LEGAL ASPECTS OF BUSINESS (LAB)

MODULE 1
INDIAN CONTRACT ACT – 1872 (SEC 1 TO 75) AND SPECIFIC CONTRACTS
(SEC124 TO 238)
Definition of Law:
 Law includes all the rules and principles which regulate our relations
with other individuals and with the state.
 Law is the body of principles recognized and applied by the state in the
administration of justice. - Salmond

That portion of the establishment habit and thought of mankind which has
gained distinct and formal recognition in the shape of uniform rules backed by
the authority and power of the government.- Woodrow wilson
 The law of contract is that branch of law which determines the
circumstances in which promises made by the parties to a contract shall
be legally binding on them.
 The contract act came into force on 1 sep. 1872. The act is applicable to
thewhole India including for the state of Jammu and Kashmir.

AGREEMENT AND CONTRACT

Definition of contract:
 A contract is an agreement made between two or more parties which
the law will enforce.
 Sec 2(h) defines contract as an agreement enforceable by law.
 A contract is an agreement, enforceable by law, made between at least
two parties by which rights are acquired by one and obligations are
created on the part of another. If the party, which had agreed to do
something, fails to do that, then the other party has a remedy.- Sir
William Anson
Examples of contract:
 Taking a seat in a bus/train.
 Putting a coin in weighing machine.
 Going restaurant and taking snacks. Etc.
Law of contract creates jus in personam and jus in rem.
Jus in personam: A right against or in respect of a specific person.
Jus in personam is available only against particular persons.
Example: A owes a certain sum of money to B. B has a right to recover this
amount from A. this right can be exercised only by B and by none else
against A.
Jus in rem: A right against or in respect of a thing.
jus in rem is available against the world at large.
Example: X is the owner of a plot of land. He has aright to have a quiet
possession and enjoyment of that land against every member of the public.
Similarly every member of the public is under an obligation not to disturb
X’s possession or enjoyment.
Definition of Agreement:
An agreement is defined as “every promise and every set of promises, forming
consideration for each other” [sec 2 (e)].
Definition of promise:
 When the person to whom the proposal is made signifies his assent
thereto, the proposal is said to be accepted. A proposal, when accepted
becomes a promise.” [sec 2(b)].
 The person making the proposal is called “Promisor” and the person
accepting the proposal is called the “Promisee”.

Agreement = Offer + Acceptance

 Consensus ad idem:
 The parties to the agreement must have agreed about the subject
matter of the agreement in the same sense and at the same time.
 Unless there is consensus ad idem, there can be no contract.
Example: Ajay, who owns two horses named Rajhans and Hansraj, is selling
horse Rajhans to Vijay. Vijay thinks he is purchasing horse Hansraj. There is no
consensus ad idem and consequently no contract.
Definition of Obligation:
 A legal tie which imposes upon a definite person or persons the
necessity of doing or abstaining from doing a definite act or acts.
 An agreement which gives rise to a social obligation is not a contract. It
must give rise to a legal obligation in order to become a contract.

Example:
 Ajay agrees to sell his car to Vijay for Rs. 50,000. the agreement gives
rise to an obligation on the part of Ajay to deliver the car to Vijay and on
the part of Vijay to pay Rs. 50,000 to Ajay. This agreement is a contract.
 A invites his friend B to come and stay with him for a week. B accepts
the invitation but when he comes to A, A cannot accommodate him as
his wife had died the day before. B cannot claim any compensation from
A as the agreement is a social one.
Contract = Agreement + Enforceability at law
Distinguish between an agreement and a contract:
ESSENTIAL ELEMENTS OF A VALID CONTRACT
 Offer and Acceptance
 Intention to create legal relationship
 Lawful consideration
consideration: it is an advantage or benefit moving from one party to the
other. In simple words “something in return”.
 Capacity of parties – competency
 Free and genuine consent
 Lawful object
 Agreement not declared void
 Certainty and possibility of performance.
 Legal formalities

TYPES OF CONTRACT OR CLASSIFICATION OF CONTRACT

On the basis of Mode of Formation
 Express contract
 Implied contract
 Quasi contract
 E commerce contract
On the basis of Performance
 Executed contract
 Executory contract
 Partly executed and partly executory
 Unilateral contract
 Bilateral contract
On the basis of Validity or Enforceability
 Valid contract
 Void contract
 Voidable contract
 Illegal agreement
 Unenforceable contract

Classification on the basis of mode of formation:

Express contract: An express contract made by the use of
words spoken or written.

