Business Law [2 ed.]

Table of contents :
Cover
Contents
Chapter 1 Nature and Formation of Contract
Introduction
Key Definitions Used in the Indian Contract Act
Nature of Contract
Elements of Contracts
Classification of Contracts
On the Basis of Validity/Enforceability
On the Basis of Formation/Creation
On the Basis of Performance/Execution
English Law
Exercise
Chapter 2 Offer and Acceptance
Introduction
Proposal
Express Offer and Implied Offer
Specific or General Offer
Essential Requirements of a Valid Offer
Revocation of Offer
Cross Offers
Counter Offer
Tenders
Acceptance
Essentials of a Valid Acceptance
Effect of Silence on Acceptance
Agreement to Agree in Future
Counter Offer is not an Acceptance
Communication of Offer, Acceptance and Revocation
Revocation of Proposal and Acceptance
Termination of Offer
Revocation or Lapse of Offer—Sec. 6
Offer and Acceptance by Post
Contracts over Telephone or Telex
Exercise
Chapter 3 Consideration
Introduction
Definition
Types of Consideration
Essentials of Consideration
Privity of Contract
Exceptions
No Consideration – No Contract
Exceptions
Exercise
Chapter 4 Capacity of Parties
Introduction
Definition
Minors
Minors in Indian Law
Legal Decisions Constituting Necessities
Liability of the Minor for Torts and Crimes
Persons of Unsound Mind
Idiocy
Lunacy
Drunken Persons
Disqualified Persons
Aliens
Foreign Sovereigns
Statutory Corporations
Married Women
Insolvent Person
Professionals
Exercise
Chapter 5 Free Consent
Introduction
When is Consent said to be Free?
Coercion
Essentials of Coercion
Burden of Proof
Duress
Effect of Coercion
Undue Influence
Essentials of Undue Influence
Undue Influence—Consequences
Defences Available against Undue Influence
Pardanashin Women
Fraud
Elements of Fraud
Mere Silence is not Fraud
Fraud—Consequences
Misrepresentation
Essentials of Misrepresentation
Consequences of Misrepresentation
Mistake
Mistake of Law
Mistake of Fact
Exercise
Chapter 6 Legality of Object and Consideration
Introduction
Definition
Agreements against Public Policy
Exercise
Chapter 7 Void Agreements
Introduction
Classification of Unlawful Agreements
Agreements in Restraint of Trade
Agreements in Restraint of Legal Proceedings
Uncertain Agreements
Wagering Agreements
Essentials of Wagering Agreements
Effects of Wagering Agreements
Exceptions
Agreements Contingent on Impossible Events [Sec. 36]
Agreement to Agree in Future
Illegal Agreement
Exercise
Chapter 8 Contingent and Quasi-Contracts
Definition
Essentials of Contingent Contracts
Rules Regarding Enforcement of Contingent Contracts [Secs. 32 to 36]
Quasi-Contracts
Quantum Meruit
Exercise
Chapter 9 Performance of Contracts
Introduction
Tender
Essentials of a Valid Tender Performance
By Whom must the Contracts be Performed?
Performance of Reciprocal Promise [Secs. 51–54 and 57]
Time, Place and Manner of Performance [Secs. 46–50 and 55]
Assignment of Contracts
Contracts which Need Not be Performed
Who can Demand Performance?
Appropriation of Payments
Rule in the Hallett’s Estate Case
Exercise
Chapter 10 Modes of Discharge of Contracts
Introduction
Discharge By Performance
Tender
Discharge by Mutual Consent [Sec. 62]
Novation
Rescission
Alteration
Remission
Waiver
Merger
Discharge by Impossibility of Performance
Impossibility at the Time of Contract
Subsequent or Supervening Impossibility
Exceptions
The Doctrine of Frustration
Effects of Supervening Impossibility
Discharge by Lapse of Time
Discharge by Operation of Law
Discharge by Breach of Contract
Actual Breach of Contract
Anticipatory Breach of Contract
Termination by Material Alteration
Exercise
Chapter 11 Remedies for Breach of Contract
Introduction
Cancellation or Rescission
Restitution
Specific Performance
Injunction
Damages
General or Compensatory Damages
Special Damages
Nominal Damages
Exemplary or Vindictive Damages
Rules Regarding the Amount of Damages
Difficulty in Calculating Damages
Liquidated Damages and Penalty
Conditions Regarding Payment of Interest
Quantum Meruit
Contract not Enforceable
Exercise
Chapter 12 Indemnity and Guarantee
Introduction
Contract of Indemnity
Contract of Guarantee
Extent of Surety’s Liability
Kinds of Guarantee
Specific Guarantee
Continuing Guarantee
Rights of Surety
Rights against Creditor
Rights against Principal Debtor
Rights against Co-sureties
Discharge of Surety
Discharge of Surety by Revocation
Discharge of Surety by the Conduct of Creditor
Discharge of Surety by Invalidation of Contract
Exercise
Chapter 13 Bailment and Pledge
Introduction
Definition of Bailment
Requisites of Bailment
Does Deposit of Money Constitute Bailment?
Bailment and Sale
Bailment and Hire-purchase
Classification of Bailments
On the Basis of Charge
On the Basis of Benefits
Duties and Rights of Bailor and Bailee
Duties of Bailor
Duties of Bailee
Rights of Bailor
Rights of Bailee
Termination of Bailment
Lien
Pledge
Rights of Pawnor
Rights of Pawnee
Duties of Pawnor
Duties of Pawnee
Finder of Goods
Duties of Finder of Goods
Rights of Finder of Goods
Pledge by Non-owners
Carrier of Goods
Meaning of Charge
Meaning of Mortgage
Sale Vs. Mortgage, Pledge and Hypothecation
Exercise
Chapter 14 Law of Agency
Introduction
Contract of Agency—Special Features
General Rules Regarding Agency
Classification of Agents
Creation of Agency
Liabilities of the Principal towards Third Parties
Named Principal/Disclosed Principal
Unnamed Principal
Undisclosed Principal
Revocation/Renunciation
Termination of Agent’s Authority as to Third Persons
Duties of Principal
Rights of Principal
Duties of Agent
Rights of Agent
Delegation of Authority of Agent
Exceptions to the General Rule [Sec. 190]
Effects of Delegation of Authority
Personal Liability of an Agent
Termination of Agency
By the Act of the Parties
By Operation of Law
Effects of Termination
Irrevocable Agency
Exercise
Chapter 15 Formation of Contracts under the Sale of Goods Act, 1930
Introduction
Contract of Sale
Sale
Elements of Contract of Sale
Distinction between Sale and Agreement to Sell
Sale and Hire-purchase Agreement
Essentials of Hire-purchase Agreement
Meaning of Goods—Sec. 2 (7)
Documents of Title to Goods [Sec. 2 (4)]
Classification of Goods
Price of Goods
Modes of Fixing the Price
Earnest Money
Conditions and Warranties
Stipulations as to Time
Condition and Warranty [Sec. 12]
Distinction between Condition and Warranty
Circumstances when a Condition can be Treated as Warranty
Implied Conditions and Warranties [Sec. 14–17]
Implied Warranties as to the Title and Possession [Sec. 14]
Implied Conditions as to the Description [Sec. 15]
Implied Conditions as to Quality or Fitness (Caveat Emptor) [Sec. 16]
The Exceptions to the Doctrine
Implied Condition as to the Mercantile Quality [Sec. 16(2)]
Usage of Trade [Sec. 16 (3)]
Sale by Sample [Sec. 17 (1)]
Exercise
Chapter 16 Transfer of Property and Rights of an Unpaid Seller
Introduction
Transfer of Title by Non-owners [Secs. 27–30]
General Rule as to Transfer of Title [Sec. 27]
Exceptions to the Rule
Performance of the Contract
Rules Regarding Delivery of Goods
Rights of the Buyer
Acceptance
Rights of an Unpaid Seller
Rights of an Unpaid Seller against Goods [Sec. 46]
Rights of Unpaid Seller against the Buyer Personally
Auction Sale
Exercise
Chapter 17 Value Added Tax Meaning of VAT
Meaning of VAT
Objectives of VAT
How does VAT work?
Levy of VAT and Types of VAT
Methods of computation of VAT
Benefits to Government
Traders
Consumers
Problems of VAT
Meaning of Cost Cascade
Advantages of VAT
Disadvantages of VAT
Exercise
Chapter 18 Insurance
Introduction
The Insurance Act, 1938
Life Insurance Corporation Act, 1956
General Insurance Business(Nationalisation) Act, 1972
Insurance Regulatory and Development Authority (IRDA) Act, 1999
Meaning of Insurance
Important Definitions
Functions of Insurance
Duties of the Insurers
Rights of Insurers
Principles of Insurance
Types of Insurance
Life Insurance
General Insurance
Exercise
Chapter 19 Consumer Protection Act
Introduction
Significance of the Consumer Protection Act
Rights of Consumers
Important Definitions
Judicial Decisions
Consumer Protection Councils
Central Consumer Protection Council
State Consumer Protection Council
Redressal Machinery under the Act
District Forum
State Commission
National Commission
Complaints before the District Forum and State Commission
Limitation Period for Filing of Complaint
Administrative Control
Nature and Scope of the Remedies under the Act
Appeals
Penalties
Excercise

Citation preview

BUSINESS LAW

BUSINESS LAW

Dr V Balachandran, M.Com., FCS, BGL, FUWAI, M.Phil., Ph.D Professor of Corporate Secretaryship Alagappa University Karaikudi

S Thothadri, M.A.(C.S), M.Phil. Lecturer in Corporate Secretaryship The New College Chennai

Vijay Nicole Imprints Private Limited CHENNAI

Vijay Nicole Imprints Private Limited No. 4, First Floor, Velachery-Madipakkam Main Road, Ram Nagar South, Chennai - 600 091. Phone: +91-44-42811452 , 42811349, 42811601 Email: [email protected] www.vijaynicole.co.in

Business Law � ISBN-13: 978-81-8209-���-�

!COPYRIGHT © 201 , Vijay Nicole Imprints Private Limited

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Information contained in this work has been obtained by publishers, from sources believed to be reliable. However, neither publishers nor copyright holders guarantee the accuracy or completeness of any information published herein, and neither publishers nor copyright holders shall be responsible for any errors, omissions, or damages arising out of use of this information. This work is published with the understanding that publishers and copyright holders are supplying information but are not attempting to render engineering or other professional services. If such services are required, the assistance of an appropriate professional should be sought.

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Laser Typeset at: Maven Learning Private Limited, Chennai - 600 091 Printed at: Maven Learning Private Limited, Chennai - 600 091

DEDICATED TO HIS HOLINESS SHRI KANCHI MAHASWAMIGAL

Contents Preface ....................................................................................... xv

Chapter 1

Nature and Formation of Contract

Introduction ........................................................................................... 1 Key Definitions Used in the Indian Contract Act ................................... 3 Nature of Contract ................................................................................ 4 Elements of Contracts .......................................................................... 6 Classification of Contracts ................................................................... 8 On the Basis of Validity/Enforceability ....................................... 10 On the Basis of Formation/Creation ......................................... 10 On the Basis of Performance/Execution .................................... 11 English Law .............................................................................. 12

Exercise ...................................................................................... 12

Chapter 2

Offer and Acceptance

Introduction ......................................................................................... 17 Proposal ............................................................................................. 17 Express Offer and Implied Offer ................................................ 18 Specific or General Offer ........................................................... 18 Essential Requirements of a Valid Offer ................................... 19 Revocation of Offer .................................................................... 20 Cross Offers .........................................................................................21 Counter Offer ............................................................................. 21 Tenders ..................................................................................... 22 Acceptance ......................................................................................... 23 Essentials of a Valid Acceptance .............................................. 23 Effect of Silence on Acceptance ................................................ 24 Agreement to Agree in Future .................................................... 25 Counter Offer is not an Acceptance ........................................... 25 Communication of Offer, Acceptance and Revocation ....................... 25 Revocation of Proposal and Acceptance .................................. 26 Termination of Offer ................................................................... 27 Revocation or Lapse of Offer—Sec. 6 ....................................... 27 Offer and Acceptance by Post ............................................................. 28 Contracts over Telephone or Telex ............................................ 28

Exercise ...................................................................................... 29

Chapter 3

Consideration

Introduction ......................................................................................... Definition ............................................................................................. Types of Consideration ............................................................. Essentials of Consideration ..................................................... Privity of Contract ................................................................................ Exceptions ................................................................................. No Consideration – No Contract ........................................................ Exceptions .................................................................................

