Basavashree College of Law

Law of Contract - I
UNIT - II

2.1 CAPACITY TO CONTRACT

Section 10 of the contract Act provides 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. Section 11 of the Act provides 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. According to section 11, the following persons are incompetent to contract:

1.Minors

In India it is generally 18 years, but if a guardian of a minor's person or property is appointed, then
it is 21. according to section 11, a minor is incompetent to contract but the Indian Contract Act is
conspicuous by its silence about the nature of minor's contract.

Mohari bibee v/s Dharmodas Ghosh

In this case, the Privy Council held that the minor's contract is void and not merely
voidable on the basis of sections 10, 11,183,184. According to section 11 should be literally
construed and that only a person who is of the age of the majority is competent to contract. A
minor's contract is ab initio and wholly void.

Following contracts entered into by a minor are absolutely void.

1. Contracts entered into by minor for the repayment of money lent or to be lent.
2. Contracts for goods supplied or to be supplied
3. Contracts for all accounts settled with infants.

Fraudulent misrepresentation by minor and its effects

Since a minor's contract is void, a pertinent question arises as to what will happen if a
minor fraudulently misrepresents himself to be a major and induces a person to enter into a
contract with him or induces him to lend some money by mortgaging his property.

Mohori Bibee v/s dharmodas Ghose

In this case, the respondent, a minor executed a mortgage in favour of one Brahmo Dutt,
a money lender of Calcutta to secure a loan of Rs. 20,000 on some house belonging to the
respondent. While considering the proposed advance, Kedar Nath, the attorney and agent of
Brahmo Dutt,received information that the respondent was a minor, yet he got the deed
executed. Subsequently, the infant, by his mother and guardian as next friend, commenced action
against Brahmo Dutt, stating that he was a minor when he executed the mortgage and prayed for
the declaration that the said deed be cancelled. Mer. Jenkins, who presided in the court of first
instance granted the relief asked. The appellate court also dismissed the appeal. Subsequently, an
appeal was filed in the Privy Council. By the time of the institution of the appeal, Brahmo Dutt
died and was substituted by Mohori Bibee. It was argued on behalf of the appellants that the
court ought not to have decreed in the respondent's favour without ordering him to repay the
sum or Rs. 10,500 received by him as part of the consideration for the mortgage.

Thus in this case, the court was of the opinion that under its discretionary power the
court may order restitution by the minor but the court did not order it in the present case because
the appellant had advanced the loan to Dharmodas Ghose while knowing that he was a minor.

Exceptions

A minor's agreement is absolutely void. But there are following exceptions for the benefit
of the minor

1. Sales, mortgages, contracts etc., in favour of minors

A minor is incompetent to contract. Yet he may accept a benefit and be a transferee. A duly
executed transfer by way of sale or mortgage in favour of a minor, who has paid the
consideration, is valid. On behalf of the minor, his natural guardian or any other de jure guardian
can enter into contract to purchase any property on the name of the minor.

2. Partnership

A minor may be admitted as a partner in a partner in a partnership firm to the benefits of a

partnership, without personal liabilities of such minor.

3. Specific Performance

A minor's agreement being void cannot be specifically enforced. But a contract may be entered
into on behalf of a minor by his guardian or by his next friend or by a legal manager of his estate,
for the benefit of the minor and can specifically be enforced in a court of law.

4. Payments of debt incurred during minority

It is permissible at law for a person after attaining majority to elect to pay the debt
incurred by him during his minority.

5. Necessaries

Liability in respect of necessaries supplied to person incapable of entering into a

contract. A minor is an incapable person. Hence the provisions of Section 68 apply to a minor. The
liability is not personal. It pertains to the estate of minor. It resembles the obligations of quasi-
contractual nature.

Following are the necessaries

1. Costs incurred in defending a suit successfully as to the minor's estate.

2. Loan to a minor to avert sale of his property in execution of a decree.

3. Purchase of bull and other agricultural appliances required for agricultural operations on the
minor's estate.

4. Necessary repairs required to the minor's house, and necessary clothes.

The followings are not necessaries

1. Expenses incurred in connection with minor's marriage, which is against the provisions of
Child Marriage restraint Act, 1929.

2. Expenses towards pilgrimage.

3. Expenses for insurance premiums for a minor is not a necessary one.

Equitable doctrine of Restitution

If a minor obtains some property by fraudulently misrepresenting his age, he can be

ordered to restore the property or goods thus obtained. This is called the equitable doctrine.

In Leslie v/s Sheill

In this case, the defendant minor by fraudulently misrepresenting himself to be a major

induced the plaintiff to lend him two sums of $ 200 each. The plaintiff filed the suit to recover $
475 being amount of advances with interest. This action was resisted by the defendant on the
plea of infancy. The court dismissed the suit and pointed out that it was necessary to safeguard
the weakness of the infants at large, 'even though here and there a juvenile slipped through',
while dismissing the suit.

