Business Law Notes PDF

B.COM-104 BUSINESS LAW NOTES PREPARED BY: DR.SHIKHA GUPTA Programme Coordinator-BBA BLOCK-1: GENERAL LAW OF CONTRACTS 1 UNIT-1: Essen...

B.COM-104 BUSINESS LAW NOTES PREPARED BY: DR.SHIKHA GUPTA Programme Coordinator-BBA BLOCK-1: GENERAL LAW OF CONTRACTS 1 UNIT-1: Essentials of contract The Indian Contract Act 1872: The law relating to contracts in India is contained in the Indian contract act 1872. The act came into force with effect from September 1st 1872. It is applicable to the whole of India expect the state of Jammu & Kashmir. The act as enacted originally had 266 sec dividend. Contract defined:- An agreement between two or more persons which is intendeds to be enforceable at laws and is constituted by the acceptance by one party of an offer made to him by the other party to do or to abstain from doing some act. Essential elements of valid contract:- All agreement 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 expressly declared to be void. They are Valid contract Offer & acceptance Intention to create legal relationship Lawful consideration Capacity of parties Free consent Lawful object Certainty of meaning Possibility of preference Not declared to be void  Legal formalities. Offer & acceptance : In order to create a valid contract, there must be a lawful offer by one party and lawful acceptance of the same by the same by the other party. The adjective lawful means offer and its acceptance must confirm to the rules laid down in the Indian contract act regarding valid offer and acceptance and its communication. Intention to create legal relationship : In case, there is no such intention on the part of parties, there is no contract. Agreements of social or domestic nature do not contemplate legal relations. The leading case on this point is Balfour vs. Balfour (1919). Lawful consideration : Consideration has been defined in various ways. Consideration is the price for which the promise of another is brought. Consideration is known as quid pro-que or something in return. Consideration is an essential element in a contract. Capacity of parties: The parties to an agreement must be competent to contract. If either of the parties does not have the capacity to contract, the contract is not valid. Accordingly, the following persons are incompetents to contract. Minors Persons of unsound mind, and Persons disqualified by law to which they are subject. Free consent: Consent means the parties must have agreed upon the same thing in the same sense. Accordingly to sec 13 two or more person are said to consent when they agree upon the same thing in the same sense. This is called consensus ad idem in English law. Accordingly to sec 14 consent is said to be free when it is not caused by Coercion Undue influence Fraud Mis-representation Mistake Lawful object : The object of an agreement must be lawful. Object has nothing to do with consideration. It means the purpose or design of the contract. The object is said to be unlawful if-  It is forbidden by law It is of such nature that permitted it would defeat the provisions of any law It is fraudulent It involves an injury to the person or property of any other The court regards it as immoral or opposed to public policy. Certainty of meaning : According to sec 29“agreements the meaning of which is not certain or capable of being made certain are void. The terms of the contract must be precise and uncertain. It cannot be left vague. Possibility of performance : If the act is impossible in itself. Physically or legally, it cannot be enforced at law. Not declared to be void or illegal : The agreement through satisfying all the conditions for a valid contract must not have been expressly declared void by any law in force in the country. Legal formalities : An oral contract is a perfectly valid contract is a perfectly valid contract, except in those cases where registration etc. is required by some status. Classification of contracts: Contracts may be classified on the basis of their A. validity or enforceability B. formation C. performance 1. Valid contract: An agreement enforceable at law is a valid contract. An agreement becomes a contract when all the essential of a valid contract as laid down in sec 10 are fulfilled. 2. Void contract: An agreement which was legally enforceable when is not enforceable by law by either of the parties is void. voidable contract: According to sec (2). An agreement which is enforceable by the 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. 3. Unenforceable contract: It is contract which is otherwise valid. But cannot be enforced because of some technical defect of a written from or absence of a proper stamp. Such contracts must be sued upon by one or both of the parties. Illegal agreement : A contract which is either prohibited by law or otherwise against the policy of law is an illegal contract. UNIT-2: OFFER AND ACCEPTANCE Offer An offer is “a tentative promise made by one party (the offeror), subject to a condition or containing a request to the other party (the offeree).” It is an “indication of a willingness to enter into a contract on certain terms.” Making an offer entails a risk because, as soon as it is accepted, a binding contract exists. To be valid, an offer must be: Complete – It must contain all the major terms of the agreement; Precise – If the offer is too vaguely worded, a court may later find the agreement to be too ambiguous to be enforced; and Communicated to the offeree – This may be done by act (sitting in the chair at the hair salon), words, writing, or a combination of these. Difference Between an Invitation to Treat and an Offer An offer has to be more than a willingness to enter into negotiations. The latter is merely an invitation to treat. Whether what is communicated is an offer or an invitation to treat is a question of degree and is dependent upon the language used. In making the distinction, the courts use an objective test of how a reasonable person would interpret a particular statement in that specific situation. As a general rule, the courts have held that an advertisement of goods for sale at a stated price is not an offer to sell the goods at that price but merely an invitation to do business or an invitation to treat (a willingness to receive an offer). However, if an advertisement offers a fixed number of items at a fixed price on a first-come, first-served basis, this may constitute a valid offer. Similarly, advertisements that offer a reward to any person who uses a preventive medicine but still catches the illness have been found to be valid offers. This was the subject of the landmark case Carlill v. Carbolic Smoke Ball Company where a company was forced to pay the £100 offered to Carlill, who used its carbolic smoke ball yet still contracted influenza. The courts viewed the advertisement as an offer to the world, especially since the advertisement stated that £1,000 had been deposited with a bank to show the company’s sincerity.84 In a self-service store, the customer is the offeror and the cashier is the offeree. The display of goods is an invitation to do business. The customer makes an offer by taking the goods to the cashier who accepts the offer by ringing them in. This was the subject of Pharmaceutical Society of Great Britain v. Boots, where Boots Pharmacy started selling some pharmaceutical products on a self-service basis, and the Pharmaceutical Society held that these transactions were unsupervised in contravention with legislation. The court found that the items on the shelf were merely an offer to treat. Modes of revocation of offer: By notices of revocation By lapse of time By non-fulfillment of condition precedent By death or insanity By counter offer By the non-acceptance of the offer according to the prescribed or usual mode By subsequent illegality By notices of revocation: Offer may be revoked by a communication of notices of revocation by the offeror to the other party before acceptance is complete against the offeror himself. By lapse of time: A proposal will come to an end by the lapse of time prescribed in such proposal for its acceptance or, if no time is so prescribed by the lapse of reasonable time. What is a reasonable time is a question of fact depending upon the circumstance of each case. Where the subject matter of the contract is an article, the gold, the price of which fluctuate daily in the market, very short period will be regarded as reasonable. By non-fulfillment of condition precedent A proposal is revoked when the acceptor fails to fulfill a conditions precedent to the acceptance of the proposal which was conditional offer. By death or insanity: A proposal is revoked by the death or insanity of the proposer if the fact of his death or instantly comes to the knowledge of the acceptor before acceptance. By counter offer: An offer comes to an end when the offeree makes a counter offer or rejects the offer. By the non-acceptance of the offer according to the prescribed or usual mode: The offer will also stand revoked if it has not been accepted according to the mode prescribed. By subsequent illegality: An offer lapses if it becomes illegal after it is made and before it is accepted. D e s c r Method i p t i o n An offer lapses if: The offeree fails to accept the offer within the time period specified in the offer; There is no s et period for acceptance, and the offeree fails to accept within a reasonable time—  p t i o n An offer lapses if: The offeree fails to accept the offer within the time period specified in the offer; There is no s et period for acceptance, and the offeree fails to accept within a reasonable time— Lapse the court will look at the subject matter, volatility of the market, and industry practices; or Either party dies or becomes incapable (unless the contract states that it is intended to bind heirs and estates). Revocation is withdrawal of an offer prior to acceptance by the offeree. Revocation must be communicated in a way that a reasonable person would understand it to be Revocation revoked. It is effective when the revocation is actually received by the offeree. This is refusal of an offer by the offeree. It may be done expressly, by stating that the offeree will not accept the offer, or it may Rejection be indicated by conduct that justifies the offeror’s belief that the offeree did not intend to accept the offer. The offeree responds to the offer by indicating a willingness to enter into a contract but on different terms. A modification of an offer usually amounts to Counter-Offer a counter-offer. If a counter-offer is made, the offeree has rejected the original offer, and it is terminated. Acceptance of an Offer Acceptance “occurs when an offeree agrees to enter into the contract proposed by the offeror.” The moment an offer is accepted, a contract is formed and each party is bound to comply with its terms. To be valid, acceptance must be: In a positive form, whether oral or by act; Unequivocal – It must be complete and unconditional;  Without any variation in the terms of the offer or, as noted above, it will constitute