33 33 34 34 37 37 38 39

Exercise ...................................................................................... 40

Chapter 4

Capacity of Parties

Introduction ......................................................................................... Definition ............................................................................................. Minors ................................................................................................. Minors in Indian Law ................................................................. Legal Decisions Constituting Necessities ............................... Liability of the Minor for Torts and Crimes ................................ Persons of Unsound Mind .................................................................. Idiocy ......................................................................................... Lunacy ....................................................................................... Drunken Persons ...................................................................... Disqualified Persons .......................................................................... Aliens ........................................................................................ Foreign Sovereigns ................................................................... Statutory Corporations ............................................................... Married Women ......................................................................... Insolvent Person ....................................................................... Professionals ............................................................................

43 43 44 44 46 47 48 49 49 49 49 50 50 50 50 50 51

Exercise ...................................................................................... 51

Chapter 5

Free Consent

Introduction ......................................................................................... When is Consent said to be Free? ........................................... Coercion ............................................................................................. Essentials of Coercion ............................................................. Burden of Proof ......................................................................... Duress ...................................................................................... Effect of Coercion ......................................................................

55 55 56 56 56 57 57

ix Undue Influence ................................................................................. Essentials of Undue Influence ................................................. Undue Influence—Consequences ........................................... Defences Available against Undue Influence ........................... Pardanashin Women ................................................................ Fraud ................................................................................................... Elements of Fraud ..................................................................... Mere Silence is not Fraud ......................................................... Fraud—Consequences ............................................................ Misrepresentation ............................................................................... Essentials of Misrepresentation ............................................... Consequences of Misrepresentation ....................................... Mistake ................................................................................................ Mistake of Law .......................................................................... Mistake of Fact ..........................................................................

57 58 59 60 60 60 61 62 63 63 64 64 66 66 66

Exercise ...................................................................................... 70

Chapter 6

Legality of Object and Consideration

Introduction ......................................................................................... 75 Definition ............................................................................................. 75 Agreements against Public Policy ...................................................... 79

Exercise ...................................................................................... 82

Chapter 7

Void Agreements

Introduction ......................................................................................... Classification of Unlawful Agreements .............................................. Agreements in Restraint of Trade ...................................................... Agreements in Restraint of Legal Proceedings ................................. Uncertain Agreements ........................................................................ Wagering Agreements ........................................................................ Essentials of Wagering Agreements ........................................ Effects of Wagering Agreements .............................................. Exceptions ................................................................................. Agreements Contingent on Impossible Events [Sec. 36] .................. Agreement to Agree in Future ............................................................. Illegal Agreement ................................................................................

85 85 86 89 90 90 91 92 92 94 94 94

Exercise ...................................................................................... 97

Chapter 8

Contingent and Quasi-Contracts

Definition ............................................................................................. 99 Essentials of Contingent Contracts ................................................... 99 Rules Regarding Enforcement of Contingent Contracts [Secs. 32 to 36] ...................................................... 100 Quasi-Contracts ............................................................................... 101 Quantum Meruit ....................................................................... 104

Exercise .................................................................................... 105

Chapter 9

Performance of Contracts

Introduction ....................................................................................... Tender ............................................................................................... Essentials of a Valid Tender Performance ............................. By Whom must the Contracts be Performed? ........................ Performance of Reciprocal Promise [Secs. 51–54 and 57] .............................................................. Time, Place and Manner of Performance [Secs. 46–50 and 55] .............................................................. Assignment of Contracts ........................................................ Contracts which Need Not be Performed ............................... Who can Demand Performance? ........................................... Appropriation of Payments ...................................................... Rule in the Hallett’s Estate Case ............................................

107 107 108 110 113 115 116 117 118 119 120

Exercise .................................................................................... 120

Chapter 10

Modes of Discharge of Contracts

Introduction ....................................................................................... Discharge By Performance .............................................................. Tender ..................................................................................... Discharge by Mutual Consent [Sec. 62] .......................................... Novation .................................................................................. Rescission .............................................................................. Alteration ................................................................................. Remission .............................................................................. Waiver ...................................................................................... Merger ..................................................................................... Discharge by Impossibility of Performance ..................................... Impossibility at the Time of Contract ....................................... Subsequent or Supervening Impossibility .............................. Exceptions ...............................................................................

123 124 124 125 125 125 125 125 126 126 126 127 127 129

xi The Doctrine of Frustration ..................................................... Effects of Supervening Impossibility ....................................... Discharge by Lapse of Time ............................................................ Discharge by Operation of Law ........................................................ Discharge by Breach of Contract ...................................................... Actual Breach of Contract ........................................................ Anticipatory Breach of Contract ............................................... Termination by Material Alteration .....................................................

130 133 133 134 134 135 136 137

Exercise .................................................................................... 137

Chapter 11

Remedies for Breach of Contract

Introduction ....................................................................................... Cancellation or Rescission .............................................................. Restitution ......................................................................................... Specific Performance ........................................................................ Injunction .......................................................................................... Damages .......................................................................................... General or Compensatory Damages ..................................... Special Damages ................................................................... Nominal Damages ................................................................. Exemplary or Vindictive Damages .......................................... Rules Regarding the Amount of Damages ............................ Difficulty in Calculating Damages ........................................... Liquidated Damages and Penalty .......................................... Conditions Regarding Payment of Interest ............................ Quantum Meruit ................................................................................ Contract not Enforceable ........................................................

141 142 143 143 144 144 145 145 145 146 147 149 149 150 151 151

Exercise .................................................................................... 152

Chapter 12

Indemnity and Guarantee

Introduction ....................................................................................... Contract of Indemnity ........................................................................ Contract of Guarantee ...................................................................... Extent of Surety’s Liability ........................................................ Kinds of Guarantee ....................................................................... Specific Guarantee .................................................................. Continuing Guarantee ............................................................. Rights of Surety ................................................................................ Rights against Creditor ........................................................... Rights against Principal Debtor .............................................. Rights against Co-sureties .....................................................

155 155 156 158 158 158 159 159 160 160 161

Discharge of Surety .......................................................................... Discharge of Surety by Revocation ......................................... Discharge of Surety by the Conduct of Creditor ...................... Discharge of Surety by Invalidation of Contract ......................

162 163 163 164

Exercise .................................................................................... 167

Chapter 13

Bailment and Pledge

Introduction ....................................................................................... Definition of Bailment .............................................................. Requisites of Bailment ........................................................... Does Deposit of Money Constitute Bailment? ........................ Bailment and Sale ................................................................... Bailment and Hire-purchase .................................................. Classification of Bailments .............................................................. On the Basis of Charge .......................................................... On the Basis of Benefits ......................................................... Duties and Rights of Bailor and Bailee ............................................ Duties of Bailor ........................................................................ Duties of Bailee ....................................................................... Rights of Bailor ........................................................................ Rights of Bailee ....................................................................... Termination of Bailment ................................................................... Lien ................................................................................................... Pledge .............................................................................................. Rights of Pawnor ..................................................................... Rights of Pawnee .................................................................... Duties of Pawnor ..................................................................... Duties of Pawnee .................................................................... Finder of Goods ................................................................................ Duties of Finder of Goods ....................................................... Rights of Finder of Goods ....................................................... Pledge by Non-owners ........................................................... Carrier of Goods ............................................................................... Meaning of Charge .................................................................. Meaning of Mortgage ............................................................... Sale Vs. Mortgage, Pledge and Hypothecation ......................

169 169 169 171 171 171 171 171 172 172 172 173 174 175 177 177 178 179 179 179 179 180 180 180 181 181 182 182 182

Exercise .................................................................................... 183

xiii

Chapter 14

Law of Agency

Introduction ....................................................................................... Contract of Agency—Special Features .................................... General Rules Regarding Agency .......................................... Classification of Agents .................................................................... Creation of Agency ............................................................................ Liabilities of the Principal towards Third Parties .............................. Named Principal/Disclosed Principal .................................... Unnamed Principal ................................................................. Undisclosed Principal ............................................................. Revocation/Renunciation ................................................................. Termination of Agent’s Authority as to Third Persons ....................... Duties of Principal ............................................................................ Rights of Principal ............................................................................ Duties of Agent .................................................................................. Rights of Agent .................................................................................. Delegation of Authority of Agent ..................................................... Exceptions to the General Rule [Sec. 190] ............................. Effects of Delegation of Authority ............................................. Personal Liability of an Agent ........................................................... Termination of Agency ....................................................................... By the Act of the Parties ........................................................... By Operation of Law ................................................................ Effects of Termination ............................................................. Irrevocable Agency ...................................................................

187 187 188 189 190 194 194 195 195 195 196 197 198 199 200 200 201 201 203 206 206 207 207 208

Exercise .................................................................................... 209

Chapter 15

Formation of Contracts under the Sale of Goods Act, 1930

Introduction ....................................................................................... Contract of Sale ................................................................................ Sale ................................................................................................... Elements of Contract of Sale .................................................. Distinction between Sale and Agreement to Sell ................... Sale and Hire-purchase Agreement ................................................. Essentials of Hire-purchase Agreement ................................ Meaning of Goods—Sec. 2 (7) ......................................................... Documents of Title to Goods [Sec. 2 (4)] ................................ Classification of Goods ..........................................................

213 213 213 214 216 217 217 218 219 220

Price of Goods .................................................................................. Modes of Fixing the Price ........................................................ Earnest Money ........................................................................ Conditions and Warranties .............................................................. Stipulations as to Time ........................................................... Condition and Warranty [Sec. 12] ............................................ Distinction between Condition and Warranty ......................... Circumstances when a Condition can be Treated as Warranty ................................................................ Implied Conditions and Warranties [Sec. 14–17] ............................ Implied Warranties as to the Title and Possession [Sec. 14] ....................................................... Implied Conditions as to the Description [Sec. 15] ................ Implied Conditions as to Quality or Fitness (Caveat Emptor) [Sec. 16] ....................................................... The Exceptions to the Doctrine ............................................... Implied Condition as to the Mercantile Quality [Sec. 16(2)] .... Usage of Trade [Sec. 16 (3)] ................................................... Sale by Sample [Sec. 17 (1)] ...................................................

221 221 223 223 223 223 224 225 225 226 226 226 227 228 228 228

Exercise .................................................................................... 229

Chapter 16

Transfer of Property and Rights of an Unpaid Seller

Introduction ....................................................................................... Transfer of Title by Non-owners [Secs. 27–30] ................................ General Rule as to Transfer of Title [Sec. 27] ......................... Exceptions to the Rule ............................................................ Performance of the Contract ............................................................. Rules Regarding Delivery of Goods ....................................... Rights of the Buyer ........................................................................... Acceptance .............................................................................. Rights of an Unpaid Seller ............................................................... Rights of an Unpaid Seller against Goods [Sec. 46] .............. Rights of Unpaid Seller against the Buyer Personally ........... Auction Sale ............................................................................

235 237 237 238 241 241 244 245 246 247 250 250

Exercise .................................................................................... 251

Chapter 17

Value Added Tax

Meaning of VAT .................................................................................. 257 Objectives of VAT ............................................................................... 257 How does VAT work? ............................................................... 257 Levy of VAT and Types of VAT ............................................................. 259 Methods of computation of VAT ................................................ 259 Benefits to Government ........................................................... 260 Traders ..................................................................................... 260 Consumers .............................................................................. 261 Problems of VAT ................................................................................ 261 Meaning of Cost Cascade ....................................................... 263 Advantages of VAT ............................................................................. 264 Disadvantages of VAT ........................................................................ 265

Exercise .................................................................................. 266

Chapter 18

Insurance

Introduction ........................................................................................ 269 The Insurance Act, 1938 .......................................................... 269 Life Insurance Corporation Act, 1956 ...................................... 269 General Insurance Business(Nationalisation) Act, 1972 ....... 269 Insurance Regulatory and Development Authority (IRDA) Act, 1999 ............................................... 270 Meaning of Insurance .............................................................. 270 Important Definitions ............................................................... 270 Functions of Insurance ............................................................ 272 Duties of the Insurers .............................................................. 274 Rights of Insurers .................................................................... 274 Principles of Insurance ..................................................................... 275 Types of Insurance ............................................................................ 277 Life Insurance .......................................................................... 277 General Insurance ................................................................... 277

Exercise .................................................................................. 282

Chapter 19

Consumer Protection Act

Introduction ........................................................................................ 286 Significance of the Consumer Protection Act .......................... 286 Rights of Consumers .............................................................. 286 Important Definitions ............................................................... 287 Judicial Decisions ................................................................... 291

Consumer Protection Councils ........................................................ Central Consumer Protection Council .................................... State Consumer Protection Council ....................................... Redressal Machinery under the Act ........................................ District Forum .......................................................................... State Commission .................................................................. National Commission ............................................................. Complaints before the District Forum and State Commission Limitation Period for Filing of Complaint ................................ Administrative Control ............................................................. Nature and Scope of the Remedies under the Act ................. Appeals ................................................................................... Penalties .................................................................................

