CU-BBA-SEM-IV-Commercial And Company Law-Second Draft

BACHELOR OF BUSINESS ADMINISTRATION SEMESTER IV COMMERCIAL AND COMPANY LAW

CHANDIGARH UNIVERSITY Institute of Distance and Online Learning SLM Development Committee Prof. (Dr.) H.B. Raghvendra Vice- Chancellor, Chandigarh University, Gharuan, Punjab:Chairperson Prof. (Dr.) S.S. Sehgal Registrar Prof. (Dr.) B. Priestly Shan Dean of Academic Affairs Dr. Nitya Prakash Director – IDOL Dr. Gurpreet Singh Associate Director –IDOL Advisors& Members of CIQA –IDOL Prof. (Dr.) Bharat Bhushan, Director – IGNOU Prof. (Dr.) Majulika Srivastava, Director – CIQA, IGNOU Editorial Committee Prof. (Dr) Nilesh Arora Dr. Ashita Chadha University School of Business University Institute of Liberal Arts Dr. Inderpreet Kaur Prof. Manish University Institute of Teacher Training & University Institute of Tourism & Hotel Management Research Dr. Manisha Malhotra Dr. Nitin Pathak University Institute of Computing University School of Business © No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any formor by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the authors and the publisher. SLM SPECIALLY PREPARED FOR CU IDOL STUDENTS 2 CU IDOL SELF LEARNING MATERIAL (SLM)

First Published in 2021 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event the Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action. 3 CU IDOL SELF LEARNING MATERIAL (SLM)

CONTENT Unit 1 Law Of Contracts ....................................................................................................... 5 Unit 2 Performance And Discharge Of Contracts ................................................................ 51 Unit 3 Concept Of Agent..................................................................................................... 82 Unit 4 Negotiable Instruments............................................................................................. 89 Unit 5 Law Of Insurance ................................................................................................... 111 Unit 6 Sale Of Goods Act.................................................................................................. 122 Unit 7 Law Of Partnership ................................................................................................ 129 Unit 8 Formation Of A Company ...................................................................................... 163 Unit 9 Company Capital Formation................................................................................... 188 Unit 10 Appointment And Removal Of Directors.............................................................. 208 Unit 11 Winding Up.......................................................................................................... 238 Unit 12 Accounts,Audit And Investigation ........................................................................ 253 Unit 13 LatestProvisionOfCompanyLaw ........................................................................... 265 Unit 14 Amalgamation ...................................................................................................... 276 4 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 1 LAW OF CONTRACTS 5 STRUCTURE 1.0Learning objectives 1.1 Introduction 1.2 Definition of contract 1.3 Difference between agreement and contract 1.4 Essentials of avalid contract 1.5 Classification of contracts 1.6 Offer and acceptance 1.7 Consideration 1.8 Capacity to contract 1.9 Free consent 1.10 Coercion 1.11 Undue Influence 1.12 Misrepresentation 1.13 Fraud 1.14 Mistake 1.15 When consideration or object is unlawful 1.16 Unlawful and illegal agreements 1.17 Effects of illegality 1.18 Agreement as opposed to public policy 1.19 Summary 1.20 Keywords 1.21 Learning Activity 1.22 Unit end questions 1.23 References CU IDOL SELF LEARNING MATERIAL (SLM)

1.0 LEARNING OBJECTIVES After studying this unit, students will be able to:  State the definition and nature of contracts  Explain Classification of contracts  Explain Validity of Contracts  Explain the concepts of offer and acceptance  State Consideration and its legal implications  Explain Capacity of a person to contract  Explain the Concept of free consent. 1.1 INTRODUCTION A contract is nothing, but a set of terms agreed upon between two or more parties. The Law of Contracts is a law governing such agreed terms. The Law of Contracts is all about the limits within which the terms can be formed. The Law of Contract does not dictate terms of a contract or how a contract should be, but merely imposes conditions as to how a contract should not be. A contract is a very wide concept and covers all kinds of transactions, right from simple purchases of consumer goods to huge business transactions. Contracts are governed by various transactions, but the basic law more so the foundation law is the Indian Contract Act, 1872. The Indian Contract Act, 1872 is not an exhaustive legislation and was not meant to be an exhaustive legislation. It only gives guidelines as to how rights and liabilities are to be framed and not what the rights and liabilities should be. In a nutshell, the Indian Contract Act is a foundation law for the various business laws. The legislative intent of the legislation is to make the parties themselves frame the laws for themselves with respect to their transactions. This Act will decide whether such laws are within justice and equity. The Law of Contract is a personal law and not a law of right. That is, it is Jus in Personam and not Just in Rem. The remedy under this law is a personal remedy and can be enforced only against the parties to the contract and no one else. 1.2 DEFINITION OF CONTRACT Section 2(d): CONTRACT: An agreement enforceable by Law is a contract. Section 2(e): AGREEMENT 6 CU IDOL SELF LEARNING MATERIAL (SLM)

Every promise and every set of promises, forming consideration for each other is an agreement. Section 2(b): PROMISE When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted becomes a promise CONTRACT AGREEMENT ENFORCEABILITY BY LAW PROMISE CONSIDERATION PROPOSAL ACCEPTANCE Figure 1.1: Definition of Promise A contract is nothing but an agreement enforceable by Law. Therefore, an agreement which creates legal obligations is a contract. An agreement is a promise or a set of promises forming consideration. A promise is a proposal that is accepted. CONSENSUS AD IDEM Since an agreement consists of offer and acceptance, the doctrine of ‘consensus ad idem’ applies. ‘Consensus ad idem’ means ‘meeting of minds. Therefore, offer and acceptance must be on the same subject matter and with respect to the same terms. Sunnam Sattiah vs. State (AIR (1980) AP16) ‘Agreement’ as defined under the Act is essentially and exclusively consensual in nature. 1.3 DIFFERENCE BETWEEN AGREEMENT AND CONTRACT S. No. Description Agreement Contract 1. Scope Wide scope Narrow Scope 7 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Legal Obligation Need not necessarily contain legal Always contains legal Social Agreements obligation obligations 3. Contracts do not Agreement includes social include social agreements agreements 4. Legal enforceability All agreements do not have legal All contracts are enforceability legally enforceable Table 1.1: Difference between Agreement and Contract. 1.4 ESSENTIALS OF A VALID CONTRACT The essential elements of a contract are as follows:- Offer and Acceptance Offer or must give all the terms and conditions clearly and they must be definite. There must be no ambiguity and no material facts must be suppressed. Acceptance to the offer must be absolute and unconditional. Acceptance must be made in the made in the mode prescribed by the Offer or. Intention to Create Legal Obligation The parties to a contract must have the intention to create a legal obligation on each other. That is, they must have the intention of legally binding each other seeking legal remedy in case of breach of contract. Rose & Frank Co. vs. Corruption Bros There was a clause in the agreement saying that there will be no legal implication or legal obligation created by this Agreement...This agreement, therefore, does not form a contract. Jones vs. Vemon's Pool There was a clause in the agreement saying that there will be no legal implication or legal obligation created by this Agreement...This agreement, therefore, does not form a contract. Balfour vs. Balfour Husband promises to pay maintenance to wife. This is only a social agreement and does not create any legal obligation. Lawful Consideration 8 CU IDOL SELF LEARNING MATERIAL (SLM)

Consideration refers to an advantage or benefit moving from one party to another. Such advantage or benefit should be lawful and real. An unlawful consideration and an imaginary consideration cannot be considered valid. Consideration can be past, present or future. Capacity of Parties Capacity of parties has three limbs: - (a) Age (b) Soundness of mind (c) Disqualification from entering into a contract A person should have attained the age of majority that is, 18 years and 21 years in some cases and must be of sound mind and must not be disqualified from entering into a Contract by any law in force. All these three conditions need to be fulfilled for a person to be considered to be competent to contract. Free and Genuine Consent Consent not influenced by coercion, force, undue influence, misrepresentation, mistake or fraud is said to be free and genuine. In the absence of all the aforesaid elements, there would be ‘Consensus Ad Idem’. Therefore, if there is ‘Consensus Ad Idem’, there is free and genuine consent. Lawful Object The Object of the Contract refers to the purpose for which the Contract is entered into. It refers to the transaction or transactions that are aimed to be completed. Therefore, such object or aim should be lawful and within the limits of public policy and limits of morality. Agreement not expressly declared void The agreement must not be declared void by any law in force. Certainty and Possibility of Performance The Contract must be clear, certain and must not be impossible to perform. Legal Formalities Legal formalities with respect to a contract depend on the transaction with respect to which the contract is entered into. If the law in force, demands that a contract with respect to that transaction must be in writing and carry a particular amount of stamp duty and must be duly registered, such legal formalities must be complied with. Example: Sale of immovable property can be done only through a Sale Deed that is duly stamped and registered with the concerned SRO, according to the Registration Act. 9 CU IDOL SELF LEARNING MATERIAL (SLM)

