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Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)
The Indian Contract Act , 1872 (Act 9 of 1872)1 [25 April 1872] Preamble WHEREAS it is expedient to define and amend certain parts of the law relating to contracts; It is hereby enacted as follows: History Ancient and Medieval Period The rules and principles governing contracts were governed in the ancient and medieval periods of Indian history mainly by two factors-moral and economic. In the well-developed and fully evolved Indian society, act ivities like transfer of property, performance of services, etc. required rules for agreements and promises, which covered not just business and commercial transactions, but also personal relationships in all walks of life. The Hindu laws were enunciated over the centuries by the compilers of smritis. The laws are collectively found in a huge body of literature called the Dharmashastras, and the rules governing contracts are part of the law called Vyavaharmayukha. Another source is the Arthshastra of Kautilya, the only existing secular treatise on politics and government. There being no general code covering contracts, the principles have to be derived from numerous references.2 The norms laid down for competence of contract correspond with the present rules, namely, that dependants, minors, sanyasins, persons devoid of limbs, those addicted to vices, etc. were incompetent to contract. According to the Arthashastra, dependants included a son whose father was alive; a father whose son managed the affairs; a woman whose husband was alive; a slave or a hired servant. The Narada Smriti puts competent persons in three categories--the king, the vedic teacher and the head of the household. All shastras agreed that contracts or transactions based on fraud or force were to be declared, by the king, as unenforceable. In general, women could not make contracts binding on their husbands or against family properties. It was possible for a 'competent' person to authorise a 'dependant' to enter into transactions. The concept of liability was developed as early as the Rig Vedic period. Spiritual debts as well as secular engagements were referred to in the literature as 'rna', and it was constantly reinforced by the smritis that failure to pay back the debts implied rebirth of the defaulter as a slave/servant/woman or beast in the house of the creditor. So, the son was liable to pay off his father's debts even if he did not inherit any property from him. Ancient Indian society, unlike Christian and Islamic society, accepted money-lending as an occupation. Usury was a sin only when the usurer cheated the debtor, or for example, when he lent goods of a lower quality, but received goods of a higher quality in return, or if he extracted fourfold or eightfold return from a distressed debtor. The creditor could advance a loan on adequate pledge or deposit with a mutual friend, or a reliable surety, if the transaction was made in writing or in the presence of a witness. Interest might or not be stipulated at the time of loan. Debtors of all castes were liable to pay interest agreed to with creditors of all castes. The interest would be fixed with
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reference to the article pledged, or surety given, or with reference to a totally unsecured debt, in the latter case, the interest could be higher. Although, all commentaries are not in agreement with the amount of interest to be charged, they all agree that it was sinful to take exorbitant interest, and that interest rates imposed by force could not be enforced in a court. The Yajnavalkya Smriti provided that in the case of cattle being loaned, their progeny was to be taken as profit. The rule of damdupat, i.e. the rule that 'the amount of principal and interest recoverable at one time in a lump sum cannot be more than double the money lent' took into consideration the fact that debts were not necessarily recoverable from a man himself, his descendants were also liable, and hence there was practically no limitation for bringing a suit for money lent. The rule also encouraged creditors to allow interest to increase. The rule of damdupat is followed in many parts of India.3 Islamic law had a complete and comprehensive law of contract providing for general principles applicable to all contracts.4 It also supplied rules to govern specific contracts of commercial, mercantile and proprietary nature, like agency (vakalat), guarantee and indemnity (zamanat and tamin), partnership (shirkat), one person's money and another's work (muzarabat), bailment (kafalat). All transactions were treated as secular contracts, and rules were provided for settlement of all types of disputes, even relating to property and succession. The application of personal laws continued until the passing of this Act, and some rules apply even thereafter, as discussed below. Introduction of English Law in India The Charters of the eighteenth century which established Courts of Justice5 for the three presidency towns of Calcutta, Madras and Bombay, introduced into their jurisdictions the English common and statute law, in force at the time,6 so far as it was applicable to Indian circumstances. Thus, it was held that the Statute of Mortmain (9 Geo II, c 36),7 the law as to forfeiture for suicide,8 and the law as to maintenance and champerty9 did not apply to India, as not being applicable to Indian circumstances. It is a matter of controversy whether English law was introduced by the Charter of 1726 (13 Geo I) so as to extend to India the statutes passed upto that date only, or subsequently also by the Charters of 1753-74 so as to embrace statutes up to 1774.10 The indiscriminate application of English law to Hindus and Mahommedans, within the jurisdiction of the Supreme Courts, led to many inconveniences.11To obviate this, the Statute of 1781 (21 Geo III, c 7o, s. 17) empowered the Court at Calcutta (being the then Supreme Court), and the Statute of 1797 (37 Geo III, c 142, s. 13) empowered the Courts of Madras and Bombay (being then the Recorders' Courts), to determine all act ions and suits against the inhabitants of the said towns, provided that their succession and inheritance to lands, rents, and goods, and all matters of contract and dealing between parties should be determined in the case of Mahommedans by the laws and usages of Mahommedans, and in the case of Hindus (called 'Gentoos' in the statutes) by the laws and usages of Hindus, and where only one of the parties should be a Mahommedan or Hindu, by the laws and usages of the defendant. The effect of these statutes was to supersede English law as regards Hindus and Mahommedans, in the case of contracts and other matters enumerated in the statutes, and to declare the right of Hindus and Mahommedans to their own laws and usages. The result was that in a suit on contract, for instance, between Hindus, the Hindu law of contract was applied, and the Mahommedan law in the case of a contract between Mahommedans, and this continued until the enactment of the Indian Contract Act. In 1862, High Courts were established for each of the presidency towns of Calcutta, Madras and Bombay. The courts established under the statutes of 1781 and 1797 were abolished. The Charters of the High Courts of Calcutta, Madras and Bombay contained similar provisions about the law to be applied. The Calcutta High Court, by Letters Patent of 1862 and later 1865 (clause 19)12 was required to
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apply, in the exercise of its ordinary original civil jurisdiction, the sale law and equity that would have been applied if the Letters Patent had not issued, which meant the law applied by the Supreme Court. The High Court continued to administer the personal law to Hindus and Mahommedans in the same manner, i.e. the Hindu law of contract to Hindus, and the Mahommeddan law of contract to Mahommedans. This was subject to the legislative powers of the Governor-General-in-Council under clause 44 of the Charter of 1865. This Indian legislature had the power to alter, by legislative enactment, the provisions of clause 19 of the Charter of 1865. The Indian Contract Act was enacted in the exercise of this power by the Indian legislature to govern matters of contract. The High Court had now to administer the law laid down in the Indian Contract Act13 or other enactments relating to particular contracts. Subject to any law made by the Governor-General-in-Council, the High Courts were still bound, in the exercise of their ordinary original civil jurisdiction, to apply the personal laws of contract to Hindus and Mahommedans as being comprised in the expression 'law and equity' in clause 19. The Charters establishing High Courts in Madras and Bombay made similar provisions. As the 'law and equity' administered by their predecessor Supreme Courts in Madras and Bombay, they applied the personal law of Hindus to Hindus, and of Mahommedans to Mahommedans. Section 17 of the statute of 1781 and s. 13 of the statute of 1797 were repealed by the Government of India Act, 1915. Section 112 of the Government of India Act, 1915 was similar to these repealed sections, and was later repealed and reproduced in s. 223 of the Government of India Act, 1935. Mofussil Courts The Bengal Regulation 3 of 1793 (s. 21) and Madras Regulation 2 of 1802 (s. 17) directed the judges in the zilla(District) and city courts to act according to justice, equity and good conscience to cases where no specific rule existed. These regulations were repealed, but the direction to act in the absence of any specific rule according to justice, equity and good conscience found place in the Bengal Civil Courts Act, 1887 (s. 37) and the Madras Civil Courts Act, 1873 (s. 16). The Bombay Regulation 4 of 1827 (s. 26), which is still in force, provided that the law to be observed in the trial of suits be the Acts of Parliament and regulations of government applicable to the case, and in the absence of such Act s and regulations--the usage of the country in which the suit arose; and if none such appeared--the law of the defendant, and in the absence of specific law and usage, equity and good conscience. The expression 'justice, equity and good conscience' was interpreted to mean the rules of English law so far as applicable to the Indian society and circumstances.14 It has been observed that in practice, the application of English law did not cause difficulty because on many points there were no differences between the English and the personal law, and there was no rule of personal law in many cases, moreover because many Indian businessmen acquired experience from their relations with Britons.15 Civil courts in other parts of India were required to apply these principles by the Acts creating them.16 The law of England, so far as consistent with the principles of equity and good conscience, generally prevailed in the country unless they conflicted with Hindu or Mahommedan law. Legislation The law made by the Legislatures for the Presidencies of Bengal, Madras and Bombay, before the date of the Government of India Act, 1833 (3 and 4, Will IV, c 85) were known as 'regulations'. The Charter Act of 1833 established a legislature for the whole of British India, and the laws made by it were called 'Acts'. Most of the regulations have been replaced by subsequent Indian legislations. Even before the enactment of the Indian Contract Act, a number of Acts were enacted to govern particular contracts, namely, the Interest Act, 1839 the Usury Laws Repeal Act, 1855 the Indian Bills of Lading
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Act, 1856 the Workman's Breach of Contract Act, 1859 the Merchant Shipping Act s (English) of 1854 and 1859, the Carriers Act, 1865 and the Policies of Insurance Assignment Act, 1866. While the Indian Contract Act repealed some of these statutes mentioned above, in its schedule, which was also repealed in 1914, the remaining of these Acts are still in force. The Indian Contract Act, 1872 Making of the Act The first draft of the Indian Contract Act, 1872 (Contract Act) made by the Third Indian Law Commission was a simplified statement of the English law with modifications suitable to India. There were differences between the views of the Indian legislature and the Commission, and the Commission resigned. The drafting of the future statutes fell upon the Indian legislative department. Some proposals of the Commissioners were rejected, whereas some provisions were borrowed from the draft New York Code of 1862. The final draft was the work of Sir James Fitzjames Stephen. Sir Frederick Pollock, the author of the first edition of this book, has opined that the framers borrowed from various codes of other countries leaving an incongruous effect. But, he says, after allowing for all drawbacks, the result was a generally sound and useful one.17 Law of Contract Until 1950 The Indian Contract Act enumerated in its schedule (now repealed) enactments repealed by the Act, but did not include the statutes of 1781 and 1797 referred to above. InMadhub Chunder v. Rajcoomar Doss, 18the parties were Hindus and the case came up before the High Court of Calcutta in its original civil jurisdiction. The case was about an agreement in restraint of trade, which was not void under the Hindu law of contract. The plaintiff contended that the Statute of 1781 being not expressly repealed by the Indian Contract Act, continued to apply, and that s. 17 of this statute required the court to apply Hindu law to Hindus. It was held that the Contract Act did apply to Hindus having regard to the general words used in clause 2 of s. 1 of the Act . Further the Act applied to all persons, whether the parties were Hindus, Mahommedans or otherwise. The Contract Act did not cover the entire field of contract law. In cases not provided by the Contract Act or other legislative enactments relating to particular contracts, it was incumbent on High Courts in their original jurisdiction to apply Hindu law to Hindus and Mahommedan law to Mahommedans. The rule of damdupat19 of the Hindu law has been applied and is still in force in Maharashtra20 and in the Presidency Town of Calcutta21 but is not recognised outside that town22 or in the Madras presidency.23 Another instance is the rule applicable to Hindus governed by the Mitaksharalaw in the Bombay presidency, that in case of a debt wrongfully withheld after demand of payment has been made, interest becomes payable from the date of demand by way of damages. This rule according to the Bombay High Court, is not affected either by the Interest Act, 1839 or by the Contract Act.24 The rule, however, is not applied to Hindus in the Madras Presidency;25but such cases have been few, and the Hindu and Mahommedan laws of contract may, for all practical purposes, be regarded as superseded by the Contract Act and other enactments relating to particular contracts. Besides, where any subject was not dealt with by the Act, the courts followed as principles of justice, equity and good conscience, the rules of English law so far as applicable to the Indian society and circumstances.26 The Contract Act has been amended from time to time.27 After the enactment of the Contract Act, not only were the provisions contained in the Contract Act relating to sale of goods and partnership removed and enacted as separate pieces of legislation,28but other Acts dealing with particular contracts were also passed, namely, the Negotiable Instruments Act, 1881 the Transfer of Property Act, 1882 the Powers of Attorney Act, 1882 the Merchant Shipping Act, 1883 (now repealed), the
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Indian Emigration Act, 1883 (now repealed), the Indian Railways Act, 189029the Carriage by Air Act, 193430the Carriage of Goods by Sea Act, 1925 (now repealed) and the Specific Relief Act, 187731 which provided specific remedies relating to contract. Law of Contract after 1950 The Indian Contract Act, 1872 continued to be in operation by virtue of Art. 372(1) of the Constitution of India . However, the provisions of the Act would be subject to the provisions of the Constitution. Any provision of the Contract Act, if inconsistent with the fundamental rights, would be void under Art. 13 of the Constitution. Contracts of service under the state32 must be consistent with the provisions of the Constitution.33 The subject of contracts, including partnership, agency, contracts of carriage, and other special forms of contracts, but not including contracts relating to agricultural land, falls within Entry 7 in List III of the Seventh Schedule of the Constitution of India (the Concurrent List). The Parliament as well as the legislature of any state have the power to make laws about these subjects [Art. 246(3)]. If any provision made by the state legislature is repugnant to any law enacted by the Parliament, the latter prevails [Art. 254(1)]. For example, the Public Premises (Eviction of Unauthorised Occupants) Act, 1971 which was a Central Act, and the MP Accommodation Control Act, 1961 both fell within Entry 6 and 7 of List III of the Seventh Schedule (the State List), but the 1971 Act being enacted later would prevail over the provisions of the 1961 State Act.34 However, if the provision made by the state legislature is repugnant to an earlier provision of law made by the Parliament, the provision made by the state legislature would prevail, if the law is reserved for the assent of the President of India, and the President of India has assented to it [Art 254(2)]. In Waverly Jute Mills Co Ltd v. Raymon and Co. (India) Pvt Ltd, 35 a question arose whether the subject matter of the Forward Contracts (Regulation Act ) 1952 fell within Entry 26 (trade and commerce within state) or 27 (production, supply and distribution of goods) of the List II of the Seventh Schedule within the competence of the state legislature, or within Entry 48 (future markets) of List I of the Seventh Schedule. It was held that being a legislation about forward contracts it related to future markets, the word 'market' having relation to business and not any location; and hence the Act fell within the legislative competence of the Parliament. It has also been held that the Punjab Forward Contracts Tax Act did not fall within Entry 7 of List III nor under Entry 62 of List II, and hence was ultra vires the legislature.36 In the exercise of these powers, the Contract Act has been amended by the Parliament.37 Some provisions of the Act have been also been amended by the states.38The legislative trend has been to let this Act deal with the general principles, and to make separate Act s for particular contracts or special aspects of particular contracts.39 Amendments to this Act The Indian Contract Act has been amended from time to time.40The most important amongst them have been: the Indian Contract (Amendment) Act, 1899 (6 of 1899) inserting s. 19A in the Act, and amending s. 74 to provide for stipulations in the nature of penalty; Central Province Act, 1 of 1915 and the CP and Berar Indian Contract (Amendment) Act, 15 of 1938 inserting ss. 19B and 19C into the Act making champertous agreements voidable; the Maharashtra Repealing and Amending Act, 26 of 1963 repealing ss. 19B and 19C in their application to the Vidarbha area of the State of Maharashtra; the UP Act, 57 of 1976 amending s. 5 making irrevocable in certain circumstances a promise to keep an offer open, and the Indian Contract (Amendment) Act of 1996 (1 of 1997) amending s. 28 of the Act . Other Laws Affecting Contracts and Enforcement
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After 1950, the Parliament has enacted from time to time legislation affecting particular contracts, namely, the Forward Contracts (Regulation) Act, 1952 the Hire Purchase Act, 1972 (but repealed in 2005), the Multimodal Transportation of Goods Act, 1993, the Securities Contracts (Regulation) Act, 1956 and a number of laws for regulating conditions of employment in various industries. Special courts are provided for in respect of certain specific types of contracts. The Railways Claims Tribunal Act, 1987 provides for setting up a railway tribunal to deal with claims for compensation for loss, damage, deterioration or no delivery of goods, claims for refund of fares or freight, and compensation for death or injury to passengers. The Consumer Protection Act, 1986 provides for a different machinery to deal with disputes affecting consumers. The Recovery of Debts due to Banks and Financial Institutions Act, 1993 provides for setting up of bank debts recovery tribunals for recovery of certain loans given by banks and financial institutions. Special tribunals or authorities under the industrial laws resolve employment disputes. Recommendations of the Law Commission of India The Law Commission of India, under the Chairmanship of Shri MC Setalwad, prepared and submitted its Thirteenth Report in 1958 recommending amendments to the various provisions of this Act . Among the most important recommendations were:
(i) (ii) (iii) (iv) (v) (vi)
modification of the doctrine of privity to entitle a third party to sue on a contract made for his benefit in certain cases; the recognition of principle of promissory estoppel; to make enforceable without consideration, an agreement to keep an offer open for a definite period of time; to make wagering agreements and collateral agreements unlawful; to include the principles regarding material alteration to documents; to permit reasonable restraint on the right to carry on trade.
Other recommendations in this report are discussed with the respective sections. The recommendations in the Thirteenth Report were not acted upon. The Law Commission of India also recommended other specific amendments to this Act in its 97th Report of 1984 about prescriptive clauses in contracts (s. 28), which was accepted when the Act was amended in 1997. In its 103rd Report of 1984 about unfair terms in contract, it recommended adding a new chapter in this Act giving power to the court to refuse to enforce a contract or part which was unconscionable. The 108th Report of 1984 about promissory estoppel, recommended adding one section to the Act making promises enforceable even though without consideration, if they were act ed upon. This report also gave the limits for operation of the doctrine of promissory estoppel. The 199th Report of 2006 recommended elaborate provisions dealing with the substance and procedure of unfair terms in contracts. 1 For the Statement of Objects and Reasons for the Bill which was based on a report of Her Majesty Commissioners appointed to prepare a body of substantive law for India, dated 6th July, 1866, see Gazette of India, 1867, Extraordinary, p. 34; for the Report of the Select Committee, see ibid., Extraordinary, dated 28th March, 1872; for discussions in Council, see ibid., 1867, Supplement, p. 1064; ibid., 1871, p. 313 and ibid., 1872, p. 527.The Chapters and sections of the Transfer of Property Act, 1882 (IV of 1882), which relate to contracts are, in places in which that Act is in force, to be taken as part of this Act (IX of 1872)--See Act (IV of 1882), s. 4.This Act has been extended to Berar by the Berar Laws Act, 1941 (4 of 1941), to Dadra and Nagar Haveli by Reg. 6 of 1963, s. 2 and Sch. I, to Goa, Daman and Diu by Reg. 11 of 1963, s. 3 and Sch., to Laccadive, Minicoy and Amindivi Islands by Reg. 8 of 1965, s. 3 and Sch. (SeeAct 34 of 1973), to Pondicherry by Act 26 of 1968, s. 3 and Sch. and has been declared to be in force in--The Sonthal Parganas--See Sonthal Parganas Settlement Regulation, 1872 (3 of 1872), s. 3, as amended by the Sonthal Parganas Justice and Laws Regulation, 1899 (3 of 1899), s. 3.Panth Piploda--See the Panth Piploda Laws Regulation, 1929 (1 of 1929), s. 2.It has been declared, by notification under s. 3(a) of the Scheduled Districts Act, 1874 (14 of 1874), to be in force in--the Tarai of the Province of Agra--See Gazette of India, 1876, Pt. I, p. 505;the Districts of Hazaribag, Lohardaga and Manbhum, and Pargana Dhalbhum and the Kolhan in the District of Singhbhum--See Gazette of India, 1881, Pt. I, p. 504.--The District of Lohardaga included at this time the present District of Palamau
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which was separated in 1894. The District of Lohardaga is now called the Ranchi District--See Calcutta Gazette, 1899, Pt. I, p. 44.It has been extended to Sikkim w.e.f. 1-9-1984.This Act has been extended to the new provinces and merged States by the Merged States Laws Act (LIX of 1949) and to the States of Tripura, Manipur (seeAct 81 of 1971) and Vindhya Pradesh (See Act 37 of 1956) by the Union Territories Laws Act (XXX of 1950). 1 For the Statement of Objects and Reasons for the Bill which was based on a report of Her Majesty Commissioners appointed to prepare a body of substantive law for India, dated 6th July, 1866, see Gazette of India, 1867, Extraordinary, p. 34; for the Report of the Select Committee, see ibid., Extraordinary, dated 28th March, 1872; for discussions in Council, see ibid., 1867, Supplement, p. 1064; ibid., 1871, p. 313 and ibid., 1872, p. 527.The Chapters and sections of the Transfer of Property Act, 1882 (IV of 1882), which relate to contracts are, in places in which that Act is in force, to be taken as part of this Act (IX of 1872)--See Act (IV of 1882), s. 4.This Act has been extended to Berar by the Berar Laws Act, 1941 (4 of 1941), to Dadra and Nagar Haveli by Reg. 6 of 1963, s. 2 and Sch. I, to Goa, Daman and Diu by Reg. 11 of 1963, s. 3 and Sch., to Laccadive, Minicoy and Amindivi Islands by Reg. 8 of 1965, s. 3 and Sch. (SeeAct 34 of 1973), to Pondicherry by Act 26 of 1968, s. 3 and Sch. and has been declared to be in force in--The Sonthal Parganas--See Sonthal Parganas Settlement Regulation, 1872 (3 of 1872), s. 3, as amended by the Sonthal Parganas Justice and Laws Regulation, 1899 (3 of 1899), s. 3.Panth Piploda--See the Panth Piploda Laws Regulation, 1929 (1 of 1929), s. 2.It has been declared, by notification under s. 3(a) of the Scheduled Districts Act, 1874 (14 of 1874), to be in force in--the Tarai of the Province of Agra--See Gazette of India, 1876, Pt. I, p. 505;the Districts of Hazaribag, Lohardaga and Manbhum, and Pargana Dhalbhum and the Kolhan in the District of Singhbhum--See Gazette of India, 1881, Pt. I, p. 504.--The District of Lohardaga included at this time the present District of Palamau which was separated in 1894. The District of Lohardaga is now called the Ranchi District--See Calcutta Gazette, 1899, Pt. I, p. 44.It has been extended to Sikkim w.e.f. 1-9-1984.This Act has been extended to the new provinces and merged States by the Merged States Laws Act (LIX of 1949) and to the States of Tripura, Manipur (seeAct 81 of 1971) and Vindhya Pradesh (See Act 37 of 1956) by the Union Territories Laws Act (XXX of 1950). 2 For a discussion and analysis of Hindu law relating to contract, see PV Kane, History of Dharmashastra, Vol III, pp. 411-85; M Rama Jois, Legal and Constitutional History of India, Vol I, 1990, pp. 62-220. 3 See below under 'Law of Contract until 1950'. 4 Tahir Mahmood, Muslim Law of India, 2nd edn., 1983, pp. 188-89. 5 These were at first the Mayors' Courts, which, in Calcutta, were superseded by the Supreme Court in 1774, and finally by the High Court in 1862. The Mayors' Courts in Madras and Bombay were replaced, in 1797, by the Recorders' Courts. The Recorders' Court in Madras was abolished in 1799, and that in Bombay in 1823, and a Supreme Court was established instead, which again was superseded by a High Court in both places in 1862. 6 Though this view of the introduction of English law into India was pronounced incorrect and unreasonable by the Indian Law Commissioners in their celebrated lex loci Report of 31 October 1840, it may now be taken as an accepted doctrine. The Commissioners maintained that neither the Hindu nor the Mahommedan law was the lex loci of British India, as it was so interwoven with religion as to be unfit for persons professing a different faith, and they held that, there being no lex loci, the English law became ipso jure, the lex lociwhen any part of British India became a possession of the British Crown, binding upon all persons who did not belong to the Hindu or Mahomedan community. They recommended the passing of an Act declaring a lex loci for British India founded on the English law, but the recommendation was never carried into effect: Naoroji v. Rogers, (1867) 4 BHC 1, pp. 17-26; The Indian Chief, (1801) 3 Robinson Adm, pp. 28-29, where Lord Stowell showed a just understanding of the nature of Asiatic personal law than the Indian Law Commissioners. 7 Mayor of the City of Lyons v. East India Co., (1836) 1 MIA 176. 8 Advocate General of Bengal v. Ranee Sumomoye Dossee, (1863) 9 MIA 387. 9 Ram Coomar Coondoo v. Chunder Canto Mookerjee, (1876) 4 IA 23. 10 This question has now only a historical interest, derived from the trial and conviction of Nuncomar under the English Statute of 1728 (2 Geo II, c 25); according to the view that only the statutes up to 1726 were introduced into India, the conviction under the Statute of 1728 would be illegal. It would, however, be legal according to the other view, and that view was maintained by Sir James Stephen in his Nuncomar and Impey, Vol II; Ilbert, Government of India, 1915, pp. 34-35. 11 Cowell's Court and Legislative Authorities in India, 6th edn., p. 55. Under the Regulating Act, 1773 the Supreme Court of Calcutta practically exercised a general jurisdiction over the whole of Bengal. 12 '...and we do further ordain that with respect to the law of equity to be applied to each case coming before the said High Courts of Judicature at Fort William in Bengal in the exercise of its ordinary original civil jurisdiction, such law or equity shall be the law or equity which would have been applied by the said High Court to such cases if these Letters Patent had not issued.' 13 Madhub Chunder v. Raj Coomar Doss, (1874) 14 BLR 76. 14 Waghela Rajsanji v. Sheikh Masludin, (1887) 14 IA 89 at 96, (1887) 11 Bom 551 at 561; Dada v. Babaji, (1865) 2
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BHC 36 at 38; Webbe v. Lester, (1865) 2 BHC 52 at 56; Naresh Chandra Guha v. Ram Chandra Samanta, AIR 1952 Cal 93; Gogun Chunder Ghose v. Dhuronidhur Mundul, (1881) ILR 7 Cal 616. 15 Alan Gledhill, The Republic of India: The Development of its Laws and Constitution, Vol. 6, p. 291. 16 The Bengal, Agra and Assam Civil Courts Act, 1887, s. 37; the Punjab Laws Act, 1872, s. 5; the Central Provinces Laws Act, 1875, s s. 5, 6; the Oudh Laws Act, 1876, s. 3; and the Burma Laws Act, 1898, s. 13. Originally, the words were synonymous with the rules of natural reason, or the law of nature; but 'an Englishman would naturally interpret' them 'as meaning such rules of English law as he happened to know and considered applicable to the case'--Ilbert,Government of India, 2nd edn., p. 330. 17 Preface to the 1st edn. of this book. 18 (1874) 14 BLR 76. 19 The rule of damdupat provides that interest exceeding the amount of the principal cannot be recovered at any one time. 20 Dhondu v. Narayan, (1863) 1 BHC 47; Khushalchand v. Ibrahim, (1866) 3 BHCAC 23; Nathubhai v. Mulchand, (1868) 5 BHCAC 196; Hakma Manji v. Meman Ayab, (1870) 7 BHC OC 19; Pavanaga v. Govind, (1873) 10 BHC 382; Ramchandra Mankeshwar v. Bhimrav Ravji, (1877) 1 Bom 577; Ganpat Pandurang v. Adarji Dada Bhai, (1877) 3 Bom 312; Dawood Durvesh v. Vullubhdas Purshotam, (1893) 18 Bom 227; Gopal Ramchandra Limaye v. Gangaram Anand Shet Marvadi, (1895) 20 Bom 721(FB) ; overruling Ganesh Dharnidhar Maharajdev v. Keshavrav Govind Kulgavkar, (1890) 15 Bom 625; Harilal Girdharilal v. Nagar Jeyram, (1896) 21 Bom 38; Ali Saheb v. Shabji, (1895) 21 Bom 85. 21 Nobin Chunder Bannerjee v. Romesh Chunder Ghose, (1887) ILR 14 Cal 781. 22 Het Narain v. Ram Deni, (1883) 12 Cal LR 590. 23 Annaji Rau v. Ragubai, (1883) 6 Mad HC 400. 24 Saunadanappa bin Andanappa Chinwar v. Shivbasawa kom Amingowda Desai, (1907) ILR 31 Bom 354. 25 Subramania Aiyar v. SA Subramania Aiyar, (1908) 18 Mad LJ 245. 26 Waghela Rajsanji v. Sheikh Masludin, (1887) 14 IA 89 at 96, (1887) 11 Bom 551 at 561; Dada v. Babaji, (1865) 2 BHC 36 at 38; Webbe v. Lester, (1865) 2 BHC 52 at 56; Naresh Chandra Guha v. Ram Chandra Samanta, AIR 1952 Cal 93; Gogun Chunder Ghose v. Dhuronidhur Mundul, (1881) ILR 7 Cal 616. 27 See below. 28 The Sale of Goods Act, 1930 and the Indian Partnership Act, 1932. 29 Now the Indian Railways Act, 1989. 30 Now the Carriage by Air Act, 1972. 31 Now the Specific Relief Act, 1963. 32 Under Art. 12 of the Constitution of India , the word 'state' includes the Government of India and the states, and all local or other authorities within the territory of India or under the control of the Government of India. 33 Delhi Transport Corporation v. DTC Mazdoor Congress, AIR 1991 SC 101, per K Ramaswamy J. at 189. 34 LS Nair v. Hindustan Steel Ltd., Bhilai, AIR 1980 MP 106 at 110; Ashoka Marketing Ltd. v. Punjab National Bank, AIR 1991 SC 855. 35 [1963] 3 SCR 209, AIR 1963 SC 90. 36 Bullion and Grain Exchange Ltd. v. State of Punjab, AIR 1961 SC 268. 37 See below. 38 Central Provinces Act 1 of 1915; CP and Berar Act 15 of 1938; Uttar Pradesh Act 26 of 1963; Uttar Pradesh Act 57 of 1976. 39 See below. 40 Act 1 of 1877; Act 12 of 1891; Act 6 of 1899; Act 10 of 1914; Act 24 of 1917; Act 3 of 1930; Act 9 of 1932; Act 3 of 1951; Central Provinces Act 1 of 1915; CP and Berar Act 15 of 1938; Maharashtra Act 26 of 1963; Uttar Pradesh Act 57 of 1976; Act 1 of 1997.
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Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/Preliminary/S. 1.
The Indian Contract Act , 1872 (Act 9 of 1872)1 Preliminary S. 1. Short title.-This Act may be called the Indian Contract Act, 1872. Extent, Commencement.--It extends to the whole of India1 [except the State of Jammu and Kashmir]; and it shall come into force on the first day of September, 1872. Enactments Repealed.--2[***] Nothing herein contained shall affect the provisions of any Statute, Act or Regulation not hereby expressly repealed, nor any usage or custom of trade, nor any incident of any contract, not inconsistent with the provisions of this Act.
Applicability of the Act The second clause of section 1 of the Act says, in the most general terms, that the Act is to extend to the whole of India. Those words are large enough to include all courts and persons of all denominations. 1 Subs. for &uot;except Part B States&uot; by Act 3 of 1951, s. 3. 2 The words &uot;the enactments mentioned in the Schedule hereto are repealed to the extent specified in the third column thereof; but&uot; repealed by Act 10 of 1914.
Scheme of the Act The scheme of the Indian Contract Act, 1872 (the Contract Act) is that it enacts in ss. 1-75 provisions applicable in general to all contracts, and then deals separately with particular kinds of contract such as sale, guarantee, bailment, agency and partnership and the scheme necessarily posits that all these transactions are based on agreements.3Partnership and sale of goods are no longer parts of the Contract Act and separate statutes have now been enacted dealing with these two subjects. 3 State of Madras v. Gannon Dunkerley & Co. Ltd., [1959] SCR 379 at 397, AIR 1958 SC 560; Sheikh Bros Ltd. v. Oschner, [1957] AC 136, [1957] 2 WLR 254 at 260 PC (structure of the Act).
Scope of the Act In Ramdas Vithaldas Durbar v. S. Amerchand & Co, 4 the point for decision was whether a railway receipt was an 'instrument of title' within the meaning of s. 103 of this Act. It was contended that it was not, for the following reasons:
(i)
first, that the Indian Contract Act was primarily a consolidating Act, and therefore ought,
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(ii)
in default of a clear expression to the contrary, to be read as embodying the law as existing when it was passed; secondly, that it was improbable that the Indian legislature could have taken the lead in a legal reform for which England had to wait until the passing of the English Factors Act, of 1877.
In dealing with these arguments, the Privy Council said:
Their Lordships cannot attach any weight to either consideration. The Indian Contract Act recites the expediency of defining and amending certain parts of the law relating to contracts. It is therefore an amending as well as a consolidating Act, and beyond the reasonable interpretation of its provisions there is no means of determining whether any particular section is intended to consolidate or amend the previously existing law. Again their Lordships do not see any improbability in the Indian Legislature having taken the lead in a legal reform. Such a reform may have been long recognised as desirable without an opportunity occurring for its embodiment in a legislative enactment, and it may well be that the opportunity occurred sooner in India than in this country, where the calls for legislative act ion are so much more numerous.
The Contract Act does not profess to be a complete code dealing with the law relating to contracts. As appears from the preamble, the Act purports to do no more than define and amend certain parts of that law. It does treat some particular contracts in separate chapters, but there is nothing to show that the legislature intended to deal exhaustively with any particular chapter or subdivision of the law relating to contracts.5 To the extent to which provisions have been made in the Act, those provisions apply to all kinds of contracts.6 Where the law is codified, it is of little avail to enquire what is the law apart from such codification. The code itself must be looked to as the guide in the matter.7 When a statute clearly covers a case, it is hardly necessary to refer to decisions.8Although provisions of the Act are as exhaustive as possible, there may still remain cases not provided for. Such cases will have to be decided on the principles of 'justice, equity and good conscience'. The Law Commission of India9 has expressed the view that this expression ought no longer to be construed in the narrower sense of rules of English law. It should be given the widest significance. 4 (1916) 43 IA 164 at 170, (1916) 40 Bom 630 at 636, AIR 1916 PC 7; Morvi Mercantile Bank Ltd. v. Union of India, [1965] 3 SCR 251, AIR 1965 SC 1954; Official Assignee v. Mercantile Bank of India Ltd., 61 IA 75, AIR 1934 PC 246; Ibrahim Isaphai v. Union of India, AIR 1966 Guj 6 at 12 (but to a limited extent). 5 Irrawaddy Flotilla Co. v. Bugwandas, (1891) 18 IA 121, (1891) 18 Cal 620 at 628, 629; cited in Jwaladutt R Pillani v. Bansilal Motilal, (1929) 56 IA 174 at 178, AIR 1929 PC 132 at 133-34; Meghu Mian v. Kishun Ram, AIR 1954 Pat 477. 6 Special Officer Amaravathi Co-op Sugar Mills v. DV Thirumalaswamy, (1973) 2 Mad LJ 361 (bye laws of a co-operative society). 7 Burn & Co. v. McDonald, (1909-10) ILR 36-37 Cal 208. 8 Lala Kapurchand Godha v. Mir Nawab Himayatalikhan Azamjah, [1963] 2 SCR 168 at 178, AIR 1963 SC 250 per SK Das J. at 254. 9 The 13th Report of the Law Commission of India 1958.
English Law and Judgments of Foreign Courts To the extent this Act deals with a subject, it is exhaustive upon the same and it is not permissible to import the principles of English law de hors the statutory provisions;10 unless the statute is such that it cannot be understood without the aid of English law;11or where any matter cannot be brought within the provisions of the Contract Act .12 In regard to the law of contract, the courts in India have taken
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guidance from the common law of England where no statutory provision to the contrary is in existence.13 The language of the provisions of the Contract Act cannot be enlarged or construed narrowly or otherwise modified in order to bring the construction in accord with the scope and limitations governing the English doctrine.14 The courts should examine the language of Indian statutes uninfluenced by any consideration derived from the English law upon the subject.15The principles of English law cannot be introduced where the subject is dealt with by the Act, but if it is necessary to interpret the Act, the aid of English law may be pressed into service.16 The English common law and the concept of justice, equity and good conscience cannot be excepted, adapted or amended by a court where the power is given to the Central Government to do so and it has not done so.17It has been held that carriage by air in India being governed neither by the Contract Act nor the Indian Carriage of Goods Act, 1934 but by rules of English common law, the carrier could escape liability by a clause in the contract exempting it on the ground of misconduct or negligence of its servants.18 The English decisions referred to in the Indian courts are decisions of courts of a country from where the Indian legal system has derived its jurisprudence and a large part of its laws. They are judgments delivered by judges held in high repute. Although none of these decisions are binding upon the courts in India, they are authorities of high persuasive value to which the Indian courts may turn for assistance. Whether the rules laid down in any of these cases can be applied by the courts, must however, be judged in the context of the Indian laws and legal procedure and the practical realities of litigation in India.19 The decisions of Australian, Canadian and other Commonwealth courts and of the Courts of the United States of America, when relevant, will have persuasive authority as judgments that expound the principles of jurisprudence similar to our own.20 10 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310 at 319, AIR 1954 SC 44 at 47; State of Punjab v. Hindustan Development Board Ltd., AIR 1960 Punj 585; Mohori Bibee v. Dharmodas Ghose, (1903) 30 IA 114 at 125, (1902) 30 Cal 539 at 548 (exhaustive and imperative); Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri, 44 Bom LR 703, AIR 1942 Bom 302 (ss 124 and 125); Burn & Co. v. McDonald, (1908) 36 Cal 354; Lala Kapurchand Godha v. Mir Nawab Himayatalikhan Azamjah, [1963] 2 SCR 168 at 178, AIR 1963 SC 250 at 254; Superintendence Company of India (P) Ltd. v. Krisha Murgai, AIR 1980 SC 1717 at 1721. 11 State of West Bengal v. BK Mondal & Sons, [1962] 2 SCR 876(Supp) at 894, 912, AIR 1962 SC 779; Ramanandi Kuer v. Kalawati Kuer, 55 IA 18, AIR 1928 PC 2, 7 Pat 221 at 227; Superintendence Company of India (P.) Ltd. v. Krisha Murgai, AIR 1980 SC 1717. 12 Firm Kanhaiyalal v. Dineshchandra, AIR 1959 MP 234; Mohori Bibee v. Dharmodas Ghose, (1903) 30 IA 114, (1902) 30 Cal 539(PC) ; Bhagwandas Goverdhandas Kedia v. Girdharlal Parshottamdas and Co., [1966] 1 SCR 656, AIR 1966 SC 543. For the same view taken of the similarly worded Preamble of the Specific Relief Act, (Act I of 1877);Ramdas Khatau & Co. v. Atlas Mills Co. Ltd., 55 Bom 659, AIR 1931 Bom 151; Meghu Mian v. Kishan Ram, AIR 1954 Pat 477. 13 Bhagwandas Goverdhandas Kedia v. Girdharlal Parshottamdas and Co., [1966] 1 SCR 656, AIR 1966 SC 543 at 549. 14 State of Punjab v. Hindustan Development Board Ltd., AIR 1960 Pun 585; Secretary of State v. GT Sarin & Co., 11 Lah 375, AIR 1930 Lah 364; Firm Chhunna Mal Ram Nath v. Firm Mool Chand-Ram Bhagat, 55 IA 154, AIR 1928 PC 99, 9 Lah 510; but see Abaji Sitaram Modak v. Trimbak Municipality, (1903) 28 Bom 66; Ramanandi Kuer v. Kalawati Kuer, 55 IA 18, AIR 1928 PC 2 at 4, 7 Pat 221 (case of wills). 15 Ramanandi Kuer v. Kalawati Kuer, 55 IA 18 at 23, AIR 1928 PC 2, 7 Pat 221 at 227; State of Punjab v. Hindustan Development Board Ltd., AIR 1960 Punj 585 (s. 70 of Contract Act); Secretary of State v. GT Sarin d' Co., 11 Lah 375, AIR 1930 Lah 364. 16 Superintendence Company of India (P.) Ltd. v. Krisha Murgai, AIR 1980 SC 1717 at 1721-22; Satyabrata Ghosh v. Mugneeram Bangur d' Co., [1954] SCR 310, AIR 1954 SC 44. 17 Indian Airlines Corpn. v. Madhuri Chowdhuri, AIR 1965 Cal 252 (liability of aircraft 'carriers). 18 Air Carrying Corpn. v. Shibendra Nath Bhattacharya, AIR 1964 Cal 396 (a case of Presidency Towns); Rukmanand Ajitsaria v. Airways (India) Ltd., AIR 1960 Assam 71; Indian Airlines Corpn. v. Madhuri Chowdhuri, AIR 1965 Cal 252; contra Mukul Datta Gupta v. Indian Airlines Corpn., AIR 1962 Cal 311.
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19 Forasol v. Oil and Natural Gas Commission, AIR 1984 SC 241, (1984) Supp SCC 263. 20 In re Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act,AIR 1939 FC 1; Tan Bug Taim v. Collector of Bombay, AIR 1946 Bom 216.
Saving of Usage or Custom of Trade In Irrawaddy Flotilla Company v. Bugwandas, 21 the Privy Council took the view that both the reason of the thing and the grammatical construction of the section required that the words 'not inconsistent with the provisions of this Act ' should not be connected with the clause 'nor any usage or custom of trade', and must apply only to the immediately preceding words 'nor any incident of any contract'.22 The Privy Council explained the apparent contrary views of the Bombay and Calcutta High Courts in earlier cases.23 In both these cases, an opinion was expressed by the Bombay and Calcutta High Courts that the liability of a common carrier, under the common law of England, which rendered him liable for all loss or damage to goods except when caused by the act of God or the King's enemies, was a 'usage of trade', the one court holding that it was inconsistent, and the other that it was consistent, with the provisions of the Contract Act . In the Privy Council, their Lordships' were inclined to the opinion that the liability of a common carrier under the English common law as an insurer of goods was not a usage of trade, but an 'incident' of the contract quite consistent with the provisions of the Act. Such an incident is not inconsistent with the provisions of ss. 151 and 152 of the Act, having regard to the words 'in the absence of any special contract' occurring in s. 152. The Law Commission of India in its Thirteenth Report does not agree with the view expressed in this Privy Council judgment. It is of the view that neither usage nor a particular custom can be incompatible with statute law, and that the expression 'not inconsistent with the provisions of the Act' should govern usage and custom also. It has recommended an amendment to clarify this position. The expression 'usage or custom of trade' used in s. 1, as well as in the other sections of the Act, relates to a particular usage as distinguished from a general or universal usage. A general usage pervading all trades has no binding force, if it is inconsistent with the provisions of the Act. A general usage is equivalent to a general law, and no general law or usage in contravention of the general law laid down by the Contract Act can be consistent with the validity of the Act itself.24 A particular usage remains unaffected by the provisions of the Act, even though it may be inconsistent with those provisions. The general provisions of the Contract Act about the rights and liabilities of an undisclosed principal are not intended to alter the well-established rule as to negotiable instrument that no person could sue on a negotiable instrument unless he was named therein as a payee.25Where an agent by trade usage sells goods, the question whether he is authorised to do so by the Act does not arise.26 Usage Usage may be broadly defined as a particular course of dealing or line of conduct generally adopted by persons engaged in a particular area of business, or more fully as a particular course of dealing, or line of conduct which has acquired such notoriety, that, where persons enter into contractual relationships in matters respecting the particular branch of business life where the usage is alleged to exist, those persons must be taken to have intended to follow that course of dealing or line of conduct, unless they have expressly or impliedly stipulated to the contrary; that is to say that a rule of conduct amounts to a usage if so generally known in the particular department of business life in which the case occurs that, unless expressly or impliedly excluded, it must be considered as forming part of the contract.27 It may be limited to a local area, or exist in respect of a very limited class, or even to the property of one person. Every usage must be notorious, certain and reasonable, and it must not offend against the intention of
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any legislative enactment. Notoriety does not mean it must be known to all the world, but that it must be well known at the place to which it applies, and be capable of ready ascertainment by any person who proposes to enter into a contract of which that usage would form part.28 A usage is not reasonable unless it is fair and proper and such as reasonable, honest, and right-minded men would adopt.29 A usage, however, which is founded on the general convenience of all parties engaged in a particular department of business can never be said to be unreasonable, and where a usage has been sufficiently proved, there will be very few cases in which it will be held that the usage is unreasonable; for the fact that the usage is established and followed, tends to show that it is convenient.30 Where persons enter into contractual obligations with one another under circumstances governed by a particular usage, then that usage, when proved, must be considered as part of the agreement. The contract expresses what is peculiar to the bargain between the parties, and the usage supplies the rest. Where the exhibitor advanced a sum to the distributor for getting the picture released from the producer and it was agreed that the shares payable to the distributor out of the realisations from the theatres shall be adjusted towards the advance lent by the exhibitor, it was held that since the agreement was vague with regard to the point of time at which the entire amount became payable, the matter could be decided on the basis of custom, practice and usage of the trade and accordingly, the contention of the exhibitor that he was entitled to recover the amount immediately after the screening of the film was over in his theatres was upheld on the basis of the custom, practice and usage of the trade which was proved by oral evidence.31 The application of the AISC Code by the arbitrator for measuring work done under a sub-contract was accepted, since the Code was applied by the parties to the main contract, and it was an industry standard.32 An agreement signed by the seller, delivered to the purchaser and accepted by the purchaser makes an effective and valid agreement; even if it is not signed by the purchaser.33 The uniform customs and practices for documentary credits formulated by the International Chamber of Commerce are deemed to be incorporated in each documentary credit which is expressed to be subject to the provisions. Yet, it has been held that even in the absence of such incorporation, they can be taken into account as part of mercantile customs and practices, unless they are contradicted.34 Usage may be expressly excluded by parties by excluding the operation of usage, or modifying its application; or impliedly by provisions inconsistent with that usage. The custom or usage of a trade cannot modify the express term which is clear and not ambiguous.35 A usage may disappear by disuse, or gradual adoption of another usage which is inconsistent with it.36 Pleadings Trade usage in conflict with the provisions of the Act can be pleaded. Its incidents and details must be indicated with clarity and precision.37 Anybody setting up such a local usage must allege and prove the incidents of that usage.38 Evidence of Usage Though a contract may be in writing, oral evidence may be adduced to prove any usage or custom by which incidents not expressly mentioned in the contract are usually annexed to contracts of that description, provided that the annexing of such incident would not be repugnant to, or inconsistent with, the express terms of the contract.39 For commercial transactions, see the cases undermentioned.40And further, such incident should not be inconsistent with the general provisions of this Act, having regard to the words 'nor any incident of any contract not inconsistent with the provisions of this Act'. Evidence of usage can be given to annex incidents to written contracts in matters to which they are silent. Evidence of usage repugnant to or inconsistent with the written contract will not be received.41
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The question of the existence of usage is a question of fact and it is necessary to prove the usage in each case, until such time as the courts take judicial notice of it. Usages may be proved by evidence having special means of knowledge thereon.42 It may be proved by oral evidence of persons who become conversant of its existence by reason of their occupation, trade or position or evidence of persons carrying on the same trade in the place, by way of opinion of witnesses. As to the evidence necessary to prove a usage of trade, it is enough if it appears to be so well known and acquiesced in, that it may be reasonably presumed to have been an ingredient imported by the parties into their contract. To prove such a usage, there need not be either the antiquity, the uniformity, or the notoriety of custom in its technical sense; the usage may still be in course of growth, and may require evidence for its support in each case.43 The Mysore High Court has held that the usage to be recognised in the ordinary course of business must be certain, definite and uniformly recognised in the ordinary course of business.44 The burden of proving the existence of a trade usage lies on the party propounding it.45 Evidence of one man has been held not sufficient to prove usage of pakki adat.46A prior judgment in which it is recognised may be admissible under s. 42 of the Indian Evidence Act, 1872 but is not conclusive proof.47 Usage and Law Merchants Usages of merchants and usages affecting contractual relationships between persons engaged in mercantile transactions must be distinguished from law merchant. The latter term refers to a number of usages, each of which exist among merchants and persons engaged in mercantile transactions, not only in one particular country, but throughout the civilised world, and each has acquired such notoriety, not only amongst those persons, but also in the mercantile world at large, that the courts of this country will take judicial notice of it.48 The law merchant is far from immutable and it is open to any court to find on the basis of evidence that it has changed, or if a change has previously been judicially ascertained and established in other proceedings, to take notice of that change.49 Usage and Custom Usage is a habitual practice which is not a source of law, although it has some legal effect. Custom is a source of law. The effect of usage is to add a term to the contract. Usage can be also excluded by a provision in the contract to the contrary. Usage cannot change a rule of law, but usage may so affect the meaning of a contract that a rule of law that would be applicable in the absence of the usage becomes inapplicable. Long continued usage may develop a rule of law in accordance with usage. Incident of any Contract Used both substantively and adjectively of a thing which, whether usually or naturally and inseparably, depends upon, appertains to, or follows another, that is more worthy. Used as a noun, it denotes anything which inseparably belongs to, or is connected with, or inherent in, another thing, called the 'principal'. Also, less strictly, it denotes anything which is usually connected with another, or connected for some purposes, though not inseparably. Thus, the right of alienation is incident to an estate in fee--simple, though separable in equity.50 An incident is that which depends on, or pertains or attaches to, another principal or thing.51 Parties to a contract are free to make any contract they please, except for where it is expressly declared illegal or unlawful. It is competent to a party to a contract to agree that the contract shall be applied for the purpose of imposing rights and liabilities according to any particular law which ordinarily would not be applicable.52 The law of contract draws a distinction between imperative and non-imperative provisions. No amount of mutual assent can avail to contract against the rights, duties and liabilities arising out of the imperative provisions. The parties may, however, make a contract, the incidents of which may be
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inconsistent with the provisions of this Act which are merely directory in nature. Wherever it has been intended that independent provisions should be permitted, it has always been expressly provided for such provisions by the introduction of the phrase 'in the absence of any contract to the contrary', which occur in a number of sections in the Act .53Incident of a contract in order to come within the saving clause must not be inconsistent with the imperative provisions of the Act.54 A stipulation in a contract of guarantee that the surety shall not have the benefit of s. 133 has been held to be inconsistent with the Act .55 21 (1891) 18 IA 121 at 127, (1891) 18 Cal 620 at 627. 22 In the section as cited by the Privy Council, there is no comma after 'contract'--Irrawaddy Flotilla Company v. Bugwandas, (1891) 18 IA 121 at 127, (1891) 18 Cal 620 at 627. 23 Kuverji Tulsidas v. Great Indian Peninsula Railway Company, (1878) ILR 3 Bom 109; Moothora Kant Shaw v. Indian General Steam Navigation Co., (1883) ILR 10 Cal 166. 24 Moothora Kant Shaw v. India General Steam Navigation Co., (1883) 10 Cal 166, 185; Meyer v. Dresser, (1863-64) 16 CBNS 646, LJCP 289, where Erle CJ said:It is a contradiction to say the law does not give the right, and yet that there is a universally established usage to allow it. A universal usage cannot be set up against the general law. 25 Subba Narayana Vathiyar v. Ramaswami Aiyar, (1906) 30 Mad 88 at 92 (FB). 26 Salig Ram Amar Nath v. Natha Mal Shadi Ram, AIR 1933 Lah 183. 27 Halsbury's Laws of England, Vol. 12(1), 4th edn., Reissue, 31 July, 1998, CUSTOM AND USAGE, para 650; see also Halsbury' Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, CONTRACTS, paras 780-781. 28 Halsbury's Laws of England, Vol. 12(1), 4th edn., Reissue, 31 July, 1998, CUSTOM AND USAGE, para 650, 657. 29 Produce Brokers Co. Ltd. v. Olympia Oil and Cake Co. Ltd., [1914-15] All ER Rep 113(HL), [1916-17] All ER Rep 753,CA . 30 Moult v. Halliday, [1898] 1 QB 125. 31 Premjit Theatres v. Raschi Mehata & Co., AIR 1990 AP 272 at 276. 32 Mcdermott International Inc. v. Burn Standard Co. Ltd., 2006 AIR SCW 3276, (2006) 11 SCC 181. 33 Aloka Bose v. Parmatma Devi, AIR 2009 SC 1527, (2009) 2 SCC 582 (agreement to sell immovable property); Mohd Abdul Hakeem v. Naiyaz Ahmed, AIR 2004 AP 299(assignment) ; B Rajamani v. Azhar Sultana, AIR 2005 AP 260. 34 Federal Bank Ltd. v. V M Jog Engineering Ltd., AIR 2000 SC 3166, (2001) 1 SCC 663. 35 Magnum Films v. Golcha Properties Pvt Ltd., AIR 1984 Del 162 at 164; also proviso 5 to s. 92 of the Evidence Act, 1872. 36 Halsbury's Laws of England, Vol. 12(1), 4th edn., Reissue, 31st July 1998, CUSTOM & USAGE, para 655. 37 Sital Prasad v. Ranjit Singh, AIR 1931 All 583. 38 Rughnath v. Ram Partab Ramchander, AIR 1935 Sind 38. 39 Indian Evidence Act, 1872, s. 92(5);Ruttonsi Rawji v. Bombay United Spinning and Weaving Co. Ltd., (1916) 41 Bom 518 at 538, 540, 37 IC 271 : AIR 1916 Bom 4; Magnum Films v. Golcha Properties Pvt Ltd., AIR 1984 Del 162 at 164. 40 London Export Corpn. Ltd. v. Jubilee Coffee Roasting Co. Ltd., [1958] 2 All ER 411; Juggomohun Ghose v. Manickchand, (1859) 7 MIA 263 at 282; Bejoy Krishna Saha v. North Bengal Sugar Mills Co. Ltd., (1945) 2 Cal 173, AIR 1949 Cal 490 (contract for supply of molasses); Hind Mercantile Corpn. Ltd. v. Miryala Venkateshwarlu & Co., AIR 1959 AP 545 (contract for supply of groundnut oil); Se Se Oil v. Gorakhram Gokalchand, (1962) 64 Bom LR 113. 41 The Indian Evidence Act, 1872, proviso 5 to s. 92. 42 The Indian Evidence Act, 1872, proviso 5 to s. 92, see also s. 49. 43 Juggomohun Ghose v. Manickchand, (1859) 7 MIA 263 at 282; G.H. Wittenbaker v. J.C. Galstaun, (1917) 44 Cal 917 at 925, 43 IC 11, AIR 1918 Cal 337; the allowance of new usage involves the possibility of allowing change in previous usage: Moult v. Halliday, (1898) 1 QB 125 at 130.
