Analysis Report On Business Law
The Law of. Contract deals with agreements which can be enforced through courts of law.
The Law of Contract is the most important part of commercial law because every commercial transaction starts from an agreement between two or more persons.
According to Salmond a contract is
“An agreement creating and defining obligations between the parties” According to Sir William Anson2, “A contract is-an agreement enforceable at law made between two or more persons, by which rights are acquired by one or more to acts or forbearances on the part of the other or others.”
Object & scope:
The object of the Law of Contract is to introduce definiteness in commercial and other transactions. How this is done can be illustrated by an example-
X enters into a contract to deliver 10 tons of coal of Y on a certain date. Since such a – contract is enforceable by the courts, Y can plan his activities on the basis of getting the coal on the fixed date. If the contract is broken, Y will get. Damages from the court and will not suffer any loss.
Sir William Anson observes as follows:
“As the law relating to property had its origin in the attempt to ensure that what a man has lawfully acquired he shall retain, so the law of contract is intended to ensure that what a man has been led to expect shall come to pass; and that what has been promised to him shall be performed.”
Definition of Contract:
Section 2(h) of the Indian Contract Act provides that, “An Agreement enforceable by law is a contract”.
Therefore in a contract there must be –
(I) an agreement and
(II) the agreement must be enforceable by law.
An agreement comes into existence whenever one or more persons promise to one or others, to do or not to do something,
“Every promise and every set of promises, forming the consideration for each other, is an agreement-Sec. 2(e). Some agreements cannot be -enforced through the courts of law, e.g., an agreement to play cards or go to a cinema. An agreement, which can be enforced through the courts of law, is called a contract.”
Essential Elements of a Contract:
An agreement becomes enforceable by law when it fulfils certain conditions. These conditions, which may be called the Essential Elements of a Contract, are explained below.
1. offer and Acceptance:
There must be a lawful offer by one party and a lawful acceptance of the offer by the other party or parties.
The adjective “lawful” implies that the offer and acceptance must conform to the rules laid down in the Indian Contract Act regarding offer and acceptance. (See ch. 2)
2. Intention to create Legal Relationship:
There must be an intention (among the parties) that the agreement `shall result in or create legal relations.
An agreement to dine at a friend’ house is not an agreement intended to create legal relations and is not a contract.
But an agreement to buy and sell goods or an agreement to marry, are agreements intended to create some legal relationship and are therefore contracts, provided the other essential elements are present. (See ch. 3)
3. Lawful Consideration:
Subject to certain exceptions, an agreement is legally enforceable only when each of the parties to it gives something and gets something.
An agreement to do something for nothing is usually not enforceable by law. The something given or obtained is called consideration. (See ch. 4)
The consideration may be ;in act (doing something) or forbearance (not doing something) or a promise to do or not to do something.
Consideration may be past (something already done or not done).
It may also be present or future: But only those considerations are valid which are “lawful
4,. Capacity of Partie:
The parties to an agreement must be legally capable of entering into an agreement otherwise it cannot be enforced by a court of law.
Want of capacity arises from minority, lunacy, idiocy,– drunkenness, and similar other factors. If any of the parties to the agreement suffers from any such disability, the agreement is not enforceable by law, except in some special cases.
5. Free Consent:
In order to be enforceable, an agreement must be based on the free consent of all the parties. There is absence of genuine consent if the agreement is induced bycoercion, undue influence, mistake, misrepresentation, and fraud.
A person guilty of coercion, undue influence etc. cannot enforce the agreement. The other party (the aggrieved party) can enforce it, subject to rules laid down in the Act.
6. Legality of the Objec:
The object for which the agreement has been-entered into must not be illegal, or immoral or opposed to public policy.
The agreement must not be vague. It must be possible to ascertain the meaning of the agreement, for otherwise it cannot be enforced.
8. Poissiblity of Performance:
The agreement must be capable of being performed. A promise to do an impossible thing cannot be enforced.
9. Void Agreements:
An agreement so made must not have been expressly declared to be void. Under Indian Contract Act there are five categories of agreements which are expressly declared to be void. They are :
1. Agreement in restraint, to marriage. (Sec. 26)
2. Agreement in restraint of trade. (Sec. 27)
3. Agreement in restraint of proceedings. ;(Sec. 28)
4. Agreements having uncertain meaning.. (Sec. 29}
5. Wagering agreement. (Sec. 30)
10. Writing, Registration and Legal Formalities:
An oral, contract is a perfectly good contract, except in those cases where writing and/or registration is required by some statute. In India writing is required in cases of lease, gift, sale and mortgage of immovable property: negotiable instruments; memorandum and articles of association of a company etc. Registration is compulsory in cases of documents coming. within the purview of Section 17 of the registration Act, e.g., mortgage, deeds covering immovable property.
The terms of an oral contract are sometimes difficult to prove. Therefore important agreements are usually entered into in writing even in cases where writing is not compulsory.
