NATIONAL LAW SCHOOL OF INDIA UNIVERSITY BANGALORE

MBL I YEAR
ANNUAL EXAMINATION (24TH JULY) 2020
PAPER I - CONTRACT LAW

PART – B
QUESTION – 5:

Explain the consequences of Breach of a Contract. What are the various remedies
available to the Innocent Party? In what circumstances can Specific Performance of
Contract be claimed?
ANSWER:

Consequences:

The main consequence has been described as ‘recission’ of the contract. Also as
‘termination’ of the contract. However, these terms are not of sufficient accuracy. The
recission here is different from the recission ab initio as for example when there is a flaw
in consent like misrepresentation or mistake.

#Heymans vs Darvin Ltd

Vendors agreed to sell a house and some grazing lands. The properties were separately
mortgaged. The purchase price was sufficient to pay them off and also a bond loan which
vendors had secured to buy another property. The purchaser failed to complete on the
agreed date. A fortnight later the vendors issued notice making time of the essence and
fixed 21 jan 1974. The purchaser. Failed to complete on this date. It was clear that
vendors were entitled to terminate the contract. But instead they sued for specific
performance and obtained it on 27 june 1974 but before the order was entered, both
mortgagees of house and grazing land took possession and sold the properties for much
less than purchaser had agreed. Vendors there upon applied to court to proceed against
purchaser in damages for breach. In the house of lords it was held that, when an injured
party is said to rescind a contract the rescission is quite different from rescission ab initio
as may arise for flaw in consent. In those cases the contract is treated in law as never
having come into existence. In the cause of a repudiatory breach being accepted, it is not
quite clear, under the general law of contract, there is no rescission ab intio but the
contract has come into existence and has been put on end to or discharged.

The contract is not set aside from the beginning. Rights and obligations which arise from
the partial execution and causes of action which have accrued from its breach whether in
favour of the innocent or guilty party alike continue unaffected. When goods have been
supplied or services performed under such a contract the innocent party can sue for the
reasonable value of a quantum meruit claim, or include the value in the claim for
damages for breach. Whether the party in breach can make any claim will depend on
whether the contract is divisible. If divisible, he may be entitled to claim for completed
part of performance, subject always to the counter claim for damages for loss suffered by
the breach.
The one consequence which is in common for every king of breach is the secondary
obligation that arises of the party in breach to pay compensation to the injured party in
damages in respect of loss suffered by the breach.

Remedies:

There are five major types of remedies for ‘Breach of Contract’

a. Recession of Contract

A contract can be rescinded by one party when the other party of the contract refuses to
fulfil his obligations.
As per Section 65, Indian Contract Act, the party that rescinds the contract must restore
any benefits he got under the said agreement.
Section 75 states that the party that rescinds the contract is entitled to receive damages
and compensation for such a recession.

b. Sue for damages

Section 73 clearly states that the party who has suffered, since the other party has broken
promises, can claim compensation for loss or damages caused to them in the normal
course of business. Such damages will not be payable if the loss is abnormal in nature, ie
not in the ordinary course of business. There are two types of damages according to the
Act,

• Liquidated Damages: Sometimes the parties to a contract will agree to the amount
payable in case of a breach. This is known as liquidated damages.

• Unliquidated Damages: Here the amount payable due to the breach of contract is
assessed by the courts or any appropriate authorities.

c. Sue for Specific Performance

This means the party in breach will actually have to carry out his duties according to the
contract. In certain cases, the courts may insist that the party carry out the agreement.

So if any of the parties fails to perform the contract, the court may order them to do so. This
is a decree of specific performance and is granted instead of damages.

For example, A decided to buy a parcel of land from B. B then refuses to sell. The courts can
order B to perform his duties under the contract and sell the land to A.

d. Injunction
 An injunction is basically like a decree for specific performance but for a negative contract.
An injunction is a court order restraining a person from doing a particular act.

So a court may grant an injunction to stop a party of a contract from doing something he
promised not to do. In a prohibitory injunction, the court stops the commission of an act and
in a mandatory injunction, it will stop the continuance of an act that is unlawful.

e. Quantum Meruit

Quantum meruit literally translates to “as much is earned”. At times when one party of the
contract is prevented from finishing his performance of the contract by the other party, he
can claim quantum meruit.

So he must be paid a reasonable remuneration for the part of the contract he has already
performed. This could be the remuneration of the services he has provided or the value of
the work he has already done.

In what cases can a decree of specific performance can be claimed

i. when monetary compensation is not a sufficient redressal

ii. where the court can oversee the performance or execution of the contract

iii. when the contract entered into is not of personal services

iv. one of the parties of a contract is not a minor

PART B
QUESTION – 6
6.a. Advantages of Registration of a Partnership under the Indian Partnership Act, 1932.
ANSWER : 6.a

Partnership Firms in India are established and Governed by the provisions of Indian
Partnership Act, 1932 (referred as “Act”). The establishment procedure of Partnership
Firm under Indian Partnership Act, 1932 leaves the Partnership Deed Registration with
Registrar of Firm (RoF) at the will of the Partners in the Firm.

Benefits of Partnership Firm Registration:

1. Ability to file case against Third Parties:

The partners of the registered Partnership Firm can bring third parties to the court for
resolution of disputes arouse during the course of Business or any other matter relating
to the Partnership Firm.

An unregistered Partnership firm loses the right file the case against third party for
resolution of their disputes until and unless the procedure of Deed Registration has been
completed. However, the third party always own the right to file the suit against a
Partnership Firm irrespective of its registration status.