294 295 295 295 296 297 299 300 301 301 301 303 303

Excercise .................................................................................. 304

Preface Law denotes rules of conduct enforced by the State. The Laws governing various aspects relating to business are not only numerous but also complex. The present book is designed primarily to cater to the requirements of B.Com. students of Madras University. The unique feature of the book is that the Provisions of the General Principles of Law of Contracts, Special Kinds of Contracts and Sales of Goods Act,1930 are presented in a lucid style. Relevant case laws are cited at the appropriate places. To make the reading interesting, live examples and illustrations are given wherever necessary. We earnestly hope that this book would serve as a classroom textbook for students pursuing B.Com., BBA, BCS courses of not only Madras University but also other universities. We wish to record our sincere thanks to Mr P K Madhavan, Managing Director, Vijay Nicole Imprints Private Limited and his dedicated team for having brought out this book in a short span of time. Suggestions are welcome and shall be gratefully acknowledged. Dr V Balachandran S Thothadri

1

CHAPTER

Nature and Formation of Contract INTRODUCTION The existence of law is necessary for the maintenance of peace and order in the society. According to Woodrow Wilson, law is that portion of the established 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. The law of contracts is the basis of mercantile or business laws. The mercantile law deals with the rights and obligations arising out of mercantile transactions. The important sources of mercantile law in India are the English Mercantile Law, its precedents, customs, usages, and Acts of the Indian Legislature. Further, the sources of English Mercantile Law are Common Law, Principles of Equity, Law Merchant and Acts of the British Legislature. Trade, commerce, and manufacturing have moved from the simple to the specialised form and law has followed the trajectory to provide answers to the emergent issues and disputes.

Fig. 1.1 Sources of Mercantile Law

2 BUSINESS LAW Laws in India are to a great extent based on English Acts applicable in England. Over a period of time, Commercial law developed with changing practices of trade and commerce. The key Acts passed by the Indian Legislature are the Indian Contract Act, 1872, the Negotiable Instruments Act, 1881, the Sale of Goods Act, 1930, the Partnership Act, 1932, and the Companies Act, 1956. The term ‘Commercial Law’ includes laws relating to Contract, Partnership, Negotiable Instruments, Sale of Goods, Companies, etc. The law of contracts in India is contained in the Indian Contract Act, 1872. The Indian Contract Act, 1872, one of the oldest statutes, has been enacted to enforce valid contracts in a court of law. According to Sir William Anson, the law of contract is intended to ensure that what a man has been led to expect shall come to pass, and that what has been promised to him shall be performed. The Act came into force from 1st Sept. 1872. It is applicable to the whole of India, except the state of Jammu and Kashmir. The Indian Contract Act, 1872 has laid down certain general rules regarding contracts. It includes formation of contracts, essential elements of valid contract, discharge of contracts, breach of contracts, remedies for breach of contracts, contingent contracts, quasi contracts, and wagering contracts. While Sec. 1 to Sec. 75 deals with General contracts, Sec. 124 to Sec. 238 deals with special kinds of contracts such as Indemnity and Guarantee, Agency, Bailment and Pledge, etc. The Provisions relating to contracts of sale of goods Sec. 76 to Sec. 123 and partnership Sec. 239 to Sec. 266 contained earlier in the Indian Contract Act, 1872 were repealed. Later, separate acts known as Sale of Goods Act, 1930 and the Indian Partnership Act, 1932, were passed. The scope of the act is depicted in Fig.1.2

NATURE AND FORMATION OF CONTRACT 3

Fig. 1.2

Scope of Indian Contract Act

The Contract Act provides the basis for other branches of business law, namely, laws relating to Negotiable Instruments Act, Insurance Act, Insolvency Act, and Companies Act, etc. They are all based upon the general principles of contract act. KEY DEFINITIONS USED IN THE INDIAN CONTRACT ACT Proposal [Sec. 2(a)] When one person signifies to another his willingness to do or to abstain from doing anything with a view to obtaining the assent of the other person to such act or abstinence, he is said to make a proposal.

4 BUSINESS LAW Promise [Sec. 2(b)] 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. Promisor and Promisee [Sec. 2(c)] The person making the proposal is called the ‘Promisor’, and the person accepting the proposal is called the ‘Promisee’. Consideration [Sec. 2(d)] When, at the desire of the promisor, the promisee or any other person has done or abstained from doing or does or abstains from doing or promises to do or abstain from doing something, such act, or abstinence, or promise, is called a consideration for the promise. Agreement [Sec. 2(e)] Every promise and every set of promises forming consideration for each other is an agreement. Reciprocal promises [Sec. 2(f)] Promises which form the consideration or part of the consideration for each other are called reciprocal promises. Void agreement [Sec. 2(g)] An agreement not enforceable by law is said to be void. Contract [Sec. 2 (h)] An agreement enforceable by law is a contract. Voidable agreement [Sec. 2(i)] An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others is a voidable contract. Void contract [Sec. 2(j)] A contract, which ceases to be enforceable by law becomes void when it ceases to be enforceable. Nature of Contract According to Sec. 2(h) of the Contract Act, a contract is an agreement enforceable by law. In most of the commercial transactions, each party is both a promisor and a promisee, as the contract is formed by mutual promises. According to Sir William Anson, ‘a contract is an agreement, enforceable at law, made between two or more persons, by which, rights are acquired by one or more to acts/forbearances on the part of other or others’. The agreement will be enforceable if it creates some obligation. An obligation is the legal duty which imposes upon a particular person, the necessity of doing/abstaining from doing an act/acts. It is clear that the law of contract is not the whole law of contracts, nor is it the whole law of obligations. It applies to only

NATURE AND FORMATION OF CONTRACT 5 those agreements which are enforceable by law. It does not affect the customs/usage of trade which is not illegal. Besides, it does not apply to social and religious obligations. Thus, Contract = Agreement + Enforceability Agreement = Offer + Acceptance The conditions of enforceability are laid down in Sec. 10 of the Act which reads as follows: “All agreements are contracts, if they are made with the free consent of the parties competent to contract, for a lawful consideration, and with a lawful object, and are not hereby expressly declared to be void.” To sum up the position (1) There must be a proposal [Sec. 2(a)] (2) Proposal + Acceptance = Promise [Sec. 2(b)] (3) Promise + Consideration = Agreement [Sec. 2(e)] (4) Agreement + Enforceability = Contract [Sec. 2(h)] Table 1.1 Distinction between Agreement and Contract S.No.

Agreement

1.

The enforceability depends on the nature of agreement.

It is enforceable under the provisions of the law of the country.

2.

Agreements may be lawful or unlawful.

Only lawful agreements become contracts enforceable in a court of law.

3.

An offer when accepted becomes an agreement.

A contract is entered into by an agreement and hence valid contracts are enforceable.

4.

When agreements are illegal or immoral, the parties are not liable to perform.

It creates legal obligation on the parties to the contract.

5.

The scope of an agreement is more comprehensive than contracts, as agreements can be social agreements, legal agreements, unlawful agreements, and domestic agreements.

The scope is limited as only legal agreements become contracts that are enforceable.

Contract

Table 1.2 S.No.

Distinction between Void Contract and Voidable Contract Void Contract

Voidable Contract

1.

A contract which cannot be enforced in a court of law is known as a void contract.

A contract which is enforceable at the option of the aggrieved party is a voidable contract.

2.

A void contract cannot be changed into a valid contract.

A voidable contract can be changed into a valid contract at the desire of the aggrieved party.

3.

Contracts become void on account of specific violations of statutes.

Contracts become voidable on account of absence of free consent, i.e., coercion, undue influence, fraud, mistake, misrepresentation.

4.

As the contracts cannot be enforced, the question of indemnity will not arise to either of the parties to the contracts.

As free consent is obtained by lawful means, the aggrieved party is entitled for compensation.

5.

The parties have no option. It does not create any legal rights /obligations. In case the main agreement is void, the collateral transactions are not affected.

The aggrieved party can either accept the terms of the contract, or set aside the contract.

ELEMENTS OF CONTRACTS

Fig. 1.3

Essential Elements of a Valid Contract

NATURE AND FORMATION OF CONTRACT 7 Offer and acceptance Lawful offer by one party and a lawful acceptance of the offer by the other party or parties is a must for forming a contract. Legal relationship There must be an intention among the parties to create legal relations. An agreement to dine at a friend’s residence is not an agreement intended to create legal relations, and hence, is not a contract. But an agreement to buy and sell goods or an agreement to entrust a machine to a mechanic for repairs, are agreements intended to create a legal relationship, and are therefore contracts, provided the other essential elements are also satisfied. Lawful consideration An agreement, subject to certain exceptions, is legally enforceable only when each of the parties gives something and gets something. An agreement to do something for nothing is not enforceable by law. The something given or taken is, technically, called a consideration. A consideration is the necessary evidence required by law of the intentions of the parties to create a legal relationship. The consideration may be an act (doing something) or forbearance (not doing something) or a promise to do or not to do something. A consideration may be past (something already done). It may also be present or future. But only those considerations are valid which are ‘lawful’. Capacity of the parties The parties to an agreement must be legally capable of entering into an agreement; otherwise it cannot be enforced by a court of law. Incapacity may arise from minority, lunacy, idiocy, drunkenness, and similar other factors. If any of the parties to the agreement suffers from any such disability, the agreement is not enforceable by law except in some special cases. Free consent In order to be enforceable, an agreement must be based on the free and genuine consent of all the parties. The parties must be of the same mind upon the same subject. There is absence of free and genuine consent if the agreement is induced by coercion, undue influence, mistake, misrepresentation, or fraud. Legality of the object The object for which the agreement has been entered into, must not be illegal, or immoral, or opposed to public policy. For example, where a person is in insolvent circumstances transferred his property to one of his creditors with the object of defrauding his other creditors, it was held that the agreement was void.

8 BUSINESS LAW Legal formalities An oral contract is a perfectly good contract, except in those cases where formalities of writing, and/or registration, etc., are to be legally observed. In India, writing is required in cases of lease, gift, sale, and mortgage of immovable property, negotiable instruments, memorandum and articles of association of a company, etc. Certainty Sec. 29 of the Contract Act provides that ‘agreements, the meaning of which is not certain, or capable of being made certain, are void’. In order to give rise to a valid contract, the terms of the agreement must not be vague or uncertain. It must be possible to ascertain the meaning of the agreement; otherwise, it cannot be enforced. Thus, an agreement to engage a servant some time next year, at a salary to be mutually agreed upon is a void agreement for want of certainty. Possibility of performance Yet, another feature of a valid contract is that it must be capable of performance. Sec. 56 lays down that, ‘an agreement to do an act impossible in itself, is void’. If the act is impossible in itself, physically or legally, the agreement cannot be enforced at law. For example, a promise by X to bring gold from the sun for Rs. 5,000 for Y is not enforceable, for it is not possible to perform the act. Not expressly declared void The agreement must not have been expressly declared to be void under the act. Sec. 24 to 30 specify certain types of agreements which have been expressly declared to be void. For example, an agreement in restraint of a marriage, an agreement in restraint of trade, an agreement in restraint of legal proceedings, and an agreement by way of wager, have been expressly declared void. CLASSIFICATION OF CONTRACTS Contracts may be classified according to their 1. Validity 2. Formation 3. Performance