Important points

1. The basic principle of common law is that minors are protected by the common law in their
contractual dealings. A contract entered by a minor is treated as viodable at this option.

1. Equality

The Doctrine of Equity intervened the basic principle of "Minors" protection. It paved the
way for the protection of parties to contracts, who were aggrieved by the fraud of the infant, to
certain extent. According to it, the minors should not be allowed to retain the benefits obtained
by their fraud. They are obliged to make restitution.

Ex: A minor plays ticks and misrepresents about his own age, and acts as a minor, and obtains
goods from the plaintiff, and the goods are still in the possession of the minor, then the court can
order the minor to restore the goods to the plaintiff. This is called "Doctrine of Restitution".

C. Only in case of goods

 The doctrine of restitution is helpful to the aggrieved plaintiff only in case of the goods,
that too if the goods are not converted by the minor, but not in the case of cash and particularly
in case of loan.

D. Necessaries

The doctrine of restitution also extends to the cases of necessaries. Where the plaintiff
incurs certain amount for the necessaries of the minor, the plaintiff is entitled to get back his
amount.

Principle of Estoppel, whether applicable in case of a minor

Section 115 of the Indian Evidence Act provides that when one person has his
declaration, act or omission intentionally caused or permitted another person to believe a thing to
be true, and to act upon such belief, neither he nor his representatives shall be allowed in any suit
or proceeding between himself and such person of his representative to deny the truth of that
thing.

The question for consideration is that if a minor fraudulently misrepresents himself to be

of full age and induces another person to lend him some money or to enter into a contract, can he
be later on allowed to plead that such a contract is void because of the reason that when he
contracted he was a minor.

When the contract itself was void the plea of estoppel must fail. No estoppel can be
pleaded against a statute. If the Contract Act declares that the contract by a minor is void nothing
can prevent the minor from pleading that such a contract is void on the ground of his minority.

Ratification

Since minor's contract is void, he cannot therefore validate it by ratification after

attaining majority for the obvious reason that ratification relates back to the making of the
contract.

In Suraj Narain v/s Sukhu Ahir

In this case, a minor borrowed some money by executing a bond. When he became
major he executed a second bond for the earlier borrowed money as well as interest on it. The
court held that the second bond was invalid because it was without consideration. And a minor
executed a promissory note after attaining majority for the consideration he received during his
minority. It was held that the promissory note was invalid because it was without consideration.
But there may be also be a situation in which a minor may execute a deed for consideration
received partly during his minority and partly after attaining majority.
Persons of unsound mind

Section 12 of the Act provides that 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 judgment as to its effect upon his interests.

1. A person who is usually of sound mind, but occasionally of sound mind, may not make a
contract when he is of sound mind.

2. A person who is usually of sound mind, but occasionally of unsound mind, may not make a
contract when he is of unsound mind.

Ex: A sane man, who is delirious from fever, or who is so drunk that he cannot understand of a
contract, of form a rational judgment as to its effect on his interest, cannot contract whilst such
delirium or drunkenness lasts.

Persons of drunkards

Section 12 of the Act provides that a drunken person is in the same category as a person
of unsound mind. A contract by a person in a state of drunkenness is absolutely void. Such
contract is incapable of ratification. It must be proved that the drunkenness was excessive and
created the impotence of mind at the time of so-called contract. Mere drinking is not a hindrance
to the contracting of just obligations.

Persons disqualified by law

A Persons may disqualify from contracting by any law to which he is subject. A contract
entered into with an alien enemy will be void.

Ex: A migrant from Bangladesh, Pakistan, etc., enter into the Indian Territory for live hood or to
cause terrorism without visas or on visiting visas. Such a person is disqualified by law to enter into
the contracts in India.

An insolvent is incompetent to contract according to insolvency laws. An insolvent is

rendered incompetent for the purpose of contracting only after he has been adjudged as insolvent
by the court.

Ex: an insolvent may contract after insolvency proceeding have been started and until he has been
adjudged as insolvent.

2.2 FREE CONSENT

Section 13 of the Act provides that "two or more persons are said to consent when they
agree upon the same thing in the same sense". This is known as consent ad idem. Unless and until
the parties are at ad idem there is no contract. Section 14 of the Contract Act says definition of
free consent. The consent is said to be so caused when it would not have been given but for the
existence of such coercion, undue influence, fraud, misrepresentation or mistake. Consent is said
to be free when it is not caused by followings:
2.2 a) Coercion

It defines section 15 of the Contract Act. According to Act coercion is the committing, or
threatening to commit, any act, forbidden by the Indian Penal Code or the 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. And it is whether the Indian Penal Code is or is
not in force in the place where the coercion is employed.