a counter-offer and terminate the original offer; and Communicated to the offeror – Some contracts may specify that notice of acceptance is not necessary and that the contract will be binding as soon as the offeree has performed whatever was required of him in the offer. Carlill v. Carbolic Smoke Ball Co. established that an offer may be made to an indefinite number of people who remain unknown to the offeree even after they have accepted. Bilateral Contracts and Unilateral Contracts How an offer is accepted depends on the type of contract. A bilateral contract occurs when a promise is exchanged for a promise. In that case, acceptance may occur through written or spoken words or by conduct (e.g., shaking hands or nodding agreeably). Silence will be viewed as a manner of acceptance only in very limited circumstances. When there is no face-to-face contact, it may be necessary to determine where and when a contract was formed or, if the lines of communication have broken down, whether a contract was even formed. UNIT-3: CAPACITY OF PARTIES Capacity refers to the competence to enter into legally binding agreements. Minors and people with diminished mental capacity may lack capacity to contract. Minors (or Infants) Minors are people who have not yet reached the age of majority according to the law of their province (usually 18 or 19). Because minors have less bargaining power than adults, as a general rule, contracts made by minors are not enforced against them but are enforceable by them. There are two exceptions to a minor's immunity from contractual liability: necessaries and beneficial contracts of service. Necessaries Contracts made by a minor for the provision of necessaries are binding. To be a necessary, the good must be necessary to this particular minor, and the minor must not already have an adequate supply of it. Although a minor only need pay a reasonable price for necessaries, the contract price is presumed to be reasonable in the absence of evidence to the contrary. The court requires the adult who is supplying goods to establish what is in fact necessary for the minor, and this may be difficult for an adult who does not know of the infant's particular circumstances. The courts have identified food, clothing, lodging, medical attention, legal advice, and transportation (means to get to and from work, but not purchase of a vehicle) as necessaries.. Based on the Sale of Goods Act, an infant may repudiate a contract even for necessaries where the goods have been ordered but not yet received, since the Act defines necessaries for an  infant as goods sold and delivered. Beneficial Contracts of Service Beneficial contracts of service made by a minor are binding. These include contracts of employment or apprenticeship when they are found to be for the minor’s benefit and not exploitative. However, when a minor is in business for himself, the courts are less likely to consider this as beneficial to the minor. Other Contracts with Minors Figure 3-15 sets out some of the other common law rules regarding contracts made with minors. The distinction between void and voidable contracts is important in this context as well as in other contexts. A void contract is a nullity from its inception, i.e., it is not really a contract at all and thus cannot be enforced by either party. A voidable contract may be terminated by one or perhaps either of the parties but is in force unless and until one party acts to bring it to an end. Figure 3-15: Rules Regarding Contracts with Minors I m p l i Topic c a t i o n A minor may always repudiate a contract for non-necessaries, even when those items are clearly beneficial to him or her. The minor must return goods still in his or her possession. If the minor sells goods, she cannot recover the goods unless she returns the money paid. Repudiation If the minor has already received a benefit or non-returnable goods as a result of a contract for non-necessaries, he will be able to repudiate only future liability and cannot recover monies already paid for the benefit received. An adult can recover money lent to a minor Loans to a minor only if the minor used the money to purchase necessaries. Although a minor may be free from  a t i o n A minor may always repudiate a contract for non-necessaries, even when those items are clearly beneficial to him or her. The minor must return goods still in his or her possession. If the minor sells goods, she cannot recover the goods unless she returns the money paid. Repudiation If the minor has already received a benefit or non-returnable goods as a result of a contract for non-necessaries, he will be able to repudiate only future liability and cannot recover monies already paid for the benefit received. An adult can recover money lent to a minor Loans to a minor only if the minor used the money to purchase necessaries. Although a minor may be free from liability under contract law, she is still Liability under Tort law liable for torts like negligence, defamation, and deceit. A minor might be tempted to buy goods on credit, sell them to a third party, and then repudiate the original contract and pocket the profit. However, this type of conduct might be criminally fraudulent. Minors are Liability under Criminal law responsible for actions under the Criminal Code, R.S.C. 1985, c. C-46 and, upon turning 16, could be subject to criminal sanctions; conduct of minors under 16 could lead to penalties under the Young Offenders Act, R.S.C. 1985, c. Y-1. A minor cannot gain capacity by Lying about age intentionally misleading an adult about his or her age. Parents may be held liable for contracts made by their children only if the child Parents of minors is acting on behalf of (as the agent of) the parents. For ongoing contracts (e.g., fitness club memberships, car leases, cell phone plans, and agreements dealing with land, shares, or Minor reaches age of majority partnerships), unless a minor promptly repudiates the contract after becoming an adult, the minor will be liable under its terms as if he had been an adult all along. For contracts that concern a single transaction, unless the minor ratifies it at majority, she will not be bound; under the  or her age. Parents may be held liable for contracts made by their children only if the child Parents of minors is acting on behalf of (as the agent of) the parents. For ongoing contracts (e.g., fitness club memberships, car leases, cell phone plans, and agreements dealing with land, shares, or Minor reaches age of majority partnerships), unless a minor promptly repudiates the contract after becoming an adult, the minor will be liable under its terms as if he had been an adult all along. For contracts that concern a single transaction, unless the minor ratifies it at majority, she will not be bound; under the Statute of Frauds, ratification must be in writing and signed by the minor-turned-adult to be enforceable.98 Contracts that are prejudicial and unfair to Prejudicial contracts minors are void. Therefore, they need not be repudiated if ongoing nor can they be ratified. The safest course for anyone making a contract with a minor is to have an adult (parent, older sibling, or guardian) guarantee the minor's contractual obligations. UNIT-4: FREE CONSENT Free Consent Contracts are usually described as valid, void and voidable. Valid Contract is an agreement enforceable at the law courts. Those agreements which are not enforceable at the law courts, i.e., for the enforcement of which legal recourse cannot be taken, are known as Void Contracts. In between the valid and the void contracts are the voidable contracts. Such contracts are the outcomes of Flaw in Consent. At an early stage you have read that, “an agreement can be called a contract provided it is made with the Free Consent of the parties, competent to contract for a lawful consideration and for a lawful object and is not expressly declared to be void”. When we analyse this statement we come to know that to be a contract, an agreement must be made with the Free Consent of the parties to the contract. Here is the importance of “Free Consent” which is very much necessary for the validity of the contract. The genuineness of the consent implies that the parties to the contract must mean the some thing in the same sense and not only that but they should mutually agree voluntarily. If their minds do not meet at the same thing in the same sense voluntarily, then their consent shall not be called Free or Voluntary. The consent in such case might have been obtained under Fraud or Misrepresentation or Coercion or undue influence. In such a case the party giving his consent under any of these four elements shall have a right to withdraw his consent. Such a contract where the consent of a party or parties to the contract is caused by any of the elements stated above, i.e. Fraud Misrepresentation, Coercion or Undue Influence/shall be called a Voidable Contract and shall be enforceable at the option of the aggrieved party or parties and not at the option of the other or others. Let us make our point clear with the help of an example. Suppose A is willing to sell his car to B for Rs. 15,000, but B is willing to purchase it for Rs. 10,000 only. A tells B if he (B) refuses, to purchase the car for Rs. 15,000 he (A) shall fire upon him. Due to this threat of getting himself hit by A’s gun, B gives his consent to purchase the car for Rs.15,000 only. Here B’s consent cannot be said to be obtained freely or voluntarily. It is cause by threat to the injury of B’s person. Therefore B has a right to withdraw his consent even at a later stage. B’s consent shall be said to be caused by Coercion. Such similar examples can be multiplied. Thus Free Consent plays a very important role in the validity of a Contract. If there is no Consent, there is no Contract. Sir John Salmond has called flaws in Consent as ‘Error in Causa’. According to him error has been made in causing consent of one of the parties to the agreement which has become responsible for vitiating the validity of the contract. Error in Causa is created by the cause of either Coercion, or Undue Influence or Fraud or Misrepresentation. Let us now take up these elements, i.e. Coercion, Undue Influence, Fraud and Misrepresentation responsible to vitiate Free Consent one by one. Coercion (Section 15) Meaning: It is committing, or threatening to commit, any act forbidden by the Indian Penal Code (XLV of 1860), 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. Explanation : It is immaterial whether the Indian Penal Code (XL V of 1860) is or is not in force in the place where coercion is employed. Characteristics: The above definition as stated by Sec. 15 of the Indian Contract Act specific certain characteristics of the term ‘Coercion’ which vitiates the consent of the parties to a contract. These characteristics are: Example: An agent refused to hand over the account books to a business man to a new agent unless the principal released him from all liabilities. The principal had to give a release deed as demanded. It was decided in Muthia vs