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44 Canara Industrial and Banking Syndicate Ltd. v. Ramachandra Ganapathy Prabhu, AIR 1968 Mys 133 at 137. 45 Sital Prasad v. Ranjit Singh, AIR 1931 All 583. 46 Rughnath v. Ram Partab Ramchander, AIR 1935 Sind 38. 47 Ibid. 48 Halsbury's Laws of England, Vol. 12(1), 4th edn., Reissue, 31 July, 1998, CUSTOM & USAGE, para 663. 49 Teheran-Europe Co. Ltd. v. ST Belton (Tractors) Ltd., [1968] 1 All ER 585, [1968] 2 WLR 523 at 530; Miller Gibb d' Co. v. Smith d' Tyrer Ltd., [1917] 2 KB 141, 33 TLR 295(CA) ; but see Die Elbinger Actiengesellschaft Fur Fabrication Con Eisenbahn Material v. Claye, (1873) LR 8 QB 313. 50 Black's Law Dictionary, 5th edn., West Publishing, 1979, p. 686. 51 The Oxford Companion to Law, Oxford, 1980, p. 606. 52 Sitaram Bhaurao Deshmukh v. Sirajul Khan, (1917) 41 Bom 636, AIR 1917 Bom 276. 53 KR Chitguppi and Co. v. Vinayak Kashinath Khadilkar, (1920) 45 Bom 157, AIR 1921 Bom 164, (1920) 22 Bom LR 659, 58 Ind Cas 184 per Hayward J. at 164, 58 IC 184. 54 Irrawaddy Flotilla Company v. Bhugwandas, (1891) 18 IA 121 at 127, (1891) 18 Cal 620 at 627. 55 KR Chitguppi d' Co. v. Vinayak Kashinath Khadilkar, supra .
Conflict of Laws Where the contract is made in one jurisdiction or country and is to be performed in another, or is sued upon in a jurisdiction where it was not made or was to be performed, it becomes necessary to determine which law of which legal system will govern the contract, or any particular aspect of it. The Act does not deal with this question. The necessity to recognise the applicability of the laws of foreign countries is stated in respect of the English courts thus:
....Sovereignty being territorial, the English courts do not in general recognise the right of a foreign State to legislate as to the legality or legal effect of acts done in England unless some United Kingdom statute so provides. Where, however, the law of the foreign State purports to affect contractual rights between parties, the English court may give effect to it, even in respect of an act done in England, if the proper law of the contract is that of the foreign State. Even where the proper law of the contract itself is not that of the foreign State, the English court may also give effect to the law of the foreign State so far as it relates to acts required to be done in the foreign State in performance of the contract.56
Even while determining the applicable law, the following questions have to be addressed:57
(i) (ii) (iii)
should contracts with a foreign element be governed by the place of contracting or by the law chosen or intended by the parties; if the contract is to be governed by the law chosen by the parties, should there be, and if so, what limits on the scope of their choice; and if the parties have not chosen the law, should the contract be governed by the law of the place of contracting, or must be identified by reference to their act ual or presumed intention, or by reference to objective localising factors.
56 Sharif v. Azad, [1967] 1 QB 605, [1966] 3 All ER 785 per Diplock LJ. at 789, [1966] 3 WLR 1285(CA) .
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57 Dicey and Morris, Conflict of Laws, 13th edn., p. 1196.
Theories on Proper Law of Contract The intention theory regards the proper law of contract as the law or laws by which the parties intended or may fairly be presumed to have intended the contract to be governed, or in other words, the law or laws to which the parties intended and may fairly be presumed to have intended to submit themselves. Accordingly, the intention expressed by the parties determined the proper law of contract and generally superseded every presumption, especially if application of the foreign law was not contrary to public policy; and the choice was bona fide and legal;58 if the intention was not expressed, it was to be inferred from the terms and nature of the contract and from the general circumstances of the case;59 and in the absence of countervailing considerations, the presumptions applied, first that the lex loci contractus was the proper law, and secondly, if one contract was made in one country and was to be performed in another, the proper law of contract could be presumed to be the lex loci solutionis.60 In Dhanrajmal Gobindram v. Shamji Kalidas and Co, 61 the Supreme Court observed that whether the proper law applicable was the lex loci contractus or lex loci solutionis was a matter of presumption; but there were accepted rules for determining which of the two is applicable. Where the parties had expressed themselves, the intention so expressed overrode the presumption. Where there was no expressed intention, then the rule to apply was to infer the intention from the terms and nature of the contract and from the general circumstances of the case. Westlake, and later Cheshire, propounded the objective theory. Cheshire opined that the subjective theory was likely to produce unrealistic results, there being 'few words less precise or more ambiguous than intention',62 Adopting the American view he stated:
...there is another theory that the proper law is the law of the country in which the contract may be regarded as localised. Its localisation will be indicated by the grouping of its elements as reflected in the formation and in its terms. The country in which its elements are most densely grouped will represent its natural seat and the law to which in consequence it belongs... the country with which the contract is in fact most closely connected and in which lies its natural seat or centre of gravity.
The difference between the theory of intention and the localisation theory is the difference between subjectivity and objectivity. According to the theory of intention, the court purports to ascertain the actual intention of the parties; according to the localisation theory, it imposes upon them the intention, that in the circumstances of the case they should have formed as reasonable men. Thus, even if they choose the applicable law, their intention is decisive, but only so far as it appears that the contract and the circumstances in which it was made do not negative that intention. On the objective view, the express selection of a governing law will not be permissible if it conflicts with the natural seat of the contract as disclosed by the grouping of its elements. Thus, the first view is that the court is to infer from the terms and circumstances of the contract what the common intention of the parties would have been had they considered the matter at the time they made the contract; the latter view is that the court must determine for the parties what they ought to have intended, had they considered the matter. The court has therefore either to read an implied term into the contract if it adopts the intention theory, or it has to apply the extraneous standard of the reasonable man, if it adopts the localisation theory. The test of presumed intention was replaced in England, Germany and France by a test based on objective connection of the transaction with a legal system. In the United States, in the absence of choice of law by the parties, the applicable law is the law which has the most significant relationship to the transaction and to the parties.63 The objective test of the 'closest and most real connection' was adopted in Bonython v. Commonwealth of Australia .64
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In National Thermal Power Corporation v. Singer Company, 65 the Supreme Court has observed that:
...the expression 'proper law of a contract' refers to the legal system by which the parties to the contract intended their contract to be governed. If their intention is expressly stated or if it can be clearly inferred from the contract itself or its surrounding circumstances, such intention determines the proper law of the contract...Where, however, the intention of the parties is not expressly stated and no inference about it can be drawn, the Court would endeavour to impute an intention by identifying the legal system with which the transaction has its closest and most real connection.
The true intention of the parties, in absence of an express selection, has to be discovered by applying 'sound ideas of business, convenience and sense to the language of the contract itself'. In such a case, selection of courts of a particular country as having jurisdiction in matters arising under the contract is usually, but not invariably, an indication of the intention of the parties that the system of law followed by those courts is the proper law by which they intend their contract to be governed. However, the mere selection of a particular place for submission to the jurisdiction of the courts or for the conduct of arbitration will not, in the absence of any other relevant connecting factor with that place, be sufficient to draw an inference as to the intention of the parties to be governed by the system of law prevalent in that place.66 Where the parties have not selected the proper law, the courts impute an intention by applying the objective test to determine what the parties would have, as just and reasonable persons, intended as regards the applicable law, had they applied their minds to the question. For this purpose the place where the contract was made, the form and object of the contract, the place of performance, the place of residence or business of the parties, reference to the courts that will have jurisdiction and such other links, are examined by the courts to determine the system of law with which the transaction has its closest and most real connection.67 58 Vita Food Products Inc. v. Unus Shipping Co. Ltd., [1939] AC 277, [1939] 1 All ER 513; Amin Rasheed Shipping Corpn. v. Kuwait Insurance Co., [1984] 1 AC 50, [1983] 2 All ER 884, [1983] 3 WLR 241(HL) . 59 See James Miller and Partners Ltd. v. Whitworth Street Estates (Manchester) Ltd., [1970] AC 593, [1970] 1 All ER 796, [1970] 2 WLR 728. 60 Lloyd v. Guibert, [1865] LR 1 QB 115 per Willes J at 120. 61 [1961] 3 SCR 1020 at 1041, AIR 1961 SC 1285 at 1294; Sayers v. International Drilling Co. NV, [1971] 3 All ER 163, [1971] 1 WLR 1176 (Dutch law applied). 62 Cheshire and North, Private International Law, 10th edn., 1979, p. 197. 63 Restatement, 188. 64 [1951] AC 201 (PC). 65 AIR 1993 SC 998 at 1005-06 ; (1992) 3 SCC 551 at 560; referring to Dicey and Morris, Conflict of Laws, 11th edn., Vol. II, pp. 1161-62; Delhi Cloth & General Mills Co. Ltd. v. Harnam Singh, [1955] 2 SCR 402, AIR 1955 SC 590; Rabindra N Maitra v. Life Insurance Corpn. of India, AIR 1964 Cal 141. 66 National Thermal Power Corpn. v. Singer Company, AIR 1993 SC 998 at 1006, (1992) 3 SCC 551 at 561. 67 AIR 1993 SC 998 at 1007, (1992) 3 SCC 551 at 562.
Law Chosen by the Parties The autonomy of the parties is recognised as one of the fundamental principles of private international law.68'Parties are entitled to agree what is to be the proper law of their contract... they are entitled to make such an agreement, and I see no good reason why, subject to some limitation, they should not
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be so entitled.69 The parties may have act ually expressed their intention upon the matter and in such a case their intention will be effectuated.70 While one view states that the choice of the parties shall be conclusive, and that if the parties have expressly stated their intention by selecting the law applicable to them, it should be given effect provided the intention expressed is bona fide and legal, and there is no reason for avoiding the choice on the ground of public policy.71 According to the other view, the parties' expression of intention is only a prima facie evidence as to the proper law applicable;72 it is only one of the factors to be taken-into account. A question arises whether the law chosen by the parties must have some connection with the transaction; and are the parties to be allowed to choose a law which has no connection, or no apparent connection with the transaction. Parties may desire to choose a neutral law, because either party is not inclined to be subject to the law applicable to the other party. The choice may also be influenced by the fact that not the main transaction, but some underlying transaction (namely, insurance, finance, etc.) may have connection with a different system of law. The plaintiff's fleet was insured with an American insurer as a part insurer. The premiums and the claim were payable in America. That other insurers included some London insurers, including Lloyds. The majority of the vessels were insured under dollar policies. Each of the policies contained 'follow London Clause' whereby the insurers were to follow Lloyds underwriters in all matters of insurance including terms, conditions and settlement, and in all matters of insurances. The policies also included the 'New York Suable Clause' which provided that the place of actual and physical issue and delivery of the policy was the city of London but the assured had the option of treating New York as the place of issue and delivery. The plaintiff sought to issue a writ in the English courts. It was held that the inference to be drawn from 'follow London Clause' was that the American policies were to be governed by English law because the clause was of paramount importance and this inspite of the fact that the law of the country, with which the defendant's policy had its closest connection, was America. And the 'New York Suable Clause' did not alter the effect of the 'follow London Clause', especially since the plaintiffs had not exercised the option under the 'New York Suable Clause' to sue in the American courts.73 Parties may agree to choose separate laws to apply to arbitration and the contract.74 Limitations on Parties' Choice The choice of the parties must be 'bona fide and legal'.75 The choice would not be bona fide if, after having discovered that one particular provision was void under the proper law, they were to try to evade its consequences by claiming that the provision was subject to another legal system.76 Further, the law chosen must have some connection with the transaction, other than the mere fact that the law has been chosen.77 One view is that there need not be any connection with the transaction, but the absence of such connection would be one factor in determining whether the choice was bona fide and legal. Lastly, the law chosen may not apply if it offends the public policy of the state where it is sought to be enforced. Implied Choice of Law A court may have to find the law chosen by the parties, although it is not expressly stated in the contract. It may be inferred from the nature of the transaction,78 the style and terminology in which it is drafted,79 the language of the document,80 the currency of payment,81 the nature and location of the subject matter of the contract,82 the residence of the parties,83 or that one party to the contract is the government.84 This may also be inferred from circumstances like the use of a standard form known to a system of law,85 from express choice of law in related transactions between the same parties or from previous course of dealings between the parties under contracts containing express choice of law;86 or from incorporation of provisions of a system of law into the contract as a contractual term.87
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It may also be inferred from the terms of the contract that arbitration88 should take place in a particular country. But it was held in Compagnie d' Armement Maritime SA v. Compagnie Tunisienne de Navigation SA, 89 that an arbitration clause was merely one of the factors, though a strong one, to be taken into account to determine choice of law. 'Selection of a certain place of arbitration...is an indication that the parties intended the law of the place to govern', and it must be considered together with the rest of the contract, and any implication from it could be negatived by an overwhelming implication from other matters.90 In Dhanrajamal Gobindram v. Shamji Kalidas & Co., 91 one clause provided for jurisdiction of the Bombay High Court and the other clause, an arbitration clause, provided that the arbitration would be in India. The first term indicated that if the courts of a particular country are chosen, it is expected that they would apply their own laws unless there be either express intention or evidence. This is on the principle 'qui elegit judicem eligit jus'.92 The second circumstance of arbitration being in India was indicative of the parties having adopted the law of the country in which the arbitration is made.93 A clause in the arbitration agreement, that disputes will be settled by arbitration in New York according to rules of the American Arbitration Society, i.e. by the American Arbitration Association, contemplated that American law will apply.1 Splitting of the Contract It is a rule that there be only a single proper law of contract which governs all aspects of the contract. This is conceptually sound, as the primary function of the proper law is to give effect to the intention of the parties not merely to agree to but also to create a legally binding relationship. But by the same logic, parties may expressly choose that different aspects of the contract,2 or different obligations under the contract,3 should be governed by different laws, namely, that obligation A will be governed by the law of one state and obligation B by the other. The concept of dpage or dismemberment indicates that different laws may apply to different parts of the same contract. There may thus be more than one law applicable to the obligations under the contract. Although, there should be no difficulty in applying laws of different states to different issues under the contract in this manner, it is always convenient that all issues under one contract be determined by one law. However, there may be an objection to allow the 'general obligation' of a contract being governed by one law, namely, whether the contract has been discharged by frustration, or if an innocent party can terminate, or the questions of illegality or repudiation.4 They may also choose to apply the law of one country generally to the transaction, but a different law to arbitration. The choice of foreign law to apply to arbitration5 or foreign seat of arbitration,6impliedly excludes the application of Part I of the Arbitration and Conciliation Act, 1986. 'Floating' Choice of Law Clauses These are clauses where the parties provide that laws will apply in the alternative in different circumstances. A 'floating' arbitration clause providing for arbitration in 'Beijing or London at the defendant's option' was held valid.7 A contract providing that it was governed by the English law, and by some other provision if the London Arbitration Clause were invalid, was approved as possessing was commercially sound as it had a fallback provision;8but there cannot be a proper law which 'floats', and is not identified when it is made, but which is left to be determined later by the unilateral act of one of the parties.9 Applicable Law in the Absence of Choice In cases where there is no expressed intention of the law applicable, it is the task of the court to discover the intention. In such cases, the 'intention of the parties' has no real existence. 'In most cases neither party has given it a thought and nor has formed an intention upon it; still less can it be said that they have any common intention.10
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One view is that the court is to infer from the terms and circumstances of the contract what their common intention would have been had they considered the matter at the time the contract was made; the other view is that the court must determine for the parties what they ought to have intended had they considered the matter. In other words, the court has either to imply a term into the contract, or apply the extraneous standard of the reasonable man. As Cheshire has stated:11
...where [the intention] has not been expressly chosen the proper law depends upon the localisation of the contract. The Court imputes to the parties an intention to stand by the legal system which, having regard to the incidence of the connecting factors and all the circumstances, generally the contract appears most properly to belong. In short the proper law is the system with which the contract has the most substantial connection...It is manifest that the Court must necessarily apply the objective theory. It must impute to the parties an intention to stand by the law of the country to which having regard to the incidence of the connecting factors, the contract entirely and substantially belongs.
The most satisfactory formulation is the law of the country 'with which the transaction12 has its closest and most real connection'13 on objective grounds. The court would then regard all the facts and circumstances about the contract. The weight to be attached to each fact or circumstances would differ from case to case. Some factors could be:14
(i) (ii) (iii) (iv) (v) (vi) (vii)
the place where the contract was made; the place of performance; the place of domicile, residence or business of the parties respectively; the national character of the corporation, and where its principal place of business is situated; the subject matter of contract; the fact that as certain stipulation is valid under one law but void under another; generally all surrounding facts which help to localise the contract.
The law of the place of performance assumes great importance, especially when the contract is to be wholly performed at that place;15 or where there are several places of performance, that which the court finds to be the 'primary' place;16 in any case in the latter case, the place of performance will be an important consideration.17 This is because the contract is most closely connected with such a law than any other. A contract made between a cotton mill at Lyallpur (in Pakistan), and the plaintiffs, was held to be governed by the law of Pakistan. After the partition, the plaintiff migrated to India and the monies in the hands of the mills were ordered to be paid over to the Custodian of Evacuee Property, Pakistan, under an Ordinance. In a suit by the plaintiff's evacuees in Delhi claiming the money, it was held that Lyallpur was the place of primary obligation, the elements out of which the contract to pay arose were most densely grouped at Lyallpur, and Lyallpur was the natural seat of the contract and the place with which it had its closest and most real connection. Accordingly, the law of Pakistan was the proper law of the contract; and even under the English doctrine of situs, situs of the debt was Lyallpur and therefore either way law of Pakistan applied.18 In Mount Albert Borough Council v. Australasian Temperance and General Mutual Life Assurance Society Ltd, 19 a loan advanced to a borough in New Zealand and secured on the rateable value of all rateable property in the borough, was payable at Melbourne in Australia. The Privy Council held lex situs applied to the security in New Zealand but not to the act ual coupons (which were to be redelivered in Auckland); whether or not personal obligation to pay was properly regarded as a specialty debt. The Privy Council did not accept the view that the obligation to pay was governed by the place where the payment was stipulated to be made, in the sense that the amount of the debt could be lawfully varied by the laws of the place of payment to bind the courts in New Zealand,
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because that would confuse two distinct conceptions--the obligation with performance. In Bonython v. Commonwealth of Australia, 20 consolidated 31/2 per cent stock of Commonwealth of Australia issued in 1932, against surrender of Queensland Government debentures, issued in 1895 in varying sums of Pounds Sterling, stipulating the payment either in Brisbane, Sydney, Melbourne or London, at the option of the holder, was held to be governed by the law of contract of Queensland because the issue of debentures fell under Queensland's law and it was a charge on the revenues of the state. Re Helbert Wagg & Co. Ltd.21 dealt with a contract between an English company and a German company was held to be governed by German law even where:
(i) (ii) (iii) (iv)
debt was payable in London in sterling without deduction of German taxes; English translation of the contract was the governing translation; the form of the' contract was appropriate to English law; and the bonds could be issued in accordance with the text and practice ruling in the city of London.
On the contrary, there was to be a mortgage on German immovable property and in case of default, it was liable to immediate seizure in execution after formal authorisation by a notary public. The contract provided that the loan agreement would be construed in accordance with German law. From these facts, the court held German law to be the proper law of the contract. The Dutch law was held applicable where an Englishman was employed by a Dutch company working on offshore drilling in Nigeria; the contract was in English, and salary was to be paid in sterling.22 Where the building site was in Scottish and was owned by English owners and the building contractors were Scotch but the contract was made in London in RIBA form, English law was held applicable.23 In a case of carriage of crude oil it was held that the contract showed that the proper law was the law of the flag of the vessel carrying the goods.24 In Forsikringsaktieselskapet Vesta v. Butcher, 25 a Norwegian insurance company insured the owners of a Norwegian fish farm against loss of fish and reinsured the risk with London underwriters through brokers. There was a condition in both the insurance and reinsurance policies that a 24-hour watch be kept on the farm, but the owners realising that they could not comply with that condition, informed the insurers that they could not accept the clause. The insurers in turn informed the brokers that a 24-hour watch would not be kept and that they would await confirmation. The brokers however did not pass the information on to the reinsurers and the insurers did not follow up the matter. The reinsurance policy was on the same terms as the original policy and promised for a 'follow settlement' clause which bound the reinsurers to follow settlements, and a 'claim control' clause under which the underwriters were to have sole control of all negotiations. That policy further provided that failure to comply with any of its terms would render the policy null and void. The insurers settled a claim by the owners following the loss of a considerable number of fish from the farm due to a severe storm and sought indemnity under the reinsurance policy. The reinsurers repudiated liability on the ground, inter alia, that there had been breach of the 24-hour watch condition, even though a watch during the storm would have made no difference. In an action brought by the plaintiffs-insurers against the reinsurers to recover the indemnity, it was held that although the reinsurance contract itself was governed by English law, it was made back to back with the original policy, which was governed by Norwegian law, and therefore relevant clauses as 24-hour watch clause were to be construed under Norwegian law, and, since under Norwegian law breach of 24-hour watch condition did not provide a valid defence to the plaintiffs' claim, the plaintiffs were entitled to judgment against the reinsurers. Time of application The proper law attaching to a contract is that which applied at the time it was made. Hence, the proper law could not be determined retrospectively by an event which at the time the contract was made was
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an uncertain event in the future. Nor could the contract float in the absence of law until the proper law was determined nor change from one country to another on the happening of subsequent event. Therefore, the choice of London by the plaintiff had no relevance in determining the proper law of a bond and as there were no other factors making English law the legal system with which the bond had the closest connection, the English courts did not have jurisdiction.26 Applying theRenvoi The doctrine of renvoi has no place in the law of contract.27 When a contract is governed by the law of the country with which it has the closest connection, it will be governed by the substantive legal principles of the law of that country, and not its conflict of law rules.28 The construction of a contract by English law involves the application of relevant English statutes and rules of English common law.29 A contract must necessarily be governed by some system of private law and there must be a proper law from the inception of the contract. Scope of the Applicable Law The 'proper law' of the contract determines (subject to exceptions) all aspects of the contract, namely, its formal and essential validity, its interpretation, effect and discharge.30 This is stated to be the advantage of the proper law doctrine. The same law also applies to all obligations under the contract. A proper law intended as a whole to govern a contract was made and the obligation fashioned by the law in force at the time when the performance is due. A proper law intended as a whole to govern a contract is administered as a living and changing body of law and effect is given to any changes occurring in it before performance falls due.31 68 Dicey and Morris, Conflict of Laws, 13th edn., pp. 1216-17 referring to the position in the United States and international conventions. 69 James Miller and Partners Ltd. v. Whitworth Street Estates (Manchester) Ltd., [1970] AC 593, [1970] 1 All ER 796, [1970] 2 WLR 728. 70 Re Helbert Wagg & Co. Ltd., [1956] Ch 323, [1956] 1 All ER 129 at 135, [1956] 2 WLR 183 at 189; Mount Albert Borough Council v. Australasian Temperance and General Mutual Life Assurance Society Ltd., [1938] AC 224 at 240, [1937] 4 All ER 206 at 212; Dhanrajamal Gobindram v. Shamji Kalidas & Co., [1961] 3 SCR 1020 at 1041, AIR 1961 SC 1285 at 1294 (intention expressed overrides presumption; inference from terms and nature of contract); dictum of Denning LJ in Boissevain v. Weil, [1949] 1 KB 482 at 491, [1949] 1 All ER 146(CA) :I do not believe that parties are free to stipulate by what law the validity of their contract is to be determined. Their intention is only one of the factors to be taken into account. 71 Vita Food Products Inc. v. Unus Shipping Co. Ltd., [1939] AC 277, [1939] 1 All ER 513 per Lord Wright at 521 (PC). 72 The Torni, [1932] at 27, [1932] All ER Rep 374; disapproved in Vita Food Inc. v. Unus Shipping Co., [1939] AC 277, [1939] 1 All ER 513; Re Helbert Wagg & Co. Ltd., [1956] Ch 323, [1956] 1 All ER 129 at 136, [1956] 2 WLR 183 at 191. 73 Armadora Occidental S A v. Horace Mann Insurance Co., [1978] 1 All ER 407 at 410-11 (CA) affirming [1977] 1 All ER 347. 74 Videocon Industries Ltd v. Union of India, AIR 2011 SC 2040, 2011 (6) SCC 161. 75 Vita Foods Products Inc. v. Unus Shipping Co. Ltd., [1939] AC 277 at 290, [1939] 1 All ER 513 at 521. 76 Cheshire and North, Private International Law, 10th edn., p. 201. 77 Boissevain v. Weil, [1949] 1 KB 482 at 490, [1949] 1 All ER 146 at 153 (CA); affirmed on other grounds [1950] AC 327, [1950] 1 All ER 728(HL) . 78 Trade Indemnity plc v. Forsakringsaktiebolaget Njord, [1995] 1 All ER 796. 79 Chatenay v. Brazilian Submarine Telegraph Co. Ltd., [1891] 1 QB 79 at 82, [1886-90] All ER Rep 1135(CA) . 80 Ibid; St Pierre v. South American Stores (Gath and Chaves) Ltd., [1937] 1 All ER 206; but see Sayers v. International Drilling Co. NV, [1971] 3 All ER 163, [1971] 1 WLR 1176 (language not of importance).
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81 R v. International Trustee for the Protection of Bondholders Akt, [1937] AC 500 at 553, [1937] 2 All ER 164; The Assunzione, [1954] at 150, [1954] 1 All ER 278, [1954] 2 WLR 234(CA) . 82 Lloyd v. Guibert, [1865] LR 1 QB 115 at 122-23. 83 Jacobs Marcus & Co. v. Credit Lyonnais, (1884) 12 QBD 589, [1881-85] All ER Rep 151; Keiner v. Keiner, [1952] 1 All ER 643 (residence at the time of making the deed). 84 However, see R v. International Trustee for the Protection of Bondholders Akt, [1937] AC 500, [1937] 2 All ER 164 (nevertheless governed by intention of parties, and the mere fact that government is a party is not decisive). 85 Amin Rasheed Shipping Corpn. v. Kuwait Insurance Co., [1984] 1 AC 50, [1983] 2 All ER 884, [1983] 3 WLR 241(HL) (insurance policy based on Lloyd's standard form marine policy). 86 Re United Railways of the Havana & Regla Warehouses Ltd., [1960] Ch 52, [1959] 2 All ER 214, [1959] 2 WLR 251 affirmed on appeal in [1961] AC 1007, [1960] 2 All ER 332, [1960] 2 WLR 969. 87 Dobell & Co. v. Steamship Rossmore Co. Ltd., [1895] 2 QB 408 at 412, [1895-99] All ER Rep 885(CA) ; Dever ex p, Re Suse and Sibeth,[1887] 18 QBD 660 at 664, 666; Amin Rasheed Shipping Corpn. v. Kuwait Insurance Co., [1984] 1 AC 50 per Lord Wilberforce at 69 [1983] 2 All ER 884, [1983] 3 WLR 241(HL) ; Stafford Allen & Sons Ltd. v. Pacific Steam Navigation Co., [1956] 1 WLR 629(CA) ; Adamastos Shipping Co. Ltd. v. Anglo-Saxon Petroleum Co. Ltd., [1959] AC 133, [1958] 1 All ER 725, [1958] 2 WLR 688(HL) ; Vita Food Products Inc. v. Unus Shipping Co. Ltd., [1939] AC 277 at 286, [1939] 1 All ER 513(PC) ; The Torni, [1932] at 27, [1932] All ER Rep 374. 88 Tzortzis v. Monark Line A/B, [1968] 1 All ER 949, [1968] 1 WLR 406(CA) ; Bangladesh Chemical Industries Corpn. v. Stephens (Henry) Shipping Co. and Tex Dilan Shipping Co. (The SLS Everest), [1981] 2 Lloyd's Rep 389; Compania Navieria Micro SA v. Shipley International Inc., [1982] 2 Lloyd's Rep 351; Astro Venturoso Compania Naviera v. Hellenic Shipyards SA (The Mariannina), [1983] 1 Lloyd's Rep 12; Steel Authority of India Ltd. v. Hind Metals Inc., [1984] 1 Lloyd's Rep 405; Spurrier v. La Cloche, [1902] AC 446, [1900-3] All ER Rep 277(PC) (even where arbitration clause is void). 89 [1971] AC 572, [1970] 3 All ER 71(HL) . 90 [1971] AC 572 at 596, [1970] 3 All ER 71(HL) at 84. 91 [1961] 3 SCR 1020, at 1041, AIR 1961 SC 1285 at 1294. 92 Spurier v. La Cloche, [1902] AC 446, [1900-3] All ER Rep 277(PC) ; NV Kwik Hoo Tong Handel Maatshappij v. James Finlay & Co., [1927] AC 604; Hamlyn & Co. v. Talisker Distillery, [1894] AC 202, [1891-94] All ER Rep 849(CA) ; Evans Marshall & Co. Ltd. v. Bertola SA, [1973] 1 All ER 992, [1973] 1 WLR 349 at 364; Oceanic Sun Line Special Shipping Co. Inc. v. Fay, (1988) 165 CLR 197 at 224-25. 93 Dhanrajmal Gobindram v. Shamji Kalidas, [1961] 2 SCR 1020 at 1041, AIR 1961 SC 1285 at 1294; Hamlyn & Co. v. Talisker Distillery, [1894] AC 202, [1891-94] All ER Rep 849(CA) ; Spurrier v. La Cloche, [1902] AC 446, [1900-3] All ER Rep 277(PC) ; National Thermal Power Corpn. v. Singer Company, AIR 1993 SC 998 at 1009, (1992) 3 SCC 551. 1 Michel Golodetz v. Serajuddin, AIR 1959 Cal 603; Mury Exportation v. D Khaitan & Sons Ltd., AIR 1956 Cal 644. 2 Dicey and Morris, Conflict of Laws, 13th edn., pp 1211-12; Hamlyn & Co. v. Talisker Distillery, [1894] AC 202, [1891-94] All ER Rep 849(CA) . 3 Re Helbert Wagg & Co. Ltd., [1956] Ch 323 at 340, [1956] 1 All ER 129, [1956] 2 WLR 183; see also the Art. 3(1) of the Rome Convention (the EEC Convention on the Law applicable to Contractual Obligations), which provides: 'By their choice the parties can select the law applicable to the whole or a part only of the contract;' and Art. 4(1) provides '...a severable part of the contract which has a closer connection with another country may by way of exception be governed by the law of that other country'. 4 Dicey and Morris, Conflict of Laws, 13th edn., p. 1212. 5 Videocon Industries Ltd v. Union of India, AIR 2011 SC 2040, 2011 (6) SCC 161. 6 Yograj Infrastructure Ltd v. Ssang Yong Engineering and Construction Co Ltd, AIR 2011 SC 3517, 2011 AIR SCW 5158 (arbitration at Singapore according to SIAC Rules). 7 Star Shipping AS v. China National Foreign Trade Transportation Corpn. (The Star Texas), [1993] 2 Lloyd's Rep 445(CA) . 8 Astro Venturoso Compania Naviera v. Hellenic Shipyards SA (The Mariannina), [1983] Lloyd's Rep 1215(CA) . 9 Armar Shipping Co. Ltd. v. Caisse Algerienne d' Assurance et de Reassurance (The Armar), [1981] 1 All ER 498, [1981] 1 WLR 207; EI du Pont de Nemours v. Agnew, [1987] 2 Lloyd's Rep 582 at 592.
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10 The Assunzione, [1954] P 150 per Singeton LJ at 164, [1954] 1 All ER 278 at 283, [1954] 2 WLR 234(CA) . 11 Cheshire and North, Private International Law, 10th edn., 1979, p. 208. 12 'Connection should be with what is being done under the contract and not the forms of the contract'-- Chitty on Contracts, 28th edn., p. 1580, para 31-013. 13 Bonython v. Commonwealth of Australia, [1951] AC 201 per Lord Simonds at 219; Re United Railways of the Havana and Regla Warehouses Ltd., [1960] Ch 52, [1959] 2 All ER 214 at 233, [1959] 2 WLR 251, affirmed on appeal in [1961] AC 1007, [1960] 2 All ER 332, [1960] 2 WLR 969; James Miller and Partners Ltd. v. Whitworth Street Estates (Manchester) Ltd., [1970] AC 593, [1970] 1 All ER 796, [1970] 2 WLR 728; Offshore International SA v. BanCo. Central SA, [1976] 3 All ER 749, [1977] 1 WLR 399; Power Curber International Ltd. v. National Bank of Kuwait SAK, [1981] 3 All ER 607, [1981] 1 WLR 1233. 14 Rabindra N Maitra v. Life Insurance Corpn. of India, AIR 1964 Cal 141. 15 Chatenay v. Brazilian Submarine Telegraph Co. Ltd., [1891] 1 QB 79 at 82-83, [1886-90] All ER Rep 1135(CA) ; The Assunzione,[1954] 1 All ER 278, [1954] 2 WLR 234(CA) . 16 Re United Railways & Regla Warehouses Ltd.,[1961] AC 1007, [1960] 2 WLR 969, [1960] 2 All ER 332. 17 Zivnostenska Banka National Corpn. v. Frankman, [1950] AC 57 at 85-86, [1949] 2 All ER 671. 18 Delhi Cloth & General Mills Co. Ltd. v. Hamam Singh, AIR 1955 SC 590, [1955] 2 SCR 402; distinguished in United Commercial Bank Ltd. v. Okara Grain Buyers Syndicate Ltd., AIR 1968 SC 1115 (property had not been proved to have vested in Pakistan custodian). 19 [1938] AC 224, [1937] 4 All ER 206, 214(PC) ; distinguishing Adelaide Electric Supply Co. Ltd. v. Prudential Assurance Co. Ltd., [1934] AC 122, [1933] All ER Rep 82. 20 [1951] AC 201 at 221 (PC); R v. International Trustee for the Protection of Bondholders Akt, [1937] AC 500 at 531, [1937] 2 All ER 164; Mount Albert Borough Council v. Australasian Temperance & General Mutual Life Assurance Society Ltd., [1938] AC 224, [1937] 4 All ER 206, 214. 21 [1956] Ch 323, [1956] 1 All ER 129, [1956] 2 WLR 183 at 190; Vita Food Products Inc. v. Unus Shipping Co. Ltd., [1939] AC 277, [1939] 1 All ER 513 and The Torni, [1932] P 27, [1932] All ER Rep 374 referred to. 22 Sayers v. International Drilling Co. NV, [1971] 3 All ER 163, [1971] 1 WLR 1176 (case in tort); WJ Alan & Co. Ltd. v. El Nasar Export & Import Co., [1972] 2 All ER 127. 23 Whitworth Street Estates (Manchester) Ltd. v. James Miller and Partners Ltd., [1969] 2 All ER 210; reversed on another ground in James Miller & Partners Ltd. v. Whitworth Street Estates (Manchester) Ltd., [1970] AC 593, [1970] 1 All ER 796, [1970] 2 WLR 728. 24 Compagnie d' Armement Maritime SA v. Compagnie Tunisienne de Navigation SA, [1971] AC 572, [1970] 3 All ER 71(HL) . 25 [1988] 2 All ER 43 (CA); affirmed in [1989] AC 852, [1989] 1 All ER 402. 26 Armar Shipping Co. Ltd. v. Caisse Algerienne d' Assurance et de Reassurance (The Armar), [1981] 1 All ER 498 at 504, [1981] 1 WLR 207(CA) . 27 Re United Railways of the Havana d' Regla Warehouses Ltd., [1960] Ch 52 at 96-97, 115, [1959] 2 All ER 214, [1959] 2 WLR 251(CA) ; affirmed on appeal in [1961] AC 1007, [1960] 2 All ER 332, [1960] 2 WLR 969; Amin Rasheed Shipping Corpn. v. Kuwait Insurance Co., [1984] 1 AC 50, [1983] 2 All ER 884, [1983] 3 WLR 241(HL) . 28 Re United Railways of the Havana d' Regla Warehouses Ltd., [1960] Ch 52, [1959] 2 All ER 214, [1959] 2 WLR 251; affirmed on appeal in [1961] AC 1007, [1960] 2 All ER 332, [1960] 2 WLR 969; not following a dictum of Lord Wright in Vita Food Products Inc. v. Unus Shipping Co. Ltd., [1939] AC 277 at 292, [1939] 1 All ER 513; Amin Rasheed Shipping Corpn. v. Kuwait Insurance Co., [1984] 1 AC 50 at 61-62, [1983] 2 All ER 884, [1983] 3 WLR 241(HL) ; EI du Pont de Nemours v. Agnew, [1987] 2 Lloyd's Rep 582 at 592; National Thermal Power Corpn. v. Singer Company, AIR 1993 SC 998 at 1007, (1992) 3 SCC 551. 29 Vita Food Products Inc. v. Unus Shipping Co. Ltd., [1939] AC 277, [1939] 1 All ER 513; Re Helbert Wagg d' Co. Ltd., [1956] Ch 323, [1956] 1 All ER 129, [1956] 2 WLR 183 at 190. 30 Dicey and Morris, Conflict of Laws, 11th edn., p. l163. 31 Delhi Cloth d' General Mills Co. Ltd. v. Harnam Singh, AIR 1955 SC 590, [1955] 2 SCR 402.
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Formation The formation of a contract will be governed by that law which would be the proper law if the contract were validly concluded. Formation of contract would cover aspects of offer and acceptance, consideration and reality of consent. A contract which lacks consideration for formation under the English law, would nevertheless be valid if the law applicable did not require it.32 In a case where a question is raised that whether the offer and acceptance resulted in a contract; the question would be determined on the basis of the putative proper law, i.e. the law which would have been the proper law of the contract if it had been validly concluded. In Mackender v. AG Feldia, 33a case relating to consent, a claim was made under a jeweller's block policy negotiated in England for loss by theft. The underwriters discovered that the merchants made a practice of smuggling diamonds into Italy. The claim was rejected on the ground of non-disclosure of the smuggling act ivities and the underwriters sought a declaration that the policy was void. It was held that the contract being voidable and not void ab initio, illegality under the proper law of contract (the Belgian law) would merely make the policy unenforceable. 32 Re Bonancina,[1912] 2 Ch 394(CA) (Italian law applicable). 33 [1967] 2 QB 590, [1966] 3 All ER 849, [1967] 2 WLR 119.
Competency to Contract Generally (but with very important exceptions), the capacity to contract follows the law of domicile at the time of making the contract.34 This of course is a matter of law which the parties cannot alter. Section 11 of this Act provides that a person is competent to contract if he is of the age of majority according to the law to which he is subject. A large proportion of the decisions under this head applying the lex domicilii have been in matrimonial causes. In Kashiba Bin Narsapa Nikade v. Shripat Narshiv, 35 a widow having domicile by marriage in British India, not having changed this domicile after marriage, had executed a bond as a surety at the age of 16 years. It was held that she was a minor by the law of her domicile, and hence not liable under the bond. But capacity to contract with regard to immovable property is determined by the local law of its situation.36 Approving the observations in Dicey, that the competence deserved to be governed not by law of domicile but by the law most closely connected with the contract, it was held in TNS Firm v. VPS Muhammad Hussain, 37 that a person's capacity to bind himself by an ordinary mercantile contract was governed by the law of the country where the contract was made. A personal disqualification imposed on a contracting party by law would extend to all dealings with any property wherever situated, including a property which had not specifically been taken over as the disqualified proprietor's estate by the Court of Wards.38 Later authorities suggest that an individual's capacity to enter into a contract is governed by the system of law with which the contract is most closely connected or by the law of his domicile and residence. The Rome Convention (IEEC Convention on the Law Applicable to Contractual Obligations) provides that where two persons, one of whom is a natural person, make a contract in the same country, then if the natural person has the capacity under that law, he cannot rely on any incapacity imposed on him by the law of another country, unless the other contracting party knew or should have known of the incapacity.39 Material Validity A contract is unenforceable for illegality if it is illegal according to the law governing it.40 But this rule is subject to exceptions.41 Interpretation, Effect and Discharge
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The interpretation of the contract, the rights and obligations of the parties under it, and the discharge, is to be determined by the proper law of contract. However, the mode of performing a contract, as distinct from the substance of the obligation, is governed by the place at which the obligation is to be performed.42 The validity of the discharge of a contract normally depends on the proper law of contract.43 A discharge according to proper law of contract is valid and a discharge not according to proper law is not; and the discharge under the other foreign law will be no answer where the obligation is not discharged under the proper law. A contractual debt may, and normally will be, regarded as situated at the debtor's place of residence, but the discharge of a debt whether by performance or through other events is a matter--subject not to the lex situs of the debt but to the proper law of contract from which it arises.44 The validity of the transfer of a contractual debt depends on lex situs but a novation, even a compulsory novation, is not governed by lex situs as it comprises annullment of one debt and the creation of another and no transfer of property is involved. The former is governed by the proper law of the contract and the latter probably by the law of the country with which the substitution of the new debtor is most closely connected.45 The fact that one aspect of a contract is to be governed by the law of one country does not necessarily mean that that law is to be the proper law of the contract as a whole.46 Different parts of a contract may be governed by different laws, though the English courts will not split the contract readily and without good reason.47 Effect of Limitation Suits instituted in India on contracts entered into in a foreign country shall be subject to the rules of limitation prescribed in the Indian Limitation Act, 1963. But the rule of limitation in a foreign country, where the contract is made, may be set up as a defence to a suit filed in India if:
(i) (ii)
the rule has extinguished the contract; and the parties were domiciled in that foreign country during the period prescribed by that rule.48
34 Lachmi Narain v. Fateh Bahadur Singh, (1902) 25 All 195. 35 (1894) 19 Bom 697. 36 Bank of Africa Ltd. v. Cohen, [1909] 2 Ch 129(CA) . 37 AIR 1933 Mad 756, (1933) 65 MLJ 458 (no reference to s. 11 of this Act). 38 Lachmi Narain v. Fateh Bahadur Singh, (1902) 25 All 195 (disqualification on a proprietor whose property is placed under the Court of Wards). 39 See also s. 11. 40 Kahler v. Midland Bank, [1950] AC 24, [1949] 2 All ER 62. (The scope of this decision is controversial; Chitty on Contracts, 28th edn., p. 1650, para 31-158). 41 See s. 23, under the heading--'Illegality and Conflict of Laws'. 42 Jacobs Marcus d' Co. v. Credit Lyonnais, (1884) 12 QBD 589(CA), (1881-85] All ER Rep 151; Mount Albert Borough Council v. Australasian Temperance d' General Mutual Life Assurance Society Ltd., [1938] AC 224, [1937] 4 All ER 206(PC) ; Bonython v. Commonwealth of Australia, [1951] AC 201(PC) . 43 Shankar Vishnu Burhanpurkar v. Maneklal Haridas Gujarathi, (1940) Bom 799, AIR 1940 Bom 362, 42 Bom LR 873, 191 IC 653.
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44 Perry v. Equitable Life Assurance of the USA, (1929) 45 TLR 468 (a claim on insurance policy dismissed because Soviet law annulled rights under insurance contracts); Re United Railways of the Havana and Regla Warehouses Ltd., [1961] AC 1007, [1960] 2 All ER 332, [1960] 2 WLR 969; R v. International Trustee for the Protection of Bondholders Akt, [1937] AC 500, [1937] 2 All ER 164; Mount Albert Borough Council v. Australasian Temperance and General Mutual Life Assurance Society Ltd., [1938] AC 224, [1937] 4 All ER 206(PC) . 45 Re United Railways of the Havana and Regla Warehouses Ltd., [1960] Ch 52, [1959] 2 All ER 214 at 233, [1959] 2 WLR 251; referring to Wolff's Private International Law, 2nd edn., p. 458; on appeal Re United Railways and Regla Warehosues Ltd., [1961] AC 1007, [1960] 2 All ER 332, [1960] 2 WLR 969; Arab Bank Ltd. v. Barclays Bank (Dominion, Colonial and Overseas), [1954] AC 495, [1954] 2 All ER 226(HL) (not applied). 46 Hamlyn & Co. v. Talisker Distillery, [1894] AC 202, [1891-94] All ER Rep 849(CA) . 47 Kahler v. Midland Bank, [1950] AC 24 per Lord MacDermott at p. 42, [1949] 2 All ER 621 at 633. 48 The Limitation Act, 1963, s. 11.