In the Law of Contract certain terms are used indicating their meaning. The terms also show that contracts can be classified into four broad divisions, namely,
(I) the method of formation of a, contract,
(2) the time of its performance,
(3) its parties, and
(4) its legality or validity:
i. Method of Formation:
1. Express Contract:
Express Contract is one which is. Expressed in words spoken or written. When such a contract is formed, there is no difficulty in understanding the rights and obligations of the parties.
2. Implied Contract:
The condition of an implied contract is to be understood from the acts, the conduct of the parties and/or the course of dealing between them.
3. Quasi Contract:
There are certain dealings which are not contracts strictly, though the parties act as if there is a contract.
The Contract Act specifies the various situations which come within what is called Quasi Contract. (Sections 68-72)
ii. The time of Performance:
1. Executed Contract:
There are contracts where the parties perform their obligations immediately, i.e., as soon as the contract is formed.
2. Executor Contract:
In this contract the obligations of the parties are to be performed at a later time.
iii. The Parties of the Contract:
1. Bilateral Contracts
There must be at least two parties to the contract. Therefore all contracts are bilateral or multilateral.
2. Unilateral Contract
In certain contracts one party has to fulfill his obligations whereas the. other party has. already performed his obligations. Such a contract is called unilateral contract.
iv. Legality or validity of the Contract:
Contracts can be classified into the following:
(1) Valid, (2) void, (3) voidable,
(4) Illegal and (5) unenforceable.
Offer And Acceptance
Offer And Acceptance:
formation of Contract:
All contracts are made by the process of a lawful, offer by one patty and the lawful. acceptance- of the offer by the other party. X says to Y, “Will you buy my house for Rs 50,000 ?”This is an offer. If Y says, “Yes”, the offer is accepted and a contract is formed.
An “offer” involves the making of a “proposal” The term proposal is defined in the Contract Act as follows :
“When one person signifies to another his willingness to do ‘or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal” -Sec. 2(a).
A proposal is also called an offer. The promisor or the person making the offer is called the offeror. The person to whom the offer is made is called the offeree.
Promise and Acceptance:
“When, the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise.”-Sec, 2(b),
“The person making the proposal is called the `promisor’ and the person accepting the proposal is called the `promisee’.” -Sec. 2(c).
Examples of offer and acceptance:
(i) Specific Offer: X offers to sell his motor car to y at the price of Rs. 5000. This is a proposal. X is the promisor or the offeror. Y is the offeree. If Y agrees to buy the car at the price stated; Y becomes the promisee or the acceptor. There is a contract.
(ii) Specific Offer: p puts up a notice offering to pay a reward of Rs. S to any student who finds out and returns a book lost in the college. Q a student, reads the notice and then finds and brings the book to P. P’s notice is an offer and Q is the acceptor. There is a contract.
(iii) general Offer: A transport company runs tramway cars along the streets. This is an offer by the company to carry passengers at the scheduled fares. The offer is accepted when a passenger gets up on a tram with the intention of becoming a passenger.
Effect Of Offer And Acceptance:
· Offer alone and acceptance alone are “inactive”, “inert” or “powerless”:
· When separate they cannot lead to the formation of a contract.
· But an offer together with acceptance leads to a contract which is enforceable by the Court, provided the other ‘essential elements of contract exist.
· The formation of a “contract can be illustrated by the famous `gunpowder and lighted match’ simile of Anson. The materials in a gunpowder (like sulphur, iron fillings, etc.) by themselves are not enough to cause an explosion. But when a lighted match is applied to the inflammable mixture, an explosion occurs.
· Similarly, offer and acceptance together can explode leading to the formation of a valid contract.
· But if there is any disqualification on the part of either offer or acceptance, no contract will be formed just as if a gunpowder lacks sulphur or a lighted match is damp no explosion will occur.
· The idea being clear, we can recall the original saying. “Acceptance is to offer what a lighted match is to a train of gunpowder. It produces something which cannot be recalled or undone. But the powder may have lain till it has become damp or the man who laid the train may remove it before the match is applied. So an offer may lapse for want of acceptance or be revoked before acceptance. Acceptance converts the offer into a promise and then it is too late to remove it” .
The Contract Act contains various rules regarding offer or proposal. They can be summed up as follows:
1. An offer may be express or may be implied from the ‘ circumstances:
An offer may be made in two ways :
I. by words, spoken or written and
II. by conduct.
When an–offer is made by stating so in words or in writing, it is called an Express offer. When an offer is implied from the conduct of a person, it is. called an Implied offer. Examples (i) and (it) in the last page, are cases of express offer. Example -(ii) is a case of an implied offer. “In so far .as the proposal or acceptance of any promise is . made in words, the promise is said to be express. In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied”-Sec. 9.