Muthu Karuppa (1927, 50 Mad. 786) that the release deed was given under Coercion and the principal could avoid it. It is necessary that the Indian Penal Code is in force at the place where Coercion is employed. Example : A on a ship on the high sea threatens to murder B, if he (B) does not write a pronote in his (A’s) favour A’s act amounts to Coercion, although Indian Penal Code does not apply on the high seas. Coercion by threat need not necessity be directed by a party to the contract. It may or may not emanate from a stranger to the contract. Similarly, it may be aimed at any person. either a party to the contract or a strange to the contract. But the idea or intention of the party resorting to coercion should be to cause a person to enter a contract. Example : (a) A threatens to Kill C (B’s son), if B does not lend Rs. 10,000 to A. B agrees to lend the aforesaid amount. The agreement is caused by Coercion. (b) A threatens to Kill B if B does not lend Rs. 10,000 C.B agrees to lend the amount to C. This agreement is made under Coercion. Effect of Coercion Coercion vitiates Free Consent. The party or parties whose consent is taken under the effect of Coercion get a right to avoid the contract, if he so likes. However, if the aggrieved party has received any benefit under the contract which he is avoiding on the basis of Coercion, he has to return that benefit to the other party or parties (S.72). The point can be made clear by the following example: A enters into a contract with B to sell his horse for Rs. 5000 B takes A’s consent under Coercion. A at the time of entering into an agreement receives Rs. 1000 as an advance from B. Later on, A avoids the sale of the horse on the basis of Coercion. A has to return Rs. 1000 to B. He cannot retain the money received as an advance from B. Burden of Proof: The party avoiding the contract has to prove that Coercion was exercised upon him and his consent received is not voluntary or he has not exercised his consent freely. Threat to commit suicide : It is an important question whether threat to commit suicide amounts to ‘Coercion? The act of committing suicide is forbidden by the Indian Penal Code and on this basis Madras High Court has decided in Amiraju vs Seshamma (1918, 41 Mad. 33) that threat to commit suicide amounts to Coercion and the party affected is entitle to avoid the contract. Wallis, C.J and Seshhagiri Iyer J. held the threat of suicide amounted to Coercioin The learned judged observed, “it was impossible to hold that an act which it is made punishable to abet or attempt is not forbidden by the Indian Penal Code, especially as the absence of of any section punishing the act itself is due to the fact that the suicide is in the nature of things beyond the jurisdiction of the Court.” However, Old Field J. gave a dissent. He held that the section should be strictly construed and that an act not punishable under the Penal Code could not be said to be forbidden by the code. However, it is not a well recognized fact that threat to commit suicide is an offence punishable under the Indian Penal Code and amounts to Coercion. The facts of the case are as under: Amiraju held out a threat to commit suicide to his wife and son, if they did not execute a release in favour of his brother in respect of certain properties. The wife and the son executed the releasse deed under the threat. Later on the wife and the son took the plea of Coercion to avoid the release deed. Coercion and Duress distinguished (a) Coercion is the term applied under the Indian law of Contracts while Duress is the term applied under the English law of Contracts.(b) Coercion has a wide scope than Duress, Coercion includes threat to property also while Duress includes actual act of violence over the person and not of property. (c) Coercion can be applied by even a stranger, while Duress must be applied by a party to the Contract upon the other party or to his wife or patent or child. Undue Influence (S.16) Definition as per S.16: (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 an 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 where he stands in a fiduciary relation to the other; or (b) when 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. (3) 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 fact of it or on the evidence adduced, to be unconscionable, he 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. Nothing in this sub-section shall affect the provision of section III of the Indian Evidence Act 1872. Illustrations (a) A, a man enfeebled by desease or age, is induced, by B’s influence over him as his medical attendant, to agree to pay B an unreasonable sum for his profession services. B employs undue influence. (b) A being in 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 indue influence. Salient Features The above definition has got the following salient features:- (1) One of the two parties to the contract is in a position to dominate the will and mind of the other party. This is presumed when the parties to the contract have a real or apparent authority over the other or one of the parties has got a fiduciary relationship which puts him in a position to win over the mind of the other party. Such position or relationship exists in the cases of minor and guardian; trustee and beneficiary; son and father, wife and husband or vice-versa. The positon is also presumed where the party is disabled or infirm and has to depend upon the other party to the contract. Mentally deficient and physically disabled people can take the plea of undue influence in avoiding the contract. (2) The dominating party should have obtained an unfair advantage from the weaker party: and (3) The transaction between the contracting parties is unconscionable. The bargain is called ‘unconscionable’ where the two parties are not on equal footing and one of them is making an exhorbitant profit of the other’s distress. Unless all the three above stated conditions exist, the contract can not be avoided on the pretext of Undue Influence. In the words of Sir Samuel Romilly undue influences is presumed in “all the variety of relations in which dominion may be exercised by one person over another”. Effect of Undue Influence (S.19-A) A contract vitiated by undue influence is voidable at the option of weaker party. The court can set aside such contract- (i) either wholly: or (ii) where the weaker party has enjoyed some benefit under the terms of the contract, then upon just and equitable terms Examples (a) A’s son has forged B’s name to a promissory note. B under threat of prosecuting A’s son obtains a bond from A for the amount of the forged note. If B sues on this bond, the court may set the bond aside. (b) A, a money-lender, advances Rs. 100 to B, an agriculturist, and by undue influence induces B to execute a bond for Rs. 200 with interest at 6 per cent per month. The Court may set the bond aside, ordering B to repay Rs. 100 with such interest as may seem just. Burden of Proof The weaker party has a right to avoid the transaction on the plea of Undue Influence. It is the other party who is to prove that he has not exercised any undue influence in getting the consent of the weaker party. If the other party is unable to prove it, the court shall set aside the transaction. (Refer to example (b) given after definition of Undue (Influence). (a) Parties suffering with physical or mental distress e.g. a patient suffering with actue pain entering into a contract with a doctor. (b) Parties having confidential relations. Confidential relationship is presumed in between parent and child; guardian and ward; solicitor and client; managing clerk of an attorney and his client; trustee and cetstui que trust; doctor and patient Chela (disciple) and a Guru (spiritual advise; fiance and fiancee. There is no undue influence in the relationship of mother and daughter; husband and wife; grandfather and grandson and landlord and tenant; credtior and debtor. Rebuttal: all cases of prescribed Undue Influence can be rebutted on the following grounds: (i) full disclosure of material facts was made to the weaker party; (ii) adequate consideration existed; and (iii) the weaker party received independent legal advice. Transaction with Parda-nishin women: Who is a parada-nishin women? A woman who observes complete seclusion due to the prevailing custom in her community is said to be parda- nishin. She does not act independently but has to depend upon someone else for performing her outward duties. A woman going to the Court to give her evidence, settling gent with her tenant, collecting rents from them, dealing with other parties in matters of business, falling to outsiders can not be regarded as a Parda- nishin woman. The training, habit and surrounding circumstances are the main elements to be considered to decide whether a woman is a Parda-nishin or not Wearing a Burga does no make a woman a Parda- nishin. A Parda-nishin woman can be influenced by undue influence. Persons entering into contracts with such a woman have to be very careful because they may be required to prove (1) that such woman understood the contents of the contracts; (2) she had free and independent advice and (3)she exercise her free will. The Privy Council has stated in 1931 in Tara Kumari Vs Chandra Mauleshwar that the principles to be applied to transactions with such women are not merely deductions from the law as to undue influence but have to be founded upon wider basis of equity and good conscience. A good number of cases have been decided not only by the privy Council but also by the Indian High Courts over the point. Distinction between Coercion and Undue Influence We can distinguish between Coercion and Undue Influence. The distinction can be made on the following basis: (a) Definition, Coercion is an act punishable under the Indian Penal Code, while Influence is not a penal act. (b) Nature of force used, Coercion requires physical force exercised by one of the parties to contract, while undue influence requires moral force. (c) Parties Even a stranger’s act may account to coercion, but undue influence can be exercised only by one of the parties to the contract. Stranger has no place in undue influence. (d) Effect. Coercion gives a right to the effected party to repudiate the contract in full but under undue influence court may set aside the contract absolutely or modify the terms of the contract on such terms which it feels just and equitable. 2. FRAUD AND MISREPRESENTATION “Fraud” : (S.1) “Fraud” means and includes any of the following acts committed by a party to contract or with his connivance, or by his agent, with intent to deceive another party thereto of his agent, or to induce him to enter into the contract: (1) the suggestion, as to fact, of that which is not true, by one who does not to 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 fited to deceive; (5) any such act or commission as the law specially declares to be fraudulent. Explanation Mere silence as to facts likely to affect the willingness of a person to enter into a 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. 