DEGREE COLLEGES BUSINESS LAW

UNIT I: INDIAN CONTRACT ACT

SYLLABUS:

1. Agreement and Contact: Definition and meaning – Essentials of a valid contract – Types

of Contracts

2. Offer and acceptance: Definition – essentials of a valid offer and acceptance –

Communication and revocation of offer and acceptance.

3. Consideration: Definition and importance – essentials of valid consideration – the

Doctrines of ‘Stranger to contract’ and ‘No Consideration – No Contract’ – capacity to

contract – Special rules regarding minor’s agreements.

4. Consent: Free consent – Flaw in consent, Coercion, undue influence, fraud,

misrepresentation and mistake.

ESSAY QUESTIONS

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1. DEFINE CONTRACT AND EXPLAIN THE ESSENTIALS OF THE VALID CONTRACT?

INTRODUCTION:The law relating to contracts is governed by the “Indian Contract Act, 1872”. It came into force

from 1st September 1872. It extends to the whole of India except the State of Jammu and Kashmir. The term ‘Contract’ is derived from the Latin word ‘Contractum’, which means “drawn together”. DEFINITION:

Section 2(h) of the Indian contract act defines contract as “an agreement enforceable by law”.Section 10 of the Indian contract act defines contract as “All agreements are contracts if they are

made by the free consent of the parties competent to contract for a lawful consideration and with a lawful object and are not hereby expressly declared to be void”.

ESSENTIAL ELEMENTS OF A VALID CONTRACT1. OFFER AND ACCEPTANCE : In order to create a valid contract there must be a lawful offer by

one party and its acceptance by the other. The terms of the offer must be definite and the acceptance of the offer must be absolute and unconditional. The acceptance must also be according to the mode prescribed and must be communicated to the offeror.

2. INTENTION TO CREATE LEGAL RELATIONSHIP : When two parties enter into an agreement their intention must be to create legal relationship between them. If the intention is not to create legal relations no valid contract is formed. Agreements of social, moral, domestic nature do not create legal relations and therefore they do not give rise to a contract.

3. CONSENSUS AD IDEM : The parties to an agreement must have mutual consent (i.e.,) they must agree upon the same thing and in the same sense. It means there must be consensus ad idem (meeting of minds)

4. CAPACITY OF PARTIES - COMPETENCY : The parties to an agreement must be capable to enter into a contract. According to Sec 11 of Indian Contract Act the parties to an agreement must be major, must be of sound mind and must not be declared disqualified from contracting by any law. If the parties are not competent then no valid contract comes into existence. Example: Agreement with minor is void

Case: Mohribibi Vs Dharmodas ghose5. FREE CONSENT : The contract must have been made with free consent of the parties. According to Sec 14

the consent is not free when it is obtained by coercion, undue influence, fraud, misrepresentation or mistake. If the consent of the parties is not free then no valid contract comes into existence.

Case: Ammiraju vs Seshamma6. CONSIDERATION: Consideration means something in return. According to Sec 25 every

agreement must be supported by consideration. So agreement without consideration is void (i.e., not enforceable by law)

7. LAWFUL OBJECT AND CONSIDERATION : The object of an agreement must be lawful according to Sec 23 of the Indian contract Act. If the object is not lawful i.e., if it is immoral, fraudulent, forbidden by law or opposed to public policy etc., then no valid contract comes into existence. And the agreement is legally enforceable only when both the parties give something and get something in return. But it must be real and lawful

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Case: Balfour vs. Balfour

8. CERTAINTY : The terms of the agreement must be certain and unambiguous. According to Sec 29 all uncertain agreements are void. A contract may be void on the ground of uncertainty.

Example: A agreed to sell his house of Rs.20 lakhs or 25 lakhs to B. It is void as the price is uncertain.

9. THE AGREEMENT MUST NOT BE DECLARED TO BE VOId : The agreement must not have been expressly declared to be void as per Sections 24 to 30 and 56 of the Indian Contract Act. Examples: Wagering agreement (Sec 30), uncertain agreement (Sec 29), Agreement in restraint of trade etc. In the above cases even if the agreement possesses all the elements of a valid agreement it will not be enforceable by law.

10. POSSIBILITY OF PERFORMANCE : the performance of the agreement must be certain. According to Sec 56 agreement to do an impossible act becomes void i.e., the law does not compel to do what is impossible.