2. An offer may be made to a definite person:
To some definite class of persons ; or to the world at large 🙁 An offer made to a definite person or a definite class of person is called a Specific offer. An offer sent to all persons (or the world at large) is called a General offer.)Example (i) is an offer to a definite person ; example (ii) is an offer’ to a definite class of persons; and example (iii) is an offer to the world at large. (See pp. 17-18)
3. legal relationship is required:
The offer must be one which -is capable of creating a legal relationship. A social party or an invitation to play cards is not a legal relationship. Therefore, an offer to such an affair does not lead to a binding contract. (See chapter 3, Part I, p. 33)
The terms of the offer must be certain, definite, unambiguous and not vague: X says to Y, “I will give some money if you marry Z “. This is not an offer which can be accepted because the amount of money to be paid is not certain.
4. A mere statement of intention is not an offer: A distinction is usually made, between an “offer” and “a statement of intention”. Price-lists and catalogues, and enquiries for customers are merely statements of intention. They are not regarded as offers but as invitation to others to made offers.
An advertisement in a newspaper or elsewhere may be so worded that it amounts to an offer. But ordinarily and advertisement is considered to be an invitation to make offers. Similarly, in an auction sale, articles are displayed with an intention that the bidders present may bid for them i.e. may make an offer. Thus in an auction sale a bid is an otter while the fall of the hammer signifies the acceptance of the auctioner. (Payre v.Cave)
(i) intention to sell:
A lable on an article in a shopkeepers showcase stating `price Rs. S’ is considered to be the expression of an intention to sell the article at Rs.5 . If is not an offer to the .world at large which can be accepted by anybody. The intending purchaser who wishes to buy the article is the proposer. The shopkeeper may or may not accept the proposal. The same rule applies to pricelist and catalogues. Fisher v. Bell.
(ii)Quotation of prices:
A quotation of prices is not an offer, but an invitation for offers. Mylappa Chettiar v. Aga Mirza Mohamed Shirazee. This is true of many common forms of advertisement.
A newspaper advertisement inviting applications ~ for a ‘job or inviting tenders for some work is not an offer. It is only an invitation to make offers. The applicants who reply to the advertisement are the proposers or offerors. The advertiser is free to accept any one of. the applications.
A banker’s catalogue of charges is not an offer. Bank of Travancorr v. Dhirt Ram
A railway time-table is not an offer. Therefore if a train does not work according to the table, the ticket-holder cannot file a’ case for breach of contract.
(vi) Question and Reply:
H telegraphed to F asking the tatter to inform him whether he would sell Bumper Hall Pen and if so at what price. F informed H that the lowest price was £900 but did not* say that he was willing to sell at that price. H telegraphed. that he would bay at that price. F gave no reply to the telegram. Held, there was no contract because neither the question of H nor the reply of F constituted an offer. Harvey v. Facey
When particular goods are advertised for sale by auction the auctioneer does not contract anyone who attends the sale intending to purchase those goods that they shall be actually put up for sale. Harris v. Nickerson.
6. Offer must be communicated to the offeree:
A person cannot accept an offer unless he knows of the existence of the offer. P offers a reward to anyone who returns his lost dog. Q finding the dog brings it to P without having heard of the offer. Held, he was not entitled to the reward. Fitch v. Snedaker In this case it was argued that a man cannot accept an offer without intending to do so, and he cannot intend to accept an offer of which he was ignorant. In Lalman v. Gauri Dutt. G sent his servant in search of his missing nephew. Subsequently G announced a reward for information concerning the boy. L brought back the missing boy, without having known of the reward. Held, there was so contract between L and G and the reward cannot be claimed.
7. An offer may be conditional:
An offer may be made subject to conditions. In such cases, the conditions must be clearly communicated to the offeree. If a person accepts an offer without knowledge of the conditions, the offeror cannot claim fulfillment of the conditions. But if the conditions arc clearly written or expressed and should have been known to the offeree, he cannot plead ignorance of the conditions.
(i) Strict enforcement:
X agreed to buy goods from Y and signed an order form given by Y containing a number of clauses in small print, without .reading them. Held, clauses were binding on X. L Estrange v. graucob Ltd.
(ii) Strict enforcement :
T, who could not read, took an excursion ticket on the railway. On the front of the ticket was printed “for conditions see back”. One of the conditions was that the railway company would not be liable for personal injuries to passengers. T was injured by a railway accident. Held, T was bound by the conditions and could not recover any damages. Thomson v. L. M. & S Rly.
(iii) No reasonable notice:
R booked her passage on a ship and received a ticket ‘folded in such a way that no writing was visible. On the ticket were printed certain conditions in small type, one of which was that the shipowner’s liability was limited to V00. R knew that there was printing on the ticket but did not know that the printing related to conditions of the contract. Held, R was not bound by the conditions as she did not know of their existence, and having regard to the smallness of the type in which they were printed, the absence of calling of attention to them, the shipowner had not given reasonable notice of them. Richardson v. Rawntree.