1. Sir Samuel Romilly argued in Hurgamin Vs. Raseley (1807) Ves. 285;Mulla on the Indian Contract Act 10th Ed. P. 53. Examples (a) 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. (b) B says to A “If you do not deny it, I shall assume that the horse is sound”. Here, A’s silence is equivalent to speech. Here, the relation between the parties would make it A’s duty to tell B if the horse is unsound. (c) 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. (d) A and B, being traders, enter upon a contract. A has private information of a chnage in prices which would after B’s willingness to proceed with the contract. A is not bound to inform B. Characteristics From the above definition we can state the following characteristics of Fraud: (1) The act done by the party is done with an intention to device. (2) The act may be done by the party himself or with his connivance by some one else or by his agent. (3) The act amounting to fraud may be a suggestion of fact (suggestion false) i.e., the statement being made is without belief to its truth. (4) The act may amount to an active concealment of a fact (suppressio veri) i.e. the party has concealed a fact which was duty bound to disclose. (5) The act amounting to fraud is in the form of a false promise. (6) The act or mission is declared fraudulent by the Court or regarded by the Court as a deceit. (7) The act committed must have deceived the other party and the party has suffered the damage on account of it. If the party does not suffer a damage on account of the fraudulent act committed by the other party, it shall not amount to fraud. Is silence a Fraud? Explanation to S.17, states in clear terms that mere silence is not fraud. Where silence amounts to active concealment, it shall amount to fraud. Thus generally silence does not amount to fraud. However where a party chooses to speak, he must do so clearly and fully. He should not make a partial and fragmentary statements of fact, so that the other party is misled. The court has decided in Bimla Bai vs Shankarlal (AIR 1959 M.P. 8) that a partial statement verbally accurate may be as false a statement as if it has been misstated fully. A father called his illegitimate son, a ‘son’ at the time of fixing his marriage. It was held that the statement was false and thereby fraudulent. Effects of Fraud Fraud gives the following rights to the aggrieved party. (1) He can avoid the contract and file a suit on the other party for damages; or (2) He can revoke the contract, or (3) He can refuse to fulfill his part of the promise and defend the suit filed by the other party for the breach of contract for damages or specific performance, or (4) He can treat the contract as a valid one and ask for the specific performance, or for damages in addition to the substitution of the original contract. Misrepresentation (S.18) Misrepresentation has been defined by the Act as follows: “Misrepresentation” means and includes:- (a) 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; (b) 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. (c) 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. Characteristics The ingredients of a contract vitiated by misrepresentation are: (a) There must be a misstatement of a material fact. (b) The statement must not be a mere opinion, or hearsay, or commendation, because praise carries no obligation. (c) The mis-statement must be made with the intention that the other party shall act upon he contract. (d) The other party must have been induced by the mis-statement. (e) The statment being made is a wrong one, although the party making it has not known it to be false. (f) The statement has been made by the party to the contract or his agent and not by a stranger. Kinds The term misrepresentation as defined by S.18 is quite exhaustive as can be seen by the words “Means and Includes”. Misrepresentations may be of any of the three kinds:- (1) It may take the form of an unwarranted positives statement which is not true, but the party believes it to be true; or (2) It may take form of breach of duty on the part of one party which misleads the other party to his prejudice or to the prejudice of anyone claiming title under him. This kind of misrepresentation includes such cases which are named as ‘Constructive Fraud’ by the Courts of equity. The party getting a benefit under the Act even under an obligation is not making full disclosure of facts but his non-disclosure misleads the other party. (3) It may take the form of causing a party to the contract to make a mistake as to the subject matter of the contract. For example, if erroneous statement is made as to the tonnage of a ship, the contract can be avoided on the basis of misrepresentation. This decision was given in Oceanic Steam Navigation Co., vs Soonderdas (1890, 14 Bomb.92). Effect of Misrepresentation The party being affected by misrepresentation has got the following rights: (1) He can avoid or revoke the contract; or (2) He can affirm the contract and insist on the misrepresentation to be made good, if it is possible to do so; or (3) He can rely upon the misrepresentation as a defence to an action of the contract. When the aggrieved party loses his rights? The aggrieved party shall not be able to exercise any of the above rights in the following cases:- (a) If he comes to know of mis-representation and even then takes the benefit of the contract or approves the contract; or (b) If the parties can not be brought back to their original position. Such situation arises where the subject matter of the contract has already been consumed or destroyed. (c) If the contract cannot be rescinded in full, then it can not be rescinded at all. Such decision has already been given in Sheffield Nickel Co. vs Dawin (1872, 2 Q.B.D. 215). (d) If the aggrieved party has transferred the rights under the contract ot the third party and the has acquired these rights in good faith and for consideration. (Phillips Vs Brroks, 1919, K.B. 243) Distinction between Fraud and Misrepresentation Fraud and Misrepresentation can be distinguished on the following basis: (a) Intention: In Fraud the party’s intention is to deceive the other party and got the benefit from him, while in Misrepresentation the party does not have any intention to deceive. It makes a careless misstatement of facts of only. (b) Rights: Faurd gives two rights to the aggrieved party, a right to action for damages and also to avoid the contract, i.e. while misrepresentation give only one right, i.e. to avoid the contract. It does not allow any damages. (c) Plea: Fraud does not allow the defendant to take the place that the plaintiff had means to discover the truth but defendant is allowed to take this plea in case of misrepresentation. (d) Penalty: The party defrauding the other can be prosecuted for cheating under I.P.C. also but such is not the case in misrepresentation. BLOCK-2: GENERAL LAW OF CONTRACTS 2  UNIT-5 :CONSIDERATION AND LEGALITY OF OBJECT CONSIDERATION Consideration is an essential element of a valid contract. A promise without consideration cannot be enforced by law except under certain circumstances. Consideration is the necessary evidence by law of the intention of the parties to effect their legal relations. Consideration, broadly speaking, is the price paid by the promisee for the obligation of the promisor. The term ‘consideration’ is used in the sense of “something in return”, i.e. quid pro quo. An agreement without consideration is a bare promise and exnudo pacto non aritio actio, i.e., cannot be held to binding on the parties. Definition of Consideration Sir Frederick Pollock has defined consideration, “It is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.” In the case, Curie v. Misa the term was defined, “A valuable consideration in the sense of the law may consist either in some right, interest, forbearance, detriment, loss or responsibility, given, suffered or undertaken by the other.” Section 2(d) of the Indian Contact Act defines consideration thus: “when at the desire of the promisor, promisee 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.” Example: A offers to sell his house to B for a sum of Rs.50,000. B accepts the offer. In this contract, for A’s promise, the consideration is a sum of Rs.50,000 while for B’s promise consideration is the house. Essential Elements of Consideration 1. Consideration must proceed at the desire of the Promisor. The act constituting the consideration must have been at the desire or request of the promisor. An act done at the desire of a third party is not a consideration. Voluntary acts also would not constitute good consideration in the eyes of law. If A rushes to B’s help whose house is on fire, there is no consideration here. It is a valuntary act of A. But if A goes to B’s help at B’s request who promises, to give a reward for the help then there is consideration. It is not necessary that the promisor himself should be benefited by consideration. It is sufficient if the act or forbearance constituting consideration was done or given at the promisor’s requrest. The promise to pay subscription to a charitable trust of relgious organisation would have been without consideration if no liability had been incurred and nothing substantial had been done by the trust or the organisation on the faith of the subscriber’s promise. Example: (a) Mohamedan promised to subscribe Rs. 500/- to a fund to rebuild a mosque and no steps were taken to rebuild the mosque, it was held that the promise was without consideration and that the subscriber was not liable (Abdul Aziz V. Masum Ali) (1914). (b) In another case of similar nature, where the Secretary had acted on the faith of the promise and incurred a liability, the court enforced the claim for the recovery of the amount to the extent of the liability incurred by the promise. (Kedar Nath V. Gauri Mohamed) (1886). Thus, mere willingness to utilise a donation for the purpose of a trust which was proposed to be set up for promoting technical or business knowledge including knowledge of insurance cannot be regarded as consideration within the definition of Sec. 2(d). (Dr. Lakshmanswami Mudaliar V. LIC 1963). 