2. Power to file suit against co-partners:

As none knows when the dispute between the Partners arises, whether for the sharing of
profits or any other matter regarding operations of the Partnership Firm. The resolution
of any dispute is best resolved by the Court of Law.

The Partners of an unregistered Partnership Firm cannot enforce any clauses of

Partnership Deed. To enforce the said clauses, the registration for Partnership Firm shall
be required by following the procedure prescribed for the same.

3. Ability to claim Set-off:

The registration of Partnership Firm enables the partners with power to claim set-off.
When any third party files a suit against the Partnership Firm, the Partnership Firm can
claim the set-off, if any against the claim of third Party. The said power to claim set-off is
not available when the Partnership Firm is not yet registered under the Indian Partnership
Act, 1932.

4. Higher Credibility:

Compared to an unregistered Partnership Firm, a Partnership Firm which has completed

the procedure of Online Registration of Partnership Firm enjoys higher credibility.
Although both registered and unregistered Partnership Firms are legal and valid under the
given Act, the Registered Firm is highly preferred by authorities over unregistered one.

5. Conversion of Entity:

A Partnership Firm as registered with the Registrar of Firm has ease compared to an
unregistered firm for conversion. The conversion of the Partnership Firm into any other
entity such as Private Company or LLP i.e. in corporate structure can be easily completed.

An unregistered firm can be registered at any time after its formation and establishment
to claim above explained advantages
 QUESTION 6.b. Minor as a ‘partner’ under the Partnership Act 1932
ANSWER : 6b

Minors Admitted to Benefits of Partnership

Section 30 of the Indian Partnership Act 1932 contains legal provisions about a minor in a
partnership. Now we know the Indian Contract Act 1857 clearly states that no person less
than the age of 18, i.e. a minor can be a party to a contract. And a partnership is a contract
between the partners. Hence a minor cannot be a partner in a partnership firm.

However, according to the Partnership Act, a minor may be admitted to the benefits of a
partnership. So while the minor will not be a partner he will enjoy all the benefits of a
partnership. To admit all the minor to the benefits of the partnership all of the partners of
the firm must be in agreement.

Rights of a Minor Partner

Once the minor is given the benefits in a partnership there are certain rights that he enjoys.
Let us take a look at the rights of a minor partner.

i. A minor partner will obviously have the right to his share of the profits of the firm. But
the minor partner is not liable for any losses beyond his interests in the firm. So a
minor partner’s personal assets cannot be liquidated to pay the firms liabilities.

ii. He can also like any other partner inspect the books of accounts of the firm. He can
demand a copy of the books as well.

iii. If necessary he can sue any or all of the other partners for his share of the profits or
benefits.

iv. A minor partner on attaining majority has the right to become a partner of the firm.
He has six months from attaining majority to decide if he will execute this right.
Whether he decides to become a partner or not he must give public notice about the
same.
Liabilities of a Minor Partner

i. A minor cannot be held personally liable for the losses of the firm. And if the firm
declares insolvency the minor’s share is kept with the Official Receiver

ii. After turning 18 the minor partner can choose to become a partner of the firm. But he
may choose to not become a partner. In this case, the minor partner has to give a
public notice about this decision. And the notice has to be given within 6 months of
gaining a majority. If such a notice is not given even after 6 months then the minor
partner will become liable for all acts done by the other partners till the date of such
notice.
iii. Should the minor partner choose to become a partner he will be liable to all the third
parties for the acts done by any and all partners since he was admitted to the benefits
of the partnership.

iv. If he becomes a full-time partner he will be treated as a normal partner and have all
the liabilities of one. His share in the profits and property of the firm will remain the
same as it was when he was a minor partner.

PART B
QUESTION 7
Examine the obligations of a finder of lost of goods under the Contract of Bailment.

Any person who finds the goods belonging to another person and takes the goods in his
custody is the finder of goods.

For Example, A found a wallet belonging to B on the road, A picked the purse. Here, A is
the finder of the goods.

Rights and Duties

According to Section 71 of the Indian Contract Act, if a person finds the goods belonging to
another person and takes the goods in his custody then he has the same responsibility as a
bailee.

Rights of the Finder of Goods

The rights of the finder of goods are the same as that of the bailee.

1. Right of lien
According to Section 168 of the Indian Contract Act, the finder of the goods has no right to
sue the owner of the goods for compensation for the trouble and expenses that have been
incurred by him voluntarily. However, he has the right to retain the goods unless the
compensation is paid to him.

For example, If A the finder of goods belonging to B has incurred expenses for preserving
the gold chain of B, then B can not sue B for the compensation but can only retain the goods
unless such an amount is paid to A by B.

2. May sue for a specific reward

Under section 168 of the Indian Contract Act, the finder of goods can sue the owner of the
goods if he has offered a specific reward for the return of the goods lost. He also has the
right to retain the goods unless he receives the reward offered. Thus, if a reward is offered
by the owner then the finder has both the rights (i) right of lien (ii) right to sue.

Thus, If A found a wallet belonging to B. B advertises that he will pay a sum of ₹1,000 to a
person whosoever finds the wallet and return it. Here, if B denies paying the rewarded sum
then A has two options with him (i) He has the right to sue B for the reward offered and,
(ii) He has the right to retain the wallet unless B pays the reward.

3. When finder of thing commonly on sale may sell it

According to Section 169 of the Indian Contract Act, if the finder of goods is unable to find
the true owner after due diligence or if the owner refuses to pay the lawful charges to the
finder then he may sell the goods if:

1. The thing is perishable or is such of nature that it will lose the greater part of its
value.
2. When lawful charges of the finder amount to two-thirds of the value of goods.