(iv) Against public interest:
M delivered one new sari to a laundry for washing. On the back of the printed receipt it was stated that the customer would be entitled to recover only 15% of the market-price of the article in case of loss. The sari was lost owing to the negligence of the laundry. In a suit by M it was held that the term was unreasonable. Such a term would give a premium on dishonesty
and is against the public interest. Lily White v. R Munnuswami.
in a Karnataka case, a laundry would pay only 8% of the price in case of loss. The court held that the term was unreasonable. M. Siddalingappa v. T. Nataraj
Comments : A contract formed on a conditional offer is valid. The terms of the contract can be constructed strictly or leniently. Formerly, all contracts were constructed and enforced strictly. See examples (r) and (ii), above. In recent times, however, the courts have adopted various protective measures for the aggrieved persons. Conditional offers are invalid under the following circumstances :
1. Lack of reasonable notice. Example (iii)
2. Unreasonable terms. Example (iv) and (v)
3. Breach of fundamental rights.
4. Tortious action by offeror:
8. Printed Contracts:
Printed Contracts (or Standard Forms of Contracts) often’ contain a large number of terms and conditions which exclude liability under the contract.
For examples, the Life Insurance –Corporation of India, the Railway Administration, Statutory Corporation and big companies issue printed forms of contract.
The individual is bound to sign them whether he likes the terms or not. Previously, the offerees of such printed forms were helpless against the massive organisations like those above. These organisations have availed of the opportunity to exploit the weak individual by imposing onerous terms upon them. Therefore; nowadays in order to protect the oppressed individual the courts have evolved various modes of protection.
Who can accept?
An offer can be accepted only by the person or persons for whom the offer is intended.
An offer made to a particular person can only be accepted by him because he is the only person intended to accept. An offer made to a class of persons can be accepted by any member of that class. An-offer made to the world at large can be accepted by any person whatsoever. X sold his business to Y without disclosing the fact to his customers. Z sent an order for goods to X by name.. Y received it and sent a letter of acceptance. Held, there was no contract between Y and Z because Z never made any offer to Y. Boulton v. Jones.
Rules regarding –acceptance:
The acceptance of an offer to, be legally effective must satisfy, the following requirements
1. must be ‘an absolute and unqualified acceptance of all the terms of the offer-Sec 7(1).
If there is any variation, even on an unimportant point, between the terms of the offer and the terms of the acceptance, there is no contract.
(i) M offered land to N at £280. N replied accepting and enclosing, £80, and promising to pay the balance by monthly installments of £50. Held, there was no contract, as there was no unqualified acceptance. Neale v .merrett.
(ii) P offered to buy O’s mare on Q giving a guarantee that the mare was quite in harness. Q guaranteed that. the mare was “quiet in
double harness “. Held, no acceptance. Jordan v. Norton
2. conditional Acceptance:
In accordance with English law as well as with the terms of the Contract Act, an acceptance with a variation is no acceptance ; it is simply a counter-proposal. which must be accepted by the original promisor before a contract is made. X offered to sell his house for Rs. 12,000. Y said, “accepted for Rs. 10,000.” This is not an acceptance but ‘a counter offer or counter offer on counter proposal. Kundan Lal v. Secretary of State ; Hyde v. Wrench. But an acceptance is not called `conditional’ if an immaterial term is added or if there occurs any misunderstanding between the parties for the interpretation of collateral terms.
3. Contracts subject to condition:
There are cases where an `immediate binding contract is formed although some of the parties’ rights and obligations may be dependent’ upon the happening of a particular event.
For example, the agreement may contain such a term as `subject to the purchaser’s solicitors approving the title.”Smith v. Butler-1. (Anson-Law of contract, p. 54)
The seeking clarification of offer neither amounts to the acceptance of the offer nor to the making of a counter offer. Cheshireand Fifoots’ Law of Contracts. 9 Edn.p. 34 ; U. P. State Electricity Board and another v. M/s Goel Electric stores, Chandigarh.
5.The acceptance must be expressed in same usual or reasonable manner :-Sec 7(2).
The offeree may express his acceptance by word of mouth, telephone, telegram or by post. These are the usual methods of communicating acceptance to the offeror. [Communication.-See p. 26]
An offer may also be accepted by conduct. If the offeree does what the offeror wants him to do, there is acceptance of . the offer by conduct. Section 8 of the Act states that, “Performance of the conditions of a proposal or the acceptance of any consideration for reciprocal promise which may be offered with a proposal, is an acceptance of the proposal.”
(i) Oral or by writing. P offers to buy Q’s bicycle at Rs. 50. Q may accept this offer by stating so orally or through telephone or by writing a letter or by sending a telegram to that effect.
(ii) conduct. A company offered £100, to anyone who contracted influenza after using their smoke ball 3 times daily for 2 weeks. Mrs. Carlill used the smoke ball but nevertheless got influenza. She claimed the reward. The company objected, that she should have notified them for her acceptance of the offer. Held, the use of the smoke ball by Mr. Carlill constituted acceptance of the offer by conduct, and no formal notice of acceptance was necessary. Carlill v. Carbolic Smoke Ball Company.
(iii) Conduct. A widow invited her niece to stay with her in her residence and promised to settle on her a particular immovable property. The niece stayed with her in residence till her death. Held, (by the Privy Council) that the niece was entitled to the property because she had accepted the aunt’s offer by going to her residence and staying with her as desired. V.Rao v. A Rao.
