In misrepresentation the plaintiff can avoid or rescind the contract. In fraud, the plaintiff can claim damages as well.
  4. If there is fraud, it may lead to prosecution for an offence of cheating under the Indian Penal Code.

Mistake
In general one cannot take the plea of ‘mistake’ for avoiding the obligations in a contract.

But mistakes do occur. Sometime mistakes are so fundamental that there may be no contract at all.

According to Section 20, an agreement is void, where both the parties to an agreement are under a mistake as to a matter of fact essential to agreement.

Thus mistake makes the contract void if:

  1. the mistake is of fact, and not of law or opinion;
  2. the fact is essential to agreement, i.e., so fundamental as to negative the agreement; and
  3. mistake must be on the part of both the parties.

Mistake of Law and Mistake of Fact

Mistakes are of two kinds:
(i) mistake of law, and
(ii) mistake of fact.

If there is a mistake of law of the land, the contract is binding because everyone is deemed to have knowledge of law of the land and ignorance of law is no excuse (ignorantia juris non-excusat).

But mistake of foreign law and mistake of private rights are treated as mistakes of fact and are execusable.

Mutual or Common or Bilateral Mistake as to Subject-matterA contract is void when the parties to it assume that a certain state of things exist which does not actually exist or in their ignorance the contract means one thing to one and another thing to the other, and they contract subject to that assumption or under that ignorance.

  • Mistake as to existence of the subject matter
    Where both parties believe the subject matter of the contract to be in existence but in fact, it is not in existence at the time of making the contract, there is mistake and the contract is void.
  • Mistake as to identity of the subject matter
    Where the parties are not in agreement to the identity of the subject matter, i.e., one means one thing and the other means another thing, the contract is void; there is no consensus ad idem.
  • Mistake as to quantity of the subject matter
    There may be a mistake as to quantity or extent of the subject matter which will render the contract void even if the mistake was caused by the negligence of a third party.
  • Mistake as to quality of the subject-matter or promise
  • Mistake as to quality raises difficult questions. If the mistake is on the part of both the parties the contract is void. But if the mistake is only on the part of one party difficulty arises.

Unilateral Mistake

  1. Unilateral Mistake as to Nature of the Contract
  2. Unilateral Mistake as to the Identity of the Person Contracted With

Unilateral Mistake as to Nature of the Contract
The general rule is that a person who signs an instrument is bound by its terms even if he has not read it. But a person who signs a document under a fundamental mistake as to its nature (not merely as to its contents) may have it avoided provided the mistake was due to either-

  1. the blindness, illiteracy, or senility of the person signing, or
  2. a trick or fraudulent misrepresentation as to the nature of the document.

Unilateral Mistake as to the Identity of the Person Contracted With
When a contract is made in which personalities of the contracting parties are or may be of importance, no other person can interpose and adopt the contract. Mistake as to the identity of the person with whom the contract is made will operate to nullify the contract only if:

  • the identity is for material importance to the contracts; and
  • the mistake is known to the other person, i.e., he knows that it is not intended that he should become a party to the contract.

Legal Object and consideration
According to Section 23, the consideration or object of an agreement is lawful unless it is

  • forbidden by law; or
  • it is of such nature that if permitted it would defeat the provisions of law; or
  • is fraudulent; or
  • involves or implies injury to the person or property of another; or
  • the Court regards it an immoral or opposed to public policy.

Every agreement of which the object or consideration is unlawful is void.

Difference between Void and Illegal Agreements

Void agreement
Void agreement means an agreement which has no legal effect (though may not be illegal). Void agreement may not taint collateral agreements/contracts. For instance A borrows from B to Rs. 1,000 for lending to C a minor. The Agreements between A and C is void, but B can nevertheless recover the money from A.

Illegal agreement
Illegal agreement means an agreement which is forbidden by law. Such agreements have no legal effects. An illegal agreement may taint collateral agreements/contracts. For example, if A had borrowed Rs. 1,000 from B to buy a pistol to shoot C, the question whether B can recover the money depends upon whether B was aware of the purpose for which money was borrowed. If B had knowledge of the illegal purpose, he cannot recover.

Consequence of Illegal Agreements

  1. An illegal agreement is entirely void;
  2. No action can be brought by a party to an illegal agreement. The maxim is “Ex turpi cause non-oritur action” which means ‘from an evil cause, no action arises’;
  3. Money paid or property transferred under an illegal agreement cannot be recovered. The maxim is in “parti delicto potier est conditio defendeties” which means ‘in cases of equal guilt, more powerful is the condition of the defendant’;
  4. Where an agreement consist of two parts, one part legal and other illegal, and the legal parts is separable from the illegal one, then the Court may enforce the legal one. If the legal and the illegal parts cannot be separated the whole agreement is illegal;
  5. Any agreement which is collateral to an illegal agreement is also tainted with illegality and is treated as being illegal, even though it would have been lawful by itself.

Exception to General Rule of no Recovery of Money or Property
In the following cases, a party to an illegal agreement may sue to recover money paid or property transferred:

  • Where the transfer is not in pari delicto (equally guilty) with the defendant, i.e. the transferee.
    For example, where A is induced to enter into an illegal agreement by the fraud of B, A may recover the money paid if he did not know that the contract was illegal.
  • If the plaintiff can frame a cause of action entirely dependent of the contract.
  • Where a substantial part of the illegal transaction has not been carried out and the plaintiff is truly and genuinely repentant.