2. Consideration may move from the promisee or any other person: In English Law consideration must move from the promisee. Under the Indian Contract Act, consideration may proceed from the promisee or any person. Thus, consideration furnished by a third party will also be valid if it has been done at the desire of the promisor. But it does not follow that the third party can sue on the agreement. Leading case Chinaya V. Ramayya (1881) : In this case, A, by a deed of gift, made over certain property to her daughter, with a direction that the daughter should pay an annuity to A’s brother, as had been done by A. On the same day the daughter executed a writing in favour of the brother agreeting to pay the annuity. The daughter declined to fulfil her promise and the brother sued to recover the amount. The defendent (sister) contended that no consideration from the brother, and that he being the stranger to the consideration had no right to sue. Held, it is not necessary that consideration must move from the promised himself. A contract can be supported can be supported even by a consideration from a person other than the promised. Therefore, the brother was entitled to maintain the suit. 3. Privity of Contract: The general rule is that only the person entitled to the benefits or bound by the obligations of a contract are entitled to sue or be used upon it. Thus, a stranger to contract, cannot file a suit to enforce any of the rights arising out of the contract. Therefore, if A for good consideration agrees with B that he will not sue for C’s negligense, the latter will not be able to set up the promisee of A to be as defence. Example: (a) Tweddle V. Atkinson (1861): In this case, the father of a boy and the father of the girl who was to be married to the boy, agreed that each of them shall pay a sum of money to the boy, and after marriage the husband should have full power to sue for such sums. After the death of both the contracting parties the husband sued the executors of the wife’s father upon the above agreement, but the action was held not to be maintainable because the husband was not a party to the contract. (b) Dunlop Tyre Co. V. Selfridge Ltd. (1915): In this case, D supplied tyres to a wholeseller X, on the condition that any retailer to whom X resupplied the tyre should promise X, not to sell to the public below D’s list price. X supplied the tyres to S, a sub-dealer, S sold two tyres at less than the list price, and thereupon, the Dunlop Co., sued him for breach of the contract. Held, Dunlop Co., could not claim the benefit of the contract as against S, a sub-dealer, There was no privity of contract between the two. Exceptions to the doctrine of privity of contract (a) Beneficiaries in the case of trust: A beneficiary under an agreement to create a trust can sue upon the agreement, though he was not a party to the contract between the settler and the trustees. Example: A creates a trust for the benefit of B, and appoints X, Y and Z as trustees. B can sue for benefits available to him under the trust though he is not a party to the contract. (b) In case of provision in marriage settlement of minors: A child in a contract of marriage is treated as a party who has given consideration, and he is entitled to enforce any contract to settle property, which a marriage settlement may contain. In Khwaja Muhammad V. Hussaini Begum (1910), it was held that where a lady sued her father. in-law to recover the arrears of allowance payable to her by him under an agreement between his and he father in consideration of her marriage, she could enforce the promise in her favour though she was a stranger to the contract. The Privy Council observed that it might occasion serious injustice to apply the common law doctrine of privity of contract in a country like India where marriages are contracted for minors by parents or guardians. (c) In case provision is made for the marriage or maintenance of a female member of the family on the partition of Hindu Undivided family: The female members though not parties to the contract, possess an actual beneficial right which places them in the position of beneficiaries under the contract, and can, therefore, enforce the promise. (d) Assignee of a contract: An assignee under an assignment made by the parties, or by the operation of law, e.g., in case of death or insolvency, can sue upon the contract for the enforcement of his rights and interests. A debt can be assigned by a creditor to a third person without the consent of the debtor. But a mere nominee cannot sue e.g. the person for whose benefit another has insured his own life cannot sue. (e) Where a charge is created on certain specific immovable property in favour of certain person: Such charge is enforceable at the instance of the beneficiary entitled, though he may be a stranger to the document creating the charge. (f) Estoppel: Where one party has by his words or conduct made to the other a promise or assurance which was intended to affect the legal relations between them, then once the other party has taken him on his words and acted upon them, the party who gave the promise shall be estopped from denying his liability arising from the promise. (g) Contracts which are entered into through an agent, can be enforced by the principal. 4. Consideration may be a promise to do something or abstain from doing something: Example: A is indebted to B to the extent of Rs. 1000. The debt falls due and A fails to pay. C promises to stand surety to the debt if B does not file a suit against A, to which B agrees. B’s promise regarding forbearance to sue A is a good consideration for C’s standing as a surety. Mutual agreements to avoid further litigations are held to be supported by valid consideration. Consideration, therefore may be an act or an abstinence. 5. Consideration may be past, present or future Past consideration: Where the promisor had received the consideration before the date of the promise, the consideration is termed as “Past consderation.” Example: A teaches the child of B at B’s request. After six months B agrees to pay A a sum of Rs.600/- for his teaching. For B’s promise the services of A will be taken as past consideration. Present consideration: When the promisor receives consideration simultaneously with his promise, the consideration is termed as Present Consideration. Example: A purchased goods from a shopkeeper of the worth of Rs.100/- A pays money to the shopkeeper. Consideration will be taken as “Prosent”. Future consideration: Where the promisor has receive consideration in future for his promise, the consideration is said to be “future”. Example: A promises to sell his house to B for a sum of Rs. 15,000/- after a week. B also promises to pay A Rs. 15,000/- after a week on Tuesday. Consideration is future for both the parties. 6. There must be independent consideraton to support each independent promise There must be as many consideration as the number of contracts. A single consideration cannot support two agreements between the same parties. 7. Consideration must have some value in the eyes of Law though it need not be adequate Inadequacy of consderation will not invalidate a contract. It is open to the parties to fix their own price. For example if A vountarily agreed to sell his car for Rs. 500/- to B, it will be a valid contract despite the inadequacy of the consideration. It is to be noted here that though inadequacy of consideration will not invalidate a contract but may be taken into account by the court in determining the question whether the consent of the promisor was freely given. 8. Consideration must be real and not illusory, impossible uncertain, ambigious, fraudulent, immoral or opposed to public policy. Consideration is always given in exchange of some benefit accruing or to make good injury caused to the other party. Consideration should not be fraudulent, forbidden by law or immoral or opposed to public policy. It should not cause injry to any person or property if allowed to be exchanged. Further, consideration must be something more than the mere promise to do an act for which the promise is already bount to do for the promisor. Thus, an agreement to perform an existing obligation made with the person to whom the obligation is already owed is not made for consideration. For example, if promise to pay an existing debt punctually if the credtior gives a discount is without consideration and the discount cannot be enforced or an agreement by a client to pay his lawyer after the latter has been engaged, a certain sum of money over and above the fee, in the event of success of the case would be void, being without consideration, (Ram Chandra Chintaman V. Kalu Raju) (1879). But a person promises to do more than what he is legally bound to do, such a promise, if not opposed to public policy, shall be good and a valid consideration. Thus, where police was requested to arrange for stationery guard for the safety of some property on payment of reasonable remuneration in a case where police had though surveillance by a mobile force to be sufficient, the promise to pay the remuneration shall not be without consideration because the acceptance by the police to provide more protection than what was deemed to be necessary is a good consideration for the promise to pay remuneration. When no consideration is necessary The general rule is that contracts made wihtout consideration are void. But Section 25 of the Contract Act lays down the undermentioned exceptions which make a promise without consideration valid and binding. 1. Promise made on account of natural love and affection (i) When a contract is made on account of naturla love and affection between the parties. (ii) The parties are standing in a near relation to each other, and (iii) The contract is in writing and registered under the law for the time being in force for the registration of documents. (a) Examples: A, out of his love and affection, promises to give his wife, Rs.10,000. This promise is put into writing and is registered. It will be a valid contract without consideration. (b) After persistent quarrels and disagreement between husband and his wife, the husband promised in writing to pay his wife, a sum of money for her maintenance and separate residence. The agreement was also registered. It was held that the promise was not enforceable because it was not entered out of natural love and affection. (Rajlusmi Dabee v. Bhootnath) (1900). 2. Promise to compensate for voluntary services: When a contract is made to compensate a person who has already done something voluntarily for the promisor, or done something which the promisor was legally compellable to do. Here two conditions must be fulfilled. First, the act must have been done voluntarily and for the benefit of the promisor, secondly, the intention of promisor must have been to compensate the promisee. This contract may be oral or written. Thus, services voluntarily rendered but not with gratuitous intention can form valid consideration for a promise given to compensate him. 3. Promise to pay a time barred debt: According to section 25(30, a promise by a debtor to pay a time barred debt is enforceable it is made in writing and is signed by the debtor or by his agent generally or specially authorised in that behalf. The promise may be to pay the whole or any part of the debt. The debt must be such, of which the creditor might have enforced payment but for the limitation of suits. For example, A owes B Rs. 2,000 but the debt is barred by the Law of Limitation. A sign written promise to pay B Rs. 1,000 on account of the debt. This is a contract. 4. Agency:- Consideration is not necessary to create an agency. 