Ex: A, on board an English ship on the high seas, causes B to enter into an agreement by an act
amounting to criminal intimidation under the Indian Penal Code. A afterwards sues B for breach of
contract at Calcutta. Here A has employed coercion, although his act is not an offence by the law
of England, and although section 506 of the Indian penal Code was not in force at the time when
or place where the act was done.

Essential elements of Coercion

1. Communicating or threatening to commit any act forbidden by the India Penal Code.
2. The unlawful detaining or threatening to detain any property to the prejudice of any person
whatever.
3. With the intention of causing any person to enter into an agreement.
4. It is mainly of will is impaired.
5. The burden of proof lies upon the plaintiff.
6. The agreement made by coercion is viodable at the option of the party whose consent was
so caused.
7. It is violent character.

In Keshavji v/s Harjivan

In this case, S- a son forged the signature of his father-F on certain promissory notes.
Basing on them, a bank gave loan. Later the bank found the forgery. They called F, and threatened
to institute criminal proceedings against S, and advised to prevent such criminal proceedings, F
ought to have settled with the bank and to pay the entire amount of debt. Due to the threat, F
was compelled to settle with the bank and paid the amount. Later, F sued the bank for the
recovery of the amount contending that he paid the amount under the settlement due to
coercion.

Finally the Privy Council set aside the settlement on the ground that the father was not a
free agent, and held that Father was entitled to revoke the settlement, and to receive back the
payment. It held that the bank authorities committed coercion against F and compelled him to
pay the amount.

Threat to commit suicide, whether coercion

According to section 15, an offence to constitute coercion should be an act forbidden by

the Indian Penal code. Under the Indian Penal Code, attempt to commit suicide is punishable and
not the threat to commit suicide.
In Ammiraju v/s Seshamma

In this case, a man gave a threat to his wife and son to commit suicide if they did not
execute a release bond regarding some properties which the wife and son claimed as their own.
But court held that the release deed was vitiated by coercion within the meaning of section 15.
the majority decision pointed that to threat to commit suicide must be deemed to be forbidden
since the attempt to commit suicide was punishable under section 30 of the Indian penal Code. An
act should be said to be forbidden by the Indian Penal Code only when it was punishable under it.
Since the threat to commit suicide was not punishable, it could not be said to be forbidden.

2.2 b) Undue Influence

Section 16 of the Act provides

1. A contract is said to be induced 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 and unfair advantage over the other.
2. In particular and without prejudice to the generality of the foregoing principle, a person is
deemed to be in a position to dominate the will of another:-

A) Where he holds a real or apparent authority over the other, or when he stands in a fiduciary
relation to the other; or

B) Where he makes a contract with a person whose capacity is temporarily or permanently

affected by reason of age, illness or mental or bodily distress.

1. Where a person who is in position to dominate the will of another, enters into a contract
with him, and the transaction appears, on the face of it or on the evidence adduced, to be
unconscionable, the burden of proving that such contract was not induced by undue
influence, shall lie upon the person in a position to dominate the will of the other.

Essentials of Undue Influence

1. Relationship between the parties being such that one of the parties is in a position to
dominate the will of the other.

2. He uses that position to obtain unfair advantages over the other.

3. Unfair advantage is in fact obtained.

Conditions of Undue Influence

1. Where he holds a real or apparent authority over the other, or where he stands in a
fiduciary relation to the other,

2. 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 stress.
Ex: 1) A, having advanced money to his son B, during his minority, upon B's coming of age obtains,
by misuses of parental influence a bond from B for a grater amount than the sum due in respect
of the advance. A employs under influence.

2) A applies to a banker for a loan at a time when there is stringency in the money market. The
banker declines to make the loan except at an unusually high rate of interest. A accepts the loan
on these terms. This is a transaction in the ordinary course of business, and the contract is not
induced by undue influence.

In Mst. Sethani v/s Bhama

In this case, the main question for consideration before the Supreme Court was whether
the Registered Sale Deed dated 1-4-1963 was obtained under undue influence from a tribal
woman, putlibai who was illiterate besides being old and blind. She was under the total
domination of the defendant-respondent Bhana. The Supreme Court observed that it is true that
the initial onus to prove undue influence was on the plaintiff-appellant, but the onus, in the facts
and circumstances of the case, was easily discharged. It is the respondent who hold obtained the
sale deed in his favour way back on 1-4-1963 by a registered sale deed, which was the light at a
late stage of the trial. From the certified copy thereof it is evident that no consideration passed at
the time of the sale.

Presumption of Undue Influence

When a person in fiduciary relationship with the plaintiff who is in his care and control,
obtains advantages, a presumption of undue influence will arise that undue influence was
exercised.