Duties of Finder of Goods

Duties of the finder of goods are the same as of the bailee. The duties are discussed in detail
below:

1. Duty to take reasonable care

Section 151 of the Indian Contract Act lays down that the bailee is required to take
reasonable care of the goods as he would have taken the care of goods under similar
circumstances. Thus, the finder of goods is required to take reasonable care of goods as he
would have taken of his goods.

Section 152 of the Act lays down that if there was not a special contract to the contrary
then the bailee can not be made liable for the loss, destruction or deterioration of the
goods provided that he has taken the due care of the goods.

Burden of Proof
The burden of proof that the reasonable care was taken by the finder of goods is on the
finder if he proves the same then he will not be liable.

2. Duty not to make unauthorised use

According to Section 154 of the Indian Contract Act states that if a person makes the
unauthorised use of goods then he will be liable to make compensation to the bailor for
any damage caused to the goods. Thus, any unauthorised use of the goods will make the
bailee absolutely liable.
3. Duty not to mix
The finder of goods is bound not to mix the goods with his goods. If the goods are mixed
with the consent of the owner then both the owner and the finder will have a proportional
share in the mixture thus produced. If the goods mixed are of such a nature that they can
be separated from the goods of the finder then the finder of goods will be liable to pay any
such amount which is incurred for the separation of goods. However, if the goods mixed
are of such a nature that they can not be separated from the goods of the finder then the
finder of the goods is required to compensate the owner of the goods for the loss of goods.

4. Duty to Return the goods

The finder of the goods has to return the goods to the owner of the goods. He is bound to
return the goods but can exercise his right of lien if he is not paid the lawful charges.

5. Duty to return the increase

The finder of goods is bound to return any profit or increase from the goods to the owner
of the goods.

Thus, if A has found the cow belonging to X, and the cow has a calf. Here, A is bound to
return the cow along with the calf. A will not become the owner of the calf.

PART B
QUESTION 8
What is the law on Force majeure as a Defense against non- performance of a contract
in India? Discuss the applicability of such law on Covid-19.

ANSWER : 8

The term ‘force majeure’ has been defined in Black’s Law Dictionary, as ‘an event or effect
that can be neither anticipated nor controlled. It is a contractual provision allocating the
risk of loss if performance becomes impossible or impracticable, especially as a result of
an event that the parties could not have anticipated or controlled.’ While force majeure
has neither been defined nor specifically dealt with, in Indian statutes, some reference
can be found in Section 32 of the Indian Contract Act, 1872 (the "Contract Act") envisages
that if a contract is contingent on the happening of an event which event becomes
impossible, then the contract becomes void.

From a contractual perspective, a force majeure clause provides temporary reprieve to a

party from performing its obligations under a contract upon occurrence of a force
majeure event.
A force majeure clause typically spells out specific circumstances or events, which would
qualify as force majeure events, conditions which would have be fulfilled for such force
majeure clause to apply to the contract and the consequences of occurrence of such force
majeure event. As such, for a force majeure clause to become applicable (should any
force majeure event occur), the occurrence of such events should be beyond control of
the parties and the parties will be required to demonstrate that they have made attempts
to mitigate the impact of such force majeure event. If an event or circumstance comes
within the ambit of a force majeure event and fulfils the conditions for applicability of the
clause then the consequence would be that parties would be relieved from performing
their respective obligations to be undertaken by them under the contract during the
period that such force majeure events continue.

Further consequential liabilities, depending on the language of the clause, the parties
maybe required to issue a notice formally intimating the other party of the occurrence of
such event and invocation of the force majeure clause. Some contracts also contain a
provision that if such force majeure event continues for a prolonged time period, the
parties may be permitted to terminate the contract.

A force majeure clause in a contract would typically include an exhaustive list of events
such as acts of God, war, terrorism, earthquakes, hurricanes, acts of government,
explosions, fire, plagues or epidemics or a non- exhaustive list wherein the parties simply
narrate what generally constitute force majeure events and thereafter add “and such
other acts or events that are beyond the control of parties”. As discussed above, it would
also include conditions which would have be fulfilled for such force majeure clause to
apply to the contract and the consequences of occurrence of such force majeure event.
Consequences would include the suspension of obligations of the parties upon
occurrence of a force majeure event.

If a contract does not include a force majeure clause, the parties would have to ascertain
in light factors such as the nature of the contract, the nature of event and so forth, as to
whether Section 56 of the Contract Act (which deals with agreements between the
parties to do an impossible act) and which has been briefly discussed below, can be
applied to such contract so as to discharge the parties from their contractual obligations.

This provision is important for businesses as it relieves the parties from performing their
respective obligations and which are to be undertaken under the contract and
consequential liabilities, during the period that force majeure events continue provided
that the conditions for clause to become applicable (which have been discussed above)
are met.

Under the doctrine of frustration, impossibility of a party to perform its obligations under
a contract is linked to occurrence of an event/circumstance subsequent to
the execution of a contract and which was not contemplated at the time of execution of
the contract.

However, under in case of a force majeure, parties typically identify, prior to the
execution of a contract, an exhaustive list of events, which would attract the applicability
of the force majeure clause.

Frustration of a contract to be invoked and applied requires that the entire subject matter
or underlying rationale for the contract be destroyed. Doctrine of Frustration renders the
contract void and consequently all contractual obligations of the parties cease to exist.
Frustration of a Contract is a test dehors of contractual provisions and is the end result of
events arising after the contract was executed.

Whereas a force majeure is contractual provision contemplating an event, which can

result in deferment of performance of contractual, obligations and therefore rights of
parties thereunder until such event continue and typically does not absolutely excuse
parties from performing their obligations.