6. Mental acceptance or uncommunicated assent does -not result in a contract:
No contract is formed if the offeree remains silent and does nothing to show that he has accepted the offer. Acceptance must be communicated to the offeror or shown by conduct. Acceptance cannot be implied from silence of the offeree. See example (iii).
(i) F offered to buy B’s horse for f30, saying, “!f 1 hear no more about . him ! shall consider the horse as mine at £30” B did not reply. Held, there was no contract because there was no communication of acceptance. Mental acceptance or uncommunicated assent does not result in a contract. Felt house v. Bindley.
(ii) A person received an offer by letter ; he wrote on the letter “accepted”, put the letter in his drawer and forgot all about it. Held there was no contract because the other party was not informed. Brogden v. Metropolitan Rly Co.
(iii) Insurance proposal; Acceptance is complete only when it is communicated to the offeror. Silence or receipt and retention of premium cannot be construed as acceptance. Life Insurance Corporation of India v. Raja vasireddy Komalavalli Kamba and others.
7. The mode of acceptance:
Where the promisor prescribes a particular mode of acceptance, the offeree must follow the _ particular mode of acceptance.
For example, if the offeror says, “acceptance to be sent by telegram”, the offeree must send a telegram.
If the offeree fails to follow the prescribed mode of acceptance, the proposer may, within a reasonable time after the acceptance is communicated to him, insist that the proposal be accepted in the prescribed manner and not otherwise. But if the proposer does not insist upon it, he accepts the acceptance as actually communicated.-Sec 7(2). Thus, under the Indian law the proposer has the option of waiving compliance with the prescribed mode of acceptance.
X offers to buy a certain quantity of coal from Y at a certain price and asks Y to. send a telegram if he accepts, Y writes a letter accepting the offer. X may insist on a telegram from Y ; but if X does not so insist, the acceptance is good.
8. Time of Acceptance:
It the offeror prescribes a time, the acceptance must be done within that time. If no time is prescribed the acceptance must be done within reasonable time. What is `reasonable’ depends on the facts of the case. See the Case of Ramsgate Victoria Hotel Co. v. Montefiore.
9. when acceptance is complete:
Section 4 of the Contract Act lays down that the communication of an acceptance is
complete,-as against the proposer, when it is put in a course of transmission to hint, ‘so as to be out of the power of the acceptor; and as against the acceptor, when it comes to the knowledge of the proposer.
(i) A proposes, by letter, to bell a house to B at a certain price. The communication of the proposal is complete’: when 8 receives the fetter. ‘
(ii) B accepts A’s proposal by a letter sent by post. The communication of the acceptance is compete-as against A, when the letter is posted, as against B, when the letter is received by A.
10. Before Offer:
Acceptance must be given before the offer.
This is the natural sequence.
There cannot be acceptance before the offer is given from any person. See the case of Lalmnn v. Gauri Du1t.
11. the acceptance must be made while the offer is in force,i. e. before the offer has been revoked or the offer has lapsed. How an offer is revoked is described below. A written offer may be contained in a letter or a telegram. A circular or advertisement or a notice may be written in such a language that it amounts to an offer. A tramway car and a bus going along a street and picking up passengers are examples of offers by conduct. Section 4 states : “The communication of a proposal is complete when it comes to the knowledge of the person towhom it is made.
Revocation of an Offer:
An offer comes to an end, and is no longer open to acceptance under the following circumstances.-Sec 6.
1. By notice:
If the offeror gives notice of revocation to the other party, i.e., expressly withdraws the offer, and the offer comes to an end. An offer may be revoked any time before acceptance. but not afterwards. Once an offer is accepted there is a binding contract. The acceptance of an offer becomes binding on the offeror as soon as the acceptance is, put in course of communication to the offeror so as to be out of the power of the acceptor. But any time before this happens the offer may be revoked. A proposal is sent by X to Y and is accepted by Y by letter. The proposal might have been revoked any time before the letter of acceptance was posted but it cannot be revoked after the letter is posted. The notice of revocation does not take effect until it comes within the knowledge of the offeree.
2. By lapse of time:
When the proposer prescribes a time within which the proposal must be accepted, the proposal lapses as soon as the time expires.
3. After expiry of reasonable time:
If no time has been prescribed, the proposal lapses after the expiry of a reasonable time. What is reasonable time will depend on the circumstances of the case.
On 8th June, M offered to take shares in R company. He received a letter of allotment on 23rd November. M refused to take the shares. Held, M was entitled to refuse as the offer had lapsed by the delay in acceptance. Ramsgate Victoria Hotel Co. v. Montefiore.
4. By failure of a condition precedent:
An offer lapses by the failure of the acceptor to fulfill a condition precedent to acceptance, where such a condition has been prescribed
P says to Q. “I will sell my house at Delhi to you for Rs. 50,000 if you are married.” The offer cannot be accepted until and unless Q is married.
5.By death or insanity:
An offer lapses by the death or insanity of the proposer, if the fact of his death or insanity comes to the knowledge of the acceptor before acceptance.
