MODULE 2:THE INDIAN

CONTRACT ACT 1872-II

 CAPACITIES OF PARTIES AND CONSIDERATION

• Capacity: - The parties to a contract must have capacity (legal ability) to make valid contract.
• Section 11:- of the Indian contract Act specify that every person is competent to contract provided.
• (i) Is of the age of majority according to the Law which he is subject, and
• (ii) Who is of sound mind and
• (iii) Is not disqualified from contracting by any law to which he is subject.
• Person of unsound mind can enter into a contract during his lucid interval. An alien enemy, foreign
sovereigns and accredited representative of a foreign state. Insolvents and convicts are not competent to
contract.
• Minor: Who has not completed the age of 18 years.
• Major: When person attains the age of 21.
Effect of Minor’s Agreement:
1. Agreement is void ab initio (can not be enforced)
2. Minor can be a promisee or beneficiary
3. No Ratification (Acceptance of transaction already done) (continuation of contract)
4. No specific Performance
5. Restitution Order
6. Contract of parent or guardian
RESTITUTION ORDER IS GRANTED SUBJECT TO
THE FOLLOWING CONDITIONS:
1. The power of court to order restitution is discretionary.
2. It is generally allowed by the court when a minor had misrepresentation to the other
party about his age.
3. The court considers all facts and circumstances.
4. If money paid to the minor is in same form, minor may be ordered to pay it back.
5. If money is used to purchase property, property shall be used in paying off money.
 DIFFERENT POSITION OF A MINOR
• Minor Agent (Minor can not appoint an agent but can be appointed as agent)
• Guarantee for and by a minor (the contract of guarantee can be in favor of minor but minor can’t be surety)
• Minor and insolvency (can not be declared insolvent as can not enter the contract)
• Minor a s a joint promisor (can be joint promisor with one major )
• Minor shareholder(can not apply for allotment of share but can have transfer of share)
• Minor and negotiable instrument act (can draw, make or negotiate any NI but is not liable for the same.
• Service contract (contract with minor is void)
• Minor as trade union member (Any person who has age of 15 years can be a member of trade union if trade union
allow for it.)
• Liability for Tort (Liable for Tort(the Civil wrong committed by him))
Ex. A 16 year boy drives a car carelessly and injures B. He is liable for civil wrong.
MINOR’S LIABILITY FOR NECESSITIES

In contract for necessities, minor or his guardian are not liable but his
property is liable.

1. Things must be suitable to the conditions in life of the minor.

2. The minor must be in need of such things
Ex. A minor was supplied a pair of pearl and diamond buttons.
PERSON OF UNSOUND MIND

• An idiot (who is of unsound mind by birth. Incapcity is permanent.)

• Delirious Person (delirious from fever- person who is speaking like cray
because of illness or overexcitement)
• Hypnotized Person (temporary incapacity)
• Mental Decay (having mental decay because of old age or poor health)
• Drunken Person
PERSON DISQUALIFIED BY LAW

1. Body corporate or company or corporation (the contractual capacity of a

company will be decided by object clause of Memorandum of Association. Can
not enter a contract beyond the rights given by MOA.)
2. Alien Enemy or friend (against country and with country)
3. Convict (cannot enter a contract at the time of imprisonment. Can enter it after
releasing from jail. Can enter contract with permission of central government.)
4. Insolvent (can enter the contract after getting discharged by court.)
CONSIDERATION

• In Latin, it is known as ‘quid pro quid’.

• Something in return.
• It is the benefit received by the party in a contract in return of
the promise made by him,
 TYPE OF CONSIDERATION

• Past Consideration (Executed)(one party to contract has received the benefit before formation of
contract.
Ex. A requests B to find out his lost cow. B found and given it to A. After that A promise to pay
500Rs. To B.
• Present Consideration (received at the time of formation of the contract. It is in process of
execution)
Ex. A buys a TV from B;s shop and pay the price immediately.
• Future Consideration (received by the party after a formation of a contract)(Executory)
Ex. A agrees to sell TV to B in first of next month and B agrees to pay the pricre 10 days after the
delivery date.
 ESSENTIALS OF VALID CONSIDERATION
• Consideration means doing or not doing something (Positive and negative)
• Consideration must move at the desire of promisor
Ex. A is employed by an institute to teach Business Law while A taught Economics. A is not entitled to claim
remuneration.
• Consideration may move from promise or other person
• Consideration may be inadequate
Ex. A product worth of Rs. 2000 can be sold in Rs. 200 with mutual consent of both the parties.
• Consideration may be past, present, future
• Act promisor bound to do is not consideration (it should be different from existing obligation)
• Consideration must be lawful (legal and as per the act)
• Consideration should be possible to perform (must be real and not illusory)
• Stranger to contract (‘ a privity of contract’ should be there to give right to
party at a contract to sue against the other party; stranger at the contract
cannot sue.) (who is not party to contract)
• Stranger to consideration (if the consideration is supplied by any other
person than promisor, it is known a s stranger to consideration.)
 EXCEPTION TO THE RULE OF STRANGER TO CONTRACT
The stranger to contract has right to sue in following conditions.
• Beneficiary (In case of trust, the beneficiary may enforce the contract.)
• Family or marriage settlement
For ex. A partition deed between the male members of a family made a provision for the expenses of
marriage of a female member. Accordingly, the expenses of the a marriage were to be contributed by
her father and brothers but they refused. Held she was entitled to the amount even though she was not
a party to the contract.
• Assignment of contract
• Agency