Typically, where a force majeure event is not specifically covered under a contract,
frustration of a contract may be claimed by the affected party, however, if the case is
opposite and a particular event is covered as a force majeure event under a contract,
frustration of such contract cannot be automatically claimed.

The following is a hypothetical example to explain the concept of force majeure in a

contract.

Company A had entered into a supply contract for a non-essential good with Company B
and such supply contract makes specific reference to occurrence of a force majeure event
and consequences of the same.

The force majeure provision in the supply contract includes within its ambit any
acts/orders of government and upon occurrence of a force majeure event, notice of the
happening of such event shall be given by either party to the other within 30 days from
the date of occurrence of such event, and consequently obligations of Company B to
supply the goods to Company A and obligation of Company A to make payments to
Company B for such goods shall be deferred for a period of six weeks.

Since in present times, due to the Corona Virus, the lockdown imposed by the
government can be construed as an act/order of the government, Company B will be
required to issue a notice to Company A indicating that such an event has occurred and
the lockdown is beyond the control of Company B and therefore provisions of force
majeure clause will trigger and all obligations of Company A and Company B shall be
deferred for a period during which the order for lockdown continues to be in effect.

It will also be interesting to see the stand which the insurance companies will take vis-a-
vis insurance policies taken by companies to cover loss arising due to certain unforeseen
circumstances in their businesses, and whether COVID-19 will be covered under these
policies.
PART – C
QUESTION : 9a
a. Promissory estoppel

ANSWER : 9a

The doctrine of promissory estoppels is based on the principles of justice, fair play, and
good conscience. It was evolved by equity to prevent injustice. It neither comes under
contract nor under estoppels proper.

The principle is that when one party with the intention of creating or affecting legal
relationship makes a promise with another party and that party acts on it, that promise
should be binding for the party who is making it. It will not be allowed to go back from its
words. Because reverting from the words will be against equity.

In Motilal Padampat Sugar Mills vs State Of Uttar Pradesh And Ors, the Chief Secretary of
Govt. made an assurance that in order to establish industries firmly the total tax exemption
will be given to the new industrial units for next 3 years based on this assurance M.P. sugar
mill started hydro generation plant taking huge amount of money as loan. Afterward govt.
makes some changes in the tax policy saying that industries will be taxed at a varying rate.

Applying the doctrine of promissory estoppels the SC held that appellant took a huge loan
relying on the assurance made by govt. so no tax should be imposed for the period of 3
years from the date of production as the promise was made. And there is nothing like to
make that promise enforceable one party should suffer harm or damages, in absence of
detriment also the promise is binding.

The doctrine of promissory estoppel is an equitable doctrine. Like all equitable remedies, it
is discretionary, in contrast to the common law absolute right like the right to damages for
breach of contract. It is a principle evolved by equity to avoid injustice and though
commonly named ‘promissory estoppel’, it is neither in the realm of contract nor in the
realm of estoppel.

In India, however, as the rule of estoppel is a rule of evidence, the ingredients of Section
115 of the Indian Evidence Act, 1872, must be satisfied with the application of the doctrine.
The doctrine of promissory estoppel does not fall within the scope of Section 115 as the
section talks about representations made as to existing facts whereas promissory estoppel
deals with future promises. The application of the doctrine would negate the constitutional
provision, as under Article 299, which affords exemption from personal liability of the
person making the promise or assurance.

The term ‘promissory estoppel was used for the first time by the Supreme Court in the case
of Collector of Bombay v. Bombay Municipal Corporation. In this case the govt. of Bombay
called upon the predecessor in the name of MC of Bombay to remove old markets from a
certain site and vacate it on the application of MC in 1865. MC gave up that site and spent
a sum of Rs. 17 lacks in erecting and maintaining markets on the new site. The collector of
Bombay assessed the new site to land revenue in 1940 and the MC thereupon filed a suit
for a declaration that it was entitled to hold the land even without payment of any
assessment. SC held that C has the right to hold the land in perpetuity free of rent.
Chandrasekhar Iyer J. while concurring with the majority rested his decision on promissory
estoppels that the govt. could not be allowed to go back on its representation.

The doctrine found a complete and eloquent exposition in the cases of U.O.I v. Anglo-
Afghan Agencies the Government of India made an announcement regarding certain
concessions with regard to the import of certain raw materials in order to encourage export
of woolen garments to Afghanistan. Subsequently, only partial concessions were allowed
and not full concessions were extended as promised. The Supreme Court held that the
Government was estopped by its promise. And after this case, the courts have applied the
doctrine of promissory estoppel and Motilal Padampat Sugar Mills Co. Ltd. v. the State of
U.P.

Where the doctrine of promissory estoppels is not applicable:

1. There are no estoppels against the settled principle of law.

2. It is not applicable in case of concluded commercial contract.

3. The doctrine of promissory estoppels cannot be invoked if the assurance is held out but
not incorporated in the agreement between parties.

4. For applying the principles of promissory estoppels, alteration of the position by the
plaintiff is the only requirement.

Ingredients of the Doctrine of Promissory Estoppel

The principle was laid down that to invoke the doctrine of estoppels, there are three
conditions which must be satisfied;

1. Representation by a person to another

2. The other should have acted upon the said representation and

3. Such action should have been detrimental to the interests of the person to whom the
representation has been made.
PART – C
QUESTION : 9b
Privity of Contract
ANSWER : 9b

The Black’s Law Dictionary (Sixth Edition) defines privity of contract as ‘That connection or
relationship which exists between two or more contracting parties’. It further defines
privity as ‘mutual or successive relationships to the same right of property, or such an
identification of interest of one person with another as to represent the same legal right’.
From the definitions, it is right to conclude that privity of contract is simply a relationship
existing between parties to an agreement/contract’.