Example: Agreement to meet two parallel lines. Agreement to bring down the sky etc11. LEGAL FORMALITIES : The agreement must satisfy certain legal formalities such as writing,

registration, stamping etc. In India writing is required in cases of sale, mortgage, lease and gift of immovable property, negotiable instruments, Memorandum and Articles of association of a company etc. Example: Oral promissory note or cheque is void.

2. DEFINE CONTRACT AND EXPLAIN THE CLASSIFICATION OF CONTRACTS.

INTRODUCTION :

The law relating to contracts is governed by the “Indian Contract Act, 1872”. It came into force from 1st September 1872. It extends to the whole of India except the State of Jammu and Kashmir. The term ‘Contract’ is derived from the Latin word ‘Contractum’, which means “drawn together”.

DEFINITION:Section 2(h) of the Indian contract act defines contract as “an agreement enforceable by law”.Section 10 of the Indian contract act defines contract as “All agreements are contracts if they are

made by the free consent of the parties competent to contract for a lawful consideration and with a lawful object and are not hereby expressly declared to be void”.

TYPES OF CONTRACTS

ON THE BASIS OF VALIDITY:

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i. VALID CONTRACT : An agreement enforceable at law is a valid contract. An agreement becomes a contract when all the essentials of a valid contract as laid down in Sec 10 are fulfilled. All agreements are contracts, if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.

ii. VOID AGREEMENTS : According to Sec 2(g), “An agreement which is not enforceable by law by either of the parties is void”. No legal rights or obligations ca arise out of a void agreement. It is void-ab-initio. Ex: An agreement without consideration or with a minor is void.

iii. VOID CONTRACTS : An agreement which was legally enforceable when entered into but which has become void due to supervening impossibility of performance. For example a contract between a citizen of Pakistan and India is a valid contract during peace but if war breaks out between the two countries, the agreement will become void contract.

iv. VOIDABLE CONTRACTS: According to Sec 2(i), “An agreement which is enforceable by law at the option of one or more of the parties but not at the option of the other or others is a voidable contract”. A voidable contract is valid and enforceable until it is repudiated by the party entitled to avoid it.

v. UNENFORCEABLE CONTRACTS : It is contract which is otherwise valid, but cannot be enforced because of some technical defect like absence of a written form or absence of a proper stamp. Such contracts must be sued upon by one or both of the parties. Such contracts cannot be proved in the court.

vi. ILLEGAL AGREEMENT : A contract which is either prohibited by law or otherwise against the policy of law is an illegal agreement. It is void ab initio. Thus, a contract to commit dacoity is an illegal contract and cannot be enforced by law. All illegal agreements are void but all void agreements or contracts are not necessarily illegal.

ON BASIS OF FORMATION:

i. EXPRESS CONTRACT : An express contract is one entered into by words which may be either spoken or written. Where the proposal and acceptance is made in words, it is an express contract.

ii. IMPLIED CONTRACT : Where the proposal or acceptance is made otherwise than in words, it is an implied contract. Implied contracts can be formed out of the surrounding circumstances and the conduct of the parties who made them.

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iii. QUASI CONTRACT : It is a contract in which there is no intention on either side to make a contract, but the law imposes a contract. In such a contract, rights and obligations arise not by any agreement between the parties but by operation of law. Ex: Finder of lost goods.

ON BASIS OF PERFORMANCE:

i. EXECUTED CONTRACT : An executed contract is one where both the parties have performed their obligations or carried out the terms of the contracts. In other words, it is a completed contract.

ii. EXECUTORY CONTRACT : Where the contract is yet to be performed either wholly or partially or one or both the parties have yet to perform their obligations, the contract is executor contract.

a. UNILATERAL CONTRACT : A unilateral contract is which only one party has to perform his promise or obligation.

b. BILATERAL CONTRACT : A bilateral contract is which where the obligation or promise in a contract is outstanding in the part of both parties.

3. DEFINE OFFER OR PROPOSAL AND EXPLAIN THE ESSENTIALS OF A VALID OFFER?

INTRODUCTION:The term ‘offer’ is also called ‘proposal’. It is the first step in formation of a contract. Any

contract emerges from the proposal. In other words, offer is the starting point for formation of any contract. The person who makes the offer is called as ‘offeror’. The person to whom the offer is made is called as ‘offeree’.