Example: A says to B ‘Will you purchase my bike for Rs

20,000?’ B says ‘Yes’ to A.

Implied contract: An implied contract is one which is

inferred from the acts or conduct of the parties or course of
dealings between them.

Example: Gets into public bus, takes a cup of tea in

restaurant.

Classification on the basis of mode of formation:

Quasi contract: It is not a real or a true contract in the sense

of law. The quasi contract is created by law without any
enforceable agreement. It is not based on the express or
implied intentions of the parties.

Example: T, a tradesman, leaves goods at C’s house by

mistake. C treats the goods as his own. C is bound to pay for
the goods.

E commerce contract: An contract is one which is entered

into between two parties via Internet or through any other
electronic mode.

Classification on the basis of performance:

Executed Contract: In a contract where both the parties have

performed their obligation, there is remaining nothing to
perform.

Example: A sells his car to B for Rs. 1 lakh. A delivered the

car and B paid the price.
Executory Contract: In a contract where both the parties are
yet to perform their obligation.

Example: A sells his car to B. if A is still to deliver the car and

B is yet to pay the price, it is an executory contract.

Classification on the basis of performance:

Partly executed and partly executory contract: one party

has already performed his promise and the other party has yet
to execute his promise.

Unilateral contract: A contract in which only one party has

to fulfill his obligation at the time of the formation of the
contract, the other party having fulfilled his obligation at the
time of the contract or before the contract comes into
existence.

Example: Alap promises to pay Rs. 1000 to anyone who finds

his lost cellphone. Bansi finds and terturn it to Alap. From the
time Bansi found the cell phone, the contract came into
existence. Now Alap has to perform his promise i.e. the
payment of Rs. 1000.

Classification on the basis of performance:

Bilateral Contract: In a bilateral contract both the parties

have to perform their respective promises. Here, the obligation
is outstanding on the part of both the parties.

Example: A promises to sell his car to B for Rs. 1 lakh and

agrees to deliver the car on the receipt of the payment by the
end of the week. The contract is bilateral as both the parties
have exchanged a promise to be performed within a stipulated
time.
Classification on the basis of Validity or Enforceability:

Valid contract: If the contract entered into by the parties and satisfies all the
elements of a valid contract as per the act, it is said to be a valid contract.

Void contract: A contract which ceases to be enforceable by law is known as

a void contract. A void contract is not enforceable by the court.
Example: A contract to import goods from a foreign country. When a war
breaks out between the importing county and the exporting country, it will
subsequently become void.

Voidable contract: when the contract is entered into without the free
consent of party i.e. caused by coercion, undue influence, misrepresentation
of fraud, it is considered as avoidable contract. By definition: A voidable
contract is enforceable by law at the option of one or more parties but not
at the option of the other or others.
Example: A promises to sell his car to B for Rs. 20,000. His consent is
obtained by use of force. The contract is avoidable at the option of A. He
may avoid the contract or elect to be bound by it.

Distinguish between void and voidable contract:

Classification on the basis of Validity or Enforceability:
Illegal agreement: An illegal agreement is one which transgresses some rule of
basic public policy or which is criminal in nature or which is immoral. All illegal
agreements are void ab initio.
Example: B borrows Rs. 5000 from A and enters into a contract with an alien to
import prohibited goods. A knows the purpose of the loan. The transaction
between B and A is collateral to the main agreement. It is illegal since the main
agreement is illegal.
Unenforceable contract: A contract which cannot be enforced in a court of law
because of some technical defect such as absence of writing or where the remedy
has been barred by lapse of time.

Distinguish between void and illegal agreement

PRACTICAL EXERCISE

1) Chintan orally offered to pay Ajay, an auto mechanic, Rs. 50 for testing used
car which Chintan was about to purchase from Dilip. Ajay agreed and tested
the car. Chintan paid Ajay Rs. 50 in cash for his services. Is the agreement
between Chintan and Ajay (a) express or implied, (b) executed or executory, (c)
valid, void, voidable or unenforceable?