Fig. 1.4

Classification of Contracts

NATURE AND FORMATION OF CONTRACT 9

10 BUSINESS LAW On the Basis of Validity/Enforceability Valid contract A valid contract is an agreement which is binding and enforceable. It contains all the essential elements of a valid contract. Void contract A contract becomes void when it ceases to be enforceable by law. A valid contract becomes void on account of subsequent impossibility, subsequent illegality, or on repudiation of a voidable contract. Voidable contract A voidable contract is one which is enforceable by law at the option of one of the parties. For instance, a contract in which the consent of one of the parties is obtained by coercion, undue influence, misrepresentation, or fraud is voidable at the option of the aggrieved party, whose consent was so caused. Such a contract shall be a valid contract, until the aggrieved party exercises his option to rescind the contract. Unenforceable contract A contract which is not capable of being enforced because of some technical defect is an unenforceable contract. For instance, a bill of exchange/pronote becomes unenforceable after three years being time barred under the Law of Limitation Act. On the Basis of Formation/Creation In the light of formation, the contract may be classified as : Express contract A contract wherein both the offer and acceptance are made by words spoken/written is an express contract. An express promise results in an express contract. Implied contract An implied contract is one in which evidence of the agreement is not expressed by words, written or spoken, but by the acts and the conduct of the parties. An implied promise results in an implied contract. There is an implied contract when (i) a person gets into a public bus (ii) one takes a cup of coffee in a hotel. Quasi contract A quasi contract rests upon the equitable principle that a person shall not be allowed to enrich himself unjustly at the expense of another. According to Prof. Wirefier, a quasi contract is a liability, not exclusive by being referable to

NATURE AND FORMATION OF CONTRACT 11 any other head of law, imposed upon a particular person to pay money to another particular person on the grounds of unjust benefit. The Indian Contract Act has used the term as certain relations resembling those of contracts for the term ‘Quasi contracts’. Quasi contracts are created by law. Under certain conditions, the law created and enforced legal rights and obligations where no real contract exists. For example, a finder of lost goods is under a legal obligation to return them to their true owner. On the Basis of Performance/Execution Executed contract An executed contract is one in which both the parties have performed their respective legal obligations. Example M agrees to purchase medicines for N for Rs. 300. When both the parties have performed their obligations, the contract is said to be executed. Executory contract It is a contract in which both the parties are yet to perform their respective obligations. Example The contract is executory, if M has not yet purchased the medicines and N has not paid the amount. A contract may, sometimes, be partly executed and partly executory. Unilateral contract It is a contract in which only one party has yet to perform his obligation. Such contracts are also termed as contracts with executed consideration. Example Lal agreed to purchase a DVD for Rs. 5,000 and paid the amount. The dealer is yet to deliver the DVD. Bilateral contract Bilateral contracts are two-sided contracts, in which there are two outstanding obligations to be fulfilled at the time of its formation. They are executory contracts or contracts with executory consideration. Example X promises to paint a picture in 10 days in return for which B promises to pay Rs. 1,000. The contract is bilateral, as obligations of both the parties are outstanding at the time of formation of the contract.

12 BUSINESS LAW English Law The English Law classifies a contract into (i) Formal contract and (ii) Simple contract. A formal contract include (a) a contract of record and (b) a contract under seal. Contract of records A contract of record is either a judgement or a recognizance. A judgement is an obligation imposed by a court upon one or more persons in favour of another or others. As a matter of fact, it is not a contract in the real sense, since it is not based upon any agreement between the two parties. A recognizance is a written acknowledgement of a debt due to the state. It is usually met with connection with criminal proceedings. Contracts of record derive their binding force from the authority of the court. Contract under seal A contract under seal is one which derives its finding force from its form alone. It is in writing and is signed, sealed, and delivered by the parties. It is also called a deed or a speciality contract. Simple contracts Contracts which are not formal are known as simple contracts. They are also known as parole contracts. They are valid only when they are supported by consideration. EXERCISE Short Answer Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Define a contract. What are agreements? What do you mean by a void contract? Explain voidable contract. What is an illegal contract? What do you understand by an unenforceable contract? What is a implied contract? What are quasi contracts? What is an executory contract? What do you mean by an unilateral contract? What do you mean by a bilateral contract?

NATURE AND FORMATION OF CONTRACT 13 Long Answer Questions 1. 2. 3. 4. 5. 6. 7. 8. 9.

Define a contract. Differentiate it from an agreement. Define a contract. What are the elements of a valid contract? Distinguish between void contracts and voidable contracts. Distinguish between void agreements and illegal agreements. State whether all void agreements are illegal. Name the contracts expressly declared void by the Contract Act? Distinguish between valid, void, and voidable contracts. Distinguish between executed and executory contracts. Distinguish between express and implied contracts.

Essay Type Questions 1. Explain the classification of contracts. 2. Describe the essentials of a valid contract. 3. Explain what you understand by a ‘void’, ‘voidable’, ‘illegal’ and ‘valid’ contract. Briefly refer to the rights of parties under such agreements and also collateral agreements. 4. What is a ‘contract’? Discuss the essentials of a valid contract. 5. “All agreements are not contracts but all contracts are agreements”. Discuss the statement explaining the essential elements of a valid contract. 6. “A contract which is regular in all respects may still fail if there is no consensus ad idem”. Explain. 7. “An agreement enforceable by law is a contract”. Explain the statement by bringing out the key elements of a valid contract. Choose the Correct Answer 1. The source of Mercantile Law (a) Precedents (c) Indian Statute Law

(b) Local customs (d) All the above

2. The important source of Indian Mercantile Law (a) Customs and usages (b) Indian Statute Law (c) British Mercantile Law (d) Common Law 3. A contract based on the equitable principle that a person shall not be allowed to enrich himself at the expense of another (a) Executed contract (b) Bilateral contract (c) Quasi contract (d) Simple contract

14 BUSINESS LAW 4. A contract which cannot be enforceable in a court of law (a) Voidable contract (b) Void contract (c) Valid contract (d) None of the above 5. Who is competent to enter into a contract? (a) A minor (b) A person of sound mind (c) A lunatic (d) A purdanasheen women 6. When one person signifies to another his willingness to do or to abstain from doing anything, it is known as (a) Proposal (b) Offer (c) Agreement (d) Contract Answers: 1. d

2. c

3. c

4. b

5. d

6. a

Fill in the Blanks 1. ________________ is an agreement between two or more parties enforceable in a court of law. 2. All _________________are agreements; but all agreements are necessarily contracts. 3. __________________ must be according to the mode described. 4. A contract is based on an ________________. 5. _________________ is a contract which is inferred from the acts or conduct of the parties. 6. ________________ is a contract which is entered into, between parties via internet. 7. An ______________ contract is a contract in which both the parties have performed their respective obligations. 8. All contracts which are not made under seal are _________ contracts. 9. In commercial and business agreements, the presumption is that the parties intended to create ___________. Answers: 1. 3. 5. 7. 9.

Contract Acceptance Implied Executed Legal relations

2. 4. 6. 8.

Contracts Agreement E-commerce Simple

NATURE AND FORMATION OF CONTRACT 15 True or False 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

All contracts are agreements. All agreements are contracts. Written law is nothing but common law. Precedents are earlier judgement of courts. The law relating to merchants is otherwise known as Lex Mercatoria. The English Mercantile Law is the most important source of Indian Mercantile Law. Common Law is the important source of Indian Mercantile Law. The Indian Contract Act, 1872 deals with all branches of law of contracts. A proposal when accepted, becomes a promise. A bilateral contract is a one-sided contract in which only one party has to perform his obligation. Implied contract is that which is not made in words. When a contract has been completely performed, it is known as executory contract. The law of contracts is not the whole law of agreements.

Answers: 1. True 4. True

2. False 5. True

3. False 6. True

7. False

8. False

9. True

10. False 13. True

11. True

12. False

CHAPTER

2

Offer and Acceptance INTRODUCTION There must be atleast two parties to constitute an agreement. Every agreement implies offer and acceptance. The offer when accepted, becomes an agreement. An offer must be certain and capable of performance. It must reveal an intention to create legal relations, and must be capable of creating a legal relationship. It must be made with a view to obtain the consent of the other party. An offer involves the making of a ‘proposal’. PROPOSAL According to Sec. 2(a) of the Contract Act, when one person signifies to another his willingness to do or to abstain from doing anything with a view to obtaining the assent of that other person to such an act or abstinence, he is said to have made a proposal. Under Sec. 2(b), 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. A proposal is called an offer, the word ‘proposal’ used in Sec. 2(a) of the act is synonymous with the word ‘offer’ used in English Law. The person making the proposal is called the ‘Promisor’, and the person accepting the proposal is called the ‘Promisee’. The promisor (the person making the offer or proposal) is called the ‘ offeror’; The promisee (the person to whom the offer is made) is called the ‘offeree’. An offer can be made by (a) any act or (b) omission of the party proposing how he intends to communicate such a proposal and which has the effect of communicating it to the other. An offer can be made by an act in the following manner:

18 BUSINESS LAW (i) By words (whether written or oral) While the written offer can be made by letters, telegrams, etc., the oral offer can be made either in person or over telephone. (ii) By conduct Offer may be made by positive acts or signs so that the person acting or making signs means to say or convey. (iii) By omission This includes such conduct or forbearance on one’s part that the other person takes it as one’s willingness or assent. Express Offer and Implied Offer An offer is said to be an ‘express offer’, when it is made by words spoken or written. An offer implied from the conduct of the parties, or from the circumstances of the case, is known as ‘implied offer’. Examples (a) X proposes by letter, to sell a house to Y at a certain price. This is an express offer. (b) A transport company runs buses on a particular route. The offer is accepted when a passenger boards the bus with the intention of becoming a passenger. This is an implied offer. Specific or General Offer A specific offer refers to an offer made to a definite person or to a definite class of persons. A general offer is an offer to the world at large. This may be accepted by any one, by complying with the terms of the offer. The much celebrated case of Carlill Vs. Carbolic Smoke Ball Company (1813) 1Q. B. 256 is an excellent example of a general offer and is enumerated. Facts of the case In this case, the patent medicine company advertised that it would give a reward of £ 100 to any one who contracted influenza after using the smoke-balls of the company for a certain period according to the printed directions. Mrs.Carlill purchased the advertised smokeball, and contracted influenza inspite of using the smoke-ball according to the printed instructions. She claimed the reward of £100. The claim was resisted by the company on the ground that the offer was not made to her and that in any case, she had not communicated her acceptance of the offer. She filed a suit for the recovery of the reward.

OFFER AND ACCEPTANCE 19 Decision The court held that she could recover the reward as she had accepted the offer by complying with the terms of the offer. Essential Requirements of a Valid Offer The essential requirements of a valid offer are : (i) (ii) (iii) (iv) (v) (vi) (vii) (viii)

The offer must be communicated to the other party. The offer must be made with a view to obtain the consent of the offeree. The terms of the offer must be definite and certain. The offer must be capable of creating a legal relationship. An offer must be express or implied from the circumstances. An offer may be conditional. A tender is an offer as it is in response to an invitation to offer. A mere statement of intention is not an offer.

Offer vis-a-vis invitation to offer An offer must be distinguished from an invitation to offer. A prospectus issued by a college for admission to various courses is not an offer. It is only an invitation to offer. A prospective student by filling up an application form attached to the prospectus, is making the offer. An auctioneer, at the time of auction, invites offers from the would-be-bidders. He is not making a proposal. A display of goods with a price on them in a shop window is construed an invitation to offer, and not an offer to sell. Case law In a departmental store, there is self-service. The customers pick up articles, and take them to the cashier’s desk to pay. The customers action in picking up particular goods, is an offer to buy. As soon as the cashier accepts the payment, a contract is entered into. (Pharmaceutical Society of Great Britain Vs. Boots Cash Chemists [Southern] Ltd.) Offer must be communicated to the offeree An offer becomes effective only when it has been communicated to the offeree. If there is no communication of an offer, there is no acceptance resulting in the contract. Thus, if A writes a letter to B, offering to sell his watch for Rs. 200 but never posts the letter and keeps it in his pocket, it is not an offer and B can never accept it.