Agreements Void as being opposed to Public Policy
The following agreement are void as being against public policy but they are not illegal:

  • Agreement in restrain of parental rights: An agreement by which a party deprives himself of the custody of his child is void.
  • Agreement in restraint of marriage: An agreement not to marry at all or not to marry any particular person or class of persons is void as it is in restraint of marriage.
  • Marriage brokerage Agreements: An agreement to procure marriage for reward is void.
  • Agreements in restraint of personal freedom are void: Where a man agreed with his money lender not to change his residence, or his employment or to part with any of his property or to incur any obligation on credit without the consent of the money lender, it was held that the agreement was void.
  • Agreement in restraint of trade: An agreement in restraint of trade is one which seeks to restrict a person from freely exercising his trade or profession.

Agreements in Restraint of Trade Void
According to Section 27, every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.

Saving of agreement not to carry on business of which good will is sold
One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided that such limits appear to the court reasonable, regard being had to the nature of the business.

When Contracts in Restraint of Trade Valid
Prima facie every restraint of trade is void, but certain exceptions to this general rule are recognised.

  • Sale of goodwill
    Where the seller of the goodwill of a business undertakes not to compete with the purchaser of the goodwill, the contract is enforceable provided the restraint appears to be reasonable as to territorial limits and the length of time.
  • Partners’ agreements not to carry any business
    Section 11(2) of the Indian Partnership Act permits contracts between partners to provide that a partner shall not carry on any business other than that of the firm while he is a partner.
  • Partners’ agreements not to carry similar business
    Section 36(2) and Section 54 of the Indian Partnership Act provide that a partner may make an agreement with his partners that on ceasing to be a partner he will not carry on any business similar to that of the firm within specified period or within specified limits. The agreement shall be binding if the restrictions are reasonable.
  • Trade Combinations
    An agreement, the object of which is to regulate business and not to restrain it is valid. Thus, an agreement in the nature of a business combination between traders or manufactures e.g. not to sell their goods below a certain price, to pool profits or output and to divide the same in an agreed proportion does not amount to a restraint of trade and is perfectly valid.
  • Negative stipulations in service agreements
    An agreement of service by which a person binds himself during the term of the agreement not to take service with anyone else is not in restraint of lawful profession and is valid.

Wagering Agreements
Wagering agreements are betting agreements. The essence of gaming and wagering is that one party is to win and the other to lose upon a future event which at the time of the contract is of an uncertain nature that is to say, if the event turns out one way A will lose; but if it turns out the other way he will win.

In India except Mumbai, wagering agreements are void. In Mumbai, wagering agreements have been declared illegal by the Avoiding Wagers (Amendment) Act, 1865.

Test of wagering contracts
“Where delivery of the goods sold is intended to be given and taken, it is valid contract, but where only the differences are intended to be paid, it will be a wagering agreement and unenforceable”.

Void Agreements
The following types of agreements are void under Indian Contract Act:

  1. Agreement by or with a minor or a person of unsound mind or a person disqualified to enter into a contract (Section 11);
  2. Agreement made under a mistake of fact, material to the agreement on the part of the both the parties (Section 20).
  3. An agreement of which the consideration or object is unlawful (Section 23)
  4. If any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the agreement is void (Section 24.
  5. An agreement made without consideration subject to three exceptions provided to Section 25.
  6. An agreement in restraint of marriage (Section 26)
  7. An agreement in restraint of trade (Section 27)
  8. An agreement in restraint of legal proceedings (Section 28)
  9. Agreements, the meaning of which is not certain, or capable of being made certain (Section 29)
  10. Agreement by way of wager (Section 30)
  11. An agreement to enter into an agreement in the future.
  12. An agreement to do an act impossible in itself (Section 56)

Obligation of person who has received advantage under void agreement, or contract that becomes void (Section 65)
When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore, it, or to make compensation for it, to the person from whom he received it. It is known as restitution.

Contingent Contract (Section 31)
A “contingent contract” is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.

Note:
Contract of insurance and contracts of indemnity and guarantee are contingent contracts.

CERTAIN RELATIONS RESEMBLING THOSE OF CONTRACT (QUASI CONTRACTS)

Quasi-Contracts
Quasi-Contracts are not contracts in real sense. They don’t contain all the essential elements of a valid contract such as offer and acceptance, capacity to contract, consideration and free consent. But sometimes the law implies a promise imposing obligations on one party and conferring right in favour of the other even when there is no offer, no acceptance, no consensus ad idem, and in fact, there is neither agreement nor promise. Such cases are not contracts in the strict sense, but the Court recognises them as relations resembling those of contracts and enforces them as if they were contracts, hence the term quasi-contracts (i.e., resembling a contract).

A quasi-contract rests on the equitable principle that a person shall not be allowed to enrich himself unjustly at the expense of another.

Quasi-Contracts or Implied Contracts under the Indian Contract Act
The following types of quasi-contracts have been dealt within the Indian Contract Act –

  • Necessaries supplied to person incapable of contracting or to anyone whom he is legally bound to support.
  • Obligations of a finder of goods
  • Obligation of person enjoying benefit of a non-gratuitous act
  • Liability for money paid or thing delivered by mistake or by coercion

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