DEFINITION:Section 2(a) of the Indian Contract Act, 1872, defines offer as “When one person signifies to

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

a. He signifies to another;b. His willingness;c. To do or to abstain from doing anything;d. With a view to obtaining the assent of that other to such act or abstinence.

ESSENTIALS OF A VALID OFFER

i. IT MUST BE CAPABLE OF CREATING LEGAL RELATION : An offer to be enforceable, it must create legal relations. An offer for social or moral act is no offer. A social invitation, even accepted does not create legal relations.

ii. OFFER MUST BE CERTAIN, DEFINITE AND NOT VAGUE: a. Terms of offer must be properly worded. It should spell with certainty the terms and

conditionsb. Offer should be made in definite and clear terms. There should not be any ambiguity in

its terms. c. Sec 29 of Contract Act provides “agreements, the meaning of which is uncertain, or

capable of being made certain, are void.”

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Case: Balfour vs. Balfour

Case: Taylor vs. Portington

iii. IT MUST BE COMMUNICATED TO THE OFFEREE : Sec 4 of the Contract Act “An offer is communicated to the person to whom it is made (offeree)”. The communication may be express or implied. It may be communicated by means of words of mouth, telegram, messenger etc. Communication of offer is complete when it comes to the knowledge of the offeree.

iv. OFFER MUST BE MADE WITH A VIEW TO OBTAIN THE ASSENT OF THE OTHER PARTY: Offeror should have an intention to obtain the consent of the offeree. An offer is different from mere expression of intention. An offer made without having an intention to get acceptance is not an offer.

v. OFFER MAY BE CONDITIONAL : a. An offer may be conditional or non – conditional.b. It is for the offeree to agree to the conditions and convey his acceptance.c. A Conditional offer lapses when the condition is not accepted.d. Conditional offers are invalid where the terms are unreasonable or the offeree is unaware

of the terms.

vi. OFFER SHOULD NOT CONTAIN A TERM NON-COMPLIANCE OF WHICH WOULD AMOUNT TO ACCEPTANCE: An offeror cannot say while making the offer that if the offer is not accepted before a certain date, it will be presumed to have been accepted. Ex: A writes to B, “I offer to sell my house for ` 40,000. If I do not receive a reply by Monday, I shall assume that you have accepted the offer.” There will be no contract if it does not reply.

vii. AN INVITATION TO OFFER IS NOT AN OFFER: a. A mere statement of price is not an offer.b. The intention of the offeror should not be merely an invitation. c. Invitation to offer aims to circulate the information of readiness to negotiate business

with anybody who on such information comes to the person sending it.

4. WHAT IS ACCEPTANCE? WHAT ARE THE ESSENTIALS OF A VALID ACCEPTANCE?

INTRODUCTION: Acceptance of an offer/ proposal is very essential for formation/ conclusion of a contract.

Acceptance is the second stage in the formation of a contract. A contract is created only after an offer is accepted. “Acceptance is to an offer what a lighted match is to a train of gunpowder”. Acceptance can be given only by the person to whom the offer has been made. But, where the offer has been made to the world at large, any person or persons, who have the notice of the offer, can come forward and accept the offer.

DEFINITION:Sec 2(b) of Indian Contract Act, 1872 defines ‘acceptance’ as: “when the person to whom the

proposal is made signifies his assent thereto, the proposal is said to be accepted.”

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Case: Lalman Shukla vs. Gauri Datt

Case: Harvey vs. Facie

ESSENTIALS OF VALID ACCEPTANCE

i. ACCEPTANCE MUST BE ABSOULTE AND UNQUALIFIED : Sec 7(1) The acceptance must be absolute and unqualified (unconditional). In other words, the

terms of acceptance must be consistent with the terms of the offer. Conditional acceptance amounts to a counter offer and rejection of the original offer.

ii. ACCEPTANCE SHOULD BE EXPRESSED IN USUAL MANNER OR AS PER MODE PRESCRIBED: Sec 7(2)

The acceptance should be expressed in usual manner or as per the mode prescribed by the offeror.

In India, if the acceptance is not made in the manner prescribed, it is the duty of the offeror to reject it within a reasonable time.