1.5 CLASSIFICATION OF CONTRACTS VALID CLASSIFICATION VOID ACCORDING TO ILLEGAL VALIDITY VOIDABLE EXPRESS CLASSIFICATION IMPLIED ACCORDING TO QUASI FORMATION E-COMMERCE CLASSIFICATION ACCORDING TO EXECUTED UNILATERAL PERFORMANCE EXECUTORY BILATERAL Figure 1.2: Flowchart depicting classification of contracts CLASSIFICATION ACCORDING TO VALIDITY This classification is based on the legal position and effect of a contract. This classification is made based on how many of the essential elements of a valid contract are fulfilled and how an agreement which does not fulfil any one of them is treated. VALID CONTRACT A valid contract is one which fulfils all the essential elements of a valid contract. VOID CONTRACT A void agreement is one which is invalid or void right from its inception. A void contract is one which became unenforceable or invalid, though it was valid at the time of inception. Therefore, void agreements are void ab into and void contracts become void only on the development of invalidity or unenforceability. In either case, they cannot be acted upon, and 10 CU IDOL SELF LEARNING MATERIAL (SLM)

the terms of such agreements cannot be enforced. An unenforceable contract also comes under the meaning of void contracts. Unenforceability of contracts may be due to possibility of performance or due to non-fulfilment of the legal requirements for enforceability of the transaction in question. Example: An agreement to do a bank robbery together is void ab into. A, an Indian citizen, entered into an agreement for supply of perfumes from B, a citizen of China. Before the transaction could be completed, a war broke out between India and China and the contract, which was valid at the time of inception, became void. A sale deed with respect to an immovable property which is not duly stamped and registered as required by the Registration Act becomes void owing to its unenforceability. ILLEGAL An agreement which is inconsistent with any law in force is said to be an illegal agreement. An incidental or collateral transaction to an illegal agreement also becomes void. All illegal agreements are void, but not all void agreements are illegal. Example: B borrows from A, a sum of Rs. 5000/- for the purpose of importing prohibited goods. Knowing such purpose, A advances the said loan. Therefore, the loan transaction also becomes tainted with illegality and hence becomes void. VOIDABLE CONTRACT A voidable contract is a contract in which the consent of one of the parties was not free and genuine. That is a contract in which the consent of one of the parties was obtained by fraud, undue influence, coercion, mistake or misrepresentation. A contract becomes voidable in these two cases also: When a person promises to do something for another for a consideration, but the other person prevents him from performing his promise, the contract becomes voidable at his option. When a party to a contract promises to perform an obligation within a specific time, any failure on his part to perform his obligation within the fixed time makes the contract voidable at the option of the promise. CLASSIFICATION ACCORDING TO FORMATION EXPRESS CONTRACT A contract in which the terms are express in writing or orally is an express contract. The offer as well as the acceptance must be express either orally or in writing. IMPLIED CONTRACT 11 CU IDOL SELF LEARNING MATERIAL (SLM)

A contract which is implied by the actions or conduct of the parties is an implied contract. Such conduct of actions must be clear and not vague and must not have any other possible interpretation. Implied contracts are born from acceptance of implied offers. Example: When a coolie lifts luggage of a passenger in the railway station, it is an implied contract. When a person lifts a product in display it is an implied contract. Upton Rural District Council vs. Powell P’s farm caught fire. He called the fire brigade, believing that his farm falls under the free zone. Held that he was liable to pay as there was an implied promise to pay for the services. QUASI CONTRACT A quasi contract is a contract formed by law and not by the intention of the parties. It is a legal obligation imposed on a person, which takes the form of a quasi-contract. It is an obligation imposed on the rule of equity that one cannot be allowed to unjustly be enriched at the expense of another. Example: ‘A’ buys some goods at a supermarket. The cashier misses to bill one of them but supplies the said product also. Held, A is liable to pay for such product also. E-COMMERCE CONTRACT A Contract entered through the internet. Businesses are set up on the internet and networks are created for the purpose of reaching the customers and enabling them to purchase the products or services. Such contracts are e commerce contract. CLASSIFICATION ACCORDING TO PERFORMANCE EXECUTED CONTRACT A contract in which both the parties of the contract have fulfilled their obligations is said to be an executed contract Example: ‘A’ purchases a product from a shop and pays for the same. It is said to be an executed contract. EXECUTORY CONTRACT If the obligations in the contract are yet to be fulfilled, the contract is said to be an executory contract. If only one of the parties are yet to fulfil their obligations, it is a unilateral contract and when both the parties to a contract are yet to fulfil their obligations, it is a bilateral contract. Example: 12 CU IDOL SELF LEARNING MATERIAL (SLM)

A purchase made on instalment basis is a unilateral contract. An order placed for food through Swiggy by paying online is a unilateral contract, until the food is delivered. When an Order for a product is placed in amazon, on cash-on-delivery basis, is a bilateral contract until the product is delivered and payment is made. 1.6 OFFER AND ACCEPTANCE OFFER Section 2(a): Offer A person is said to have made a proposal when he signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that person to such act or abstinence. The person who is making the offer is an offer or proposer or promisor. The person to whom the offer is made is the offeree or propose. When the offer is accepted, such offeree or propose becomes acceptor or promise. KINDS OF OFFERBASED ON EXPRESSION: Express Offer An offer made orally or in writing is an express offer. Example: When A sends a letter to B offering to sell his bike, it amounts to an express offer. Implied Offer When an offer can be implied by the conduct or actions of the offer or proposer, it amounts to an implied offer. Wilkie vs. London Passenger Transport Board A transport company runs his bus in a particular route and stops at a particular stop it. It was held that it amounts to an offer for transportation services. Bharat Petroleum Corporation Ltd. vs. Great Eastern Co. Ltd A ship was chartered and did not return in time. The owner did not call for the ship back. It was held that it was an implied offer to extend the time for offer. Carllill vs. Carbolic Smoke Ball Co. The company promised to pay a compensation of 100 Pounds to any consumer using the smoke balls as per the instructions given in the package and getting influenza. A consumer using the smoke balls got affected by influenza. Held she was entitled to compensation. 13 CU IDOL SELF LEARNING MATERIAL (SLM)

BASED ON TO WHOM IT IS MADE (a) Specific Offer When the offer is made to a specific person or a specific set of people, it is a specific offer. Such an offer can be accepted only by the person or persons to whom it is made. (b) General Offer When the offer is made to the general public or the world at large, which is open for anyone to accept, it is a general offer. When more than one person accepts the offer and a contract can be made with only one person, the contract is made with the person who communicated his acceptance first. If a contract can be made with more than one person, a contract is made with every person who communicated his acceptance. ESSENTIALS OF A VALID OFFER 1. INTENT TO BE BOUND BY THE OFFER The person making the offer must do so with the intent of being bound by it himself and with the intent of acting on it. Mere declaration of wish or intention without the idea of acting on it is not a valid offer. 2. INTENT TO OBTAIN THE ASSENT OF THE PROPOSEE The offer must not be made with the mere aim of communicating his intention to the offeree but made with the intention of obtaining the assent of the offeree. 3. DEFINITE OFFER The offer must be definite, and the terms must be clear and not vague or uncertain. There must be no loopholes or vagueness. 4. COMMUNICATED TO THE OFFEREE The said offer must be communicated to the offeree. The communication is said to be completed when the offeree gets knowledge of the terms of the offer. The communication can be made in any mode or manner. If the offer is made over a telephonic conversation, the offer is said to be completed at the same time. If the offer is communicated by post, it is said to be completed when the offeree receives the post and opens and reads it. Similarly, in case of an email, communication is said to be completed when the email is opened and read. LEGAL RULES AS TO AN OFFER 1. Capable of Giving rise to legal obligations The offer must be made with an intention of creating a legal obligation on the offer or and offeree. A social invitation does not constitute a valid offer. Therefore, an offer which is capable of resulting in a valid contract is only a valid contract. 14 CU IDOL SELF LEARNING MATERIAL (SLM)

Example:  An invitation to a party or dinner does not amount to an offer.  A promise by a husband to pay his wife maintenance is not a valid offer (Balfour Vs. Balfour) 2. Terms must be definite, unambiguous and not vague There must be no ambiguity or vagueness in any terms of the offer. Therefore, even if such terms are accepted, they cannot result in any contractual relationship. However, if the offer itself gives a provision to clear such ambiguity or vagueness, such offer can be valid. Taylor vs. porting ton ‘A’ offered to take a house on lease for 285 pounds provided the house is repaired and decorated according to the present style. As the term ‘present style’ is not properly defined, it was held not to be a valid offer. Gould vs. Gould A husband promised to pay 15 Pounds per week as maintenance to the wife till the time he could manage it. Since the term ‘till he could manage it’ is no definite, it was held that it is not a valid offer. Foley vs. Classique Coaches Ltd. F sold a piece land to a motor company on a condition that the company should by all their petrol from F at a price agreed by both the parties. It was held that though the term ‘price agreed by both parties’ is vague, the same term provides for a mode for clearing such vagueness. 3. A Declaration of Intent or Announcement Is Not an Offer A mere declaration of intention without the aim of obtaining the assent does not amount to an offer. Such a declaration would only mean that an offer will be made in the future, but not made as yet. Executive Engineer, Sundargarh vs. Mohan Prasad (AIR (1990) Ori 26) An advertisement for a concert or an auction sale does not amount to an offer to hold such concert or auction sale. Harris vs. Nickerson An auctioneer advertised in a newspaper that a sale of office furniture would be held. However, before a broker could come attend the auction, the furniture was withdrawn. Held, the advertisement does not amount to an offer and was only a declaration of intention. 4. An Invitation to Make an Offer or Do Business is Not Offer 15 CU IDOL SELF LEARNING MATERIAL (SLM)