In Rajamani Ammal v/s Bhoorasami Pandayachi and another

In this case, the plaintiff, the sister of the defendant remained under care and control of
the defendant during her minority and afterwards. Immediately after the attained majority, the
defendant obtained a release deed from her. The plaintiff was unmarried and illiterate girl. She
had no independent advice; she had executed the deed without knowing its nature, contents and
affect. It was held that the deed was vitiated by exercise of undue influence because "the first
defendant had obtained an advantage over the plaintiff when he was in a fiduciary relation to the
plaintiff. Neither the first defendant nor the third defendant who claims under the first had
attempted to rebut the presumption of undue influence arising out of the defendant's fiduciary
relation.

Burden of proving Undue Influence

Section 16 provides that where a person who is in a position to dominate the will of
another, enters into a contract with him, and the transaction appears, on the face of it or on the
evidence adduced, to be unconscionable, the burden of proving that such a contract was not
induced by undue influence, shall lie upon the person who is in position to dominate the will of
the other.
Ex: A, being debt to b, the money-lender of his village, contracts a fresh loan on terms which
appear to be unconscionable. It lies on B to prove that the contract was not induced by undue
influence.

According to section 16 92) of the Act provides when a person is considered to be in a

position to dominate the will of the other. It gives three illustrations of such a position, namely:

1. Whether the donee holds a real or apparent authority over the other,
2. Whether he stands in a fiduciary relation to the other,
3. Whether he makes a transaction with a person whose mental capacity is temporarily or
permanently, affected by reason of age, illness or mental or bodily stress.

Effect of Undue Influence

Section 19-A of the Act deals with the consequences of agreements obtained by 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. Any such contract may
be set aside either absolutely or, if the party who was entitled to avoid it has received any benefit
there under, upon such terms and conditions to the court may seem just.

Ex: A;

A's son has forged B's name to a promissory note. B, under threat of prosecuting A's son, obtains
bond from A, for the amount of the forged note. If B sues on this bond, the court may set the
bond aside.

2.2 c) Fraud

Section 17 of the Act provides that Fraud means and induces any of the following acts
committed by the party to a contract, or with the connivance or by his agent, with intent to
deceive another party thereto or his agent, to induce him to enter into the contract-

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

Mere silence as to facts likely to affect the willingness of a person to enter into contract
is not fraud, unless the circumstances of the case are such that regard being had to them, it is the
duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech.

Ex: 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. but if 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.

Essential elements of Fraud

1. A suggestion; as to a fact with the knowledge that it is not true.

2. The active concealment of a fact by one having knowledge or belief of the factor.

3. A promise made without intention to perform it.

4. Any other act fitted to deceive.

5. Any such act or omission as the law specially declares to be fraudulent.

Effect of Fraud

When consent to an agreement is caused by coercion, fraud or misrepresentation the

agreement is a contract voidable at the option of the party whose consent was so caused by
fraud. A party to a contract was caused by fraud or misrepresentation may, if he thinks fit insist
that the contract shall be performed and that he shall be put in the position in which he would
have been if the representations made have been true. But a fraud which did not cause their
consent to a contract of the party, on whom such fraud was practiced, does not render a contract
voidable.

Ex: B, having discovered a vein of ore on the estate of A, adopts means to conceal and does
conceal, the existence of the ore from A's ignorance B is enabled to but the estate at an
undervalue. The contract is voidable at the option of A.

2.2 d) Misrepresentation

Section 18 of the Act provides misrepresentation means and includes:

1. The positive assertion in a matter not warranted by the information of the person making it,
of that of which is not true, though he believes it to be true.
2. 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;
3. 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.

Essential elements of Misrepresentation

1. It is a false statement without any intention to deceive.

2. It may be innocent some times.
3. It does not involve dishonest intention.
4. The effect of agreement caused by misrepresentation is voidable, at the option of the party
whose consent has been so caused.
5. It must be made before the conclusion of the contract with a view to inducing the other
party to enter into the contract.
6. The aggrieved party has tow remedies:

A. He can avoid or rescind the contract.

B. He can accept the contract but insist that he shall be placed in the position in which he
would have been if the representation made had been true.

1. The aggrieved party loses the right to rescind or avoid the contract if he, after becoming
aware of the misrepresentation or fraud, takes a benefit under the contract or in some
other way affirms it.
2. The aggrieved party loses the right to rescind or avoid the contract, when the subject-
matter was destroyed or a third party has acquired right in it.

Effect of Misrepresentation

When the consent to an agreement is caused by misrepresentation, the agreement is a

contract voidable at the option of the party whose consent was so caused. A party whose consent
was so caused by misrepresentation, may, if he thinks fir, insists that the contract shall be
performed, and that he shall be put in the position in which he would have been if the
representation made had been true. A fraud or misrepresentation which did not cause the
consent to a contract of the party on whom such fraud was practiced or to whom such
misrepresentation was made does not render a contract voidable.