If he does not reject it within a reasonable time, it will be presumed that he has accepted it.

iii. ACCEPTANCE MUST BE MADE WITHIN A REASONABLE TIME: Offeror would normally remain his offer for a particular period. In the absence of specific period, the offer remains open for a reasonable period. The

acceptance must be made within such specific or reasonable period. Acceptance made after the offer has been withdrawn is invalid.

iv. ACCEPTANCE SHOULD BE COMMUNICATED TO THE OFFEROR : An acceptance to be valid and legally binding, it must be communicated to the offeror. Mere intention or mental determination to accept on the part of the offeree is no

acceptance. A communication of acceptance to be valid, must be either by the offeree himself or by

his authorized agent. A communication of acceptance by any other person will not be valid.

For a general offer, no communication is necessary if it is made by acting upon the terms of offer.

v. ACCEPTANCE MUST BE GIVEN BEFORE THE OFFER LAPSES : Acceptance should be communicated before the offer lapses, or terminates, or is revoked

by the offeror. Offeror can revoke his offer before the acceptance. Therefore, acceptance must be made

before such revocation. vi. ACCEPTANCE CANNOT BE IMPLIED FROM SILENCE :

No contract is formed if the offeree remains silent and does nothing to show that he has accepted the offer.

Mental acceptance is no acceptance.

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Case: Ramsgate Victoria Hotel Co. vs. Montefiore

Case: Carllil vs. Carbolic Smoke ball co.

Silence = acceptance only if the offeror, has by his previous conduct, indicated that silence amounts to his acceptance.

5. WHAT IS CONSIDERATION? WHAT ARE THE VALID ESSENTIALS OF A VALID CONSIDERATION?

MEANING: Consideration is one of the most essential element for formation of contract. Consideration is a quid pro quo, i.e something in return. It may be

o Some benefit, right, interest or profit that may accrue to one party or

o Some forbearance, detriment, loss or responsibility suffered or undertaken by the

other party.DEFINITION:According to Sec 2(d) of Indian Contract Act, 1872 consideration is : When at the desire of the promisor, the promise or any other person

has done or abstained from doing or does or abstains from doing or promises to do or abstain from doing, something

Such act or abstinence or promise is called a consideration for the promise.

ESSENTIALS OF VALID CONSIDERATION

1. IT MUST MOVE AT THE DESIRE OF PROMISOR: Consideration must move at the desire of the promisor However it is not necessary that the Promisor should benefit by the consideration. When moving at the instance of a third party, it cannot constitute valid consideration. But

consideration fro the benefit of a third party is valid.

2. CONSIDERATION MUST MOVE FROM PROMISEE OR ANY OTHER PERSON: In English law, consideration must move from promisee only. But in Indian Law, it may

move from promisee or any other person. Any other person is referred to as stranger to consideration. It means that “Stranger to the

consideration or Privity of Consideration is valid in India”.

3. CONSIDERTION MUST BE REAL BUT NOT ILLUSORY: Consideration must be real and possible. It must not be illusory or unsubstantial. Consideration is not valid if it is (i) Physically impossible (ii) legally not permissible (iii) Uncertain (iv) Illusory.4. CONSIDERATION NEED NOT BE ADEQUATE:

Consideration need not be adequate. If it has some value in the eyes of law, it is enough and the contract is valid.

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Case: Brogdon vs. Metropolitan Railway co.

Case: Durga Prasad vs. Baldeo

Case: Chinnayya vs. Ramayya

A contract which is supported by consideration is valid irrespective of the fact that the consideration is inadequate.

But inadequacy of the consideration may be taken into account by the court in determining the question whether the consent of the promisor was freely given.

5. IT MAY BE PAST, PRESENT OR FUTURE: Indian Contract Act recognizes three kinds of consideration, viz, Past, Executed or Executory. Past Consideration: Means something wholly done, forborne or suffered before making of

agreement. Under English Law, past consideration is no consideration Present Consideration: Which moves simultaneously with promise. Future or Executory Consideration: This is to move at a future date.