An intention or invitation to do a business transaction or a mere invitation to make an offer does not amount to an offer. Display of goods for sale does not amount to an offer, but an invitation to make an offer. Advertisements, catalogues, promotions, etc. amount to an invitation to offer but not an offer. Example: Display of groceries in a supermarket amounts to invitation to make an offer but not an offer. Pharmaceutical Society vs. Boot Cash Chemists A customer chooses products in a shop under self-service system and takes them to the cashier for billing and payment. It was held that the contract was made not when the customer chooses but when the cashier bills for the products. 5. Newspaper Advertisements are not offer Newspaper advertisements are only declarations of intention to make an offer, but not an offer. However, if a reward is announced through a newspaper advertisement, it amounts to a valid offer. Adikanda Biswal vs. Bhubaneshwar Development Authority A Development authority gave an advertisement for allotment of plots on first come and first served basis. An application with full consideration is only an offer, which is subject to acceptance. 6. Must Be Communicated The offer must be communicated to the offeree or propose. Communication is said to be completed only when the offeree becomes aware of the terms of the offer. If the offer is communicated through a telephonic conversation, offer is said to be communicated at the same time. If the offer is communicated by way of a letter or e mail, it is said to be communicated only when the propose reads the letter or the e mail. 7. Must be Made with a view of obtaining assent This is in consonance with the rule that a mere declaration of intention does not amount to an offer. The offer must be made with a view of making the offeree or propose accept the offer. Example: ‘A’ tells ‘B’ casually that he wants to sell his car, without asking ‘B’ if he wants to buy it. It does not amount to an offer. 8. Silence as Acceptance Cannot Be Valid An offer with a clause that silence amounts to acceptance does not amount to a valid offer. Just as an offer must be clear, communicated and definite, acceptance must also be definite, 16 CU IDOL SELF LEARNING MATERIAL (SLM)

clear and in the prescribed form. Therefore, mere silence cannot be considered as a valid acceptance and any such clause in an offer, makes it an invalid offer. Example: ‘A’ sends a letter to ‘B’ asking if he is willing to buy his scooter and the letter read that if there is no reply to this letter and if B remains silent, it implies that he agrees to buy that scooter. Held, it does not amount to a valid offer as silence does not amount to an acceptance. 9. A Statement of Price is not an Offer A mere declaration or statement of price for a product does not amount to an offer. Such a statement of price is only an invitation to an offer. Harvey vs. Facey H sent a telegram to F asking if F is willing to sell a Bumper Hall Pen asked F to quote the lowest price. F sends a reply telegram saying that the lowest price is 900 Pounds. H replies saying that he is willing to buy it at the said price. However, F replies saying that he doesn’t agree to sell the Bumper Hall Pen. It was held that the telegram sent by F quoting the price does not amount to an offer. TENDERS A tender is basically an invitation to offer a particular service, generally for the Government. Therefore, in a tender, the invitation is given by the Government, or any trader and offer is made by the person applying for the tender. A tender can be of two types: Definite offer When tenders are invited for the supply of specific goods or services, each tender submitted is an offer. The tender accepted forms a binding contract. Example: When tenders are invited for supply of cotton and when A, B and C submit their tenders and B’s tender gets approved, a binding contract is formed with B. Standing offer Where the goods or services are required over a period of time, such traders may invite tenders to give standing or continuing offer. Therefore, every time a requirement arises, a distinct contract is made with respect to the same goods or services. Example: A textile company invites tenders looking for long term supply of cotton for its business. M submits his tender and gets accepted. Therefore, it becomes a binding contract between A and M and M is bound to supply the cotton till the subsistence of the tender. 17 CU IDOL SELF LEARNING MATERIAL (SLM)

Great Northern Rail vs. Witham A railway company invited tenders for supply of iron articles and W’s tender got accepted. During the subsistence of the tender, W refused to supply the said articles. It was held that W is bound to supply the iron articles till the subsistence of the tender. SPECIAL TERMS OF A CONTRACT If there are any special or unique or important terms in an offer, they must also be clearly communicated to the offeree and that is also subject to acceptance. If such special terms are told after the acceptance of the offer, such terms would not bind the offeree. Further, they must be presented prominently and in such a manner a reasonable man would become aware of them before entering into the contract. Olley vs. Malborough Court Ltd. A hotel put a notice in a bedroom saying that the hotel will not be responsible for any loss or theft in the room. It was held that such a notice will not bind the guest as this notice came to his notice only after the conclusion of the contract. Certain conditions are attached to the transaction itself and will bind the parties. For example, when conditions are printed in a ticket with a sign saying, ‘conditions at the back’, they will bind the customers. It is immaterial whether the customer bothers to read them or not. Parker vs. S.E. Rail Co. P deposited his bags in a cloak room in the railway station. On the ticket issued to him, it was written ‘see back’ and at the back there was a clause limiting the liability of the railway company with respect to any loss. P’s luggage was lost. It was held that the railway company was not liable. L Estrange Graucob Ltd. Case P agreed to purchase a machine and signed a contract to that effect. It was held that P was bound by all the clauses. Thompson vs. L.M. & S. Rail Co. A lady who could not read purchased a ticket from a railway company. The back of the ticket had a clause that the railway company will not be liable for any personal injury, with a sign ‘see back’ in the front. It was held that she was bound by the clause. If the conditions are printed on the back of a ticket with no sign indicating their presence, they will not bind the customers. Conditions printed on vouchers or receipts for payments will not bind the customers. Cross Offers Cross offers are when two parties make identical offers to each other, unaware of the offer made by the other party. In such cases one offer will not amount to an acceptance of the 18 CU IDOL SELF LEARNING MATERIAL (SLM)

other. They will be considered only cross offers and are subject to acceptance (Tinn vs. Hoffman). ACCEPTANCE Section 2(b): Promise When an offeree signifies his assent to an offer, the offer is said to be accepted. An offer, when accepted becomes a promise. The acceptance may be express or implied. Maharashtra Housing and Area Development Authority vs. Maharashtra St. Human Rights Commission An application for allotment of a flat does not give legal right to the flat unless the letter of allotment is issued. Therefore, application for allotment amounts to an offer and a letter of allotment amounts to acceptance. V. Rao vs. A. Rao A widow promised to transfer her property to her niece if she stayed with her at her residence. The niece stayed with the widow till the widow’s death. It was held that she was entitled to the property. A mere intention to accept does not amount to acceptance. Acceptance must be overt, that is, apparent and not tacit or passive or merely indicatory. Acceptance can be given only by the person to whom the offer is made. However, in case of a general offer, any person can accept the offer as the offer is made to the general public. Boulton vs. Jones Boulton purchased the business from Brocklehurst. Jones had given money as credit to Brocklehurst. Jones gives an order for supply of goods from the business. Boulton supplies the goods. Jones refuses to pay for the goods and intended to set off the debt with the goods. Held there was no contract between Boulton and Jones as the offer was not made to Boulton. However, if the contract is treated as a quasi-contract, then Jones would become liable to pay for the goods. LEGAL RULES AS TO ACCEPTANCE 1. Acceptance must be absolute and unqualified Acceptance must be unconditional and unqualified. If the acceptance is conditional, it would amount to a counteroffer and would not amount to a valid acceptance. Acceptance must be given with respect to each and every term of the offer. 19 CU IDOL SELF LEARNING MATERIAL (SLM)

When an acceptance is given subject to a contract, the acceptance is not complete as it is not absolute and unqualified. Similarly, when an offer is rejected but an agreement is made to agree in future, it does not amount to a valid acceptance. Routledge vs. Grant A made an offer to B to purchase a house and asked B to hand over possession on 25th June. B said he could hand over possession only on 1st August. It was held that there was no contract. Neale vs. Merret M offered to sell a piece of land to N at the rate of 250 Pounds. N agreed and paid 80 Pounds and said he would pay the balance amount in instalments of 50 Pounds. Held it does not amount to a valid acceptance as it was not unqualified. Jordan vs. Norton N offered to buy J’s horse if warranted quiet in harness. However, J said that it was quiet in double harness. Held, there was no acceptance. 2. Acceptance must be communicated to the offer or The acceptor must explicitly accept the offer made and must communicate the same. Mere resolve or mental determination to accept an offer does not amount to acceptance. The acceptance must be a matter of fact. Felt house vs. Bindley F offered to by his nephew’s horse for 30 Pounds and said that if there is no response, he will consider the offer accepted and take the horse for the said amount. The nephew did not respond but told his auctioneer not to sell the horse to anyone else as his uncle is buying it. The auctioneer, however, sold the horse. Held it was not a valid acceptance and F did not have any case against the auctioneer. Brogden vs. Metropolitan Rail Co. A draft agreement for the sale of coal was sent and the recipient kept wrote ‘approved’ on it and kept it in his desk. Held the acceptance was not communicated and therefore no contract arises. 3. Acceptance must be made in the prescribed mode Acceptance must be made in the mode prescribed in the offer or in a reasonable manner, when no mode is prescribed. However, when the acceptance is given in any mode other than the prescribed mode and the offer or does not object to it within a reasonable time, he is deemed to have accepted the acceptance. 20 CU IDOL SELF LEARNING MATERIAL (SLM)

