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KEY TAKE AWAYS

  • When a Proposal is Accepted it becomes a Promise. When that Promise is met with Consideration that then becomes an Agreement. And finally, when that Agreement is enforceable by law it is said to be a Contract.
  • Void, valid contract, Void contracts and Voidable contracts
  • Voidable contracts can be caused due to; Coercion (Section15), Undue influence (Section 16), Fraud (Section.17), Misrepresentation (Section 18) and lastly due to Mistake (Sections.22,23,24)
  • Section 25 that talks about the exception to the ‘No Consideration No Contract Rule’. This is applicable to those who are in a close relationship, those who have done a voluntary service and lastly those who create an agency.

INTRODUCTION

Indian Contract Act

The Indian Contract Act came into force on September 1st 1872, and it is not exhaustive. It is mainly divided into 4 sections being: -

  1. Sections 1 to 75 that deal with the general principles of a contract.
  2. Sections 76 to 123 that deal with contracts relating to the sales of goods.
  3. Sections 124 to 238 that deal with special contracts like that of indemnity, guarantee, bailment etc.
  4. Sections 239 to 266 that deal with contracts relating to partnerships.

A contract, according to Anson, is a legally binding agreement made between two or more persons, by which rights are acquired by one or more to act or forbearances on the part of the other or others.

Section 2 of the Indian Contract Act deal with all the definitions also known as the ‘interpretations Clause’.

Section 2(h) of the Indian Contract Act

Under this section the term contract is defined as an agreement that is enforceable by law. An agreement is a promise or a collection of promises that form a consideration for one another. It clearly defines the scenarios in which a promise made by the parties entering into a contract would be legally binding.

Intention To Create a Contract – arose through the case law Balfour v Balfour[1919] Citation(s): 2 KB 571

Under this case it was held that there is an assumption made by the court against the intention to create a legally enforceable agreement in circumstance where the agreement is enforceable in nature.

Requirements for the formation of a contract is that firstly an agreement must be made and secondly that agreement should be enforceable by law.

ESSENTIALS OF A CONTRACT

  • Proposal + Accepted = Promise
  • Promise + Consideration = Agreement
  • Agreement + Enforceability by law = Contract

When a Proposal is Accepted it becomes a Promise. When that Promise is met with Consideration that then becomes an Agreement. And finally, when that Agreement is enforceable by law it is said to be a Contract.

Section 2(a) defines a “Proposal” as the situation in which one person indicated to another his/her willingness to do or abstain from doing anything with the aim of getting the assent of the other.

Section 2(e) - “Agreement” is all the promises and every collection of promises that form a consideration for each other.

VALID CONTRACT

Though Section 10 of the ICA does not expressly define what a valid contract is it does states that all agreements are contracts if they are made with free consent, by competent parties, with a lawful consideration, with a lawful object and finally is not an expressly declared to be void.

Example: - in Suraj Narain Dube vs Sukhu Aheer and Anr. on 6 July, 1928 Citations: AIR 1928 All 440 the contract was held as one that was not valid as one of the parties was a minor. Here as one of the parties was a minor it doesn’t fulfil the requirement of the parties being competent hence it won’t amount to a valid contract.

VOID CONTRACT

Section 2(g) states that an agreement that is not enforceable by law would amount to a void contract.

Example: - Virender Singh vs Laxmi Narain and Anr. on 1 November, 2006

VOIDABLE CONTRACT

Section 2 (I) of the ICA states that a voidable contract is one in which an agreement, which is said to be enforceable by law, at the option of one or more than one of the parties however not at the option of the other or others.

Voidable contract may be a contract that has legal effect and force when it's made, but is susceptible to be subsequently annulled or put aside by the courts through the method of recission. thanks to the section 10 of the Contracts Act provides, all agreements are contracts if they're made by the free consent of the parties competent to contract.

There are five causes which cause the voidable contract, and they are as follows:

  1. Coercion (Section15)
  2. Undue influence (Section 16)
  3. Fraud (Section.17)
  4. Misrepresentation (Section 18)
  5. Mistake (Sections.22,23,24)

Coercion

Coercion is committing or threatening to commit any act forbidden by the legal code, or the unlawful detaining or threatening to detain, any property, to the unfairness of a person to enter into an agreement (Section 15).