5. Complete gift:- The rule ‘no consideration, no contract’ does not apply to completed gifts. According to explanation to section 25, nothing shall affect the validity, as between the donor and donee of any gift actually made. Stranger to Contract: According to general rule of law only parties to a contract my sue and may be sued on the contract. This rule is based on the doctrine of the privity of contract. This means relationship subsisting between the parties to a contract. It means mutually of will and creates a legal bond or tie between the parties to a contract. The consequences of the doctrine of privity of contract are: (1) Any person who is not a party to a contract cannot sue upon it even though the contract is for his benefit and he supplied consideration. (2) A contract cannot give rights or impose obligations arising under the contract on any person other than the parties to it. But there are certain exceptions to the rule that a stranger can sue, i.e. a stranger can sue in certain cases. This is possible in cases of trust or charge. Similarly, a stranger may sue in case of marriage settlement, partition or other family arrangements. A stranger can also be sued in case of acknowledgement or estoppel. Where the promisor by his conduct, acknowledge or otherwise constitutes himself as an agent of the Third party, a binding obligation is thereby incurred towards him. Similarly, in case of assignment of a contract, the assignee of rights and benefits under a contract not involving personal skill can enforce the contract subject to the equities between the original parties. LAWFUL CONSIDERATION OR OBJECTS An agreement, the consideration or the object of which is not lawful, cannot be enforced by law. This is because courts will not allow polluted hands to touch the pure fountains of justice. According to Sec. 23, “The consideration or object of an agreement is lawful unless:- (a) it is forbidden by law; or (b) is of such a nature that, if permitted, it would defeat the provisions of any law; or (c) is fraudulent; or (d) involes or implies injury to the person or property of another; of (e) the court regards it as immoiral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.” The objects and the consideration of an agreement shall be unlawful in the following cases. 1. If it is forbidden by law: An act is said to be forbidden by law if it has expressly been declared to be unlawful by any of the laws of the country for the time being in force. And, for this purpose, both the parties are presumed to know the law. If a contract can be performed in one of the two ways, i.e., legally or illegally, it is not an illegal contract, though it is unenforceable at the suit of a party who chooses to perform it illegally. Examples: (a) A, B and C enter into an agreement for the division among them of gains acquired, or to be acquired, bythem by fraud. The agreement is void, as its object is unlawful. (b) A promises to obtain for B an employment in the public service, and B promises to pay 1,000 rupess to A. The agreement is void, as the consideration for it is unlawful. 2. If it is of such a nature that, if permitted, it would defeat the provisions of law: The term “Law” includes any enactment or rule of law for the time being in force in India. This may be considered under three heads: (i) An agreement which defeats the provisions of any legislative enactment Example: An agreement by which an insolvent who had obtained his personal, but not his final discharge, settled the claim of one creditor without notice to the official assignee or his other creditors and by which that creditor agreed not to oppose his final discharge, was void as inconsistent with the policy of the statute. (ii) If defeats the rules of Hindu and Mohomedan Law The rules must of course be such as are recognised and enforceable by courts of law; they do no include rules of exclusively religious character. An agreement that would defeat the provisions of Hindu Law would be unlawful within the meaning of the present clause. Example: (a) A contract to give a son in adoption in consideration of an annual allowance to the natural parents. A suit will not lie to recover any allowance on such a contract, though the adoption has been performed. (b) An agreement entered into before marriage between Mohamedan wife and husband by which it is provided that the wife shall be at liberty to live with her parents after marriage is void. (iii) Other rules of law in force in India Example: An engagement of a Chartered Accountant to be paid on the basis of a percentage of the relief obtained in an income-tax case of an assesee is opposed to the provision of the Chartered Accountants Act. 3. If it is fraudulent: When the object of an agreement is to cheat the other party by concealment of any material fact or otherwise, it is said to be fraudulent. An agreement to defraud revenue is illegal, including the revenues of a foreign country. Example: When the object of an agreement between A and B was to obtain a contract from the Commissairate Department for the benefit of both, which could not be obtained for both of them without practising fraud on the Department. Held, that the agreement was fraudulent and, therefore, void. 4. If it involes or implies injury to the person or property of another: The consideration or object of an agreement is unlawful when it involves or implies injury to the person or property of another. Example: An agreement which compels a debtor to do manual labour for the creditor as long as the debt is not repaid in full is void. (5) (a) If the court regards it as immoral: The definition of the word immoral has been kept limited only to those acts which the court regards as immoral. This shows that what is ‘immoral’ depends upon the standards of morality prevailing at a particular time and as approved by courts. In most cases the meaning is restricted to sexaul immorality. A landlord cannot recover the rent of his house knowingly let to a prostitute who carries on her vocation there. Similarly, money lent to a prostitute expressly to enable her to carry on her trade cannot be recovered. Likewise money advanced by the palintiff to the defendant to enable the defendant to continue cohabitation with a dancing girl cannot be recovered. Ornaments lent by a brothel keeper to a prostitute for attracting men and encouraging prostitution cannot be recovered back. A promise to pay for the past co-habitation has been held to be legal (Dhiraj Kumar V. Bikramjit Singh). But where co-habitation - even not adulterous is also not enforceable. An agreement to pay maintenance for an illegitimate child is not illegal. A loan made for the purpose of teaching to dancing girls has nothing immoral in its object. Example: A agrees to let her daughter to B for concubinage. The agreement is void, because it is immoral, though the letting may not be punishable under the Indian Penal Code. (b) Agreement which are considered by the courts to be opposed to public policy: The principle of public policy is this: ex dolo malo non oritur actio- No court will lend its aid to a man who found his cause of action upon an immoral or an illegal act. No exhaustive list can be prepared of all the agreements opposed to public policy. Anything which goes against the interest of general public will be deemed to be opposed to public policy. The doctrine of public policy was summarised by the Supreme Court in Gherual Parek V. Mahadeodas (1959). “Public policy or the policy of the laws is an illusive concept; it has been desrcibed as “untrustworthy guide”, “variable quality”, “uncertain one”, “unruly horse”, etc: the primary duty of a court of law is to enforce a promise which the parties have made and to uphold the sancity of contracts which from the basis of society, but in certain cases, the court may relieve them of their duty on a rule founded on what is called the public policy.” The law relating to public policy is not a fixed and immutable matter, rather it is alterable by the passage of time. The general head of public policy covers wide range of topics. Some of these are: (i) Trading with the enemy: Those contracts which tend either, to benefit an enemy country or to disturb the good relations of a country with a friendly country, are against public policy. Contracts made before the outbreak of hostilities may be performed after the cessation of hostilities unless already cancelled by the parties or the Government. (ii) Siffling Prosecution : Agreements for shifting prosecution are a well-known class of those countracts which the courts refuse to enforce on this ground. The principle is “that you shall not make a trade of a felony”. If a person has committed an offence he should be punished and, therefore, “no court of law can countenance or give effect to an agreement which attempts to take the administration of law out of the hands of the judges and put it in the hands of private individuals.” (Sudhindra Kumar V. Ganesh Chandra (1939). Thus, a criminal offence cannot be arbitration. but an agreement to refer a civil dispute to arbitration is perfectly valid. Example: A promises B to drop a court case which he has instituted against B for robbery and promises to restore the value of the things taken. The agreement is void, as its objects is to stifle prosecution. (iii) Agreements for improper promotion of litigation : In this connection there are two types of agreements (i) Maintenance and (ii) champerty. Maintenance: When a stranger agrees to render assistance by money or otherwise to another person in a suit in which that third person has himself no legal interest, for its prosecuton or defence, it is called maintenance. Champert: Champerty is a species of maintence. It is a bargain whereby one person promises to assist another in recovering property in consideration of the latter giving the former a share in the property so recovered. According to English Law, all Maintenance and Chamerty agreements are illegal and unenforceable. But in India, they are perfectly valid if they are made with the bonafied object of assisting a claim believed to be just and the amount of compensation is reasonable. In Bhagwat Dayal Sing V. Debi Dayal Sahu, it was held that “An agreement champertuous according to English Law is not necessarily void in India, it must be against public polciy to render it void here.” Thus, a fair agreement to supply funds to carry on a suit in consideration of having a share of the property it recovered ought not to be regarded as being per se opposed to public policy. But agreements of this kind ought to be carefully watched and when found to be extortionate and unconscionable so as to be inequitable against the party, or to be made, not with the bonafide object of assisting claim, but for improper objects, as for the purpose of gambling in litigation so as to be contrary to public policy. The quantum of the share which the financier would get under the agreement is an important matter to be taken into consideration in judging the fairness or otherwise of the agreement. Examples: (a) A claim was of a simple nature and in fact no suit was necessary to settle it, an agreement to pay Rs. 30,000 to the plaintiff for assisting in recovering the claim was held to be extortionate and inequitable (Harilal Nath V. Bhailal Pranlal, 1940). (b) R agreed to file an appeal in the