Doctrine of Privity of Contract-

The general principle of law is that a contract confers rights and imposes obligations on
the persons who are parties to the contract i.e. persons who executed the contract.
Parties to a contract can enforce such contract against one another.

Consequently, the doctrine of privity of the contract states that only the parties to an
agreement have the right to sue or be sued in respect of issues arising from the
agreement i.e. only the parties to a contract can enforce the contract. This right arises out
of the fact that a contract creates a relationship between the parties and not third
persons.

The foundation for the doctrine of privity of contract was laid in Tweedle v. Atknson, 161.
In this case, two fathers agreed that if their children got married, both fathers will pay a
sum to the groom. The children got married. The groom’s father paid his part of the
agreed sum but the bride’s father failed to pay and subsequently died. The groom
instituted this action against his father-in-law’s estate for the recovery of the sum. The
court held that the contract could not be enforced because the groom was not a party to
the contract even though it was made in his favor.

Effect of the Doctrine of Privity of Contract on Third PARTY

A third party is a person who is not a party to an agreement or transaction. In other

words, he is a person who did not execute the contract which he seeks to enforce. He
does not have rights and obligations under the contract.

Because he is a stranger to a contract which he seeks to enforce, a third party cannot

enforce such a contract neither can the contract be enforced against him. Consequently,
he cannot sue or be sued in regards to any matter which may arise out of the contract.

Effect of the doctrine on third-party beneficiaries

The most a third party can be is a beneficiary of a contract. A third party beneficiary is one
who enjoys benefits from a contract/agreement entered into by two or more parties.

Generally, third-party beneficiaries do not have the right to sue or be sued under the
contract. This was established in In Dunlop Pneumatic Tyre & Co. vs. Selfridge & Co.,
1915. In this case, the plaintiff was into the manufacturing of tyre. The plaintiff sold some
goods to Dew & Co. The companies entered an agreement to the effect that Dew & Co.
shall maintain the price list of the goods and shall not sell the goods below the price list.

It was also agreed that Dew & Co. shall obtain an undertaking from any company it sells
to the goods to. In the undertaking, such company shall also promise not to sell the goods
below the price list. Dew & Co. sold some tyres to the defendant and obtained the
required undertaking from the defendants.

However, the defendant reneged on the undertaking by selling the tyres to another
customer at price below the price list. The plaintiff sued the defendant for damages and
breach of contract. The House Lords dismissed the plaintiff’s suit on the following
grounds:

• There was no enforceable contract between the plaintiff and defendants. Even
though the plaintiff was a beneficiary under the contract, he is not a party to it. It
is a stranger to the contract and cannot claim any right under the contract.

Example: Mr. Dee and Mr. Cee are business partners. Rocky and Dan, are sons of Mr. Dee
and Mr. Cee, respectively. Mr. Dee and Mr. Cee agree to transfer majority interest in their
business to Rocky and Dan, once they attain the age of thirty. Rocky and Dan are third
party beneficiaries. Even though the contract was made to benefit them, Rocky and Dan
cannot enforce the contract against their fathers if their fathers do not keep to the
agreement.

Some jurisdictions, however, have statutory provisions which enable a third-party

beneficiary overcome the doctrine of privity of contract. To be able to successfully sue
under a contract, a third party beneficiary must be an ‘intended beneficiary’ not an
‘incidental beneficiary’.

Exceptions to the Doctrine of privity of contract-

The general principles of law often have exceptions. There are exceptions to the general
doctrine of privity of contract. These exceptions afford third parties, especially third-party
beneficiaries, the opportunity to enforce a contract. We shall consider these exceptions
seriatim.

• Agreement between a third party and Agent of a Disclosed Principal: Where an

agent enters into a contractual relationship with a third party, the agent’s
principal has the right to enforce such a contract against the agent and/or third
party. However, to successfully enforce such an action, two conditions must be
present
 1. The agent must have entered into such agreement in the name of the principal.
2. The agreement is not outside the scope of the agent’s authority.

• Agreement for Marriage Settlement, Partition or Other Family Arrangement: A

person who is a beneficiary under an agreement for marriage settlement, partition
or other family arrangement, can enforce such an agreement as if he is a party to
the agreement.

Privity of contract means the relationship between parties to a contract. Parties to a

contract have rights and obligations under the contract. They can enforce such
obligations against each other and thus can sue or be sued.

The doctrine of privity of contract grants the right to sue and be sued in a contract to
parties in a contract. The doctrine precludes third parties from enforcing a contract as
they are strangers to a contract. Even where a third party is made a beneficiary under a
contract, the general principle of law is that he cannot enforce the contract against the
parties. However, there are exceptions to the doctrine.

These exceptions afford the third party the opportunity to enforce the contract and sue a
party who acts in a manner adverse to the interest of the third-party beneficiary.

PART – C
QUESTION : 10.a
Coercion
ANSWER : 10.a

Coercion (Section 15)

Coercion means using force to compel a person to enter into a contract. So force or threats
are used to obtain the consent of the party under coercion, i.e it is not free consent. Section
15 of the Act describes coercion as

• committing or threatening to commit any act forbidden by the law in the IPC

• unlawfully detaining or threatening to detain any property with the intention of causing
any person to enter into a contract
For example, A threatens to hurt B if he does not sell his house to A for 5 lakh rupees. Here
even if B sells the house to A, it will not be a valid contract since B’s consent was obtained by
coercion.

Now the effect of coercion is that it makes the contract voidable. This means the contract is
voidable at the option of the party whose consent was not free. So the aggravated party will
decide whether to perform the contract or to void the contract. So in the above example, if B
still wishes, the contract can go ahead.