Tort and Contract A distinction between liability in tort and in contract,49turns on the origin of the duty. Obligations under contract arise from agreement between the parties, are voluntary and particular to the parties; while those in tort are independent of agreement and are imposed upon the parties by the law. In tort, the duty is owed to persons generally, while in contract, it is owed to specific person or persons. A tort makes the claimant's existing position worse; a breach of contract consists of failing to make the claimant's position better in the manner contemplated under the contract. In modern law, however, these distinctions have become hazy because of legislative regulation of many relationships, terms implied by law, the imposing of terms upon parties which cannot be contracted out of. The law relating to capacity is different; a minor is liable for his torts, but not on contract excepting to a limited extent. A contractual right can be assigned but not a right of action in tort. The distinction between tort and contract has been described as not logical, and it is sometimes difficult to see whether a particular act is a wrong or a breach of a contract. Nevertheless, as the law has drawn a distinction, 'tort' may be defined in terms of a breach of duty other than a contractual duty.50 Difference in incidents There is a difference between the principles governing damages in tort and contract. The function of damages in contract is to put the injured party as far as possible in a position in which he would have been had the contract been performed; and in tort, it is to put the person injured in a position, as if a tort had not been committed.51 The tests for remoteness in tort and contract also differ. Although the defence of contributory negligence does not apply in the law of contract, it is now established that the court may reduce damages for breach of contract on the ground of contributory negligence if the plaintiffs claim is based on breach of a contractual duty to take reasonable care, concurrent with liability in the tort of negligence.52 The measure of damages is different. Award of nominal damages belongs to the law of contract. Exemplary or punitive damages can be awarded in tort.53 Damages for reputation are not generally available in contract,54 in contrast to tort, unless the contract is for the maintenance or promotion of the plaintiff's reputation,55 although damage to employment prospects of employees has been allowed.56 The period prescribed by the law relating to limitation for actions for tort and for enforcing contractual obligations are different, and they also differ as to time from which the limitation period is reckoned.57 Claims in Tort A party can claim in tort against the other party in respect of matters occurring in the course of dealings of the parties before the contract; namely, in tort of deceit for fraudulent pre-contractual statements,58 or in tort of negligence, where the other party owed him a duty of reasonable care.59 As stated in Brown v. Boorman, 60'...the contract creates a duty, and a neglect to perform that duty, or the
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non-feasance, is a ground of act ion upon a tort'. A threatened breach of contract also may give rise to liability in tort.61 Choice of Action When the elements of the plaintiff's case allow a claim in tort or breach of contract, he has to choose the basis for his act ion,62 and the existence of a contract between the parties may not necessarily be a reason to deny a claim in tort, unless the contract is inconsistent with a claim in tort.63 An assumption of responsibility by a person rendering professional or quasi-professional services, coupled with a concomitant reliance by the person for whom the services were rendered, could give rise to a tortious duty of care irrespective of whether there was a contractual relationship between the parties. In consequence, unless the contract between the parties precluded him from doing so, a plaintiff who had available to him concurrent remedies in contract and tort, is entitled to choose that remedy which appeared to him most advantageous.64 The principle has been stated:
In the modern law, a party to a contract may choose to base his claim on an established and independent tort against the other party, but this choice will not be allowed to subvert the contract's express or implied terms, nor any legal immunity attaching to the other party qua the contractor.65
49 Anson's Law of Contract, 29th edn., pp 23-34; Halsbury's Laws of England, Vol. 9(1), 4th edn. Reissue, 30 June 1998, 'CONTRACTS', para 609 - 611; Chitty on Contracts, 28th edn., pp. 31-79. 50 Sachs v. Henderson, [1902] 1 KB 612. 51 See for detail discussion s. 73, 'Nature of the remedy of damages'. 52 Sayers v. Harlow Urban Dsitrict Council, [1958] 2 All ER 342, [1958] 1 WLR 623; Quinn v. Burch Brothers (Builders) Ltd., [1966] 2 QB 370, [1966] 2 All ER 283(CA) ; Forsikringsaktieselskapet Vesta v. JNI Butcher Bain Dawes, (No 1) [1988] 2 All ER 43, [1988] 3 WLR 565(CA) ; affirmed in [1989] 1 All ER 402, [1989] 2 WLR 290(HL) ; Klaus Mittelbachert v. East India Hotels Ltd., AIR 1997 Del 201 (distinction between tort and contract immaterial). 53 Rookes v. Barnard, [1964] AC 1129, [1964] 1 All ER 367. 54 Addis v. Gramophone Co. Ltd., [1909] AC 488, [1908-10] All ER Rep 1(HL) (aggravated damages cannot be awarded in contract). 55 Aerial Advertising Co. v. Batchelors Peas Ltd. (Manchester), [1938] 2 All ER 788. 56 Malik v. Bank of Credit and Commerce International SA (in liquidation), [1997] 3 All ER 1, [1997] 3 WLR 95(HL) ; damages awarded for loss of reputation. 57 See the Limitation Act, 1963 58 Doyle v. Olby (Ironmongers) Ltd., [1969] 2 QB 158, [1969] 2 All ER 119; Archer v. Brown, [1985] 1 QB 401, [1984] 2 All ER 267; S Chatterjee v. Dr K L Bhave, AIR 1960 MP 323; see also s. 17 below-- 'Damages for Fraud'. 59 Hedley Byrne d' Co. Ltd. v. Heller d' Partners Ltd., [1964] AC 465, [1963] 2 All ER 575. 60 [1842] 3 QB 511, per Tindal CJ at 526. 61 Rookes v. Barnard, [1964] AC 1129, [1964] 1 All ER 367. 62 Henderson v. Merrett Syndicates Ltd., [1995] 2 AC 145, [1994] 3 All ER 506. 63 [1995] 2 AC 145, 194. 64 [1995] 2 AC 145, [1994] 3 All ER 506, applying Hedley Byrne d' Co. Ltd. v. Heller d' Partners Ltd., [1964] AC 465, [1963] 2 All ER 575. 65 Chitty on Contracts, 28th edn., p. 45, para 1-077; See also, cl (d) of s. 2 below--'Contracts Requiring Tortious Duty
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of Care to Third Parties'.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/Preliminary/S. 2.
The Indian Contract Act , 1872 (Act 9 of 1872)1 Preliminary S. 2. Interpretation-clause-In this Act the following words and expressions are used in the following senses, unless a contrary intention appears from the context: (a) (b) (c) (d)
(e) (f) (g) (h) (i) (j)
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; 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; the person making the proposal is called the 'promisor,' and the person accepting the proposal is called the 'promisee'; when, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise; every promise and every set of promises, forming the consideration for each other, is an agreement; promises which form the consideration or part of the consideration for each other, are called reciprocal promises; an agreement not enforceable by law is said to be void; an agreement enforceable by law is a contract; an agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract; a contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.
Introduction The section is an interpretation clause, but it declares a considerable part of the substantive law. Its propositions are not confined to principles of universal jurisprudence, but embody several concepts peculiar and of particular importance to common law. Clauses (a), (b), (c), (e) and (f) provide that an agreement is a promise or a set of reciprocal promises, that a promise is formed by the acceptance of a proposal; and that there must be a promisor who makes the proposal and a promisee who accepts it. In the case of reciprocal promises, each party is a promisor as to the promise he makes and a promisee as to that which he receives; he is both, proposer and acceptor, proposing to become liable and accepting the other's liability. The mutual proposals of the two parties become promises by mutual acceptance; whatever may have happened before the promises were exchanged are merely preliminary negotiation, and does not
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enter into the legal analysis of the transaction.
Formation of Contract The interpretation clause indicates that an agreement can be reached by the process of offer and acceptance. It has been held that every transaction, to be recognised as a contract, must in its ultimate analysis, resolve itself into a proposal and its absolute and unqualified acceptance.66 This analysis of the process may not always be appropriate in a number of situations. Conveyances drafted by a legal advisor are signed simultaneously by both the parties. Parties may contract through the same broker representing both the parties, who brings them to agree on the same terms.67 Persons entering competitions, or seeking membership of associations, contract not only with the organiser or association, but also with one another.68 In such cases, it is difficult to say who has made the offer, and who has accepted the same. In commercial transactions, particularly complex ones, contracts are often concluded after prolonged negotiations in which the sequence of offer and acceptance cannot be identified. The correspondence must then be considered as a whole, along with the conduct of the parties to see whether the parties have reached an agreement.69 Such analysis has been viewed as out of date.70 Courts will hold that there is a contract, even though it is difficult or impossible to analyse the transaction in terms of offer and acceptance.71 In order to decide whether there is an absolute and unqualified agreement between the parties, the entire negotiation and correspondence should be considered.72 Binding promise can be inferred from the circumstances of a case.73 Yet, the analysis of the formation into offer and acceptance is a working method, which enables us, in doubtful cases, to ascertain whether a contract has been concluded.74 The learned editor of the earlier editions of this book had also found it 'difficult at first sight to say without doing violence to the language, that in common affairs of life a promise is always an accepted proposal'. But he observed that the language of the section was justified, and explained it with an example: a man offers to sell and deliver goods on credit, then and there, to another, who in the beginning does not want the goods, but is finally persuaded to take them at a price named by the seller. The seller delivers the goods and receives in exchange the buyer's promise to pay for them. The buyer's promise has never been a proposal, the seller offered to sell, and the buyer accepted the offer by taking the goods and pledging his credit. However, the buyer must be deemed to adopt the seller's terms at the last moment before delivery of the goods, as the seller would not have delivered them unless he knew that he would get the buyer's promise to pay for them. The only way in which he could be sure of this was the existence of a proposal from the buyer to become liable for the price, which proposal would become a promise on the goods being delivered. This is the only way in which the promise can really be simultaneous with the performance for which it is exchanged, as the theory of the common law requires it to be. Both these reasons [though the force of the latter appears to be destroyed in India by sub-section (d)] appear to be sound, and sufficient, on principle, to justify the language of the Act. The traditional offer-acceptance analysis is not without difficulties, but rejecting it will deprive the courts, parties and legal advisors of guidance in concluding whether an agreement has been reached. The traditional method provides a degree of certainty desirable and necessary in order to promote effective commercial relationships.75 66 Badri Prasad v. State of Madhya Pradesh, AIR 1970 SC 706 at 712; Suraj Besan and Rice Mills v. Food Corpn. of India, AIR 1988 Del 224 at 227; Deep Chandra v. Ruknuddaula Shamsher Jung Nawab Mohammad Sajjad Ali Khan, AIR 1951 All 93 at 97 (FB); Nirod Chandra Roy v. Kirtya Nanda Singh, AIR 1922 Pat 24; Dagdu v. Bhana, (1904) 28 Bom 420 at 425 (DB); Haji Mohamed Haji Jiva v. E Spinner, (1900) 24 Bom 510 at 523 (DB). 67 Pagnan SpA v. Feed Products Ltd., [1987] 2 Lloyd's Rep 601.
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68 Clarke v. Earl of Dunraven (The Satanita), [1897] AC 59; Phillips,[1976] 92 LQR 499; but see Berry v. Pulley, [2002] 2 SCR 493 (Supreme Court of Canada): there is no contract between the members, such as to entitle a member to sue another for breach of contract. 69 Gibson v. Manchester City Council, [1978] 2 All ER 583(CA), [1978] 1 WLR 294; Vorster,(1987) 103 LQR 278. 70 Butler Machine Tool Co. Ltd. v. Ex-Cell-O Corpn. (England) Ltd., [1979] 1 All ER 965(CA), [1979] 1 WLR 401; Adams,(1979) 95 LQR 487; Tankereederei Ahrenkeil GmbH v. Frahvil SA (The Multitank Holsatia), [1988] 2 Lloyd's Rep 486; Interfoto Picture Library Ltd. v. Stilleto Visual Programmes Ltd., [1989] Ch 433, [1988] 1 All ER 348. 71 Clarke v. Earl of Dunraven (The Satanita), [1897] AC 59. 72 Dhulipudi Namayya v. Union of India, AIR 1958 AP 533; Meenakshi Mills Ltd. v. TC Anantarama Ayyar, AIR 1930 Mad 654(DB), 122 Ind Cas 507. 73 Ganesh Prasad Singh v. Beehu Singh, AIR 1934 All 271; Firm Kanhaiya Lal v. Dineshchandra, AIR 1959 MP 234. 74 Anson's Law of Contract, 29th edition, 2010, p. 30. 75 Tekdata Interconnections Ltd. v. Amphenol Ltd., [2009] EWCA Civ 1209.
Clause (a): Proposal
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.
The word 'proposal' is used in the Act in the same sense as the word 'offer' is used in English law. Writers of English law have defined an offer as:
...an intimation, by words or conduct, of a willingness to enter into a legally binding contract, and which in its terms expressly or impliedly indicates that it is to become binding on the offeror as soon as it has been accepted by an act, forbearance, or return promise on the part of the person to whom it is addressed.76
In Chitty on Contracts, the word 'proposal' has been defined as:
an expression of willingness to contract made with an intention (actual or apparent) that it is to become binding on the person making it as soon as it is accepted by the person to whom it is addressed.77
While the earlier definition emphasises an intention to enter into a legally binding contract and upon the requirement of consideration from the offeree, the latter stresses the intention to be bound upon the assent of the offeree. The language of the definition in this Act appears to confine 'proposal' to an offer to be bound by a promise78 upon receiving the assent from the offeree, or on the offeree fulfilling or undertaking to fulfil certain conditions.79 To have made a proposal, a person must have:
(i) (ii)
signified to another his willingness to do or to abstain from doing anything; and has done so with a view to obtaining the assent of that other to such act or abstinence.
The offeror therefore manifests or makes known his intention of doing or not doing something, and he
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does so with the purpose of getting the offeree to assent to it. The Objective Test of Intention The test of the person's intention in making a proposal is an objective one,80 that is, as it would be reasonably construed by a person in the position of the offeree. A person can be said to have made an offer though he did not subjectively have the intention to make one,81 or even if it has been made under a mistake,82 if A's conduct is such as to induce B to reasonably believe that A had that intention.83 It has been suggested that for reason of convenience and facility of proof of agreement, it should make no difference whether B's state of mind amounts to knowledge of, or merely to indifference to, the truth.84 Thus, where ambiguous terms used by the buyer in the order are misinterpreted by the seller, and such misinterpretation is acted upon by the buyers, the buyer cannot contend that he did not make the offer as understood by the seller. By refusing to make payment for the goods supplied, the buyer commits breach of contract.85 The Association of British Travel Agents (ABTA) prominently displayed in their offices, notice of a scheme stating that if holidays had not commenced and any member tour operator failed (financially), the ABTA would arrange reimbursement of money paid for the holiday arrangements. In a claim concerning a package holiday booked with the tour operator, an ABTA member, the Court of Appeal held the notice to be an offer by the 'objective test', since any member of the public, booking a holiday with an ABTA member would reasonably regard these words as an offer of the ABTA.86 The last clause of Section 3 of the Act appears to support the objective theory. On the other hand, a proposer might not be bound where the offeree would know that the proposer never intended to make the offer on those terms. In ChweeKin Keong v. Digilandmallcom Ptd Ltd., 87 the defendant advertised colour laser printers on the internet for 66 Singapore dollars (SGD) by mistake instead of the real price of 3854 SGD. Plaintiff placed order for 1606 printers over the internet, and the defendant's computers completed the contract. The defendant realised the mistake and repudiated the transaction immediately. It was held that there was no contract. Proposal, Statement and Invitation to Treat A proposal must be distinguished from mere statement of intention which is not intended to require acceptance. The latter may be merely a statement of intention, or an invitation to make offers, or to do business. If it is not intended to be binding, it is an 'invitation to treat'. The distinction between offer and invitation to treat depends upon the intention of the person making it, the intention that he would be bound no sooner the offeree signifies his assent to it. It must require nothing more to convert it into a promise except acceptance. It manifests a final declaration of readiness to undertake an obligation upon certain specified terms and conditions, leaving the offeree the option of acceptance or refusal. So long as one of the parties to the transaction could back out of it at his choice, there can be no binding or concluded contract between the parties, although they have an agreement on the material terms.88 The person may expressly provide that he would not be bound by the other person's assent; or his statement may contain words or expressions which negate the intention; and where this intention is not clear, the court may take into account the words and expression used in the statement, the surrounding circumstances, and also the consequences of holding it to be an offer. An express statement that a declaration is not an offer is effective to prevent it from being an offer,89 but the mere use of the words 'offer' or 'invitation' may not be conclusive. A statement may be an invitation to treat even if contains the word 'offer'.90 It may be an offer even if it invites the addressee to make an 'offer',91 or it is expressed as an 'acceptance'.92 A notice communicating to its constituents the decision of the bank to raise the rate of interest from a certain date was not an express proposal within the meaning of Section 2(a), but it nevertheless gave the terms on which the constituents could propose to keep alive their overdraft account with the bank or to take further advances from the bank.93 Similarly, a telephonic request for supply of goods suitable for a prospective customer was a preliminary inquiry, the offer being made by conduct, when the goods were subsequently dispatched by the supplier.94 A proposal must also be distinguished from a
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statement that merely gives information.95 A statement may be a proposal even if it is styled as agreement,96 or uses the words 'I hereby agree to assign the lease to you...'.97 Express words of promise often are no more than a proposal. Thus, a letter requesting a loan of money, and promising repayment with interest on a certain day, is not a promissory note but a mere proposal for a loan.98 An underwriting letter contained the words: 'This engagement is binding on me for two months'; they were incapable of operating as a promise, and it was held, that their real effect was an offer with limit of two months for acceptance.99 Where a person intends, actually or objectively, as stated above, to be bound without further negotiations by a simple acceptance of his terms, his expression will be an offer or proposal. An offer is distinct from statements short of being an offer made during negotiations, an expression of intention, and an invitation to treat. Stating the price in response to the request or enquiry is not an offer.100 There is no offer where the owner of a house states the price at which he 'may be prepared to sell' in response to an enquiry from an interested buyer.101 When a person, in reply to an offer to buy his house at a certain figure, states that he would not sell the property for anything less than a certain amount, he thereby merely invites offers and does not make any offer to sell at the price mentioned by him.1 But a letter communicating willingness to sell at a price in reply to an inquiry whether the property is for sale, has been held to be an offer.2 Sending quotations or terms of business is not an offer, but intimation, on the part of the merchant sending it, of his readiness to transact business on those terms, even though it uses the words, 'let us have your transaction at once'.3 A letter written to a supplier to purchase goods in response to a telegram received informing the rates of the goods is an offer and not an acceptance, so as to confer jurisdiction on the court at the place where such letter is posted.4 A term in a partition deed that any of the parties wishing to sell his share will sell to the others at the market value is not an offer but an undertaking to make an offer.5 A bank sending forms to a person at his request for depositing money does not thereby make an offer.6 An informal talk between an Honorary Secretary of a bank and another person enquiring whether the person would purchase land belonging to the bank on certain conditions, followed by an assurance from the person, and a report by the secretary to the bank about the assurance, was merely an enquiry and an assurance, and neither an offer nor a contract.7 A municipal corporation invited tenders for a construction project. It sought confirmation about the willingness of a tenderer to deposit the entire amount within 60 days from the date of receipt of final acceptance of the tender. The tenderer sought two weeks time and agreed. There was no promise by the municipal corporation to accept the tender if she agreed to pay the entire bid amount within that time.8 SAIL offered a scheme of discount for any customer who lifted a certain quantity of goods. A group of customers, who did not qualify separately, but did so as a group, sought clarification whether they could avail of the discount. SAIL informed that the discount would be available to such a group provided they declared their intention to join together for combined off-take according to the scheme and other conditions. Six traders sent a letter that they had formed a group and suggested a formula for distribution of discount among individual members. The formula for distribution of discount to individual members of an unorganised group was not envisaged under the scheme. The competent authority of SAIL decided that such discount could not be given. The traders filed a writ petition seeking directions that the discount benefit be disbursed to them. It was held that there was no concluded contract.9 Advertisement issued by a housing development authority, offering a scheme, is an invitation to offer.10 A voluntary retirement scheme offered by an employer is not a proposal, but merely an invitation to treat. The application made by employees constitutes the proposal to be accepted by the employer.11 Advertisement and Display of Goods Neither quotation of prices12 nor a letter asking for quotation or terms13 are offers, they are invitations for offers. Where orders are invited, a contract comes into being only when the invitee places an order and the invitor accepts the same.14 Advertisements of goods for sale in newspapers or magazines are not offers.15 Nor are displays at the shop-window of goods with marked prices,16 or on the shelves of a self-service shop,17 or an indication of the price of petrol at a petrol pump,18 or advertisements
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announcing schemes for purchase of land, plot or houses,19 or special offers in catalogues or brochures. As a general rule, these are not offers but invitations for making offers. All displays and advertisements may not always be so. A notice at the entrance of an automatic car-park (the transaction being effected through a machine)20 advertisements of reward for lost articles,21 advertisement promising to pay money to a person who used a product and caught influenza,22 have been held to be offers. The test lies in the intention of the maker. The statement is an offer if the person making the statement shows the intention to be bound immediately on acceptance. Auctions An auctioneer's request for bids is not an offer, but an invitation to the customers to bid; the bid constitutes the offer, which is accepted by the auctioneer in a customary manner, usually by the fall of the hammer. The bidder may withdraw the bid until it is accepted.23 An advertisement announcing that an auction will be held on a certain day is an invitation to treat, and does not bind the auctioneer to sell the goods, nor does it make him liable on contract to indemnify the persons who have incurred expense in order to attend the sale.24 Tenders An invitation for tenders for the supply of goods or for execution of works is not an offer. It is a mere attempt to ascertain whether an offer can be obtained within such a margin as the employer is willing to adopt; it is an offer to negotiate, an offer to receive offers,25 even where the reserve price is fixed.26The act ual tender is the offer, and if accepted, it becomes a binding contract. The mere fact that a person makes a highest tender cannot entitle the tenderer to claim acceptance.27 But if the person inviting the tender states in the invitation that the highest offer to buy will be accepted, the invitation of tender may be regarded as an offer or an invitation to submit offers with an undertaking to accept the highest offer and the contract will be concluded as soon as the highest offer to buy is communicated.28 Where the tenders are invited by the government or public bodies and authorities, obligations in the conduct of the procedures are imposed on the persons inviting them in the interest of fairness, preventing discrimination and natural justice, and their decisions may be subject to judicial review.29 Acceptance of tender may lead to three possibilities as explained by Atkin J. in Percival Ltd. v. LCC Asylums and Mental Deficiency Committee :30
These tenders...vary in form...It sometimes happens that the effect of the form of the tender with an acceptance is to make a firm contract by which the purchasing body undertakes to buy all the specified material from the contractor. On the other hand these tenders are very often in a form under which the purchasing body is not bound to give the tenderer any orders at all: in other words, the contractor offers to supply goods at a price and if the purchasing body chooses to give him an order for goods during the stipulated time, then he is under an obligation to supply the goods in accordance with the order, but apart from that nobody is bound. There is also an intermediate contract that can be made in which, although the parties are not bound to any specified quantity, yet they bind themselves to buy and pay for all the goods that are in fact needed by them. Of course, if there is a contract such as that, then there is a binding contract which will be broken if the purchasing body in fact do need some of the articles the subject of the tender, and do not take them from the tenderers.
Tender and Standing Offer A tender for supply of goods, as may be required without the quantity being specified, is not an offer which may be accepted generally so as to form a binding contract. It is a continuing offer, which is accepted from time to time whenever an order is given for any of the goods specified in the tender.31 A writing by which A agrees to supply coal to B at certain prices and up to a stated quantity, or in any quantity which may be required for a period of 12 months, is not a contract unless B binds himself to take certain quantity, but a mere continuing offer which may be accepted by B from time to time by
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ordering goods upon the terms of the offer. In such a case, each order given by B is an acceptance of the offer; and A can withdraw the offer, or, to use the phraseology of the Act, revoke the proposal, at any time before its acceptance by an order from B.32 Such a transaction may be reduced to a statement by the intending vendor in this form: 'If you will send me orders for coal, I shall supply it to you for a period of twelve months at a particular rate'. This is merely a proposal from A to B. If in reply of such a proposal, B says to A, 'I agree', it does not constitute an acceptance of the proposal. An acceptance can take place only by B sending an order to A. If, however, there is an undertaking on the part of B not to send orders for coal (or whatever the goods in question may be) to any other person than A during a specified time, then, there is a good consideration for a promise by A to supply such coal as B may order on the specified terms and up to the specified extent. A printer agreed to carry out printing and binding of certain public documents on certain terms expressed in a schedule for eight years. The agreement was terminated in the same year, and the printer sued. It was held that he had no ground of act ion. It was further observed that:
The contract....does not purport to contain any covenant or obligation of any sort on the part of the Crown. The respondent undertakes to print certain public documents at certain specified rates. For all work given to him on the footing of the contract the Government was undoubtedly bound to pay according to the agreed tariff. But the contract imposes no obligation on the Crown to pay the respondent for work not given to him for execution. There is nothing in the contract binding the Government to give to the respondent all or any of the printing work referred to in the contract, nor is there anything in it to prevent the Government from giving the whole of the work, or such part as they think fit to any other printer.33
The acceptance of such tender merely amounts to an intimation that the offer will be considered to remain open during the period specified, and that it will be accepted from time to time by giving orders of specified quantities, and does not bind either party unless and until such orders are given. Thus, until order is given, arbitration clause will not apply.34 In his mining lease, the lessee undertook to sell to the government, out of the ore brought to the surface, such quantities as were required by the government, after the latter had notified to the lessee. This was held to be an offer by the lessee, and till it was accepted by the government by exercise of its option as a preferential purchaser, it was not a contract.35 However, failure to supply the goods without placing any order would not amount to breach of contract.36 Proposal must be Certain The proposal must be sufficiently definite to permit the conclusion of the contract by mere acceptance.37 Since a contract is concluded by the mere acceptance of an offer, the terms of the intended or proposed agreement must be indicated with sufficient definiteness in the offer itself. The terms of the offer must therefore be definite and certain. This does not mean that each and every term may be stated. Sometimes even essential terms may be left out; but if these can be determined or supplied by interpreting the agreement, or with reference to usages, previous conduct or practices, or implied terms, the offer would be adequately definite. A proposal is certain if, under the general rules of construction or otherwise, the intention of the parties can be ascertained, and if it can be rendered certain, as by reference to something certain. A proposal is not less certain if it is conditional, provided there is no element of uncertainty about it, or in its terms.38 An offer for purchase lacking specification of quantity required was vague and would not carry contractual relationship.39 A statement seeking advance payment without any particulars of the thing offered,40 or stating that the person is prepared to purchase the property for a 'reasonable sum',41 are not proposals. A tender which did not specify the amount of money offered was not certain and could not be acted upon.42 A contract for renewal of agreement by mutual consent does not create any obligation or rights in either party for renewal of agreement.43
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A term of the proposal signifies a condition without the fulfilment of which the offeror is not willing to undertake the obligation. Whether a particular condition amounts to a term depends on the intention of the proposer. Some conditions of the offer may be essential, others ancillary. Where the acceptor accepts the essential conditions, but does not accept the ancillary conditions strictly, a contract is nevertheless concluded.44 Proposal by Whom The proposal may emanate from a third person, who suggests to the prospective parties the terms of an agreement. In such a case, a contract is formed as soon as both parties have act ed on the agreement, even though there has until that moment, been no direct communication between them.45 A yacht club committee invited non-members to enter for a race on the terms, inter alia, that a yacht that fouled another should pay damages. A and B both entered their yachts, but as they were jockeying for position prior to crossing the starting line, A's yacht fouled B's, and A was held liable in damages to B.46 Proposal to Whom An offer may be addressed to an individual, or to a specified group of persons or to the world at large. The former is called a specific offer, and the latter general offer. The person to whom the offer has been made can accept it. A letter of authority given to a broker to find a suitable purchaser is not an offer to the world at large to sell to any person who would offer the minimum price.47 Communicated The word 'signifies' in the definition indicates that the offer must be communicated to the person to whom it is made.48 Proposal: Other Provisions An offer may be communicated by any act or omission by which the offeror intends to communicate or has the effect of communicating it (S. 3). Its communication is complete when it comes to the knowledge of the offeree (S. 4). It can be revoked until the offeree posts his acceptance (S. 5). It stands revoked by notice of revocation or by lapse of time, failure by the acceptor to accept the condition precedent to acceptance, and death or insanity of the offeror (S. 6). It may prescribe the manner of acceptance (S. 7). It may be express or implied (S. 9). Intention to create Legal Relations In order that a proposal may be binding by acceptance, it must be such as can be reasonably regarded as having been made in contemplation of producing legal consequences. An agreement is not a contract without an intention of creating legal relation, even though supported by consideration.49 A contract is created by the common intention of the parties to enter into legal obligation, and the intention is inferred when the parties to an agreement conform to the rules of law for formation of contracts. But this intention may be negated, impliedly by the nature of the agreed promise or promises, as in the case of offer and acceptance of hospitality, or of some agreements made in the course of family life between members of a family.50 It may also be negated expressly.51 Contractual intention may be negated by many factors. Whether or not there is a contractual animus must depend largely on the true construction of the documents from which that animus is to be inferred.52 The test of intention to create legal relations is an objective one. Although, the promisor never intended to create legal relations, he will be bound if a reasonable person would consider that there was an intention to contract.53 Many social or domestic arrangements may not be contracts, as they are not intended to be legally binding. In Balfour v. Balfour, 54 a husband staying in Ceylon (now Sri Lanka) promised to pay GBP 30 a month to his sick wife. She was unable to enforce it inter alia because the parties did not intend it to be legally binding. But this did not apply where the husband and wife were separated or were about to
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do so. Thus in Merritt v. Merritt, 55 an estranged husband promised to pay GBP 40 a month to his wife, and told her to pay out of it the outstanding mortgage debt on the matrimonial house, the relevant papers of which he handed over to her. He agreed to transfer the house to her sole ownership after the mortgage was paid off. After the mortgage was paid off, he reduced the monthly allowance to GBP 25 per month and refused to transfer the house. The agreement was held binding. In all these cases, it was observed that the court looks at the situation and asks itself whether the arrangement was intended to be binding. A husband's promise to his wife to buy a car followed by the hire-purchase agreement in respect of a car registration, booked in the wife's name--there being a prohibition against parting with possession of a car--was a purely domestic arrangement and not intended to create a legal relationship or give rise to the rights in the car or in the hire-purchase agreement for the benefit of the wife. It was a purely domestic agreement with no intention to execute an equitable assignment or create a trust.56 An arrangement where the owner of the vehicle agreed to carry a co-worker to the place of their work and back for a weekly sum paid does not show that either party intended to enter into a legal contract.57 A contractual relationship may be negated by statements made in jest or anger. The defendant was a director of one company and the plaintiff company, holding shares in this company, resolved, in the defendant's absence, to sell their shares. After a heated discussion, the plaintiff company rescinded the resolution and the defendant stated that he would make good the loss which the plaintiff company might suffer by retaining those shares. He was held not liable on the undertaking. It was not recorded as a contract nor recorded in the minutes of the meeting, and the directors thought he was bound in honour.58 An arrangement which is believed simply to give effect to pre-existing rights is not a contract because the parties had no intention to enter into a new contract.59 The use of deliberately vague language such as in 'letters of comfort' may negate the intention to create a legally binding contract.60 A comfort letter, may for example, be a letter written by a parent company, or sometimes even by a government, to the lender giving comfort to the lender about a loan made to a subsidiary or a public entity. A letter of comfort from a parent company to a lender stating that it was the policy of the parent company to ensure that its subsidiary was 'at all times in a position to meet its liabilities' in respect of a loan made by the lender to the subsidiary, did not have contractual effect as it was merely a statement of present fact regarding the parent company's intentions and was not a contractual promise as to the parent company's future conduct.61 In a commercial transaction, it is not necessary to prove that there was such an intention, the onus being on the party disputing such an intention. To quote Lord Moulton again, 'not only the terms of such contracts but the existence of an animus contrahendi on the part of all the parties to them must be clearly shown'.62 The onus of proving that there was no such intention lies on the person asserting it, and it is a heavy burden.63 In Rose and Frank Co. v. JR Crompton & Bros Ltd., 64 an agreement appointing the plaintiffs as sole agents in the US provided:
This agreement is not entered into nor is this memorandum written as a formal or legal agreement and shall not be subject to legal jurisdiction in the law courts either of the United States or England, but it is only a definite expression and record of the purpose and intention of the three parties concerned to which they each honourably pledge themselves with the fullest confidence based on past business with each other, that it will be carried through by each of the three parties with mutual loyalty and friendly cooperation.
It was held that in social and family matters, an intention of not creating a legal relationship was readily implied, but there was no reason why in business matters also, the parties should not intend to rely on each other's good faith and honour, and to exclude all ideas of settling disputes by any outside intervention. If they clearly express such an intention, there is no reason in public policy why effect should not be given to their intention. The above clause was interpreted by the court of appeal to mean that the clause was not intended to affect their legal relation or be enforceable in a court of law,
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but it was held by Atkin LJ that the order given by the plaintiffs and accepted by the defendants created an enforceable contract; which the House of Lords accepted.65 A letter addressed by the chairman of a holding company to the officers of the subsidiary company to appoint a person to certain post would be merely in the nature of an advice, giving rise to no contractual relationship, and even if treated as direction to the subsidiary company, will not be enforceable at the instance of the person seeking the benefit.66 A statement by a manufacturer in promotional literature of his product being 'fool proof' and 'required no maintenance', was held to be without an intention to be act ed on as express warranties and did not give rise to a contract between the manufacturer and a dealer who had bought the product from an intermediary.67 Intention to create legal relations may be construed from the circumstances of the case. A stranger was a lodger with a family but was treated as a member of the family. The family and the stranger had devised separate answers for a fashion competition and had agreed upon the sharing of expenses and the winnings. One of them won the prize. It was held that the stranger was entitled to share the prize as it could not be said that it did not give rise to a legal right because it was similar to a family matter.68 In Edwards v. Skyways Ltd., 69 the board of an airlines company agreed to pay ex gratia payment to pilots declared redundant. They were also to be paid their share of contribution to the pension fund. The ex gratia payment was equivalent to the company's contribution for each member of the pension and superannuation fund. This agreement was held to be a binding contract which the company could not rescind because of the use of the word 'ex gratia'. The use of the word 'ex gratia' signified that a pre-existing liability was not admitted, but it did not preclude the legal enforceability of the settlement itself. It did not make the promise without legal effect. Proposal 'Subject to Contract' A proposal 'subject to contract' does not create a contract when accepted.70 Such a proposal indicates that the proposer does not intend to enter into a binding contract until a formal agreement has been executed.71 Proposal and Option A contract of option is one whereby the grantor of the option offers to enter into what may be called a 'major' contract with a second person and makes a separate contract to keep his offer open.72 The contract of option may exist either as a separate option contract, or as part of a larger contract such as one of the following: a lease with an option in the lessee (of land) to renew the lease or buy the reversion; a sale with an option of repurchase granted to either the seller or the buyer; a sale with an option for the buyer to make further purchases on similar terms; a service or agency agreement with an option in either party to renew. The effect of the contract of option is to create an irrevocable offer and a power of acceptance, such that it is a breach of the contract of option to revoke it. The exercise of the option may be subject to certain conditions precedent, such as a time limit, or the occurrence of a certain event, or the duration of a major contract of which it forms a part, or the mode in which it may be exercised. An option by its very nature is dependent entirely on the volition of the person granted the option. He may or may not exercise it. It is a privilege or concession. Its exercise cannot be compelled by the person granting the option. It is because of this one sidedness or &uot;unilaterality&uot;, as it were, that the right is strictly construed. The conditions entitling the option holder to exercise the option must be strictly fulfilled.73 A promise to reconvey the property within a specified period at the option of the promisor is an option which becomes enforceable when the offeree exercises his option.74 Whether a statement is an agreement or an option is a matter of construction. Thus, where the seller in a sale of immovable property could buy back the property at a price stipulated in the sale after 5 years, but before 6 years from the sale, the seller could not receive the price before the 6 years, the sale did not contain a term of forfeiting the right of repurchase if payment is not made in time, and the agreement to repurchase could be enforced by either party, the agreement was an agreement of sale, and not a mere option to repurchase.75 A covenant in a sale deed that the purchaser, in the event of
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selling the property in future must sell it to the seller or his heirs for the same price and also the price of any building he might have erected on the property, amounts to a completed contract and not merely a standing offer or option requiring acceptance before it could become a contract.76 76 Anson's Law of Contract, 29th edition, 2010, p. 33. 77 Chitty on Contracts, 28th edn., 1999, p. 90, para 2-002. 78 Ma Pwa Kywe v. Maung Hmat Gyi, AIR 1939 Rang 86. 79 Deep Chandra v. Ruknuddaula Shamsher Jung Nawab Mohammad Sajjad Ali Khan, AIR 1951 All 93. 80 Paal Wilson d' Co. A/S v. Partenreederei Hannah Blumenthal (The Hannah Blumenthal), [1983] 1 All ER 34QBD, [1983] 1 AC 854; Vorster,[1987] 103 LQR 274; De Moor,[1990] 106 LQR 632. 81 Upton-on-Severn Rural District Council v. Powell, [1942] 1 All ER 220. 82 OT Africa Line Ltd. v. Vickers Pic, [1996] 1 Lloyd's Rep 700. 83 The Hannah Blumenthal,[1983] 1 AC 854; as interpreted in Allied Marine Transport Ltd. v. Vale de Rio Doce Navegacao SA, (The Leonidas D), [1985] 2 All ER 796(CA) . 84 Chitty on Contracts, 28th edn., 1999, p. 91, para 2-003. 85 E v. Ram d' Co. v. John Bhatt d' Co. Ltd., AIR 1928 Mad 873. 86 Bowerman v. Association of British Travel Agents Ltd., [1996] CLC 451; noted by McMeel [1997] 113 LQR 47. 87 [2005] 1 SLR 502 (Court of Appeal of Singapore, Supreme Court), the case proceeds on the basis of mistake. 88 Bajinath v. Kshetrahari Sarkar, AIR 1955 Cal 210. 89 Financings Ltd. v. Stimson, [1962] 3 All ER 386(CA) . 90 Spencer v. Harding, (1870) LR 5 CP 561; Clifton v. Palumbo, [1944] 2 All ER 497. 91 Harvela Investments Ltd. v. Royal Trust Co. of Canada (CI) Ltd., [1985] 2 All ER 966. 92 Bigg v. Boyd Gibbins Ltd., [1971] 2 All ER 183, [1971] 1 WLR 913. 93 Hulas Kunwar v. Allahabad Bank Ltd., AIR 1958 Cal 644. 94 Interfolo Picture Library Ltd. v. Stiletto Visual Programmes Ltd., [1988] 1 All ER 348 at 350. 95 I B P Company Ltd. v. Ramashish Prasad Singh, AIR 2006 Pat 91, 2006 (1) BLJR 132. 96 Financings Ltd. v. Stimson, [1962] 3 All ER 386, [1962] 1 WLR 1184. 97 Visweswaradas Gokuldas v. BK Narayan Singh, AIR 1969 SC 1157 at 1159, (1969) 1 SCC 547. 98 Dhondbhat Norharbhat v. Almaram Moreshwar, (1889) ILR 13 Bom 669; Narayanasami Mudaliar v. Lokanibalammal, (1897) 7 Mad LJ 220. 99 Hemp, Yarn and Cordage Co., Re Hindley's case,[1896] 2 Ch 121(CA) . 100 Harvey v. Facey, [1893] AC 552 (a statement of the lowest price at which a landowner is prepared to sell); followed in Col. DI MacPherson v. MN Appanna, AIR 1951 SC 184; Seacarriers A/S v. Aoteraroa International Ltd. (The Barranduna), [1985] 2 Lloyd's Rep 419 (quotation of frieght rates not an offer). 101 Gibson v. Manchester City Council, [1978] 2 All ER 583. 1 Col. DI MacPherson v. MN Appanna, AIR 1951 SC 184, (1951) SCC 161. 2 Surendra Nath Roy v. Kedar Nath Bose, AIR 1936 Cal 87, at 89 (DB). 3 Shyamsunder Ramdas v. Abdul Sattar Haji Abba Abdul Karim, AIR 1938 Nag 186. 4 Matanhella Brothers v. Shri Mahabir Industries Pvt. Ltd., AIR 1970 Pat 91(DB) . 5 M Pooran Singh v. Krishna Bai, AIR 1951 Mad 396.
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6 State Aided Bank of Travancore Ltd. v. Dhrit Ram, AIR 1942 PC 6. 7 Central Bank Yeotmal Ltd. v. Vyankatesh Bapuji, AIR 1949 Nag 286 at 288. 8 Cjayasree v. Commr, Municipal Corpn. Hyderabad, AIR 1994 AP 312. 9 Steel Authority of India Limited v. Salem Stainless Steel Suppliers, AIR 1994 SC 1414, (1994) 1 SCC 274. 10 Ghaziabad Development Authority v. Union of India, AIR 2000 SC 2003, (2000) 6 SCC 113; Adikanda Biswal v. Bhubaneswar Development Authority, AIR 2006 Ori 36. 11 Bank of India v. OP Swaranakar, AIR 2003 SC 858, (2003) 2 SCC 721; HFC Voluntary Retd Employees Welfare Society v. Heavy Engineering Corpn. Ltd., AIR 2006 SC 1420, (2006) 3 SCC 708; Board of Trustees, Vishakhapatnam Port Trust v. T S N Raju, (2006) 7 SCC 664. 12 AM Mylappa Chettiar v. Aga Mirza Mahoamed Shirazee, (1919) 37 Mad LJ 712, 54 IC 550, AIR 1920 Mad 177; Secretary of State v. Madho Ram, (1929) 10 Lah 493 at 502, AIR 1929 Lah 114; Grainger & Son v. Gough, [1896] AC 325(HL) . 13 Firm Durga Parshad Mutsaddi Lal v. Firm Rulia Mal Doogar Mal, AIR 1922 Lah 100. 14 Chatturbhuj Vithaldas Jasani v. Moreshwar Parashram, AIR 1954 SC 236 (whether there was a contract to disqualify a candidate for an election under the Representation of People's Act). 15 Partridge v. Crittenden, [1968] 2 All ER 421, [1968] 1 WLR 1204. 16 Timothy v. Simpson, [1834] 6 C&P 499; Fisher v. Bell, [1960] 3 All ER 731. 17 Pharmaceutical Society of Great Britian v. Boots Cash Chemists (Southern) Ltd., [1953] 1 QB 410, [1953] 1 All ER 482(CA) . 18 Esso Petroleum Ltd. v. Commissioners of Customs and Excise, [1976] 1 All ER 117, [1976] 1 WLR 1. 19 Adikanda Biswal v. Bhubaneswar Development Authority, AIR 2006 Ori 36. 20 Thornton v. Shoe Lane Parking Ltd., [1971] 2 QB 163, [1971] 1 All ER 686(CA) . 21 Gibbons v. Proctor, (1891) 64 LT 594. 22 Carlill v. Carbolic Smoke Ball Co., [1893] 1 QB 256, [1891-94] All ER Rep 127. 23 Joravarmull Champalal v. Jeygopaldas Ghanshamdas, AIR 1922 Mad 486. 24 Harris v. Nickerson, [1873] LR 8 QB 286. 25 SP Consolidated Engineering Co. (P) Ltd. v. Union of India, AIR 1966 Cal 259. 26 Anil Kumar Srivastava v. State of Uttar Pradesh, AIR 2004 SC 4299. 27 U P State Electricity Board v. Goel Electrical Stores, AIR 1977 All 494; but see Harvela Investments Ltd. v. Royal Trust Co. of Canada (CI) Ltd., [1986] AC 207 at 224, [1985] 2 All ER 966 (undertaking to accept the highest offer). 28 Harvela Investments Ltd. v. Royal Trust Co. of Canada (CI) Ltd., [1986] AC 207 at 224, [1985] 2 All ER 966. 29 Tata Cellular v. Union of India, AIR 1996 SC 11, (1994) 6 SCC 651; see Section 10 below: 'Public Contracts'. 30 (1918) 87 LJ KB 677 at 678-79. 31 Great Northern Railway Co. v. Witham, (1873) LR 9 CP 16; Percival Ltd. v. LCC Asylums and Mental Deficiency Committee, (1918) 87 LJ KB 677; Chatturbhuj Vithaldas Jasani v. Moreshwar Parashram, AIR 1954 SC 236; Union of India v. Maddala Thathaiah, AIR 1966 SC 1724; Manickam Chettiar v. State of Madras, AIR 1971 Mad 221. 32 Bengal Coal Co. Ltd. v. Homee Wadia & Co., (1899) 24 Bom 97 following Great Northern Railway Co. v. Witham, (1973) LR 9 CP 16; Joravarmull Champalal v. Jeygopaldas Ghanshamdas, (1922) 43 Mad LJ 132, AIR 1922 Mad 486; Chaturbhuj Vithaldas v. Moreshwar Parashram, AIR 1954 SC 236. 33 R v. Demers, [1900] AC 103 at 108, [1895-99] All ER Rep 1325; followed in Secretary of State v. Madho Ram, (1929) 10 Lah 493, AIR 1929 Lah 114. 34 Dresser Rand S A v. Bindal Agro Chem Ltd., AIR 2006 SC 871, (2006) 1 SCC 751. 35 Dantu Bhaskarrao v. CVK Rao, AIR 1964 AP 77 (a case under the People's Representation Act 1951); distinguishing N Satyanathan v. K Subramanyan, [1955] 2 SCR 83, AIR 1955 SC 459.
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36 Chand Kunwar v. State of Rajasthan, AIR 1981 Raj 23. 37 Coffee Board Bangalore v. Janab Dada Haji Ibrahim Halari, AIR 1966 Mys 118; Scammell v. Ouston, [1941] AC 251 at 255, 269, [1941] 1 All ER 14; May & Butcher v. R, [1934] 2 KB 17, [1929] All ER Rep 679. 38 Pipraich Sugar Mills Ltd. v. Pipraich Sugar Mills Mazdoor Union, AIR 1957 SC 95 at 102. 39 Coffee Board Bangalore v. Janab Dada Haji Ibrahim Halari, AIR 1966 Mys 118. 40 Ratan Lal Gattani v. Harcharan Lal, AIR 1947 All 337. 41 KS Thangal v. State of Kerala, AIR 1968 Ker 197. 42 Gorakh Nand Yadav v. District Magistrate, Gorakhpur, AIR 1992 All 340 (the rules required the amount in words and in figures). 43 BDA Ltd. v. State of Uttar Pradesh, AIR 1995 All 277. 44 See Section 7 below: 'Mirror Rule'; 17A Am Jur 2d, Contracts, 90-91; quoted with approval in D Wren International Ltd. v. Engineers India Ltd., AIR 1996 Cal 424. 45 Clarke v. Earl of Dunraven, [1897] AC 59 HL; Shanklin Pier Ltd. v. Detel Products Ltd., [1951] 2 All ER 471, (1951) 2 KB 854 (the parties to a collateral contract need not be same as those to the 'main' contract). 46 The judgments are not clear whether the contract between A and B was complete as soon as both had sent in the prescribed entry to the club secretary, or only when they actually sailed against one another. 47 Sanwarmal Goenka v. Soumyendra Chandra Gooptu, AIR 1981 Cal 37 at 41 (DB). 48 See Sections 3, 4 below for rules regarding communication. 49 Chitty on Contracts, 28th edn., p. 155, para 2-145; Zakhem International Construction Ltd. v. Nippon Kohan KK, [1987] 2 Lloyd's Rep 596. 50 Balfour v. Balfour, [1919] 2 KB 571, [1918-19] All ER Rep 860. 51 Rose d' Frank Co. v. J R Crompton d' Bros Ltd., [1923] 2 KB 261(CA) ; on appeal [1925] AC 445, [1924] All ER Rep 245(HL) ; Edwards v. Skyways Ltd., (1964) 1 WLR 349 at 355, [1964] 1 All ER 494 at 500-01; Appleson v. H Littlewood Ltd., [1939] 1 All ER 464 (condition in a coupon in a football pool); Jones v. Vernons Pools Ltd., [1938] 2 All ER 626. 52 Gore v. Van der Lann, [1967] 1 All ER 360; distinguishing Wilkie v. London Passenger Transport Board, [1947] 1 All ER 258. 53 Carlill v. Carbolic Smoke Ball Co., [1893] 1 QB 256, [1891-1894] All ER Rep 127. 54 [1919] 2 KB 571, [1918-19] All ER Rep 860(CA) ; Pettitt v. Pettitt, [1970] AC 777 at 816, [1969] 2 All ER 385: husband can be wife's tenant--where it has been said that the facts of Balfour's case 'stretched the doctrine to its limits'--but there are many instances of its application--eg Gage v. King, [1961] 1 QB 188, [1960] 3 All ER 62; Spellman v. Spellman, [1961] 1 WLR 921, [1961] 2 All ER 498; cf Re Beaumont (decd), Martin v. Midland Bank Trust Co. Ltd., [1980] Ch 443 at 453, [1980] 1 All ER 266. 55 Merritt v. Merritt, [1970] 2 All ER 760(CA) ; see also Jones v. Padavatton, [1969] 2 All ER 616(CA) (a case by a mother against a daughter for possession of a house purchased out of mother's money); Gould v. Gould, [1969] 3 All ER 728 (where the husband had promised to pay 12 a week 'as long as I can manage it', was held not to be binding); Re Windle,[1975] 1 WLR 1628, [1975] 3 All ER 987; Tanner v. Tanner, [1975] 1 WLR 1346, [1975] 3 All ER 776 (where the parties were not married); Horrocks v. Forray, [1976] 1 WLR 230, [1976] 1 All ER 737 (where there was no such reliance and hence, no contract); for the arrangement being enforceable by way of constructive trust: Eves v. Eves, [1975] 1 WLR 1338 at 1342, [1975] 3 All ER 768; Grant v. Edwards, [1986] Ch 638, [1986] 2 All ER 426; Lloyd's Bank plc v. Rosset, [1988] 3 All ER 915; Burns v. Burns, [1984] Ch 317, [1984] 1 All ER 244. 56 Spellman v. Spellman, [1961] 1 WLR 921 at 926, 928, [1961] 2 All ER 498(CA), Danckwerts LJ contra; Balfour v. Balfour, [1919] 2 KB 571, [1918-19] All ER Rep 860(CA) ; but see Nalini v. Somasundaram, AIR 1964 Mad 52. 57 Coward v. Motor Insurers Bureau, [1962] 2 WLR 663 at 672, [1962] 1 All ER 531. 58 Licences Insurance Co. v. Lawson, (1896) 12 TLR 501. 59 See The Aramis, [1989] 1 Lloyd's Rep 213; Harvela Investments Ltd. v. Royal Trust Co. of Canada (CI) Ltd., [1986] AC 207, [1985] 2 All ER 966; but see Furness Withy (Australia) Pty Ltd. v. Metal Distributors (UK) Ltd. (The Amarozia), [1990] 1 Lloyd's Rep 236 (new contract intended); British Steel Corp. v. Cleverland Bridge and Engineering Co. Ltd., [1984] 1 All ER 504; Wilson Smithett d' Co. (Sugar) Ltd. v. Bangladesh Sugar Industries Ltd., [1986] 1 Lloyd's Rep 378 (letter of intent held to be an acceptance); Kleinwort Benson Ltd. v. Malaysian Mining Corpn. Bhd, [1989] 1 All ER 785
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(letters of comfort). 60 But see Associated British Ports v. Ferryways NV, [2009] EWCA Civ 189 (can be binding if so intended on proper construction of the document as a whole). 61 Kleinwort Benson Ltd. v. Malayasia Mining Corpn. Bhd, [1989] 1 All ER 785(CA) ; reversing decision of Hirst J. in [1988] 1 All ER 714. United Breweries (Holding) Ltd v. Karnataka State Industrial Investment, AIR 2012 Kant 65. 62 Heilbut Symons d' Co. v. Buckleton, [1913] AC 30, 47 [1911-13] All ER Rep 83; followed by the House of Lords in LBA v. EMf Electronics Ltd., [1980] 14 Build LR 1; cf Strover v. Hasrrington, [1988] 1 All ER 769, 779; Hispanica de Petroleos SA v. Vencedora Oceanica Nevagacion SA (The Kapetan Markos NL), [1981] 2 Lloyd's Rep 323. 63 GAFLAC v. Tanter (The Zephyr), [1985] 2 Lloyd's Rep 529 at 536; Yani Haryanto v. ED and F Man (Sugar) Ltd., [1986] 2 Lloyd's Rep 44; Edwards v. Skyways Ltd., (1964) 1 WLR 349, [1964] 1 All ER 494. 64 [1923] 2 KB 261 (CA), on appeal [1925] AC 445, [1924] All ER Rep 245 at 250(HL) . 65 Rose and Frank Co. v. JR Crompton & Bros Ltd., [1923] 2 KB 261(CA) ; on appeal [1925] AC 445, [1924] All ER Rep 245(HL) . 66 Nandganj Sihori Sugar Co. Ltd. v. Badri Nath Dixit, AIR 1991 SC 1525 per Thommen J. at 1528. 67 Lambert v. Lewis, [1982] AC 225 at 262, [1981] 1 All ER 1185. 68 Simpkins v. Pays, [1955] 1 WLR 975, [1955] 3 All ER 10. 69 [1964] 1 WLR 349, [1964] 1 All ER 494. 70 Bennett, Walden & Co. v. Wood, [1950] 2 All ER 134; Confetti Records v. Warner Music UK Ltd., [2003] EWHC 1274(Ch) . 71 See also Section 7 below, under the heading: 'Acceptance Subject to Formal Document'. 72 See generally Halsbury's Laws of England, Vol. 9(1), 4th edn. Reissue, 30 June 1998, 'CONTRACTS', para 640. 73 Shanmugam Pillai v. Annalakshmi Ammal, AIR 1950 FC 38; K Simrathmull v. Nanjalingiah Gowder, AIR 1963 SC 1182. 74 Shree Ram v. Ratanlal, AIR 1965 All 83. 75 V. Pechimuthu v. Gowrammal, AIR 2001 SC 2446, (2001) 7 SCC 617 76 Venkatachalam Pillai v. Sethuram Rao, AIR 1933 Mad 322(FB) .