Example:  A sends a letter to B offering to sell his car for Rs. 2, 00, 000/- and asks B to give his response through a letter. However, B communicates his acceptance through telephone and A did not object to it. Therefore, a contract is made out. 4. Acceptance must be given within the specified time or within reasonable time Acceptance must be made within the time prescribed in the contract. If there is no time specified, it must be made within a reasonable time. What the reasonable time is depends on the facts and circumstances of each case. Rams gate Victoria Hotel Company vs. Montefiore M offered to take shares of R Company on 8th June. R gave its acceptance on 23rd November. Held the offer lapsed as acceptance was not given within a reasonable time. 5. Acceptance cannot precede an offer It is not possible to accept an offer which is not yet made. Therefore, an acceptance which precedes an offer is an offer by itself and subject to acceptance. 6. Acceptance must show the intention of the Acceptor to fulfil the terms of the promise The acceptor must have the intention to act on the contract and give life to the same. Therefore, he must have the intention to fulfil the terms of the promise. 7. Acceptance can be given only by the party to whom the offer is made No person other than the party to whom an offer is made can give acceptance to the offer. Boulton vs. Jones Boulton purchased the business from Brocklehurst. Jones had given money as credit to Brocklehurst. Jones gives an order for supply of goods from the business. Boulton supplies the goods. Jones refuses to pay for the goods and intended to set off the debt with the goods. Held there was no contract between Boulton and Jones as the offer was not made to Boulton. However, if the contract is treated as a quasi-contract, then Jones would become liable to pay for the goods. 8. Acceptance must be given before the offer lapses or is withdrawn Once the offer is withdrawn or gets lapsed it loses its life. Therefore, an expired offer cannot be accepted. 21 CU IDOL SELF LEARNING MATERIAL (SLM)

9. Mere silence is not acceptance Acceptance cannot be inferred from silence. Acceptance must be explicitly communicated. Harvey vs. Facey H sent a telegram to F asking if F is willing to sell a Bumper Hall Pen asked F to quote the lowest price. F sends a reply telegram saying that the lowest price is 900 Pounds. H replies saying that he is willing to buy it at the said price. However, F replies saying that he doesn’t agree to sell the Bumper Hall Pen. It was held that the telegram sent by F quoting the price does not amount to an offer. Communication for Offer, Acceptance and Revocation Communication of Acceptance Communication of acceptance can be given in three modes: - a) Communication of acceptance by act b) Communication of acceptance by omission c) Communication of acceptance by Conduct. All these three are implied communications of acceptance. Communication of offer or acceptance will be complete when the letter reaches the proposer/ acceptor. Entores Ltd. vs. Miles for East Corporation Contract is made when the offer is made and instantly accepted by the offeree. Mukul Datavs. Indian Airlines Terms and conditions printed on the back side of the ticket of a passenger binds a passenger and he is said to have accepted such terms and conditions, as they were displayed in the Airlines office Notice board also. Raipur Transport vs. Ghanshyam A transport carrier accepted to transport goods without any conditions. Later, he issued a circular limiting his liabilities. Held the special condition was not communicated earlier and therefore was not binding. Communication of Performance Carllil vs. Carbolic Smoke Ball Company (i) An offer, to be capable of acceptance, must contain a definite promise by the offer or that he would be bound provided the terms specified by him and accepted. (ii) An offer may be made either to a particular person or to the public at large 22 CU IDOL SELF LEARNING MATERIAL (SLM)

(iii) If an offer is made in the form of a promise in return for an act, the performance of that act, even without any communication thereof, is to be treated as an acceptance of the offer. REVOCATION OF OFFER AND ACCEPTANCE A proposal may be revoked at any time before the acceptance to the proposal is communicated. An acceptance may be revoked at any time before the communication of acceptance reaches the Proposer. Examples: - A sends an email to B offering to sell his mother’s gold jewellery on 1stFebruary 2021. On the same day, in the evening sends a reply accepting the offer. A sends an email the next day, revoking the offer without seeing the mail. The revocation is not valid as the acceptance has already been communicated. REVOCATION OR LAPSE OF AN OFFER The circumstances in which an offer is revoked or gets lapsed are as follows: - Communication of Notice of Revocation A proposer can revoke the offer by giving a notice of revocation at any point of time before the acceptance is communicated by the offeree. Lapse of Time When reasonable or prescribed time for accepting the offer lapses, the offer is automatically revoked. Non Fulfilment of Condition Precedent When there is a condition precedent to be fulfilled before making the offer and such a condition is not fulfilled, the offer is said to be revoked. Death of insanity of Offer or Acceptor When the offer or dies, the offer dies with him. If the offer or gets affected by insanity, he would no longer be competent to enter into a contract. Therefore, the offer lapses on the insanity of the offer or. However, if the offeree communicates his acceptance without the knowledge of death or insanity of the offer or, the acceptance is valid. When a counteroffer is made A counteroffer is when another offer is made in response to an offer. When a counteroffer is made, the offer earlier made gets automatically revoked. Making a counteroffer amounts to rejection of the offer made. Example: ‘A ‘offers to sell soft toys at the rate of 50 per ton. B says he is willing to buy them at the rate of 40 per ton. B has made a counteroffer and has not accepted A’s offer. 23 CU IDOL SELF LEARNING MATERIAL (SLM)

Hyde vs, Wrench W offered to sell a farm to H for 1000 Pounds. H asked to sell it at 950 Pounds. W refused the offer. Later H himself came with an offer to buy it for 1000 Pounds itself. Held that the counteroffer made amounts to rejection. Tinn vs. Hoffman A offered to accept half the quantity of goods offered by the offer or though he accepted all the other terms and conditions. Held there was a counteroffer. When there is provisional acceptance When an acceptance is given subject to a final approval, such acceptance is not valid unless the final approval is obtained and till the final approval both the parties can withdraw their offer or acceptance. Acceptance is not made in the prescribed or usual mode. When the acceptor does not communicate or give his acceptance in the mode prescribed by the offer or by the usual mode, the offer can be revoked by the offer or. However, if the offer or remains silent after getting such an acceptance, he is deemed to have recognised that acceptance. If the law has changed In case of any change in the law which makes the performance of the contract illegal or impossible, the offer lapses when the law in question comes into effect. Example: When a retailer gives an order for a thousand plastic bags with M Plastics & Co on 12.02.2021 which are to be supplied in one month and the government imposes a ban on plastics on 15.02.2021, the offer becomes infructuous due to illegality. 1.7 CONSIDERATION Section 2(d) defines consideration and reads as follows: Section 2(d): Consideration When at the desire of the promisor, the promise 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 an act or abstinence is called consideration for the promise The elements of consideration are: a) Must be at given the desire of the promisor b) Must be an act or abstinence 24 CU IDOL SELF LEARNING MATERIAL (SLM)

c) May be for the past, present or future d) Need not necessarily be given only by the promise. Gousmohiddin vs. Appasahib L filed a suit against T, his tenant for possession of premises and arrears of rent. The suit was decreed in favour of L. L obtained an order of attachment of movable property of T. In consideration for T agreeing not to initiate any appeal, L agreed to give one months’ time to pay the arrears of rent and vacate the premises. Held, the agreement was valid. LEGAL RULES AS TO CONSIDERATION It must move at the desire of the Promisor The consideration must be given at the desire or instance of the promisor and not at the instance of any third party. Durga Prasad vs. Baldeo D promises to pay P a certain commission on articles which would be sold through their agency in a market. The market was constructed by P at the desire of C and not at the desire of D. Therefore, D was not bound to pay as it was without consideration. It may move from the Promisee or any other person Any person can move the consideration, even if he is a stranger to the contract. However, he cannot enforce the contract or sue the other party. Chinnayya vs. Ramayya An old lady made a gift of a property to her daughter, on a condition that she should pay her maternal uncle annuity. The daughter agrees and even gives in writing to her uncle that she would pay annuity. She fails to do so. Held she was liable to pay and there was valid consideration. It may be an Act, Abstinence, Forbearance or Return Promise Forbearance to sue, compromise in a disputed claim, composition with creditors, etc. qualify as valid considerations and fall under the category of ‘forbearance as consideration’ Debi Radha Rani vs. Ram Dass D wishes to sue her husband for maintenance allowance. Her husband promises to pay a monthly allowance and D forbears from suing on such promise. Held, forbearance to sue amounts to a valid consideration. It may be Past, Present or Future Consideration may be for the past, present or the future. 25 CU IDOL SELF LEARNING MATERIAL (SLM)