name of A with the terms that in case of success A would pay half the costs to R and half the purchase price. Held that an agreement to share the property half and half the purchase price. Held that an agreement to share the property half and half is hampertous and opposed to public policy and, therefore, void. (iv) Agreements to interfere with course of justice: An agreement for the purpose or to the effect of using improper influence of any kind with judges or offices of justice is void. Thus, an agreement whereby one person agreed to assist another in carrying out litigation for the purpose of delaying execution of a decree as held to be unenforceable. (v) Agreements to vary the period of limitation: Agreements the object of which is to curtail or extend the period of limitation prescribed by the Law of Limitation, are void. Agreements cannot be allowed to defeat the provisions of Law unless otherwise so provided in the law itself. (vi) Marriage brokage contracts: An agreement to procure marriage for reward is void. Of course validity of marriage will not be affected but money actually paid cannot be recovered or, if not paid, suit for the recovery of the promised award cannot be maintained. Example: (a) A promises to a purohit to pay Rs. 20 in consideration for procuring a second wife for A. The promise is illegal. (b) An agreement to pay money to parents or the guardians in consideration of his giving his daughter in marriage is void. (vii) Sale of public offices: Traffic by way of sale of public offices and appointment obviously tends to the prejudice of public service. Such agreements are void. An agreement to pay money to public servant to induce him to retire, and thus, make way for the appointment of the promisor is virtually a trafficking with reference to an office, and is void. Similarly a promise to make an annual payment to a person on condition that he withdraws his candidature for a public office in favour of the promisor is unenforceable. Where money is paid uder such an agreement, it cannot be recovered back from defendant, though he has failed to procure employment for the palintiff in public service. (viii) Contracts in restraint of marriage and marriage agreements against public policy: A contract in general restraint of marriage is unentroceable on the ground of public policy. Such agreements may relate to not to marry at all or not to marry any particular person or class of persons. An agreement to marry is illegal as against public policy if one of the parties at that time is married. But the contract is enforceable if at the time the contract was made one of the parties was unaware of the fact. Money paid by a person to obtain a divorce by another is money paid for an illegal or immoral purpose. (iv) Agreements in restraint of parental rights: father is the natural guardian of his minor child and in the absence of father, mother has this authority. This right of guardianship is in the nature of sacred trust and, therefore, cannot be bartered away by any agreement. He may, in his discretion, as gurdian entrust the custody and education of his children to another. But this agreement is essentially a revocable one, in the welfare and interest of the child, therefore, an agreement, in which a father agreed to transfer guardianship of his two minor childern in favour of a lady, was held to be void, though the father agreed not to revoke the authority of the lady. Giddu Narayanish V. Mrs. Annie Besant (1907). (v) Agreements tending to create interest against duty : An agreement with public servant which might cast upon the public servant obligations inconsistent with his public duty is void. An agent must not deal in the subject matter of the contract of agency on his own account, as it is against his duty. A person should not place himself in such position where his duty will come in clash with his interest. (vi) Agreements to create Monoplies: Agreements having for their object the creation monopolies are void as opposed to public policy. (vii) Agreements, the consideration of which is unlawful in part (i) If the legal part of the agreement cannot be separated from the illegal part then. (a) If there are several objects but several consideration, the agreement is void if any one of the consideration is unlawful. (Sec. 24) (ii) Where there is reciprocal promise to do things legal and also other things illegal the legal part which can be separated from the illegal part can constitute a valid contract and the illegal part shall be void (Sec. 57). A agrees that he will sell to B a house for Rs. 10,000, but if B uses the house for gambling purposes, he shall pay Rs. 50,000, to A. The first part of hte agreement shall be valid and binding. But the second part shall be void and unenforceable. (ii) In the case of an alternative promise, one branch of which is legal and the other illegal, the legal branch alone can be enforced. Example: A and B agree that A shall pay B Rs. 10,000 for which B shall afterwards deliver to A, either car or smuggled opium. There is a valid contract to deliver car and void contract as to opium. Agreements to defraud creditors or revenue authorities. If the object of an agreement is to defraud the creditors or the revenue authorities, that agreement is not enforceable, because it is opposed to public policy. If a transfer of property is made and the transfer is declared insolvent on a petition presented within two years of the date of the transfer, this transfer is void against the official receiver or asignee, provided transfer is not made (i) before and in consideration of marriage, or (ii) to a buyer in good faith and for valuable consideration. UNIT 6: VOID AGREEMENTS: Void agreements are those agreements which are not enforced by law courts. Section 2(g) of the Indian Contract Act defines a void agreement as, “an agreement not enforceable by law”. Thus the parties to the contract do not get any legal redress in the case of void agreements. Void agreements arise due to the non-fulfillment of one or more conditions laid down by Section 10 of the Indian contract Act. Ths Section states as follows: All agreements are contracts if they are made with 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. Nothing herein contained shall affect any law in force in India, and not hereby expressly replealed, by which any contract is required to be made in writing or in the presence of witness, or any law relating to the registration of documents. From the above, it is quite clear that non-fulfillment of any of these conditions by one of the parties to a contract shall make an agreement void. These conditions being:- 1. Free consent of the parties; 2. Competency of the parties to contract; 3. Existence of a lawful consideration; 4. Existence of a lawful object; 5. Agreement being not included in the list of those specially declared to be void by the Indian Contract Act by its Section 26, 27, 28, 29, 30, and 56; 6. Completion of certain formalities required by any other law of the country like transfer of Property, Act, Company Act, etc. Difference between a Void Agreement and a Void Contract Most of the students do not make any distinction between the two terms. They treat them in one and the same sense. But this is wrong. Agreement shall be called a contract only when it fulfills all the conditions laid down by Section 10 of the Act. The students can make a distinction between an agreement and a contract on the following basis:- 1. Definition: void agreement is defined by Section 2(g) viz., an agreement not enforceable by law is void agreement. Void contract is defined by Section 2(j) viz., a contract which ceases to be enforceable by law is a void contract since the time it ceases to be enforceable. Thus it is very clear from the two definitions that a void agreement is void from the very beginning and does not create any legal effect, while a void contract is not void from the beginning, it becomes void at a subsequent stage due to the occurrence of an event or change in the original conditions. We may illustrate this with the help of an example. A, an Indian, enters into a contract with B, a Pakistani national, to supply woolen a carpets after three months. After some time war breaks out between India and Pakistan. The contract in between A & B shall become void at the outbreak of war. 2. Rights: A void agreement does not create any legal right or obligation upon the parties to the agreement. On the other hand, a void contract does create a right and an obligation upon the parties. A party to the void contract is within his rights to get back the benefit which he had given to the other party in terms of money, goods or services and the other party enjoying such benefit under a void contract is placed under an obligation to return that benefit to him. This is true in many cases but not in all cases e.g., a voidable contract being rescinded shall make, it obligatory on the aggrieved party to return the benefit which he has already derived from the contract. But if a contract becomes void due to supervening impossibility the benefit enjoyed by the promisor shall not be returned to the promisee by him. 3. Treatment: void agreements have been specifically stated in Chapter II of the act under Sections 11, 20, 23, to 30, and 56. But no such specific mention is made for void contract in any Chapter of the Act. Difference between Illegal and opposed to Public Policy Agreements All these three terms are the outcome of Section 23 of the Indian Contract Act which deals with lawful consideration and lawful object. The five cases stated in this section are:- (a) it is forbidden by law; or (b) is of such nature that, if permitted, it would defeat the provisions of laws; or (c) is fraudulent; or (d) involves or implies injury to the; person or property of another; or (e) the court regards it as immoral or opposed to public policy. The first four acts listed above i.e., from (a) to (d) form part of illegal acts, while the fifth act refers to immoral acts as well as those opposed to public policy. Let us know these acts before we distinguish them. Illegal acts are not supported by Law. “Es turpi causa non oritur actio”, which means that no right of action can spring out of an illegal contract, is an old and well-known legal maxim. It is founded on good sense and expresses a clear and well recognized legal principle. Illegal acts may take any of the following forms:- (a) Act which is prohibited by law. A is granted a licence to ply a bus on a particular route. The licence is to be used by him only and not to be tranferred in somebody else’s name. He forms a partnership with B and transfers the licence in the firm’s name. The transfer is illegal since it is prohibited or forbidden by law. (b) Any act which defeats the provisions of any law. A agrees to lend B Rs. 1000 for six months provided B does not raise the plea of limitation under the Indian Limitations Act. The agreement is illegal since it defeats the provisions of Limitations Act. (c) Any act which is Fraudulent. A, B and C enter into an agreement for the division among them of gains acquired, to be acquired, by them by fraud. The agreement is illegal since its object is fraudulent. (d) Any act which involves an injury to the person or property of another. A enters into an agreement with B, an editor of newspaper, to pay Rs. 500 if he (B) publishes a libellous matter in his paper against C. Here B cannot recover the money from A since the object of the agreement is to injure the person of C and thereby it is illegal. Immoral: The word immoral is very comprehensive and concerns every aspect of personal life and conduct deviating from the standards and norms of the human life. Normally, acts contrary to sound and positive morality as recognised by law are immoral acts ‘Ex dolo malo non oritur actio’ is a maxim founded on general principles of policy and the courts are not prepared to help the persons whose action is based upon immoral act. Supreme Court of India in its decision confirmed in the case Cherulal Parekh V. Mahadee Das A.I.R. 1959 has stated that judicial decisions have confirmed the operation of the doctrine to the cases of sexual morality. On the above basis immoral acts can be divided into the following two categories:- 1. Where the consideration of the agreement forms an act of sexual immorality. This category includes case of illicit cohabitation or prostitution. 