2) Abhi sent in a football pools coupon containing a condition that it “shall not
be attended by or give rise to any legal relationship. rights, duties,
consequences.” He sued for $4,335 which he claimed to have won. Is the claim
enforceable?
 CHAPTER 2
OFFER AND ACCEPTANCE
Definition of offer: An offer is a proposal by one party to another to enter
into a legally binding agreement with him.
Example: Ajay says to Vijay, “Will you pruchase my car for Rs. 50,000?’
 The person making the offer is known as the offeror, Proposer or
Promisor and the person to whom it is made is called the offeree or
proposee.
 When the offeree accepts the offer, he is called the acceptor or
promisee.
Classification of offers or kinds of offers:
Express offer: the offer made by using words spoken or written is known
as an express offer.
Implied offer: the offer which could be understood by a conduct of parties
or circumstances of case is called the implied offer.
Example: ATM, Bus, Train, Weighing machine etc.
Specific offer: When an offer is made to a specific person it is called
specific offer.
General offer: when an offer is made to the world at large, it is called
general offer.
Cross offer: when two parties make identical offers to each other, in
ignorance of each other’s offer, the offers are cross offers.
Example: A offers buy a letter to sell 100 tons of steel at Rs. 1000 per ton.
On the same day B also writes to A offering to buy 100 tons of steel at Rs.
1000 per ton.
Continuous offer: offer which is open for a continuous period of time.
Also known as open offer or standing offer.
Example: A tender to supply goods as and when required, amounts to a
Continuous offer.
Essential elements of an offer (Proposal):
Two parties
Communication
Willingness
With intention of obtaining assent
Offer may be positive or negative
Legal rules as to offer:
1) Offer must be such as in law is capable of being accepted and giving rise to
legal relationship.
2) Terms of offer must be definite, unambiguous and certain.
Example: A says to B, “I will sell you a car.” A owns three different cars. Offer is
not definite.
3) An offer may be distinguished from:
 A declaration of intention and an announcement.
 An invitation to make an offer or do business.
Case: Showcase
A person saw an electric iron in the showcase of a shop. A labe below the iron
mentioned the price as Rs. 1500. he had been looking for that model of electric
iron for a long time. He approached the shop to buy one such iron. However,
he was told that the shop did not have that model in stock. The person insisted
that he be given the one in the display window. Is the display of articles in the
shop window an offer?
Note: Newspaper advertisement are not offer:
Case: An auctioneer advertised in a newspaper that a sale of office furniture
would be held on a certain date. A person, with the intention to buy furniture,
came from a distant place for the auction but he auction was cancelled. Can he
file a suit against the auctioneer for his loss of time and expenses?
  Person cannot file suit for any loss against auctioneer.
 Advertisement by auctioneer in newspaper is an invitation to make an
offer. Hence, it does not create any obligation or responsibility on part of
auctioneer.
4) Offer must be communicated.
5) Offer must be made with a view to obtaining the assent.
6) Offer should not contain a term the non-compliance of which may be
assumed to amount to acceptance.
7) A statement of price is not an offer.
Tenders: A tender (in response to an invitation to offer) is an offer and may be
either –
1) Tender as a definite offer: when tenders are invited for the supply of
specified goods or services.
Example: A invites tenders for the supply of 1,00,000 bricks. X, Y, and Z submit
the tenders. A accepts X’s tender. There is a binding contract between A and X.
2) Tender as a standing offer: where goods or services are required over a
certain period, a tender may invite tenders as a standing offer which is a
continuing offer.
Acceptance: It is the manifestation by the offeree of his willingness to be
bound by the terms of the offer.
 An offer when accepted becomes a promise. [sec 2(b)].
 Acceptance may be express or implied.
Legal rules as to acceptance:
1. It must be absolute and unqualified.
2. It must be communicated to the offeror.
3. It must be according to the mode prescribed or usual and reasonable
mode.
4. It must be given within a reasonable time.
5. It cannot precede an offer.
6. It must show an intention on the part of the acceptor to fulfill terms of
the promise.
7. It must be given by the party or parties to whom the offer is made.
8. It must be given before the offer lapses or before the offer is withdrawn.
 9. It cannot be implied from silence.
Communication of offer, acceptance and revocation
Mode of communication (sec 3): offer, acceptance or revocation may be
communicated by words spoken or written or by conduct.
When is communication complete (sec 4): communication ofan offer is
complete when it comes to the knowledge of the person to whom it is made.
Example: A proposes, by a letter, to sell a house to B at a certain price. The
letter is posted on 10th july. It reaches B on 12th july.
The communication of the offer is complete when B receives the letter, i.e. on
12th july.
Revocation: Revocation means “taking back”, “recalling” or “withdrawal”. It
may be a revocation of offer or acceptance.
Time for revocation of offer and acceptance (sec 5):
 A proposal may be revoked at any time before the communication of its
acceptance is complete as against the proposer, but not afterwards.
 An acceptance may be revoked at any time before the Communication
of the acceptance is complete as against the acceptor, but not
afterwards.
Example: A proposes by a letter sent by post to sell his house to B. the letter is
posted on the 1st of the month. B accepts the proposal by a letter sent by post
on the 4th. The letter reaches A on the 6th.
 A may revoke his offer at any time before B posts his letter of
acceptance, i.e. , 4th but not afterwards.
 B may revoke his acceptance at any time before the letter of acceptance
reaches A, i.e. 6th but not afterwards.
Revocation or lapse of offer:
1. By communication of notice of revocation by the offeror. [sec 6(1)]
2. By lapse of time. [sec 6(2)]
3. By non-fulfilment by the offeree of a condition precedent to acceptance.
[sec 6(3)]
4. By death or insanity of the offeror. [sec 6(4)]
5. If a counter-offer is made to it.
 6. If an offer is not accepted according to the prescribed or usual mode.
7. If the law is changed
Rejection of offer:

Express rejection: The offeree may reject the offer expressly i.e. by words
written or spoken.
 Express rejection is effective only when notice of rejection reaches the
offeror.
Implied rejection: Rejection of the offer is implied by law:
 Where the offeree makes a counter offer.
 Where the offeree gives a conditional acceptance.

CHAPTER 4
CAPACITY TO CONTRACT

Definition of capacity:
 Capacity means competence of the parties to enter into a valid contract.
 According to sec 10, an agreement becomes a contract if it is entered
into between the parties who are competent to contract.
 A/c to sec 11, every person is competent to contract who
 Is of the age of majority according to law.
 Is of sound mind, and
 Is not disqualified from contraction by any law.
Following persons are declared as incompetent to contract:
1. Minors
2. Persons of unsound mind,
3. Persons disqualified by any law to which they are subject.
1. MINORS
 According to sec 3 of Indian Majority Act, 1875, a minor is a person who
has not completed 18 years of age.
In the following cases, he attains majority after 21:
 1. Where a guardian of a minor’s person or property has been appointed
under the Guardians and Wards act 1890, or
2. Where the superintendence of minor’s property is assumed by a court of
wards.
Effect of Minor’s Agreement:
1) An agreement with or by a minor is void ab initio.
Case: D minor borrowed money from M by executing mortgage of his house in
favour of M. later on his failure to pay money . If was held that minor’s
agreement is void and money cannot be recovered. M was ordered to release
his house from mortgage. Court has explained that minor cannot be promisor
but he can be promisee.
2) Minor can be a promisee or a beneficiary.
Example: A, a minor, under a contract of sale delivered gods to the buyer.
Held, he was entitled to maintain a suit for the recovery of price.
3) His agreement cannot be ratified by him on attaining the age of
majority.
Example: M, a minor, borrows Rs 5000 from L and executes a promissory note
in favour of L. after attaining majority, he executes another promissory note in
settlement of the first one. The second note is void for want of consideration.
4) If he has received any benefit under a void agreement, he cannot be asked
to compensate or pay for it.
5) He can always plead minority.
6) There can be no specific performance of the agreements entered into by
him.
7) He cannot enter into a contract of partnership.
8) He cannot be adjusted insolvent.
9) He is liable for necessaries supplied or items.
10) He can be an agent
11) His parents/guardian are/in not liable for the contract entered into by him.
12) A minor is liable in tort (a civil wrong).
 Minor’s liability for necessaries:
Necessaries include:
1) Necessary goods: Necessary goods are the articles which are reasonably
necessary to the minor having regard to his station in life.
2) Services rendered: certain services rendered to a minor have been held to
be necessaries. These include: education, training for a trade, medical advice
etc.
 A loan taken by a minor to obtain necessaries also binds him and is
recoverable by the lender as if he himself had supplied the necessaries.
2. PERSONS OF UNSOUND MIND
 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.
 A person, who is usually of unsound mind but occasionally of sound
mind, may make a contract when he is of sound mind.
 A person who is usually of sound mind, but occasionally of unsound
mind, may not make a contract when he is of unsound mind.
 Example: a patient in a lunatic asylum, who is at intervals of sound mind,
may contract during those intervals.
Contracts of persons of unsound mind:
1. Lunatics: a lunatic is a person who is mentally deranged due to some
mental strain or other personal experience. He suffers from intermittent
intervals of sanity and insanity.
2. Idiots: an idiot is a person who has completely lost his mental powers.
An agreement of an idiot, like that of a minor, is void.
3. Drunken or intoxicated persons: a drunken or intoxicated person suffers
from temporary incapacity to contract i.e. at the time when he is drunk.
3. OTHER PERSONS
1. Alien enemies: an alien (the subject of a foreign state) is a person who is
not a subject of the republic of India. He may be and alien friend or an
alien enemy.
 2. Foreign sovereigns and accredited representatives of foreign state:
they can enter into contracts and enforce these contracts in our courts.
But they cannot be sued in our courts without the prior sanction of the
Central Governments.
3. Insolvent: when a debtor is adjudged insolvent, he is deprived of his
power to deal in his property divisible among his creditors.
4. Convicts: A convict when undergoing imprisonment is incapable of
entering into a contract.