Clause (b): Acceptance and 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.
Acceptance An acceptance is a final and unqualified expression of assent to the terms of an offer. Section 2(b) defines acceptance as assent to the proposal by the person to whom the proposal has been made. An unqualified, unconditional acceptance of the offer creates a contract when communicated to the offeror (see Section 7). Under Section 3 an acceptance may be communicated by any act or omission by which the offeree intends to communicate or has the effect of communicating it. Under Section 4, its communication is complete as against the proposer when it is put into a course of transmission to him so as to be out of the reach of the acceptor, and as against the acceptor, when it reaches the proposer. Section 5 provides for revocation of acceptance. Under Section 7, acceptance must be absolute and
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unconditional, and of all the terms of the proposal, and in the manner, if any, prescribed by the proposal. Acceptance may be express or implied (Section 9). Intention to Accept The assent may be by express words or by positive conduct.77 A bank received margin money from a customer for issue of bank guarantee. The bank suggested that in lieu of charges of other services, the customer should deposit an amount. The customer stated inability, but offered to keep its trade surplus with the bank. The bank did not respond, but issued the bank guarantee. It was held that the bank was not entitled to claim charges, because the customer's proposal to keep trade surplus was accepted by the bank by issuing the bank guarantee.78 The proposal of C in sending to W a music track for incorporation into W's album and an invoice, stood accepted when W produced the album incurring expenses.79 Seeking clarifications about the proposal is neither an acceptance nor a counter-proposal,80 nor does mere acknowledgment of offer amount to acceptance. A letter communicating 'without engagement of any kind' that the intent of the offeror had been duly placed, did not create a binding contract,81 nor a letter stating &uot;will inform within 15 days&uot;.82 The objective test of agreement also applies to an acceptance.83 A letter of intent for supply of sugar specifying amount, price and shipping details was held to be an acceptance.84 An acceptance of a proposal by a company, subject to ratification by its managing director who was away at the time, became a concluded contract on the company writing that the managing director would be arriving to sign the agreement; the requirement of the formal document was held not to apply.85 Acceptance of security deposit from a tenderer and issue of purchase order to him concluded the contract between the board and the tenderer, although the formal written contract had not been executed.86 Government orders signed by authorised officers of the government and containing terms of the loan were sufficient to create the loan, even though the loan agreement was not specifically signed on behalf of the government.87 A buyer in an auction sale was liable to pay taxes where the advertisement for auction sale and the acceptance of the bid stated that the buyer will bear all statutory liabilities.88 Letters of Intent A letter of intent merely indicates a party's intention to enter into a contract with the other party in future. A letter of intent is not intended to bind either party ultimately to enter into any contract.89 However, it might be construed as a letter of acceptance if such intention is evident from its terms. The question whether the letter of intent is merely an expression of an intention to place an order in future or whether it is a final acceptance of the offer thereby leading to a contract, is a matter that has to be decided with reference to the terms of the letter. Parties may expressly negative contractual intention, but where this is not so, the court can hold parties bound by the document, especially when parties have acted on it, or have spent money on its reliance.90 A letter of intent, for example, might merely provide that the offer shall be left open.91 Who can Accept There cannot be an acceptance of a proposal which has not come to the knowledge of the offeree. In Lalman Shukla v. Gauri Dutt, 92 the plaintiff was in the defendant's service as a munim. The defendant's nephew absconded, and the plaintiff volunteered his services to search for the missing boy. In his absence, the defendant issued handbills offering a reward of Rs 501 to anyone who might find the boy. The plaintiff traced him and claimed the reward. The plaintiff did not know the handbills when he found the boy. It was held that the plaintiff was not entitled to the reward. It has been held that contractual obligations do not arise if services are rendered which in fact fulfill the terms of an offer, but are performed in ignorance of the fact that the offer exists. There cannot be assent without knowledge of the offer and reliance upon it.93 But it has been held that allotment of shares to the
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nominee of a member who has renounced his entitlement concludes the contract between the company and the nominee, though the proposal was made to the member.94 The person accepting on behalf of a legal person must have the authority to accept.95 Communication of Acceptance An acceptance must be communicated to the offeror. This is indicated by the use of the word 'signifies' in the section. Mere mental resolve,96 or written acceptance on a piece of paper and keeping it,97 or inter-departmental communication proposing acceptance,98 or mere resolution of acceptance by a company1 or other body2 or a corporation3 would not result into a contract, unless these are communicated to the proposer. In Robophone Facilities Ltd v. Blank, 4 Lord Denning discussed the effect of a clause providing that the agreement would become binding on the acceptance thereof by signature. He held that notwithstanding this terminology:
...signing is not enough.... The plaintiffs would be able to keep the form in their office unsigned, and then play fast and loose as they pleased. The defendant would not know whether there was a contract binding on them.... Just as mental acceptance is not enough, nor is internal acceptance within the plaintiff's office.
An acceptance would be effective without communication if the offeror has, expressly or impliedly, waived the requirement of communication of acceptance. Performance of the condition of an offer would amount to acceptance.5 There is no contract where acceptance is communicated, not to the proposer, but to one's own agent.6 Promise Upon acceptance, the proposal becomes a promise. A liability under contract cannot arise unless the contract has been concluded. Whether a contract has been concluded or not is a question of fact to be determined in each case by considering all relevant facts and circumstances, and does not depend on the parties' or solicitors' description of the situation either as a contract or as negotiation.7 A contract happens when the acceptance is signified, the question of payment of promised price is a question not of formation, but of performance.8 A proposer can neither claim that his proposal must be considered by the offeree, nor can there be a claim for any compensation unless the proposal is accepted. An employee is entitled to voluntary retirement only if his application is accepted by the employer.9 An applicant for land or house in a scheme of housing and development becomes entitled to it only after his application is accepted by the authority promoting the scheme.10 However, rights may be conferred by statute in respect of relationships falling short of being promises. For example, an applicant for allotment of a building site, or a flat, in a housing scheme of a development authority is entitled to relief under the provisions of the Consumer Protection Act, 1986.11A person who has hired a 'service' under that Act includes 'potential users', i.e., those who are capable of using the service.12 Contract as a Promise A promise defined in clause (b) of Section 2 is not the same thing as an agreement under clause (e). A contract has been defined as a promise or a set of promises which the law will enforce.13 This clause read with clauses (e), (h) and Section 10, indicates that a promise is an agreement, and is enforceable when it satisfies the conditions given in Section 10, when it becomes enforceable by law. Reading these together, a promise becomes a contract when it is supported by consideration. One
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view is also that since by definition, the law of contracts is confined to promises, it is concerned with 'exchanges that relate to the future', and that where no such promise is given, there is no contract.14 The acceptance of a proposal brings into existence a promise which, even without consideration, is sufficient for application of Section 63.15 The definition of consideration in the Act also supports the view that a contract is a promise. If A agrees to sell to B a piece of land for Rs 20,000/-, A's promise to convey the land is the consideration for B's promise to pay the price, and B's promise to pay the price is the consideration for A's promise to convey the land. There is no consideration of the agreement between them as a whole. The requirement of consideration as an essential element for an enforceable contract refers to consideration for a 'promise'16 and not for an agreement, and a promise can be enforced if it is supported by consideration. So also the rule that a minor cannot be liable under a contract, but can be a beneficiary, can be explained with reference to contract as a promise; for he is not competent to make or give a promise, but is not incompetent to be a promisee. 77 Gaddar Mal v. Tata Industrial Bank Ltd., AIR 1927 All 407 at 410; Bhagwan Das v. Shiv Dial, AIR 1914 Lah 436 at 438. 78 Allahabad Bank v. MECON Doranda Ranchi, AIR 2005 Jhar 54. 79 Confetti Records v. Warner Music UK Ltd., [2003] EWHC 1274(Ch) (although original offer was 'subject to contract', conduct of making album showed acceptance). 80 U P State Electricity Board v. Goel Electric Stores, AIR 1977 All 494; Sindhu Resettlement Corporation Ltd v. Shree Om Commercial Coop Society Ltd, App from Order 240/2012 decided on 4 Mar 2013 (Guj). 81 Kilburn Engg Ltd. v. Oil and Natural Gas Corpn. Ltd., AIR 2000 Bom 405 (intimation stating 'award of contract likely to be issued on ...' was no acceptance). 82 Biswanath Shaw v. Central Bank of India, AIR 2009 Cal 243. 83 See above--'The Objective Test of Intention'. 84 Wilson Smithett & Co. (Sugar) Ltd. v. Bangladesh Sugar Industries Ltd., [1986] 1 Lloyd's Rep 378. 85 Municipal Committee Harda v. Harda Electric Supply Co. (Private) Ltd., AIR 1964 MP 101 at 106. 86 Punjab State Electricity Board v. Abnash Textile Trading Agencies, AIR 1986 P&H 323; See Section 7 below: 'Acceptance Subject to Formal Document'. 87 State of UP v. Raza Buland Sugar Co. Ltd., AIR 2006 All 61. 88 Plato Industries Ltd v. State of HP, AIR 2011 HP 120. 89 Dresser Rand S A v. Bindal Agro Chem Ltd., AIR 2006 SC 871, (2006) 1 SCC 751; Rajasthan Co-op Dairy Federation Ltd. v. Maha Laxmi Mingrate Marketing Service Pvt. Ltd., (1996) 10 SCC 405; 90 Dresser Rand S A v. Bindal Agro Chem Ltd., AIR 2006 SC 871, (2006) 1 SCC 751 at 773. 91 Ibid. 92 (1913) 11 All LJ 489; Fitch v. Snedaker, (1868) 38 NY 248; Crown v. Evan Clarke, (1927) 40 CLR 227. 93 Crown v. Evan Clarke, (1927) 40 CLR 227 (High Court of Australia). 94 H Ezekiel v. Carew & Co. Ltd., AIR 1938 Cal 423. 95 Gammon India Limited v. Punjab State Electricity Board, AIR 1997 P&H 43 (fax by an officer is no acceptance where authority to accept with the Board); State of Madhya Pradesh v. Firm Gobardhan Dass Kailash Nath, AIR 1973 SC 1164 at 1166 (person accepting had no authority to waive condition of deposit); Subramania Mudaliar v. Ammapet Cooperative Weavers Production and Sales Society, AIR 1961 Mad 289 (communication must be by the secretary of the society, where its regulations so provide); Powell v. Lee, (1908) 99 LT 284, 24 TLR 606 ; Life Insurance Corpn. of India v. Prasanna Devaraj, AIR 1995 Ker 88 (receipt of premium issued by divisional manager when only central office has power of accepting does not conclude the contract). 96 T Linga Gowder v. State of Madras, AIR 1971 Mad 28.
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97 Brogden v. Metropolitan Railway Co., (1877) 2 App Cas 666; see also Galaxy Energy International Ltd v. Murco Petroleum Ltd, [2013] EVVHC 3720(Comm), [2013] All ER 306(D) (Nov) . 98 Gajendra Singh v. Nagarpalika Nigam Gwalior, AIR 1996 MP 10; Kamalabai Jageshwar Joshi v. State of Maharashtra, AIR 1996 SC 981, (1996) 1 SCC 669. 1 Best's case, (1865) 2 De GJ & Sm 650, 34 LJ Ch 523; cf Gunn's case, (1867) LR 3 Ch App 40; Rani Huzur Ara Begum v. Deputy Commr. Gonda, AIR 1941 Oudh 529 (accepance of a compromise). 2 Rani Huzur Ara Begum v. Deputy Commissioner Gonda, AIR 1941 Oudh 529 (resolution by the Court of Wards to compromise on terms arrived at after discussion); Central Bank Yeotmal Ltd. v. Vyankatesh Bapuji, AIR 1949 Nag 286; Gajendra Singh v. Nagarpalika Nigam Gwalior, AIR 1996 MP 10 (resolution of a municipal corporation). 3 Gajendra Singh v. Nagarpalika Nigam Gwalior, AIR 1996 MP 10 (resolution and interdepartmental communication). 4 [1966] 3 All ER 128 at 132; see also Hubli-Dharwad Municipal Corporation v. Chandrashekar M Shetty, AIR 2009 Kant 41. 5 See Section 8 below. 6 National Savings Bank Association, Hebb's case (1867) LR 4 Eq 9; Kennedy v. Thomassen, [1929] 1 Ch 426, [1928] All ER Rep 525; but see Life Insurance Corporation of India Machilipatnam v. Vankadaru Koteswaramma, AIR 2003 AP 153 (this case can be explained with reference to the conduct of one party indicating its acceptance of existence of contract). 7 Gastho Behari Sirkar v. Surs' Estates Ltd., AIR 1960 Cal 752. 8 Claude-Lila Parulekar v. Sakal Papers Pvt. Ltd., AIR 2005 SC 4074, (2005) 11 SCC 73. 9 National Textile Corporation (MP) Ltd. v. M R Jhadav, AIR 2008 SC 2449, (2008) 7 SCC 29. 10 Adikanda Biswal v. Bhubaneswar Development Authority, AIR 2006 Ori 36; MHADA v. MSHRC, AIR 2010 Bom 104 (allotment letter). 11 The Consumer Protection Act, 1986, Section 2 (i). 12 Lucknow Development Authority v. MK Gupta, AIR 1994 SC 787. 13 Pollock, Principles of Contract, 13th edn., 1950; the American Restatement 2d 1 defines contract as: ...a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognises a duty. 14 Farnsworth, Contracts, 3rd edn., 1980, p. 4. 15 Sabaldas Janjimal v. Sobhokhan, AIR 1948 Sind 91; but see Abaji Sitaram Modak v. Trimbak Municipality, (1903) 28 Bom 66, (1903-04) ILR 27-28 Bom 472 (consideration is not necessary for an 'agreement'). 16 See Section 2 clause (d).
Clause (c): Promisor and Promisee
The person making the proposal is called the 'promisor,' and the person accepting the proposal is called the 'promisee'.
Person The use of the word 'person' in this clause indicates that the 'person' must be given an extended sense to include governments.17 The promisee is the person who is a party to the contract. The heirs of a promisee or the assignee of a promisee cannot claim to be promisees themselves, simply on the basis that they themselves could claim what the promisee could claim.18 Two Parties
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A contract envisages two parties, a promisor and a promisee. It can only be bilateral and the same party cannot be a party on both sides. No man can be under any obligation to himself.19For the same reason, a person cannot form a partnership while act ing in different capacities.20 Hence, there cannot be a contract between A on one side and A and B on the other, and hence, a partner cannot be an employee of his own firm.21 17 State of Uttar Pradesh v. Kanhaiya Lal Mukund Lal Sarraf, AIR 1956 All 383. 18 Alluri China Bapanna v. Muttangi Jaggiah, AIR 1939 Mad 818. 19 Nabendra Nath Basak v. Shasabindoo Nath Basak, AIR 1941 Cal 595. 20 Meenakshi Achi v. PSM Subramanian Chettiar, AIR 1957 Mad 8 at 12. 21 S Magnus v. Commr. of Income Tax, AIR 1958 Bom 467, [1958] 33 ITR 538 ; but see Section 5 of the Transfer of Property Act, 1882, under which a person may transfer property to himself or to himself and another living person.
Clause (d): Consideration
When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.
The section defines what is consideration for a promise. It is an act, forbearance or promise done or given at the request of the promisor by the promisee or any other person. While this section defines consideration, the requirement of consideration as an essential element of contract is mentioned only in Section 25 of the Act ; which renders an agreement without consideration void, subject to exceptions therein.22 Doctrine of Consideration The purpose of the doctrine of consideration is to put some legal limits on enforceability of agreements and to establish which promises should be legally enforceable. It limits the freedom of individuals to make binding legal promises; only those promises which are supported by consideration are enforceable, others are not binding, even if the promisor intends to bind himself by the promise.23 Among the limitations on the enforcement of promises, the requirement of consideration is described as the most fundamental.24 It ensures that the parties have decided to contract after deliberation, and not on impulse. It is an index of the seriousness of the parties to be bound by the bargain. Consideration also serves an evidential and formal function. The requirement of consideration is peculiar to the countries modelled on the common law system. The continental systems do not require consideration as an element of a contract, though most insist on some formality for gifts or donative promises; here contractual obligation can arise when the parties intend to create legal relations. The UNIDROIT Principles dispense with the requirement of consideration in relation to conclusion, modification or termination of contracts,25 because in commercial dealings, obligations are almost always undertaken by both the parties, and the requirement of consideration is of minimal importance.26 But as Lord Denning LJ has said in Combe v. Combe :27
The doctrine of consideration is too firmly fixed to be thrown by a side wind. Its ill effects have been largely
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mitigated of late, but it still remains a cardinal necessity of the formation of a contract, although not its modification or discharge.
Definition Consideration is defined as:
A valuable consideration in the sense of the law, may consist either in some right, interest, profit, or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered, or undertaken by the other.28
This definition requires that something of value must be given, and that this can either be a benefit to the promisor or some detriment to the promisee. The Supreme Court compared this definition with Section 2(d) of this Act, and approved as being practically the same. It held that the word 'valuable' was implied in our law, and could be negative or positive.29 Another definition approved extensively is the one given by Sir Frederick Pollock:30
An act or forbearance of the one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.
This definition emphasizes the notion of bargain upon which the English law of contract may be said to be based, and has been approved by the House of Lords,31 and found considerable favour with extra-judicial writers, though it may not give help in determining whether consideration exists in a given set of facts.32 So it is the price of a promise, a return or quid pro quo for a promise made.33 The term 'consideration' must be distinguished from the act of payment of agreed price. The act of payment of price (or its non-payment) is the performance of a promise already agreed. Consideration can exist or not exist, and must be reckoned, with reference to the making of a contract. If a promise to pay the price is the consideration for the promise, payment of price is performance of that promise and not its consideration. Not paying price agreed is non-performance or breach, and not lack of consideration.34 Promise and Consideration The benefit or detriment relates to each promise looked at separately, as is indicated in the definition in Section 2(d). The promisee who seeks to enforce the promise (or under the Indian law, some other person) must have given something of value (detriment to himself or benefit to promisor) at the request of the promisor. Law is therefore, concerned with consideration for a promise, and not consideration for a contract.35 Apart from exceptions in the English law of contracts made by deed; and in the Indian law of those given in Section 25, a promise will not be enforced unless it was given for value, that is, not necessarily for an adequate value, but for something which the law can deem of some value, and the parties treat as such by making it a subject of bargain. The value so received in exchange for the promise may consist in present performance, for example, the delivery of goods, or it may itself be the promise of a performance in the future. These elements of 'act, abstinence and promise'36 are embodied in the definition of consideration by clause (d) of the section. This section purports to be an interpretation clause, but is really a substantive enactment. Only in Section 25, after partial anticipation in Sections 10, 23 and 24, does it appear for what purpose the notion and definition of
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consideration have been introduced. Detriment and Benefit Consideration for a promise may consist in either some benefit conferred on the promisor, or detriment suffered by the promisee,37 or both. The benefit conferred on the promisor may be any right, interest, profit or benefit given to him at his request. The detriment suffered by the promisee may be any forbearance, detriment, loss or responsibility suffered or undertaken by the promisee (or under the Indian law, any other person) at the request of the promisor. In many agreements, both may correspond in the same contract. A buyer's promise to buy goods is supported both by a detriment to him and benefit to the seller. However, either of the two is sufficient. Detriment suffered by the promisee is always good consideration for it is 'the price for which the promise is bought';38 detriment to the promisee is of essence of the doctrine, and 'benefit to the promisor is, when it exists, merely an accident.39 In a shipbuilding contract, the owner agreed to pay the price in US dollars in five installments. After, the payment of the first installment, the dollar was devalued and the builder demanded a corresponding increase in price threatening otherwise to terminate the contract. The builders gave a letter of credit as security for repayment in the price. The owner agreed to pay the increase demanded, without protest, and the builders agreed to increase the amount of the letter of credit. It was held that the agreement to carry out the contractual duty to build was no consideration, but the increase in the letter of credit was, it being additional obligation or liability to increased detriment.40 A detriment to the promisee is good consideration even though there is no benefit to the promisor.41 The detriment may consist of any damage or any suspension or forbearance of the plaintiff's right or any possibility of a loss occasioned to him by the promise of the other.42 Alteration of position by one person constitutes a good consideration for a promise on the faith of which he has so altered the position.43 Giving up the right to manage their own estate, for agreeing to common management, was sufficient consideration.44 A bank seeking to enforce a guarantee has suffered a detriment, though it has conferred no benefit (factual) upon the surety,45 but in fact conferred benefit on a third person, the principal debtor. Promises have been also enforced where there has been no detriment to the promisee,46 but has secured some benefit including 'practical' benefit to the promisor.47 The terms 'benefit' and 'detriment' have been used by courts in two senses:
(i) (ii)
act which has some value; or such acts, the performance of which is not already legally due from the promisee.
The former stresses the factual benefit48 or sufferance, while in the case of the latter, the factual benefit is disregarded, and legal benefit or detriment is considered. In the latter sense, a promisee has provided the consideration only if he has done or promised to do that which he was not legally bound to do,49 irrespective of whether this confers factual benefit on the promisor. The consideration may be of benefit to the promisor or to a third party or may be of no apparent benefit to anybody but merely a detriment to a third party.50 Detriment to the promisee suffices even though the promisor does not benefit, e.g., where A guarantees B's bank overdraft and the promisee bank suffer detriment by advancing money to B.51 Anything done, or any promise made, for the benefit of the principal debtor may be sufficient consideration to the surety for giving the guarantee.52 Reciprocity of obligations is not of the essence of consideration and an act done or forbearance made in return for a unilateral promise is sufficient consideration to support the promise.53 'At the desire of the Promisor' The act constituting the consideration must have been done at the desire or request of the promisor.54 This indicates the 'return' element of consideration. Contracting a marriage in consideration of a
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promise of a settlement was enforceable.55 A promise to compensate for a past voluntary act is also enforceable as an exception under Section 25(2) of the Act, if the voluntary act is done, 'for the promisor'. If the promisee has acted not at the desire of the promisor, but in reliance of the promise, there is no consideration of the promise.56 A dispute arose between the original owners of land and their assignees of underground coal and mining rights about the right to receive rent from the sub-lessee of the mining rights. The sub-lessee agreed to pay rent to the assignees, on the latter's executing an indemnity bond. The payment being made at the desire of the assignees, there was a lawful consideration and the contract was held valid.57 An act done at the desire of a third party is not consideration. Thus, a promise by the defendants to pay to the plaintiff a commission on articles sold through their agency in a market, which was constructed by the plaintiff, not at the desire of the defendants, but of the Collector of the place, was without consideration and therefore, void.58 It could also not be supported under Section 25(2) which enacts that an agreement without consideration is void, unless it is a promise to compensate a person who has already voluntarily done something for the promisor. The expression 'voluntarily' appears to be used in contradistinction to the words 'at the desire of the promisor'.59 'Need not benefit the Promisor' The consideration may be of benefit to the promisor or to a third party or may be of no apparent benefit to anybody but merely a detriment to the promisee.60 Consideration may be provided either in the form of detriment suffered by the promisee or benefit provided to the promisor. Detriment to the promisee suffices even if the promisor does not benefit.61 Consideration which moves from the promisee, or any other person, need not move to the promisor.62 There is nothing to show in the definition of 'consideration' in Section 2(d) of the Contract Act, that the benefit of any act or abstinence as contained in that section must directly go to the promisor. The promisee may provide consideration by conferring a benefit on a third party at the promisor's request. A contract could arise even though the promise for doing or abstaining from doing something was for the benefit of a third party.63 Where goods are bought and paid for by the use of a cheque or credit card, the issuer of the cheque makes a promise to the supplier of the goods that the cheque will be honoured or that the supplier will be paid; and the supplier provides consideration for this promise by supplying the goods to the customer. In the case of a credit card transaction, there may also be consideration moving from the issuer of the card in the form of the discount allowed to him by the person supplying goods or services.64 Consideration moving to one or some of the joint promisors is sufficient consideration to support a promise to pay made by the others.65 Four persons had executed a mortgage, but the defence raised on behalf of two of them was that they had not received any consideration thereunder. The court relied upon Section 2(d) of the Contract Act and held that all the mortgagors were equally liable by the transaction although two of them might not have benefited by the transaction.66 Thus, co-executants of a promissory note cannot escape liability on the ground that the other executant alone had received the amount of consideration under the pro-note.67 The term 'consideration' in the Gift Tax Act, 195868 was construed according to its definition in Section 2(d) of the Contract Act as not requiring that the benefit of act or abstinence must directly go to the promisor. A contract could arise even though the promisee does or abstains from doing something for the benefit of a third party (in that case, a limited company of which the assessees were shareholders and directors), and the promisor could treat the benefit to the company as a consideration to them.69 Promissory Estoppel and Consideration The doctrine of promissory estoppel70 is a departure from the doctrine of consideration. A promise in future creates an estoppel, the principle being that if a promise is made in the expectation, that it would be acted upon and it was in fact act ed upon, the party making the promise will not be allowed to back out of it and the courts should insist that the promise so made must be honoured.71 The
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principle of promissory estoppel has been stated in India thus:
Where one party has by his words or conduct made to the other a clear and unequivocal promise which is intended to create legal relations or affect a legal relationship to arise in the future, knowing or intending that it would be acted upon by the other party to whom the promise is made and it is in fact so act ed upon by the other party, the promise would be binding on the party making it and he would not be entitled to go back upon it, if it would be inequitable to allow him to do so having regard to the dealings which have taken place between the parties, and this would be so irrespective of whether there is any pre-existing relationship between the parties or not.72
The American Law Institute's Restatement of the Law of Contracts in Article 90 73 states:
...a promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such act ion or forbearance is binding if injustice can be avoided only by enforcement of the promise.
The remedy granted for breach may be limited when justice so requires. Promissory estoppel differs fundamentally from traditional contract theory because it protects reliance, not bargains. Developed to prevent injustice, this doctrine renders a promise binding if the promisee has suffered some detriment in reliance on the promise, even though the detriment was not required as consideration, i.e., the reliance or detriment has not been placed or suffered 'at the request of the promisor'. In English law, promissory estoppel has been regarded as a passive equity, and allowed only as a defence. Allowing it to be used as a cause of action signifies seriously diluting the rule requiring consideration to support a contractual obligation. 'Promise to Subscribe' Questions may sometimes arise as to whether the thing done by the plaintiff, claiming to do so under a promise, was in fact done at the desire of the promisor. The Commissioners of the Howrah Municipality constituted themselves, trustees by deed for the purpose of building a town hall in Howrah and for inviting and collecting subscriptions for that purpose. The defendant signed his name in the subscription book for an amount of Rs 100. As soon as the subscriptions allowed, the Commissioners, including the plaintiff, who was also Vice-Chairman of the municipality, entered into a contract with a contractor for the purpose of building the town hall. The defendant did not pay his subscription, a suit was brought against him by the plaintiff on behalf of himself and all the other commissioners who had rendered themselves liable to the contractor. It was held that the suit would lie, as there was a contract for good consideration because the subscriber knew the purposes to which the subscriptions were to be applied, and also that there would be a contractor for the work.74In fact, the act of the plaintiff (promisee) in entering into a contract with the contractor may be said in this case to have been done at the desire of the defendant (promisor) so as to constitute a consideration within the meaning of the section for the promise to pay the subscription. If there were no contract with the contractor, or if no liability had been incurred and nothing substantial had been done on the faith of the defendant's promise, the promise to pay the subscription would have been without consideration, and therefore void. It would seem to follow that in the opinion of the Calcutta High Court, every promise of a subscription to a public or charitable object becomes a legal promise, and enforceable by the promoters, as soon as any definite steps have been taken by them in furtherance of the object and on the faith of the promised subscriptions. The Madras High Court followed this decision and held that where a person promises to pay a subscription for a particular object and steps have been taken in furtherance of the object on the faith
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of the promised subscription, the subscriber is liable.75 But in a subsequent case, it was held that a promise to pay a subscription in order to meet a liability already incurred was not enforceable, as in such a case it could not be said that there was any request by the promisor to the promisee to do something in consideration of the promised subscription.76 In an Allahabad case, where a Mahommedan subscribed Rs 500 to a fund started for rebuilding a mosque, and no steps were taken to rebuild the mosque, it was held that the promise was without consideration, and that the subscriber was not liable.77 There are two English decisions of a similar kind. In Re Soames,78S promised to leave the plaintiffs GBP 3,000 via his Will for the maintenance of a school. The plaintiffs established a school, which the court held they would not have done, but for S's influence. The Will contained no such bequest, but the executors of S were held liable. In Re Mountgarret,79M suggested that estimates be obtained for the cost of supplying seating in a school chapel. The school authorities obtained designs though no means were available. The designs were sent to M and he replied that the school could look to him for GBP 2800. He also stated that he was willing for lectern, pulpit and organ work to be added if the cost was not above GBP 3000. Plans for the additional work were prepared, but then M died. M's estate was held liable for the seating, and the plans for the other work, but not the actual work. These two English decisions seem in accordance with the principle of unilateral contacts, where there is a promise for an act . A makes a promise to B if B performs an act. B is at liberty to act or not, but if he does so A is liable on his promise. Re Mountgarret indicates that a promisor in such a case may revoke his promise at any time and remain liable only for work done up to that time. There is little English authority on the point but in Errington v. Errington, 80 Denning LJ expressed the opinion that such a revocation is impossible once the promisee has started on performance. Mere willingness to utilize a donation for the purposes of a trust which was proposed to be set up for promoting technical or business knowledge, including knowledge of insurance could not be regarded as consideration within Section 2(d). In pursuance of a resolution of the company, an insurance company paid two lakhs out of the shareholders' fund towards a certain memorial trust proposed to be formed to promote technical or business knowledge including insurance. After the payment, its insurance business was taken over by and vested in the Life Insurance Corporation; the trustees of the trust were called upon to return the amount so paid. This amount was held to be a donation and the resolution of the company and acceptance by the trustees did not constitute a contract, and even if it was an offer, there was no consideration moving from the trustees.81 At all events a voluntary payment, even if repeated, is not in itself evidence of a promise to continue it.82 The question of consideration for a promise arises only if the offer is accepted so as to ripen into an agreement. If there is no concluded agreement between the parties, then the further question whether it is supported by consideration would not arise.83 Subscription Agreements in the United States American courts84 will enforce promises of subscriptions for charitable purposes as a matter of public policy, because subscription agreements foster and encourage public and quasi-public enterprises. There is a tendency to adopt a rule that will sustain subscriptions as legal obligations, so that institutions are not helpless in carrying out the purposes of their organisation. The theory supporting enforceability of such agreements is one of contract and not of gift, and the general common law rule that a promise to subscribe is without consideration and unenforceable generally applies to them. But the courts have modified the technical rules of consideration and have held as sufficient a consideration to enforce such subscriptions, which may not be sufficient to support other contracts,85by adopting fine reasoning. Consideration is found in the performance or promise of performance given by the promisee, which the subscriber treats and considers of value to him; or it may constitute some forbearance or act ion on the part of the promisee; at times the intention to benefit has been held to be sufficient consideration. Consideration has also been found in the mutual promises of subscribers, each promise given by each of the aggregate body of subscribers being sufficient consideration to support the validity of each other's promise. Some courts have upheld the validity of charitable subscriptions on the theory of promissory estoppel,86 holding that while a mere
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promise to contribute is unenforceable for want of consideration, yet if money has been expended or liabilities have been incurred in reliance on the promise so that non-fulfilment will cause injury to the payee, the donor is estopped to assert lack of consideration and the promise will be enforced; and the doctrine has been invoked especially where a request of or invitation to the promisee to go on with its work cannot be implied in fact. 'Promisee or Any Other Person' A second principle is that there must be consideration to the promisor (or at his request to some other person) by the person enforcing the contract or by the promisee or other person. Under the Act, consideration may proceed from the promisee or any other person. This is a departure from the English law under which consideration must move from the promisee, i.e., the party who wishes to enforce a contract must furnish or have furnished consideration for the promise of the other party, the whole consideration or in part (namely, even if provided partly by agent, partner or co-promisee). In Dutton v. Poole, 87decided in 1688, the father of a bride was about to fell timber on his estate so as to provide for a marriage portion for her. However, he refrained from doing so on the promise of the eldest son to pay the amount to her. It was held that the daughter could maintain an act ion against the son on his promise to the father. Though she was neither a party to the contract, nor had the consideration moved from her; it had moved from the father. The decision was based on such nearness of relationship between the plaintiff (daughter) and the party, from whom the consideration moved (father), that the plaintiff could be considered a party to the consideration. Thus, a stranger to the consideration could, by construction of law, be regarded as a party to it, if he was closely related to the person from whom the consideration actually proceeded. This decision was set aside in 1861 by Tweedle v. Atkinson, 88 where the respective fathers of the husband and the wife agreed that each should pay a sum of money to the husband, and that the husband should have full power to sue for such sums. After the death of both the contracting parties, the husband sued the executors on the agreement of the wife's father. The act ion was held not maintainable. The husband was a stranger to the consideration, and the plea of nearness of relationship to the contracting parties was regarded as of no consequence. In Chinnaya v. Ramayya, 89A made over certain property by a gift-deed to her daughter with a direction that the daughter should pay an annuity to A's brother, as had been done by A. On the same day, the daughter executed a writing in favour of the brother agreeing to pay the annuity. The daughter declined to fulfill her promise, and the brother sued the daughter to recover the amount due under the agreement. The daughter contended that no consideration proceeded from the brother, and that he, being a stranger to the consideration, had no right to sue. It was held, following Dutton v. Poole, that the consideration had indirectly moved from the brother to the daughter, and that he was therefore entitled to maintain the suit. He distinguished Tweedle v. Atkinson, 90 on the ground that no consideration had proceeded in Tweedle, either directly or indirectly, from the husband. Kindersley J. in Chinnayya v. Ramayya, rested his judgment upon the terms in which this section defines 'consideration'. In a later case of Samuel Pillai v. Ananthanatha Pillai, 91 the administratrix of the estate of deceased person agreed to pay one of the heirs of the deceased, his full share of the estate if the heir gave a promissory note for a proportionate part of a barred debt, due to a creditor to the estate. The heir executed a promissory note in favour of the creditor, gave it to the administratrix, and received his full share in the estate. The note was subsequently handed over by the administratrix to the creditor. In a suit by the creditor against the heir on the promissory note, it was held that the act of the administratrix in handing over to the heir his share of the estate, without deducting any portion of the debt, constituted consideration for the heir's promise to the creditors, and that the creditor could recover upon the promissory note. In both the Madras cases, consideration had proceeded from a third party, and therefore, the suit would not have been maintainable according to the modern English law, unless a trust was established. This principle that the consideration for a promise need not necessarily move from the promisee, has been followed later in a number of cases;92 but not where consideration moved from a third party who was a minor.93 A family arrangement was upheld even though the consideration moved from a third
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party.94 In a contract of marine insurance, a broker's undertaking to pay premium was consideration, though it moved from a third person.95 Executory and Executed Consideration Contracts may be of two classes, one where consideration is executed and the other where it is executory.96 A consideration which insists in performance (or so far as it consists in performance) is said to be executed. If and so far as it consists in promise, it is said to be executory. Consideration is executory when a promise is made by one party in return for a promise made by the other; in such a case, each promise is the consideration for the other. Each party may have his act ion against the other for non-performance. Such contract is bilateral, and is binding as soon as the promises are exchanged. If the consideration is executory on both sides, there will be outstanding rights and liabilities on both the sides. These are mutual or reciprocal promises.1 Thus, if there is a contract for the sale of goods, delivery and payment to be made at some future date, the consideration consists in the promise to sell and to deliver on the one hand and in the promise to pay on the other; the contract becomes binding as soon as the promises are made, and does not depend upon delivery or payment to be made. The fact that the promise given for a promise may be dependent upon a condition does not affect its validity as consideration. Consideration is executed when an act is performed in return for a promise, the promise is unilateral; and there will be a right on one side and an outstanding liability on the other. Illustrations of this may be found in offers of reward.2 Where, for instance, the owner of a lost article offers a reward to the person who finds and returns it to him, the finder, by returning the article, both, accepts the offer and furnishes the consideration for the offeror's promise. Where the consideration is executed, liability is outstanding on one side only; where, on the other hand, the consideration is executory, liability is outstanding on both sides. The consideration cannot be wholly executed on both sides. For where performances, and performances only, are exchanged, of which sale of goods over the counter for ready money is a familiar example, nothing remains to be done by either party, and there is no promise at all and nothing for the law to enforce.3 If a contract has been fully and completely performed on both sides, no question of any further rights and liabilities under the contract is likely to arise. An irrevocable power of attorney to the creditor, to sell the hypothecated property, and credit the same towards the loan advanced, remains an executory promise of the debtor as long as the debt is outstanding and property not sold against the executed promise of the creditor. The consideration of the power of attorney is the loan advanced or remaining unpaid.4 It is not correct to say that as against the loan advanced, the hypothecation of the property becomes a completed or executed promise. Hypothecation is only a step towards payment of the loan. But the promise of the debtor remains executory in character as against the executed promise of the creditor.5 An executed consideration is within the definition of consideration of Section 2(d); it consists in performance.6 Past Consideration English Law If the act or forbearance alleged to constitute the consideration has already been done before, and independently of the giving of promise, it is said to amount to a past consideration, for e.g., a thing guaranteed by the seller after it has been sold. Executed consideration is not a past consideration. In the case of executed consideration, the promise and the act constituting the consideration are both integral and co-related parts of the same transaction.7In the case of past consideration, the promise is subsequent to the act and independent of it. It is merely an act or forbearance given in the past by which a person has benefited without incurring any legal liability. The general principle of the common law is that in the formation of a contract, the consideration is given and accepted in exchange for the promise. Hence, the acceptance of the consideration and the
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giving of the promise must be simultaneous, and, in order to have the effect of binding the party making it, a request must be the offer of a promise in return for some consideration, which offer will become a promise (if not meanwhile revoked),8if and when the consideration is furnished as requested. Thus, the consideration must always be present at the time of making the promise, and there is no such thing as a past consideration. If a service is rendered without any immediate promise or understanding that it is to be recompensed, it is a mere gratuitous act having no legal effect except such transfer of property or the like as may be contained in the act itself. If there be such a promise, expressed by words or by tacit understanding, to be inferred from the circumstances, there is at once an agreement, in which, if the recompense be not specified, the promise is to give such reward as may be found reasonable. A subsequent promise specifying the reward will not make an obligation where there was none before, but will show what the parties thought reasonable; and there is generally no reason why the parties' own estimate, in a matter which concerns only themselves, should not be accepted. Such a promise 'may be treated either as an admission which evidences, or as a positive bargain which fixes, the amount of that reasonable remuneration on the faith of which the service was originally rendered'.9 In many common circumstances, the fact of service being rendered on request is ample evidence of an understanding that it was to be paid for according to the usual course. In determining whether consideration is past, the courts are bound to apply a strictly chronological test. If the giving of the consideration and the making of the promise are substantially one transaction, the exact order in which these events occur is not decisive. For example, a manufacturer's guarantee, though sometimes given to customer after the sale, has consideration, because the giving of the guarantee and the sale are in substance a single transaction. Under the English law, past consideration is no consideration. A promise to pay compensation for something already done is past consideration and is no consideration.10 This rule is, under the English law, subject to exceptions. Consideration given at the request of the promisor.--In Pau On v. Lau Yiu, 11 the plaintiffs agreed with a company to sell certain shares in return for allotment of some shares of the company, and further agreed not to sell the newly allotted shares for some period of time. Later, the plaintiffs refused to complete the agreement unless they had an indemnity against any fall in the value of the newly allotted shares during this period, and the defendants (majority shareholders in the company) gave this guarantee. The price of the shares fell, and the plaintiffs claimed the amount of indemnity. The defendants pleaded that there was no consideration. It was held that since the consideration expressed by incorporation in the guarantee, the plaintiffs' promise in the main agreement not to sell the shares for a year, the defendants' indemnity would not be treated as independent of the antecedent promise of the plaintiff not to sell, because the parties had understood the restriction on the sale to be within the price of shares. The plaintiffs' promise was made at the request of the defendant and the promise of indemnity was given to fulfill that intention. Hence the promise, although antecedent to the guarantee, was a good consideration and the indemnity was enforceable. The conditions in which this exception applied were stated by the Privy Council in the above case as follows:
An act done before the giving of a promise to make a payment or to confer some other benefit can sometimes be consideration for the promise. The act must have been done at the promisor's request, the parties must have understood that the act was to be remunerated either by a payment or the conferment of some other benefit, and payment, or the conferment of a benefit, must have been legally enforceable had it been promised in advance.12
Payment for antecedent debt.--The existence of an existing debt is sufficient consideration for a later promise to pay that debt;13 and there will be good consideration if there has been forbearance on the part of the creditors.14
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Negotiable instruments under the Bills of Exchange Act, 1882.--Under Section 27 (1)(b) of the Bills of Exchange Act, 1882 an antecedent debt or liability constitutes valid consideration for a bill of exchange. The consideration usually consists in, that the creditor forbears from suing for the debt, or treats the bill as conditional payment.15 Indian law The words 'has done or abstained from doing' in the definition given in the Act provide that an act done by A at B's request, without any contemporaneous promise from B, may be a consideration for a subsequent promise from B to A. Consideration may consist in performance which is known as executed consideration.16 An executed consideration consists in an act already done by one as consideration for a promise of the other, and the liability is outstanding on one side only. This is present, as opposed to future consideration.17 The use of the perfect tense in the clause 'has done or promised to do...' embodies in the law of India the exception to the general rule laid down in Lampleigh v. Brathwaite. 18 There it was allowed that in general, a service rendered without any agreement for reward at the time will not support a subsequent promise of reward--'a mere voluntary courtesy will not have19 a consideration to uphold an assumpsit'--but it was said that if the service was 'moved by a suit or request' of the promisor, the promise 'couples itself with the suit before,' or, as we should now say, is held to relate back to the original request, and accordingly, is deemed to be made on good consideration. Old debts form good consideration for mortgage or transfer of property.20 A power of attorney given by a company to a bank enabling it to sell the properties with the bank was for good consideration relatable to the loan advanced earlier by the bank;21 so was a promissory note executed as security for repayment of a loan already received by the debtor;22 or a promissory note executed in favour of a person for services rendered by him.23 Services previously rendered at the desire of a promisor are good consideration.24 In Sindha v. Abraham, 25 the plaintiff rendered services to the defendant at his desire expressed during his minority, and continued those services after his majority at his request again. The question arose whether such services constituted a good consideration for a subsequent express promise by the defendant to pay an annuity to the plaintiff. The agreement was one to compensate for past services, and it was held that it could be enforced, as the services formed a good consideration within the meaning of this section. The court was of the opinion that the services were intended to be recompensed, though the nature and the extent of the proposed recompense were not fixed until the agreement, sued upon, was executed by the defendant. If so, there was a contract for reasonable recompense when the services were rendered, and the decision might have been put on that ground alone. It was chiefly rested, however, on the ground that, under the words of the present sub-section, service already rendered at the desire of the promisor and such services to be rendered, stood upon the same footing. It would seem that, under the Act, the decision must have been the same on this ground even if the services were rendered at the time, gratuitously, though at the desire of the defendant. It was also said that if the services had been rendered voluntarily, i.e., without the desire of the defendant, the case would be within Section 25 of the Act.26 However, neither that section nor the present clause will enable a person who has purported to bind himself when not competent to contract (Section 11), to repayment of a loan, to bind himself to it by a new promise when he is competent.27 But where mortgage bonds were executed without authority of the collector, and after his regime, fresh bonds were executed in lieu of earlier bonds, these were not without consideration.28 A promissory note is without consideration, if the debt to which the creditor had no legal right is being assigned to him in spite of prohibition of law.29 Mutual Promises These words 'or promises to do or to abstain from doing something' in the definition, supplemented by sub-sections 2(e) and 2(f), convey in an indirect manner the extremely important proposition that a
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contract may be formed by the exchange of mutual promises, each promise being the consideration for the other. In this case, neither promise is of any value by itself, but each of them derives its value from the exchange, which makes them both binding. This effect of mutual promises is not a logical deduction from the general notion of consideration, but this positive institution of law is required for the convenience of business in civilised life. The proposal to give a promise for a promise, is accepted by giving the promise asked for. Thereafter, the two parties are both bound, each being both promisor and promisee. It is not really necessary or useful or even true to say that the promise of the party who accepts has ever been a proposal, though the language of sub-section 2(b) does not seem to recognise the existence of promises which have not passed through that stage. Still it is true that, but for the counter-promise or 'reciprocal promise'; neither party's signification of willingness could become a promise within the definition of the Act . In this sense, one can say that the acceptance of an offered promise by giving the reciprocal undertaking asked for, has itself the nature of a proposal, though it becomes a promise in the act of utterance, and there is no moment at which it exists merely as a proposal. A promise to do something in future is a legal consideration,30 provided it involves a legal obligation.31 A promise by a widow to adopt a person is good consideration for the adoptee's agreement in favour of the widow to pay a certain sum of money for maintenance and, at times, for the management of property.32 A single consideration may support more than one promise.33 For example, where a tenant gave several undertakings by the rent note, they were held to have collectively formed one consideration for the landlord assenting to continuing the tenant in possession and enjoyment of the premises. Every clause of the rent note was supported by consideration and no clause could be singled out and repudiated on the ground that it was without consideration. Abstains: Forbearance The 'detriment' suffered by the promisee is the essence of consideration. Where the consideration is a present performance and not a promise, the detriment may consist either in act ually parting with something of value, or in undertaking a legal responsibility, or in foregoing the exercise of a legal right. The exercise of one's legal rights may not always be profitable; it may be presumed to be of some value because the law deems it worthy of its protection. Thus, the performance which constitutes a consideration may be negative as well as positive, provided that the promisee's abstinence from exercising a right was undertaken at the request of the promisor. There need not be a total abandonment of the right, or an undertaking to suspend it for a definite time. Such an undertaking, if it exists, is of course not a performance but a promise, and such a contract is formed by mutual or reciprocal promises [sub-section 2(f)]. The class of cases under discussion is one where the defendant has requested the plaintiff to forbear the enforcement of a claim against him offering a new promise in return, and the plaintiff has in fact forborne for an appreciable time without any express acceptance of the defendant's terms. The giving up, or forbearing to exercise an actually existing and enforceable right is certainly a good consideration.34 a promise to abstain from questioning the validity of an adoption was good consideration.35 An act ual forbearance to exercise a right may be a good executed consideration, provided it be at the promisor's request, and a promise of forbearance may also be a good executory consideration. Forbearance to sue In most cases of forbearance, the promise is one to forbear suing either for a definite time or for a reasonable time according to the circumstances. This promise may be express or inferred from the surrounding circumstances of the case and the transaction as a whole.36 Such cases really belong to contracts by mutual promises. Sometimes it may not be easy to say whether, on the facts of a particular case, the consideration is actual forbearance or an agreement to forbear; in other words, whether the promise sued upon was exchanged for a promise of forbearance, or was an offer to be
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accepted by forbearance in fact, and became a promise when its condition was fulfilled by the plaintiff's forbearance for the specified time, if any, or otherwise for a reasonable time.37 The Allahabad High Court in Bittan Bibi v. Kuntu Lal, 38by a majority, held that in order to constitute a valid consideration, forbearance to sue should be at the request of the debtor whether express or implied. An act ual forbearance, as opposed to an agreement to forbear to approach the court, is not a good consideration unless it proceeds from a request, express or implied, on the part of the promisor. If not moved by such a request, the forbearance is not in respect of the promise.39 There exists clear public interest in encouraging avoidance of litigation and the resolution of disputes by the parties provided the settlement or compromise is genuine, entered into freely without the concealment of essential information or the taking of undue advantage.40 In order that forbearance should be consideration, some liability should be shown to exist,41 or to be reasonably supposed to exist,42 by the parties; or that there is a reasonable claim (one made on reasonable grounds), though doubtful,43 or which is in good faith believed by the party forbearing to have at any rate a fair chance of success; if the claim is not only invalid, but is known by the party forbearing to be so, there is no consideration;44 nor where the plaintiff does not bona fide believe in the validity of the claim.45 Forbearance to sue, even though no definite time is allowed, is a valuable consideration for a promise, provided the promisee has a reasonable ground to believe that he has a good cause of action.46 Where, after the expiration of the time fixed for completion of a mortgage, the mortgagee declined to advance the money unless the mortgagor consented to pay interest from the date fixed for the completion, and the mortgagor agreed to do so, it was held that there was a good consideration for the agreement though time was probably not of the essence of the original contract. The mortgagee believed in good faith that he was entitled to rescind at once, and the abandonment of his claim to do so was consideration enough for the mortgagor's agreement to his terms.47 Forbearance to sue on a claim which is not only void, but is also so known to the party forbearing, is not a good consideration, and equally so if the claim is not believed by him to be valid. Hence, forbearing to sue in respect of a void agreement,48 e.g., a wagering claim,49 is not a good consideration. In Bob Guiness Ltd v. Solomonsen, 50D had incurred a void gaming debt to P who threatened to report to the Turf Protection Society unless he was paid. D promised to pay through instalments. After paying one instalment, he ceased payment. P brought a suit for balance. The suit failed as P never promised to forbear, although he did forbear and had to prove fresh consideration, the original debt being void. A promise to abstain from suing can be a consideration, but only when the person suing has a subsisting right to sue. Therefore, non-payment of instalment of a debt fixed under the Debt Conciliation Act, which had become barred under the Act, cannot be a good consideration of a promise to pay these instalments by a third party.51 A wife's promise to forbear from applying to the divorce court for maintenance is no consideration because it is not binding on the wife and is worth nothing.52 The defendant's offer to pay or to give security, or as the case may be,53 is accepted by the performance of its conditions,54 and that performance is a good consideration for the defendant's promise, where the defendant has made an offer to pay in consideration of forbearance, with some other alternative offer, the plaintiffs forbearing to sue is in fact a sufficient acceptance of the first alternative.55 If it is asked at what moment the proposal conveyed by such a request becomes a promise, the answer is that it does so whenever the other party has in fact forborne his rights for such time which the court considers long enough to amount to a reasonable compliance with the request. This appears to be a question of fact depending on all the circumstances, for which no general rule can be laid down. The promise to forbear may be made absolute or for a certain time; or even for no specified time at all.56 There need not be any express promise to forbear. It is sufficient if circumstances exist from which such a promise could be implied, and a forbearance has infact followed. A forbearance to sue, even for a short time, may be consideration for the promise.57 A request to forbear suing or taking other proceedings, not specifying any length of time, is understood to be a request of forbearance for
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a reasonable time.58 In the Alliance Bank v. Broom, 59 the defendant owed GBP 22,000 to the bank, which pressed him to give security. He promised to do so, but the bank did not make any return promise not to sue him. The defendant failed to give security. It was held that there was consideration for the defendant's promise as the bank had given, and the defendant received. The bank's suit for specific performance was decreed as the bank forbore for some time and the debtor did receive benefit of some degree resulting in the bank staying its hand for some time. Forbearance on the part of the creditor to sue could operate as a sufficient consideration for a promise even though it be for a limited time.60 In Crears v. Hunter, 61F borrowed money from C on the promise that on attaining majority, his son H would become surety for the debt, which he did by joining in and executing a joint promissory note with his father. Interest was paid in the presence of H, and C issued receipts in the joint names of himself and his son. Lord Esher MR, relied upon the fact that the term of payment of interest in the future indicated that the promissory note could not be sued upon for so me time though there was no express request by H that C should forbear to sue F. On the discovery of an irregularity in advancing a loan, the agent and a clerk of a bank were asked to explain the irregularity. They executed an undertaking to secure the payment of the loan amount and in default they held themselves liable for payment. This agreement was held to be for valid consideration, e.g., forbearance to take action.62 It has been held to be good consideration in the case of a promise to abandon a particular remedy such as arbitration proceedings;63 forbearance to sue for ejectment given in return for agreement to pay enhanced rent;64 promise not to file appeal if the tenant was given time to vacate;65 as also an agreement to accept the decree and not to file appeal against it when both parties could have appealed;66 forbearance to enforce execution and allow time to the debtor to pay for a verbal promise by the debtor to pay the debt;67 or forbearance to sue a person other than the promisor.68The withdrawal of pending proceedings for maintenance under Section 488 of the Criminal Procedure Code, 197369 was a good consideration for an agreement to pay maintenance allowance;70 so was relinquishing the counterclaim a good consideration for the withdrawal by the plaintiff of his claim.71 Accepting sole liability by one of two joint debtors is good consideration for an agreement to discharge the other;72 so is release of a principal debtor a good consideration, for the undertaking of his liability by another person.73 The party at whose request forbearance is granted is bound by its terms.74 Compromises The most usual and important kind of forbearance occurring in practice is the one which is exercised or undertaken by way of compromise of a doubtful claim. It may seem at first sight that the validity of the promise is doubtful. It is a question of some importance within what limits the abandonment or compromise of a disputed claim is a good consideration. The difference between forbearance and compromise is that in the latter, the claim is not admitted, and the claimant promises to abandon the claim. Cockburn, Lord Chief Justice has stated in Callisher v. Bishoffsheim :75
. . . a compromise is effected on the ground that the party making it has a chance of succeeding in it, and if he bona fide believes that he has a fair chance of success, he has a reasonable ground for suing, and his forbearance to sue will constitute a good consideration. When such a person forbears to sue he gives up what he believes to be a right of act ion, and the other party gets an advantage, and, instead of being annoyed with an action, he escapes from the vexations incident to it.