Example: ‘A’ orders food in SWIGGY and makes the payment online immediately. It amounts to future consideration. A is a tailor who stitched clothes for M. M pays the stitching charges after two weeks. It amounts to past consideration. P purchases soap from a shop nearby and pays for it immediately. It amounts to executor or present consideration. It need not be Adequate Consideration cannot be invalid merely because it is inadequate. However, inadequacy of consideration creates doubts on the consent of the parties to the contract. The adequacy of consideration is not an issue to be decided when the contract has come up for execution, but when the terms of the contract were negotiated. It must be real and not illusory Consideration must be real. It must not be legally impossible, physically impossible or uncertain or illusory. Illusory consideration is when an already existing duty or obligation is made the subject matter of consideration. Such a consideration is not valid. Physically impossible considerations are considerations that are impossible to perform. Legally impossible considerations are considerations in violation of any law in force. Uncertain consideration is when the consideration is vague and not properly defined. Hall vs. Cazenoue A chartered ship contained a clause saying the ship would sail on a date before the contract, which is impossible. Held, the contract was invalid. Harvey vs. Gibbons A borrowed money from B. A promised to pay some amount to B’s servant in return for discharging him from the debt. Held the contract is legally unenforceable as B’s servant has no right to deal with the transactions of B. Stilk vs, Myrick Two of the crew of a ship deserted halfway through a voyage. The captain promised to divide their salary and give it to the rest of the crew, if they worked the ship home. Held, it was the duty of the crew to safely work the ship home and the consideration is illusory. It must be something the Promisor is not already bound to do A promise to do something one is already obligated to does not constitute a valid consideration. Collins vs. Godefroy 26 CU IDOL SELF LEARNING MATERIAL (SLM)

A promised to pay B, who had received summons at a trial in a Civil Court to pay a certain amount for his appearance in Court. Held, it was not a valid consideration as B was already obligated to attend the Court proceedings on receipt of summons. It must not be illegal, immoral or against public policy The consideration must not be illegal, immoral or against public policy. If the consideration is unlawful, the Courts shall not enforce such contracts. DOCTRINE OF PRIVITY OF CONTRACT No person other than the parties to the contract shall have the right to enforce the contract or sue based on the contract and No contract can affect the interest of third parties This is called the doctrine of privity of contract. Exceptions to the rule that a third party cannot enforce the terms of a contract: In case of a trust A beneficiary of a trust in whose favour a trust or other interest in some specific immovable property has been created can enforce it even though he is not a party to the proceedings. M.K. Rapai vs. John A agrees to transfer certain properties to be held by T in trust for the benefit of B. B can enforce the agreement even though he is not a party. In case of a family settlement, marriage settlement or partition. Any person getting any benefit from a partition or family arrangement can sue for their benefits even though they are not parties to the arrangement. Shuppu Ammal vs. Subramaniyam Two brothers agreed to invest in equal shares a certain sum of money for the maintenance of their mother in a Deed for Partition for Joint properties. Held, she was entitled to the said maintenance. In case of assignment of contracts The assignee of rights and benefits under a contract which does not involve any personal skill is entitled to enforce the contract, subject to the equities of the original parties. Acknowledgement or estoppels When the promisor by his words or conduct, becomes the agent of a third party a contract is formed between the promisor and third party. In case of the covenant running with the land When immovable properties are sold along with charges or liabilities on them, they are call covenants running with the land. The person buying the land becomes liable for such charge. 27 CU IDOL SELF LEARNING MATERIAL (SLM)

SAIL vs. State of MP The Central Government assigned a piece of land to its own corporate undertaking with all rights and privileges as to exemption from land revenue in respect of the land would be available to the successor also. Contracts entered into through Power Agents A contract entered into by a Power Agent on behalf of his principal within his capacity would deem to be entered into by the principal himself. WHEN A CONTRACT MAY BE VALID EVEN WITHOUT CONSIDERATION A contract without consideration may be considered valid in the following circumstances Natural love and affection Natural love and affection is established by the following elements: - Exist between the parties The parties must be closely related to each other It must be in writing Must be registered Venkata swamy vs. Ranga swamy V on account of natural love and affection for his brother undertakes in writing to clear the debts of his brother. If V does not discharge the debt, R may do so and sue his brother for the debt amount. Compensation promised for past voluntary services Past Voluntary Service is established by the following elements Service to be rendered voluntarily Service to be rendered for the promisor The promisor must have been in existence at the time of service The promisor must have intended to compensate Promise to pay time barred debts (Section 25(3)) Time barred debts are debts which have been barred by limitation. When the debtor promises to pay the same, it amounts to valid consideration. Agency (Section 185) There is generally no consideration in a principal and agent relationship. However, such contracts are recognised by law. Completed gift 28 CU IDOL SELF LEARNING MATERIAL (SLM)

Gifts are valid contracts which do not have the element of consideration. Bailment (Section 148) In case of Bailment, the Bailor gives custody of certain goods to the Bailee, which need not necessarily be for a consideration. Charity Kedar Nath vs. Gorie Mohamed A gratuitous promise is also enforceable as it would cause inconvenience to the promise if he acted on it. 1.8 CAPACITY TO CONTRACT Section 11 speaks about capacity of persons to enter into contracts and gives the following conditions to have capacity to enter into a contract. A person must: a) Attained the age of majority b) Of sound mind c) Not be disqualified by any law in force, applicable to him. MAJORTY Section 3 of Indian Majority Act, 1875 says that the age of majority is 21 for the following categories of people: A guardian is appointed by Court under Guardians and Wards Act. There is a major who is appointed by the Court of Wards for supervising or having superintendence over the property of a minor. Legislative intent of incapacitating minors from entering into a contract is to: (i) Protect the minors from transactions gone wrong out of inexperience and from fraud by persons more experienced. (ii) Make sure the persons associating or dealing with minors is not put to hardship. LEGAL POSITION OF A MINORS AGREEMENT A contract made with a minor is void ab initio An agreement with a minor is void ab inito, which means it was void right from the beginning. Mohiri Bibi vs. Dharmadas Ghose A minor mortgaged his property in favour of a money lender. It was held that the contract was void ab initio. 29 CU IDOL SELF LEARNING MATERIAL (SLM)

No ratification after attaining majority An agreement entered into with a minor cannot be ratified by the minor on attaining majority. Minor can be a beneficiary or can take benefit out of a contract Raghavachariah Vs. Srinivas A mortgage was executed in favour of a minor. Held the minor is entitled to enforce the mortgage. A minor can always plead minority Leslie Vs. Shiell S, a minor, posed himself to be a major and asked for a loan from L. Held, even though there was a misrepresentation, the minor is protected and therefore, L cannot recover money from S. Liability for necessities (i) Contract must be for the goods reasonably necessary for his support in his station of life. (ii) The minor must not already have sufficient supplies of such necessities Nash Vs. Inman Minor purchased eleven fancy waist coats from N, when he already had enough. This does not come under necessity. Therefore, minor is not liable to pay. Contract by guardian A guardian can enter into a contract on behalf of the minor fulfilling the following conditions: (a) Capacity of a guardian (b) Best interest of a minor No specific performance No specific performance can be claimed with respect to minor agreements as they are void ab initio No insolvency A minor cannot have any debt or liability. Therefore, the question of insolvency does not arise. Partnership not possible Liabilities cannot be attached but the minor will be entitled to the benefits of the partnership. Minor can be an agent A minor can act as an agent and any act of the minor as an agent will bind the Principal/ 30 CU IDOL SELF LEARNING MATERIAL (SLM)

Joint contract between minor and adult Sain Das Vs. Ram Chand In case of a joint purchase made by a major and a minor, the contract can be enforced only against the Major. Liability for torts A minor can be liable for torts. Minor cannot bind parent or guardian unless the minor is an agent of the parent or guardian. Sharafat Ali Vs. Noor Mohd A minor promise is entitled to enforce the benefits of the contract PERSONS OF UNSOUND MIND Section 12 defines soundness of mind. A person is said to be of sound mind if he is capable of understanding the contract and its terms and forming rational judgement with respect to the consequences of the contract and his interests in the same. Unsoundness of mind can be divided into three categories: • Lunacy • Idiocy • Intoxication Lunacy is when the unsoundness comes at intervals and is not permanent. Idiocy refers to permanent unsoundness of mind. Therefore, a contract entered with a lunatic person when he was sane amounts to a valid contract. A contract is invalid when entered with a person affected by idiocy. When a contract is entered into with a person under the influence of drugs or any intoxicant, such a contract is invalid unless the contract was entered into when he was sober. OTHER PERSONS DISQUALIFY FROM ENTERING INTO A CONTRACT Alien enemies: Alien enemies are citizens or nationals of a country with which the Republic of India is at war with. With respect to validity of a contract entered into with an alien enemy, it can be classified under two categories: a) Contracts before war b) Contracts during war With respect to a contract before war, it may be suspended or dissolved. Dissolution shall take place if the performance of the contract would benefit the alien enemy or would be against public policy. An Indian who resides in a hostile country or carries on business there is considered an alien enemy. 31 CU IDOL SELF LEARNING MATERIAL (SLM)