6. CONSIDERATON MUST BE LEGAL: Consideration must be lawful Illegal consideration has no value in law Also, consideration must be moral and not opposed to public policy (Sec 23)

6. EXPLAIN THE TERM ‘CONSIDERATION’ AND STATE THE EXCEPTIONS TO THE RULE ‘NO CONSIDERATION, NO CONTRACT’?

INTRODUCTION:Consideration is one of the essential elements of a valid contract. The term ‘consideration’

means something in return i.e. quid pro quo. Consideration must result in a benefit to the promisor, and a detriment or loss to the promise or a detriment to both.DEFINITION: According to section 2(d) of Indian Contract Act, 1872 defines consideration as under:

“When, at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing something, such act or abstinence or promise is called a consideration for the promise”

EXCEPTIONS TO THE GENERAL RULE NO CONSIDERATION, NO CONTRACT:

The following are the exceptions to the general rule that ‘Ex nudo pacto non oritur actio’ i.e ‘a contract without consideration is void’

a. NATURAL LOVE AND AFFECTION (Sec 25(1)): Such agreements made without consideration is valid if

It is expressed in writing It is registered under the law It is made on account of love and affection and It is between parties standing in a near relation to each other.

Example: By a registered agreement V on account of love and affection for his brother R, promises to discharge his debt to B. If V does not discharge the debt, R may discharge it and then sue V to recover the amount.

Case: Venkataswamy v. Rangaswamyb. PROMISE TO COMPENSATE (Sec 25(2)):

Such promise made without consideration is valid if:

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It is a promise to compensate (wholly or in part); and The person who is to be compensated has already done something voluntarily or has done

something which the promisor was legally bound to do.Example: A finds B’s purse and gives it to him. B promises to give A ` 50. This is a contract.

c. PROMISE TO PAY TIME BARRED DEBT (Sec 25(3)): Such promise without consideration is valid if: It is made in writing, It is signed by the debtor or his agent, and It relates to a debt which could not be enforced by a creditor because of limitation.

A debt is barred by limitation if it remains unpaid or unclaimed for a period of three years. Such a debt becomes legally irrecoverable.

d. COMPLETED GIFTS (Sec 25): The gift actually made by a donor and accepted by the donee are valid even without

consideration. Thus, a completed gift needs no consideration. But transfer of property cannot subsequently be demanded on the ground that there was no consideration.

e. AGENCY (Sec 185): No consideration is necessary to create and agency.f. CHARITABLE SUBSCRIPTION : Where the promise on the strength of the promise makes

commitments i.e., changes his position to his detriment.

7. WHAT ARE THE RULES REGARDING AGREEMENT WITH MINOR?

INTRODUCTION: According to Section 11 of the Indian Contract Act, 1872, “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.”

Minor: A minor is a person who has not attained majority. According to Section 3 of the Indian Majority Act, 1875, a person is deemed to have attained majority as under:

a. Where a guardian of a minor’s person or property is appointed under the Guardian and Wards Act, 1890 On completion of 21 years.

b. In other Cases On completion of 18 years.

RULES REGARDING AGREEMENT WITH MINOR:The law protects minor’s rights because they are not mature and may not possess the capacity to

judge what is good and what is bad for them. a. VALIDITY: Sec 11 of the Contract act says that a minor is not competent to enter into the contract.

The privy council made it clear that a minor is not competent to contract and a contract by minor is void ab – initio

b. CONTRACT FOR THE BENEFIT OF A MINOR : A minor can be promise. Incapacity of a minor to enter into a contract means incapacity to bind him by a contract. There is nothing which debars him from becoming a beneficiary. Example: A, a minor under a contract of sale delivered goods to the buyer, Held, he was entitled to maintain to suit for a price.

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Case: Mohiri Bibi vs. Dharmodas Ghose

c. RATIFICATION ON ATTAINING THE AGE OF MAJORITY : An agreement with a minor cannot be ratified (approved) even after he attains majority. Ratification relates back to the date of the making of the agreement and therefore an agreement which was then void cannot be made valid by subsequent ratification.

Example: A person on attaining majority, gave a promissory note in satisfaction of one executed by him for money borrowed when he was a minor. It was held that the claim under the promissory note could not be enforced because there was no consideration.