Can a cause of act ion to which there is a complete defence be of any value in the eye of the law? If a man bargains for reward in consideration of his abandoning such a cause of action, does he not really get something for nothing, even if he believes he has a good case? The abstaining or promising to abstain from doing anything which one would otherwise be lawfully free to do or not to do, is a good consideration, and every man who honestly thinks he has a claim deserving to be examined76 is free
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to bring it before the proper court, and have the judgment of the court on its merits, without which judgment it cannot be certainly known whether the claim is well founded or not. That which is abandoned or suspended in a compromise is not the ultimate right or claim of the party, but his right of having the assistance of the court to determine and, if admitted or held good, to enforce it. 'If an intending litigant bona fide forbears a right to litigate a question of law or fact which it is not vexatious or frivolous to litigate, he does give up something of value. It is a mistake to suppose it is not an advantage, which a suitor is capable of appreciating, to be able to litigate his claim, even if he turns out to be wrong.77 The abandonment of a doubtful or disputed claim is good and valuable consideration even if the claim is ultimately found to be unsustainable. The test to be applied is not to find out whether the party had a good case, but only to see if he thought in good faith that he had a case which he was abandoning.78 Compromise of disputes79 and of doubtful rights80 is sufficient consideration for agreements. Forbearance to sue coupled with forbearance to declare the defendant a defaulter in respect of a wagering agreement was good consideration.81 But the abandonment of an obviously groundless claim will not make a good consideration 'any more than a promise to pay a sovereign in satisfaction of a debt of a guinea is supportable by the consideration that it saves the creditor the trouble of bringing an undefended act ion for the larger sum'.82 This principle is followed by the Indian courts.83 A settlement of a bona fide dispute between the parties84 is a good consideration. An agreement in the nature of the compromise of a bona fide dispute as to the right of succession to a priestly office is not without consideration;85 nor a mutual agreement to avoid further litigation invalid on this ground;86 nor a family arrangement providing for marriage expenses of a female member of a joint Hindu family on a partition between them of the joint family property.87 A promissory note in the nature of a compromise, of doubtful litigation, passed by a tenant to the zamindar, during the pendency of a suit brought by the zamindar against the tenant to eject him from his holding is not without consideration.88 Where the plaintiff bona fide pleads his title to the property in the suit and then there is a compromise whereby the plaintiff agrees to buy the property and some other property from the defendant, such a contract is lawful and for valid consideration. Besides it was beneficial to the defendant inasmuch as he got paid for his interest in the suit property the title to which was in dispute in the suit.1 A compromise relating to title to land, at a time when it was doubtful, is valid, although subsequently it may be found by judicial decision in another case, that one of the parties to the compromise had a wholly valid title, and the other had no title at all.2 If at the time of entering into an agreement, the parties come to a settlement bona fide, the settlement would be binding on them and it cannot be challenged at a subsequent stage on the ground that on close examination by a judicial tribunal, it would have been found that one party had nothing to lose.3 But a pledge or promise of security for an existing debt is void unless there is some forbearance or undertaking by the creditor (such as not pressing for payment, or accepting a reduced rate of interest) in return for it. Thus, where the drawer of a hundi became insolvent before it fell due, and the plaintiff, who was the holder, in due course applied to the acceptor to give security for payment at maturity, and the latter executed a mortgage 'by way of collateral security bond', it was held that, the plaintiff not having entered into any undertaking whatsoever, could not recover on the mortg age deed.4 A compromise of a claim arising out of an illegal contract is insufficient as consideration, unless the compromise arises out of a dispute of fact as to whether the contract is in fact illegal.5 Family Arrangements In the case of family arrangements, the court will not look too closely into the quantum of consideration, and an arrangement designed to promote peace and goodwill among members of a family has been held to be based on good consideration,6 even though there may not be a dispute,7 or the dispute does not involve legal claims,8 or the rights claimed are not doubtful9 or there is no claim to property.10 The courts give effect to a family settlement upon the broad and general ground that its object is to settle existing or future disputes regarding property amongst members of the
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family; the word 'family' also being understood in a narrow sense of being a group of persons recognised in law as having a right of succession or having a claim to a share in the property in dispute.11 The consideration for a family arrangement may be preservation of family property, preservation of peace and honour of the family or the avoidance of litigation;12 or avoiding the possibility of a future dispute;13 but it must be shown that there was an occasion for effecting the family arrangement and that it was acted upon;14 and if there is no family dispute to be settled, it is essential that some consideration, howsoever small, must pass from the side of the person upon whom a right in property is sought to be conferred.15Two sisters, who were litigating against each other, entered into a compromise and affected a registered sale between themselves but no cash passed. That was held to be immaterial and the sale was valid under Section 25(1) of the Contract Act, as the sale was the result of 'rapprochement' between the sisters.16 Differences having arisen between two brothers on the death of the father, the younger brother was contemplating litigation. The mother intervened and gave a letter undertaking to make good the shortfall, which may result from the elder brother not paying the amount claimed by the younger brother and thus peace in the family was purchased and restored. This was held to be a good consideration, which brought about an enforceable agreement.17 'Something' Consideration must be real. It must be some thing which is of some value in the eye of law. Though this Act speaks only of unlawful and lawful consideration, it must be 'good or valuable' in the sense in which these words appear in English law.18 It need not be of any particular value; it need not be in appearance or in fact or of approximately equal value with the promise for which it is exchanged,19 but it must be something which the law can regard as having some value, so that the giving of it effects a real though it may be a very small change in the promisee's position. The benefit or detriment conferred or suffered may be of the most trifling description, provided it is not utterly worthless. A meritorious or gratuitous consideration such as love and affection, or obedience and submission by way of respect is not good or valuable consideration,20 nor an expectation of spiritual and moral benefit.21 Mere moral duty to perform a promise given to a party does not constitute consideration.22 However, a promise to marry is valuable consideration.23 The promise should not be obviously impossible, i.e., 'according to the state of knowledge of the day, so absurd that the parties could not be supposed to have so contracted',24 nor uncertain. In White v. Bluett, 25 a promise by a son 'not to bore his father' was held to be too vague. Promise to cooperate in the recovery from a joint debtor was sufficiently certain to form a consideration for a forbearance.26 Consideration should not be something which the promisee would have done anyway.27 When a subordinate got nothing in return for his promise--what he got he was entitled to get--the consideration was unreal.28 The consideration should not be illusory, i.e., consisting of a promise the terms of which leave performance entirely to the discretion of the promisee, namely, a promise to do something if 'I feel like it', or 'unless I change my mind'. Whilst there is a general insistence that consideration must be of some value, there seems to be no single theory which explains all the cases in which the consideration has been held to be insufficient.29 The courts have at times resorted to inventing consideration, ignoring the intention of the parties. In working the doctrine, courts have at times held a promise invalid which the parties intended to be binding, and at other times have held even the slightest of benefit or detriment, to constitute consideration, which is criticized and subject to ridicule.30 This practice of inventing consideration has been criticized as a source of uncertainty in law.31 However, the courts would be reluctant to describe a promise made in a commercial context as gratuitous and it has been said that 'a defence of lack of consideration rarely has merit'32 and that 'businessmen know their own business best even when they appear to grant an indulgence'.33 Under a contract to process pulses, performance was accepted. Later agreement by the contractor for upgrading the pulse already supplied was held without consideration because the earlier contract was
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performed and discharged. Promise not to invoke bank guarantee could not provide consideration because the guarantee could not have been invoked for a contract fully performed. Consideration and Motive The requirement of consideration, vital to the English conception of contract, is not satisfied by a purely moral obligation, nor is it synonymous with motive. Consideration and motive are not the same.34 The consideration for a promise is always a motive for a promise, unless it is nominal or invented; while a motive for a promise may not always be the consideration for it.35 Motive induces a promise to be given. A concubine and paramour rendered services to each other by their agreement to cohabit, her services being given in exchange for his similar services. Having once operated as consideration for the earlier promise, her past services could not be treated as a subsisting consideration for a subsequent promise to transfer properties. Therefore, a gift by a karta of a portion of the joint family property to his permanent concubine, past cohabitation being the motive and not the consideration, is invalid even as to his own undivided interest as it was motivated by a desire to compensate for past services.36 Adequacy of Consideration Courts do not generally concern themselves with the adequacy of consideration.37 They make no attempt to audit the bargain made by the parties to see if it is a fair one. The courts will not ask if the price is adequate--this is for the parties themselves to decide;38 nor will they upset a bargain 'which is the result of the ordinary interplay of forces'.39 At times, even the most trifling of benefit or detriment has been considered by the court as sufficient. Even statutes made for the protection of consumers do not require sales or supply at fair price or reasonable price.40 The act of executing a deed was consideration for a promise to pay money, although the deed was void.41 It has been good consideration to permit to weigh boilers for a promise to return them,42 or just to show a person a document,43 or give up a piece of paper which later turned out to be of doubtful validity; in the last case, the worthlessness of the document surrendered was no defence to the promise sought to be enforced, for it related to the adequacy of consideration, for, 'the plaintiffs were induced by the defendant's promise to part with something which they might have kept, and the defendant obtained what he desired by means of that promise'.44 Where a promissory note was executed for a consideration of the debt due on accounts, the fact that the amount was not credited in the accounts did not render it without consideration.45 A promise to pay an estate agent for the withdrawal of claim which seemed to have had no legal basis, and was at most a moral claim or had a nuisance value, was a good contract with valuable consideration.46 A smaller sum of money advanced can validly constitute the consideration for an acceptance of liability for a bigger amount by the debtor.47 In Esso Petroleum Co. Ltd v. Commissioners Customs and Excise Commissioners, 48 one coin depicting a World Cup footballer offered to every customer, who purchased four gallons of petrol, was an offer of consideration to the customer to enter into a contract of sale of petrol, and hence not a gift. In Chappell & Co. v. Nestle, 49 an advertisement promised to supply one of the six gramophone records named in the advertisement in return for a postal order for one shilling six pence and three wrappers of their chocolate. It was held that the wrappers were part of the consideration.
A contracting party can stipulate for what consideration he chooses. A peppercorn does not cease to be good consideration if it is established that the promisee does not like pepper and will throw away the corn.50
But in Lipkin Gorman v. Karpnale, 51 gaming chips supplied by a gaming club to one of its members
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(and then lost by the member in the course of the gaming) were held not to constitute consideration for the money which the member had paid for them. One reason for this view appears that the chips were themselves worthless (so were wrappers in the Chappell case), the second view was that the chips remained the property of the club; the third view was that parties merely regarded the chips as a convenient mechanism for facilitating gambling and did not regard the transaction as sale of chips. The court thus refused to 'invent' consideration in this case. This has invited a view that, '...the question whether a party has provided consideration may thus receive one answer when it arises for the purpose of determining the enforceability of a promise, and a different and narrower one when it arises for the purpose of determining whether a transaction has adversely affected the rights of a third party.'52 If the owner of a newspaper offers the financial editor's advice to readers who will send their queries to a given address, the trouble of sending an inquiry is a sufficient consideration for an undertaking that reasonable care shall be used to give sound advice in answer thereto. It seems that the contract was concluded as soon as the reader had sent in his inquiry, the general offer being not merely an invitation, but the proposal of a contract; though it would also seem that only nominal damages would be recoverable if the editor did not answer at all.53 Third parties cannot challenge the existence or adequacy of consideration.54 Landholders who entered into accepted compensation for acquisition of land, under agreements entered voluntarily, could not question this amount later when the civil court granted compensation at much higher rate in respect of similar lands.55 Inadequacy of consideration may not affect the validity of contract if the consent is free. It may be corroborative evidence of lack of consent. The aspects of inadequacy and its effect on contract are discussed in Section 25. Nominal Consideration and Inadequate Consideration Nominal consideration must be distinguished from inadequate consideration. Nominal consideration is one placed deliberately by the parties in order to give efficacy to the contract. Inadequate consideration is one which is substantially less than the performance promised. The deliberate use of nominal consideration can be regarded as a form to make a gratuitous promise binding. It may not also necessarily be paid. It is submitted that the Act does not make any distinction between inadequate and nominal consideration, and that any nominal consideration is sufficient in the eye of law for supporting a contract.56 Such distinction was hinted at in Midland Bank Trust Co. Ltd v. Green, 57 though the question did not directly arise in that case. While inadequate consideration may be taken into consideration by the court in determining whether consent to a contract was free,58 nominal consideration is one likely to be expressed with due deliberation and thought. It has been said that the difference is of common sense. The language of the document may not be indicative of the true intention, for documents in cases of this kind are often deliberately drafted so as to conceal the true nature of the transaction.59 Although, the parties are free to contract for nominal consideration, prejudice caused thereby to third parties is undesirable and may be dealt with by other laws dealing with fraudulent transactions, namely, laws relating to taxation, stamp duty, protection of shareholders, protection of investors ceiling on land holdings etc. An allegation that the written contract showed a lower valuation to avoid payment of stamp duty was no ground to refuse specific performance. It is for the authorities under the stamp law to take act ion for violation of provisions of that law.60 Pre-existing obligations under Law The performance of what one is already bound to do, either by general law or by a specific obligation to the other party, is not a good consideration for a promise;61 because such performance is no legal burden to the promisee, but rather relieves him of a duty. Neither is the promise of such performance a consideration, since it adds nothing to the obligation already existing.62 Moreover, in the case of the
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duty being imposed by the general law, an agreement to take private reward for doing it would be against public policy. Before applying this rule, it must be ascertained that a legal duty does exist. A promise to remunerate a person named as executor (not out of the estate itself) if he accepts the office and performs the duty of the executor is not bad for want of consideration, since it is not a legal duty to accept the office63 and perform those duties without claiming any remuneration. But a person served with a subpoena is legally bound to attend and give evidence in a court of law, and a promise to compensate him for loss of time or other inconvenience is void for want of consideration.64 A person performing an act of public duty furnishes no consideration by performing or promising to perform that act .65 Similarly, an agreement by a client to pay to his vakil after the latter had accepted the vakalatnama a certain sum in addition to his fee if the suit was successful, is without consideration.66 And it has been held that a bond passed by a judgment-debtor to the holder of a decree against him for the amount of the decree plus Rs. 3/- paid for him for the stamp and registration charges of the bond is without consideration where the decree was made by a court having no jurisdiction to make it, and the bond was passed to secure the release of the debtor from arrest.67 But if a man, being already under a legal duty to do something, undertakes to do something more, than is contained therein, or to perform the duty in one of several admissible ways--in other words, to forgo the choice which the law allows him--this is a good consideration for a promise of special reward.68 In Glasbrook Brothers Ltd v. Glamorgan County Council, 69 the owners of a coal mine, fearing violence from the strikers, sought more protection from the police than necessary. The police were held entitled to the consideration promised for this special guard, even though the police had done the act of the same kind as that which they are legally bound to do. In another case, a football club was held liable to the police authority for the cost of policing the match played on its ground.70 On another view, the act ual performance of an existing duty may confer a factual benefit, because on actual performance, the promisee is saved of pursuing the legal remedy for its breach. A promise to perform an existing duty or the performance of it should be regarded as good consideration because it is a benefit to the person to whom it is given as also to a person who gives it. Therefore, a promise by the father to pay to the mother a weekly sum for maintenance of their illegitimate child was a binding contract, it being a promise in return for an act, a promise by the father to pay a weekly sum for return for the mother's keeping the child 'well looked after and happy', who had till then been living with the father and was handed over to the mother. So long as she looked after the child she would be entitled to the receipt of the weekly sum. It was held that the mother had promised more than her statutory duty to maintain.71 This decision was explained later72 as an instance of recognition that the mother's promise gave a practical benefit to the father. An agreement between a husband and a deserting wife whereby the husband promised a weekly maintenance and she promised to indemnify him against all debts and not to pledge his credit, is an agreement for consideration. She did not forfeit her right of maintenance by the desertion.73 Performance of Existing Contractual Obligations If A is already bound to do a certain thing, not by the general law, but under a contract with Z, neither the performance of it nor a fresh promise thereof without any addition, or variation, will support a promise by Z, who is already entitled to claim performance. For Z is none the better thereby in point of law, nor A any worse. But if M, a third person not at present entitled to claim anything, offers a promise to A in consideration of: (a) A's performance of his obligation to Z; or (b) A's promise to M to perform that obligation, is such performance or promise supported by consideration? English authority favours the opinion that the performance is a good consideration (see below) and they seem to assume that both performance and promise must be good consideration in such case.74 The test ought to be whether there is any legal detriment to A, the supposed promisee. Now A's performance--that what he already owes to Z is no detriment to him, and on the other hand, the resulting discharge of his liability is to him an advantage; and therefore it is no consideration for a new
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promise by anyone. But A's promise to M to do something, though he may have already promised Z to do that same thing, is the undertaking of a new obligation to a new party. There is no reason why it should not be made binding by M's counter promise, as in any other case of a contract by reciprocal promises, unless the law forbids the same performance to operate in discharge of two distinct contracts. In a contract by reciprocal promises, the promises are the consideration of each other, and not the performance. The difficulty, if any, may be removed, in the case of performance, by the slightest appreciable addition to the performance already contracted for; and in the case of promise, by A's new undertaking to M being or including an undertaking not to rescind or vary without M's consent, the existing contract with Z. Performance of Existing Contractual Duty Owed to Third Party A promise to perform, or the performance of a pre-existing contractual obligation with a third party can be valid consideration for another contract.75Shadwell's76 case supports the view that the performance of a contractual duty owed to a third party can be good consideration for a promise. Later authorities too uphold that view. A, a firm of stevedores, had unloaded goods from B's ship. Some of these goods belonged to C. C promised A not to sue him for damaging the goods. It was held that A had provided consideration for this promise by unloading the goods, even if he was already bound by the contract with B to unload them.77 In Pao On v. Lau Yiu, 78 the plaintiff company agreed to sell certain shares to a company F, the consideration being the agreement to allot 4.2 million shares of F, the market value of each share was taken as USD 2.50 per share. The plaintiff agreed not to sell or transfer 2.5 million shares out of the total for one year. The plaintiff then threatened to breach this contract unless the defendants (majority shareholders of F) gave an indemnity against loss on these 2.5 million shares if their price went below USD 2.50 per share. The defendants gave the indemnity. The value of the shares did go down. The plaintiff sought to enforce the indemnity and recover the loss. The promisee defendants pleaded that there was no valid consideration for the indemnity agreement. It was held that since the consideration expressed in the guarantee included by incorporation the plaintiff's promise in the agreement of sale not to sell the shares for a year, the defendants' agreement of indemnity could not be treated as independent of the original promise. Since the promise not to sell for a year was made at the defendant's request, the promise of indemnity was given to fulfil that intention and it was held to be enforceable. The consideration for the indemnity was the plaintiff's promise to perform their pre-existing obligation under the contract with F. Performance of Existing Contractual Duty Owed to the Promisor Normally performance of a duty already owed under the contract to the promisor is not good consideration. Even in terms of public policy, it is necessary to discourage a tendency to use improper pressure or threatening to break one's contract unless other party complies by paying or promising to pay more; a tendency to resort to extortive renegotiations. A promise to pay extra freight for the carriage of goods to the agreed destination cannot be enforced by the law, and the claim can be rejected on grounds of public policy that the enforcement of such promises might lead carriers to refuse to perform their contracts unless extra freight was paid, which would encourage undesirable forms of pressure amounting to extortion.79 Where a mortgagor is already under a legal obligation to pay interest due regularly under the terms of the mortgage, a promise to pay that interest regularly cannot form good consideration for an agreement for reduction of rate of interest payable.80 In such cases, however:
...with a properly developed doctrine of the avoidance of contracts on the grounds of economic duress, there is no warrant for the court to fail to recognise the existence of some consideration even though it may be insignificant and even though there may have been no mutual bargain in any realistic use of that phrase.81
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The performance of the existing contractual duty may confer the 'benefit' or provide the 'detriment' in practical terms. The promisee may find it more economical and of 'practical benefit' to have the promise performed immediately rather than be required to pursue the action for damages which may not compensate fully the breach. The promisor would suffer a 'detriment' in immediate performance, because else he would utilize his funds elsewhere with a greater advantage. Where one party to a contract, agrees in absence of economic duress or fraud, to make a payment to the other party to the contract, over and above the contract price, in order to secure completion of the contract by the other party on time and thereby obtains a benefit in avoiding a penalty payable to the third party if the contract was not completed on time, the obtaining of that benefit could amount to consideration for payment of the additional sum. In Williams v. Roffey Bros. & Nicholls (Contractors) Ltd., 82 a sub-contractor resumed his work on promise of additional payment for the carpentry work in refurnishing of flats, it was held by the Court of Appeal that since the defendant agreed to make the additional payment to avoid a penalty under the main contract for having to engage another sub-contractor, this amounted to consideration for the extra payment, even though the plaintiff was not required to undertake any work additional to that which he had originally undertaken to do, and the plaintiff sub-contractor was entitled to claim the extra payments. Glidewell LJ, stated:83
(i) (ii) (iii) (iv) (v) (vi)
if A has entered into a contract with B to do work for, or to supply goods or services to, B in return for payment by B; and at some stage before A has completely performed his obligations under the contract B has reason to doubt whether A will, or will be able to, complete his side of the bargain; and B thereupon promises A an additional payment in return for A's promise to perform his contractual obligations on time; and as a result of giving his promise, B obtains in practice a benefit, or obviates a disbenefit; and B's promise is not given as a result of economic duress or fraud on the part of A; then the benefit to B is capable of being consideration for B's promise, so that the promise will be legally binding.
The recognition of 'practical' benefit has been criticized.84 It enables the promisor to rely upon his own breach to establish consideration. It undermines the strength of the contractual obligation. Yet, it enables commercially desirable renegotiations.85 The Court of Appeal refused to extend the principle of 'practical' benefit to the issue of part payment of money debt.86 In the absence of 'practical' benefit to the promisor, the promise will still be without consideration. Although the rule that a promise by one party to a contract to fulfil his contractual duty towards the other party did not constitute good consideration, in a contract to build a ship, the builders' original liability to build the ship did not constitute good consideration for an agreement to pay further percentage. But on a devaluation of currency, the increase by the shipbuilders in the amount of their letter of credit which they had agreed to give as security for instalments was sufficient consideration on their part for the agreement, since by increase they had undertaken an additional obligation or had rendered themselves liable to an increased detriment, and were not merely fulfilling their existing contractual duty.87 The principle that a promise to perform an existing contractual obligation is not good consideration when it was premised on the continuation of same obligations. Thus, a new agreement that replaced a rescinded contract, could be enforced, its consideration being provided not only by the mutual promises contained in the agreement, but also by the mutual release from the earlier agreement.88 Examples of Valid Consideration An act done or forbearance made in return for unilateral promise is a sufficient consideration to
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support the promise.89 Where a party leaves the determination of all matters under a contract in the discretion of the other party; that does not, in all circumstances, constitute a total want of consideration.90 Where it was agreed at the time of partition that a particular co-sharer should realise arrears of rent due before partition, and distribute the amounts to the other co-sharers in proportion, and the particular co-sharer failed to realise the amounts, it was held that the other co-sharers could claim their share of the rent from him as there was consideration for the agreement.91 The benefit received by the vendee under the original conveyance is the consideration for the option to repurchase, reserved to a vendor under it.92 Accepting the responsibility of conducting religious ceremonies in a temple is a valuable consideration to support the gift of property to the person who accepts the responsibility.93A entered into employment with a company at the instance and request of B, its manager. B executed a promissory note in favour of A for a part of his remuneration. It was held that the note was executed for sufficient consideration. Where the mortgagees under a trust were obliged to pay a certain sum to charity and in discharge of such obligation they transferred the mortgage interest to charity, the transfer was held to be for valuable consideration, which arose from the fact that the charity in return did not enforce its right to recover that amount from the family (i.e., mortgagees).94 An oral award though not enforceable, was not illegal, and when acted upon was good consideration.95 A waiver of preemption rights by minority shareholders was held good consideration for the promise of the majority shareholder to pay for shares if his purchaser did not pay for them.96 Doctrine of Privity A contract cannot confer rights or impose obligations arising under it on any person except the parties to it. No one but the parties to a contract can be entitled under it, or bound by it. This principle is known as that of privity of contract.97 The doctrine has two aspects. The first aspect is that no one but the parties to the contract are entitled under it. Contracting parties may confer rights or benefits upon a third party in the form of promise to pay, or to perform a service, or a promise not to sue (at all or in circumstances covered by an exclusion or limitation clause). But the third party on whom such right or benefit is conferred by contract can neither sue under it nor can rely on defences based on the contract. The second aspect of the doctrine is that parties to a contract cannot impose liabilities on a third party. A person cannot be subject to the burden of a contract to which he is not a party. It is the counterpart of the proposition that a third party cannot acquire rights under a contract.98 This rule, for example, also bars a person from being bound by an exemption clause contained in a contract to which it is not a party, so that a contract between A and B cannot impose a liability upon C.1 The doctrine of privity may involve any (or more) of the four questions:2
(i) (ii) (iii) (iv)
Can a person enforce a contract to which he is not a party? Can a person set up a defence based on the terms of a contract to which he is not a party in order to answer a claim brought by a person who is a party to the relevant contract? Can a contracting party set up a defence based on the terms of his own contract in order to answer a claim brought by a person who is not a party to the relevant contract?3 Can a contracting party enforce his own contract against a person who is not a party to the relevant contract?
Applicability of the Doctrine of Privity in English Law It was an established rule of English law that a third party could not sue on a contract though made for his benefit,4 described as well as established as any 'in our law', a 'fundamental principle',5 and an 'elementary' principle. The principle is that apart from special considerations of agency, trust,
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assignment or statute, a person not a party to a contract cannot enforce or rely for protection on its provisions.6 English law knows nothing of a jus quaestium tertio arising by way of contract, such a right may be conferred by way of property, as for example, under a trust, but it cannot be conferred on a stranger to a contract as a right to enforce the contract in personam.7 Applicability of the Doctrine of Privity in India Under the Act, the consideration for an agreement may proceed from a third party, but it does not follow that the third party can sue on the agreement. There was some divergence of opinion on this point.8Even though under the Contract Act, the definition of consideration is wider than in English law, yet the common law principle is generally applicable in India with the effect that only a party to the contract is entitled to enforce the same.9 The best statement of the law is that of Rankin CJ, in Krishna Lal Sadhu v. Promila Bala Dasi :10
Clause (d) of section 2 of the Contract Act widens the definition of 'consideration' so as to enable a party to a contract to enforce the same in India in certain cases in which the English law would regard the party as the recipient of a purely voluntary promise and would refuse to him a right of action on the ground of nudum pactum. Not only, however, is there nothing in Section 2 to encourage the idea that contracts can be enforced by a person who is not a party to the contract, but this notion is rigidly excluded by the definition of 'promisor' and 'promisee'.
The Calcutta High Court has held that the administration of justice was not to be hampered by Tweedle v. Atkinson, 11 and that 'in India, we are free from these trammels and are guided in matters of procedure by the rules of justice, equity and good conscience'.12 The Law Commission of India recognised that a rigid adherence to the doctrine of privity caused hardship, and recommended incorporation of a separate section into the Act .13 The amendment proposed purported to make a contract enforceable by the third party in his own name, if the contract expressly conferred a benefit on him, but subject to any defences available to the contracting parties. It also proposed that the parties to the contract should be unable to vary or rescind or alter the contract, once the third party had adopted the contract. Privity and Consideration The rule that a party wishing to enforce the contract must furnish or have furnished consideration (under the English law) must be distinguished from the doctrine of privity. The rules of privity and consideration may not always coincide. The two rules reflect separate issues of policy. The rule of privity relates to who can enforce the contract, and that of consideration is about the types of promises which can be enforced.14 Two different factual situations may arise. The plaintiff may be a party to an agreement without furnishing any consideration. A, B and C may all be signatories to an agreement whereby C promises A and B to pay A GBP 100 if B will carry out work desired by C. There may be another case where the person wishing to enforce a contract may not be a party to the agreement at all. B and C may make an agreement whereby B promises to write a book for C and C promises to pay GBP 100 to A. Under the English law, A cannot sue C in both the cases. But does he fail in the first case because the consideration has not moved from him and in the second because he is not privy to the contract? The fundamental assumption of the English law is that a contract is a bargain. If a person furnishes no consideration, he takes no part in a bargain; if he takes no part in a bargain, he takes no part in a contract. In the second of the above two cases, A is a stranger to the contract. But he is equally a stranger in the first; he is a party to an agreement but he is not party to a contract. It is true if the doctrine of consideration were abolished, the problem of privity will remain as in other continental legal systems. But as long as consideration is an essential feature of English law, it would seem to be
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immaterial whether a person is forbidden to sue on the ground that he has given no consideration or on the ground that he is stranger to the contract. These are but two ways of saying the same thing.15 It was controversial whether the rule that consideration must move from the promisee and the doctrine of privity of contract were fundamentally distinct or whether they are merely variations of a common theme. In the earlier English cases, the two rules have always led to the same result. But Lord Haldane in Dunlop Pneumatic Tyre Co. Ltd v. Selfridge & Co. Ltd., 16 distinguished between the two:
[I]n the law of England certain principles are fundamental. One is that only a person who is a party to a contract can sue on it. Our law knows nothing of a jus quaesitum tertio arising by way of contract. Such a right may be conferred by way of property, as for example, under a trust, but it cannot be conferred on a stranger to a contract as a right to enforce the contract in personam. A second principle is that if a person, with whom a contract not under a seal has been made, is to be able to enforce it, consideration must have been given by him to the promisor or to some other person at the promisor's request.
Under this Act, consideration may move from the promisee or any other person. In the first of the situations given above, A can sue C because the consideration for C's promise has been provided by B, who is 'any other person' according to this definition, and C is a party to the agreement. Although consideration for an agreement may proceed from a third party, a stranger to an agreement cannot sue upon it.17 There is, however, nothing in Section 2 to allow a stranger to a contract to enforce it. In Kepong Propecting Ltd v. Schimidt, 18 the Privy Council considered the provisions of Section 2(d) of the Malaya Contracts Ordinance (the same as in this Act ) and held that the provision gave a wider interpretation to the definition of 'consideration' than that which applied in England, particularly in that it enabled consideration to move from another person than the promisee, yet that did not affect the law relating to enforcement of contracts by third parties. On the contrary, paras (a), (b), (c) and (e) of Section 2 supported the English conception of a contract as an agreement on which only the parties to it could sue.19 Justification for the Doctrine of Privity The rule of privity has been justified on a number of grounds. First, it is unjust to enable a third party to sue on the contract and not be liable for it. Secondly, enabling third parties to enforce contracts would affect or limit the rights of contracting parties to vary or terminate the contract. Thirdly, the third party may not have provided the consideration, and hence should not be able to enforce the contract. Lastly, the promisor is likely to face two actions, from the promisor and the third party. Criticism of the Doctrine of Privity First, the third party rule prevents effect being given to the intentions of the contracting parties. If remedy is denied to the third party when the contracting parties intended it to be so, it frustrates their intentions. Secondly, it causes injustice to the third party who may have relied on the contract to regulate his affairs, and thus, upsets the reasonable expectations of the third party to the benefit under the contract. Thirdly, such a third party who suffers a loss cannot sue, and the promisee who has suffered no loss can. Fourthly, therefore, the third party who suffers loss cannot claim compensation, and the promisee not having suffered any loss can claim nominal damages only. Fifthly, even if the promisee were to obtain a satisfactory remedy, he may not be able to, or may not wish to sue. Lastly, the third party rule causes difficulties in commercial life, particularly where transactions and projects involve a 'network' of contracts allocating risks, responsibilities and liabilities between the parties.20 The courts have developed exceptions21 to the doctrine to avoid injustice. The existence of the number of exceptions demonstrates its basic injustice, and the fact that these exceptions continue to evolve and are litigated, shows that the existing exceptions have not solved the problems.
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Privity in Other Legal Systems The doctrine of privity is peculiar to the common law countries. A number of countries recognise the rights of third parties to enforce the contract.22 The rule that a third party cannot enforce a contract has been abrogated by statute in a number of 'common law' countries.23 Even in the United Kingdom, the Contracts (Rights of Third Parties) Act, 1999 provides for enforcement of contractual terms by third parties.24 The UNIDROIT Principles provide that a contract is binding upon the parties,25 but this does not prejudice any effect which that contract may have in respect of third parties under the applicable law, nor does it purport to deal with the effects of avoidance and termination of a contract on the rights of third persons. Remedies Available to the Promisee for the Benefit of the Third Party Specific Performance Third parties for whose benefit a contract has been made may not sue on the contract, but the party making the contract may sue for specific performance for the benefit of the third party even where damages obtainable will be nominal. In Coulls v. Bagot's Executor & Trustee Co. Ltd., 26 a company O, for a consideration of GBP 5, agreed to quarry stone from the property of C and agreed to pay a fixed minimum royalty of GBP 12 per week to C and his wife during their joint lives and thereafter to the survivor. The document was signed by the company, the husband and the wife. The wife was held entitled to receive the royalties after her husband's death and notwithstanding that she gave no consideration, she could enforce this right. Barwick CJ, held that a person not a party to a contract may not himself sue upon the contract so as to directly enforce its obligations. But it is possible for that person to obtain the benefit of a promise made with another for his benefit by steps other than enforcement by himself in his own right.27 In a contract where a promise by A is made to B and C for consideration to pay B and C, it is not open to A to question whether the consideration moved from both B and C or as between themselves or only from one of them. The agreement was a promise in respect of which there was privity between A on the one hand and B and C on the other. It is enforceable in the joint life time of B and C, but only if both are parties to the action to enforce it. B, though he supplied the consideration could not sue alone. If C was unwilling to join as plaintiff he could be joined as a defendant, but the judgment would be in favour of both B and C. Similarly, if B would not join in the action, C could join B as a defendant and with a similar judgment, i.e., in favour of B and C.28 In neither of these cases could A successfully deny either privity or consideration. Similarly, if B were dead, the representatives of B would have to be joined by C because A's promise was not made with C alone though the judgment will be in favour of C being the survivor.29 The mode of enforcing would be by the executor enforcing the promise to pay the survivor, i.e., for the benefit of the widow. Windeyer J, reviewed the law relating to consideration and the right of third parties to enforce a contract where consideration moved from a joint promisee, and seems to hold that C (the wife) could enforce the contract in the manner suggested by the Chief Justice Barwick,30 observing that complete and perfect justice to a promisor may well require that a promisor perform his promise to pay money or transfer property to a third party, and held that specific performance could be possible in such cases, unless these cases were for rendition of personal services. In Beswick v. Beswick, 31 one PB agreed with his nephew to transfer his business in consideration of the nephew employing him at GBP 6-10 a week for the rest of his life and to pay to PB's wife after his death an annuity charged on the business at GBP 5 a week for her life. The nephew took over the business, but after the death of PB refused to pay any sum to PB'swidow. She brought an act ion against the nephew in her capacity as administratrix and her personal capacity. This action was decreed by the Court of Appeal. Lord Denning MR held that the rule that 'no third person can sue or be sued on a contract to which he is not a party' is only a rule of procedure. Where a contract is made for the benefit of a third person, the third person may enforce it in the name of the contracting party or his executor or personal representative, or jointly with him, or, if he refused to sue, by adding him as a co-defendant.32 Danckwerts LJ, there held that a contract to make a money payment could be
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specifically performed.33 The House of Lords affirmed the decision of the Court of Appeal, but the question whether the widow was entitled to sue at common law in her personal capacity as beneficiary, was not argued and the correctness of the decision in Tweedle v. Atkinson, 34 was not challenged. Dunlop Pneumatic Tyre Co. Ltd v. Selfridge & Co. Ltd., 35 and Scruttons Ltd v. Midland Silicones Ltd., 36 were considered as the greatest difficulty in the way of widow's right to sue personally. It was held that the widow, as administratrix of the estate of her husband, was entitled to enforce the agreement by way of specific performance in her own favour, notwithstanding that damages recoverable for her husband's estate were or might be nominal. Lord Reid was of the opinion that the widow had no right in her personal capacity but as an administratrix, she could sue for specific performance for the benefit of herself and Lord Hodson was of the same opinion. For an unconscionable breach of faith, the equitable remedy was apt. Lord Pearce was of the opinion that specific performance was the proper remedy.37 Lord Upjohn held that in common law, a third party cannot sue to enforce a contract but equity must come in for the purpose of specifically enforcing a right, and if the husband of the widow in his lifetime could enforce the contract, there was no reason why the widow could not sue for her benefit. The power of equity to specifically enforce a contract in favour of third party at the instance of the contracting party was not in doubt. And further equity will act if damages would only be nominal.38 Although, the promisee may seek specific performance of the contract, the remedy itself is limited. It may not be ordered to enforce a contract of personal service, or a contract involving numerous details or requiring constant supervision of the court.39 Damages Generally, in a suit for damages; the plaintiff cannot recover more that the amount required compensating him for his own loss,40 and not that of the third party.41 If the action is for recovery amount, the promisee may not recover because the amount is not due to him.42 Where the plaintiff transferred the property to the defendant who undertook to construct a house for her and her children who could live rent free for life, the plaintiff could recover her own loss, and not for the rights of occupation after her death which her children would have enjoyed.43 The third party rule produces an unjust and perverse result, because the person who has suffered the loss (of the intended benefit) cannot sue, while the person who has suffered no loss (the party to the contract) can sue. The legal representatives of a deceased hotel guest who had been staying in a hotel under an arrangement between his employer company and the hotel, were held entitled to claim compensation for negligence of the hotel causing his death, although they were third parties to the contract. The decision rested on the ground that any other view was an anomaly, where the employer company was disentitled from claiming compensation, and the guest (his legal representatives), not being parties to the contract, from suing.44 But a trustee may be able to recover substantial damages for breach of contract even though the loss is suffered by his cestui que trust.45 An agent may be able to recover substantial damages even though his undisclosed principal suffers the loss.46A local authority could recover substantial damages although the loss was suffered by the inhabitants, as it act ed like a trustee (though not strictly a trustee) for the inhabitants of its area and had to act in their interests. It administered funds for their benefit, and owed them a duty to get them in.47 In Jackson v. Horizon Holidays Ltd., 48 the plaintiff had booked a holiday with the defendants. The plaintiff and his wife and children found the hotel most disappointing and their holiday was spoiled. On their return to England, the plaintiff brought an act ion for damages in respect of the loss of his holiday for himself, his wife and two small children. Lord Denning held that the damages granted were excessive for his own distress, but upheld the award on the ground that the contract was made for the benefit of himself as well as his wife and children, and hence he could recover their loss as well as his own.49 This approach was disapproved by the House of Lords in Woodar Investment Development Ltd v. Wimpey Construction UK Ltd .50 In this case, a purchaser under a contract of sale agreed to pay part of the price to the third party. The seller alleged wrongful termination by the purchaser and sought damages. The decision rested on the ground that there was no breach by the purchaser, but
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all the judges indicated that if there was breach by the purchaser, the seller could have recovered only for his loss and not that of the third party. But the decision in Jackson's case was supported on the ground that the damages had been awarded for the plaintiff's own loss, or alternatively on the ground that cases relating to holidays required special treatment.51 Where a promisee seeks damages in respect of a contract made for a third party's benefit, he can recover nominal damages only. But in St Martins Property Corp. Ltd. v. Sir Robert McAlpine & Sons Ltd., 52 a question arose as to whether a contracting party was liable for loss suffered by a third party to whom the subject matter was transferred. In this case, the owner-employer, having a building contract (which contained a clause prohibiting assignment) for development of property by a contractor, assigned the property, and later along with the assignee, sued the contractor for damages for defects in the building. It was held that since the assignment was invalid, the assignor retained the rights under the agreement. Although, the normal rule disabled a plaintiff from recovering damages except for his own loss, and hence, from recovering any damages if he had parted with the ownership of property, the plaintiff assignor in the present case could, as an exception, recover substantial damages. The contractor could foresee that the parts of the constructed property would be occupied and purchased by third parties, and therefore, it could be foreseen 'that damage caused by a breach would cause loss to a later owner'. The parties were treated as having entered into a contract on the footing that the plaintiff would be able to enforce contractual rights for the benefit of those who suffered from the defective performance, but who, under the terms of the contract, could not acquire any right to hold the defendant contractor liable for breach. The House of Lords held that the case fell within the rationale of one of the exceptions to the rule that a party can recover damages only in respect of his own loss, applied the principle of The Albazero,53 that since the parties to the contract of carriage must have contemplated that property in the goods might be transferred to third parties after the contract had been made, the shipper must be treated in law as having made the contract of carriage for the benefit of all persons who might, after the time of contracting, acquire interests in the goods. The exception to the rule that damages could not be recovered for third party's loss was later extended further. It was held that where a party entered into a building contract for the benefit of a third party and subsequently assigned its rights against the building contractor to the third party, the latter was entitled to recover substantial damages for defects in the performance of the contract where it was foreseeable that such defects would cause third party loss.54 In Pamatown Ltd v. Alfred McAlpine Construction, 55U owned a site which he wanted to develop, and appointed M as the contractor. In order to avoid VAT, the contract with M was made between M and P, the latter being a company in the same group as U. On the same day, a separate 'Duty of Care Deed' was executed between U and M under which M gave warranties about exercise of care in construction. This deed, unlike the building contract, did not contain an arbitration clause. P made a claim in arbitration against M for defective work. M alleged that P could not recover substantial damags under the building contract since it has no proprietary interest in the site and had therefore, suffered no loss. The Court of Appeal held that the fact that P was not the owner of the property was no bar for its claim for substantial damages for breach of contract between P and M. The contract being based on the intention or contemplation of P and M. On appeal, the House of Lords reiterated the rule that a plaintiff could recover damages only for a loss which he himself had suffered, but it formualted the exception of a situation where it has been within the contemplation of the contracting partis that breach by one was likely to cause loss to an identified or identifiable stranger to the contract, rather than to the other contracting party. It justified the exception for the necessity to avoid the disappearance of a substantial claim into a legal 'black hole', and stated that the necessity disappeared where the third party had a right to recover substantial damages even if those damages might not be identical to those which would have been recovered under the main contract in the same circumstances. In the instant case, the exception did not apply, because by 'a plain and deliberate course...was adopted' under which U, the company with the potential risk of loss, was given a distinct entitlement to sue the contractor directly. Arbitration
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An arbitration clause in a contract does not bind a third party, even where the third party and one contracting party have the same director, and the third party has received goods under that contract, has paid for the goods, acted in terms of that contract, and has indicated in its prospectus that it was bound by that contract. The fact that the third party affirmed and approved that contract and act ed on its terms might be relevant to determine its obligations under the contract, but not for deciding the existence of an arbitration agreement.56 Similarly, an arbitration agreement between a financer, borrower and one guarantor does not bind the second guarantor.57 However, non-signatory parties to agreements with arbitration clauses, can pray for and be referred to arbitration under section 45 in Part II of the Arbitration and Reconciliation Act, 1996 in exceptional cases. Following factors will be relevant: direct relationship with the signatory party; direct commonality of the subject matter, and the agreement between parties; the transaction being a composite transaction where the performance of the principal or mother agreement may not be feasible without the aid, execution and performance of the supplementary or ancillary agreement for achieving the common object; will the composite reference achieve ends of justice. Thus, an arbitation agreement by a company within a group might bind its non-signatory affiliates, if the circumstances demonstrate that the mutual intention of the parties was to bind both the signatory as well as non-signatory parties.58 Privity Established Goods supplied by the plaintiff to the defendant and admitted to have been received by the latter raise a presumption of an order having been placed by the defendant. It is immaterial whether or not the order was by a partner or a person authorised. The initial onus was discharged, and privity established.59 A transaction by which A promised to pay B and C for consideration during their joint lives and after the death of one of them, to the survivor, the consideration moved from B but the agreement was signed by all three, i.e., A, B and C. There was privity between A on one side and B and C on the other.60 In a suit by a purchaser against the seller for damages for shortage of supply of goods by shipper; the shipper, as agent, was also entitled to take benefit of the arbitration clause in the contract between the purchaser and the seller and to apply for stay of suit.61 Where, by a deed, A conveyed his property to B and, on the same day B agreed by another deed to reconvey the property to A and C, or any one of them, it was held that there was an agreement enforceable at law, though the said second deed was not signed by A or C.62 An agent of a foreign company for sale of its machine agreed with the purchaser that the purchaser will deduct his commission and pay the balance of price to the company. The purchaser was liable to the agent for the commission.63 Application of the Principle The general rule is that only the persons entitled to the benefits or bound by the obligations of a contract are entitled to sue or be sued upon it.64 No right may be enforced by a person who is not a party to the contract.65 This is so even where it is clear from the contract that some provision in it was intended to benefit such third party.66 It can neither be used as a shield nor as a sword. Therefore, if A, for good consideration, agrees with B that he will not sue C for C's negligence, the latter will not be able to set up the promise of A to B as defence. There is no difference in principle between A promising B to pay C and A promising B that he will not claim that which C ought to pay A. Privity must be pleaded and established.67 Third Party cannot enforce MC Chacko v. State Bank of Travancore, 68 is a striking example of the application of the rule of privity in India. In this case, the appellant was the Managing Director of the Highland Bank. K, the father of the appellant, had guaranteed amounts due by the Highland Bank to the Kottayam Bank for
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an overdraft arrangement between the two banks. K had executed a deed making the appellant and other members of the family universal donees of his properties. This deed contained a clause as follows:
I have no debts whatsoever. If in pursuance of the letter given by me to the Kottayam Bank at the request of my eldest son, Chacko, for the purpose of Highland Bank Ltd., Kottayam, of which he is the Managing Director, any amount is due and payable to the Kottayam Bank, that amount is to be paid to from the Highland Bank by my son, Chacko. If the same is not so done and any amount becomes payable (by me) as per my letter, for that my eldest son Chacko and the properties in Schedule A will be answerable for that amount.