Distinction between Misrepresentation and Fraud

1. Misarepresentation is a false statement without any intention to deceive. It is also called

innocent.

But in case of Fraud is a statement deliberately or recklessly made to deceive another. It is also
called intention misrepresentation.

2. Misrepresentation may be innocent, i.e., there may not be deceit or any intention to gain.

But in case of Fraud it shows that there must be in intention either to deceive or to induce the
other party to enter into a contract.

3. Misrepresentation does not involve dishonest intention; i. e. the element of moral

obligation is missing.

But in case of Fraud the dishonest intention is present.

4. Misrepresentation is only a vitiating element in a contract. It makes the contract voidable at

the option of the party injured.

But in case of Fraud being a vitiating element in a contract, it gives rise to an independent action
of tort.

2.2 e) Mistake

Classification of Mistake

Mistake may be classified into the following categories

1. Common Mistake

In common mistake, both the parties make the same mistake. Each knows the intention of the
other and accepts it, but each is mistaken about some underlying and fundamental fact.

Ex: The parties are unaware that the subject-matter of their contract has already perished.

2. Mutual Mistake

In mutual mistake, the parties misunderstand each other and are at cross purpose.

Ex: A intends to offer his 8 H.P car for sale but B believes that the offer relates to another car for
10 H.P.

3. Unilateral Mistake

In unilateral mistake, only one of the parties is mistaken. The other knows or must be taken to
know, of his mistake.

4. Absence of Consent

Section 13 of the Act mistake of this category may relate to

A. Mistake as to the identity of the person

Section 13 of the Act says two or more persons are said to consent when they agree
upon the same thing in the same sense. that is to say there will be no contract if the parties are
not at ad idem.

Ex: If the offeree is mistaken about the identity of the offeror and if he contracts on such mistaken
assumption, parties cannot be said to be ad idem.

B. Mistake as to the existence of the subject-matter

If there is a mistake as to the nature of the transaction, the contract is void.

Ex: If a person signs the deed of gift being under the mistaken impression that he is simply signing
a power of attorney, the deed will be invalid on the ground of mistakes as to the nature of
transaction.

1. Mistake as to the existence of the subject-matter of the contract.

2. Mistake as to title.
3. Mistake as to the quality of the thing contracted for
4. A false and fundamental assumption going to the root of the contract.

C. Mistake as to the nature of transaction

If there is a mistake as to the nature of the transaction, the contract is void.

Ex: If a person signs the deed of gift being under the mistaken impression that he is simply signing
a power of attorney, the deed will be invalid on ground of mistake as to the nature of transaction.

5. Mistaken by ignorance or Misconception of some matters

For brining a case of mistake under this category there should be following essential elements:

1. Facts must be essential to the agreement

When both the parties to an agreement are under a mistake as to a matter of fact essential to the
agreement the agreement is void.

Ex: A agrees to sell B a specific cargo of goods supposed to be on the way from England to
Bombay. It turns out that before the day of bargain, the slip conveying the cargo had been cast
was, and the goods lost. Neither party was aware of these facts. The agreement is void.

2. Mistaken must be of fact not of law

Section 21 of the Act provides a contract is not voidable because it was caused by mistake as to
any law in force in India, but a mistake as to a law not in force India has the same effect as a
mistake of fact.

Ex: A and B make a contract grounded on the erroneous belief that a particular debt is barred by
the Indian Law of Limitation; the contract will not be voidable.

3. Both the parties must have been under a mistake

Section 22 of the Act provides that a contract is not voidable merely because it was
caused by one of the parties to it being under a mistake as to a matter of fact.

In A. A Singh v/s Union of India

In this case, the plaintiff was the highest bidder in an auction by the government for the
right of fishery for a period of one year. He made the highest bid under the mistaken impression
that the rights of fishery was for a period of three years. He tried to avoid the agreement on the
ground of mistake of fact. But it was held that the mistake was unilateral and therefore he could
not avoid the agreement.

Rectification of Mistake

Where a contract has been reduced to writing or a deed owing to mutual mistake, fails
top express the concurrent intention of the parties at the time of its execution, the court will
rectify the written instrument in accordance with their true intent.

Conditions for Rectification

1. The parties must have been in final and full agreement prior to the execution of the
instrument which it is sought to rectify.
2. The party seeking to have the instrument rectified must adduced clear, unambiguous
evidence that its terms do not accurately record the true intention of the parties at the time.

3. The intention of the parties as expressed in the prior agreement must have continued
unchanged up to the time of the execution of the written statement, and there must be a literal
disparity between the terms of the two transactions.