CASE
Teji, a minor, broke his right leg in a football match. He engaged Curewell, a
doctor, to set it. Does the doctor have a valid claim for his services? Give
reason.

Yes doctor has valid claim for his service. Minor can enter into contract for
necessity. Medical services are considered as necessity. But doctor
cannot claim anything against minor but he can recover it from property of
minor if any.

CHAPTER 5
FREE CONSENT
Meaning of ‘consent’ and ‘free consent’ (sec 13 and 14):
 Two persons are said to consent, when they agree upon the same thing
in the same sense.
 It is also known as consensus ad idem
Free consent, consent is said to be free when it is not caused by
1. Coercion
2. Undue influence
3. Fraud
4. Misrepresentation
5. Mistake.
COERCION
 When a person is compelled to enter into a contract by the use of force
by the other party or under a threat, ‘coercion’ is said to be employed.
 Coercion is the committing, or threatening to commit, any act forbidden
by the Indian Penal Code, 1860.
 Consent is said to be caused by coercion when it is obtained by:
1. Committing or threatening to commit any act forbidden by the Indian
Penal code, 1860.
2. Unlawful detaining or threatening to detain any property.
Examples:
1. A threatens to kill B, if D does not agree to sell his property to A. B’s
consent is obtained by coercion.
2. D threatens to kill A if he does not sell his house to B at a very low price.
Even if D is a stranger to to the transaction between A and B, the
agreement is caused by coercion.
Case: S. S. Sakhar Karkhana ltd. v/s C.I.T Kolhapur
The sugar co-operative societies of Maharashtra are governed by the
provisions of the Maharashtra co-operative societies Act, 1960. Its members
are predominantly sugarcane farmers. Under the law, co-operatives have to
compulsorily take deposits from its farmer members.The question that arose
was about whether this was coercion and a ground for making the contract
voidable?
Effect of coercion: 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 cause. (se 19)
Example: A railway company refuses to deliver up certain goods to the
consignee, except upon the payment of an illegal charge for carriage. The
consignee ays the sum charged in order to obtain the goods. He is entitled to
recover so much of the charge as was illegally excessive.
Note: Threat to commsit suicide amounts to coercion.

UNDUE INFLUENCE
Definition: 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.
 A person is deemed to be in a position to dominate the will of another:
o When a person holds real or apparent authority over other.
o Master and servant.
o Doctor and patient.
2) When he stands in fiduciary relationship over other.
1. Guardian and Child
2. Guru and disciples
3. Doctor and patient
4. Solicitor and client
5. Trustee and beneficiary.
3) When contract is made with mentally weak person.
Examples:
1. A spiritual guru induced his devotee to gift to him the whole of his
property in return of a promise of salvation of the devotee.
2. An illiterate elderly women made a deed of gift of practically the whole
of her property to her nephew who managed her affairs. Held, the gift
should be set aside on the ground of undue influence.
4) Contracts with pardanashin women.
o A pardanashin woman is one who observes complete seclusion because
of the custom of the particular community to which she belongs.
o Any person who enters into a contract with a pardanashin woman has
strictly to prove that no undue influence was used.
o The court, when called upon to deal with a deed executed by a
pardanashin woman, must satisfy upon evidence:
First, that deed was executed actually by her with full understanding of what
she was about to do.
Secondly, that she had full knowledge of the mature and effect of the
transaction in which she is said to have entered,and
Thirdly, she had independent and disinterested advice in the matter.
 Effect of undue influence: when consent to an agreement is obtained by
undue influence, the agreement is a contract voidable at the option of
the party whose consent was so obtained.