When a counter offer is given, the original offer lapse. See the Case of Hyde v. Wrench
A proposal once refused is dead and cannot be revived by its subsequent acceptance.
A offers to sell his farm to B for Rs. 1,000. B replies offering to pay Rs. 950. A refuses. Subsequently B writes accepting the original offer. There is no contract because the original offer has lapsed.
Definition of Consideration:
Consideration is an essential element in a contract. Subject to certain exceptions, an agreement is not enforceable unless each party to the agreement gets something: This “something” is called consideration: It is used in the sense of quid -pro quo i.e. something in return.
In the English case, Currie v. Misa, consideration was defined as, “some right, interest’ profit or benefit accruing to one party, or some –forbearance, detriment, loss “or responsibility given; suffered or undertaken by the other.”
Section 2(d) of the Contract Act defines consideration ‘as follows : “When, at the desire of the promisor, the promiseeor any other person has done or abstained, from– doing, or. does or abstains from doing, or promises ‘to do or to abstain from, doing, something, such act or abstinence or promise is called a consideration for the promise.”
(i) P agrees to sell a house to Q for Rs. 80,000. For P s promise, the V consideration is Rs: 80;000. For Q’s promise, ‘the’ consideration, is the house:
(ii) H engages Q as a clerk in his office for Rs 1000 a month. The monthly wage is the consideration received by Q ; the services of constitute the ‘Consideration received by H.
(iii) X promises not to file a suit against if Y pays him Rs. 100 by a fixed date. The -forbearance of X is the consideration for Y’s Payment.
Types of Consideration:
Consideration may be classified into three t*s, as follows:
When the consideration of one party was given–before the date of the promise, it is said to be past. Suppose that X–does` tine work for Yin *the month– of January (without.expecting any payment). In February..Ypromisesto pay Mmsome money.-: The consideration of X is pt”‘ consideration.
Under English law pastconsideration is no consideration and a contract based on past consideration is void.
But under Indian law a past consideration is good -consideration because the definition of consideration in Section 2 (d) includes the words ` “has done or abstained from doing”.
2. Present consideration:
Consideration which moves simultaneously with the promise is called Present Consideration or Executed Consideration. B buys an article from a shop and pays the price immediately. The consideration moving from B is present or executed consideration.
3. Future consideration:
When the consideration is to move at a future date, it is called Future Consideration or Executory Consideration. In a contract the consideration may be executory on both sides. A promise may support a promise. Thus a promise to pay money at a future date for goods to be delivered at a future date is a valid contract.
Rules (or the Essential Factors) of Consideration:
The following rules may be laid down’ regarding consideration
1.desire (or request) of the promisor is essential:
The act done or lass suffered by the promisee must have been done or suffered at the desire of the promisor. An act done without any request is a voluntary act and does not come within the definition of consideration.
(i)P sees Q’s house on fire and helps in extinguishing it. Q did not ask for 6i: help. P cannot demand payment for’ his service
(ii) The Collector of a district asked D to spend some money on the improvement of a market and he did so. D cannot demand payment from the shopkeepers using the market for having improved the market. Durga Prasad v. Baldeo.
(iii) X promised to pay. Y some money by a letter. Y ‘showed the , letter to Z who thereupon consented to the marriage of her daughter with Y. Z cannot force X to pay the money to Y because them is no connection between the marriage and the promise to pay. Dashwood v. Jermyn
2. Theconsideration must be real:
The consideration must have some value in the eye of taw. It must not be sham or illusory. The impossible’ acts and illusory or non-existing goods cannot support a contract. Therefore, real consideration comes from good consideration. (See p. 39). A contribution to charity is without consideration. Therefore, it is not real consideration.
(i) Illusory consideration: G promises for no consideration, to give H Rs 1,000. This is a void agreement. No consideration, no contract.
(ii) Impossible act: X promises to supply Y one total of gold brought from the sun. The consideration is sham and illusory and there is no contract.
(iii) No consideration: V owed 1208 to E who told V that if the money was not paid by 7th July he would file a bankruptcy petition against V Thereupon V promised to pay the money before 12 o’clock on 8th July and E agreed not to file the petition before that time. Held, there was no consideration for E’s promise. ‘Vanburgen v. St. EdmundsProperties Ltd
Above illustrates the rule that a promise to do what one is already bound to do (whether under the law or under an existing contract) confers no additional benefit and is of no value. The consideration is unreal. A promise to pay an existing debt punctually if the creditor gives a discount is without consideration and the discount cannot be enforced.