20 BUSINESS LAW Case law S offered a reward to any one who traces his lost dog. F brought the dog without any knowledge of the offer. It was held that F cannot sue for the reward. (Fitch Vs. Snedakar) Offer must be made with a view to obtaining the assent of the other party An offer or proposal to do or to abstain from doing anything must be made with a view to obtaining the assent of the other party to whom the offer is made. Mere enquiry is not an offer. An offer may be conditional An offer can be made subject to a condition. In that case, it can be accepted only subject to that condition. A conditional offer lapses when the condition is not accepted. Thus, a conditional offer to pay a certain amount made by the management of an industry for the trade union, lapses when the condition is not accepted. (Pipraich Sugar Mills Ltd. Vs. P.S. Mills Mazdoor Union) Case law T, who could not read, took an excursion ticket on the railway. On the front of the ticket was printed ‘for conditions see back’. One of the conditions was that the railway company would not be liable for personal injuries to passengers. T was injured by a railway accident. Held T was bound by the conditions and could not recover any damages. (Thompson Vs. L. M. & S. Railway Co.) Revocation of Offer An offer may be revoked by the offeror at any time, as long as it has not been accepted by the offeree. A person who makes an offer can withdraw it at any time before acceptance. Under Sec. 6 of the Indian Contract Act, 1872, an offer is revoked under the following circumstances. By giving notice of revocation The offer comes to an end when the offeror gives notice of revocation to the other party. However, the notice of revocation would take effect only when it comes to the knowledge of the offeree. By lapse of time Where a prescribed time is stipulated within which the proposal must be accepted, the proposal lapses on account of expiry of time. One cannot say while making the offer that if the offer is not accepted before a certain date, it will be presumed to have been accepted.

OFFER AND ACCEPTANCE 21 After lapse of reasonable time The proposal lapses after the expiry of a reasonable time, where there is no time prescribed. Again, what is reasonable time will depend on the circumstances of each case. Example (a) By death or insanity An offer lapses by the death or insanity of the proposer if the fact of death or insanity comes to the knowledge of the acceptor, then the acceptance lapses. (b) Be refusal A proposal once refused, is dead and cannot be revived by its subsequent acceptance. Example A writes to B, “I offer to sell my house for Rs. 40,000. If I do not receive a reply by next Monday, I shall assume that you have accepted the offer”. There will be no contract, if B does not reply. Cross Offers Where two parties make identical offers to each other, in ignorance of each other’s offer, the offers are known as cross offers, and neither of the two can be called an acceptance of the other, and therefore, there is no contract. Case law H wrote to T offering to sell him 800 tons of iron at Rs. 60 per ton. On the same day, T wrote to H offering to buy 800 tons at Rs. 69. Their letters crossed in the post. T contended that there was a good contract. It was held that there was no contract. (Tinn Vs. Hoffman & Co.) Counter Offer A counter offer is a rejection of the original offer and the making of a new offer. The new offer is a counter offer. A person who makes a counter offer and subsequently changes his mind and wishes to accept the original offer, cannot do so as the first offer lapses and he cannot treat it as still open.

22 BUSINESS LAW Case law Where an offer to purchase a house with a condition that possession shall be given on a particular day was accepted, by varying the date for possession, the court held that there was no contract. (Routledge Vs. Grant) Tenders A tender (in response to an invitation to offer) is an offer and may be either: (i) a definite offer to supply specified goods or services or (ii) a standing offer. Tender as a definite offer When tenders are invited for the supply of specified goods or services, each tender submitted is an offer. The party inviting tenders may accept any tender he chooses, and thus bring about a binding contract. 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. Tenders 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. The acceptance of a standing offer has the effect that as and when the goods or services are required, an order is placed with the person who submitted the tender, and each time a distinct contract is made. Case law The Great Northern Railway Co. invited tenders for the supply of stores. W made a tender, and the terms of the tender were as follows: ‘To supply to the company for 12 months with such quantities of specified articles as the company may order from time to time’. The company accepted the tender and placed the orders. W executed the orders placed from time to time but later refused to execute a particular order. In Great Northern Railway Vs. Witham (1873), the court held that W was bound to supply goods within the terms of the tender.

OFFER AND ACCEPTANCE 23 ACCEPTANCE Acceptance is one of the essential elements of a valid contract. An offer may be accepted only by the person to whom it is made. If any one else attempts to accept it, there will not be any contract. When the person to whom the proposal is made signifies his assent, it is an acceptance of the proposal. An accepted proposal is called a promise. An acceptance must be communicated to the offeror in order to complete the acceptance. The acceptor should do something to signify his intention to accept. Example A offers to sell his house to B for Rs. 50,000. B accepts the offer to purchase the house for Rs. 50,000. This is an acceptance. Acceptance may be expressed or implied. It is expressed, when it is communicated by words, spoken, or written, or by doing some required act. It is implied when it is to be gathered from the surrounding circumstances, or the conduct of parties. When an offer is made to a particular person, it can be accepted by him alone. If it is accepted by any other person, there is no valid acceptance. Where an offer is made to the world at large, any person or persons with the notice of the offer, may come forward and accept the offer. (Carlill Vs. Carbolic Smoke Ball Co.) Where a reward has been offered for giving a specific piece of information, e.g., conviction of the thief of a certain property, or finding a specific thing, acceptance can be made only by the first person who gives the information, and no further acceptance of the offer is possible. (Zancaster Vs. Walsh) Essentials of a Valid Acceptance Acceptance must be absolute and unconditional In order that an acceptance of a proposal is valid, it must be unconditional and unqualified. If there is a variation in the terms of the acceptance, it is not an acceptance but a counter offer. Case law N offered to buy J’s horse if warranted quiet in harness. J agreed to the price, and warranted the horse quiet in double harness. It was held that there was no acceptance. (Jordon Vs. Norton)

24 BUSINESS LAW Acceptance must be communicated to the offeror If the offeree remains silent and does nothing to show that he has accepted the offer, no contract is formed. The acceptor should do something to signify his intention to accept. Thus, when a person accepts an offer, but fails to post the letter of acceptance, there is no acceptance. Case law The manager of a railway company received an offer through a letter relating to the supply of coal; he wrote on the letter ‘accepted’, and kept it in his drawer and forgot all about it. It was held that there was no contract, as the acceptance had not been communicated. (Brogden Vs. Metropolitan Rly. Co.) Acceptance must be made within a reasonable time For an acceptance to be valid, it must be made within the time allowed by the offeror and if no time is specified, it must be made within a reasonable time. Example A person applied for shares in a company in June. He cannot be bound by an allotment made, later, in November. Acceptance may be expressed or implied Acceptance is expressed when it is communicated by words spoken, or written. It is implied when it is to be gathered from the circumstances, or the conduct of the parties. (i) It must show an intention on the part of the acceptor to fulfil the terms of the promise. If no such intention is present, the acceptance is not valid. (ii) Acceptance must be given by the party or parties to whom the offer is made. (iii) Communication of acceptance must be made by an authorised person. (iv) It must be given before the offer lapses, or before the offer is withdrawn. Effect of Silence on Acceptance The acceptance of an offer cannot be implied from the silence of the offeree, or his failure to answer, unless the offeree has by his previous conduct indicated that his silence means that he accepts.

OFFER AND ACCEPTANCE 25 Case law A draft agreement relating to the supply of coal was sent to the manager of a railway company for his acceptance. The manager wrote the word ‘approved’ on the agreement, but by an oversight the document remained in his drawer. Held there was no contract, as it was only mentally accepted, and there was no expression of his mental determination. (Brogden Vs. Metropolitan Rly. Co.) Agreement to Agree in Future Law does not allow making of an agreement to agree in the future. The parties must agree on the terms of the agreement. The terms of the agreement, must be either definite or capable of being made definite, without further agreement of the parties. Case law A, an actress was engaged for a provincial tour. The agreement provided that if the party went to London, A would be engaged at a salary to be mutually arranged us. The court held that there was no contract as the terms were not definite, and were not capable of being made definite without further agreement of the parties. (Lotus Vs. Roberts) If the contract contains the machinery for ascertaining the terms of future contract, there is a binding contract. Counter Offer is not an Acceptance When the acceptance does not conform to the terms of the offer in all respects, or if it contains any new terms or conditions put up by the acceptor, it becomes a counter offer, and there will be no acceptance to the offer. COMMUNICATION OF OFFER, ACCEPTANCE AND REVOCATION According to Sec. 4, the communication of proposal is complete when it comes to the knowledge of the person to whom it is made. The communication of acceptance is complete: (i) As against the proposer, when it is put into a course of transmission to him so as to be out of the power of the acceptor. (ii) As against the acceptor, when it comes to the knowledge of the proposer.

26 BUSINESS LAW Example A proposes by letter, to sell a house to B at a certain price; B accept A’s proposal by a letter sent by post. The communication of acceptance is complete: (a) As against A when the letter is posted by B. (b) As against B when the letter is received by A. The communication of revocation (of an offer or an acceptance) is complete: (i) As against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it. (ii) As against the person to whom it is made when it comes to his knowledge. Example A proposes by a letter, to sell a house to B at a certain price. B accepts the proposal by a letter sent by post. A revokes his proposal by a telegram. The revocation is complete as against A, when the telegram is dispatched and as against A, when it reaches him. Revocation of Proposal and Acceptance Sec. 5 provides that a proposal may be revoked at any time before the communication of its acceptance is complete, as against the proposer, but not afterwards. Also, 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. B accepts the proposal by a letter sent by post. A may revoke his proposal at any time before or at the moment when B posts his letter of acceptance, but not afterwards. B may revoke his acceptance at any time before or at the moment when the letter communicating it reaches A, but not afterwards.

OFFER AND ACCEPTANCE 27 Termination of Offer An offer may come to an end by revocation, or lapse or rejection. Revocation or lapse of offer — Sec. 6 1. The offer lapses after a stipulated or reasonable time. If a time is prescribed in an offer for its acceptance, the offer is revoked by the lapse of time, if it is not accepted within this time. Illustration M offered to purchase shares in a company by writing a letter on 8th June. The company allotted the shares on 23rd November. M received the shares. Held, that the offer lapsed, as it was not accepted within a reasonable time. 2. An offer stands revoked, if the offeree fails to fulfil a condition precedent to acceptance (Sec.6(3)). 3. Revocation by death or insanity — Sec. 6(4). The death or insanity of the offeror puts an end to the offer, provided the offeree comes to know of it before acceptance. If the acceptance is made in ignorance of the death, or insanity of the offeror, there would be a valid contract. Under the English Law, death of the offeror puts an end to an offer, and there is no need to issue notice of death to the offeree. 4. An offer terminates when it is rejected by the offeree. 5. An offer terminates, when it is revoked by the offeror, before acceptance. 6. An offer terminates by not being accepted in the mode prescribed, or if no mode is prescribed, in some usual and reasonable manner. 7. A conditional offer terminates, when the condition is not accepted by the offeree. 8. Counter offer—an offer is revoked if a counter offer is made to it. If the offeree gives a conditional acceptance or introduces a fresh term in the acceptance, his acceptance does not result in a contract, but it amounts to a counter offer.

28 BUSINESS LAW OFFER AND ACCEPTANCE BY POST When a proposal is made through the post, the post office by implication becomes the agent of the proposer. Therefore, a letter of acceptance duly addressed and posted, is sufficient acceptance, even though the letter may not actually reach the proposer. The letter must, however, be correctly addressed, and the letter must be actually posted. Case law G applied for shares in a company. A letter of allotment was posted, but the letter did not reach G. It was held that G was a shareholder in the company. [Household Fire Insurance Co. Vs. Grant (1879)] The English Law of Communication of proposals, acceptance, and revocation through post offices differs in some respects from the Indian Law. In England, the post office is the agent of the party, making the proposal to take it to the offeree, and bringing back the acceptance from the offeree. But in India, post office is the agent of both the offeror and offeree. Hence, acceptance cannot be revoked in the English Law. It would be appropriate, at this juncture, to recall what Sir William Anson rightly observed that ‘Acceptance to an offer is what a lighted match is to a train of gunpowder; It produces something which cannot be recalled or undone’. Contracts over Telephone or Telex Persons may enter into contracts either (i) when they are face to face or (ii) over telephone or telex or (iii) through the post office. When persons are face to face, one person making the offer and the other accepting it, the contract comes into existence immediately. Similarly, in the case of communication over telephone, the contract is formed as soon as the offer is accepted, but the offeree must make it sure that his acceptance is received by the offeror i.e, there will be no contract, as communication of acceptance is not complete.

OFFER AND ACCEPTANCE 29 EXERCISE Short Answer Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Define a Proposal. How is an offer made? What is an express offer? What are counter offers? What do you mean by cross offers? What are general offers? What is meant by an acceptance? When is an offer completed? When and how may an offer be revoked? Is agreement to agree in future valid?

Long Answer Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

What is an offer? Explain the types. Differentiate between an express offer and an implied offer. What constitutes an offer? Explain the essential requirements of a valid offer. What is meant by an acceptance by conduct? Give an example. Explain the legal rules as to acceptance. Explain lapse of offer. What are the essentials of acceptance? How is an offer revoked? Distinguish between a general offer and a special offer. Distinguish between an offer and an invitation to an offer. Distinguish between a general offer and a specific offer.