Case: Indran Ramaswamy vs. Anthiappa Chettiard. PLEAD MINORITY ; Even if minor has by misrepresentating his age, induced the other party to

contract with him, he cannot be sued either in contract or in tort for fraud because if the injured party were allowed to sue for fraud, it would be giving him an indirect means or enforcing the void agreement.

e. MINOR AS AN AGENT : A minor can act as an agent and bind his principal by his acts without incurring any personal liability.

f. MINOR AS A SHAREHOLDER : A minor can become a shareholder or member of a Company if The shares are fully paid up The articles of association do not prohibit

g. MINOR AS AN INSOLVENT : A minor cannot be declared insolvent because he is not competent to contract.

h. MINOR AS A PARTNER : A minor cannot become a partner in a partnership firm. However according to sec 30 of Indian Partnership Act 1932, with the consent of all partners for the time being be admitted to the benefits of partnership. Minor can share profits without incurring any personal liability.

i. CONTRACT BY MINOR’S GUARDIAN : The contracts entered into on behalf of a minor by his guardian or manager of his estate can be enforced by or against the minor if the contract

Is within the scope of the authority of guardian or manager Is for the benefit of the minor

Minor’s guardian cannot enter into a valid contract for purchase of the immovable property for his/ her service. j. A JOINT CONTRACT BY MINOR AND MAJOR: In case any agreements made by a minor

jointly with major, the major will be liable.k. CONTRACT FOR SUPPLY OF NECESSARIES:

A person who has supplied the necessaries to a minor or to those who are dependent on him is entitled to be reimbursed from the property of such minor.

The term necessaries include articles required to maintain a particular person in the state, degree and station in life in which he is. In India, food, clothing, shelter, education and marriage of a female have been held to be necessaries.

A claim for the payment of necessaries supplied can be made against the minor’s property and not against the minor personally.

8. WHAT IS FREE CONSENT? AND GIVE THE DETAILS WHEN THE CONSENT IS NOT FREE?

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INTRODUCTION: The consent means an act of assenting to an offer. According to section 13, “two or more

persons are said to consent when they agree upon the same thing in the same sense.” Thus, consent involves identity of minds in respect of the subject matter of the contract. In English law, this is called ‘consensus – ad – idem’. When there is no consent at all, the agreement is void – ab – initio, i.e., it is not enforceable at the option of either party.

DEFINITION: According to section 14, “Consent is said to be free when it is not caused by coercion or undue influence or fraud or misrepresentation or mistake”. When there is consent but it is not free (i.e. when it is caused by coercion or undue influence or fraud or misrepresentation), the contract is usually voidable at the option of the party whose consent was so caused.

a. COERCION: Coercion means compelling a person to enter into a contract under a pressure or a threat. According to sec 15, a contract is said to be caused by coercion when it is obtained by

Committing any act which is forbidden by the Indian Penal Code Threatening to commit any act which is forbidden by the IPC or Unlawful detaining of any property Threatening to detain any property.

Case: Ranganayakamma vs. AlwarsettiEffect of Coercion: sec 19 provides that an agreement consent to which is obtained by coercion is

void at the option of the party whose consent is so obtain. Coercion in India is known as Duress in England.

b. UNDUE INFLUENCE : The term ‘Undue influence’ means dominating the will of the other person to obtain an unfair advantage over the other. According to sec 16(1), a contract is said to be induced by undue influence

Where the relations subsisting between the parties are such that one of them is in a position to dominate the will of the other, and

The dominant party uses the position to obtain an unfair advantage over the other.

Effect of undue influence: When consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused.

c. FRAUD: The term ‘fraud’ means a false representation of fact made willfully with a view to deceive the other party. According to sec 17, ‘Fraud’ means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent with intent to deceive another party thereto or his agent, or to induce him, to enter into the contract.

The suggestion, as to a fact, of that which is not true, by one does not believe it to be true The active concealment of a fact by one having knowledge or belief of the fact. A promise made without any intention of performing Any such act or omission as the law specially declares to be fraudulent Any other act fitted to deceive.

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Effects of fraud: The party whose consent was caused by fraud can rescind (cancel) the contract or insist upon performance or right to claim damages.

d. MISREPRESENTATION: The term ‘Misrepresentation’ means a false representation of fact made innocently or non – disclosure of a material fact without any intention to deceive the other party. Section 18 defines the term ‘misrepresentation’ as

The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true.

Any breach of duty which without an intent to deceive, gains an advantage to the person committing it, or any one claiming under him, by misleading another to his prejudice or to the prejudice of anyone claiming under him.

Causing however innocently a party to an agreement, to make a mistake as to the substance of the thing which is the subject of the agreement.

e. MISTAKE: A mistake is said to have occurred where the parties intending to do one thing by error do something else. Mistake is an erroneous belief concerning something. Mistakes are of two types

Mistake of law: it can be mistake of Indian law or Mistake of foreign law Mistake of fact: It can be either bilateral or unilateral mistake.