2.3 AGREEMENTS DECLARED TO BE VOID

Section 2 (h) defines that an agreement enforceable by law is a contract. It means every
agreement must be lawful. All lawful agreements are valid and are enforceable by law. There are
some agreements which have been declared to be void under the Indian Contract Act. Those are:

1. Unlawful Agreements

Section 23 provides that the object of an agreement is lawful, unless

1. It is forbidden by law

Section 23 provides that any agreements, the object or consideration of which is forbidden by law
is unlawful and therefore void.

In Pearce v/s Brooks

In this case, plaintiff agreed to supply the defendant with a brougham on hire, till the
purchase money was paid by installments in a period which was not to exceed twelve months.
The plaintiff had the knowledge that the defendant was a prostitute and the brougham was to be
used by her as a prostitute and to assist her in carrying on her said immoral vocation. The jury
found that the carriage was used by the defendant as a part of her display to attract men and the
plaintiff knew that it was supplied for that purpose. In this case, Pollock C.B., observed, it is a
settled law that any person who contributes to the performance of an illegal act by supplying a
thing with the knowledge that it is going to be used for that purpose, cannot recover the price of
the thing so supplied.

Section 23 is founded on the principle that no one shall be allowed to trade on felony. In
case the accused person is innocent, the law will be abused for the extortion and in case he is
guilty, the law will be eluded by a corrupt compromise screening the criminal for a consideration.
The legislature did not lay down under section 23 the conditions or qualifications as to what are
forbidden by law or what would default the provisions of any law. One has to go to law itself
which is the subject matter of the interpretation to see if the Act contained of is prohibited by law
or it would defeat the provisions of any law so as to pronounce it as void.

2. Agreements which defeat the provision of any law

Section 23 provides that if an agreement is of such a nature that if permitted, it would defeat the
provisions of any law, the consideration or object of such agreement is said to be unlawful and
every agreement the object or consideration of which is unlawful is void.
Ex: A promise B to drop a prosecution which he has instituted against B for robbery and B
promises to restore the value of the things taken. The agreement is void, as its object is unlawful,
for it defeats the provisions of criminal law. A person who is guilty of the crime of robbery must
be dealt with according to law.

3. Fraudulent

Section 23 of the Act provides the consideration is unlawful if it is fraudulent.

Ex: A, B and C enter into an agreement for the division among them of gains acquired, or to be
acquired by fraud. The agreement is void, as its object is unlawful.

Exceptions

1. Where the illegal purpose has not yet been substantially carried into effect before it is
sought to recover money paid or goods delivered in furtherance of it.
2. Where the plaintiff is not in pari delicto with the defendant
3. Where the plaintiff does not have to rely on the illegality to make out his claim.

4. Injury to person or property of another

Section 23 of the Act provides the consideration or object which involves or implies injury to the
person or property of another is unlawful and therefore void. If parties enter into a sham
transaction and their object is to deceive a third party, no legal right or duties will follow or in
other words the contract would be void. Thus an agreement which involves injury to the
properties of other persons is void under section 23 of the contract Act.

5. Immoral or Opposed to Public Policy

Section 23 of the Act says the object of an agreement is unlawful if the court regards it is
immoral or proposed to public policy.

Meaning of Public Policy

It means an agreement which is injurious to the public or is against the interest of the
society is said to be opposed to public policy.

Ex: A contract of marriage brokerage is void.

A contract enforcing bonded labour is void.

A waging contract is void.

Meaning of Immoral

What is immoral at a a material time depends on the fact and circumstances of the case
and the prevailing standards of morality in the society.
In Pearce v/s Brooks

In this case, a coach builder had let out a brougham on hire to a prostitute for the
purpose of enabling her "to make a display favorable to her immoral purposes." The coach
builder subsequently sued the prostitute for moneys payable under the agreement. It was held by
the Court of Exchequer that he could not recover the moneys. The rule which is applicable to the
matter is, ex turpi causa non oritur action, and whether it is an immoral or an illegal purpose in
which the plaintiff has participated, it comes equally with the terms of that maxim, and the effect
is the same; no cause of action can arise out of either in the one or the other.

2. Agreements without consideration

Under the law of contract consideration is necessary for all formation of contract, because
without the consideration the contract is void. Section 2 (d) of the Act defines consideration.
According to the section when, at the desire of the promiser, the promise or any other person has
done or abstained from doing, or does, or abstains from doing, or promises to do or to abstain
from doing, something, such act or abstinence or promise is called a consideration for the
promise. If without the consideration making of contract is declared to be void. So consideration
is the utmost essential element of a valid contract or agreement.

3. Agreement in Restraint of Marriage

Section 26 of the Act provides every agreement in restraint of the marriage of any person
other than a minor, is void. Thus the only exception recognized by Section 6 is that of an
agreement to restrain minor from marriage. Section 26 (2) of the Act declares that an agreement
in partial restraint of the marriage of any person, other than a minor, is void if the court regards it
as unreasonable in the circumstances of the case.