Distinguish between coercion and undue influence:

MISREPRESENTATION AND FRAUD
A representation when wrongly made, either innocently or intentionally, is a
misrepresentation.
Misrepresentation may be:
1. An innocent or unintentional misrepresentation, or
2. An intentional, deliberate or willful misrepresentation with an intent to
deceive or defraud the other party.
The former is called ‘misrepresentation 'and the latter is ‘fraud’.
MISREPRESENTATION
Misrepresentation is a false statement which the person making it honestly
believes to be true or which he does not know to be false.
According to sec 18, there is misrepresentation :
1. When a person positively asserts that a fact is true when his information
does not warrant it to be so, though he believes to be true.
2. When there is any breach of duty by a person which brings an advantage
to the person committing it by misleading another to his prejudice.
3. When a party causes, however innocently, the other party to the
agreement to make a mistake as to the substance of the thing which is
the subject of the agreement.
 Misrepresentation is a false statement which the person making it
honestly believes it to be true or which he does not know to be false.
 It also includes non disclosure of the material facts without any intent to
deceive the other party.
 Example: “A” sells his horse to “B” telling that horse is sound. “A”
believes that horse is sound, although he does not have sufficient
ground for the belief. Later on “B” finds the horse to be unsound. This is
a case of misrepresentation by “A”
Essential elements of misrepresentation:
1. The party makes a representation of facts which are false.
2. The misrepresentation should be related to the material facts of
contract.
3. The misrepresentation should be with an intention that the other party
should act upon it.
 4. The representation should have been acted upon.
5. The misrepresentation was made innocently.
6. Other party actually acted believing misrepresentation to be true.
Consequences of Misrepresentation: A contract is voidable at the option of
the aggrieved party but he cannot sue for damages.
FRAUD
Fraud exists when it is shown that –
1. A false representation has been made (a) knowingly, or (b) without
belief in its truth, or (c) recklessly, not caring whether it is true or false
and the maker intended the other party to act upon it, or

2. There is a concealment of a material fact or that there is a partial

statement of a fact in such a manner that the withholding of what is not
stated makes that which is stated false.

Peek v. Gurney 1873

The prospectus of the company did not refer to the existence of a document
disclosing the liability. This gave the impression of the company that it was
prosperous. If the existence of the document has been disclosed the
impression would have been quit different. Held non disclosure amounted to
fraud and any one who purchase share on the faith of this prospects could
avoid the contract.

The fraud means and includes the following acts:

1. Suggestion of facts which is not true by one person who does not believe
it to be true.
2. Active concealment of the fact.
3. A promise made without any intention of performing it.
4. Any act or omission, specifically declared as a fraudulent by law.
5. Any other act to deceive.
The essentials of fraud are:
1. There must be a representation or assertion and it must be false
2.The representation must relate to a fact
3.The representation must have been made with the intention of inducing the
other party to act upon it
4.the representation must have been made with a knowledge of its falsity
5.the other party must have subsequently suffered some loss

Example: A, a shopkeeper, while selling ghee represents the

buyer that it is ‘pure deshi ghee’ although he knows that it is
adulterated. A commits a fraud with the buyer by deliberate
misrepresentation of facts.
CONSEQUENCES OF FRAUD
 If a contract is induced by fraud, it is voidable at the options of the party
defrauded. Until it is avoided it is valid. Following are the remedies:
 He can rescind the contract within a reasonable time
 He can insist on the performance of the contract on the condition that
he shall put in the position in which he would have been if the
representation made was true.
 He can sue for damages

MISTAKE CHART REFER FROM PPT

MISTAKE

Mistake may be defined as an erroneous belief about something. It may

be a mistake of law or a mistake of fact.