Also, if any monies have been paid or goods delivered under coercion must be repaid or
returned once the contract is void. And the burden of proof proving coercion will be on the
party who wants to avoid the contract. So the aggravated party will have to prove the
coercion, i.e. prove that his consent was not freely given.

PART - C
QUESTION : 10.b
Undue Influence
ANSWER : 10.b

Section 14 of the Indian Contracts Act states that consent is said to be free when it is not
caused by coercion, undue influence, fraud, misrepresentation and mistake subject to the
provisions of the respective sections. Consent is said to be so caused when it would not
have been given for the existence of such coercion, undue influence, fraud,
misrepresentation or mistake. Where consent to an agreement occurs due to coercion,
undue influence, fraud or misrepresentation, the agreement is voidable at the option of
the party whose consent was so caused .

Influence is said to be “undue” when a person, who is in the dominant position, uses that
position to attain unfair benefit for himself at the cost of the person relying upon his
authority or assistance. Section 16(1) of the Contracts Act defines undue influence – A
contract is said to be induced by “undue influence” where the relations subsisting
between the parties is 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. This
definition states that when one of the parties of the contract is dominated over by the
other, and does a particular thing under their influence, that influence is said to be undue
influence. (2) In particular and without prejudice to the generality of the force going
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) where he makes a contract with a person whose
mental capacity is temporarily or permanently affected by reason of age, illness or mental
or bodily distress. (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 face of it or on the
evidence adduced, to be unconscionable, the burden of proving that such contract was
not induced by undue influence shall lie upon the person in a position to dominate the
will of the other.

The phrase “undue influence” cannot be used properly unless a) confidence is exposed on
the person charged, as where the latter is a solicitor, trustee, guardian etc. or b) unless
the influence of a person A is such that B stands in some sort of respect, awe or fear of
him such as a child towards his parents or a pupil towards a spiritual preceptor and so on,
so that the idea of displeasing A by a refusal to submit to his wishes puts B in a fear of
prospective to his individual secular or spiritual welfare and happiness. Undue influence
means the domination of a weak mind by a stronger mind to an extent which causes the
behaviour of the weaker person to assume an unnatural character.

The doctrine of undue influence under the common law was evolved by the Courts in
England for granting protection against transactions procured by the exercise of insidious
forms of influence spiritual or temporal. The doctrine applies to acts of boundary as well
as to other transactions in which one party by exercising his position of dominance
obtains an unfair advantage over another. The Indian enactment is founded substantially
on the rule of English common law. Section 16(1) lays down the general principles. By
section 16(2) a presumption arises that a person shall be deemed to be in a position to
dominate the will of another if the conditions set out therein are fulfilled. Sub-section (3)
lays down the condition for raising a rebuttal presumption that a transaction is procured
by the exercise of undue influence. The reason for the rule in sub-section (3) is that the
person, who has obtained an advantage over another by dominating his will, may also
remain in a position to suppress the requisite evidence in support of the plea of undue
influence.

A transaction is voidable as against a third party, if it is the result of undue influence and
that party took the benefit either as a volunteer or with the knowledge of will of the
executants. A person may be forced by circumstances to enter into a contract which he
would rather not have entered into. If the circumstances are explained to him and it is
pointed out that he ought to enter into the transaction either because his honour
requires it, or he would have peace of mind and be saved from future worries, that would
be pressure, but need not be undue influence or coercion so as to vitiate the transaction.

Undue Influence may be inferred when the benefit is such as the take had no right to
demand and the granter had no rational motive to give. The fact that a person accepted
the terms of a compromise as he had no other option, cannot be the test to determine
whether compromise is liable to be attacked as vitiated by undue influence. The entirety
of the transaction must be taken into consideration and the necessity for the sale, are all
factors which should necessarily be borne in mind before a transaction could be set aside
on the ground that the price paid therefore is so low that it could be said to have been
polluted by undue influence.

In Anson’s law of contract it is stated “If it can be shown that one party exercised such
dominance over the mind and will of the other that the latter’s independence of decision
was substantially undermined, and this domination brought about the transaction, the
victim will be entitled to relive on the ground of undue influence.”

In order to reach conclusions of whether there had been undue influence it must be
proved that the influence was such as to deprive the person affected of the free exercise
of his will. It must amount to imposing a restraint on the will of another whereby he is
prevented from doing what he wishes to do or is forced to do which he does not wish to
do. Any and every persuasion by one party to the other to contract cannot lead to
interference or conclusion that such party has influenced the other party. One may, by his
act and conduct, convince and persuade the other party to do a particular act and if the
other party does such an act freely and of own volition may be to his or her prejudice or
to his or her disadvantage or even to his or her peril, it cannot be said that such an act
was influenced by the other. Also, a wife does not fall under the class of ‘protected
persons’ as in certain relationships there is a presumption of undue influence.

In the case Manali Singhal v. Ravi Singhal , a settlement was arrived at between the
husband and the wife for payment of maintenance to the wife, which was arrived at in
the presence of equal number of persons from both sides. Later on, the husband raised
the plea of coercion and undue influence by the wife. There being no proof that persons
on husband’s side was physically and economically unable to pay and the signatures of
the husband’s entire side were on the agreement in as much as the amount was written
in words as well as figures, it was held that the husband had arrived at a settlement of his
own free will and without any pressure.

Transactions affected by undue influence are voidable, but not void, and so third parties
who acquire some interest in the subject matter of the contract in good faith and for a
value cannot be displaced by the person seeking rescission.