4. Agreement in Restraint of Trade

Section 27 of the Act provides that an agreement in restraint of trade is void. Agreement
in restraint of trade as one in which a party agrees with any other party to restrict his liability to
carry on trade with other persons not parties to the contract in such manner as he choose. A
contract in restraint may be described as one which unreasonably restricts the right of a person to
carry on his profession. Such contracts are of three kinds:

1. Those by which an employee agrees that after leaving his present employment he will not
complete against his employer, either by setting up business on his own account or by
entering the service of a rival trader.
2. Those by which the vendor of the goodwill of a business agrees that in future he will not
carry on a similar business in competition with the purchaser.
3. Those by which manufacturer or merchants form a combination for the purpose of
regulating their relations as for instance, agreeing to restraint the output or to fix the selling
price of a certain commodity.

According to section 27 of the Act every agreement by which anyone is restrained from
exercising a lawful profession, trade or business of any kind, is to that extent void. One who sells
the goodwill of a business, may agree with the buyer to restrain from carrying on a similar
business within specified 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.

In Madhub Chunder v/s Raj Coomar Dass

In this case, the defendant felt affected by the business of the plaintiff and agree to pay
some of money to the plaintiff if he stopped his business in that locality. The plaintiff stopped
business but the defendant did not pay him. The plaintiff therefore sued the defendant to recover
the said money which he claimed that he had advanced to his workman. In this case, the Calcutta
High Court held that the agreement was void and therefore no part of it could be enforced.

Exceptions

1. Restraint during terms of service

An agreement whereby an employee covenants to bind himself not to complete his employer
during the term of his agreement is not a restraint of trade.

In Charlesworth v/s Mac-Donald

In this case, the defendant agreed to serve for three years as an assistant to the plaintiff,
a physical and surgeon. The agreement contained a stipulation against practicing by the
defendant within the period of the agreement but he started practicing. The court granted
injunction restraining the defendant from practicing in Zanzibar during the period of agreement.
The court opined that such an agreement was not covered within the meaning of section 27 of the
Act.

2. Trade Combinations

Except in the cases where the contract is wholly one sided, normally the doctrine of restraint or
trade is not attracted in cases where the restriction is to operate during the period the contract is
subsisting and it applies in respect of a restriction which operates after the termination of the
contract.

In Bholanath shankardas v/s Lachminarain

In this case, the Allahabad High Court held that a combination formed by traders of a
p[particular locality to carry on business only among the members and to pay of their profits to
common fund and imposing fines upon members for violation of conditions laid down by the
combination was not invalid under section 27 of the contract Act even though it might have
indirectly damaged their trade rivals.

3. Solus Agreements
Section 27 declares void all agreements by which any one is restrained from exercising a lawful
profession, trade or business of any kind. It does not forbid contracts which are necessary for
carrying on of business.

Ex: A manufacturer may either into an agreement to sell his entire product to a particular person
and not to sell it to anyone else. Such agreements may be called solus agreements.

4. Agreements in restrain of Legal proceedings

Section 28 of the Indian Contract Act provides that every agreement by which any party
is restricted absolutely from enforcing his rights under or in respect of any contract, by the
ordinary tribunals, or which limits time within which he may thus enforce his rights is void to that
extent. According to Section 28 provides:

1. By which a party thereto is restricted absolutely from enforcing his right under or in respect
of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the
time within which he may thus enforce his rights
2. Which extinguishes the rights of any party thereto, or discharges any party thereto from any
liability, under or in respect of any contract on the expiry of a specified period so as to
restrict any party from enforcing his rights, is void to that extent.

Exceptions

1. Saving of contract to refer to arbitration dispute that may arise

This section shall not render illegal a contract by which two or more persons agree that any
dispute which may arise between them in respect of any subject or class of subjects shall be
referred to arbitration and only the amount awarded in such arbitration shall be recoverable in
respect of the dispute so referred.

2. Saving of contract to refer questions that have already arisen

Nor this section shall render any illegal contract is writing by which two or more persons agree to
refer to arbitration any questions between them which has already arise or affect any provision of
law in force for the time being as to reference to arbitration.

3. Agreements void for Uncertainty

Section 29 of the Act provides that agreements, the meaning of which is not certain, or capable of
being made certain, are void.

Ex: 1. A agrees to sell B a hundred tons of oil. There is nothing whatever to show what kind of oil
was intended. The agreement is void fo0r uncertainty.

2. A agrees to sell to B all the grain in my granary at Ramanagar. There is no uncertainty here to
make the agreement void.