Essay Type Questions 1. Explain the effect of silence on acceptance. 2. State whether a contract is valid even if there is no proper communication of acceptance. 3. Discuss rules regarding communication of an offer and acceptance. 4. Explain role of communication, acceptance and revocation of proposals in the formation of valid contract. 5. ‘A mere mental acceptance, not evidenced by words / conduct

30 BUSINESS LAW is in the eye of law, no acceptance’. Explain. 6. ‘An acceptance to be effective must be communicated to the offeror’. Explain with exceptions if any. 7. ‘The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made’. Explain. 8. ‘Acceptance is to offer what a lighted match is to a train of gunpowder’. Discuss. Choose the Correct Answer 1. An offer may be communicated (a) Orally (b) By conduct only (c) By a written mode (d) By all the above modes. 2. Acceptance may be communicated by (a) Any person (b) A person who has the authority to accept (c) His agent 3. An offer may be made to a (a) Specific person (b) Any one including a public person (c) Specific person as well as a public person 4. An acceptance with a variation is nothing but a (a) Counter offer (b) Specific offer (c) Public offer 5. An offer is said to be general when it is made (a) To a definite person (b) To the public at large (c) To a group of persons (d) None of the above 6. An offer can be communicated (a) At any time (b) Before it can be accepted (c) After acceptance (d) None of the above Answers: 1. d

2. b

3. b

4. a

5. b

6. b

Fill in the Blanks 1. Newspaper advertisements are not _____________. 2. An acceptance to an offer in ignorance of the offer is no _____________. 3. When two parties make identical offers to each other in ignorance of each other’s offer, the offers are known as _____________.

OFFER AND ACCEPTANCE 31 4. An acceptance may be revoked at any time before the _____________of the acceptance is complete as against the acceptor, but not afterwards. 5. An offer may come to an end by __________. 6. ______________ means relationships subsisting the parties who have entered into contractual obligations. Answers: 1. Offers 3. Cross offers 5. Lapse / Revocation

2. Acceptance 4. Communication 6. Privity of contract

True or False 1. A standing offer is in the nature of a tender. 2. Acceptance may be communicated by any person. 3. An offer can be revoked at any time before its acceptance is complete as against the offeree. 4. Insanity/death of the proposer automatically revokes the proposal. 5. A specific offer can be accepted by any one. 6. Once an offer is accepted, there can be no revocation of acceptance. 7. There can be an acceptance even after the revocation of offer. 8. If the counter offer is not accepted, the original offer can be accepted. 9. An invitation to offer is an offer. 10. A counter offer constitutes an acceptance of an offer. Answers: 1. True 4. False 7. False 10. False

2. False

3. False

5. False 8. False

6. True 9. False

CHAPTER

3

Consideration INTRODUCTION Consideration is a legal evidence of the intention of the parties to effect a legal relation. Consideration means that when a party to an agreement promises to do something, he must get something in return. According to Pollock, consideration is the price for which the promise of the other is bought and promise, thus, given for value is enforceable. An agreement without consideration is void. It must proceed at the desire of the promisor. The consideration can support only one promise. It must not be illusory, illegal, uncertain, or ambiguous. A contract results only when one promise is made in exchange for something in return. Consideration is an aid in deciding that promises are worthy of enforcement. In the English case Currie Vs. Misa (1875), consideration was defined as, ‘some right, interest, profit or benefit accruing to one party or some for bearance, detriment or loss or responsibility given, suffered, or undertaken by the other’. DEFINITION Sec. 2(d) of the Contract Act defines consideration as follows: ‘When at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing or promises to do or to abstain from doing something, such act or abstinence or promise is called a consideration for the promise’. Consideration is the price or a return for a promise—a quid pro quo—or something given or taken as equivalent to another. Consideration can be construed as follows:

34 BUSINESS LAW (i) An undertaking by a party to refrain from filing a suit (i.e., forbearance to sue) (ii) A compromise, accepting to receive a lesser sum from the debtor (i.e., remission) (iii) Any compromise of a disputed claim. Example: Creditors consenting to receive a lesser sum of Rs. 500 instead of the original sum of Rs. 800 is a case of compromise known as remission. Example X agrees to sell a house to Y for Rs. 50,000. For X’s promise, the consideration is Rs. 50,000. For Y’s promise, the consideration is the house. Types of Consideration Consideration may be classified to three types, as follows: (i) Executory or future consideration means that it takes the form of a promise to be performed in the future. It is the price promised by one party in return for the other party’s promise, e.g., A promise to deliver goods. (ii) Executed or present consideration implies consideration which takes place simultaneously with the promise, e.g., A purchases a shirt from a shop and pays the price immediately. (iii) Past consideration is when the consideration of one party was given before the date of promise. A does some work for B during January (without expecting any payment). In February, B promises to pay him some money. This is past consideration. Under English Law, past consideration is no consideration, and a contract based on past consideration is void. Essentials of Consideration A contract without consideration is a gratuity. In the words of Salmond, ‘a promise without consideration is a gift; one made for a consideration is a bargain’. Consideration must move at the desire of the promisor The promisor must desire the act or forbearance. An act done without any request is a voluntary act. The act performed at the desire of third party cannot be considered.

CONSIDERATION 35 Case law The collector of a district asked D to spend some money on the improvement of a market and he did so. D cannot demand payment from the shopkeepers using the market, for having improved the market. (Durgaprasad Vs. Baldeo) Consideration must be real Consideration must have some value in the eye of law. It must be competent, real and not illusory, impossible, uncertain, vague, or ambiguous. Example P promises to supply Q one tola of gold brought from the sun. As the consideration is illusory, there is no contract. Consideration must be lawful If the consideration is unlawful, the contract is void and unenforceable. Consideration may be an act to do something, or abstinence, or a return promise Case law In the case [Radha Rani Vs. Ram Dass (1941)], the wife was ready to sue the husband for maintenance allowance. When her husband agreed to pay the maintenance allowance, she forbears to sue him. The court held that the wife’s forbearance to sue, amounts to consideration for her husband’s agreement for the payment of maintenance allowance. Consideration may be past, present or future Past consideration The consideration which has already moved before the formation of an agreement. However, the English Law does not recognize past consideration. Example X performed some services to Y at his desire. After a week, Y promised to compensate X for the work done by him. It is a clear case of past consideration. Present consideration The consideration which moves simultaneously with the promise is called a present consideration.

36 BUSINESS LAW Example In case of cash sales, promise to pay the price and promise to deliver the goods are performed simultaneously. Future consideration The consideration which is to be moved after the formation of an agreement is called a future consideration. Example M promises to deliver some goods to N after a week, and N promises to pay after a week from the date of delivery. Consideration need not be adequate The rationale behind this rule is that it is impossible for the court to determine what is an adequate consideration. The parties to the contract should decide the quantum of consideration, and if consent was freely given, the court will enforce the agreement. Example P agrees to sell a plot worth Rs. 50,000 for Rs. 1,000. P’s consent to the agreement was freely given. The agreement is a contract not withstanding the inadequacy of the consideration. Consideration must not be illegal, immoral, or opposed to public policy Consideration given for an agreement must not be unlawful or some illegal act, such as paying someone to commit a crime. If the consideration is unlawful, the contract is void, and it cannot be enforced in a court of law. Public duty Where the promise is already under an existing public duty, an express promise to perform or a performance of that duty will not amount to a consideration. There will be no detriment to the promisee or benefit to the promisor over and above their existing rights and liabilities. Consideration may move from the promisee or from any other person A stranger to the consideration can sue to enforce the contract, though a stranger to the contract cannot do so. In England, a stranger to the consideration cannot sue on the contract. Case law A person granted some properties to his wife C directing her at the same time to pay an annual allowance to his brother R. C also entered into an agreement with R promising to pay the allowance to R. This agreement can be enforced by R eventhough no consideration was received by C, from R. [Chinnaya Vs. Ramaya (1881)]

CONSIDERATION 37 PRIVITY OF CONTRACT Privity of contract means a relationship subsisting between the parties who have entered into contractual obligations. It is the general rule that only the parties to a contract may sue and be sued on the obligations arising out of the contract. A third party cannot sue for carrying out of promises made by the parties to a contract. This rule is known as privity of contract. Case law A contract between P and Q cannot be enforced by R. The leading case in the doctrine of privity of contract is Dunlop Pneumatic Tyre Co. Ltd. Vs. Selfridge Co. In this famous case, it was held that an action will not lie as the parties to the contract were Dew & Co. and Selfridge & Co. The Dunlop Co. could not sue on a contract to which they were not a party. But a stranger to the consideration can sue to enforce it, provided he is a party to the contract. A contract between P, Q, and R whereby P pays money to Q for delivering goods to R can be enforced by R, although he did not pay any part of the consideration. The English case of Tweedle Vs. Atkinson laid down the rule that a stranger to the consideration cannot sustain an action on the promise made between two persons, unless he has in some way intervened in the agreement. Exceptions There are certain exceptions to the rule that a stranger to the contract cannot sue upon it. Charge in favour of person When a charge in favour of a person has been created on a specific immovable property, such charge is enforceable at the instance of the person beneficially interested, though he is not a party to the contract. Creation of trust An agreement to create a trust can be enforced by the beneficiary. D agrees to transfer certain properties to T, to be held by T, in trust for the benefit of C. C can enforce the agreement though he was not a party to the agreement. Provision of marriage settlement In Khwaja Muhammed Khan Vs. Husaini Begum, the father of the bridegroom had contracted with the father of the bride to make the daughter an allowance

38 BUSINESS LAW called Kharchi-i-pandan, if she married the son. After the marriage, the daughter sued her father-in-law to recover arrears of the allowance. The Privy Council held that though she was no party to the contract, yet, she was clearly entitled to proceed in equity to enforce her claim. Contracts entered into by the agent A Principal (P), even if concealed may sue on a contract made by an agent. Thus, where A is secretly acting as agent for P, P can intervene to enforce the contract between T and A. Assignment The assignee of a debt or an actionable claim may, if the assignment is a legal assignment, sue the original debtor. Holder in due course A holder in due course of a negotiable instrument can sue prior parties. Family settlements When family disputes are settled by mutual agreement and the terms of settlement are written down in a document, such agreements can be enforced by the members of the family who were not originally parties to the settlement. The differences between the English and the Indian Law pertaining to consideration arc enumerated below. 1. The Indian Law of contract does not make any distinction between formal contracts and simple contracts. 2. Under the English Law, past consideration is no consideration. Under the Indian Law, past consideration is good consideration. 3. Under the English Law, consideration must move from the promisee. Under the Indian Law, it may move from the promisee or any other person. NO CONSIDERATION – NO CONTRACT Consideration is essential for the validity of a contract. A promise without consideration is a gratuitous undertaking and cannot create a legal obligation. Under the Roman Law an agreement without consideration was called a nudum pactum, and was unenforceable. Under the English Law, simple contracts must be supported by consideration but special contracts require no consideration. Under the Indian Law, the presence of consideration is, as a rule, essential to the validity of contracts.

CONSIDERATION 39 Exceptions There are exceptional cases where a contract is enforceable even though there is no consideration. They are detailed below. Natural love and affection An agreement made without consideration is valid if, it is expressed in writing, and registered under the law in force for the registration of documents, and is made on account of natural love and affection between parties standing in a near relation to each other [Sec. 25(1)]. An agreement without consideration is valid under Sec. 25(1) only if, the following requirements are compared with 1. The agreement is made by a written document. 2. The document is registered according to the law relating to registration in force at the time. 3. The agreement is made on account of natural love and affection. 4. The parties to the agreement stand in a near relation to each other. Case law In Rajlukhy Vs. Bhoothnath, an agreement was entered into by a husband with his wife. During quarrels and disagreement, he promised to give some property to his wife. It was held that the agreement is void because, under the circumstances, there is no natural love and affection between the parties. Voluntary compensation A promise made without any consideration is valid if, it is a promise to compensate wholly or in part, a person who has already voluntarily done something for the promisor, or something, which the promisor was legally compellable to do [Sec. 25(2)]. Sec. 25(2) applies when there is a voluntary act by one party and there is a subsequent promise (by the party benefited) to pay compensation to the former. The term ‘voluntarily’ signifies that the act was done, ‘otherwise than at the desire of the promisor’. Example D finds B’s purse and gives it to him. B promises to give D Rs. 50. This is a contract.