3. Public duty:
“Where the promise is already under an existing public duty, an express promise to perform, or performance of, that duty will not amount to consideration. There will be no detriment to the promisee or benefit to the promisor over and above their existing rights and liabilities
Example: A contract to pay money to a witness who has received a subpoena to appear at a trial. Collins v. Godefroy
4. Promise to a stranger:
But a promise made to a stranger to perform an existing contract, is enforceable because the promisor undertakes a new obligation upon himself -which can be enforced by the stranger. X wrote to ‘his nephew B, promising to pay him an annuity of £150 in consideration of his marrying C B was already engaged to marry C Held, the fulfillment of B’s contract with C was consideration to support X’s promise to pay the annuity. Shadwell v. Shadwell.;
5. Consideration need not be adequate:
Section 25 (explanation 2) provides that, “An agreement to which the consent of the party is freely given is not void merely because the consideration is inadequate; but the inadequacy of the consideration may be taken into account by ‘the court in determining the question whether the consent of the promisor was freely given.” The reason behind this rule is that it is impossible for the court to decide what adequate consideration is. The parties to the contract must decide the quantum of consideration and, if consent was freely given, the court will enforce the agreement. If the consideration is inadequate, the Court may hold that consent of the promisor was not freely given and the agreement may become void. “Consideration” means a reasonable equivalent or other valuable benefit passed on by the promisor to the promisee or by the transferor `to the transferee. Similarly, when the word `Consideration’ is qualified by the word `adequate’, it makes consideration stronger so as to make it sufficient and valuable having regard to the facts, circumstances and necessities of the case. Sonia Bhatia v. State of U. P. and others.
(i) P agrees to self a horse worth Rs 1000 for Rs. 10. P’s consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration.
(ii) D, promises to B to sell land in Calcutta at Rs. 10 per cottah. The agreement is valid provided the consent of D was freely given.
(iii) S files a suit against B for Rs. 5,000. Subsequently he agrees to withdraw the suit on payment of Rs. 3,000. The agreement is a contract. The withdrawal of a suit is valuable consideration so as to support the promise to pay money.
6. The consideration must not be illegal, immoral, or opposed to public policy:
If either the consideration of the object of the agreement is illegal, the agreement cannot be enforced. The same principle applies if the consideration is immoral or opposed to public policy. [See, Section 23 and ch. S for examples of such agreements.
7. The consideration may be present, past, or future:
This follows from the definition of consideration given in the Act.
8. Consideration may move from the promisee or from any other person:
A person granted some properties to his wife C directing her at the same time to pay an annual allowance to his brother R C also entered into an agreement with R promising to pay the allowance to R. This agreement can, be enforced by R even though no part of the consideration received by C moved from R Chinnaya v. Ramaya. A stranger to the consideration can sue to enforce the contract, though a stranger to the contract cannot. In England, a stranger to the consideration .cannot sue on the contract.
9. What is good consideration? :
The rules or the necessary factors for consideration can be summed up as follows :
(1) There must be desire of the promisor;
(2) it must be real ;
(4) Not illegal, immoral or opposed to public policy ;
(5) Present, past or future; and
(6) From the promisee or any person.
Subject to the above essential factors, a good consideration can be any of the following :
(1) Physical goods;
(3) Forbearance (for example not to sue) ;
(4) Arbitration or the compromise of disputed claims, and
(5) Settlement or composition with creditors.
“No Consideration No Contract”
Consideration is essential for the validity of a contract. “A promise without consideration- is a gift; one made for a consideration is a bargain”.-Salmond and Windfield, Law of Contracts.
A promise without consideration is a gratuitous undertaking and cannot create a legal obligation. Under Roman law an agreement without consideration was called a nudum pactum and was unenforceable. Under English law simple contracts must be supported by consideration but specially contracts require no consideration. Under Indian law the presence of consideration is, as a rule, essential to the validity of contracts.
Exceptions to the rule:
There are exceptional cases where a contract is enforceable even though there is no consideration. They are as follows:
I. Natural love and affection: An agreement made without consideration is valid if, `it is expressed in writing and registered under the law for the time being in force for the registration of documents, and is made on account of natural love and affection between parties standing in a near relation to each other.”-Sec 25(1).
An agreement without consideration is valid under Section 25(l) only if the following requirements are complied with :
(i) The agreement is made by a written document.
(ii) The document is registered according to the law relating to registration in force at the time.
(iii) The agreement is made on account of natural lave and affection.
(iv)The parties- to the agreement stand in a near relation to each other.
(i) A for natural love and affection, promises to give his son B, Rs. 1,000. A puts his promise to B in writing and registers it. This is a contract. [Illustration (b) to Section 25]
(ii) An agreement entered into by a husband with his wife, during quarrels and disagreement, whereby the husband promised to give some property to the wife. The agreement is void because, under the circumstances, there is no natural love and affection between , the parties. Rajlukhy Debee v. Bhootnath`
2. Voluntary Compensation:
A promise made without any consideration is valid if, “it is a promise to compensate wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do.”-Sec. 25(2).
Section 25(2) applies when there is a –voluntary act by one party and there is a subsequent promise (by the party benefited) to pay compensation to the former. The term `voluntarily’ signifies that the act was done, ` otherwise than at the desire of the promisor”.
(i) D finds B’s purse and gives it to him. B promises to give D Rs. 50. This is a contract.
(ii) D supports B’s infant son. B promises to pay D’s expenses in so doing. This is a contract.