K's guarantee was barred by limitation. The Kottayam Bank sued the Highland Bank and the appellant and other family members. The claim against the appellant rested upon the fact that he was one of the donees under the deed, which, it was claimed, created a charge on the properties mentioned. The Supreme Court held that the deed was an arrangement binding between the members of the family for satisfaction of the debt, if any, under the guarantee. The covenant that K would either personally or out of the properties given to him satisfy the debt, was intended to confer an indemnity upon the appellant and others. It did not create a charge in favour of the bank. According to the principle that a stranger could not sue under a contract, the Kottayam Bank could not recover under the deed. There would be no privity of contract between the landholder whose land was taken under management under Section 45 of the Bombay Tenancy and Agricultural Lands Act, 1948 and was delivered back due to termination of management, and the person to whom it was leased during the management.69 Where a person transfers property to another and stipulates for the payment by the purchaser to a third person, a suit by such person to enforce the stipulation will not lie.70 A stranger providing legal advise to the arbitrator, and hence indirectly to the parties to an arbitration agreement, could not sue for the benefit conferred upon him by the award,71 nor could a company sue upon a contract entered into by the managing director of the company on his own behalf and on behalf of his friends, relatives and other directors.72 A consumer of LPG connection had a contract with the authorised distributor of the Indian Oil Corporation for the supply of connection; he had no subscription voucher, and had no right to proceed against the Indian Oil Corporation.73 Where a lease contained a stipulation that the lessee would pay to the zamindar those zamindari dues which were payable by the lessor to the zamindar, it was held that the zamindar, not being a party to the lease, was not entitled to sue the lessee, under the terms of the lease.74 By a tharao (resolution), the owners of certain villages were given full rights over the forests in those villages under their vahivat. Some of these villagers executed contracts in favour of the plaintiffs. But the government, after merger of the states, cancelled the tharaos. In an action for injunction against the government, it was held that the plaintiffs could not enforce the agreement, as they were not parties thereto.75Similarly, it has been held that where a policy of insurance is effected by the assured on his own life, and the policy is expressed to be for the benefit of his wife, the wife, not being a party to the contract of assurance, is not entitled, in cases not governed by the provisions of the Married Women's Property Act, 1874 to sue the insurance company on the policy unless the policy is assigned in writing as provided by the Transfer of Property Act, 1882section 130, or a trust has been declared by the assured as provided by the Indian Trusts Act, 1882section 5.76 A motor insurance policy providing that the insurer shall indemnify the insured against liability in respect of death or accident could not be enforced by a passenger who is a stranger to contract.77 Nor could a third party claiming damages under third party risk insurance enforce the arbitration clause in the insurance policy.78 A bank cannot claim under an insurance policy taken by its debtor for goods hypothecated with it.79 There is no contract between the members of a trade union inter se, such as to entitle a member to sue another for breach of contract.80 In a recent case81, it was held that a shareholder of a company cannot challenge termination of an agreement between that company with another.82 A third party is not entitled to challenge the existence or the adequacy of consideration of a sale.83
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Contracting party cannot set up defence under his contract against third party A contract between O and B (the contractor) excluded consequential liability. A clause in the contract between O and B provided that rights, remedies and redresses that B has against O, M (the sub-contractor) will have against B. It was held that this did not give B the same benefits nor did it render B bound against M in the same way. The clause did not absolve B of its liability towards M. Third Party is not liable A contract between A and the government authorized the latter to take possession of all tools, plant, machinery, stores and materials in or upon the works incertain eventualities of breach of contract. It could not, it was held, jeopardize the property of B who had entered into a partnership with A with the knowledge of government and did not impose a liability on him.84 An agreement between the government and forest officers appointed for the forests of a raj is not enforceable against the raj after the government gives up its administration of the forests, because there is no privity of contract.85A issued an advertisement for a circus run by B, the proposal for which was approved by C, B's financier. A's suit against C for recovery of the dues for services rendered was dismissed for want of privity.86 The lessors of the mills could not be held liable under a contract between the government and the lessees of the rice mills, where the lessees were operating as agents of the government,87 nor was there any privity between the seller of mineral ore and the foreign buyer, where the seller had a contract with the State Trading Corporation for sale of the mineral ore, and the corporation had another contract with the foreign buyer for sale of goods purchased from the seller.88 In Gujarat Bottling Co. Ltd v. Coca Cola Co., 89 it was held that a clause in a franchisee agreement between the two companies by which company G agreed not to sell, assign, transfer, pledge, mortgage, lease or license or in any other way encumber or dispose off in whole or part, the agreement or any interest therein, either directly or indirectly, nor to pass by operation of law or in any other manner without the consent of company C. It was held that interim injunction could not be issued restraining the shareholders of G from transferring their shares as they were not parties to the contract between G and C. In Paschimanchal Vidyut Vitran Nigam Ltd v. DVS Steels and Alloys (P) Ltd., 90 it was held that the electricity dues of a former owner of property cannot be recovered from the purchaser of the premises,91 unless the rules, or terms or conditions of supply, authorize the supplier to do so. Where goods consigned to an airline for carriage are delivered late, that airline is liable for compensation; and not the other airlines to which it had transferred goods for onward carriage.92 A person who has merely arranged for shipping goods through a vessel chartered by him is not liable to a buyer for shortage of goods shipped to the buyer under a contract of sale.1 The Corporation to which roads are handed over after construction by the Government, is not liable for paying bills of the contractor who has constructed the road.2 A bank is not liable for interest on delayed payment of insured amount under an insurance policy arranged by it for its customer who holds its credit card.3 A bank that has lent money for purposes of a transaction cannot be impleaded as party to arbitration concerning matters arising between parties to the transaction.4 A drawee of a cheque cannot claim compensation from the banker of the drawer for delay in clearing the cheque.5 A paper mill placed an order and gave advance for machinery with a supplier stipulating that the contract for such supply shall be made by the supplier with an engineering firm, such that the bills shall be submitted to the firm, and be paid by the firm. Bills were raised on the firm, and goods despatched to the firm. The mill could not be liable merely taking steps at various stages in the transaction for pursuing supply of the machinery.6 Exceptions to Application of the Principle Trust Where A makes a promise to B for the benefit of C, the promise can be enforced by C against A if B has constituted himself trustee of A's promise for C. This equitable principle was first laid down by Lord Hardwicke in the eighteenth century,7 and was developed later.
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In Les Affreteurs Reunis SA v. Leopold Watford (London) Ltd., 8 the shipowners promised the charterers that they (shipowners) would pay commission to the broker who had negotiated the charterparty. The House of Lords held that the broker could enforce the agreement against the owners, although he was not the promisee in the contract, and had given no consideration for the promise by the owners. It was held that the charterers were trustees of the shipowner's promise to the broker. The absence of the charterers, the trustees, as plaintiffs was held to be immaterial, as the parties agreed to treat the case as if they were plaintiffs. This exception of trust as a promise has been applied to promises to pay money or to transfer property, but is presently confined within narrow limits and its application refused to other forms of contractual obligations, like exclusion clauses.9 Later English cases show that the courts are reluctant to apply the exception, because its application prevents the parties to the contract to vary it by mutual consent.10 Courts have required that the intention to constitute a trust must be affirmatively proved by substantial evidence.11 Secondly, there must be an intention to benefit the third party. In an appeal from Canada, Alice Marie Vandepitte v. Preferred Accident Insurance Company of New York, 12 the development of the doctrine received a check at the hands of the Privy Council. In this case, B had insured his car with D. B's daughter J, driving with B's permission, negligently injured V. V sued J with success but the judgment was unsatisfied. V then sued D claiming theft the policy covered J as well as B, B having so stipulated for her as trustee. The Privy Council held for D, holding that the intention to constitute a trust must be affirmatively proved and that the trust doctrine applied only to benefits to be conferred on a third party cestui que trust, whereas were the argument of D to prevail, serious duties and obligations would be placed upon J, without her consent. Thirdly, the intention to benefit the third party must be irrevocable. English Courts are stated no longer to favour the device of trust as a contractual right,13 but the Australian Courts find that there is 'considerable scope for development of trusts' specially in the context of policies of insurance effected for the benefit of third persons.14 To establish that a trust of the promise has been created, it is necessary, firstly, to establish an intention of the promisee to enter into the contract as a trustee. A trust does not arise simply because a party to a contract undertakes to confer a benefit on a stranger.15 Use of express words like 'trust' or 'trustee', establish the intention.16 In the absence of express words, no satisfactory test can be laid down to determine whether the requisite intention exists. Nearness of relationship is a circumstance which may be indicative of a trust but does not, per se, enable a third party to sue.17 Mere direction in a document to which the plaintiff is not a party, to pay a certain sum to the plaintiff, is not enough to create a trust in his favour.18 Sometimes, it has been found difficult to decide whether in a contract, the intention is to create a right arising by way of contract or by way of property under a trust. In some cases, it was held that trust was created,19 in others that it was not.20 In Inuganti Kasturamma v. Chelikani Venkatasurayya Garu, 21A contracted with B to pay a sum of money to C, it was held that the latter could not sue A merely on the basis of the contract. In order to enable C to sue, the contract must be intended to secure a benefit to him so that he may be entitled to say that he has a beneficial interest as cestui que trust. It was not possible to lay down categorically and exhaustively the circumstances which have to be considered in order to determine whether or not a contract is intended to secure such a benefit. But the court laid down four considerations which it referred to:
(i) (ii) (iii)
whether the defendant was made a trustee for the plaintiff by the document, or whether the defendant's position was merely such that she might become a trustee if certain events were to take place as contemplated in the document; if she was made or had become a trustee, had she any personal and substantial interest in the property which she had a right to protect, or did the contract override any interest of her own in the property; in other words; was any specific property charged with the payment to the plaintiff in which the
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(iv)
defendant was to have no interest whatsoever; was the deed communicated to the plaintiff and did he accept in lieu of any rights that he had prior to the deed. The plaintiff, in the instant case, could recover payment as the document was held to have created a trust in his favour.
This equitable exception was applied in India by the Privy Council in Khwaja Muhammad Khan v. Husaini Begam 22 Where an obligation in equity amounting to a trust arising out of the contract exists, the beneficiary has a right to sue.23 In this case, the father of the bridegroom had contracted with the father of the bride to make the daughter an allowance called kharch-i-pandan if she married the son. After the marriage, the daughter sued her father-in-law to recover arrears of the allowance. The Privy Council held that though she was no party to the contract yet 'she was clearly entitled to proceed in equity to enforce her claim'. Thus, a bargain between the husband of the plaintiff and the defendants, where the shares belonging to the plaintiff's husband were sold to the defendant and the share money remained charged for payment of monthly sums both to the husband and after his lifetime to the wife, could be enforced by the wife since an obligation was in the nature of a trust.24 Certain persons collected dues from carters coming to the bazaar for the benefit of charitable purposes of a sabha. It was held that they thereby constituted themselves as trustees for the sabha, and it could as cestui que trust file a suit against them for recovery of the amount.25 The beneficiary in a benami transaction may sue, joining the benamidar.26However, on coming into force of the Benami Transactions (Prohibition) Act, 1988 no suit, claim or act ion to enforce any right in respect of any property held benami against the person, in whose name the property is held, or against any other person, shall lie, by or on behalf, of a person claiming to be the real owner of such property nor can defence be based on any right in respect of any property held benami as provided in sub-sections (1) and (2) of Section 4 subject to the exceptions in sub-section 3.27 In Okara Grain Buyers Syndicate Ltd v. United Commercial Bank, 28 a contract of procurement of grain by a syndicate for and on behalf of the Punjab government for the due performance of which security was deposited in a bank in Okara, subsequently in Pakistan, became impossible of performance due to the partition of the country. It was held that legal ownership of the deposit was and continued to be in the depositor and was claimable by the syndicate. No trust was created in favour of the third party government. Insurance The principle of privity has been applied also to the insurance policies effected for the benefit of third parties. Where a policy of insurance is effected by the assured on his own life, and the policy is expressed to be for the benefit of his wife, the wife, not being a party to the contract of assurance, is not entitled, in cases not governed by the provisions of the Married Women's Property Act, 1874 to sue the insurance company on the policy unless the policy is assigned in writing as provided by the Transfer of Property Act, 1882Section 130, or a trust has been declared by the assured as provided by the Indian Trusts Act, 1882Section 5.29 Where a man insures his life expressly for the benefit of his widow, this gives her no lien upon the policy money in preference to his creditors.30 An insurance policy protects only the owner and not the mortgagees.31 A bank is not entitled to claim the policy amount under an insurance policy taken by its debtor for goods hypothecated with it,32 but a financer can can claim the amount where the policy is taken in the financer's name.33 Family Arrangements and Marriage Settlements The Specific Relief Act, 1963 enables specific performance of a contract being a settlement on marriage, and family arrangements at a suit of any person beneficially entitled thereunder,34 and creates an exception to the rule that a party to a contract cannot sue.35 Even before its enactment, a party although a stranger, could sue to enforce a benefit where it was due under a marriage settlement, partition or other family settlement.36 Where A and B, two Hindu brothers, divided the family property between them, and agreed at the time of partition that they should contribute Rs. 300/in equal shares and invest the sum on the security of immovable property and pay the interest
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towards the maintenance of their mother, it was held that the mother, though not a party to the contract, was entitled to sue her sons to have that amount invested in her favour.37 Similarly, where on a partition between a Hindu son and his father, it was arranged that the father should remain in possession and management of the share of the property allotted to the son and maintain the son's wife and his children out of it, it was held that the wife, though not a party to the arrangement, was entitled to sue the father for the maintenance of herself and her children.38 The wife and children, though not named as parties to the contract, possessed an actual beneficial right which placed them in the position of cestui que trust under the contract.39 A family arrangement between a father, his daughter and her husband whereby the father conveyed his house to his daughter who undertook to maintain him for life would be a sufficient consideration. The daughter can specifically enforce the contract.40 Similarly, where a provision is made for the marriage expenses of a female member of a Hindu family on a partition of the joint family property between the male members, the female member is entitled to sue the parties to the partition deed to enforce the provision in her favour.41 This principle was again given effect to by the Privy Council in Dan Kuer v. Sarla Devi, 42 to enforce a provision for maintenance of the mother made in a partition award in a partition between a father and his sons. The mere fact that an agreement is entered into by persons who are relations of each other does not make such an agreement a family settlement, so as to be binding on persons who are not even parties thereto.43 In equity, a covenant for the settlement of property under a marriage settlement can be enforced by persons 'within the marriage consideration', i.e., by husband, wife and the issue of the marriage, but not by the next-of-kin of the wife, or her children by a previous marriage.44 This equitable exception to the doctrine of privity applies where the contract is made in consideration of marriage and the intended beneficiary is within the marriage consideration.45 In Prebble v. Broghurst, 46 the children of the marriage were described as quasi-parties to the contract--a marriage settlement, i.e., they were treated for every purpose of settlement as though consideration moved from each one of them.47 But an intended beneficiary who is not an issue of marriage is not within the marriage consideration, nor are children by a previous marriage unless their interests are interwoven with those of the children of marriage.48 Even children of marriage would be strangers to a post-nuptial settlement.49 Where the obligation to settle property has been assumed voluntarily, no object of intended trusts can enforce the obligation,50 e.g., where a spinster made a voluntary settlement in favour of herself and her issue containing a covenant to settle after-acquired property and married thereafter, and had children, they had, as volunteers, no right to enforce the covenant.51The creation of a settlement on marriage in which the plaintiff may be beneficially entitled can be specifically enforced under the Specific Relief Act, 1963.52 Creation of a Charge A stranger to a contract can sue for the money made payable to him by it where the money is charged on immovable properties,53 or also where specific money in suit is allocated by the promisor in favour of such third party.54 It is necessary that the intention must be expressed by adequate words to make property or a fund belonging to a person charged for payment of debt mentioned in the deed. In order to create a charge, there must be evidence of intention disclosed by the deed that a specified property or fund belonging to a person was intended to be made liable to satisfy the debt due by the creator of the charge in favour of the person seeking to enforce it.55 Covenants running with Land The privity of contract doctrine has been relaxed for commercial reasons to allow certain positive or restrictive covenants to run with the land, so as to benefit or burden persons not party to the contract imposing such covenants. Third parties can acquire rights in this manner under a covenant to which they were not a party. These are properly classified as belonging to the law of property. In India, the enforcement of covenants running with the land is provided under Section 40 of the Transfer of Property Act 1882,56 in respect of :
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(i) (ii)
a right to restrain enjoyment in a particular manner of property imposed for the more beneficial enjoyment of the property; and benefit of an obligation arising out of contract and annexed to the ownership of property.
These can be enforced against the transferee with notice or a gratuitous transferee, but not against transferee for consideration and without notice of the right or obligation. In England, Section 56(1) of the Law of Property Act, 1925 provides that a person may take an immediate or other interest in land or other property, or the benefit of any condition, right of entry, covenant or agreement over or respecting land or other property, although he may not be named as a party to the conveyance or other instrument. It applies to 'any thing in action'. The scope of the section is limited.
(i) (ii) (iii) (iv)
to real property; to covenants running with the land; to cases where the instrument is not merely for the benefit of the third party but purports to contain a grant to or covenant with him; and to deeds strictly inter partes.57
Benefit of Exclusion Clauses The extent to which third parties to contracts can take benefit of clauses in those contracts excluding or limiting liability for loss or damage have been a challenge to the privity doctrine. Earlier English cases have accepted a principle of 'vicarious immunity', according to which a servant or agent performing a contract was entitled to that immunity from liability which his employer would have had,58 but this principle was later discarded by the House of Lords in Scruttons Ltd v. Midland Silicones Ltd., 59 in which the stevedores engaged by the carrier negligently damaged a drum containing chemicals, and in a suit by the cargo-owners in tort, relied on a limitation clause contained in the bill of lading between the carrier and the cargo-owners, but did not succeed. However, it was held that liability could be limited if provided by contract in certain cases, namely, where the bill of lading clearly provided, that the carrier was contracting on his own behalf and also contracting as agent of the stevedore, or had authority from the stevedore to act, or if the stevedore later ratified, or if there was consideration moving from the stevedore. The Supreme Court of Canada has accepted the doctrine of vicarious immunity. The plaintiffs had a contract of bailment with a warehouseman which contained a clause limiting the liability of the warehouseman on, any one package, 'to USD 40, unless the holder had declared in writing a valuation in excess of USD 40 and paid the additional charge specified to cover warehouse liability'. The goods were damaged because of negligent handling by the employees of the warehouseman. The plaintiff sued the employees for the tort of negligence. Although, there was no express men tion of employees in the limitation clause, it was held that the employees could take the benefit of the contractual limitation because the employees were acting in the course of employment and had performed the very services provided for in the contract between their employer (warehouseman) and the plaintiff; particularly so when the plaintiff knew that employees would be involved in performing the obligation of the warehouseman.60 On the other hand, the benefit of the clause excluding liability in a contract for preparing drawings between a building contractor and an engineering firm was not available to engineers employed by the firm who had prepared the drawings, as it was not shown that the exemption clause was established for the benefit of the engineers, and the facts did not give rise to an inference that the exemption was intended to include the engineers.61 In New Zealand Shipping v. AM Satterthwaite (The Eurymedon), 62 the Privy Council considering a 'Himalaya Clause',63 had to consider whether an exclusion clause contained in a bill of lading could be
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relied upon by a third party stevedore employed by a carrier in a suit by consignees for negligently damaging the goods while unloading them. The Privy Council gave to the stevedores the benefit of the exemptions and limitations contained in the bill of lading by regarding that the shipper had made an offer of a unilateral contract to the stevedores to unload the goods on terms incorporating the exclusion clause, which offer the stevedores had accepted by commencing the work; and held that the carrier had contracted to the exclusion clause as an agent for its servants, agents and independent contractors, and therefore, was 'designed to cover the whole carriage from loading to discharge, by whomsoever it is performed, the performance attracted the exemption or immunity in favour of whoever the performer turned out to be'.64 The approach in this case was viewed as artificial. The principle of The Eurymedon,65 was restricted to contracts carriers and stevedores. In Southern Water Authority v. Carey, 66 the main contract between the employer and the head-contractor for construction of sewage works excluded liability on the part of all sub-contractors, agents and independent contractors. In a suit for negligence filed by the employer against the engineering subcontractor, the latter relied on the above clause, and was entitled to the benefit of the exemption clause on the ground that it negatived the duty of care which would otherwise have existed upon the head-contractors. In Norwich City Council v. Harvey, 67 the subcontractor had contracted on the same terms as the main contract between a building owner and the head-contractor, and the main contract provided that the owner was to bear the risk of damage by fire. The building was damaged by fire as a result of negligence of the roofing sub-contractor. The owner sued him in tort, and although there was no contractual relationship between the owner and the sub-contractor, it was held that the latter owed no duty of care, because both the contractors had contracted on the basis that the owner had assumed to bear the risk of damage by fire. The above cases indicate a departure from the privity doctrine, dictated by the need to support established commercial practice, and to avoid the redistribution of the risks perceived and contemplated by the contracting parties at the time of making the contract. Collateral Contracts A collateral contract between a third party and one of the parties to a main contract may be associated with the main contract. Such a contract may enable a third party to enforce the main contract. A manufacturer's guarantee is an example of such contract collateral to the main contract of purchase of goods. Where such collateral contract is expres s, it may not be an exception to the third party rule, because the 'third party' is party to the collateral contract. They are a device used or implied to impose obligations on persons not parties to the main contract. A employed B as a painting contractor and instructed B to buy paint made by C. A gave this instruction on the basis of a statement of C to A that the paint would last for seven years. The paint lasted for three months. Although the contract was between A and B, it was held, in an action by A, that there was a collateral contract between A and C that the paint would last for seven years.68 It has also been suggested that the same reasoning may also apply where a person purchases goods from a seller who gives a 'guarantee' in the name of the manufacturer, which guarantee can be regarded as a collateral contract.69 A garage owner undertook the job of repairing the plaintiff's car damaged in a collision, after an insurance company had ordered the repairs. Normally, it should have taken five weeks; the garage owner took eight weeks. The owner sued the garage for expenses incurred by him in hiring a car for three weeks. The garage owner pleaded that the contract was with the insurance company and the car owner could not sue. The court held that there was a second collateral contract when the garage undertook to do the job in a reasonable time and so it was liable to the plaintiff.70 Multilateral Contracts In a club or other unincorporated association, one member joining the club is deemed to contract with other members. He does so without being aware of the identity, and although his communication is
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only with the secretary. Similarly, where a number of persons agree to enter into a competition subject to rules, such persons contract not only with the organising club, but also with each other.71 Assignment Where an assignment of benefits under a contract is validly made, whether according to the provisions of statute or otherwise,72 the promisor is faced with an act ion brought by a person who he did not regard as a party, or whom he did not intend to benefit. An assignee will also be bound by an arbitration clause in the contract assigned.73 A consignee with a duly endorsed railway receipt74 may maintain as owner a suit for loss or damage to goods against the railways, but a bare consignee may not.75 Where title has passed to the consignee, he can sue.76 The delivery of the railway receipt to the consignee now passes to the consignee the property in the consignment, and the consignee shall have all the rights and liabilities as the consignor.77 A consignee will have a right to sue only if he is able to bring his case within any of the exceptions to the general rule,78 which debars any person who is not a privy to a contract from instituting a suit for breach thereof.79 Contracts requiring tortious duty of care to third parties A contract between A and B may also create a tortious duty of care by one of them towards a third party. That party's negligence constitutes a breach of contract for which the affected third party may seek relief. These are not cases of torts per se, but cases where the basis of the third party's tort claim is not independent of the rights conferred by contract. In one view, allowing such liability to be imposed is not any circumvention of established principles of the law of contract;80 yet the effect of these decisions allows a third party to enforce a contract by pursuing an action in tort.81 A contract between a professional, namely, solicitor or surveyor and his client imposes a duty of care so that such solicitor or surveyor may be liable to third parties for misrepresentation.82 Solicitors have been held liable in tort to third parties for negligence in drawing up Wills. In one case because the Will was neverdrawn up,83 and in the other, because it was executed in a manner as to invalidate the gift under it.84 These cases can be analysed as torts. Acknowledgement and Estoppel A stranger to a contract can sue where one of the parties to the contract afterwards agrees with the stranger to pay him directly or is estopped from denying the liability to so pay.85 A promisor may create privity between himself and the third party by conduct, by acknowledgment,86 or otherwise, constituting himself an agent of the third party, entitling the third party to sue.87 In a case before the High Court of Calcutta,88A advanced Rs. 300/- to B on the security of a pattah relating to immovable property and deposited with him by B. B then transferred by a registered kabala all his property, movable and immovable, to C for a sum of Rs. 2000/-. The entire amount of Rs. 2000/- was not paid, as there was a provision and declaration in the kabala that out of this consideration money of Rs. 2000/-, the sum of Rs. 300/- due to A should be paid by C. A sued C for Rs. 300/-, basing his claim upon the kabala. It was found that there was no agreement between A and C for payment of Rs. 300/- by C to A.89 But on the very day on which the kabala was executed, C acknowledged the obligation to pay Rs. 300/- to A, that the acknowledgment was communicated to and accepted by A, and that as a result of this, the pattah, which was erroneously believed by the parties as constituting a charge,90 was handed over by A to C. Upon these facts, it was held that A was entitled to recover the amount claimed from C. This decision was followed in a later case when there was no communication to A of the arrangement between B and C; and the court held that the absence of communication did not make any difference in principle.91 Contract for Benefit of a Third Person It has been held that where a contract is made for the benefit of a third person, there may be an equity in favour of the third person to sue upon the contract,92 and it has been suggested that a person who
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takes a benefit under a contract may sue on the contract.93 Thus, a stranger having beneficial interest under a contract can sue in equity to enforce, although he himself is a stranger to the contract.94 This view was dissented from by the Bombay High Court,95 and is directly opposed to the decision of the Privy Council in Jamna Das v. Ram Autar Pande, 96 that a purchaser's contract to pay off a mortgage cannot be enforced by the mortgagee who was no party to the contract. Indeed, the weight of decisions now is in favour of the view that a person not a party to the contract cannot sue on the contract unless the case comes within one of the recognised exceptions97 and this seems clearly indicated by the provisions of sub-ss (a),(b), (c) and (e) of Section 2.98 It has accordingly been held that where A mortgages his property to B, part of the consideration for the mortgage being B's promise to A to pay C the amount which A owed to C, C not being a party to the contract, cannot sue B for the payment.99 It has also been held that if the courts consider that it would be in aid of justice to adjudicate between the parties, the courts may allow a third party to a contract to sue for doing justice between the suitors; and a suit by the addressee of an insured article sent by post was entitled to sue if the article was not delivered.1 A legal representative of a company staying in a hotel under a contract between the company and the hotel were entitled to sue for compensation on account of his death, though he was not a party to the contract.2 Statutes Conferring Rights or Imposing Liabilities on Third Parties India A policy of insurance effected by any married man on his own life, and expressed on the face of it to be for the benefit of his wife, or children, shall be deemed to be a trust for the benefit of his wife or such children.3An insurer issuing a policy under the Motor Vehicles Act, 1988 covering third party liability is liable to satisfy any judgment or decree which may be passed in favour of the third party against the insured in respect of compensation for loss to the third party arising in an accident involving a motor vehicle.4 Where an insured under such a policy becomes insolvent or makes compromise or arrangement with creditors, or the insurance company is wound up, the rights of the insured against the insurer stand transferred to such third party to whom such liability is incurred.5Where a person (principal employer) employs a contractor for execution of any work involved in his business or trade, such principal employer is liable to pay compensation under the Workmen's Compensation Act, 1923 arising out of accidents to the workmen employed by the contractor in doing such work (subject to being indemnified by the contractor).6 A mortgagee, consignee or other person having an interest in the subject matter insured, may insure on behalf of and for the benefit of other persons insured as well as for his own benefit.7 A holder of a promissory note, bill of exchange or cheque is entitled to recover the amount due thereon.8 Every consignee of goods under a bill of lading and every endorsee of a bill of lading has the right of suit and is subject to the same liabilities as if he were a party to the bill of lading.9 A consignee of goods covered by railway receipt or the endorsee shall have all rights and liabilities of the consignor on delivery of railway receipt to him.10 Although, a principal is a party to the contract made by the agent on his behalf, the position of an undisclosed principal requires consideration. If an agent makes a contract with a person who neither knows, nor has reason to suspect that he is an agent, his principal may require the performance of the contract.11 A user of goods or beneficiary of services using or taking benefit with the consent of the person who has purchased the goods or hired the services, is a consumer, and can file a complaint and obtain relief for defect in goods or deficiency in services.12 Specific performance may be obtained by a person beneficially entitled under a marriage settlement and family arrangement, a new company arising out of amalgamation of a contracting party
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(company) with another company, and a new company in respect of contracts entered into before its incorporation.13 On receiving the assent of the conciliation officer, the settlement of industrial disputes binds not only the parties to that dispute, but also binds all the workmen in the establishment, who are employed at the date of the dispute and all persons who subsequently become employed in that establishment.14 United Kingdom Statutes similar to those discussed above confer rights or impose liabilities on third parties in the UK.15 The Contracts (Rights of Third Parties) Act, 1999 reforms the privity rule so as to enable contracting parties to confer a right to enforce the contract on a third party. This Act gives a two-limbed test for the circumstances in which a third party may enforce a term of a contract. The first limb is where the contract expressly so provides. The second limb is where the term purports to confer a benefit on the third party, unless it appears on a true construction of the contract that the contracting parties did not intend to have the right to enforce it. The third party need not be in existence when the contract is made (namely, unborn child, future spouse, company not yet incorporated). The right of the third party for enforcement of the contract is subject to the terms and conditions of the contract. The parties to the contract are free to limit or place conditions on the third party's rights, for example, requiring him to enforce the right only by arbitration. A third party seeking to enforce his rights as above, is entitled to all the remedies which are available to a person bringing a claim for breach of contract (damages, injunctions, specific performance or other relief). Thus, the normal rules about the remedies apply to such claims, namely, causation, remoteness, duty of mitigation etc. The third party can take advantage of exclusion or limitation clauses in the contract. Where a third party has a right under the contract, the contracting parties cannot (unless the express term of the contract enables rescission or variation of the contract without third party's consent), rescind or vary the terms of the agreement in a way which affect the third party's rights without the consent of the third party, if:
(i) (ii) (iii)
the third party has communicated his assent to the terms to the promisor; or the promisor is aware that the third party has relied on the terms; or the promisor can reasonably be expected to have foreseen that the third party would rely on the terms and the third party has in fact relied on it.
Parties may also expressly provide that the consent of the third party would be required only in specified circumstances. The Act confers on the court or an arbitral tribunal to dispense with the third party's consent if the consent cannot be obtained because his whereabouts are unknown, or he is incapable of giving consent, or where it cannot be reasonably be ascertained whether he has in fact relied on the contractual term. While dispensing with the consent, the court or tribunal may impose conditions, including a condition requiring payment of compensation to the third party. Subject to an express term excluding any defence, set-off or counter-claim, the promisor can rely on any defence or set off arising out of the contract and relevant to the term being enforced, which would have been available to him, had the claim been by the promisee. He can also set up any defence or set-off, or make any counter-claim (not arising out of the same contract), where this would have been possible had the third party been a party to the contract. Where a proceeding is brought against a third party, he can set up any of the defences mentioned above, including that of a term purporting to exclude liability, provided he could have done so had he been a party to a contract.
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Where the promisee has recovered damages (or the agreed sum) from the promisor in respect of either the third party's loss or the promisee's expense in making good that loss, the court or tribunal shall reduce any award to the third party by taking account of the sum already recovered. This protects the promisor from double liability. The Act does not confer any rights on a third party to enforce contracts on negotiable instruments, contracts being memorandum and articles of association of a company which bind a company and its members and the members to each other, contracts of employment, contracts for the carriage of goods by sea or rail or road (except reliance by third party on an exclusion or limitation of liability). The Act does not affect any existing right or remedy of the third party. A third party shall not be treated party to a contract for the purposes of any other Act or instrument made under any other Act . The third party is treated as a party to an arbitration agreement between the promisor and the promisee as regards the disputes between him and the promisor, and he is able not only to enforce his right to arbitration, but is also bound to enforce that right by agreement. The Act does not impose any obligation or restraint on the Crown. It is an enabling measure allowing the parties to the contract, including the Crown, to confer enforceable rights on third parties.
22 See also Section 127 (consideration for guarantee) and Section 185 (consideration not necessary for creating of an agency) of the Indian Contract Act, 1872. 23 PS Atiyah, An Introduction to the Law of Contract, 5th edn., 1995, p. 118. 24 Farnsworth, CONTRACTS, 3rd edn., 1999, p. 45. 25 See also Art. 29 of the United Convention on the International Sale of Goods, 1980. 26 The UNIDROIT Principles, Art. 3.2 provides:A contract is concluded, modified or terminated by mere agreement of the parties, without any further requirement. 27 Combe v. Combe, [1951] 2 KB 215 at 220, [1951] 1 All ER 767 per Denning LJ; Gould v. Gould, [1969] 3 All ER 728. 28 Misa v. Currie, (1875) LR 10 Ex 153 at 162 [1874-80] All ER Rep 686,HL ; Thomas v. Thomas, (1842) 2 QB 851, 114 ER 330;. Midland Bank Trust Co. Ltd. v. Green, [1981] AC 513 at 531, [1979] 3 All ER 28; R v. Braithwaite, [1983] 1 WLR 383 at 391, [1983] 2 All ER 87. 29 Chidambara Iyer v. P.S. Renga Iyer, [1966] 1 SCR 168, AIR 1966 SC 193 at 197 per Subbarao J; Ramacharya Venkatramanacharya v. Shrinivasacharya Venkatramanacharya, (1918) 20 Bom LR 441, AIR 1918 Bom 183 at 184; Sonia Bhatia v. State of Uttar Pradesh, AIR 1981 SC 1274 (reasonable equivalent or valuable benefit). 30 Pollock, Principles of Contract, 13th edn., p. 133; quoted in Keshub Mohindra v. Commissioner of Gift Tax, [1968] 70 ITR 1 at 23, (1969) 1 ITJ 293 at 304. 31 Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd., (1915) AC 847 at 885, [1914-15] All ER 333(HL) at 335 per Lord Dunedin. 32 Chitty on Contracts, 28th edn., p. 170, para 3-007. 33 Bachawat J in Fazaladdin Mandal v. Panchanan Das, AIR 1957 Cal 92; referring to Chitty on Contracts, Vol. 1, 20th edn., p. 39. 34 See, for instances that fail to make this distinction.: Prahlad v. Laddevi, AIR 2007 Raj 166; Dhanbarti Koerin v. Shyam Narain Mahton, AIR 2007 Pat 59. 35 Chitty on Contracts, 28th edn., p. 169, para 3-004. 36 Manna Lal v. Bank of Bengal, (1876) ILR 1 All 309 at 311. 37 Sivagami Achi v. PS Subramania Chettiar, AIR 1936 Mad 978 at 980.
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38 Pollock, Principles of Contract, 13th edn., 1950, p. 133; definition approved in Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd., [1914-15] All ER 333. 39 Sir William Holdsworth, History of English Law, Vol. 8, p. 11, (2nd edn., 1937). 40 North Ocean Shipping Co. Ltd. v. Hyundai Construction Co. Ltd., [1978] 3 All ER 1170. 41 Perumal Mudaliar v. Sendanatha Mudaliar, AIR 1918 Mad 311 at 312; Munnalal v. Duklo, AIR 1926 Nag 149 at 151; Ganesh Prasad Singh v. Bechu Singh, AIR 1934 All 271 at 272; See Chitty on Contracts, 28th edn., p. 169, para 3-005; Anson's Law of Contract, 29th edn., 2010, p. 92; but see Kamta Prasad v. Second Additional District Judge, AIR 1997 All 201 (held to be void though there was detriment to the promisee, because there was no benefit to promisor; it is submitted that this view is not correct). 42 Perumal Mudaliar v. Sendanatha Mudaliar, AIR 1918 Mad 311 at 312. 43 Shailesh Chandra Guha v. Bechari Gape, AIR 1925 Cal 94. 44 Kirtyanand Sinha v. Ramanand Sinha, AIR 1936 Pat 456, 164 IC 220. 45 See Section 127 of the Act: Anything done, or any promise made, for the benefit of the principal debtor may be a sufficient consideration to the surety for giving the guarantee. See also Prakashwati Jain v. Punjab State Industrial Development Corporation, AIR 2012 P&H 13. 46 Bolton v. Madden, (1873) LR 9 QB 55. 47 Good v. Cheesman, (1831) 2 B&Ad 328; Alliance Bank v. Broom, (1864) 2 Dr & Sm 289, 34 LJ 256(Ch), [1861-73] All ER Rep 1449; De la Bere v. CA Pearson, [1908] 1 KB 280, [1904-07] All ER Rep 755; Ward v. Byham, [1956] 1 WLR 496, [1956] 2 ALL ER 318; Chappell d' Co. Ltd. v. Nestle Co. Ltd., [1960] AC 87, [1959] 2 All ER 701; Williams v. Roffey Bros. d' Nicholls (Contractors) Ltd., [1991] 1 QB 1, [1990] 1 All ER 512(CA) . 48 Bolton v. Madden, (1873) LR 9 QB 55. 49 It is no consideration if the promisee has promised to do what he is already legally bound to do; see below, under the heading: 'Pre-existing Obligations Under Law' and 'Performance of Existing Contractual Obligations'. 50 Bolton v. Madden, (1873) LR 9 QB 55 at 57; referred in Keshub Mohindra v. Commissioner of Gift Tax, [1968] 70 ITR 1, (1969) 1 ITJ 293; Midland Bank Trust Co. Ltd. v. Green, [1981] AC 513 at 531, [1979] 3 All ER 28. 51 O'Sullivan v. Management Agency and Music Ltd., [1985] QB 428 at 459, [1985] 3 All ER 351. 52 Section 127 of the Indian Contract Act, 1872, expressly provides so. 53 Fazaladdin MandaI v. Panchanan Das, AIR 1957 Cal 92 at 94; mutuality is no longer a necessary condition for grant of specific performance; see Section 20(4) of the Specific Relief Act, 1963. 54 Goodhart,[1951] 67 LQR 456-a request is not essential to a binding obligation provided the consideration is referable to the promise; Smith,(1953) 69 LQR 99. 55 PK Nanjundasami Chetti v. Kanagaraju, (1919) 42 Mad 154 at 159, 49 IC 666, AIR 1919 Mad 500. 56 Combe v. Combe, [1951] 2 KB 215, [1951] 1 All ER 767. 57 Radha Govinda Rai v. Khas Dharmaband Colliery Co. Ltd., AIR 1963 Pat 160. 58 Durga Prasad v. Baldeo, (1881) ILR 3 All 221 (the case could not also fall under Section 25(2) because the market was not constructed by the plaintiff for the defendants). 59 Sindha Shri Ganpatsingji Himatsingji v. Abraham, (1895) 20 Bom 755 at 758; Raja of Venkatagiri v. Sri Krishnayya Rao Bahadur Zamindar, AIR 1948 PC 150, 50 Bom LR 517. 60 Re Wyern Developments Ltd.,[1974] 2 All ER 535; International Petroleum Refining d' Supply Sociedad Ltd. v. Brett Caleb d' Sons Ltd., [1980] 1 Lloyd's Rep 569; Barclay's Bank plc v. Weeks, Legg d' Dean, [1998] 3 All ER 213 (need not move to the promisor). 61 O'Sullivan v. Management Agency and Music Ltd., [1985] QB 428, [1985] 3 All ER 351; Re Dale, Proctor v. Dale, [1994] Ch 31 [1993] 4 All ER 129; Jones v. Padavatton, [1969] 1 WLR 328, [1969] 2 All ER 616, (giving up a job); Tanner v. Tanner, [1975] 3 All ER, 776 (giving up tenancy); Coombes v. Smith, [1986] 1 WLR 808. 62 Fanindra Narain Roy v. Kachheman bibi, (1917) 45 Cal 774, 41 IC 673, AIR 1918 Cal 816 at 817; Ganesh Prasad Singh v. Bechu Singh, AIR 1934 All 271 at 272. 63 Sudhanshu Mohan Koley v. Mathura Mohan Adak, (1975) ILR 1 Cal 182; see also International Petroleum Refining
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& Supply Sociedad Ltd. v. Brett Caleb & Sons Ltd., [1980] 1 Lloyd's Rep 569 (promisor benefited indirectly); Pearl Carriers Inc. v. Japan Lines Ltd. (The Chemical Venture), [1993] 1 Lloyd's Rep 508 (consideration for promise by shipowners to charterers in the form of payments made by charterers of ship to the crew). 64 Customs d' Excise Commrs v. Diners Club Ltd., [1989] 2 All ER 385 at 395; Re Charge Card Services Ltd., [1987] Ch. 150, affirmed in [1988] 3 All ER 702, [1989] Ch 487; Chitty on Contracts, 28th edn., p. 188, para 3-037. 65 Sornalinga Mudali v. Pachi Naicken, AIR 1914 Mad 41; P Rama Patter v. A Vishwanath Patter, 45 Mad 345, AIR 1922 Mad 23 at 24; Munnalal v. Duklo, AIR 1926 Nag 149 at 151; Anant Krishna Modak v. Sarasvatibai Padmanabh Shetti, AIR 1928 Bom 316 at 318, 30 Bom LR 709, 111 IC 556; Amin Chand v. Guni, AIR 1929 Lah 466 at 467, 119 IC 766. 66 Fanindra Narain Roy v. Kachheman bibi, (1917) 45 Cal 774, 41 IC 673, AIR 1918 Cal 816. 67 Andhra Bank Suryapet v. Anantnath Goel, AIR 1991 AP 245 at 248. 68 Gifts made after 30 September 1998 are not chargeable to gift tax vide Section 75 of the Finance (No. 2) Act, 1998. 69 Keshub Mohindra v. Commr. of Gift Tax, [1968] 70 ITR 1, (1969) 1 ITJ 293. 70 See section 10 below: 'Doctrine of Promissory Estoppel'. 71 Lyle-Meller v. A Lewis d' Co. (Westminster) Ltd., [1956] 1 All ER 247; Sat Narain v. Union of India, AIR 1961 Pun 314. 72 Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh, AIR 1979 SC 621 at 631, [1979] 2 SCR 641, (1979) 2 SCC 409 at 425. 73 AIR 1979 SC 621 at 636-637. 74 Kedar Nath Bhattacharji v. Gorie Mahomed, (1886) ILR 14 Cal 64; distinguished in Adaitya Dass v. Prem Chand Mondal, (1928) 120 IC 105, AIR 1929 Cal 369 (no evidence of plaintiff's expense being incurred at defendant's request); Gopal Vinayak Deshmukh v. Trimbak Narayan Deshmukh, AIR 1953 Nag 195. 75 District Board of Ramnad v. DK Mahomed Ibrahim Saheb, AIR 1933 Mad 524, 64 Mad LJ 574, 143 IC 496; cf Perumal Mudaliar v. Sendanatha Mudaliar, AIR 1918 Mad 311. 76 Doraswamy Iyer v. Arunachala Ayyar, AIR 1936 Mad 135, 159 IC 345. 77 Abdul Aziz v. Masum Ali, (1914) 36 All 268, 23 IC 600, AIR 1914 All 22 at 23; Commr. of Income Tax v. Kameshwar Singh, AIR 1953 Pat 231 at 234; Re Hudson,(1885) 33 WR 819, 54 LJ Ch 711 (claim in administration suit for unpaid instalments of testator's promised subscription with allegation of expense and liabilities incurred on the faith thereof, treated as unarguable. The court did however indicate that had the claim been for liabilities actually incurred by the plaintiffs, it might have been successful); Re Hudson was applied in Commr. of Income Tax v. Kameshwar Singh, AIR 1953 Pat 231. 78 Re Soames,(1897) 13 TLR 439. 79 Re Mountgarret,(1913) 29 TLR 325. 80 1952] 1 KB 290 at 295, [1952] 1 All ER 149(CA) . 81 A Lakshamanaswami Mudaliar v. Life Insurance Corpn. of India, AIR 1963 SC 1185 at 1190, (1963) 33 Com Cas 420, (1963) 1 SCJ 521 (the donation was also ultra vires the company). 82 Jiban Krishna Mulick v. Nirupama Gupta, (1926) 53 Cal 922, 96 IC 846, AIR 1926 Cal 1009; Jamuna Das v. Ram Kumarji, AIR 1937 Pat 358, 169 IC 396. 83 Pipraich Sugar Mills Ltd. v. Pipraich Sugar Mills Mazdoor Union, AIR 1957 SC 95, [1956] SCR 872 at 885. 84 See generally 73 Am Jur 2d Subscriptions. 85 73 Am Jur 2d Subscriptions, 10. 86 73 Am Jur 2d Subscriptions, 10. 87 Dutton v. Poole, (1688) 2 Lev 210 approved by Lord Mansfield in Martyn v. Hind, (1776) 2 Cowp 437 at 443. 88 (1861) 1 B & S 393, [1861-73] All ER Rep 369, 124 RR 610, especially the judgment of Crompton J; accepted by House of Lords in Beswick v. Beswick, [1967] 3 WLR 932 at 955 (HL), [1967] 2 All ER 1197; contra Denning MR in the same case [1966] Ch 538, [1966] 3 All ER 1(CA) .
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89 Venkata Chinnaya Ray Garu v. Ramayya Venkataramaya, (1881) 4 Mad 137, (1876-1882) ILR 1-4 Mad 930. 90 (1861) 1 B&S 393, [1861-73] All ER Rep 369, 124 RR 610. 91 Samuel Pillai v. Anathanatha Pillai, (1883) ILR 6 Mad 351. 92 Budhavaram Narashimhulu Chetti v. Noota Ibbundrum Nagaram Varu, AIR 1923 Mad 434 at 435; Wahidan v. Nasir Khan, AIR 1930 All 434 at 436; Raja Shiba Prasad Singh v. Tincouri Banerji, AIR 1939 Pat 477 at 485; Daw Po v. U Po Hmyin, AIR 1940 Rang 91, 187 IC 875; Marayee Ammal v. Nalluswamy, (1965) 2 Mad LJ 329; see also Fazaladdin Mandal v. Panchanan Das, AIR 1957 Cal 92, per Bachawat J at 95. 93 Raj Rani v. Prem Adib, AIR 1949 Bom 215 at 217. 94 Sundar Sahu Gountia v. Chamra Sahu Gauntia, AIR 1954 Ori 80 at 84. 95 Ramachandra Ramyallabh v. Gomtibai, AIR 1926 Bom 82 at 85. 96 Distinction approved by the Supreme Court in Union of India v. Chaman Lal Loona and Co., AIR 1957 SC 652 at 655; quoting Chitty on Contracts, 21st edn., Vol. I, pp. 43-44; Pankaj Bhargava v. Mohinder Nath, AIR 1991 SC 1233, (1991) 1 SCC 556 at 564. 1 The Indian Contract Act, 1872, Section 2(f). 2 Carlill v. Carbolic Smoke Ball Co., [1893] 1 QB 256, [1891-94] All ER Rep 127; Budgett v. Stratford Co-op and Industrial Society Ltd., (1916) 32 TLR 378. 3 The possible existence of a collateral promise, e.g. a warranty on sale, does not affect the general truth of this agreement. 4 Board of Revenue Madras v. Annamalai & Co. (Pvt.) Ltd., AIR 1968 Mad 50, (1967) 2 Mad LJ 515(FB) ; Seth Loon Karan Sethiya v. Ivan Ejohn, AIR 1969 SC 73, (1969) 1 SCR 122 (held to be equitable assignment). 5 Board of Revenue Madras v. Annamalai & Co. (Pvt.) Ltd., AIR 1968 Mad 50, (1967) 2 Mad LJ 515(FB) . 6 Fazaladdin Mandal v. Panchanan Das, AIR 1957 Cal 92. 7 Westminster City Council v. Duke of Westminster, [1991] 4 All ER 136. 8 As to revocation see Section 5 below. 9 Re Casey's Patents, Stewart v. Casey, [1892] 1 Ch 104, Bowen LJ. 10 Re Mc Ardle,[1951] 1 Ch 669, [1951] 1 All ER 905. 11 Pao On v. Lau Yiu, [1980] AC 614, [1979] 3 All ER 65(PC) ; Lampleigh v. Brathwait, (1615) Hob 105; Re Casey's Patents, Stewart v. Casey, [1892] 1 Ch 104. See also Rainforest Trading Ltd v. State Bank of India Singapore, [2012] 2 SLR 713 (Singapore Court of Appeal). 12 (1979) 3 All ER 65 (PC) at 74. 13 Slade's case,(1602) 4 Co. Rep 91a. 14 Wigan v. English and Scottish Law Life Assurance Association, [1909] 1 Ch 291 at 297, [1908-10] All ER Rep 449. 15 Misa v. Currie, (1875) LR 10 Ex 153, [1874-80] All ER Rep 686,HL, affirmed sub nom Misa v. Currie, (1876) 1 App Cas 544(HL) ; Stott v. Fairlamb, (1883) 53 LJQB 47(CA) . 16 Fazaladdin Mandai v. Panchanan Das, AIR 1957 Cal 92. 17 Union of India v. Cham Lal Loona & Co., AIR 1957 SC 652 at 655. 18 Hob 105, 1 Sm LC 148. 19 Sic one would expect 'make'. 20 Kunj Behari Lal Rastogi v. Madhsodan Lal, AIR 1919 All 348. 21 Board of Revenue Madras v. Annamalai & Co. (Pvt.) Ltd., AIR 1968 Mad 50 at 52, (1967) 2 Mad LJ 515(FB) . 22 Central Bank of India v. Tarseema Compress Wood Manufacturing Company, AIR 1997 Bom 225. 23 Dungarmull Kissenlal v. Sambhu Charan Pandey, AIR 1951 Cal 55.