Exception to rule “ No Consideration No Contract”

FREE CONSENT

• Consent of the parties must be genuine consent means agreed upon something in the
same sense i.e. there should be consensus – ad – idem. (identity of mind)
• A consent is said to be free when it is not caused by coercion, undue influence, fraud,
misrepresentation or mistake.
• Parties to a contract must give their free consent
• Both the parties must be agreed upon the same thing in the same sense.
• Consent of parties must be free.
• In the free consent it must not have been:-
1. Coercion (threaten by anyone).
2. Undue influence. (Dominance of one party).
3. Fraud
4. Misrepresentation.
5. Mistake. –
1.Mistake by fact (Bilateral and Unilateral, regarding subject matter)
2. Mistake by law (Ignorance of Law is no Excuse)
COERCION

• Coercion is the committing or threatening to commit any act forbidden by the

Indian Penal code or the unlawful detaining or threatening to detain any
property.
• The threat amounting to coercion need not necessarily be from a party to
contract, it may also proceed from a stranger to the contract

• Enter the act which is prohibited by IPC (Indian Penal Code)

CERTAIN THREATS DO NOT AMOUNT TO
COERCION

• Threat to sue
• Statutory compulsions (By the order of the court)
• Threat to strike (right given under Industrial disputes act)
• Detaining property under mortgage (Until the payment of loan)
UNDUE INFLUENCE
• Undue influence refers to “the unconscious use of power over another person, such power being
obtained by virtue of a present or previously existing dominating control arising out of relationship
between the parties.
• A person is deemed to be in a position to dominate the will of another,
1. Holds authority over another (Master and servant, Parent and child)
2. Stands a fiduciary relation to the other (other party keeps faith in him) (Guardian and Child, Doctor
and Patient)
3. Makes a contract with a person whose mental capacity is temporarily or permanent affected by reason
of age or illness
4. Contract with pardanashin woman.
5.No presumptions of dominance of will. (husband and wife, creditor and debtor)
Matter Coercion Undue Influence

Kind of Force Physical force Moral or mental force

Intention To obtain consent for contract To obtain unfair advantage of weak

party

Punishment Criminally liable-IPC No criminal liability

Parties Can be employed by parties or Party to contract.

outsider

Relationship Immaterial Material

Consequences Voidable at the option of aggrieved Voidable or court may set aside on
party application of party.
FRAUD

• Defined as an intentional, deliberate or willful mis statement of facts which are material
for the formation of contract. It includes,
1. Suggestion of facts which is not true by one person who does not believe it to be true.
2. Active concealment (cover up) of the fact.
3. Promise made without any intention to perform.
4. Any act or omission, specifically declared as fraudulent by law.
5. Any other act to deceive (Cheat).
ESSENTIAL ELEMENTS OF FRAUD

• False Representation
• Material Fact
• Rely upon the false representation
• Silence is not fraud.
EXCEPTION TO THE RULE- SILENCE IS NOT
FRAUD
• It is duty of a person to speak in circumstances
• Silence is equivalent to speech
CONTRACT OF UBBERIMAE FIDEI(UTMOST
GOOD FAITH- HIGHEST STANDARD OF GOOD
FAITH)
• Contact of insurance
• Contract for sale of immovable property
• Contracts of Marriage
• Contracts of Family Settlement
• Contract of Partnership
EFFECTS OF FRAUD

• A contract is voidable at the aggrieved party and can cancel the contract.
• Exceptions:
1. If party can discover the truth with ordinary effort.
2. Fraud did not cause the consent of party.
3. Party has entered into a contract in ignorance of fraud.
MISREPRESENTATION

• It means a false statement of fact made by one party to another party, which has the effect
of inducing that party into the contract.
• It includes,
1. A positive false statement made without any basis of information.
2. A breach of duty which brings advantages to the person committing it.
3. The inducement of mistake about subject matter.
ESSENTIAL ELEMENTS OF MISREPRESENTATION

• The party makes a representation of facts which are false.

• Misrepresentation should be related to material facts of contracts.
• It should be with an intention that the other party should act upon it.
• The representation should have acted upon.
• The misrepresentation was made innocently.
• Other party actually believing misrepresentation to be true.
Matter Fraud Misrepresentation
Meaning Deliberate mis-statement False statement made innocently
Party making statement believe No Yes
in truth
Intention to deceive Yes No
Action Aggrieved party can avoid the Aggrieved party can avoid
contract and recover damages contract but cannot ask for
damages.
Means of discovery of truth Contract is voidable if party has Contract is not voidable if party
means of discovering truth with has means of discovering truth
normal effort with normal effort
SIMILARITIES BETWEEN FRAUD AND
MISREPRESENTATION
• Result from misstatements made by a party
• The contract caused by both of these is voidable at the option of aggrieved party,
MISTAKE

• An erroneous belief about some facts.

• Mistake of Law
1. Mistake of Indian Law
2. Mistake of Foreign Law
• Mistake of Fact
1. Bilateral Mistake
2. Unilateral Mistake