PART – A
QUESTION : 1
Mr. Larsen and Mr. Toubro good friends for over 15 years were working in France and had
been to England for vacation. On expiry of his leave Mr. Larsen was keen to return to
France but Mr. Toubro was not interested to return back. Mr Toubro insisted that Mr.
Larsen provide for his maintenance with a written promise to pay him 500 pounds every
month. Mr Larsen agreed on the same but clearly specified that the deed was not binding,
and it was a moral Obligation. Mr. Larsen returned to work and paid 500 pounds for 6
months after which he refused to fulfil his obligations. Mr Toubro has now filed a case for
breach of Contract. Decide on the following issues:

a. Whether the promise of Mr. Larsen was made with an Intention to create a legal
relationship?
b. Whether between social relation such as the above there can be an enforceable and
binding contract? Explain the same with the help of Case Laws.
c. What are the essential differences between social and legal agreements?

ANSWER : 1
a. No it was not made with an intention to create a legal relationship. Mr Larsen agreed
on the same but clearly specified that the deed was not binding, and it was a moral
Obligation
b. No there cannot be a binding contract
Many agreements remain beyond the scope of contract law, as they do not fulfil the
requirements of a contract. Moreover, there are some agreements which, in literal
sense, appear to satisfy the requirements of a contract (such as, offer, acceptance,
etc), but still (they) are not enforced as contracts because they do not catch the spirit
 of a contract. They are excluded under the legal contrivance that the parties must not
have intended legal consequences to follow. For example, X makes a promise to his
son to buy a motor bike for him if he (the son) scores highest marks in his class. In
case X fails or refuses to give his son the promised award, his son has no remedy
against X, i.e. the promise made by X cannot be enforced. In this example, the
promise is not enforceable at law as there is no intention to create legal obligations.
Such agreement is social agreement which does not give rise to legal consequences.
This illustrates that an agreement is a broader term than a contract. And, therefore, a
contract is an agreement, but every agreement is not essentially a contract
Key Differences Between Agreement and Contract

The points given below are substantial so far as the difference between agreement and
contract is concerned:

1. Promises and commitments forming consideration for the parties to the same
consent is known as an agreement. The agreement, which is legally enforceable is
known as a contract.
2. The agreement is defined in section 2 (e) while a Contract is defined in section 2
(h) of the Indian Contract Act, 1872.
3. The major elements of an agreement is the offer and its acceptance by the same
person to whom it is made, for adequate consideration. Conversely, the major
elements of an agreement are agreement and its enforceability by law.
4. Every agreement is not a contract, but every contract is an agreement.
5. An agreement needs not to be given in writing, but the contracts are normally
written and registered.
6. The agreement does not legally bound any party for the performance. In the
Contract, the people are legally bound to perform their part.
7. The scope of the agreement is wider than a contract because it covers all types of
agreement as well as contract. On the contrary, the scope of a contract is
relatively narrower than an agreement because it covers only that agreement
which have legal enforceability.

PART – A
QUESTION : 2
Romeo, the pet dog of Mrs. Lakhpatni, the wife of a wealthy businessman, went missing
in the at a business conference hall she Page 2 of 3 attended. Her personal Attendant
Bhola, was immediately sent in search of Romeo. Bhola, went in search of the pet outside
the conference hall as he felt Romeo would have run away from overcrowded areas and
maybe needed fresh air. Meanwhile, Mrs. Lakhpatni, announced in the Conference Hall
that whoever returns Romeo, will be paid a sum of Rs. One Lakh as Reward. Bhola, in his
sincerity found Romeo across the street from the Conference Hall. Bhola after returning
Romeo to Mrs. Lakhpatni, learns that there was an announcement of a reward and seeks
to claims the same.
a. Decide the case as to whether Bhola can claim the reward.
b. Elucidate the Rules of a Valid General Offer?
c. Describe the conditions of a valid Acceptance.

ANSWER : 2

a. Plaintiff was a servant of defendant who was sent for finding the dog of his master, who
went missing. The servant was able to find the missing dog. Meanwhile the Owner of
the dog has announced a reward of Rs 1 Lakh for the finder of her dog and the question
arises if the servant can claim this reward.

Statutes and provisions involved:

• 2 (h), and 8 of Indian Contracts Act, 1872

Issues Dealt:

Whether the claim of Rs. 1 LAKH should be provided to the SERVANT or not?

Solution:

That there must be an acceptance to offer in order to convert it into a contract and assent
is the basic essential in order to constitute a contract. At the time he was tracing the dog
he was unaware about this reward associated with dog, so without knowledge how can it
create a contract between parties.

Also that at the time of tracing the missing dog he was acting as a servant and thus fulfilling
the responsibilities and obligations for which he was sent.

Case Law :

#Lalman Shukla vs gauri dutt

In this case it was highlighted by the Honorable High Court of Allahabad that knowledge
and acceptance of a proposal are the basic essentials in order to constitute a valid contract.
If the person gives his assent and then performs the condition of proposal than only he is
entitled to claim rewards associated with such proposal.