Mistake of fact may be 1. a bilateral mistake and 2. a unilateral

mistake.

Bilateral mistake: where both the parties to an agreement are

under a mistake as to a matter of fact essential to the agreement,
there is a bilateral mistake.
The mistake must be mutual.

Example: A agreed to purchase B’s motor car which way lying

in B’s garage. Unknown to either party, the car and garage
were completely destroyed by fire a day earlier.

The mistake must relate to a matter of fact essential to the

agreement.

Example: A buys an old painting for Rs. 5000 thinking that it is an

excellent piece of art. Actually the painting is a new one and is
worth only Rs. 500. A cannot avoid the contract on the ground of
mistake.

Bilateral mistake can be further classified as:

Mistake of quantity

Mistake of price

Mistake as to possibility of performance

1. Mistake of quantity:

Example: A agreed to buy 100 sewing thread reels from B. both

believed that each reel contains 500 metres of thread but, in fact,
the length of thread was only 300 metres. Held, the agreement was
void as there was a bilateral mistake as to quantity of subject
matter.

Mistake as to price:

Example: A agreed with B to let out his house for a monthly

rent of Rs 520. however, in the lease deed it was written as Rs.
350. held, the agreement was void.
Mistake as to possibility of performance:

Example: A agrees to sell 100 units of a particular product.

Later, it is discovered that there was a ban on sale of the
product even at the time of making the contract. The contract is
void.

Case: A agrees to sell his horse to B. But unknown to both

the parties, the horse had already died at the time of making
of the contract. Is it valid contract? Why?

It is not a valid contract.

Both parties were not aware about the death of horse.

It amounts as bilateral mistake about possibility of
performance. When any agreement is entered into with
bilateral mistake, it remains in the stage of a void
agreement.

Unilateral mistake:

When in a contract only one of the parties is mistaken regarding the

subject matter or in expressing or understanding the terms or the
legal effect of the agreement, the mistake is a unilateral mistake.

Example: A offers to sell his house to B for an

intended sum of Rs. 44000. by mistake he
makes an offer in writing of Rs. 40000. he
cannot plead mistake as a defence.

Exception:

Mistake as to the identity of the person contracted with.

Example: S wanted to go to the first night of a play. B the

managing director of the theatre, gave instructions that a
ticket was not to be sold to S as he had in the past published
virulent criticism of the its production. S knew this. He asked
one of his friends to buy a ticket for him. He was, however,
refused admission by the manager of the theatre. Held, there
was no contract as the theatre company never intended to
contract with S.

Mistake as to the nature of contract.

Example: M, an old man of poor sight, indorsed a bill of

exchange thinking that it was a guarantee. Held, there was no
contract on the ground that the mind of the signer did not
accompany the signature.

Difference between unilateral mistake and bilateral mistake:

 CHAPTER 9

PERFORMANCE OF CONTRACT

Performance of a contract takes place when the parties to the contract fulfill their obligations arising under
the contract within the time and in the manner prescribed. (Sec 37).
The performance may be of two types:
 Actual performance, and
 Attempted performance or tender.

An actual performance of a contract means performing all the promises and fulfilling
all the liabilities by all the parties.
An attempted performance means the promisor has made an offer to perform a promise to
the promisee but it has not been accepted.
REQUISITES OF A VALID TENDER
1) It must be unconditional
Example: A owes B Rs. 5000 and has falled due. A offers to pay in five installment and
tenders the first installment. This is a conditional tender.
2) It must be at proper place.
Example: D owes C Rs. 100 payable on the 1st August with interest. He offers to pay on the
1st of July the amount with interest up to the 1st of July. It is not a valid tender as it is not
made at the appointed time.
For whole obligation.
Example: A agreed with B to sell 10,000 Kg of rice but A delivered 100 Kg less. Hence it is not
a valid tender due to deficiency in the quantity.
In legal tender money (current currency notes or coins)
It must be made at proper time and to a proper person.
Reasonable opportunity to promisee to verify or examine the goods.
Effect of refusal of a party to perform promise wholly:
when a party to a contract refuses to perform, or disables himself from performing, his
promise in its entirely, the promisee may put an end to the contract.
Example: A servant is employed for one year on a salary of Rs. 6000 per month, the whole
salary to be paid at the end of the year. The servant wrongfully leaves the service after three
months. He is not entitled to the salary for the period he has employed because, by leaving
the service, he has disabled himself from performing his promise in its entirely.
Contracts which need not be performed:
When its performance becomes impossible. (sec 56)
When the parties to it agree to substitute a new contract for it or to rescind or alter it. (sec
62)
When the promisee dispenses with or remits, wholly or in part. The performance of the
promise made to him or extends the time for such performance or accepts any satisfaction
for it (sec 63).
When the person at whose option it is voidable, rescinds it. (sec 64)
When the promisee neglects or refuses to afford the promisor reasonable facilities for the
performance of his promise. (sec 67)