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24 P Kanakasabapathy Mudaliar v. Hajee Gosman Sahib, AIR 1925 Mad 192 (promise to pay bonus for extra work put in by the employees); Tayerali Mahamadali v. Garabad Sadu, AIR 1939 Bom 252 at 251. 25 Sindha Shri Ganpatsingji v. Abraham, (1895) 20 Bom 755; cf Ramacharya Venkatramanacharya v. Shrinivasacharya Venkatramanacharya, (1918) 20 Bom LR 441, AIR 1918 Bom 183; Dungarmull Kissenlal v. Sambhu Charan Pandey, AIR 1951 Cal 55. 26 See below. 27 Suraj Narain Dube v. Sukhu Aheer, (1928) 51 All 164, 112 IC 159, AIR 1928 All 440. The words are in themselves not clear, but if a merely void transaction could thus be in effect ratified, the intention of the Act would be frustrated; but see Narain Singh v. Chiranji Lal, AIR 1924 All 730 (2) at 731; Bankey Lal v. Ram Piari, AIR 1933 All 659 (mortgagee agreeing to payoff the debts of the mortgagor incurred during minority to the third party and paying off those debts was valid consideration for the mortgage). 28 Lala Babu Ram v. Ganga Devi, AIR 1959 All 788 at 798. 29 RK Sundaram Asari v. TR Abdul, AIR 1956 Mad 692 at 693. 30 ANAR Arunachallam Chettyar v. VMRP Firm, AIR 1938 Rang 202 at 203 (FB). 31 Taluk Board Koilpath v. Senthattikalai Pandia Chinnathambiar, AIR 1936 Mad 709. 32 Mittar Sain v. Data Ram, (1925) 24 All LJ 185 at 205, 90 IC 1000, AIR 1926 All 194 at 198. 33 Kothari Revashankar Amulakh v. Gauriben Jayashankar Vyas, AIR 1954 Sau 8; State of Orissa v. Narain Prasad, (1996) 5 SCC 740 (consideration for grant of liquor licence made up of monthly rental plus excise duty in addition to the obligation to purchase the minimum guaranteed quantity). See also Union of India v. Himachal Futuristic Communications Ltd, FAO (OS) 113/2013 decided on 25 Feb 2013 (Del). 34 Jagadindra Nath Roy v. Chandra Nath Poddar, (1903) 31 Cal 242; Indira Bai v. Makarand, AIR 1931 Nag 197; Vathyam Balarama Sastri v. Vavilala Vasudeva Sastri, (1948) 1 Mad LJ 47, AIR 1948 PC 7. 35 Srish Chandra Roy v. Roy Banomali Rai, (1904) 31 IA 107, (1904) 31 Cal 584 at 596, PC. 36 Amin Chand v. Guni, AIR 1929 Lah 466, 119 IC 766. 37 Miles v. New Zealand Alford Estate Co., (1886) 32 Ch D 266 at 289 Per Brown LJ, [1886-90] All ER Rep Ext 1726. 38 AIR 1952 All 996 (FB) (a case under the Stamp Act); referring to Crears v. Hunter, (1887) 19 QBD 341. 39 Combe v. Combe, [1951] 2 KB 215 at 221, 226-227, [1951] 1 All ER 767 at 771, 774; Bittan Bibi v. Kuntu Lal, AIR 1952 All 996 at 1010 (FB). 40 Colchester Borough Council v. Smith, [1992] Ch 421 at 435, [1992] 2 All ER 561(CA) . 41 Srinivasa Raghava Iyengar v. K R Renganatha Iyengar, AIR 1919 Mad 528 at 529; Gulab Chand v. Kamal Singh, AIR 1922 All 260 at 262; Syed Muhammad Jafar v. Ram Charan, AIR 1923 Oudh 176; Gajendra Singh v. Durga Kumari, AIR 1925 All 503 at 506 (FB); Anant Krishna Modak v. Sarasvatibai Padmanabh Shetti, AIR 1928 Bom 316 at 318, 30 Bom LR 709, 111 IC 556; Aya Ram Tola Ram v. Sadhu Lal, AIR 1938 Lah 781 at 784; M Ramiah Pillai v. PA Sankaranarayana Iyer, AIR 1958 Ker 246 at 248; Lakshmi Chand v. Niader Mal, AIR 1961 All 295 at 298; Bank of New India Ltd. v. G Govinda Prabhu, AIR 1964 Ker 267 at 269; Tulsabai Nathudas v. Narayan Ajabrao Raut, AIR 1974 Bom 72 at 73, (1975) Bom 562. 42 Ajodhya Jha v. HE Cox, AIR 1920 Pat 552 at 553. 43 Indira Bai v. Makarand, AIR 1931 Nag 197 (settlement of a doubtful claim of maintenance of wife). 44 Wade v. Simeon, (1846) 2 CB 548, 135 ER 1061. 45 Gopal Sahai-Bichha Lal v. Dhani Ram-Ram Gopal, 118 IC 646, AIR 1929 Lah 689 at 690. 46 Oldershaw v. King, (1857) 2 H & N 517 (forbearance to press for immediate payment); Wilby v. Elgee, (1875) LR 10 CP 497 (forbearance to sue for doubtful claim sufficient); Alliance Bank v. Broom, (1864) 2 Dr & Sm 289, 34 LJ 256(Ch), [1861-73] All ER Rep 1449; and Fullerton v. Provincial Bank of Ireland, [1903] AC 309 (forbearing by the bank to enforce existing debt on promise to give security). 47 Dadabhoy Dajibhoy Baria v. Pestonji Merwanji Barucha, (1893) ILR 17 Bom 457 at 486 (the plaintiff's right, it seems, was really to give the defendant notice that he would rescind if the defendant did not complete within a reasonable period of time). 48 Gopinath Bhagat v. Lakshminarain Singh, AIR 1917 Cal 485 at 486 (incapacity to enter into contract involving
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pecuniary liability under the Chhota Nagpur Encumbered Estates Act, 1876). 49 Poteliakhoff v Teakle, [1938] 2 KB 816, [1938] 3 All ER 686(CA) ; Hill v. William Hill (Park Lane ) Ltd., [1949] AC 530, [1949] 2 All ER 452. 50 [1948] 2 KB 42. 51 Tulsabai Nathudas v. Narayan Ajabrao Raut, AIR 1974 Bom 72 at 73, (1975) Bom 562. 52 Combe v. Combe, [1951] 2 KB 215, [1951] 1 All ER 767. 53 Alliance Bank v. Broom, (1864) 2 Dr & Sm 289, 34 LJ 256(Ch), [1861-73] All ER Rep 1449. 54 See Section 8 below. 55 Wilby v. Elgee, (1875) LR 10 CP 497; but see Oliver v. Davis, [1949] 1 KB 74, [1949] 2 All ER 353,CA (there was no forbearance, and therefore no consideration, where the offer of the defendant, though intended to secure forbearance, was withdrawn before the plaintiff was aware that it has been made). 56 Srinivasa Raghava Iyengar v. KR Renganatha Iyengar, AIR 1919 Mad 528 at 529. 57 Alliance Bank v. Broom, (1864) 2 Dr & Sm 289, 34 LJ 256(Ch), [1861-73] All ER Rep 1449. 58 Ibid, Fullerton v. Provincial Bank of Ireland, [1903] AC 309 at 313-314; Glegg v. Bromley, [1911-13] All ER Rep 1138 CA; Mohesh Chandra Guha v. Rajani Kanta Duff, AIR 1916 Cal 740, (1915) 22 CLJ 235, 31 IC 29; Srinivasa Raghava Iyengar v. Ranganatha Iyengar, (1918) 36 Mad LJ 618, AIR 1919 Mad 528, 51 IC 963; Anant Krishna Modak v. Sarasvatibai Padmanabh Shetti, AIR 1928 Bom 316, 30 Bom LR 709, 111 IC 556. 59 (1864) 2 Dr & Sm 289 at 292, 34 LJ (Ch) 256, [1861-73] All ER Rep 1449; Miles v. New Zealand Alford Estate Co., (1886) 32 Ch D 266 at 289-291, [1886-90] All ER Rep Ext 1726; Crears v. Hunter, [1887] 19 QBD 341; Horton v. Horton (No 2), [1961] 1 QB 215, [1960] 3 All ER 649, [1960] 3 WLR 914, (amendment of a separation deed inserting a clause of paying GBP 30 a month free of tax instead of just GBP 30, the former being the true intention of parties, it being a compromise of a wife's possible action for rectification). 60 Alliance Bank v. Broom, (1864) 2 Dr & Sm 289, 34 LJ 256(Ch), [1861-73] All ER Rep 1449 (a case of giving security for a debt already advanced); Board of Revenue Madras v. Annamalai & Co. (Pvt.) Ltd., AIR 1968 Mad 50, (1967) 2 Mad LJ 515 at 517 (FB); see Crears v. Hunter, (1887) 19 QBD 341 referred in Bittan Bibi v. Kuntu Lal, AIR 1952 All 996(FB) . 61 (1887) 19 QBD 341 relied on in Bittan Bibi v. Kuntu Lal, AIR 1952 All 996(FB) . 62 Bank of New India Ltd. v. G Govinda Prabhu, AIR 1964 Ker 267. 63 Allied Marine Transport Ltd. v. Vale do Rio Doce Navegacao SA (The Leonidas D), [1985] 1 WLR 925 at 933, [1985] 2 All ER 796; Banque de I'Indochine et de Suezsa v. JH Rayner (Mincing Lane) Ltd., [1983] QB 711, [1983] 1 All ER 137; GN Angelakis Co. S A v. Cie Algerienne de Navigation (The Attika Hope), [1988] 1 Lloyd's Rep 439. 64 Lakshmi Chand v. Niader Mal, AIR 1961 All 295. 65 Kedarnath Gangagopal Misra v. Sitaram Narayan Moharil, AIR 1969 Bom 221 at 223, 224. 66 Bhirgunath Prasad Singh v. Annapurna Dai Sijuarin, AIR 1934 Pat 644 at 645. 67 Narendra Lal Khan v. Tarubala Desai, AIR 1921 Cal 67. 68 Karam Din Nawab Din v. Anant Ram Lala Hukum Chand, AIR 1941 Pesh 6 at 7 (forbearance to attach the property of another). 69 Now Section 125 of the Criminal Procedure Code, 1973. 70 Kastoori Devi v. Chiranji Lal, AIR 1960 All 446. 71 Mayadas Lakhmidas v. Bhagwandas Parmanand, AIR 1924 Sind 41 at 45. 72 U San Ya v. PRMPSPL Firm, AIR 1936 Rang 396 at 398. 73 Mahesh Chandra Guha v. Rajani Kanta Dutt, AIR 1916 Cal 740, (1915) 22 CLJ 235, 31 IC 29; Sada Ram v. Sahazada Ram, AIR 1934 Lah 789 at 790. 74 Ogle v. Earl Vane, (1868) 3 QB 272; Hickman v. Haynes, (1875) 10 CP 598, [1874-80] All ER Rep 2182; Levey & Co. v. Goldberg, [1922] 1 KB 688, [1922] All ER Rep 842.
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75 (1870) LR 5 QB 449. 76 He need not have a positive opinion that it is justified; for its success may depend on facts not within his own knowledge, or on unsettled questions of law, or both. Often, a man who is asked, 'Is your cause just?' may quite fairly answer: 'I see nothing against good conscience in it; whether it is good in law is exactly what I want the court to tell me.' These refinements, however, are perhaps fitter for the moralist than for the lawyer. 77 Bowen LJ in Miles v. New Zealand Alford Estate Co., (1886) 32 Ch D 266 at 291, [1886-90] All ER Rep Ext 1726; Wilby v. Elgee, (1875) LR 10 CP 497; Debi Radha Rani v. Ram Dass, AIR 1941 Pat 282; Vathyam Balarama Sastri v. Vavilala Vasudeva Sastri, (1948) 1 Mad LJ 47, AIR 1948 PC 7; Rameshar Mistri v. Babulal Pandit, AIR 1946 Pat 97, 225 IC 629. 78 Firm Gopal Co. Ltd. v. Firm Hazari Lol & Co., AIR 1963 MP 37. 79 Kastoori Devi v. Chiranji Lal, AIR 1960 All 446. 80 Harihar Prasad Singh v. Maharaja Kesho Prasad Singh, AIR 1925 Pat 68 at 94 (FB); Baba Tikam Das v. Nawab Abbas Mirza, AIR 1934 Oudh 442 (2) at 444; Raja Jagat Kishore Acharya Choudhury v. Hemendra Kishore Acharya Choudhury, AIR 1935 Cal 263 at 265. 81 Aya Ram Tala Ram v. Sadhu Lal, AIR 1938 Lah 781 (a decision based on Hyams v. Stuart King, [1908] 2 KB 696(CA) ; later overruled by the House of Lords in Hill v. William Hill (Park Lone) Ltd., [1949] AC 530, [1949] 2 All ER 452. 82 Raja Jagaveera Rama Venkateswara Ettappa v. Arumugam Chetty, (1918) 45 IA 195 at 203, 48 IC 907, AIR 1918 PC 173 (the real question was whether a contract to pay enhanced rent for tenant's improvements could be implied, under a Madras Act; in fact there was no forbearance or promise thereon; O. Gopal Sahai-Bichha Lal v. Dhani Ram-Ram Gopal, AIR 1929 Lah 689, 118 IC 646; Wade v. Simeon, (1846) 2 CB 548, see also Combe v. Combe, [1951] 1 All ER 767, [1951] 2 KB 215. 83 Olati Pulliah Chetti v. Varadarajulu Chetti, (1908) 31 Mad 474 at 476-477. 84 Trnsukia Municipal Board v. Harikissen Lohia, AIR 1957 Assam 10; Mania v. Deputy Director of ConsoLtdation, Uttar Pradesh, AIR 1971 All 151 (compromise between two sisters, sale deed pursuant thereto good without money consideration). 85 Girijanund Datta Jha v. Sailajanund Dutta Jha, (1896) 23 Cal 645 at 665-66; Rameshwar Prosad Singh v. Lachmi Prosad Singh, (1903) 31 Cal 111, at 131-32; Bhiwa Mahadshet Takate v. Shivaram Mahadshet Takate, (1899) 1 Bom LR 495, 497; Sunder Singh v. Haro, AIR 1929 Notes 23e, (1929) 116 IC 719(property) . 86 Bhima v. Ningappa, (1868) 5 BUC, ACJ 75. 87 S.A. Anantanarayana Iyer v. Savithri Ammal, (1911) ILR 36 Mad 151; Sidh Gopal v. Behari Lal, (1928) 50 All 284, 107 IC 247, AIR 1928 All 65. 88 Ram Kirpal v. Gaya Dat, AIR 1914 All 533 (1914) 12 All LJ 331; Callisher v. Bischoffshein, (1870) LR 5 QB 449. 1 Indubala Devi v. Jitendra Nath Ghose, AIR 1971 Cal 411 at 413; referring to Callisher v. Bischoffsheim, (1870) LR 5 QB 449 and Wade v. Simeon, (1846) 2 CB 548, 135 ER 1061. 2 U.P. Govt. in Nazul Department v. Church Missionary Trust Association Ltd., (1947) 22 Luck 93, AIR 1948 Oudh 54, 229 IC 421. 3 Tinsukia Municipal Board v. Harikissen Lohia, AIR 1957 Assam 10; relying on Poornammal v. R Srinivasarangan, AIR 1956 SC 162. 4 Manna Lal v. Bank of Bengal, (1876) ILR 1 All 309. 5 Binder v. Alachouzos, [1972] 2 QB 151, [1972] 2 All ER 189, per Lord Denning MR. 6 Ranganayakamma v. K S Prakash, AIR 2009 SC 1218(Supp), (2008) 15 SCC 673. 7 Latif Jahan Begam v. Nabi Khan, AIR 1932 All 174, (1932) All LJ 9, 137 IC 231. 8 Kale v. Deputy Director of Consolidation, AIR 1976 SC 807 at 813. 9 Ram Charan Das v. Girja Nandini Devi, AIR 1959 All 473 at 481. 10 Latif Jahan Begam v. Nabi Khan, AIR 1932 All 174, (1932) All LJ 9, 137 IC 231; Kirtyanand Sinha v. Ramanand Sinha, AIR 1936 Pat 456, 164 IC 220. 11 Ram Charan Das v. Girja Nandini Devi, AIR 1966 SC 323.
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12 Sundar Sahu Gountia v. Chamra Sahu Gauntia, AIR 1954 Ori 80 at 84; Ram Charan Das v. Girja Nandani Devi, AIR 1959 All 473; Tek Bahadur Bhujill v. Debi Singh Bhujil, AIR 1959 Assam 109 at 119; Madan Gopal v. B Mukund Lal, AIR 1959 Punj. 434. 13 Gandharp Singh v. Nirmal Singh, AIR 1919 Oudh 105 at 109 (FB); Ram Charan Das v. Girja Nandani Devi, AIR 1959 All 473 at 481; Adusumilli Venkata Subba Rao v. Gullapali Subba Rao, AIR 1964 AP 326 at 329. 14 Potti Lakshmi Perumallur v. Potti Krishnavenamma, AIR 1965 SC 825. 15 Phul Kumari Devi v. Sambhu Prasad Singh, AIR 1965 Pat 87 at 91-92; Kashinath Das v. Pravash Chandra Das, AIR 1978 Cal 509. 16 Mania v. Deputy Director of Consolidation UP, AIR 1971 All 151 at 154. 17 CWT v. Vijayaba Dowger Maharani Bhavnagar, AIR 1979 SC 982 at 983, [1979] 3 SCR 545. 18 Muthukaruppa Mudali v. Pi Mu Kathappudayan, AIR 1915 Mad 528. 19 Also see Section 25,Explanation 2. 20 Shakuntala v. State of Haryana, AIR 1979 SC 843; Kanak Sundar Bibi v. Ram Lakhan Pandey, AIR 1955 Pat 458 at 462; Sona Bhatia v. State of Uttar Pradesh, AIR 1981 SC 1274 (love, affection, spiritual benefit may enter into the intention of the donor, but are not legal consideration). 21 Debi Saran Koiri v. Nandalal Choubey, AIR 1929 Pat 591. 22 Firm Gopal Co. Ltd. v. Firm Hazari Lal & Co., AIR 1963 MP 37; Eastwood v. Kenyon, (1840) 11 A&E 438, 52 RR 400, [1835-42] All ER Rep 133(QB) ; Lee v. Muggeridge, (1813) 5 Taunt 36, 128 ER 599, where a man is morally bound to pay a debt, though not legally bound, a subsequent promise to pay will give a right of action, but this was finally rejected in Eastwood v. Kenyon, (1840) 11 A&E 438, 52 RR 400, [1835-42] All ER Rep 133(QB), [1835-42] All ER Rep 133(QB) . 23 Srinivasa Padayachi v. Parvathiammal, AIR 1970 Mad 113. 24 Clifford (Lord) v. Watts, (1870) LR 5 CP 577, per Brett J at 588. 25 (1853) 23 LJ Ex 36. 26 Bank of Nova Scotia v. MacLellan, (1977) 78 DLR 1(3d) (Canada) . 27 See below 'Pre-existing Obligations Under Law' and 'Performance of Existing Contractual Obligations'. 28 Uttar Pradesh Government v. J R Bhatia, AIR 1956 All 439. 29 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, CONTRACTS, para 735. 30 Anson's Law of Contract, 29th edn., 2010, p. 94. 31 Chitty on Contracts, 28th edn., pp. 171-72, para 3-008. 32 Thorensen Car Ferries Ltd. v. Weymouth Portland Borough Council, [1977] 2 Lloyd's Rep 614, per Dolandson J at 619. 33 Woodhouse AC Israel Cocoa Ltd. SA v. Nigerian Produce Marketing Co. Ltd., [1972] AC 741 at 757-58 per Lord Hailsham LC, [1972] 2 All ER 271. 34 Dwijendra Nath Mullick v. Gopiram Gobindram, AIR 1926 Cal 59 at 63 (motive was withdrawal of a case, and consideration was a return of some portion of embezzeled funds and mortgage executed); Sivagami Achi v. PS Subramania Chettiar, AIR 1936 Mad 978 at 980 (motive was the discharge of liability by plaintiff to an insolvent, and the consideration was that the defendant should forgo his claim against the insolvent); S Rajanna v. SM Dhondusa, AIR 1970 Mys 270 (giving up right to receive monthly amount from each of the brothers in the coparcenery was the motive, and the agreement lacked consideration). 35 Thomas v. Thomas, [1842] 2 QB 851, 114 ER 330. 36 Dwarampudi Nagaratanamba v. Kunuku Ramayya, AIR 1968 SC 253; applying Balo v. Parbati, (1940) All 371, AIR 1940 All 385, but not applying Istak Kamu Musalman v. Ranchod Zipru Bhate, (1947) Bom 206, (1946) 48 Bom LR 775, AIR 1947 Bom 198.. 37 Hitchcock v. Coker, (1837) 6 A&E 438, 45 RR 522, [1835-42] All ER Rep 452; Gravely v. Barnard, (1874) LR 18 Eq 518; Alec Lobb (Garages) Ltd. v. Total Oil (GB) Ltd., [1985] 1 WLR 173 at 179, [1985] 1 All ER 303 at 313.
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38 Kulasekaraperumal v. Pathakutty Thalevanar, AIR 1961 Mad 405; Keshub Mohindra v. Commissioner of Gift Tax, [1968] 70 ITR 1, (1969) 1 ITJ 293; Gaumont-British Picture Corpn. Ltd. v. Alexander, [1936] 2 All ER 1686 at 169; Thomas v. Thomas, (1842) 2 AB 857, 114 ER 330. See also Langdale v. Danby, [1982] 3 All ER 129[1982] 1 WLR 1123; Brady v. Brady, [1985] 2 All ER 617 at 630; Normid Housing Association Ltd. v. Ralphs, Mansell d' Assicurazioni Generali SpA, [1989] 1 Lloyd's Rep 265 at 272. 39 Lloyd's Bank Ltd. v. Bundy, [1975] QB 326, 336 per Lord Denning MR, [1974] 3 All ER 757. 40 See Section 2(c)(iv) of the Consumer Protection Act, 1986, which enables the filing of a complaint that a trader has charged for the goods, a price, in excess of the price fixed by, or under, any law for the time being in force or displayed on the goods or any package containing such goods. 41 Westlake v. Adams, (1858) 5 CB 248(NS) . 42 Bainbridge v. Firmstone, (1838) 8 A&E 743. 43 Chitty on Contracts, 28th edn., p. 176 para 3-014 from Sturlyn v. Albany, (1587) Cro Eliz 67; but see Re Charge Card Services Ltd., [1987] Ch 150; affirmed in [1988] 3 All ER 702, [1989] Ch 487 (production of charge card and signature of voucher not consideration for a supply of goods, evidently because such consideration would be blatantly 'invented'). 44 Haigh v. Brooks, (1839) 10 A&E 309 at 320 per Lord Denman CJ. 45 Khimji Punja d' Co. v. Maun Devshi Bhallji, AIR 1950 Kutch 24 at 26-27. 46 Scott v. Ricketts, [1966] 3 All ER 791. 47 Balbhaddar Prasad v. Dhanpat Dayal, AIR 1924 Oudh 193 at 195. 48 [1976] 1 WLR 1, [1976] 1 All ER 117. 49 Chappell & Co. Ltd. v. Nestle Co. Ltd., [1960] AC 87, [1959] 2 All ER 701. 50 [1959] 2 All ER 701 at 712 per Lord Somervell. 51 [1991] 2 AC 548, [1992] 4 All ER 512, [1991] 3 WLR 10. 52 Chitty on Contracts, 28th edn., p. 177, para 3-015. 53 De la Bere v. CA Pearson Ltd., [1908] 1 KB 280, [1904-07] All ER Rep 755(CA) . 54 Sivarama Konar v. Thiruvadinatha Pillai, AIR 1957 Tr & Coch 189; Sudhakar Sahu v. Achutananda Patel, AIR 1967 Ori 89. 55 Desigowda v. Karnataka Industrial Area Development Board, AIR 1996 Kant 197. 56 It is submitted that the observation in John Tinson and Co. Pvt. Ltd. v. Surjeet Malhan, AIR 1997 SC 1411 to the effect that consideration of Rs. 1/- was no consideration, is not justifiable under the provisions of the Act. 57 Midland Bank Trust Co. Ltd. v. Green, [1979] 3 All ER 28, [1981] AC 513 at 532 per Lord Wilberforce: &uot;To equate' 'nominal' with 'inadequate' or even 'grossly inadequate' consideration would embark the law on enquiries which I cannot think were ever intended by Parliament.&uot; 58 See Section 25 below. 59 Chitty on Contracts, 28th edn., p. 179. 60 John Thomas v. Joseph Thomas, AIR 2000 Ker 408. 61 Muthukaruppa Mudali v. Pi Mu Kathappudayan, AIR 1915 Mad 528 at 529; Karim Bux v. Debi, AIR 1933 All 511; Sundar Sahu Gountia v. Chamra Sahu Gauntia, AIR 1954 Ori 80 at 84. 62 Combe v. Combe, [1951] 2 KB 215, [1951] 1 All ER 767. 63 Narayan Coomari Debi v. Shajani Kanta Chatterjee, (1894) ILR 22 Cal 14. It was argued, without success, that the agreement was against public policy by making it the executor's interest to prolong the administration of the estate against his duty. 64 Sashannah Chetti v. Ramasamy Chetty, (1868) 4 MHC 7; Collins v. Godefroy, (1831) 1 B&Ad 950 (case of a witness subpoenaed to give evidence, who performs a public duty). 65 Collins v. Godefroy, (1831) 1 B & Ad 950 (a case of a witness subpeonaed to give evidence).
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66 Ramchandra Chintaman v. Kalu Raju, (1878) ILR 2 Bom 362. 67 Banda Ali v. Banspat Singh, (1882) ILR 4 All 352. 68 England v. Davidson, (1840) 11 A & E 856, 52 RR 522 (reward to constable for services beyond duty); Hartley v. Ponsonby, (1857) 7 E&B 872, 110 RR 867; Glasbrook Brothers Ltd. v. Glamorgan County Council, [1925] AC 270, [1924] All ER 579(HL) . 69 [1925] AC 270, [1924] All ER 579(HL) . 70 Harris v. Sheffield United Football Club Ltd., [1988] QB 77, [1987] 2 All ER 838 (such liability may arise irrespective of contract). 71 Ward v. Byham, [1956] 1 WLR 496 at 498, [1956] 2 All ER 318; Hicks v. Gregory, (1849) 8 CB 378 referred to; Williams v. Williams, [1957] 1 WLR 148, [1957] 1 All ER 305; Sukha v. Ninni, AIR 1966 Raj 163 (agreeing to accept an amount less than that provided by judicial order). 72 Williams v. Roffey Bros. & Nicholls (Contractors) Ltd., [1991] 1 QB 1, [1990] 1 All ER 512(CA) . 73 Williams v. Williams, [1957] 1 WLR 148, [1957] 1 All ER 305; applying Goodinson v. Goodinson, [1954] 2 QB 118, [1954] 2 WLR 1121, [1954] 2 All ER 255. 74 It has been the opinion of the earlier editors of this book that on principle this assumption is not tenable; Shadwell v. Shadwell, (1860) 9 CB 159(NS), 127 RR 604; but quaere whether there was in fact any intention to create a legal obligation at all (see the dissenting judgment of Byles J); Seorson v. Pegg, (1861) 6 H&N 295. 75 Firm Gopal Co. Ltd. v. Firm Hazari Lal & Co., AIR 1963 MP 37; following Shadwell v. Shadwell, (1860) 9 CB 159(NS) ; Pao On v. Lau Yiu, [1980] AC 614 at 632, [1979] 3 All ER 65(PC) ; Indermal Tekaji Mahajan v. Ramprasad Gopilal, AIR 1970 MP 40. 76 Shadwell v. Shadwell, (1860) 9 CB 159(NS), 127 RR 604. 77 New Zealand Shipping Co. Ltd. v. AM Satterthwaite & Co. Ltd. (The Eurymedon), [1975] AC 154, [1974] 1 All ER 1015 (the plaintiff obtained the benefit a direct obligation which he could enforce). 78 [1980] AC 614, [1979] 3 All ER 65 at 74-75, applying dictum of Bowen LJ in Re Casey's Patents, Stewart v. Casey, [1892] 1 Ch 104 at 114-115. 79 See Atlas Express Ltd. v. KafCo. (Importers and Distributors) Ltd., [1989] 1 All ER 641; Syros Shipping Co. SA v. Elaghill Trading Co. (The Proodos C ), [1980] 2 Lloyd's Rep 390, [1981] 3 All ER 189; Williams v. Roffey Bros. & Nicholls (Contractors) Ltd., [1991] 1 QB 1, [1990] 1 All ER 512 at 520 (CA). 80 Rudra Pratap Singh v. Ballabh Das, AIR 1948 Oudh 152, at 154. 81 Vantage Navigation Corpn. v. Sahail and Saud Bahwan Building Materials Llc (The Alev), [1989] 1 Lloyd's Rep 138, per Hobhouse J at 147. 82 Williams v. Roffey Bros. & Nicholls (Contractors) Ltd., [1991] 1 QB 1, [1990] 1 All ER 512(CA) (question of novatio not considered), referring to Ward v. Byham, [1956] 1 WLR 496, [1956] 2 All ER 318; Williams v. Williams, [1957] 1 WLR 148, [1957] 1 All ER 305. 83 (1990) 1 All ER 512 (CA) at 521. 84 South Caribbean Trading Co. Ltd. v. Trafigura Beheer, [2005] 1 Lloyd's Rep 128 85 Anson's Law of Contract, 29th edn., 2010, p. 111. 86 Re Selectmove Ltd.,[1995] 1 WLR 474, [1995] 2 All ER 531. 87 North Ocean Shipping Co. Ltd. v. Hyundai Construction Co. Ltd. and another, [1978] 3 All ER 1170; Pao On v. Lau Yiu, [1980] AC 614 at 633, [1979] 3 All ER 65(PC) ; Sybron Corpn. v. Rochem Ltd., [1983] ICR 801, [1983] 2 All ER 707. 88 Compagnie Noga D'importation et D'Exportation Sa v. Abacha, [2003] All ER 915(Comm), [2003] EWCA Civ 1100. 89 Fazaladdin Mandal v. Panchanan Das, AIR 1957 Cal 92. 90 Gaumont-British Picture Corpn. Ltd. v. Alexander, [1936] 2 All ER 1686. 91 Nirbheram Fatte Kurmi v. Sukhdeo Kisun Kurmi, (1944) Nag 212, AIR 1944 Nag 307. 92 Bipin Behari Deb v. Masrab Ali, AIR 1961 Assam 173; Dasarath Gayen v. Satyanarayan Ghosh, AIR 1963 Cal 325;
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PR Kanakasabapathi Chettiar v. PV Govindarajulu Naidu, AIR 1964 Mad 219; Sinnakaruppa Gounder v. M Karuppuswami, AIR 1965 Mad 506 at 508; Shree Ram v. Ratanlal, AIR 1965 All 83; Asmal Bagas Ablzaram v. Raj Mahijibhai Parbhatsing, AIR 1974 Guj 19 at 23. 93 Ramacharya Venkatramanacharya v. Shrinivasacharya Venkatramanacharya, (1918) 20 Bom LR 441, AIR 1918 Bom 183. PRS Pillai v. Manuel Sathyanesan, AIR 1965 Ker 155. 94 Chidambara lyer v. PS Renga Iyer, [1966] 1 SCR 168, AIR 1966 SC 193, [1966] 1 SCR 168. 95 OP Verma v. Lala Gehrilal, AIR 1962 Raj 231. 96 Pitts v. Jones, [2008] 1 All ER 941, [2007] EWCA Civ 1301,CA . 97 The current edition follows the practice of the earlier edition and other writers on the Act of including the commentary on the doctrine of privity under Section 2(d); See also Law Commission of India, 13th Report, 1959, proposing to incorporate the provisions conferring rights upon third parties, after Section 37 of the Act in the chapter relating to performance. 98 Shiv Dayal Kapoor v. Union of India, (1963) 2 Punj 463, AIR 1963 P&H 538. 1 AIR 1963 P&H 538, quoting Cheshire & Fitfoot, Law of Contract, 5th edn., (1960) p. 378; Fatechand Murlidhar v. Maharashtra State Electricity Board, AIR 1985 Bom 71 at 74 (owner of a building not privity to contract between the tenant and the Electricity Board). 2 Adams & Bronsword,(1993) 56 MLR 722. 3 See Mcdermott International Inc. v. Burn Standard Co. Ltd., 2006 AIR SCW 3276, (2006) 11 SCC 181. 4 See now, Contracts (Rights of Third Parties) Act, 1999, conferring rights on third parties to sue on contract. 5 Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd., (1915) AC 847, 853, [1914-15] All ER Rep 333 per Lord Haldane at 334. 6 Scruttons Ltd. v. Midland Silicones Ltd., [1962] AC 446, [1962] 1 All ER 1, [1962] 2 WLR 186(HL) ; distinguishing Elder Dempster & Co. v. Paterson Zochonis & Co.,[1924] AC 522, [1924] All ER Rep 135; Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd., (1915) AC 847, [1914-15] All ER Rep 333; Snelling v. John G Snelling Ltd., [1972] 1 All ER 79 (even though agreement is for third party's benefit); Veeramma v. Appayya, AIR 1957 AP 965; Bhanwar Singh v. Raghubir Nanwa Singh, AIR 1985 All 331, 333. 7 Tweddle v. Atkinson, (1861) 1 B & S 393, [1861-73] All ER Rep 369, 124 RR 610; Scruttons Ltd. v. Midland Silicones Ltd., [1962] 1 All ER 1, [1962] 2 WLR 186(HL) ; following Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd., (1915) AC 847, [1914-15] All ER Rep 333; rejecting Smith v. River Douglas Catchment Board, [1949] 2 KB 500, [1949] 2 All ER 179(CA) ; and White v. John Warrick & Co. Ltd., [1953] 2 All ER 1021; Alice Marie Vandepittee v. Preferred Accident Insurance company of New York, [1933] AC 70 at 79, [1932] All ER Rep 527 at 532, AIR 1933 PC 11; Beswick v. Beswick, [1967] 2 All ER 1197, [1967] 3 WLR 932 at 953 (HL); Coulls v. Bagot's Executor & Trustee Co. Ltd., (1967) 119 CLR 460; Gandy v. Gandy, (1885) 30 Ch D 57 at 66, [1881-85] All ER Rep 376. 8 See for a discussion of various judgments, Tirumulu Subbu Chetti v. Arunachalam Chettiar, (1930) 53 Mad 270, 124 IC 55, AIR 1930 Mad 382(FB) . 9 Narayani Devi v. Tagore Commercial Corpn. Ltd., AIR 1973 Cal 401 at 405; Kepong Propecting Ltd. v. Schimidt, [1968] AC 810[1968] 2 WLR 55, (a case under the Malaya Contracts Ordinance). 10 (1928) 55 Cal 1315, AIR 1928 Cal 518, 32 CWN 634, 114 IC 658. 11 (1861) 1 B&S 393, [1861-73] All ER Rep 369, 124 RR 610. 12 Deb Narain Dutt v. Ram Sadhan Mandal, (1914) 41 Cal 137 per Jenkins CJ, at 145, 20 IC 630, AIR 1914 Cal 129; approved and followed in N Devaraje Urs v. M Ramakrishniah, AIR 1952 Mys 109. 13 Law Commission of India, 87th Report, 1958, para 16, recommended adding Section 37A to the Act as follows:37A. Benefits conferred on third parties:(1) Where a contract expressly confers a benefit directly on a third party, then, unless the contract otherwise provides, it shall be enforceable by the third party in his own name, subject to any defences that would have been valid between the contracting parties.(2) Where a contract expressly conferring a benefit directly upon a third party has been adopted, expressly or impliedly, by a third party, the parties to the contract cannot substitute a new contract for it or rescind or alter it so as to effect the rights of the third party. 14 Anson's Law of Contract, 29th edn., 2010, p. 616; Law Commission (UK) No. 242 (1996). The Reform of Privity Involves Relaxing the Importance Attached to Consideration; Privity of Contract: Contract for the Benefit of Third Parties, Part VI. 15 Coulls v. Bagot's Executor & Trustee Co. Ltd., (1967) 119 CLR 460 Windeyer J, at 494.
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16 (1915) AC 847 at 483, [1914-15] All ER Rep 333 at 334; this distinction was accepted by the English Law Revision Committee in 1937. 17 Akolla Suryanarayana Rao v. Dwarapudi Basivireddi, (1932) 55 Mad 436, 139 IC 135, AIR 1932 Mad 457; Ganesh Das v. Banto, (1935) 16 Lah 118, 158 IC 387, AIR 1935 Lah 354 at 357; National Petroleum Co. Ltd. v. Popatlal Mulji, (1936) 60 Bom 954, 165 IC 338, AIR 1936 Bom 344; UK Seal v. ARA Aramugam Chettyar, AIR 1938 Rang 35 at 38; Jnan Chandra Mukherjee v. Mano Ranjan Mitra, ILR (1941) 2 Cal 576, AIR 1942 Cal 251; Rijhumal Nandiram v. Jan Mahomed, AIR 1943 Sind 190 ; Saraswatibai v. Haibatrao Ramji Patil, (1945) Nag 581, AIR 1945 Nag 261; Maroti Bansi Teli v. Radhabai, AIR 1945 Nag 60; Beni Madho v. Major AU John, AIR 1947 All 110 at 114; C Duraiswami Iyengar v. United Life Assurance Co. Ltd., AIR 1956 Mad 316 at 317; Chhanganal Harpaldas v. Dominion of India, 59 Bom LR 704, AIR 1957 Bom 276; Babu Ram Budhu Mal v. Dan Singh Bishan Singh, AIR 1957 Punj 169 at 170; Narayani Devi v. Tagore Commercial Corpn. Ltd., AIR 1973 Cal 401 at 405. 18 Kepong Propecting Ltd. v. Schimidt, [1968] AC 810. 19 Ibid. 20 See for discussion--Law Commission (of UK) No. 242 (1996) Privity of Contract: Contract for the Benefit of Third Parties, Part III. 21 Also referred to as 'Circumventions' of the doctrine--Law Commission (of UK) No 242 (1996) Privity of Contract: Contract for the Benefit of Third Parties, Part II, para 2.8. 22 Scotland, France, Germany, Italy, Austria, Spain, Portugal, Netherlands, Belgium, Luxembourg, Greece. 23 Western Australia, Queensland and New Zealand. 24 See below: 'Statutes Conferring Rights: UK'. 25 UNIDROIT Principles, Art. 1.3; and comment below it. 26 Coulls v. Bagot's Executor & Trustee Co. Ltd., (1967) 119 CLR 460. 27 Ibid, relying on Beswick v. Beswick, [1966] Ch 538, [1966] 3 All ER 1, [1966] 2 WLR 396(CA) ; Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd., (1915) AC 847, [1914-15] All ER Rep 333; dissenting on the ground that the promise was gratuitous and privity was not lacking; Beswick v. Beswick, [1967] 3 WLR 932, [1967] 2 All ER 1197(HL) ; approving Coull's case. 28 Coulls v. Bagot's Executor & Trustee Co. Ltd., (1967) 119 CLR 460 per Garfield Barwick CJ at 478-79. 29 Ibid at 479; Attwood v. Rattenbury, (1822) 6 Moo CP 579 at 584. 30 Coulls v. Bagot's Executor Trustee Co. Ltd., (1967) 119 CLR 460 per Windeyer J at 503; quoting Wilson v. Northampton & Banbury Junction Railway Co., (1874) 9 Ch App 279 at 284. 31 [1967] 3 WLR 932, [1967] 2 All ER 1197(HL) affirming [1966] Ch 538, [1966] 3 All ER 1, [1966] 2 WLR 396(CA) ; approving Coulls v. Bagot's Executor Trustee Co. Ltd., (1967) 119 CLR 460. 32 Beswick v. Beswick, [1966] Ch 538, [1966] 3 All ER 1 at 9, [1966] 2 WLR 396(CA) (Salmon LJ contra); but see Coulls v. Bagot's Executor & Trustee Co. Ltd., (1967) 119 CLR 460; cf Deb Narain Dutt v. Ram Sadhan Mandal, (1914) 41 Cal 137 at 141, 20 IC 630, AIR 1914 Cal 129 (per Jenkins CJ--Courts in India not hampered by Tweddle v. Atkinson). 33 Beswick v. Beswick, [1966] Ch 538, [1966] 2 WLR 396 at 410, [1966] 3 All ER 1 at 10-11; upheld by the House of Lords on appeal [1967] 3 WLR 932, [1967] 2 All ER 1197(HL) ; Hohler v. Aston, [1920] 2 Ch 420 (contract relating to purchase of a house); Keenan v. Handley, 2 DeGJ & Sm 283, (1864) 12 WR 930(annuity) ; Drimmie v. Davies, (1899) 1 LR 176 at 190 (annuity). 34 (1861) 1 B&S 393, [1861-73] All ER Rep 369, 124 RR 610. 35 (1915) AC 847, [1914-15] All ER Rep 333(HL) . 36 [1962] 1 All ER 1 (HL); affirming Midland Silicones Ltd. v. Scruttons, [1960] 2 All ER 737(CA) . 37 Referring to and applying Hart v. Hart, (1881) 18 Ch D 670, at 685, [1881-85] All ER Rep 1745 (per Kay J, an agreement for valuable consideration and partially performed should be carried out by a decree for specific performance) and Coulls v. Bagot's Executor & Trustee Co. Ltd., (1967) 119 CLR 460. 38 Beswick v. Beswick, [1967] 2 All ER 1197, [1967] 3 WLR 932(HL), applying cases of specific performance of contracts for benefit of third parties--Hohler v. Aston, [1920] 2 Ch 420 (purchase of a house for the benefit of the third parties); Keenan v. Handley, (1864) 12 WR 930 at 950 (annuity to mother, and after her death to her child not a party); Drimmie v. Davies, (1899) 1 IR 176 at 190 (Holmes LJ) annuities provided for third parties); Wilson v. Northampton &
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Banbury Junction Railway Co., (1874) 9 Ch App 279 at 284 (specific performance instead of damages when court can do more complete justice); and observations of Windeyer J in Coulls v. Bagot's Executor & Trustee Co. Ltd., (1967) 119 CLR 460; see also Veeramma v. Appayya, AIR 1957 AP 965. 39 See generally Sections 10-20 of the Specific Relief Act, 1963, below. 40 See below, under the heading: 'Exceptions to Application of the Principle'. 41 Albacruz (Cargo Owners) v. Albazero (Owners) (The Albazero), [1977] AC 774 at 846. 42 Chitty on Contracts, 28th edn., p. 985, para 19-044; Coulls v. Bagot's Executor and Trustee Co., (1967) 119 CLR 460 at 502. 43 Forster v. Silvermere Golf and Equestrian Centre Ltd., (1981) 125 SJ 397. 44 Klaus Mittelbachert v. East India Hotels Ltd., AIR 1997 Del 201 (whether claim arose out of contract or tort was not decided). 45 Pan Atlantic Insurance Co. Ltd. v. Pine Top Insurance Co. Ltd., [1988] 2 Lloyd's Rep 505. 46 Siu Yin Kwan v. Eastern Insurance Co. Ltd., [1994] 2 AC 199 at 207, [1994] 1 All ER 213. 47 St Albans City and District Council v. International Computers Ltd., [1996] 4 All ER 481. 48 Jackson v. Horizon Holidays Ltd., [1975] 1 WLR 1465, [1975] 3 All ER 92(CA) . 49 [1975] 1 WLR 1465, [1975] 3 All ER 92(CA) . 50 [1980] 1 WLR 277, [1980] 1 All ER 571. 51 [1975] 1 WLR 1465, [1975] 3 All ER 92(CA) ; Calabar Properties Ltd. v. Stitcher, [1984] 1 WLR 287 at 290, [1983] 3 All ER 759. 52 [1993] 3 All ER 417; sub nom Linden Gardens Trust Ltd. v. Lenesta Sludge Disposals Ltd., [1994] AC 885, [1993] 3 All ER 417. 53 Albacruz (Cargo Owners) v. Albazero (Owners) (The Albazero), [1977] AC 774; Dunlop v. Lambert, (1839) 2 Cl&F 626. 54 Darlington Borough Council v. Wiltshire Northern Ltd., [1995] 3 All ER 895(CA) . 55 [2000] 4 All ER 97 (HL); reversing on facts Alfred McAlpine v. Panatown, (1998) 58 Const LR 58; discussed in Treitel,(1998) 114 LQR 527; Coote,(1998) CLJ 250; Duncan Wallace,(1999) 115 LQR 394; Coote,[2001] 117 LQR 81. 56 Indowind Energy Ltd v. Wescare (I) Ltd, AIR 2010 SC 1793, (2010) 5 SCC 306. 57 S N Prasad v. Monnet Finance Ltd, AIR 2011 SC 442, (2011) 1 SCC 320. 58 Chloro Controls India (P) Ltd v. Severn Trent Water Purification Inc, (2013) 1 SCC 641 (enumerates circumstances). 59 Khushalbai Mahijibhai Patel v. Firm Mohamad-hussain Rahimbux, AIR 1981 SC 977 at 979. 60 Coulls v. Bagot's Executor & Trustee Co. Ltd., (1967) 119 CLR 460 at 479. 61 Societe Commercial De Coreales & Financiers v. State Trading Corpn. of India, AIR 1998 Guj 94. 62 Prag Datt v. Saraswati Devi, AIR 1982 All 37. 63 Continental and Eastern Agencies v. Coal India Limited, AIR 2003 Del 387. 64 Alice Marie Vandepitte v. Preferred Accident Insurance Company of New York, [1933] AC 70, [1932] All ER Rep 527, AIR 1933 PC 11; Des Raj Pahwa v. Concord of India Insurance Co. Ltd., AIR 1951 Punj 114; Shiv Dayal Kapoor v. Union of India, (1963) 2 Punj 463, AIR 1963 Punj 538; Fatechand Murlidhar v. Maharashtra State Electricity Board, AIR 1985 Bom 71 at 74. 65 MC Chacko v. State Bank of Travancore, [1970] 1 SCR 658, AIR 1970 SC 504 at 507-08: (1969) 2 SCC 343; Narayani Devi v. Tagore Commercial Corpn. Ltd., AIR 1973 Cal 401; but see other exceptions below. 66 Scruttons Ltd. v. Midland Silicons Ltd., [1962] AC 446, [1962] 2 WLR 186 at 195-96 per Lord Reid at 213, [1962] 1 All ER 1 at 10; crystallized in Tweddle v. Atkinson, (1861) 1 B & S 393, [1861-73] All ER Rep 369, 124 RR 610 (a stranger cannot 'take advantage' from the contract); and finally established in Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co., (1915) AC 847, [1914-15] All ER Rep 333.
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67 Bhatinda Chemicals v. M V. &uot;X-Press Nuptse&uot;, AIR 2006 Bom 311. 68 [1970] 1 SCR 658, (1969) 2 SCC 343, AIR 1970 SC 504. 69 Dhondu Undru Chaudhary v. Ganpat Lal Shankar Lal Agarwal, AIR 1991 SC 1037. 70 Tirumulu Subbu Chetti v. Arunachalam Chettiar, (1930) 53 Mad 270, 124 IC 55, AIR 1930 Mad 382(FB) ; Suraj Prasad Oja v. Ram Lal Singh, (1947) 25 Pat 269, 230 IC 224, AIR 1947 Pat 131; Maghi Mal v. Darbara Singh, AIR 1933 Lah 695; Iswaram Pillai v. Tharagan, (1913) 38 Mad 753, AIR 1914 Mad 701 (third party creditor of mortgagor cannot enforce an agreement under which the mortgagee agreed with the mortgagor to pay part of the amount to such creditor). 71 Tarachand Khimandas v. Syed Abdul Razak Shah, AIR 1939 Sind 125. 72 Raj Cylinders and Containers v. Hindustan General Industries Ltd., AIR 1998 Del 418; Harnam Singh v. Purbi Devi, AIR 2000 HP 108 (Where D agreed to sell land to elder brother, other brothers cannot enforce it). 73 Indian Oil Corpn. v. Consumer Protection Council, (1994) 1 SCC 397(case under the Consumer Protection Act, 1986). 74 Mangal Sen v. Muhammad Hussain, (1915) ILR 37 All 115, AIR 1915 All 97; Adhar Chandra Mondal v. Dolgobinda Das, (1936) 63 Cal 1172, AIR 1936 Cal 663. 75 State of Gujarat v. Vora Fiddali, AIR 1964 SC 1043 at 1076. 76 Shankar Vishyanath Vagh v. Umabai, (1913) ILR 37 Bom 471 (the parties to the suit being Hindus, and the provisions of Section 6 of the Married Woman's Property Act did not apply); contra Pokkunuri Balamba v. Kakaraparti Krishnayya, (1914) ILR 37 Mad 483, AIR 1914 Mad 595, (1913) 25 Mad LJ 65(FB) ; Re Engelbach's Estate, Tibbetts v. Engelbach, [1924] 2 Ch 348, [1923] All ER 93 (policy money held to form part of the estate of the assured). 77 British India General Insurance Co. Ltd. v. Janardan Vishwanath Naik, AIR 1938 Bom 217 (but see the Motor Vehicles Act, 1939, Section 96, and now the Motor Vehicles Act, 1988, Section 149); See alsoNew India Assurance Co. Ltd. v. Rula, AIR 2000 SC 1082 (third party entitled to amount although the policy cancelled later on the ground of non-payment of premium). 78 Des Raj Pahwa v. Concord of India Insurance Co. Ltd., AIR 1951 Punj 114. 79 New India Assurance Co. Ltd. v. Lakka Vijaya Gopala Reddy, AIR 2003 AP 465. 80 Berry v. Pulley, [2002] 2 SCR 493 (Supreme Court of Canada). 81 Cox d' Kings India Ltd v. Indian Railways Catering d' Tourism Corpn Ltd, (2012) 7 SCC 587. 82 Ibid. 83 Sivarama Konar v. Thiruvadinatha Pillai, AIR 1957 TC 189; Sudhakar Sahu v. Achutananda Patel, AIR 1967 Ori 89. 84 Shiv Dayal Kapoor v. Union of India, AIR 1963 P&H 538. 85 State of Bihar v. Charanjit Lal Chandha, AIR 1960 Pat 139. 86 Aries Advertising Bureau v. CT Devaraj, AIR 1995 SC 2251, (1995) 3 SCC 250. 87 Nand Kishore Prasad v. State of Bihar, AIR 1974 SC 1988. 88 Mohd Serajuddin v. State of Orissa, AIR 1975 SC 1564. 89 AIR 1995 SCC 2372, (1995) 5 SCC 545. 90 AIR 2009 SC 647, (2009) 1 SCC 210; see also Haryana State Electricity Board v. Hanuman Rice Mills, AIR 2010 SC 3835, (2010) 9 SCC 145; Prafulla Kumar Sahoo v. Central Electricity Supply Co. of Orissa Ltd., AIR 2005 Ori 54; Abhisar Developers v. Torrent Power Ltd., AIR 2011 Guj 1; See also Special Officer (Commerce) NESCO. v. Raghunath Paper Mills Pvt. Ltd., AIR 2011 Ori 52 and Agarwal Strips Pvt. Ltd. v. Deputy General Manager (Elct) CESCO., AIR 2011 Ori 42 (purchaser's application for electricity connection cannot be denied on the ground that the previous owner of premises has not paid electricity charges); Sona Co-operative Housing Society Ltd. v. Gujarat Electricity Board, AIR 2004 Guj 26 (a condition requiring new occupier to pay electricity arrears of previous occupier must be struck down). 91 Ajay Kumar Agrawal v. OSFC, AIR 2007 Ori 37 (even where the purchaser of premises has agreed to pay these arrears). 92 Ramnath Exports Private Ltd. v. The Chairman, Air India, AIR 2003 Del 461.