When an individual is being coerced, he/she is said to have not entered the contract of his/her own will. This situation usually arises when a person enters a contract under violence or threatened violence to himself/herself or to his/her immediate family.

Barton V. Armstrong (1975) Citation: UKPC 27, AC 104 - It was held that the equitable rule allowed for any agreement that was as a result of some duress and fraudulent misrepresentation (in that each one parties were consenting), did enable the agreement to be put aside and hence voidable.

Oriental Bank of Commerce And ... vs S.M. Chopra on 12 October, 1999 Citations: 2000 (1) AWC 594 – Under this case it was held by the Hon'ble Court that as the resignation of the party had been obtained by the defendants by force, under coercion and without the free consent and will of the plaintiff the contract will be declared as illegal and voidable and will not binding on the plaintiff, and the plaintiff can continue in services of the defendants without any effect of the said resignation letter.

Bishundeo Narain And Another vs Seogeni Rai and Jagernath on 4 May, 1951 Citations: 1951 AIR 280, 1951 SCR 548 - The suit out of which the appeal arises was for a declaration in compromise decree, made during a previous suit for partition, this was held as one that doesn't bind the plaintiffs. The learned counsel for the plaintiffs-appellants also contends that he asked for partition within the present case. But that was held as a matter of doubt.

Undue Influence

This occurs when the relations subsisting between the parties is such that one’swishes is more dominant to the other party and so that party is in a position to dominate the desire of the opposite and uses that position to get an unfair advantage over the opposite (Section 16(1))

This scenario happens when a person enters a contract under improper pressure which prevents him/her from exercising a free and independent lodgement whereas the pressure isn't sufficient to amount to duress. Here it is essential that an individual is deemed to be in a position to dominate the desire of other (Section 16(2))

Inche Noriah V. Shaik Allie bin Omar: PC 1928 Citation [1929] AC 127, [1928] All ER 189 - in this case it was observed by the court that undue influence was being used against the nephew by his elderly aunt.

National Insurance Co. Ltd vs M/S. Boghara Polyfab Pvt.Ltd on 18 September, 2008 – the issue that arose in this case was whethera dispute raised by an insured, after giving a full and final discharge voucher to the insurer, are often mentioned as to arbitration.The court, was of the view that there was a significant dispute between the parties and this rose the suspicion whether the `discharge voucher' was given voluntarily or under pressure or coercion, which so was required to be settled by the Arbitral Tribunal. After hearing both sides it was finally held that the leave will be granted.

Fraud

Fraud is anyact committed by a person who has entered into a contract, or together with his/her connivance, or by his/her agent, with intent to deceive another party thereto of his/her agent, or to induce him/her to enter into a contract (Section17).

Whenever an individual causes another to act on a false representation which the maker himself/herself doesn't believe to be true, he's/she’s said to have committed a fraud.

R.C. Thakkar vs (The Bombay Housing Board on 5 May, 1972 Citations: AIR 1973 Guj 34 - in this case the trial judge held that as the party failed to prove fraudulent misrepresentation and there is clearly no evidence that supports this, the case would not go in favour of him.

Shri Vallabh Glass Works Ltd. & ... vs Union of India & Others on 14 March, 1984 Citations: 1984 AIR 971, 1984 SCR (3) 180 – under this case the question of fraud arose when, the products manufactured by the petitioner-company, namely, wired glass, figured glass, rolled glass, coloured figured glass, coolex figured glass, and coolex wired glass belong to the category of plate glass , and whether or not they are susceptible to be subjected to excise duty under tariff item 23A(1) of the primary Schedule of the Central Excise and Salt Act, 1944, hereinafter mentioned as `the Act.'

the learned Advocate appearing for the petitioner-company, is that the disputed items of glass manufactured by the petitioner-company can by no stretch of imagination be considered to be plate glass and consequently tariff item 23A could never apply to those items.

Misrepresentation

When a person gives out inaccurate information by one part or their agent to another and this is done before the contract has been made but such actions induce the making f said contract then it comes under the category of misrepresentation. In such a situation the wronged party can revoke the contract or claim damages for the same.