3. Time-barred debt:
A promise to pay, wholly or in part, a debt which is barred by the law of limitation can be enforced if the promise is in writing and is signed by the debtor or his authorised agent.-Sec. 25(3). A debt barred by limitation cannot be recovered. Therefore a promise to repay such a debt is, strictly speaking, without any consideration. But nevertheless such a promise can be enforced if the debtor or his authorised agent makes written and signed promise to repay it. The debt must be a liquidated or ascertained sum of money and there must be a definite promise to pay. A mere acknowledgement of the debt is not enough.
D woes B Rs. 1000 but the debt is barred by the Limitation Act. D signs a written promise to pay B Rs. 500 on account of the debt. This is a contract.
No consideration is required to create an agency.-Sec. 185.
5. Completed gift:
The rule “no consideration; no contract” does not apply to completed gifts. Explanation l, to Section 25 states that, “Nothing in this section shall affect the validity as between the donor and the donee, of any gift actually made”. Thus, if a person gives certain properties to another according to the provisions of the Transfer of Property Act (i.e., by a written and registered document) he cannot subsequently demand the property back on the ground that there was no consideration.
Capacity of Parties
Traditionally, a minor or an infant is anyone under the age of 21. This has been changed by statutes in almost every state, and a minor is now anyone under the age of 18. The term infant and minor are used interchangeably in most situations.
The Law Regarding Minor’s Agreement:
1. Minor’s Agreement is Void: An agreement by a minor is (subject to the exceptions noted under 2 and 3 below) absolutely void and inoperative. The mortgagee wanted refund of the sum which he had actually paid. The reason underlying the rule is that a minor id supported to be incapable of judging what is good for him.
2. A minor can be a promisee: An agreement under which a minor has received a benefit can be enforced as against the other party. A minor in whose favour a mortgage has been executed can get a decree for the enforcement of the mortgage.
Example: D. an infact professional boxer,held a licence from the British Boxing Board under which his money was to be stopped if he was disqualified. D sued to recover it. Held, the contract was for his benefit and was binding on him.
3. Minor’s Liability for Necessaries: The minor’s property is liable for the payment of a reasonable price for necessaries suppliedto the minor or to anyone whom the monir is bound to support.
Examples: A trader supplies a minor with rice needed for his consumption. He can recover the price from the minor’s property.
4. Law Regarding Compensation or Restitution: A minor cannot be compelled to compensate for or refund any benefit which he has received under a void agreement because Sections 64 and 65 of the Act do not apply to such cases [Sec ch. 11]
But it has been held in a number of cases that the court may, on cancelling an instrument at the instance of a minor, require the minor to make compensation to the other party.
Examples: A minor sells a house for tk. 10,000. Later he files a suit to set aside the sale on the ground of minority. He may be directed to refund the purchase-money received by him.
5. No Estoppel: A minor who faisely represents himself to be a major, and thereby includes another persons to enter into an agreement with him, can nevertheless plead minority as a defence in an action on the agreement. There can be no estoppel against a minor.
[ The Principle of Estoppel: The Principle of estopple is a rule of evidence. When a man has, by words spoken or written, or by conduct, induced another to believe that a certain state of things exists, he will not be allowed to deny the existence of that state of things. “Estoppel arises when you have represented as a fact, although it is not a fact.” (Lord Halsbury)]
6.No Ratification: A minor on attaining majority cannot ratify an agreement entered into while he was a minor. The reason is that a void agreement cannot be validated by any subsequent action and a minor’s agreement is void ab initio.
7. No specific Performance: An agreement by a minor being void, the court will never direct specific performance of such an agreement by him.
8. No Insolvency: A minor cannot be deciared insolvent even though there are dues payable from thr properties of the minor.
9. Partnership by Minor: A minor cannot enter into a contract of partnership. But he can be admitted into the benefits of a partnership with the consent of all the parties.
10. A minor can be an agent: A minor can draw make, indorse, and deliver negotiable instruments so as to bind all parties except himself. Aminor cannot be adjudicated an inslvent.
11. Position of minor’s Guarding: An agreement entered into by the guarding of a minor on his behalf stands on a different footing from an agreement entered into by the minor himself. An agreement by a minor is void but an agreement by his guardian on his behalf is valid provided the obligations undertaken are within the powers of the guardian. The powers of a guardian are determined by the personal law of the minor and by the Guardian and Wards Act. An agreement made by the guardian is binding on the minor if it is for the benefit of the minor or is for legal necessity.
12. A Company Shares of A Minor: A minor cannot apply for and be a member of a company. If a minor has, by mistake, been recorded as a member, the company can rescind the transaction and remove the name from the register. The minor can also repudiate the transaction and get his name removed, from the register. But where a minor was made a member and, after attaining majority, he received and accepter dividends, he will be estopped from denying that he is a member.
Definition of “Free Consent”:
An agreement is valid only when it is the result of the “free .. consent” of all the parties to it. Section 13 fines the act defines the meaning of the term `consent’ and Sec