40 BUSINESS LAW Time-barred debt A promise to pay, wholly or in part, a debt which is barred by the law of limitation can be enforced if the promise is in writing and is signed by the debtor or his authorised agent [Sec. 25(3)]. A debt barred by limitation cannot be recovered. Therefore, a promise to repay such a debt is, strictly speaking, without any consideration. The debt must be a liquidated or ascertained sum of money, and there must be a definite promise to pay. A mere acknowledgement of the debt is not enough. Example D owes B Rs. 1000, but the debt is barred by the Limitation Act. D signs a written promise to pay B Rs. 500 on account of the debt. This is a contract. Agency Under Sec. 185 of the Indian Contract Act, no consideration is required to create an agency. Completed gift The rule ‘no consideration, no contract’ does not apply to a completed gift. Sec. 1 to Sec. 25 state that ‘Nothing in this section shall affect the validity, between the donor and the donee, of any gift actually made’. Thus, if a person gives certain properties to another according to the provisions of the Transfer of Property Act, (i.e. by a written and registered document) he cannot subsequently demand the property back on the ground that there was no consideration. EXERCISE Short Answer Questions 1. 2. 3. 4. 5.

Define consideration. When is consideration deemed to be unlawful? Explain the legal rules as to consideration. What do you understand by privity of contract? What are the various types of consideration?

Long Answer Questions 1. When is consideration deemed to be unlawful? 2. What do you understand by unlawful consideration, and what would be its impact on an agreement?

CONSIDERATION 41 3. ‘A contract without consideration is void’. Comment. 4. ‘A stranger to a contract cannot sue’. Are there any exceptions to this rule? Essay Type Questions 1. ‘Consideration is essential for a valid contract’. Discuss briefly its essential aspects. 2. ‘An agreement in restraint of trade is void’. Examine this statement mentioning exceptions, if any. 3. State whether all agreements which are against public policy of the state are unenforceable. 4. Mention the circumstances in which a contract without consideration, may be treated as valid. 5. ‘An agreement without consideration is void unless it is in writing and registered’. Explain. 6. ‘No consideration–no contract’- critically examine. 7. ‘Consideration is something in return. But it is not necessary that this something in return should be equal in value with something given’. Explain. 8. ‘A stranger to a contract cannot sue to enforce the contract’. Discuss. Choose the Correct Answer 1. Consideration may be (a) Past (b) Present (c) Future (d) All the above 2. The consideration may be (a) Positive (b) Negative (c) Both 3. A consideration should not (a) Defeat the provisions of any law (b) Be opposed to public policy (c) Result in some interest / right 4. A valuable consideration may not consist either in (a) Some profit to one party (b) Some detriment to the other party (c) Some profit and some detriment to one party

42 BUSINESS LAW 5. An agreement made without consideration is (a) Valid (b) Void (c) Voidable Answers: 1. d 2. c 3. c 4. c 5. b Fill in the Blanks 1. No consideration is necessary to create an ______________. 2. A consideration must be real and not _____________. 3. In English Law __________ consideration is no consideration. 4. _____________ of the consideration is for the parties to consider at the time of meeting the agreement. 5. A contract without consideration is _______________. Answers: 1. Agency 2. Illusory 3. Past 4. Adequacy 5. Void True or False 1. 2. 3. 4. 5. 6. 7. 8. 9.

Consideration must move from the promisee. Past consideration is no consideration. A promise to pay a time-barred debt is a good consideration. Consideration may move even from a person who is not a party to the contract. A worthless act may be a sufficient consideration, even if the act is done at the desire of the promisor. The consideration must not be the performance of contractual obligations. The consideration need not be adequate. Executory consideration is also a valid consideration. Consideration is not required for the creation of an agency.

Answers: 1. True 4. True 7. True

2. False 5. False 8. True

3. True 6. True 9. True

CHAPTER

4

Capacity of Parties INTRODUCTION The term ‘capacity’ refers to the competence of the parties to enter into a valid contract. Competency of the parties is an important requisite for a valid contract. According to Sec. 10 of the Indian Contract Act, an agreement is valid and enforceable only if the parties to it are capable of entering into the contract. Secs. 10, 11, and 68 of the Indian Contract Act deal with the matter of capacity of the contracting parties. Certain persons are incapable of binding themselves wholly or partially to a promise or enforcing an agreement made to them. Incapacity to contract may arise out of (i) mental deficiency and (ii) status. Infants or minors, lunatics, idiots, and drunken persons fall under (i) and foreign ambassadors or sovereigns, etc., alien enemies, professionals, corporations, and married women fall under (ii) In other words, for the enforcement of a valid contract, parties must be a major in age, of sound mind, and not disqualified by any other law in force. DEFINITION Sec. 11 of the Contract Act states that ‘every person is competent to contract, who is of the age of majority according to the law to which he is subject of sound mind, and not disqualified, from contracting by any law to which he is subject’. From Sec. 11 it follows that a person is incapable of entering into contracts under the following circumstances: (i) If he has not attained the age of majority according to the law to which he is subject

44 BUSINESS LAW (ii) If he is, not of sound mind, i.e., if he is a lunatic or an idiot, or suffering from a similar disability and (iii) If he is disqualified from contracting by any law to which he is subject. MINORS According to the Indian Majority Act, 1875 a minor is one who has not completed his or her 18th year of age, so a person becomes a major after the completion of the 18th year of life. But, there are two exceptions: 1. When a guardian of the minor’s person or property is appointed by a court of law and 2. When a minor’s property is taken ever by the court of wards for management. In other cases, minority continues upto the completion of the 21st year. Minors in Indian Law The Privy Council’s categorical declaration in Mohiri Bibi Vs. Dharamadas Ghose (l903) 30 Cal. 539, makes it absolutely clear that a minor’s contract under the Indian law is absolutely void, and therefore there is no possibility or question of ratification by the minor or coming of age. In Mohiri Bibi’s case, the minor had executed a mortgage for the sum of Rs. 20,000 out of which the lender had paid the minor only about Rs. 8,000. The minor then filed a suit for setting aside the mortgage. It was contended that as the contract was voidable, and the minor was now repudiating it, the amount of Rs. 8,000 actually paid to the minor must be refunded under Sec. 65 of the Indian Contract Act. Decision The Privy Council pointed out that as the minor’s contract was absolutely void, no question of refunding money could arise in these circumstances. The present position of the law in India regarding minor’s capacity to contract may be stated thus: A minor’s contract is altogether void in law, and a minor therefore cannot bind himself by a contract. All those contracts to which a person, incompetent to contract, is a party are void, as

CAPACITY OF PARTIES 45 against him, but he can derive benefit under them. A minor can always plead infancy and is not stopped to do so even where he had procured a loan or entered into some other contract by falsely representing that he was of full age, when in reality he was a minor. (Gadigappa Vs. Balangowda) A minor can be a promisee An agreement under which a minor has received a benefit can be enforced as against the other party. In Raghavachariah Vs. Srinivas, it was pointed out by the court that a minor in whose favour a mortgage has been executed can get a decree for the enforcement of the mortgage. Under the English Law agreements for the infant’s education, service or apprenticeship, and agreements enabling the care of his living are binding, unless they are detrimental to his interests. A minor can always plead minority A minor can always plead minority and is not stopped in doing so, even when he has procured a loan or entered into some other contract by falsely representing that he was of full age, when in reality he is a minor. Minor’s liability for necessaries The minor’s property is liable for the payment of a reasonable price for necessaries supplied to the minor or to anyone whom the minor is bound to support. A trader who supplies necessaries can always recover u/s 68 of the Indian Contract Act, which provides for liability in respect of necessaries supplied to a person incapable of entering into a contract. For necessaries supplied to a minor, it is only his property that is liable, not the minor himself, personally. But an infant is personally liable for necessaries supplied in the English Law. Case law (i) Inman, an infant undergraduate in Cambridge brought 11 fancy waistcoats from Nash. He was at the time adequately provided with clothing. In Nash Vs. Inman, it was held by the court that the waistcoats were not necessary, and the price could not be recovered. (ii) Fletcther Moulton J. observed as follows: ‘The basis of the action is hardly contract. Its real foundation is an obligation which the law imposes on the infant to make a fair payment in respect of needs satisfied’.

46 BUSINESS LAW Legal Decisions Constituting Necessities The following have been held as necessities in India. 1. Costs incurred in successfully defending a suit on behalf of a minor in which his property was in jeopardy. (Ryder Vs.Wombell) 2. Money advanced to a Hindu minor to meet his marriage expenses. (Kidar Nath Vs. Ajudhia) 3. A loan to a minor to save his property from sale in execution of a decree. (Sham Charan Mal Vs. Chowdhry Lebya Singh) The case of necessities supplied to a minor is covered by Sec. 68 of the Contract Act which reads as follows: ‘If a person is incapable of entering into a contract, or any one whom he is legally bound to support, is supplied by another person with necessities suited to his condition of life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person’. What goods and services are ‘necessities’ for minors are determined by their status and social position. Necessities include the following: (a) Goods Physical goods are necessary not only for bare existence but also for reasonable comforts and luxuries to which the minor concerned is habituated. (b) Services rendered A minor requires certain services for e.g., a nurse for an infant, a teacher, marriage expenses of a minor, etc. (c) A minor may get loans for his necessities, if he so requires. Minor as an agent A minor can draw, make, endorse, and deliver negotiable instruments so as to bind all parties except himself. A minor cannot be adjudicated as an insolvent. If an adult stands surety for a minor, the adult is liable on the agreement. Ratification Ratification relates back to the date of making a contract. Since a minor’s agreement is void, there can be no question of ratifying it. A minor on attaining majority cannot ratify an agreement entered into, while he was a minor. (Mahendra Vs. Kailash) Minor as a partner A minor cannot enter into a contract of partnership. But, he can be admitted into the benefits of a partnership with the consent of all the partners.

CAPACITY OF PARTIES 47 Specific performance An agreement by a minor being void, the court will never direct specific performance of such an agreement by him. Minor as a member of a company A minor cannot apply for and be a member of a company. If a minor has, by mistake, been registered as a member, the company can rescind the transaction and remove the name from the register. The minor can also repudiate the transaction and get his name removed, from the register. In Fazalbhoy Vs. The Credit Bank of India, it was held that where a minor was made a member and, after attaining majority received and accepted dividends, he will be stopped from denying that he is a member. Minor’s parents liability A contract with a minor does not give the creditor any rights against the minor’s parents, whether the contract is for necessities or not. A parent may be liable only when the infant is contracting as an agent for the parent. Minor can’t be adjudged as insolvent A person is adjudged as an insolvent who has lost his capacity to redeem his debts. As he is not capable of contracting any debts, he cannot be adjudged as an insolvent. Minor as a shareholder As per the provisions of the Companies Act, a minor may be a shareholder of a company provided he has paid full amount in respect of shares subscribed. Marriage contract Any agreement made by a minor during his minority for marriage shall be void. Similarly, any such agreement made during his minority for marriage after attaining majority, shall also be void. Liability of the Minor for Torts and Crimes A minor is always liable for crimes and torts (civil wrong) he has committed. However, it is not left open to the shopkeeper to convert liability under civil law to be a liability under torts. (a) In Burnard Vs. Haggis (1863) 32 L. J. C. P. 189, a minor hired a horse for riding and caused strain to the horse as a consequence of which action was taken on torts against the minor. The court held a contractual liability which cannot be converted into a tortuous liability. Hence, a minor cannot be held liable under torts.

48 BUSINESS LAW (b) However, in Jennings Vs. Rundall (1779) 8 E.R. 332, a minor hired a horse for his own use, but lent the horse to a friend of his who misused the horse and caused injuries to it. In this case, the minor was held liable under torts as he has no business to lend a horse to his friend when it was hired for his own use. PERSONS OF UNSOUND MIND The party to a contract should have a sound mind while entering into contracts. According to Sec. 12 of the Indian Contract Act, a person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it, be 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 not make a contract when he is of unsound mind. 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 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. Case law In Inder Singh Vs. Parameshwar Dhan Singh a congenital idiot agreed to sell a property worth Rs.25,000 for Rs.7,000. His mother sued to set aside the agreement on the grounds that he is an idiot. It was held that the same was void on the grounds that a man incapable of judging the consequences of his act, should not be held to be bound by his contract. Example A patient in a lunatic asylum, who is at intervals of sound mind, may make a contract during these intervals. The test of soundness of mind is (a) capacity to understand the contract (b) competency to form a rational judgement as to its effect on a person’s interest. Unsoundness of mind may arise from insanity, idiocy, drunkenness, and similar factors. Mental deficiency brought about by old age or disease cornea falls within the ambit of the definition.