Conclusion:

It can be concluded that through this case it was clearly established that firstly, acceptance
or assent is a must for converting a proposal into enforceable contract. Secondly, parties
must have knowledge about the proposal and without knowledge of the proposal it cannot
converted into agreement even if condition associated with such proposal is fulfilled.

b. Rules of a valid general offer

2. Offer may be express or implied

3. Offer may be specific or general
4. Offer must give rise to legal obligation
5. Terms of an offer must be definite and certain
6. Offer must be distinguished from an invitation to offer
7. Offer must be distinguished from a mere declaration of intention
8. Offer must be communicated
9. Communication of special terms
10. Offer must be made with a view to obtaining the consent of the other
party to do or to abstain from doing the act
11. Offer should not impose an unnecessary obligation to communicate non
acceptance.

c. Conditions of valid acceptance

1] Acceptance can only be given to whom the offer was made

2] It has to be absolute and unqualified

3] Acceptance must be communicated

4] It must be in the prescribed mode

5] Implied Acceptance

PART – A
QUESTION : 3
a. Raghu, age 17, wanted to buy a motorcycle. He did not have the money to pay cash but
persuaded the dealer to sell a motorcycle to him on credit. The dealer did so partly
because Raghu said that he was 21 and showed the dealer an identification card that
falsely stated his age as 21. Raghu drove the motorcycle away. A few days later, he
damaged it and then returned it to the dealer and stated that he wants to avoid the
contract because he was a minor. The dealer said that he could not do so because (i) he
had misrepresented his age and (ii) the motorcycle was damaged. Can Raghu avoid his
contractual obligations? Argue.
b. Justify whether Software are goods under the Sale of Goods Act with relevant case law.
ANSWER : 3
a. No estoppel against a minor: Where a minor by misrepresenting his age has induced
the other party to enter into a contract with him, he cannot be made liable for the
contract. There can be no estoppel against a minor. It means he is not estopped from
pleading his infancy in order to avoid a contract. No Specific performance Except in
certain cases A minor's contract being absolutely void, there can be no question of the
specific performance of such contract. Yes, Raghu can avoid his contractual
obligations.

b. In the case of TCS v. State of Andhra Pradesh the Supreme Court held that a software
program on a CD or a floppy drive would be a “good” for the purposes of levy of sales
tax. A software program is a collection of instructions or commands that are given to a
computer to perform a given task. In the TCS case a special mention was given to
‘canned software, where it was held by the learned judge that once a software is
uploaded on a medium like a CD or a floppy drive, it ceases to be a work of intellectual
creation. This is primarily because each of these mediums becomes a marketable
commodity in itself. “Marketability” of a commodity was the determining factor
whether it is a “good” or not. It has also been held that “operational software” which
was uploaded on a hard-disk does not lose its character as a tangible good.

It is argued that since “custom designed” computer software is a product of a labor

intensive process and it must be considered as a service rather than a good. However,
sale of most of the software programs resemble sales of any other consumer product
available for consumption, and it is usually sold through separate pre-existing
packages. On the other hand contracts for providing data processing services have been
held to be contracts for services rather than contracts for “goods”.

With the help of the above justification it is clear that despite of being an intangible
commodity, “computer software” can be included in the definition of “goods” for the
purposes of the ‘Act’.

PART – A
QUESTION : 4
Javed drove his car to a car parkin a shopping mall. Outside the car park, the prices were
displayed and a notice stated cars were parked at their owner’s risk. An automatic ticket
machine provided a ticket, a barrier was raised and Javed parked his car inside the
shopping mall. In small print on the ticket it was stated to be issued subject to conditions
displayed on the premises. On a pillar opposite the machine was a notice stating the
‘Parking at Owners risk-owner of the shopping mall would not be liable for any injuries
occurring on their premises’. On his return from shopping inside the mall, Javed finds that
his car has been damaged. Javed seeks your opinion to file a suit against the shopping
mall for breach of contract and damages. Advise Javed.
ANSWER : 4

I would advise Javed to start legal proceedings against the shopping mall.

Supreme Court of India in a recent Judgment titled Taj Mahal Hotel Vs United India
Insurance Company Ltd. & Others , held that in a case of theft of a Vehicle given for Valet
Parking, the Hotel cannot claim exemption from liability by arguing it was due to acts of
third parties beyond their control, or that they are protected by an owner’s risk clause,
prior to fulfilling its burden as required under Sections 151 and 152 of the Indian Contract
Act, 1872.

By now it is well established, that while a case of robbery by force is visibly beyond a
bailee's control, in cases of private stealth, or simple theft where no force or violence is
involved, the bailee still has the prima facie burden of explaining that the loss or
disappearance of the goods in his custody is not attributable to his neglect or want of care
, held the Bench. This is because no one apart from the bailee is in a position to explain
the fate of the goods.

Supreme Court stated that, in short, the Hotel - Owner cannot contract out of liability for
its negligence or that of its servants in respect of a Vehicle of its guest in any
circumstance. Once the possession of the Vehicle is handed to the Hotel Staff or Valet,
there is an implied contractual obligation to return the Vehicle in a safe condition upon
the direction of the Owner.

Even where there is a general or specific exemption clause, there remains a prima facie
burden of proof on the Hotel to explain that any loss or damage caused to the Vehicles
parked was not on account of its negligence or want of care per Sections 151 & 152 of the
Indian Contract Act, 1872 which applies the reasonable care and prudent test to a
condition where goods are bailed. It is only after this burden of proof is discharged that
the exemption clause can come into force. The burden of proving that such loss or
damage was covered by the exemption clause will also be on the Hotels.

Therefore in Javed’s case,

a. The mall could not contract out of liability for its own negligence or that of its servants
in respect of a vehicle entrusted to its care in any circumstance.
b. There remains a prima facie burden of proof on the mall to explain that any loss or
damage caused to the vehicles parked was not on account of the mall’s negligence or
want of care per Sections 151 and 152 of the Contract Act.
c. It is only after that burden of proof is discharged, that an exemption clause (limiting
liability for third party acts outside the control of the mall) can be effective. The
burden of proving that such loss or damage is covered by the exemption clause will
also be on the mall.
d. Liability for loss or damage by acts of god and third parties can be properly excluded
by and exemption clause.