2. Where the object of the agreement promotes sexual immorality. Lending money to a prostitute to help her in the furthernace of her vocation forms part of such category. Cases of immoral acts can be the following examples based on cases decided by the varioius courts, Indian as well as English. (a) A made gift to a husband and a wife for the consideration that the wife shall maintain immoral relations with him (donor). Held the agreement is unlawful as it is immoral. Kandaswami V. Narayanswami, 1923, 45 Mad.L.J 551. However, there has been a controversy about the past cohabitation. Allahabad and Madras. High Courts have treated an agreement to give woman sum of money in consideration of past cohabitation asgood consideration as being a reward for past services under S. 25(2), but Bombay High Court and Mysore High Court have taken the view that gift made for past-co- habitation is void. (b) A makes an agreement with B for hire of his house to be used by B for promoting prostitution. The agreement is void since the object is to promote immorality. All Baksh v. Chunia 1877 Punjab. Hiring, sale of a house or property or giving ornaments for adopting vocation of prostitution or running a brothels declared immoral by the various Indian as well as English Courts. However, if money is borrowed by a dancing girl to teach singing or dancing to her own daughters, the agreement is not void because singing is not acquired with a view to practise prostitution. Khubchand v Beram (1889, 13 Bombay 150). (c) A firm of coach-builder shired out a carriage to a prostitute, knowing that it was to be used by the prostitute to attract men. Held, the coach-builders coult not recover the hire as the agreement was based on immorality. (Peace v Brooks 1866. L.R. 1 Ex. 213). Opposed to Public Policy: agreement harmful to the public welfare said to be opposed to public policy. Lord Truro in Egerton v Brownlow (1953; 4 H...Cas. 1) has stated that Public Policy is that principal of law which holds that no subject can lawfully do that which has a tendency to be injurious to the public or against the public good-which may be termed the policy of the law, or public policy in relation to the law. No precise definition can be given of term. Certain classes of acts are said to be against public policy or against the policy of the law when the law refuses to recognize it on the plea that they have a mischievous tendency and shall be injurious to the interests of the state or the Public. Agreements may not be in the interest of the Country and the are therefore not to be enforced. During the war, trading with enemies is one such example, pollutioin in the society or adversely affect the character of the youth. All such cases are to be dealth with under the head ‘Opposed to Public Policy’. There is no limit to such acts which can be included under jurisdiction of this head, and therefore, Lord Halsbury in Nanson v Driefontein consolidated Mines (1902, A.C. 484, 491) very rightly stated “no court can invest a new head of public policy”. Lord Davey in 1902 said in the House of Lord’s that ‘Public Policy is always an unsafe and treacherous ground for legal decision’. All those statements were made on account of reason that there is every scope of providing a judge with an excuse for invalidating any contract which is violently disliked. Burrough J. was excited to say that (public policy was a very unruly horse, and when you once get astride it you never know where it will carry you.” (Richardson v Mallish, 1824, Bing 229, 252). However, the jurisdiction of the head ‘agreements opposed to public policy’ has been restricted by the Supreme Court’s decision in Gherulal Prakh v Mahadeodas Mariya & Ors., (1959, S.C.A.,342) by the words, “it is advisable in the interest of stability of the society not to make any attempt to discover new heads in these days”. It does not mean that the doors have been closed, but caution is given and the courts are permitted to evolve a new head but only under extraordinary circumstances which give rise to incontestable harm to the society. The Indian Contract Act has tried to restrict the scope of agreements opposed to Public policy. The following heads usually cover the agreements/opposed to public policy: 1. Agreements for trading with enemy countries; 2. Agreements for stifling prosecutions. 3. Agreements included under “Champerty and Maintenance” under the English Law. Such agreements relate to the promotion of litigation. However, these are not declared void in India. 4. Agreement creating interference with course of justice, e.g., agreements to use any kind of pressure of influence on judges or officers of justice shall be void. 5. Marriage brockerage contracts e.g., agreement to pay brockerage for getting a spouse shall be void. 6. Agreements tending to create interest against duty e.g., agreement by agents to deal in their own name instead in the name of their principals, without principal’s knowledge. 7. Agreements for sale of public offices e.g. agreement to pay some money in return of getting a job in an office, shall be declared void. 8. Agreements to create monopolies. 9. Agreements not to bid in an action sale. 10. Agreements in restraint of trades. The above discussion, on agreements opposed to public policy, clearly states the grounds and explains that all such agreements which are contrary to the welfare of the state by interfering with the civil or judicial administration or with the individual freedom of the citizens shall be unlawful as opposed to public policy. Agreements under Mistake of Law Indian Contract Act has nowhere defined mistake. However, it can be defined as an erroneous belief about something. Mistake is of two broad types. (1) Mistake as to fact, and (2) Mistake as to Law. Sec. 21 of the Act deals with the effect of Mistake as to Law, but is silent over other issues relating to such types of mistake. A contract is not voidable because it was caused by a mistake as to any law in force in India but a mistake as to law not in force in India has the same effect as a mistake of fact. Illustration 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 is not voidable. A a widow, is entitled to certain occupancy rights. A remarries and believing that she has lost her occupancy rights by reason of her second marriage agrees to take the land from B, her Zamindar, on an increased rate of rent. Both A and B honestly believe that A has lost her occupancy rights. The contract is not voidable. Now first of all we should see what a Mistake of Law pertains to ignorance of some Law of the land. It is expected from every citizen of a country to be conversant with the Law of the land. If he violates any law, he cannot be excused on the plea that he had no knowledge about the law, e.g., if a motorist crosses the road without carrying for the red-light signal is a punishable offence. He is to be prosecuted for the offence and is to be fined by the magistrate if challaned. Thus the maxim. ‘Ignorantia jusrisdon excusalt’, meaning “Ignorance of Law is no excuse”, holds good in every country. It has been stated by many jursits without some arbitrary rule, imposing upon each citizen the duty of well considering and understanding the consequences of his own acts and contracts there would be no limit to the excuse of ignorance and there shall be no security in any contract. Of course in some individual cases this maxim may put severe hardships, but it brings stability and certainty to the general transactions of Commerce. In the absence of such a rule such transaction shall become fluctuating and insecure. However, Mistake of Law is again classified into two- (1) Mistake as to Indian Law; (2) Mistake as to Foreign Law; Mistake as to Foreign Law is treated as Mistake as to Facts and therefore, an agreement based upon Mistake as to Foreign Law is declared void by the Indian Law Courts. Mistake as to Indian Law does not universally or generally invalidate the transactions which are based upon it. It is due to the simple reason that the maxim Ignorantial juris non excusat is restricted in its operation to ignorance of the general law of the country. Sec. 21, as has been stated above, does not give any relief to the aggrieved party in respect of Mistake of Indian Law. It has been argued that when the mistake is so fundamental as to prevent any real agreement upon the same thing in the same sense for being formed, it is immateral of what kind of mistake was and how it was brought about. Therefore Sec. 21, does not grant any validity to such apparent agreement which do not satisfy the conditions of Free and real Consent. These conditons have have been stated by the provisions of sections 10-13 of the Indian Contract Act. Such a decision has been given in Balaji Ganoba v Annapuranabai (A.I.R. Nag 1952) also. Thus mistake of Indian Law does not vitaite the contract of the parties. They have to perform their part of promise otherwise shall face the consequences of the Breach of Contract. You should remember one thing in this context. Private rights of property are usually treated to be matter of facts. If any party to the contract does not have knowledge of his private rights of property and enters into a contract which forms part of the same subject matter, certainly the contract shall be avoided as soon as the aggrieved party comes to realise mistake on his part. This shall all the more be clear from the following illustration. A agrees to purchase a house from B who is distant relation of his father, never knowing that he is the actual owner of the house. After getting registration of transfer deed in his favour he comes to know of his ownership of the said house but could not get back the consideration money from B. Agre