Foreign sovereigns, diplomatic staff and accredited representatives of foreign states The diplomatic staff and officers falling under this category enjoy immunity and therefore cannot be sued for specific performance or for any civil remedy without the prior sanction of the Central Government. Mighell vs Sultan of Johore An ex- king does not enjoy immunity and can be sued in the Indian courts of law. The Central Government may grant permission to sue a foreign ambassador or sovereign under the following circumstances: a) When he has instituted a suit in a court against the person desiring to sue him b) Where he himself or through his agent carries on trade within the jurisdiction of the court c) Where he is in possession of immovable property in the jurisdiction of the court and is to be sued with reference to such property d) When he has expressly waived the privilege given to him Corporations A Corporation is an artificial person created by law. Its capacity to contract is governed by its own rules and regulations being any special legislature, Memorandum and Articles of Association or Bylaws. Insolvents An insolvent’s property is under the control of the Official Receiver or Official Assignee. Therefore, only the Official Receiver decides on how to deal with the properties of the insolvent which incapacitates the insolvent from taking an independent decision. Such incapacity will continue till an Order of Discharge is passed by the court. Convicts A Convict does not have a right to enter into a contract during his period of imprisonment unless he obtains a license for the same which is called “Ticket of Leave”. The incapacity continues till the expiry of the period of sentence. 1.9 FREE CONSENT Consent means acquiescence or act of assenting to an offer. Free consent is consent which is not influenced by coercion, undue influence, fraud, misrepresentation and mistake. Where there is free consent, there is consensus ad idem which is consensus of mind. Bala Debi vs S Majumdar 32 CU IDOL SELF LEARNING MATERIAL (SLM)

An illiterate woman executed a deed of gift in favour of her nephew under the impression that she was executing a deed authorizing her nephew to manage her lands. Held the deed was void and inoperative. 1.10 COERCION Coercion is the committing or threatening to commit any act forbidden by the IPC or the unlawfully detaining or threatening to detain any property, to the prejudice of any person, whatsoever, with the intention of causing any person to enter into an agreement. Coercion includes: (a) Threat to commit or committing any act forbidden by the IPC (b) Restraint of person or property (c) Prejudice to the other party (d) Intention to force the person to enter into an agreement. Ranganayakamma Vs. Alwar Setty A young girl of 13 was forced to adopt a child by the relatives of her deceased husband, who did not allow the body to be removed unless she consented to adopt the child. It amounts coercion. Muthta Vs. Muthu Karuppa An agent refused to hand over the account books of the business to the other agent, unless he was freed from all his lawful liabilities. Held there was coercion. Effects of coercion (Section 19) A Contract influenced by coercion is: - (A) Voidable at the option of the party whose consent was so obtained (b) Any benefits received under the contract must be returned, if rescinded (c) A person to whom anything was delivered, or money was paid under coercion must repay or return it. Amiraju Vs. Seshamma Husband threatens to suicide if his wife and son did not execute a release deed. Held, it amounts to coercion. 1.11 UNDUE INFLUENCE A contract is said to be induced by undue influence if the relationship subsisting between the parties is in such a way that one is in a position to dominate the will of another. 33 CU IDOL SELF LEARNING MATERIAL (SLM)

Undue influence is established when: - 1. When a person holds real or apparent authority over the other person 2. Where there is a fiduciary relationship 3. Where mental capacity is compromised owing to health, age or bodily distress or temporary unsoundness of mind. Mannu Singh Vs. Umadat Pandey A spiritual guru induces his devotees to gift him the whole of their properties in return for a promise of salvation. Ranee Annapurni Vs. Swamtnath A poor Hindu widow was persuaded by a money lender to agree for 100% interest on the money lent. She agreed as she had no other way out and had no mode of sustenance. Held, there was undue influence. Rate of interest was reduced to 24%. Inche Noriah Vs. Shaikh Allie Bin Omar An illiterate old woman's nephew took care of all her affairs and managed all her properties. The nephew made her gift all her property away. Held there was undue influence. EFFECT OF UNDUE INFLUENCE Voidable at the option of the affected party. FIDUCIARY RELATIONSHIP Fiduciary relationships are presumed with respect to: (i) Parent and child (ii) Guardian and ward (iii) Trustee and beneficiary (iv) Doctor and patient (v) Solicitor and client (vi) Fiancé and fiancée Fiduciary relationship is not presumed with respect to: (i) Creditor and debtor (ii) Husband and wife (iii) Landlord and tenant BURDEN OF PROOF Burden of proof is on the person claiming undue influence. Saraswathi Vs. Lakshmi Kantam 34 CU IDOL SELF LEARNING MATERIAL (SLM)

Mere proof of nearness of relationship is not sufficient. Domination of will must be proved. Three points are to be proved to make out undue influence (a) Domination of will (b) Actual influence (c) Transaction is unconscionable or unreasonable. Exception to the rule that the burden of proof of undue influence is on the influenced: Section 16 (3): Where there is a prima facie case of influence and there is apparent domination of will on the face of the case, the burden of proof shifts on the one committing undue influence. Ladli Prashad Vs, Karnal Distillery Co. Ltd. The reason for existence of section 16(3) is that a person who can obtain another's consent by domination or using the advantage of his position over the other, can also be in a position to destroy any evidence of existence of undue influence. Kanwarni Madna Wati Vs. Raghunath Singh An illiterate old woman, physically and mentally distressed executes a mortgage deed. Held, the burden of proof is on the mortgagee to prove that there was no undue influence. REBUTTING OF PRESUMPTION (a) Full disclosure of facts to the party alleged to be subject to undue influence (b)Adequate consideration or price (c) Weaker party had access to independent or proper advice. PARDANASHIN WOMEN Validity of contracts with Pardanashin Women: (a) The woman had full understanding about what she was going to do. (b) The woman had full knowledge about the nature and effect of the transaction she was entering into (c) She had independent and dis-interested advise. COERSION UNDUE INFLUENCE The consent is given under threat of an offence. Consent is given under the influence of the authority exercised by one party over the other, owing to the relationship existing between them 35 CU IDOL SELF LEARNING MATERIAL (SLM)

Physical in character Moral in character Intention to cause the person to enter into an Intention to obtain undue advantage. agreement Involves a criminal No criminal act is involved. Table 1.2: Comparison between Coercion vs Undue Influence 1.12 MISREPRESNTATION A false statement which the person making it honestly believes to be true or which he does not know to be false. It also includes non-disclosure of material facts without any mala fide intention. Misrepresentation: a) Positive assertion of a false statement, believing it to be true. b) Breach of duty by a person which brings an advantage to the person committing it by misleading another to his prejudice. c) Innocent mistake as to the substance of the agreement. Derry vs. Peek A company's prospectus said that it had statutory powers to run its tramways by steam provided the consent of the Government Authority is obtained. The company honestly believed that the said permission/approval would be granted. However, the permission was refused, and the company wound up. Held, there was misrepresentation. Essential elements to prove misrepresentation: (a) representation of a material fact (b) Made before the conclusion of the contract with a view to induce the other party to give consent to the contract (c) Made with the intention to make the other party act upon that contract (d) Must actually have been acted upon (e) The material fact must be wrong, though believed to be true by the person making it (f) Need not necessarily be made to the party alone. Can also be made to a third person. Babul Vs. R.A. Singh 36 CU IDOL SELF LEARNING MATERIAL (SLM)

A told his wife, while his daughter was within hearing distance that the groom selected for their daughter was a young man. However, the groom was over 60 years. Held there was misrepresentation. CONSEQUENCES OF MISREPRESENTATION (a) Aggrieved party can avoid or rescind the contract (b) Accept the contract but insist that the damage caused by the misrepresentation be rectified. LOSS OF RIGHT OF RECISSION (a) The affected party takes advantage or benefit from the contract (b) If restutio in integrum (restoration to original position is not possible (c) If a third party has acquired the rights in the subject matter Long Vs. Lloyd A induces B to buy his lorry falsely representing that it was in excellent condition. B then discovered that the lorry was in a very bad shape. A then agreed to bear half the costs of the repairs. B conceded and A did bear the said half of the cost of repairs. Later, the lorry completely broke down. Held, the contract cannot be rescinded by B now, as he accepted half the cost of repairs from an earlier. Phillips Vs. Brooks A purchases goods from B, who sold it by fraud and then pawned it with C. A then learns of the fraud committed by B. Held, A cannot rescind the contract now as he has pledged the goods with C. 1.13 FRAUD Fraud exists when it is shown that: A false representation is made knowingly, with the knowledge of its falsity or recklessly, negligent without making sure whether the fact is true or not, with the intention of making the other party act on it. There is a concealment of material fact or partial statement of facts, which makes the facts stated false. Section 17: Fraud means and includes any of the following acts committed by a party to a contract or with his connivance (intentional or passive acquiescence), or by his agent with the intent to deceive or induce a person to enter into a contract: - 37 CU IDOL SELF LEARNING MATERIAL (SLM)

(a) The suggestion that a fact is true when it is not true and the person making it does not believe it to be true. (b) The active concealment of a fact by a person having knowledge or belief of the fact (c) A promise made without the intention of performing it (d) Any other act fitted to deceive (e) Any such act or omission as the law specially declares to be fraudulent. Elements: Inclusive definition Not necessarily by the party directly Intention to deceive Any of the following or other acts: The suggestion that a fact is true when it is not true and the person making it does not believe it to be true. The active concealment of a fact by a person having knowledge or belief of the fact A promise made without the intention of performing it Any other act fitted to deceive Any such act or omission as the law specially declares to be fraudulent. ESSENTIAL ELEMENTS OF FRAUD 1. There must be a representation or assertion and it must be false. Peek vs. Gurney The prospectus of a company concealed of a particular liability, which showed the financial position of the company in an elevated state. Trusting such representation, many people bought the shares. Held, there was fraud. With vs. O'Flanagan The negotiations for the sale of a medical practice started in January, when there was a representation that there would an annual taking of 2000 Pounds. However, it later dwindled to 5 Pounds a week. The decrease was not communicated. Held there was fraud. The representation must relate to a material fact which exists now or existed earlier. Bisset vs. Wilkinson The vendor of a particular piece of land said that in his opinion, the land would carry about 2000 sheep. However, it carried less than that number. Held there was no fraud as it was only an opinion. The representation must have been made before the conclusion of the contract 38 CU IDOL SELF LEARNING MATERIAL (SLM)