Example: A contracts with B to repair B’s house. B neglects or

refuses to point out to A the places in which his house requires
repairs. A is excused for the non performance of the contract, if it is
caused by such neglect or refusal.
When it is illegal.
By whom must contracts be performed?
Promisor himself
Agent
Example: A promises to pay B a sum of money. A may perform this promise, either by
personally paying the money to B or by causing it to be paid to B by another.
Legal representatives
Third persons
Joint promisors.
Devolution of joint liabilities and rights:
“Devolution” means passing over from one person to another.
Sec 43 lays following rules as to performance of joint promises:
Any one of the joint promisors may be compelled to perform. (sec 43, para 1)

Example: A, B and C jointly promise to pay D Rs. 3000. D may compel all or any or either A or
B or C to pay him Rs. 3000.
A joint promisor compelled to perform may claim contribution. (sec 43, para 2)
Example: A, B and C are under a joint promise to pay D Rs
300. A is compelled to pay the whole amount to D. he may
recover rs. 100 each from B and C.

Sharing of loss arising from default (sec 43, para 3).

Example: A, B and C are under a joint promise to pay D Rs.

3000. C is unable to pay anything and A is compelled to pay
the whole sum. A is entitled to receive Rs. 1500 from B.

Release of a joint promisor.

Time and place of performance:
Where no application is to made and no time is specified.
Where time is specified and no application is to be made.
Application for performance on a certain day and place.
Application by the promisor to the promisee to appoint place.
Performance in manner or at time prescribed or sanctioned by the promisee.
Reciprocal promises: Promises which form the consideration or part of the consideration for
each other are called reciprocal promises. [sec 2 (f)].
Classification of Promises:
Mutual and independent
Conditional and dependent
Mutual and concurrent
Rules regarding performing of reciprocal promises:
Simultaneous performance of reciprocal promises.
Example: A and B contract that A shall deliver certain
goods to B to be paid for by B on delivery. A need not
deliver the goods, unless B is ready and willing to pay
for the goods on delivery.
Rules regarding performance of reciprocal promises:
Simultaneous performance of reciprocal promises (sec 51).
Example: A and B contract that A shall deliver certain goods to
B to be paid for by B on delivery. A need not deliver the
goods, unless B is ready and willing to pay for the goods on
delivery. B need not pay for the goods unless A is ready and
willing to deliver them on payment.
Order of performance of reciprocal promises (sec 52)
Example: A and B contract that A shall build a house for b at a
fixed price. A’s promise to build the house must be performed
before B’s promise to pay for it.

Effect of one party preventing another from performing

promise. (sec 53)

Effect of default as to promise to be performed first. (sec 54)

Reciprocal promise to do things legal.
Time as the essence of the contract:
When time is of the essence.
When time is not of the essence.
Appropriation of payments:
Where the debtor intimates (sec 59).
Example: A owes B three distinct debts of Rs. 20000, Rs.
30000 and Rs. 50000. A sends Rs. 50000 and instructs B that
the payment should be appropriated against the third debt. He
is bound to appropriate the payment against the third debt only.
Where the debtor does not intimate and the circumstances are not indicative (sec 60).
Where the debtor does not intimate and the creditor falls to appropriate. (sec 61)
Assignment of contracts: To ‘assign’ means to ‘transfer’. Assignment of contractual
obligations:
Contractual obligations involving personal skill or ability cannot be assigned. (sec 40)
A promisor cannot assign his liabilities or obligations under a contract.
Succession of contract takes place in:
In the case of death of the party to contract his legal succeeds to the rights and liabilities
under the contract.
In the case of insolvency of the party to contract, his rights and liabilities under the contract
are acquired by the official liquidator.