CAPACITY OF PARTIES 49 Idiocy Idiocy is a congenital defect caused by a lack of development of brain. An idiot is a person who has lost his mental ability completely. An agreement with an idiot is void from the very beginning. Lunacy Lunacy can sometimes be cured, but idiocy is incurable. A lunatic is one whose mental powers are deranged so that he cannot form a rational judgement on any subject. However, he can make a valid contract during the lucid intervals. Drunken Persons A contract by a drunken person is void. Drunken persons are liable for necessaries supplied. Drunkenness produces temporary incapacity. Illustration (6) to Sec.12 of the act reads as follows: ‘A sane man who is delirious from fever, or who is so drunk that he cannot understand the terms of a contract or form a rational judgement as to its effects on his interest cannot contract while such delirium or drunkenness lasts’. Example If an agreement entered into by a person of unsound mind is for his benefit, it can be enforced. [Jungal Kishore Vs. Cheddu (1903)] DISQUALIFIED PERSONS

Fig. 4.1 Persons Disqualified by Law

50 BUSINESS LAW Aliens An alien is a person who is a citizen of a foreign country. An alien may be an alien-friend or an alien-enemy. While contracts with an alien-friend subject to some restrictions are valid, contracts with an alien-enemy (an alien whose country is at war with India), become unenforceable. While the war continues, an alien-enemy can neither contract with an Indian subject, nor can he sue in an Indian court. Contracts made before the declaration of war may either be suspended or dissolved. Those contracts, which are against the public policy and which would benefit the enemy, stand dissolved. Foreign Sovereigns Foreign sovereigns and governments can enter into contracts through agents residing in India. In those cases, the agent becomes personally responsible for the performance of contracts. Foreign sovereigns or governments cannot be sued, unless they voluntarily submit to the jurisdiction of the local court. [Mighell Vs. Sultan of Johore (1894)] Statutory Corporations A company cannot enter into a contract which is against its Memorandum of Association. A statutory corporation cannot go beyond the objects mentioned in the act, passed by the Parliament. Municipal Corporations are disqualified from entering into contracts which are not within its statutory powers. Married Women In India, there is no difference between men and women as regards contractual capacity. A woman, married or single, can enter into contracts and deal with her properties in any manner, provided she is a major and does not suffer from any disability like lunacy or idiocy. A married woman can bind her husband’s properties for necessaries supplied to her. Married women in England, now, exercise the same contractual capacity as men. Insolvent Person They are incompetent to contract until they obtain a certificate of discharge.

CAPACITY OF PARTIES 51 Convicts—When undergoing imprisonment, a convict cannot enter into a valid contract. He can, however, enter into a contract if he is lawfully under a licence called ‘ticket of leave’. His incapacity to contract comes to an end when he is pardoned, or his terms of imprisonment expires. Professionals In England, barristers are prohibited by the etiquette of their profession from suing for their fees. But, they can sue and be sued for all claims other than their professional fees. In India, since the passing of the Bar Councils Act of 1927, a barrister who is in the position of an advocate with liberty, both to act and plead, has a right to contract, and sue for his fees. It has been held in Nihal Chand Vs. Dilwar Khan, that a barrister can sue for his fees in India. Like barristers, members of the Royal College of Physicians are prohibited in England from suing their patients for their fees. In India, however, there is no restriction on doctors as regards filing a suit for recovery of their fees from their patients. EXERCISE Short Answer Questions 1. 2. 3. 4. 5. 6.

Who is a minor? What do you understand by ‘capacity to contract’? Who are the parties competent to enter into a contract? Can a minor be a partner and shareholder? What are the necessaries of life as far as minors are concerned? Who are disqualified persons?

Long Answer Questions 1. Discuss the law relating to competence of parties to enter into a valid contract. 2. Discuss the provisions of law relating to contracts with minors. 3. What are ‘Necessaries’? Explain ‘minors’ liability for necessaries. 4. State the extent of liability of a minor for torts and crimes.

52 BUSINESS LAW Essay Type Questions 1. Explain the legal position of a minor under the Indian Contract Act, 1872 for necessaries supplied to him. 2. ‘A minor is allowed to enforce a contract which is of some benefit to him and under which he is required to bear no obligation’. Explain. 3. Explain the law relating to competence of the parties giving suitable examples. 4. A person who is usually of unsound mind, but occasionally of sound mind may make a contract when he is of sound mind’. Explain. 5. Minor’s agreements are absolutely void. Is there any agreement with a minor which can be enforced in a court of law? Discuss. Choose the Correct Answer 1. Minor’s agreemen ts are (a) Valid (b) Void ab initio (c) Voidable 2. A minor is a person who has not completed (a) 16 years (b) 18 years (c) 21 years 3. Persons disqualified by law do not include (a) Convicts (b) Insolvents (c) Agents 4. For necessaries of life (a) A minor is liable (b) A minor’s estate is liable (c) The guardian is liable 5. Persons who do not fall under the category of persons of unsound mind (a) Lunatics (b) Drunkard (c) Alien (d) Idiot 6. Where a guardian is appointed for a minor, he becomes major on completing (a) 16 years (b) 18 years (c) 21 years Answers: 1. b 2. b 3. c 4. b 5. c 6. c

CAPACITY OF PARTIES 53 Fill in the Blanks 1. A minor can be a ______________ or _______________. 2. A minor cannot be adjudged as _____________. 3. A minor is liable for _____________ supplied to him. 4. A ______________ is a person who suffers from intermittent intervals of sanity and insanity. 5. Capacity to contract means ______________. Answers: 1. Promisee or beneficiary 2. Insolvent 3. Necessaries 4. Lunatic 5. Competency of parties to enter into a contract True or False 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

A minor is not liable in tort. A minor is not personally liable. The term ‘necessaries’ is not defined in the Indian Contract Act. A loan taken by a minor to obtain necessaries also binds him and it is recoverable by the lender. A minor can be a promisee. A minor may be held liable in tort. A minor can be declared as insolvent. An agreement with a minor is void ab-initio. A minor can act as principal. A minor can be a payee of a cheque. A lunatic can never enter into a contract. A contract with a minor is voidable at the option of the minor. The guardian of a minor shall not be held liable for necessaries supplied to his dependent children. A minor cannot act as an agent. A minor who is of sound mind is competent to enter into a contract.

Answers: 1. 4. 7. 10. 13.

False True False True False

2. 5. 8. 11. 14.

True True True False True

3. 6. 9. 12. 15.

True True False False False

CHAPTER

5

Free Consent INTRODUCTION Free consent is an essential requirement of a valid contract. The term ‘consent’ means agreement between the parties upon the same thing in the same sense, i.e. consensus ad idem. In the absence of free consent, there will not be any valid contract between the parties. The consent of parties is said to be free when they are of same mind on all the material terms of the contract. If the parties enter into an agreement concerning particular persons or things, but each has different persons or thing in his mind, there is no agreement and no contract comes into existence between them. Absence of consent may arise from number of causes, viz., 1. By reason of an error as to the nature of the contract itself. 2. By reason of an error as to the identity of the party with whom the contract is entered into. 3. By reason of an error as to the subject-matter of the agreement. In all the cases, there is no contract at all because in the law of contract, consensus of ideas is a condition essential to the formation of a contract. When is Consent said to be Free? Free consent is the consent which has been obtained by the free will of the parties out of their own accord. According to Sec. 14, consent is said to be free when it is not caused by: (i) Coercion as defined under Sec. 15 or (ii) Undue influence as defined under Sec. 16 or (iii) Fraud as defined under Sec. 17 or (iv) Misrepresentation as defined under Sec. 18 or (v) Mistake as defined under Secs. 20, 21 and 22.

56 BUSINESS LAW COERCION Sec. 15 of the Indian Contract Act defines coercion ‘as the committing or threatening to commit, any act forbidden by the Indian Penal Code, or an unlawful detaining or threatening to detain, any property to the prejudice of any person to enter into an agreement’. Threats of imprisonment are included under the head ‘Coercion’. Consent obtained at the point of pistol or intimidation is also an act of coercion. Similarly, a threat to commit suicide with the intention of causing a person to enter into an agreement is an act of coercion. It is not necessary that coercion must proceed from a party to the contract, nor is it necessary that the subject of the coercion must be the other contracting party. It may be directed against any third person. An act will amount to coercion if the following essentials are fulfilled. Essentials of Coercion (i) There must be a clear utterance of threat. (ii) The threat should be to commit an act forbidden by the Indian Penal Code. (iii) It must be committed with the intention of causing the plaintiff to enter into an agreement. (iv) Unlawful detaining or threatening to detain any property. (v) Coercion may be employed by a party or by his agent. (vi) Coercion may be used against a party or against any other person. In the case of any other person, that person must have some interest in the agreement. Burden of Proof The burden of proof of an act of coercion vests with the aggrieved party. He should prove that his consent in the contract was obtained by force, because of which he has given his consent to the contract. Case law A Hindu widow of 13 years was forced to adopt a boy of her husband’s relatives under threat that her husband’s dead body would not be allowed to be removed unless she adopted the boy. It was held that the adoption was not binding on her as her consent

FREE CONSENT 57 was obtained under coercion within the meaning of Sec. 15. Any person who obstructed a dead body from being removed would be guilty of an offence u/s 297 of the Indian Penal Code (Renganayakamma Vs. Alwar Setty). Duress Coercion in India is known as duress in England. If the consent of the other party to a contract is obtained under fear caused by threats of bodily harm, it is known as the use of duress. Table 5.1 Difference between Coercion and Duress S.No. 1.

Coercion Coercion may be directed even against a third party.

Duress Duress must be aimed against the life of the contracting party, his wife, or children.

2.

Coercion may proceed from any person.

Duress must proceed from the party to the contract.

3.

It may be by way of threat to commit suicide.

Duress must be such as to cause immediate violence.

Effect of Coercion Sec. 19 provides that an agreement for which consent is obtained by coercion is voidable at the option of the party whose consent is so obtained. UNDUE INFLUENCE Sec. 16 of the Indian Contract Act provides that a contract is said to be induced by undue influence when 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. Undue influence includes coercion, compulsion, menace, or persuasion used for the purpose of inducing the other party to enter into a contract. Undue influence is moral coercion as opposed to physical coercion mentioned in Sec. 15.

58 BUSINESS LAW Essentials of Undue Influence 1. The relation subsisting between the parties should be such that one of the parties is in a position to dominate the will of the other. 2. The object must be to take undue advantage. 3. The dominant party uses his dominant position to obtain that unfair advantage. In the following relationship, by virtue of holding authority, a person is said to dominate over the will of other. It is important to note that domination is presumed in the following relationship, and it need not be proved. 1. 2. 3. 4. 5. 6.

Parent and child Trustee and beneficiary Guardian and ward Spiritual master and disciple Lawyer and client Doctor and patient Though undue influence is presumed in the above cases, undue influence has to be proved in the under mentioned cases. 1. Husband and wife 2. Landlord and tenant 3. Creditor and debtor Case law D was a young man addicted to smoking. Sri Ram was his Guru to whom he sold property worth Rs. 1,380 for Rs. 70. The sale was set aside on the ground of undue influence (Man Bhari Vs. Sri Ram). A person is in a position to dominate the will of another: (a) Where he holds a real or apparent authority over the other Instances of the cases which are included in this category are relations between master and servant, parent and child and even relations between guardian and ward. (b) Where he stands in a fiduciary relationship to the other The relationship between guardian and ward, preacher and follower, solicitor and client, doctor and patient, trustee and beneficiary is generally taken to be a fiduciary one. There may be cases where the same person may both hold real or

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Difference between Coercion and Undue Influence

Coercion

Undue Influence

1.

It involves the use of physical force.

It is due to moral pressure.

2.

Coercion need not proceed from the promisee nor need it be directed against the promisor.

In the case of undue influence, there must be a certain relationship between the parties which places one party in a position to dominate the will of the other.

3.

Where the consent of the promisor is obtained by coercion, the contract is voidable at his option.

Where the consent is obtained by undue influence, the contract is either voidable or the court may set aside it.

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