The representation must have been made with the intention of inducing the other party to enter into a contract. It must have been made with the knowledge of falsity. Reese River Smith Mining Co. vs. Smith A prospectus issued by a company gave false information about the existence of unbounded wealth in Nevada. Believing such representation, a person bought the shares. Held there was false. The other party must have been induced to act upon such representation Smith vs. Chadwick A bought the share of a company, believing the statement in the prospectus that B was a director, while he was not. A has no knowledge about B and whether B is a director or not is immaterial to the transaction. Hence there was no fraud. The other party must have been deceived, having relied on the representation Horsefull vs. Thomas T bought cannon from H. The cannon was defective, but H had plugged it. T did not examine the cannon but when he used it, it burst. It was held that T was liable to pay, as the plug did not deceive T. a) The other party must have suffered some loss. CONSEQUENCES OF A FRAUD (Sec 19) 1. Rescind the contract 2. Insist the performance of contract and be put in the same position as before fraud 3. Damages WHEN A CONTRACT AFFECT BY FRAUD IS NOT VOIDABLE 1. When the truth could be discovered by ordinary diligence. 2. Ignorance of fraud or misrepresentation 3. Interest of third parties intervene 4. When the defrauded person cannot be put in a position he was prior to the fraud. Silence as to facts Keates vs. Lord Cadagon A landlord does not tell his tenant that the premises is in a ruinous condition. However, there is no active concealment as the tenant must have inspected the premises. Hands vs. Simpson, Fawcett & Co. 39 CU IDOL SELF LEARNING MATERIAL (SLM)

Is employed H under him and among other duties, he was supposed to drive. H did not say that he was not a qualified driver. Held that H was not duty bound to voluntarily disclose such fact. Exceptions: 1. There is a duty to speak (ubberima Fidae) 2. Silence equals speech 3. When change in circumstances are not communicated 4. Latent defects which are not ordinarily discoverable 5. Trustee does not disclose all the facts with respect to a property to the beneficiary. DIFFERENCE BETWEEN FRAUD AND MISREPRESENTATION BASIS FRAUD MISREPRESENTATION Intention Deliberate or Wilful Innocent Belief Believes the statement to be Believes the statement to be false true Rescission and damages Aggrieved party entitled to Aggrieved party entitled to rescission as well as damages rescission alone. Discovery of truth If there are means to discover When there is active the truth with ordinary concealment, it amounts to diligence, misrepresentation is fraud. not made out. Table 1.3: Difference between fraud and misrepresentation 1.14 MISTAKE Mistake is defined as an erroneous belief about something. It may be a mistake of fact or mistake of law. MISTAKE OF LAW Mistake of Law may be of two types: MISTAKE OF LAW OF THE COUNTRY Ignorance of law cannot be excused (Ignorentia Juris Neminum Excusat). Therefore, the contract. Solle vs. Butcher 40 CU IDOL SELF LEARNING MATERIAL (SLM)

A party cannot be allowed to get any relief on the ground that he was not aware of the law when he did a particular act. MISTAKE OF LAW OF THE FOREIGN COUNTRY Mistake of law with respect to a foreign country can be treated as a mistake of fact and a contract affected by it is therefore void MISTAKE OF FACT Bilateral Mistake is when both the parties to a contract are under a mistake. That is, there is a mistake on both parties to the contract. (i) The mistake must be mutual (ii) The fact under mistake must be essential element of the contact. Galloway vs. Gallowa A man and woman, who genuinely believed to be married to each other, entered into a separation agreement where the man was liable to pay a weekly allowance towards maintenance, when there was no marriage between the parties. Held the agreement was void. Exception: Erroneous presumption as to the value of a product does not amount a mistake of fact. TYPES OF BILATERAL MISTAKES (a) Mistake as to subject matter Subject matter refers to the transaction on which the contract revolves. (i) Existence of subject matter Couturier vs Hastie ‘A’ agreed to sell a cargo of corn, which both of them believed to be in transit from Salonica to UK. However, before they entered into the contract, the corn got fermented in the ship and the captain sold the corn already. (ii) Identity of subject matter Raffles vs. Wichelhaus We agreed to buy from R a cargo of cotton \"to arrive ex peerless from Bombay\" There were two ships of that name sailing from Bombay, one sailing at an earlier point of time and another at a later point of time. W meant the one sailing earlier, but R meant the one sailing later. Held there was no contract. Scriven Bros & Co. Vs. Handley Co. In an auction sale, the auctioneer was selling tow. A bid for a lot, thinking that it was hemp. Held there was no contract. 41 CU IDOL SELF LEARNING MATERIAL (SLM)

Henkel vs. Pape A who inspected 50 rifles in B's shop and enquired for their price. Later he sent a telegram saying, 'Send three rifles'. However, the clerk misinterpreted and read the telegram as 'Send the rifles'. B sent all the fifty rifles. ‘A’ accepted three alone and returned the rest. Held there was no contract made out, though A is liable to pay for the three rifles by an implied contract. (iii) Quality of subject matter Nicholas and Venn vs. Smith Marriot Table napkins were sold at an auction with a description saying ‘With the crest of Charles I and the authentic property of the monarch. The napkins were in fact Georgian. Held there was a bilateral mistake of fact and the contract was void. (iv) Quantity of subject matter Cox vs. Prentice A silver bar was sold, claiming to be of a particular weight, while it was in fact weighing at a different value. Held the agreement is void. (v) Title of subject matter Cooper vs. Phibbs A person took a fishery on lease from a person, believing it was owned by him. However, the fishery belonged to a third party. Held the lease was void. (vi) Price of subject matter Webster vs. Cecil C offered to sell a property for 1250 Pounds to W. C had earlier declined an offer for 2000 Pounds and so he very well knew that the price meant was 2250 and not 1250 and knowing fully well about the mistake, he accepted the offer. Held the contract could not be enforced. (b) Mistake as to possibility of performance An impossible contract becomes void. Impossibility includes physical impossibility and legal impossibility. Griffith vs. Brymer A contract for hiring a room for witnessing the coronation of Edward VII is void when the room was booked, and booking was accepted without the knowledge of cancellation of the event. 1. UNILATERAL MISTAKE Where the mistake is on the part of only one of the parties to the contract, it is a unilateral mistake. The mistake may be with regard to subject matter or understanding the terms of the 42 CU IDOL SELF LEARNING MATERIAL (SLM)

contract and their legal effects. A unilateral mistake is not a defense unless it is brought by the fraud or misrepresentation of the other party. Smith vs. Hughes H bought oats from S and seeing the sample, H thought they were old. However, they were new. Held there was only a unilateral mistake and the contract is valid. Tamplin vs. James J was the highest bidder at an auction sale of a public plot. At the time when he made the bid, he believed that a certain field was a part of the plot offered for sale. However, the field was not a part of the plot. There was no misdescription or ambiguity. Held J was bound by the contract Exceptions 1. Mistake as to the identity of the person contracted with When there is a mistake as to the party to the contract itself, the contract becomes void. Mistaken identity is sufficient to make a contract void. Boulton vs. Jones Jones was under the impression that he was transacting with Brocklehurst, while he was transacting with Bouton. There was a mistake in identity and the contract is void. Cundy vs. Lindsay Blekarn ordered by letter goods from Lindsay and signed it in such a way that Lindsay believed it came from the well-known firm 'Blenkiron & Co. Held the contract was void as the person intended to contract with is different from the person actually contracted with. Solwer vs. Potter In May 1938, a lady by name Ann Robinson was convicted for permitting disorderly conduct in her cafe. In July of the same year, she changed her name to Ann Potter and took a lease of Solwe's premises. Held the contract is void. Said vs. Butt S wanted to go to the first night of a play. B, the managing director of the theatre issued instructions not to issue tickets to S as he passed virulent criticism. Knowing this, S asked one of his friends to buy the ticket for him. He was refused admission. Held, the contract was void and therefore, the ticket is invalid. When a person is ready to enter into a contract with anyone who accepts to do so or make an offer to do so, identity of purchaser is immaterial and a mistake as to the purchaser's identity will not make the contract void. Phillips vs. Brooks 43 CU IDOL SELF LEARNING MATERIAL (SLM)