Smith v Land & House Property Corp (1884) Citation: 28 Ch D 7

The plaintiff put up his hotel for sale stating that it had been let to a ‘most desirable tenant’. The defendants then agreed to buy the hotel. however, the tenant was bankrupt. As a result, the defendants refused to complete the contract due to which they were sued by the plaintiff for specific performance. The Court of Appeal held that the plaintiff’s statement wasn’t mere opinion, but was one among fact.

Edgington v Fitzmaurice (1885) 29 Ch D 459

The plaintiff shareholder received a circular issued by the administrators requesting loans to the quantity of £25,000 with interest. The circular stated that the corporate had bought a lease of a valuable property. Money was needed for alterations of and additions to the property and to move fish from the coast and be purchasable in London. The circular was found as being misleading in a few aspects. It then had been alleged, inter alia, that it had been framed in such how on cause the assumption that the debentures would be a charge on the property of the corporate, which the entire object of the difficulty was to pay off pressing liabilities of the corporate, to not complete the alterations, etc. The plaintiff who had taken debentures, claimed repayment of his money on the bottom that it had been obtained from him by fraudulent mis-statements.

The Court of Appeal held that the statement of intention was a press release of fact and amounted to a misrepresentation which the plaintiff was entitled to rescind the contract. Although the statement promised of intent the court held that it was found that the defendants had no intention of maintaining or keeping of such an intent at the time, they had made the statement.

Mistake

Any action, decision, act or judgement that produces an unwanted and unintentional result would amount to a ‘Mistake’.

Phillips v Brooks Ltd Citation: [1919] 2 KB 243 - Phillips v Brooks Ltd [1919] 2 KB 243 is an English jurisprudence case that deals with mistake. It had been held that an individual is deemed to contract with the person ahead of them unless they will substantially prove that they instead intended to deal with someone else. This same conclusion can be seen also in Shogun Finance Ltd v Hudson.

There are two categories into which Mistake can be divided into: -

  • Mistake of Law,
  • Mistake of Fact.

Mistake of Law

Mistake of Law means any contract which is performed by parties without knowing the law (or by ignoring the law), which is important for that contract. Section 21 of the Indian Contract Act deals with ‘effect of mistake on law’.

Grant v. Borg

In this case, the person wasn't knowing the clauses of the Immigration Act 1971, for staying beyond the deadline by the leave. Here, he cannot apply for defence under the error of law.

Mistake of Fact

Mistake of fact means any contract which is performed by parties without knowing any material fact (or ignoring the fact), which is important for that contract. Section 20 and Section 22 of the Indian Contract Act deals with the concept of ‘Mistake of Fact’. Mistake of Fact is of three types: Bilateral mistake, Unilateral mistake and customary mistake.

The State of Maharashtra v. Mayer Hans George

In the case of The State of Maharashtra vs Mayer Hans George, A is a politician of the court and he's ordered to arrest Y. An arrests Z by mistake, as he believes Z is Y. Here, A can take the bottom of real intention as a defence within the mistake of fact.

EXCEPTIONS OF A VOIDABLE CONTRACT

Section 25 talks about the exception to the ‘No Consideration No Contract Rule’

Firstly, if an agreement is in writing and is registered between two parties who are in a close relationship and can be categorised as one that comes under natural love and affection then such an agreement is enforceable. Even if it is without consideration.

Secondly, if a person is said to have done a voluntary service in the past and the beneficiary promises to pay at a later date, relating to the same, then the contract is said to be binding.

However, the following should be suited to the situation:

  • The service has to have been rendered voluntarily in the past
  • It was rendered to the promisor
  • The promisor should be in existence when the voluntary service was done (especially important when the promisor is an organization)
  • The promisor should have shown his/her willingness to compensate the voluntary service

And lastly, in accordance to section 185 of the ICA no consideration is needed to create an agency.

CONCLUSION

The Indian Contract Act defines voidability to its ultimate extent and it is observed to be well fitted to protect the rights and interests of the people on a large scale.

It can be observed that it has been drafted in a way in which it can fulfil all the obligations of both the parties. In spite of the fact that, it is said that, The Indian Contract Act is drafted to promote and maintain contractual connections between parties but alongside it is crucial to confine those contract and agreements which may cause any type of harm to the general public.


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