4. Agreement by way of Wager

 Section 30 of the Act provides that agreements by way of wager are void but it does not
define the term wager. Wager means staking something of value upon the result of some future
uncertain event, such as, a horse race, or upon the ascertainment of the truth concerning some
past or present event, such as the population of London, with regard to which the wagering
parties express opposite views.

Elements of Wager

1. Gain or loss

There must be two sides and mutual chances of gain and loss.

2. Uncertain Event

The performance of the agreement must depend upon an uncertain event as the sole condition of
their contract. An event may be uncertain, not only because it is future event, but because it is
not yet ascertained, at any rate to the knowledge of the parties.

3. No other interest

The parties must contemplate the determination of the uncertain event as the sole
condition of their contract. The object of the wager is to make a gain purely as the decision of an
uncertain event.

4. Neither party should have a proprietary interest in the event.

The stake must be the only interest which the parties have in the contract. That is to say,
neither party must have a proprietary interest in the event.

Ex: If either party to a contract, under which money is payable upon the determination of an
uncertain event possesses an interest in the subject-matter of the contract that will be affected in
value according to the determination of the event, the contract is void as being a wager.

Lotteries

Lotteries have been defined as games of chance in which the event of either gain or loss
of absolute right to a prize or prizes by the person concerned is made wholly dependent upon the
drawing or casting of lots, and the necessary effect of which is to get a spirit of speculation and
gaming that is often productive of serious evils.

The lotteries authorized by the state also has a sanction in law, a gambling may be raised
and may be authorized for a specific purpose, but if would not attain the status of trade like other
traders or becomes res commercium.

Effects of Wagering Contracts

Section 30 of the Contract Act provides

 1. Agreements by way of wager-are void
2. No suit shall be brought for recovering anything to be won on any wager
3. Entrusted to any person to abide the result of any game or other uncertain event on which
any wager is made.

Exception

Section 30 of the Act says this section shall not be deemed to render unlawful subscription or
contribution, or agreement to subscribe or contribute made or entered into for or towards any
plate, prize or sum of money, of the value or amount of five hundred rupees or upwards to be
awarded to the winner or winners of any horse race.

Agreements to do impossible acts

Section 56 provides a contract to do an act which, after the contract is made, becomes
impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes
void when the act becomes impossible or unlawful.

2.4 CONTINGENT CONTRACTS

Section 31of the Act provides contingent contract. It means 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.

Ex: A contract to pay B, Rs. 10,000 if B's house is burnt. This is a contingent contract.

Elements of Contingent Contract

1. A contract to do or not to do something.

2. If some event does or does not happen.

3. The said event must be collateral to such contract.

When can a contingent contract be enforced?

1. On the happening of an event

Section 32 provides that contingent contracts to do or not to do anything if an uncertain

future event happens cannot be enforced by law unless and until that event has happened.

Ex: If A makes a contract with b to buy B's horse if A survives C. this contract cannot be enforced
by law unless and until C dies in A's lifetime.

2. On the event not happening

Contingent contracts to do or not to do anything if an uncertain future event does or does not
happen can be enforced when the happing of that event becomes impossible, and not before.
Ex: A agrees to pay B a sum of money, if a certain ship does not future. The ship is sunk. The
contract can be enforced when the ship sinks and not before. If the future event on which a
contract is contingent in the way in which a person will act at an unspecified time, the event shall
be considered to become impossible3, when such person does anything which renders it
impossible that he should so act within any definite time, or otherwise than under future
contingencies.

3. Contingent on specified event not happening within fixed time

Contingent contracts to do anything if a specified uncertain even does not happened

within a fixed time may be enforced by law when the time fixed has expired and such event has
not happened, or before the time fixed has expired if it becomes certain that such event will not
happen.

Ex: A promises to pay a sum of money if a certain ship does not return within a year. The contract
may be enforced if the ship does not return within a year, or is brunt within the year.

When a contingent contract becomes void?

1. Event becoming impossible

Section 32 of the Act provides that if the event becomes impossible, contingent contract to do or
not to do anything if an uncertain future event happens become void.

Ex: A contracts to pay B a sum of money when b marries C, C dies without being married to B. the
contract becomes void.

2. On the happening of specified event within fixed time

Contingent contracts to do or not to do any thing if a specified uncertain event happens within a
fixed time, becomes void if at the expiration of the time fixed, such event has not happened, or if,
before the time fixed, such event becomes impossible.

Ex: A promises to pay B a sum of money if a certain ship does not return within a year. The
contract may be enforced if the ship returns within the year, and becomes void if the ship is burnt
within the year.

3. Agreements contingent on impossible events

Section 36 provides that contingent agreements to do or not to do anything if an

impossible event happens, are void, whether the impossibility of the event is known to the parties
to the agreement at the time when it is made.

Ex: A agrees to pay B Rs. 1, 0000 if two straight lines should enclose a space. The agreement is
void.