SHORT ANSWER QUESTIONS

1. “MERE SILENCE IS NOT A FRAUD” EXPLAIN.

GENERAL RULE: According to explanation to sec 17, “mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud”. Example: A sells, by auction, to B a horse which A knows to be unsound. A says nothing to B about the horse’s unsoundness. This is not fraud by A.Example: A candidate failed to mention the fact of shortage of attendance in the examination form. Held, no fraud.

EXCEPTIONS TO THE GENERAL RULE : The general rule that silence does not amount to fraud has the following exceptions. Where the

circumstances of the case are such that, regard being had them, it is the duty of the person keeping silence to speak. Such duty arises in the following two cases:

Where parties stand in fiduciary relationship like parent - child, trustee – beneficiary: Eg: A sells by auction to B, a horse which A knows to be unsound. B is A’s daughter and has just come of age. Here, the relation between the parties would make it A’s duty to tell B if the horse is unsound.

Where the silence itself is equivalent to speech : Eg: B says to A, “If you do not deny it, I shall assume that the horse is sound.” A says nothing. Here A’s silence is equivalent to speech. If the horse turns out to be vicious A can be held liable for fraud.

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Half truth : Half truth is worse than a blatant lie. Partial truthful disclosures may easily deceive the other party. Partial disclosures may easily deceive the other party, e.g. prospectus of a company disclosing only average dividend declared by the company in the last 5 years instead of the actually declining dividends over that period.

2. MISTAKE :A mistake is said to have occurred where the parties intending to do one thing by error do

something else. Mistake is an erroneous belief concerning something. Mistakes are of two types MISTAKE OF LAW : It can be mistake of Indian law or Mistake of foreign law

1. Mistake of Indian law: The contract is not voidable because everyone is supposed to know the law of his country.

2. Mistake of Foreign law: A mistake of foreign law is treated as mistake of fact, i.e. the contract is void if both the parties are under a mistake as to a foreign law because one cannot be expected to know the law of other country.

MISTAKE OF FACT : Mistake of fact can be either bilateral mistake or unilateral mistake.1. Bilateral mistake: The term ‘bilateral mistake’ means where both the parties to the

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

2. Unilateral mistake: The term ‘unilateral mistake’ means where only one party to the agreement is under a mistake. According to sec 22, “A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to matter of fact.”

3. A STRANGER TO A CONTRACT CAN NOT SUE – Explain?General rule “A stranger to a contract cannot sue’. Though a stranger to consideration can sue

because the consideration can be furnished or supplied by any person whether he is the promise or not, but a stranger to a contract cannot sue because of the absence of privity of contract (i.e. relationship subsisting between the parties to a contract). This general rule is known as the doctrine of privity of contract.

Example: S bought tyres from the Dunlop rubber co and sold them to D, a sub dealer, who agreed with S not to sell these tyres below Dunlop’s list price and to pay the Dunlop Co £5 as damages on every tyre D undersold. D sold two tyres at less than the list price and thereupon the Dunlop co sued him for the breach. Held, the Dunlop co could not maintain the suit as it was stranger to the contract.

Case: Dunlop pneumatic tyre co ltd vs. Selfridge & Co ltd EXCEPTIONS: The following are the exceptions to the rule that ‘a stranger to a contract cannot sue’

IN CASE OF TRUSTS : The beneficiary (the person for whose benefit the trust has been created) may enforce the contract though he is not a party to the contract.

Example: A agrees to transfer certain properties to be held by T in trust for the benefit of B. B can enforce the agreement even though he is not a party to an agreement.

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IN CASE OF FAMILY SETTLEMENT : The person for whose benefit the provision is made under family arrangements may enforce the contract although he is not a party to the agreement.

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

ACKNOWLEDGEMENT OR ESTOPPEL : Where the promisor by his conduct, acknowledges or otherwise or otherwise constitutes himself as an agent of a third party, a binding obligation is thereby incurred by him towards the third party.

Example: A receives some money from T to be paid over to P. A admits of this receipt to P. P can recover the amount from A who shall be regarded as the agent of P.

ASSIGNMENT OF A CONTRACT : Where a benefit under a contract has been assigned, the assignee can enforce the contract subject to all equities between the original parties to the contract. Example: the assignee of an insurance policy.

BUSINESS LAW