A man called north entered a jewellery shop and selected some articles and wrote a cheque saying that he was Sir George Bullough. The jeweller accepted in good faith. The jeweller contended that there was no contract as there was a mistake as to identity. Held, since the jeweller entered into a contract with anyone who came to the shop, the contract cannot be made void merely on mistaken identity. Mistake as to the nature of contract When the party signs with an impression that he is signing a contract with respect to a particular transaction, while it is for a completely different transaction, there is mistake as to nature of contract. The contract is void. Foster vs. Mackinnon M, an old man of poor sight indorsed a bill of exchange thinking that it was a guarantee. Held, the contract was void. Tarsem Singh vs. Sukhminder Singh The buyer believed that the land was sold at the price quoted per Bigha while it was quoted per Kanal. Held the contract is void. The consideration for the contract must be lawful and valid Object means purpose or design of the contract. Consideration refers to the benefit from the contract. Section 2(d) defines consideration as follows: “When at the desire of the promisor, the promise 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 an act or abstinence or promise is called consideration for the promise.” 1.15 WHEN CONSIDERATION OR OBJECT IS UNLAWFUL Section 23 lists out the circumstances in which consideration or object becomes unlawful: It is forbidden by law Example: A promise to get an employment with public services on a bribe. Held the agreement is void. If the consideration is permitted, it would defeat the provisions of any law Gauri Shanker vs. Mumtaz Ali Khan If the object or consideration of an agreement is such that, though not directly forbidden by law, it would defeat the provisions of any law, such an agreement is void. 44 CU IDOL SELF LEARNING MATERIAL (SLM)

If it is fraudulent If it involves or implies injury to the person or property of another Ram Swaroop vs. Bansi Mandar B borrowed a sum of Rs. 100/- from L and executed a bond promising to work for L without pay for a period of twelve years. In case of default, B was to pay principal and interest at once. Held the contract was void. If the court regards it as immoral Sumitra Devi vs. Sulekha Kundu An agreement, the consideration or object of which is immoral is unlawful Immorality includes direct sexual immorality and an act in furtherance of sexual immorality. Agreements opposed too public policy. 1.16 UNLAWFUL AND ILLEGAL AGREEMENTS An unlawful agreement is one which, like a void agreement, is not enforceable by law. It is void ab initio and is destitute of legal effects. It affects only the immediate parties and has no further consequences. An illegal agreement is not only void but also has a further effect on collateral transactions and make them void. Illegal contracts have penal consequences while unlawful contracts do not have penal consequences. Apthorp vs. Neville & Co. An agreement to publish a libel is illegal. 1.17 EFFECTS OF ILLEGALITY 1. Ex turpi causa non oritor actio: No action arises from a base cause. 2. In part delicto potiorest condition defendentis: In case of equal guilt, the defendant is in a better position. The Plaintiff has the right to sue in the following cases: a) Where he is not equally guilty and was inducted by fraud or undue influence or coercion. b) When he does not have to rely on the illegal transaction. c) When a substantial part of the transaction is carried, and he is truly and genuinely repentant 3. The collateral transactions to an illegal contract are void. 45 CU IDOL SELF LEARNING MATERIAL (SLM)

4. No action lies for the recovery of money under an illegal agreement 5. No action lies for the reach of an illegal agreement In case there are legal and illegal elements to a contract and the illegal elements can be severed, the Court will enforce the legal elements and declare the illegal elements as void and unenforceable. In case of reciprocal promises, where the promise first made is illegal and the promise made to be fulfilled under certain circumstances is illegal, only the legal promise can be given effect to. In case of Alternative promises, when one branch is legal and the other branch is illegal, the legal branch can be given effect to and the illegal branch is void. In case there are several objects with a single consideration, the agreement is void if one of the objects is unlawful. If there is a single object with several considerations, the agreement is void if one of the considerations are unlawful. 1.18 AGREEMENT AS OPPOSED TO PUBLIC POLICY An agreement is said to be opposed to public policy if is harmful to public welfare. Public policy does not have a clear definition and is vague and subject to interpretation. Some instances of agreements as opposed to public policy are as follows: - (a) Agreements of trading with enemy (b) Agreement to commit a crime (c) Agreements which interfere with the administration of justice (d) Agreements in restraint of legal proceedings (e) Trafficking in public offices and titles (f) Agreements to create interest opposed to duty (g) Agreements in restraint of parental rights (h) Agreements restricting personal liberty (i) Agreements in restraint of marriage (j) Marriage brokerage or brokerage agreements (k) Agreements interfering with marital duties (l) Agreements to defraud creditors or revenue authorities (m)Agreements in restraint of trade, excepting sale of goodwill and partners’ agreement. Giridhar Singh vs. Neeladhar Singh 46 An agreement for the sale of a girl is against public policy and void. Neville vs. Dominion of Canada News Co. Ltd. CU IDOL SELF LEARNING MATERIAL (SLM)

An agreement by a newspaper proprietor that he would abstain from publishing about the conduct of a particular person is against public policy and thus void. Trade combinations are agreements between traders and manufacturers dealing with the same business, through an association formed by them in order to fix a price for their product. Such dealings are not unlawful though they are in restraint of trade. S.B. Fraser & Co vs. Bombay Ice Manufacturing Co. An agreement between certain ice manufacturing companies not to sell their ice below a particular price and to divide the profits in a certain proportion is valid. In service contracts, an employee may be prevented from taking any other engagement during the course of this employment or may be prevented from taking any similar engagement after termination of service. The former is valid while the latter is void. Niranjan Shankar vs. Century Spinning and Manufacturing Co. Ltd. The restraint made during employment is valid, while any restraint applied after termination of service is void. Brahmaputra Tea Company vs. Scarth An agreement preventing an employee from taking any similar engagement for a period of five years from the termination of service is void. 1.19 SUMMARY  Contract is an agreement enforceable by law. An agreement is a promise or set of promises for a valid consideration. A promise is when a proposal made is accepted. A proposal is an offer to do or abstain from doing something, with a view of obtaining the assent of the other party.  Contracts can be classified into valid, void, voidable, illegal and unenforceable contracts on the basis of validity and into  Acceptance and offer must be valid genuine, free and definite to be valid. Acceptance and offer must be duly communicated. Offers may be general or specific and express or implied. Acceptance must be given explicitly mere silence does not amount to acceptance.  Consideration in a contract must be valid, lawful, definite and not illusory. Consideration need not necessarily be adequate. Doctrine of Privity of contract says that only a party to a contract can enforce its terms. However, consideration can need not necessarily flow from the party to the contract.  Consent in a contract must be free and genuine without the influence of fraud, misrepresentation, coercion, undue influence or mistake. Free and genuine consent implies consensus ad idem. 47 CU IDOL SELF LEARNING MATERIAL (SLM)

 A person who is capable of entering into a contract is a person who has attained the age of majority and is of sound mind and is not disqualified from entering into a contract under any law. 1.20 KEYWORDS  Contract: An agreement legally enforceable is a contract  Agreement: Every promise or set of promises forming a part of consideration is an agreement.  Offer: A person is said make a proposal when he signifies his assent to do or abstain from doing anything, with a view of obtaining the assent of the other party.  Promise: A proposal is said to be accepted when the person to whom it is made signifies his assent thereto.  Coercion: Coercion is the committing, or threatening to commit any act forbidden by the IPC or the unlawfully detaining or threatening to detain any property, to the prejudice of any person, whatsoever, with the intention of causing any person to enter into an agreement 1.21 LEARNING ACTIVITY 1. S wanted to go to the first night of a play. B, the managing director of the theatre issued instructions not to issue tickets to S as he passed virulent criticism. Knowing this, S asked one of his friends to buy the ticket for him. He was refused admission. Analyse the legal validity of the ticket and decide whether S is entitled to admission or not. ___________________________________________________________________________ ___________________________________________________________________________ 2. A man called North entered a jewellery shop and selected some articles and wrote a cheque saying that he was Sir George Bullough. The jeweller accepted in good faith. The jeweller contended that there was no contract as there was a mistake as to identity. Analyse the legal implication of mistaken identity with respect to this contract. ___________________________________________________________________________ _____________________________________________________________________ 1.22 UNIT END QUESTIONS A. Descriptive Questions. 48 Short Questions 1. Explain the different types of mistake. CU IDOL SELF LEARNING MATERIAL (SLM)

2. Differentiate between coercion and undue influence. 3. Differentiate between fraud and misrepresentation. 4. Differentiate between agreement and contract 5. Explain the doctrine of Privity of Contract Long Questions 1. The parties to a contract in a sense make the law for themselves. Comment. 2. Discuss the statement “All agreements are not contracts but all contracts are agreements” using essential elements of a valid contract. 3. Discuss with suitable illustrations the law relating to validity of contracts with minors. 4. Explain the essential elements of valid offer and valid acceptance. 5. Explain the legal rules as to consideration. B. Multiple choice Questions 1. A contract creates a. right in personam b. Right in rem c. Only rights and no obligations d. Only obligations and no rights 2. An agreement not enforceable by law is said to be: a. Void b. Voidable c. Unenforceable d. Valid 3. A specific offer can be accepted by a. Any person b. Any friend of offeror c. The person to whom it is made d. Any friend of offeree 4. An agreement with or by a minor is a. Void b. Voidable at the option of the minor c. Voidable at the option of the other party d. Valid 5. Where consent is caused by fraud or misrepresentation, the contract is, 49 CU IDOL SELF LEARNING MATERIAL (SLM)

a. Voidable at the option of the aggrieved party b. Void c. Unenforceable d. Not affected in any manner Answers 1-a, 2-b, 3-c, 4-a, 5-a 1.23 REFERENCES Textbooks  Elements of Mercantile Law by N.D. Kapoor  Mercantile Law by Garg Chawla Reference Books  Legal Aspects of business by Pathak Akhileshwar  Legal Aspects of Business by P.K. Pandhi Websites  www.Manupatra.com 50 CU IDOL SELF LEARNING MATERIAL (SLM)