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1 Kuok Oils and Grains PTE Ltd. v. Tower International Pvt. Ltd., AIR 2005 Guj 9. 2 North Eastern Electric Power Corpn. Limited v. Khoda Talley, AIR 2004 Gau 171. 3 Sandhya Sah v. New India Assurance Co., AIR 2004 Pat 42. 4 Deutsche Post Bank Home Finance Ltd. v. Taduri Sridhar, AIR 2011 SC 1899 (contract between a developer and purchaser relating to construction work). 5 Vysya Bank Ltd. v. A P State Agro Industries Development Corporation, AIR 2004 AP 10 6 Tamilnad Card Boards and Paper Mill Ltd. v. Sirpur Paper Mills Ltd., AIR 2003 AP 438. 7 Tomlinson v. Gill, (1756) Amb 330. 8 [1919] AC 801. 9 Southern Water Authority v. Carey, [1985] 2 All ER 1077. 10 Re Schebsman, [1944] Ch 83, [1943] 2 All ER 768 at 779. 11 Alice Marie Vandepitte v. Preferred Accident Insurance Company of New York, [1933] AC 70, [1932] All ER Rep 527, AIR 1933 PC 11. 12 [1933] AC 70, [1932] All ER Rep 527, AIR 1933 PC 11 applied to by Falshaw; cited with approval in Des Raj Pahwa v. Concord of India Insurance Co. Ltd., AIR 1951 Punj 114. 13 Chitty on Contracts, 28th edn., p. 999, para 19-066; Anson's Law of Contract, 29th edn., 2010, p. 638. 14 Trident General Insurance Co. Ltd. v. McNiece Bros Pty Ltd., (1988) 165 CLR 107. 15 Seth Bhabhootmal Seth Nathmal Oswal v. Moolchand Munnalal Sagotia, AIR 1943 Nag 266; MC Chacko v. State Bank of Travancore, [1970] 1 SCR 658, AIR 1970 SC 504, (1969) 2 SCC 343. 16 Desraj v. Ralli Ram, AIR 1957 J&K 10. 17 Veeramma v. Appayya, AIR 1957 AP 965. 18 Inuganti Kasturamma v. Chelikani Venkatasurayya Garu, (1915) 29 Mad LJ 538, AIR 1916 Mad 65 (document created a trust); see also Gurdit Singh v. Chuni Lal, AIR 1932 Lah 66. 19 Re Flavell, Murray and Flavell,(1883) 25 Ch D 89, [1881-85] All ER Rep 267; Harmer v. Armstrong, [1934] Ch 65, [1933] All ER Rep 778 (specific performance granted though the plaintiffs were not mentioned in the contract). 20 Re Schebsman, [1944] Ch 83, [1943] 2 All ER 768 (a contract between an employee and two companies employing him, providing for payment to his widow and daughter in certain eventualities); Gurdit Singh v. Chuni Lal, AIR 1932 Lah 66 (document creating a deposit of amount stating 'will have all creditors paid off by and get receipts from them' did not create a trust in favour of the creditor). 21 (1915) 29 Mad LJ 538, AIR 1916 Mad 65. 22 (1910) 37 IA 152, (1910) ILR 32 All 410, 7 IC 237. 23 Deb Narain Dutt v. Ram Sadhan Mandal, (1914) 41 Cal 137, 20 IC 630, AIR 1914 Cal 129; Shanmugan v. PLAPL Annamalai Chettiar, AIR 1935 Mad 141 (being beneficiary under a settlement); Jang Bahadur v. Rana Uma Nath Bakhsh Singh, (1937) 12 Luck 639, 2 Cal 576, AIR 1937 Oudh 99; Jnan Chandra Mukherjee v. Mano Ranjan Mitra, ILR (1941) 2 Cal 576, AIR 1942 Cal 251 (no trust made out); Seth Bhabhootmal Seth Nathmal Oswal v. Moolchand Munnalal Sagotia, AIR 1943 Nag 266 (no trust made out); Shamji Bhanji & Co. v. North Western Railway Co., (1946) 48 Bom LR 698, 231 IC 367, AIR 1947 Bom 169; Nawabjada K Atikalla v. Md. Mobarak Hossein, AIR 1949 Cal 174; N Devaraje Urs v. M Ramakrishniah, AIR 1952 Mys 109; Post Master General, Patna v. Ram Kirpal Sahu, AIR 1955 Pat 442; Veeramma v. Appayya, AIR 1957 AP 965; Desraj v. Ralli Ram, AIR 1957, J&K 10. 24 Narayani Devi v. Tagore Commercial Corpn. Ltd., AIR 1973 Cal 401 at 405; following Jnan Chandra Mukherjee v. Mano Ranjan Mitra, ILR (1941) 2 Cal 576, AIR 1942 Cal 251 at 252. 25 Ram Dhan v. L Chauthmal, AIR 1935 Oudh 496. 26 A Singarayya v. A Subbayya, (1924) 47 Mad LJ 517, 84 IC 962, AIR 1924 Mad 861; The Indian Trusts Act, 1882, Section 82. 27 See The Benami Transactions (Prohibition) Act, 1988, Sections 3 and 4.
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28 AIR 1961 Pun 66; affirmed on appeal in United Commercial Bank Ltd. v. Okara Grain Buyers Syndicate Ltd., AIR 1968 SC 1115. 29 Shankar Vishyanath Vagh v. Umabai, (1913) ILR 37 Bom 471; contra Pokkunuri Balamba v. Kakaraparti Krishnayya, (1914) ILR 37 Mad 483, AIR 1914 Mad 595, (1913) 25 Mad LJ 65(FB) ; Re Engelbach's Estate Tibbetts v. Engelbach, (1924) 2 Ch 348, [1923] All ER 93. 30 Krishna Lal Sadhu v. Promila Bala Dasi, (1928) 55 Cal 1315, AIR 1928 Cal 518, 32 CWN 634, 114 IC 658. 31 Graham Joint Stock Shipping Co. Ltd. v. Merchants Marine Insurance Co. Ltd., [1924] AC 294; Yangtze Insurance Association Ltd. v. Lukmanjee, [1918] AC 585. 32 New India Assurance Co. Ltd. v. Lakka Vijaya Gopala Reddy, AIR 2003 AP 465 33 New India Assurance Co Ltd v. T T Finance Ltd, AIR 2011 Del 121. 34 See Section 15(c) of the Specific Relief Act, 1963 below. 35 Janaki Bala Debya v. Maheshwar Das, AIR 1942 Pat 460. 36 Tirumulu Subbu Chetti v. Arunachalam Chettiar, (1930) 53 Mad 270, 124 IC 55, AIR 1930 Mad 382(FB) ; Jagadambya Debya v. Bibhuti Bhusan Sarkar, AIR 1933 Cal 407 (no family arrangement); Jang Bahadur v. Rana Uma Nath Bakhsh Singh, (1937) 12 Luck 639, 165 IC 113, AIR 1937 Oudh 99; Seth Bhabhootmal Seth Nathmal Oswal v. Moolchand Munnalal Sagotia, AIR 1943 Nag 266; Dan Kuer v. Sarla Devi, (1947) 73 IA 208, (1946) All 756, AIR 1947 PC 8(partition) ; Veeramma v. Appayya, AIR 1957 AP 965 (family arrangement). 37 Shuppu Ammal v. Subramaniyan, (1909) ILR 33 Mad 238; Arumuga Gounden v. Chinnammal, (1911) 21 Mad LJ 918; Nehal Singh v. Fateh Chand, AIR 1922 All 426, (1922) 20 All LJ 708, 68 IC 778. 38 Rakhmabai v. Govind Moreshwar, (1904) 6 Bom LR 421; Jang Bahadur v. Rana Uma Nath Bakhsh Singh, (1937) 12 Luck 639, 165 IC 113, AIR 1937 Oudh 99. 39 Gandy v. Gandy, (1885) 30 Ch D 57, [1881-85] All ER Rep 376 (a negative decision). 40 Veeramma v. Appayya, AIR 1957 AP 965; Khwaja Muhammad Khan v. Husaini Begum, 37 IA 152, (1910) ILR 32 All 410, 7 IC 237. 41 Sundararaja Aiyangar v. Lakshmiammal, (1915) ILR 38 Mad 788, AIR 1914 Mad 95, 24 IC 943. 42 (1947) 73 IA 208, (1946) All 756, AIR 1947 PC 8 (award created a charge and entitled the wife to sue). 43 Mittar Sain v. Data Ram, (1925) 24 All LJ 185 at 205, 90 IC 1000, AIR 1926 All 194 (per Sulaiman J, there were no disputes nor any charge created). 44 Chitty on Contracts, 28th edn., p. 1003, (1999) para 19-074. 45 Re Cook's Settlement Trusts, [1965] Ch 902, [1964] 3 All ER 898, (1965) 2 WLR 179. 46 (1818) 1 Swan 309, 36 ER 402. 47 Attorney General v. Jacobs Smith, [1895] 2 QB 341 per Kay LJ at 353 (CA). 48 Re Cook's Settlement Trusts, [1965] Ch 902, [1964] 3 All ER 898, [1965] 2 WLR 179. 49 Green v. Paterson, (1886) 32 Ch D 95. 50 Re Cook's Settlement Trusts,[1964] 3 All ER 898. 51 Re Kays Settlement, Broadbent v. Mac Nab, [1939] Ch 329, [1939] 1 All ER 245. 52 Iswaran Pillai v. Tharagan, (1913) 38 Mad 753, AIR 1914 Mad 701. 53 Tirumulu Subbu Chetti v. Arunachalam Chettiar, (1930) 53 Mad 270, 124 IC 55, AIR 1930 Mad 382 at 389 (FB); Jang Bahadur v. Rana Uma Nath Bakhsh Singh, (1937) 12 Luck 639, 165 IC 113, AIR 1937 Oudh 99; Seth Bhabhootmal Seth Nathmal Oswal v. Moolchand Munnalal Sagotia, AIR 1943 Nag 266; Gulabchand Sitaram Marwadi v. Laxminarayan Balmukund Marwadi, (1944) Nag 46, 212 IC 539, AIR 1944 Nag 120. 54 Iswaran Pillai v. Sonnivevaru, (1913) 38 Mad 753, AIR 1914 Mad 701. 55 MC Chacko v. State Bank of Travancore, [1970] 1 SCR 658, AIR 1970 SC 504, (1969) 2 SCC 343. 56 Mulla's Transfer of Property Act, 9th edn., pp. 273-86.
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57 Chitty on Contracts, 28th edn., p. 1019-20, para 19-107; Beswick v. Beswick, [1967] 3 WLR 932, [1967] 2 All ER 1197(HL) ; affirming [1966] Ch 538, [1966] 3 All ER 1, [1966] 2 WLR 396(CA) . 58 Elder Dempster d' Co. v. Paterson Zochonis d' Co., [1924] AC 522, [1924] All ER Rep 135(HL) ; per Scrutton LJ in the Court of Appeal [1923] 1 KB 421 at 441; Mersey Shipping d' Transport Co. Ltd. v. Rea Ltd., [1925] 21 Lloyd's Rep 375; Pyrene Co. Ltd. v. Scindia Steam Navigation Co. Ltd., [1954] 2 QB 402, [1954] 2 All ER 158. 59 Scruttons Ltd. v. Midland Silicones Ltd., [1962] AC 446, [1962] 2 WLR 186, [1962] 1 All ER 1(HL), affirming Midland Silicones Ltd. v. Scruttons, [1960] 2 All ER 737(CA) ; Wilson v. Darling Island Stevedoring & Lighterage Co. Ltd., (1956-57) 95 CLR 43 (stevedores, not party to bill of lading, could not be sued in contract, but not relieved of tortious duty in negligence). 60 London Drugs Ltd. v. Kuehne & Nagel International Ltd., [1992] 3 SCR 299 (Supreme Court of Canada); see comments of Waddams,(1993) 109 LQR 349; Adams & Bronsword,(1993) 56 MLR 722. 61 Edgeworth Construction Ltd. v. ND Lea & Associates, [1993] 3 SCR 206 (Supreme Court of Canada) (but the suit against engineers was dismissed on another ground). See also Kay Lim Construction & Trading Pte Ltd v. Soon Douglas (Pte) Ltd, [2012] SGHC 186 (Singapore High Court), [2013] 1 SLR 1. 62 New Zealand Shipping Co. Ltd. v. AM Satterthwaite & Co. Ltd. (The Eurymedon), [1975] AC 154, [1974] 1 All ER 1015(PC) . 63 The name is derived from the name of the ship involved in Adler v. Dickson, [1955] 1 QB 158, [1954] 3 All ER 397, and refers to an exclusion or exemption clause relieving the shipowner or carrier his servant, agents and independent contractors from liability for negligence; see Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, CONTRACT, para 814. 64 New Zealand Shipping Co. Ltd. v. AM Satterthwaite d' Co. Ltd. (The Eurymedon), [1975] AC 154 at 167, [1974] 1 All ER 1015(PC) ; KH Enterprise v. Pioneer Container (The Pioneer Container), [1994] 2 All ER 250 (sub-bailee from carrier could invoke exclusive jurisdiction clause contained in the contract between the owner of the goods and the carrier allowing the carrier to contract 'on any terms', as he had contracted with the carrier 'on the same terms'); see also The Mahkutai,[1996] 3 WLR 1, [1996] 3 All ER 502(PC) (exclusive jurisdiction clause did not fall within the terms of the Himalaya clause, and the ship owners not being party to the bill of lading, were not entitled to invoke the exclusive jurisdiction clause). 65 New Zealand Shipping Co. Ltd. v. AM Satterthwaite d' Co. Ltd. (The Eurymedon), [1975] AC 154, [1974] 1 All ER 1015(PC) . 66 Southern Water Authority v. Carey, [1985] 2 All ER 1077. 67 Norwich City Council v. Harvey, [1989] 1 All ER 1180. 68 Shanklin Pier Ltd. v. Detel Products Ltd., [1951] 2 KB 854, [1951] 2 All ER 471(warranty) . 69 Chitty on Contracts, 28th edn., p. 962, para 19-005. 70 Charnock v. Liverpool Corpn., [1968] 1 WLR 498, [1968] 3 All ER 473. 71 The Satanita, [1895] p. 248, affirmed [1897] AC 59; but see Ellesmere (Earl) v. Wallace, [1929] 2 Ch 1, [1929] All ER Rep 751. 72 See Section 37 below, under the heading: 'Assignment of Contract'. 73 RK Associates v. v. Channappa, AIR 1993 Kant 247. 74 See Section 37 below, under the heading: 'Consignee of Goods under Railway Receipt'. 75 Chhangamal Harpaldas v. Dominion of India, 59 Bom LR 704, AIR 1957 Bom 276. 76 Morvi Mercantile Bank Ltd. v. Union of India, AIR 1965 SC 1954 at 1960; approving Shamji Bhanji d Co. v. North Western Railway Co., (1946) 48 Bom LR 698, 231 IC 367, AIR 1947 Bom 169; Chhanganal Harpaldas v. Dominion of India, 59 Bom LR 704, AIR 1957 Bom 276; Union of India v. West Punjab Factories Ltd., AIR 1966 SC 395; Bhai Mehar Singh Kishan Singh v. Union of India, AIR 1979 Del 158; Lal Chand Madhav Das v. Union of India, AIR 1986 Del 29; New India Assurance Co. Ltd. v. Union of India, (1995) 2 SCC 417. 77 The Railways Act, 1989, Section 74 provides:The property in the consignment covered by a railway receipt shall pass to the consignee or the endorsee, as the case may be, on the delivery of such railway receipt to him, and he shall have all the rights and liabilities as the consignor. 78 Utkal Farm d Road Machinery v. Union of India, AIR 1995 Mad 185 at 187 (consignee can sue because consignor entered into contract of carriage 'for the benefit' of the consignee).
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79 Ibrahim Isaphai v. Union of India, AIR 1966 Guj 6; following Chhanganal Harpaldas v. Dominion of India, 59 Bom LR 704, AIR 1957 Bom 276. 80 White v. Jones, [1995] 2 AC 207 per Lord Goff at 268, [1995] 1 All ER 691 at 710. 81 Law Commission (UK) No. 242 (1996) Privity of Contract: Contract for the Benefit of Third Parties, para 2.14. 82 Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd., [1964] AC 465, [1963] 2 All ER 575. 83 White v. Jones, [1955] 2 AC 207, [1995] 1 All ER 691. 84 Ross v. Caunters, [1980] Ch 287, [1979] 3 All ER 580. 85 Tirumulu Subbu Chetti v. Arunachalam Chettiar, (1930) 53 Mad 270, 124 IC 55, AIR 1930 Mad 382(FB) ; Seth Bhabhootmal Seth Nathmal Oswal v. Moolchand Munnalal Sagotia, AIR 1943 Nag 266; Daw Po v. U Po Hmyin, AIR 1940 Rang 91, 187 IC 875; Noratmal v. Mohanlal, AIR 1966 Raj 89. 86 Moitrali Mukherjee v. Manik Chand Johuri, AIR 1996 Cal 226 (eviction of sub-lessee). 87 V Ramaswami Ayyar v. S S Srishnasa & Sons, AIR 1935 Mad 904; Jnan Chandra Mukherjee v. Mano Ranjan Mitra, ILR (1941) 2 Cal 576, AIR 1942 Cal 251; Surjan Singh v. Lala Nanak Chand, AIR 1940 Lah 471, 191 IC 763. 88 Deb Narain Dutt v. Ram Sadhan Mandal, (1914) 41 Cal 137, 20 IC 630, AIR 1914 Cal 129 following Khwaja Muhammad Khan v. Husaini Begum, (1910) 37 IA 152, (1910) 32 All 410, 7 IC 237; see also Jiban Krishna Mullick v. Nirupama Gupta, (1926) 53 Cal 922 at 925, 96 IC 846, AIR 1926 Cal 1009 (court decided that instant case did not fall within the purview of the principle in Khwaja's case because it was not created for the benefit of the plaintiff); Hashmatmal v. Pribhdas, (1928) 114 IC 111, AIR 1929 Sind 117. 89 It was argued in this case that there was a novation within the meaning of Section 62 below, but it was held upon the facts that there was no novation. 90 The case was from the mufassil,where a mortgage by deposit of title deeds was not recognised by law--The Transfer of Property Act, 1882, Sections 58 and 59. 91 Dwarka Nath Ash v. Priya Nath Malki, (1917) 22 CWN 279, 36 IC 792, AIR 1918 Cal 941; Deb Narain Dutt v. Ram Sadhan Mandal, (1914) 41 Cal 137 at 141, 20 IC 630, AIR 1914 Cal 129. 92 Khirod Behari Dutt v. Man Govinda, AIR 1934 Cal 682, (1934) 61 Cal 841, 152 IC 351; relying on observations of Jenkins CJ in Deb Narain Dutt v. Ram Sadhan Mandal, (1914) 41 Cal 137, 20 IC 630, AIR 1914 Cal 129, and Dwarka Nath Ash v. Priya Nath Malki, (1917) 22 CWN 279, 36 IC 792, AIR 1918 Cal 941; Khirod's case was not approved by the Privy Council in Kepong Propecting Ltd. v. Schmidt, [1968] AC 810, [1968] 2 WLR 55 (from Malaysia). 93 Khirod Behari Dutt v. Man Govinda, AIR 1934 Cal 682, (1934) 61 Cal 841, 152 IC 351 not applied in Kepong Propecting Ltd. v. Schmidt, [1968] AC 810, [1968] 2 WLR 55(PC) ; Guari Shankar v. Mangal, AIR 1933 Lah 178, 141 IC 490; purports to follow Torabaz Khan v. Nanak Chand, AIR 1932 Lah 566, 138 IC 263. 94 Torabaz Khan v. Nanak Chand, AIR 1932 Lah 566, 138 IC 263; Khirod Behari Dutt v. Man Govinda, AIR 1934 Cal 682 at 696, (1934) 61 Cal 841, 152 IC 351; Bhujendra Nath Biswas v. Sushamoyee Basu, AIR 1936 Cal 67 at 68; Pandurang Ganpatrao Tidke v. Vishwanath Pandurang, AIR 1939 Nag 20; Mehdatunnissa Begum v. Halimatunissa Begum, AIR 1939 Pat 194 at 196. 95 National Petroleum Co. Ltd. v. Popatlal Mulji, (1936) 60 Bom 954, 165 IC 338, AIR 1936 Bom 344. The two views are discussed in Post Master General, Patna v. Ram Kirpal Sahu, AIR 1955 Pat 442. 96 (1911) 39 IA 7, (1911) 34 All 63, 13 IC 304; Kepong Propecting Ltd. v. Schmidt, [1968] AC 810, [1968] 2 WLR 55(PC) . 97 Ganesh Das v. Banto, (1935) 16 Lah 118, 158 IC 387, AIR 1935 Lah 354; Adhar Chandra Mondal v. Dolgobinda Das, (1936) 63 Cal 1172, AIR 1936 Cal 663; Akolla Suryanarayana Rao v. Dwarapudi Basivireddi, (1932) 55 Mad 436, 139 IC 135, AIR 1932 Mad 457; Wali Uddin Ahmad v. Thakur Ram Rakhan, AIR 1936 Oudh 313, 162 IC 451; Jnan Chandra Mukherjee v. Mano Ranjan Mitra, ILR (1941) 2 Cal 576, AIR 1942 Cal 251; Shamji Bhanji & Co. v. North Western Railway Co., (1946) 48 Bom LR 698, 231 IC 367, AIR 1947 Bom 169; Gulabchand Sitaram Marwadi v. Laxminarayan Balmukund Marwadi, (1944) Nag 46, 212 IC 539, AIR 1944 Nag 120; Saraswatibai v. Haibatrao Ramji Patil, (1945) Nag 581, AIR 1945 Nag 261; Suraj Prasad Oja v. Ram Lal Singh, (1947) 25 Pat 269, 230 IC 224, AIR 1947 Pat 131; Gajadhar Prasad Gangapershad Shukul v. Rishabhkumar Mohanlal Baniya, (1949) Nag 122, AIR 1949 Nag 319; Sudama Devi v. Ram Kishan Lal, AIR 1954 All 348; MC Chacko v. State Bank of Travancore, [1970] 1 SCR 658, (1969) 2 SCC 343, AIR 1970 SC 504. 98 Kepong Propecting Ltd. v. Schimidt, [1968] AC 810, [1968] 2 WLR 55(PC) . 99 Iswaram Pillai v. Tharagan, (1913) 38 Mad 753, AIR 1914 Mad 701; but see Inuganti Kasturamma v. Chelikani Venkatasurayya Garu, (1915) 29 Mad LJ 538, AIR 1916 Mad 65 (document created a trust); Ganesh Das v. Banto,
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(1935) 16 Lah 118, 158 IC 387, AIR 1935 Lah 354. 1 Post Master General Puma v. Ram Kirpal Sahu, AIR 1955 Pat 442. 2 Klaus v. Mittelbachert v. East India Hotels Ltd., AIR 1997 Del 201 (whether the basis of the claim was tort or contract was not decided). 3 The Married Women's Property Act, 1874, Section 6. 4 The Motor Vehicles Act, 1988, Section 149; see also the Inland Vessels Act 1917, Section 54C. 5 The Motor Vehicles Act, 1988, Section 150; See for similar provision the Workmen's Compensation Act, 1923, Section 14;New India Assurance Co. Ltd. v. Rula, AIR 2000 SC 1082 (third party entitled to amount although the policy may be cancelled on the ground of non-payment of premium later). 6 The Workmens Compensation Act, 1923, Section 12; for similar provision regarding payment of contribution by the principal employer, the Employees State Insurance Act, 1948, Section 40. 7 The Marine Insurance Act, 1963, Section 17. 8 The Negotiable Instruments Act, 1881, Section 8. 9 The Indian Bills of Lading Act, 1856, Section 1. 10 The Railways Act, 1989, Section 74; For the extent to which any other assignees may sue on a contract, see 'Assignment' under Section 37 below. 11 The Indian Contract Act, 1872, Section 231. 12 The Consumer Protection Act, 1986, Sections 2(d)(1) and (11); (provisions of the Act apply to certain types of goods and services only). 13 The Specific Relief Act, 1963, Section 15. 14 The Industrial Disputes Act, 1947, Section 18(3);TobacCo. Friends Union v. State of Uttar Pradesh, AIR 1958 All 688; BKjobanputra v. BS Kalelkar, AIR 1965 Bom 146. 15 Chitty on Contracts, 28th edn., pp. 1017-23, paras 19-103 to 19-114.
Clause (e): Agreement
Every promise and every set of promises, forming the consideration for each other, is an agreement.
Every promise is an agreement, so is every set of promises 'forming consideration for each other'. The phrase 'forming consideration for each other, relates to the words 'set of promises' and does not qualify 'every promise'.16 Therefore, a promise is an agreement without consideration. The fact that consideration is not a necessary element for making an agreement is seen from the language of sections 10 and 25,17 though it is necessary for making it enforceable. A promise ripens into an agreement only after an offer has been accepted by the offeree; the question of consideration arise thereafter.18 An agreement is either a single promise or a group of promises,19 and therefore it appears that an executed consideration would not be reckoned as an agreement.20 The original draft prepared by the Indian Law Commissioners only laid down in general terms that 'a contract is an agreement between parties whereby a party engages to do a thing or engages not to do a thing'.21The current use of language treats an agreement as an act of both parties, whether a legal obligation is incurred by one or by both of them. The expression 'agreement' stresses on the consensuality required in a transaction.22 Since an agreement is a promise, there is no difficulty in treating promises made to minors for
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consideration received as contracts, for they are made by persons competent to contract for consideration received.23 An acknowledgment containing a stipulation to pay interest becomes an agreement, and must be stamped as such.24 16 Abaji Sitaram Modak v. Trimbak Municipality, (1903) 28 Bom 66. 17 Ibid. 18 Pipraich Sugar Mills Ltd. v. Pipraich Sugar Mills Mazdoor Union, AIR 1957 SC 95. 19 Abaji Sitaram Modak v. Trimbak Municipality, (1903) 28 Bom 66 at 72; Sadashiv Vaman Dhamankar v. Trimbak Divakar Karandikar, (1899) 23 Bom 146 at 163-64. 20 See also 'Contract as a Promise' above. 21 Section I of draft Second Report of Indian Law Commissioners, 1866, p. 11; this section is understood to be the work of Sir James Stephen. 22 Sunnam Sattiah v. State of Andhra Pradesh, AIR 1980 AP 18 at 23 (licence under the Abkari Act). 23 Sadashiv Vaman Dhamankar v. Trimbak Divakar Aarandikar, (1899) 23 Bom 146 at 163-64. 24 Moolchand v. Lachman, AIR 1958 Raj 72; Matoliram v. Lala Nanumal, AIR 1958 Raj 260.
Clause (f): Reciprocal Promises
Promises which form the consideration or part of the consideration for each other, are called reciprocal promises.
These are mutual promises25 which form consideration for one another. A seller promising to deliver goods in two month's time and the buyer agreeing to pay for them on delivery results in a binding contract immediately, its performance being postponed. The promise of one party may be the whole consideration for the promise of the other, or part consideration. Thus, where the same seller promises to deliver goods in two months time, the buyer paying some part of the price immediately, and the remaining part payable on delivery, the promise of the buyer to pay the balance at the time of delivery forms only part of the consideration for the seller's promise to deliver the whole of the goods. A promise can be regarded as consideration for a counter-promise, only if its performance would have been so regarded.26 Reciprocal promises forming the contract may be either independent or dependent. They are independent when the obligation of one party to perform his promise is absolute and not conditional on the performance by the other party of his promise. These can be enforced without showing performance of the plaintiff's own promise, or readiness or willingness to perform it. Dependent promises may be of two types. Concurrent promises are those where the promise of one party is to be performed simultaneously with the promise of the other party, but depends upon the readiness and willingness of the other party to perform the latter promise (see Section 51), e.g., goods to be delivered in exchange for cash or bills. The other is where one promise is dependent upon and must be performed after the performance of the other (see Sections 52-54). In the latter case, performance of one party's promise may have to be completed or tendered before he can sue on the other's reciprocal promise, and it is a condition precedent to the right of act ion on the reciprocal promise. 25 So called in English law.
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26 Re Dale, Proctor v. Dale, [1994] Ch 31 at 38, [1993] 4 All ER 129 at 133.
Clause (g): Void Agreement
An agreement not enforceable by law is said to be void.
The words 'not enforceable by law' in this clause do not refer to a disability to sue arising under any procedural laws like law of limitation or civil procedure. The unenforceability contemplated in this clause is one arising under the provisions of a substantive law.27 It may be declared void by this Act, or by any other law.28 A contract void since its inception is no contract at all, not having passed from the stage of agreement to being a contract. It is an agreement not enforceable by law.29 It is a practice to use the term 'void contract', which is truly a contradiction in terms.30 The distinction between 'agreement' and 'contract' made by clause (h) is apparently original, and is convenient, and has also been adopted by some English writers. The distinction is apparent from Section 2.31 An agreement not enforceable by law is itself void, and therefore, cannot be a contract at all.32'...a void contract is a paradox, in truth there is no contract at all.'33 By clause (e), every promise and every set of promises forming the consideration for each other is an agreement and by clause (h), an agreement enforceable by law is a contract. By clause (g), an agreement not enforceable by law is said to be void. This distinction ought to be observed. Although a void agreement is described as one not enforceable, yet reliefs can be granted under it. For example, if goods are delivered under a void agreement, the goods are recoverable by an act ion of conversion in tort. If the contract is discovered to be void, the obligation of restitution arises under section 65. A party to an agreement which is void for unlawful consideration or object may be entitled to recover, if he can establish his claim otherwise under that agreement; so would a party to such an agreement be entitled to recover if he is not a participant in the illegality. Unenforceable Contracts Unenforceable contracts are valid in all respects, but may not be sued upon by the parties. Such disability may arise for want of registration;34 or because the time prescribed for filing the suit has expired;35 or because the plaintiff firm has not been registered;36 or the document or instrument does not bear the requisite stamp duty;37 or because the lender of money does not possess a licence under money-lending laws. 27 Mahanth Singh v. U Ba Yi, (1939) 66 IA 198, AIR 1939 PC 110, 41 Bom LR 742, 181 IC 1. 28 See Section 23 below--'Expressly Declared Void'. 29 Sadhusingh Fatehsing v. Jhamandas Valiram, AIR 1937 Sind 211 at 212; Mahanth Singh v. U Ba Yi, (1939) 66 IA 198, AIR 1939 PC 110, 41 Bom LR 742, 181 IC 1; Village Panchayat of Jangareddigudem v. Kommireddy Narasayya, AIR 1965 AP 191 at 193, 196. 30 Sadhusingh Fatehsing v. Jhamandas Valiram, AIR 1937 Sind 211 at 212; Chitty on Contracts, 28th edn., p. 22, para 1-037. 31 Harnath Kuar v. Indar Bahadur Singh, 50 IA 69 at 75, (1922) 45 All 179 at 184, AIR 1922 PC 403. 32 Rai Satyadeva Narayan Sinha v. Tirbeni Prasad, AIR 1936 Pat 153. 33 Fawcett v. Star Car Sales Ltd., (1960) NZLR 406 per President Giresson at 412; quoted in Ingram v. Little, [1960] 3 All ER 332 at 340. 34 See the Indian Registration Act, 1908, Section 49.
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35 See the Indian Limitation Act, 1963, Section 3. 36 See the Indian Partnership Act, 1932, Section 69. 37 See the Indian Stamp Act, 1899, Section 35, also various stamp legislations in various states.
Clause (h): Contract
An agreement enforceable by law is a contract.
The definition of 'contract' in this section is built upon a succession of definitions of elements which constitute it, namely, proposal, acceptance, promise, promisor, promisee, consideration and agreement.38 The conditions required for an agreement being enforceable by law are contained in Chapter II of the Act, section 10 below; and the absence of any such condition makes an agreement void, though certain defects will make a contract voidable. The manner in which contracts are, if necessary, enforced, belongs to civil procedure and specific relief. 38 Rai Satyadeva Narayan Sinha v. Tirbeni Prasad, AIR 1936 Pat 153.
Clause (i): Voidable Contract
An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract.
Section 2(i) describes a voidable contract as one which is enforceable by law at the option of one of the parties, but not at the option of the others. Section 2(g) describes that an agreement not enforceable by law is void. The language of clauses (g) and (i) would not be accurate in England. What clause (i) indicates is that one of the parties (or possibly more) can at his option maintain the contract, or resist its enforcement, or take act ive steps to set it aside and the other party has no such option. Such a contract is voidable.39 When rescinded by a party entitled to rescind, it becomes void. Nevertheless, it is in the first instance a contract, being valid until rescinded. Since the contract is voidable, it gives the person a right of choice or election. Such a right, once exercised, is exhausted. If such a person, by express notice or by conduct, elects to affirm, he cannot later seek to avoid the contract; and if he has elected to avoid, he cannot later be allowed to affirm. There is no locus poe nitentoe in either case.40 If the party having the option, affirms the contract, or fails to exercise the right to rescind within a reasonable time, so that the position of the parties has been altered, he loses the right to rescind. The option which characterises a voidable contract is an option either to say 'it shall not be enforceable at all', or to leave it as a good contract enforceable by any party on usual conditions.41 Hence, the words 'may put an end to the contract' in Section 39 also render the contract voidable. Voidable contracts under this Act can be divided into two groups, namely, contracts voidable in their inception under Section 19 on the ground of coercion, fraud, misrepresentation and under Section
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19A undue influence; and the contracts becoming voidable by subsequent default of one party under Section 39 (refusal of party to perform promise wholly), Section 53(impossibility created by act of party), and Section 55 (failure to perform at time fixed, time being of essence). Where an agreement does not in terms confer on the parties, or one of them, a power to determine the agreement whether such a power should be inferred is a question of construction of the agreement to be determined in accordance with the ordinary principles applicable to such a question.42 A contract may be voidable, not only under the Act, but also under other laws. A transfer by a guardian of minor's property in violation of Section 29 of the Guardians and Wards Act, 1890 or under Sections 8(2) or (3) of the Hindu Minority and Guardianship Act, 1956 are voidable at the option of the minor. A transaction covered by the second proviso to Section 20 of the Madras Estates (Abolition and Conversion into Ryotwari) Act, 1948 being enforceable by the government, but not against it, is a voidable transaction.43 This definition was not intended to alter, and does not alter the substantive law. A contract is not vitiated by a clause conferring on one party an option to enforce the contract.44 A contract giving to one party the power to terminate is not a voidable contract, and Section 19 does not apply to cases where the contract itself contains a defeasance clause. The party who is given a right to terminate the contract under it is entitled to do so unless the other party proves that the former has waived his rights.45 It has been held that when a 'voidable contract' is avoided, it 'becomes void', and hence attracts application of Section 65 to it for restoration of advantage received by the parties.46 39 Rajah of Venkatagiri v. State of Andhra Pradesh, AIR 1958 AP 522 at 529. 40 Kunja Lal Bhuiya v. Hara Lal Bhuiya, AIR 1943 Cal 162. 41 Muralidhar Chatterjee v. International Film Co. Ltd., (1943) 70 IA 35, AIR 1943 PC 34 at 39, (1943) 2 Mad LJ 369. 42 Re Spenborough Urban District Council's Agreement,Spenborough Corporation v. Cooke Sons & Co. Ltd., [1967] 1 All ER 959 at 962; Winter Garden Theatre (London) Ltd. v. Millenium Productions Ltd., [1948] AC 173 at 203, [1947] 2 All ER 331 at 343. 43 Rajah of Venkatagiri v. State of Andhra Pradesh, AIR 1958 AP 522 (option with the government to disaffirm contracts during one year before abolition of estates). 44 Chetoomal Bulchand v. Shankerdas Girdharilal, AIR 1929 Sind 83, 118 IC 220. 45 Western India Life Insurance Co. Ltd. v. Asima Sirkar, AIR 1942 Cal 412 at 417. 46 Satgur Parsad v. Har Narain Das, AIR 1932 PC 89, 59 IA 147.
Clause (j): Becomes Void
A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.
In Mahant Singh v. U Ba Yi, 47 the Privy Council observed that clause (j) did not declare every unenforceable contract void, but only those unenforceable by law, and these meant not unenforceable by reason of some procedural regulation, e.g., the law relating to limitation, but unenforceable by substantive law. It observed:
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. . . a contract which was from its inception illegal, such as a contract with an alien enemy, would be avoided by clause (g) and one which became illegal in the course of its performance, such as a contract with one who had been an alien friend but later became an alien enemy, would be avoided by clause (j). A mere failure to sue within the time specified by the statute of limitations or an inability to sue by reason of the provisions of one of the Orders under the Civil Procedure Code would not cause a contract to become void.48
A contract which becomes void is a valid contract at its inception, but is rendered void (i.e., unenforceable) by some later event. Under this Act, a contract becomes void under Section 32, when it becomes void when the event on which its enforcement is contingent, becomes impossible;49Section 35, when the specified event on which the enforcement of contract is contingent, does not happen before the time fixed, or becomes impossible within that time; Section 56, when the act promised becomes impossible or unlawful by reason of some event which the promisor could not prevent. It has also been held that a contract 'becomes void' when it is rescinded by the party at whose option it is voidable.50 Section 65 provides that when the contract becomes void, any person who has received any advantage under it is bound to restore it or make compensation for it to the person from whom it was received. 47 (1939) 66 IA 198, AIR 1939 PC 110, 41 Bom LR 742, 181 IC 1; see Vishwanath Narayan v. Deokabai, (1948) Nag 50, AIR 1948 Nag 382; Pulingundla Venkatappa Naidu v. Geddam Chennappa Naidu, AIR 1945 Mad 171, 221 IC 153. 48 AIR 1939 PC 110 at 113. 49 Purvankara Projects Ltd. v. Hotel Venus International, (2007) 10 SCC 33. 50 Satgur Parsad v. Har Narain Das, AIR 1932 PC 89, 59 IA 147.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER I Of Communication, Acceptance and Revocation of Proposals/S. 3.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER I Of Communication, Acceptance and Revocation of Proposals S. 3. Communication, acceptance and revocation of proposals.-The communication of proposals, the acceptance of proposals, and the revocation of proposals and acceptances, respectively, are deemed to be made by any act or omission of the party proposing, accepting or revoking, by which he intends to communicate such proposal, acceptance or revocation, or which has the effect of communicating it.
Introduction Sections 3 and 4 of the Contract Act, deal with communication of proposals, acceptances and revocation of proposals and acceptances. Section 3 specifies what is communication. Section 4 describes when it is complete.
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The section states that a proposal or acceptance may be made by an act or omission, by which the person intends to communicate, or which has the effect of communicating it. The earlier editors of this book had suggested replacing the word 'or' with 'and', because the section suggests that an inchoate communication of a proposal, etc., made by an act intended to communicate it, but in fact does not have that effect, fails to have legal effect. The Law Commission of India considered this opinion, but recommended no change because the existing language has not caused any difficulty. It is submitted that the use of the word 'or' in the section indicates that a communication of a proposal, etc., is made by an act which: (i) is intended to communicate it; or (ii) has the effect of communicating it. An act or omission with intention to communicate would amount to a communication of the proposal etc., provided its communication is complete under s. 4. The later clause suggests that if the act or omission has the effect of communicating the proposal or acceptance to the addressee, it is equally a communication, irrespective of intention. Thus, an act or omission of the party proposing or accepting or revoking, as the case may be, would be communicated if, when objectively viewed from the position or viewpoint of the addressee, would have the effect of communication.
The Objective Test In the matters of contract formation, the objective test of agreement is adopted.1 Law will attribute to a person an intention which that person's conduct bears when reasonably construed by a person in the position of the person to whom it is addressed. Words are to be interpreted as they were reasonably understood by the party to whom they were spoken.2A person would be bound by any act or omission or conduct which appears to be an offer or acceptance, as the case may be, to the person to whom it is made. Where A makes such an offer to B in circumstances that it appears to B that A has the requisite intention to be bound by the offer, and B accepts it, A is bound by the acceptance. A may however deny his apparent consent if: (i) B knew or ought to have known that A's apparent intention did not correspond with A's real intention; or (ii) A had agreed to something he did not intend because of B's fault. To this extent, the test of intention is not purely objective.3 The purpose of the objective test is to protect B when he relies on the act or omission of A.
If whatever a man's real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party and the other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party's terms.4
The other theory described as the 'fly on the wall' theory or the theory of 'detached objectivity'5 requires that the words used by one party must be judged as they would appear to a reasonable man eavesdropping on the negotiations, and not as they appeared to the party to whom they were addressed;
...once a contract has been made, that is to say, once the parties, whatever their innermost states of mind, have to all outward appearances agreed with sufficient certainty in the same terms on the same subject matter, then the contract is good.6
This approach is criticised because it is likely to force on both the parties an agreement which neither of them intended. Also, it cannot be reconciled with the approach in The Hannah Blumenthal,7 which supports the broad proposition that the question of formation should be viewed from the perspective of the person to whom the communication is made, and at the same time stresses the subjective
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understanding of a reasonable person in the position of such person. According to Lord Diplock in The Hannah Blumenthal--
To create a contract by exchange of promises between two parties where the promise of each party constitutes the consideration for the promise of the other, what is necessary is that the intention of each as it has been communicated to and understood by the other(even though that which has been communicated does not represent the act ual state of mind of the communicator) should coincide...Thus if A (the offeror) makes a communication to B (the offeree) whether in writing, orally or by conduct, which, in the circumstances at the time it was received, (1) B, if he were a reasonable man, would understand as stating A's intention to act or refrain from act ing in some manner also specified in the offer, and (2) B does in fact understand A's communication conveying his willingness so to act or to refrain from act ing which, mutatis mutandis, satisfies the same two conditions as respects A, the consensus ad idem essential to the formation of the contract in English law is complete.8
1 Anson's Law of Contract, 29th edn. 2010, at p. 32; Chitty on Contracts, 28th edn., at pp. 90-91, para 2-003. 2 Paal Wilson d' Co. A/S v. Partenreederei Hannah Blumenthal (The Hannah Blumenthal), [1983] 1 All ER 34(HL) ; Vorster,[1987] 103 LQR 274; De Moor,[1990] 106 LQR 632. 3 See also s. 2(a) above: 'The Objective Test of Intention.' 4 Smith v. Hughes, [1861-73] All ER Rep 632. 5 Howarth,(1984) 100 LQR 265; Vorster,(1987) 103 LQR 274. 6 Solie v. Butcher, [1949] 2 All ER 1107. 7 Paal Wilson d' Co. A/s v. Partenreederei, the Hannah Blumenthal, [1983] 1 All ER 34(HL) . 8 [1983] 1 All ER 34 (HL) per Lord Diplock at 49 of All ER.
What is Communication Communication may be made effectively in many other ways besides written, spoken or signalled words. For example, delivery of goods by their owner to a person who has offered to buy them for a certain price will be understood to signify acceptance of that proposal, unless there be some indication to the contrary. No words are used nor needed to explain the intent with which a person steps into a ferry-boat or a tramcar, or drops a coin into an automatic machine. It is also possible for parties to hold communication by means of prearranged signs being any form of cipher or secret writing, and not having in themselves any commonly understood meaning; but this does not happen often in business. Means of communication, which a person has prescribed or authorised, are generally taken as against him to be sufficient. An unexecuted intention to communicate something, or even an unsuccessful attempt cannot be treated as amounting to communication; nor can a mere mental act of assent.9 Communication in Electronic Form An offer and acceptance, like any other expression of will or intention, may be communicated by any means, including by data messages in electronic form (called 'electronic record' in the Information Technology Act, 2000). The provisions of the Contract Act, are wide enough to cover such transactions. In the context of contract formation, unless otherwise agreed by the parties, an offer and the acceptance of an offer, or either of them, may be expressed by means of data messages or
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electronic record. Where electronic record, are used in the formation of a contract, that contract shall not be denied validity or enforceability on the sole ground that data messages was used for that purpose.10Now, s. 10A of the Information Technology Act, 200011 provides that proposals, accceptances and their revocation can be expressed by means of electronic record. Thus, a contract may result from exchange of e-mails,12 or by fax.13 A guarantee negotiated and concluded by exchange of e-mails can be enforced.14 However, data messages expressing offer and acceptance generated solely by computers without human intervention, namely, contracts effected through electronic data interchange (EDI), may lack the requisite intention. Computers can now be programmed to make their own decisions and sophisticated judgments.15 Autonomous machines can learn through experience, modify the instructions in their own programs and even devise new instructions. They can then make decisions based on these self-modified or self-created instructions. If autonomous computers are able to learn and modify their own behaviour in this way, a reasonable implication must be that they are capable of manifesting (or, at least, appearing to manifest) human cognitive processes which we associate with the exercise of free will. These processes include making choices, forming - intentions, reaching decisions and giving or withholding consent. What follows from these A (rtificial) I (ntelligence)-orientated developments? Humans can give their computers substantial autonomy in decision-making, thus permitting the machines to operate where the tasks in question are highly complex and involve not only the need for speed of operation but also the making of sophisticated, precise judgments...computers (can now be made to) not only negotiate details such as the price, quantity and dates of delivery and payment but also to decide whether to make or accept an offer without reference to any human trader.16 The question of intention in such transactions is solved by the provisions relating to attribution. An electronic message sent by an information system programmed by or on behalf of the originator17 to operate automatically shall be attributed to the originator.18 Apart from this fiction (of attribution), even though such offers or acceptances lack the requisite human intent, the objective theory of contract can aid the party who relied on these manifestations; and to that extent the last clause of this s. 3 effectively deals with such manifestations. Attribution procedures further give to the receiving party the benefit of a presumption that the message came from the sender. 9 Brogden v. Metropolitan Railway Co., [1877] 2 App Cas 666(HL) at 691 per LORD BLACKBURN; SM Bholat v. Yokohama Specie Bank, AIR 1941 Rang 270, 197, 890IC ; Bank of India Ltd. v. Rustom Fakirji Cowasjee, AIR 1955 Bom 419 at 430. 10 UNCITRAL Model Law on Electronic Commerce, (1996). The Information Technology Act, 2000 does not make such express provision. For contracts which may not be made in electronic form, see The Information Technology Act, 2000, s. 1(4). 11 Section 10A inserted in the Information Technology Act, 2000 by the Information Technology (Amendment) Act, 2008, provides:10-A. Validity of contracts formed through electronic means.--Where in a contract formation, the communication of proposals, the acceptance of proposals, the revocation of proposals and acceptances, as the case may be, are expressed in electronic form or by means of an electronic record, such contract shall not be deemed to be unenforceable solely on the ground that such electronic form or means was used for that purpose. 12 Trimex International FZE Ltd. v. Vedanta Aluminium Ltd., 2010 AIR SCW 909, (2010) 3 SCC 1; see also Heera Laxmi Amusements Pvt. Ltd. v. Shree Asthvinayak Cine Vision Ltd., 2013 (5) Mh LJ 208(Bom) ; Golden Ocean Group Ltd v. Salgaocar Mining Industries Pvt Ltd, [2012] EWCA Civ 265(CA) (a guarantee); Nicholas Prestige Homes v. Neal, [2010] EWCA Civ 1552. 13 Great Offshore Ltd. v. Iranian Offshore Engg & Construction Co., (2008) 14 SCC 240; Quadricon Pvt. Ltd. v. Bajarang Alloys Ltd., AIR 2008 Bom 88. 14 Golden Ocean Group Ltd. v. Salgaocar Mining Industries Pvt. Ltd., [2011] EWHC 56(Comm), [2011] All ER 158(D) (Jan) (It satisfied Statute of Frauds 1677).
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15 See ChweeKin Keong v. Digilandmallecom Pvt. Ltd., [2005] 1 SLR 502 (Court of Appeal of Singapore, Supreme Court). 16 Tom Allen and Robin Widdison, 'Can Computers Make Contracts', Harvard Journal of Law and Technology, 1996. 17 Under s. (2) clause (za) of the Information Technology Act, 2000, 'originator' means a person who sends, generates, stores or transmits any electronic message or causes any electronic message to be sent, generated, stored or transmitted to any person but does not include an intermediary. 18 The Information Technology Act, 2000, s. 11(c).
Silence as Acceptance A contract being the result of a proposal made by one party and, acceptance of that proposal by the other, acceptance of proposal and intimation of acceptance by some external manifestation that the law regards as sufficient is necessary.19 As a general rule, an offeree who does nothing in response to the proposal is not bound by its terms. In Felthouse v. Bindley, 20an uncle offered to buy a horse from his nephew for a price, and said, 'if I hear no more about him I shall consider the horse is mine' at the price quoted. The nephew did not answer but instructed his auctioneer not to sell that particular horse. The auctioneer sold the horse by mistake. It was held that the nephew's acceptance was not communicated to the uncle, the nephew had no obligation to reply, and his silence did not constitute an acceptance. Hence, the uncle's act ion for conversion failed. The decision is hard to support, for the nephew intended to sell the horse to the uncle, and the uncle had waived communication of acceptance. If the case was the reverse and the nephew was to sue the uncle holding him to the contract, the result might have been different, since the uncle had waived communication of acceptance. The general rule laid down in the case, however, has been well accepted. If the letter of defendants constituted an offer to take over the contract made with the company of which the defendant was the managing director, the absence of any response by the plaintiff to that offer could not be construed as an acceptance capable of binding the defendant. Such a result would only flow from an estoppel operating against the offeror. But the cause of action of the plaintiff could not be founded on an estoppel. Therefore, the claim in contract failed.21 Law does not cast a duty on the person to whom a proposal is made to reply to that proposal,22 and hence acceptance cannot be inferred from the silence of the offeree23 and as a general rule, a proposal is not accepted by mere silence on the part of the offeree.24 Silence is not an effective expression of intention, nor is inaction. The reason is that silence and inaction are by their nature equivocal, as there can be more than one reason for a person to be silent and inactive. Apart from not wanting to accept, an offeree may simply be forgetful or slow in responding to the proposal. Where the offeree does not wish to accept the proposal, it is undesirable to put him to the trouble and expense of refusing the proposal. Moreover, lack of any outward expression of assent would effectively enable the offeree to deny or assert the fact of acceptance to suit his own convenience.25 Since it is the proposer who takes the initiative by proposing for conclusion of the contract, the offeree is free to accept or not to accept, but also to simply ignore it. A proposer cannot bind the offeree against the latter's will by expressly stipulating that, if the offeree does nothing, he will be bound to a contract,26 or to a variation27 of an existing contract. Acceptance can, however, be inferred from silence only under exceptional circumstances. First, where the offeree makes up his mind to accept a proposal continuing such a stipulation and complies with the proposal by remaining silent, namely, where an option- holder has agreed that his silence shall be acceptance, or where the mode of acceptance has been specified by the offeree or the proposal been made on the form provided by the offeree, and he stipulates that his silence shall constitute acceptance.28 Secondly, silence taken together with certain facts, may constitute acceptance. The conduct of the
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offeree may raise an estoppel.29 Where the proposal is ambiguous, and the offeree communicates with the proposer indicating that he understood the proposal in a particular sense, the silence of the proposer may constitute acceptance.30 If there is a course of dealings between the parties, the proposer may suppose that the silence amounts to acceptance, namely, previous offers to buy goods have been accepted as a matter of course by the dispatch of the goods.31 If there is a prior agreement that contract forms, if not returned unsigned with a letter, shall amount to acceptance, then the non-return of the contract is acceptance, but that is not so if there is no prior agreement.32 This will apply to arbitration agreements as well.33 Thirdly, if silence is reinforced by conduct, it may constitute acceptance. Where a tenant was offered a renewal of the tenancy at a higher rent, his continuing to stay constituted acceptance.34 A vessel was used after the term of its charter party was over, and continued on same terms. It was held that the conduct of using the vessel implied that the arbitration clause in the charter party was also accepted.35 A debtor's proposal to give additional security was accepted by the creditor's forbearance to sue for that debt.36 A contractor consented, subject to payment at enhanced rates, to the proposal to spread the contract work over two years instead of the agreed one year. On completing the work, he was entitled to payment at enhanced rates even though the employer remained silent.37 A document purporting to be an arrangement, requiring signatures of both the plaintiff and the defendant to operate as binding agreement, was signed by the defendant. The plaintiff act ing upon that signature presented some further documents necessary for effectuating the agreement to the defendant, which the defendant signed. This could only have been done on the footing of the plaintiff having accepted the proposed agreement. This was held to make the contract complete. Any repudiation afterwards was not sufficient to revoke the agreement.38 But in Ramji Dayawala & Sons (P.) Ltd. v. Invest Import, 39R had objected during negotiations to the incorporation of an arbitration clause referring to international arbitration into the agreement, and had sought an amendment to the draft to that effect. The agreement however, got signed between the parties containing such arbitration clause. Immediately after signatures on the document, R objected to the inclusion of the said clause stating that he had never agreed to its inclusion. I did not respond, but continued with the contract work with R. Holding that there was no agreement to refer the matter to arbitration, the Court observed: '[a]s part of the offer was disputed at the negotiation stage, this (deletion of the clause) was a counter-offer, and silence of the original offeror amounted to its acceptance'. Fourthly, silence may constitute acceptance by custom of trade or business in question.40 19 Bhagwandas Govardhandas Kedia v. Girdharlal Parshottamdas and Co., AIR 1966 SC 543 at 547. 20 (1862) 11 CBNS 869, 142 ER 1087. 21 Fairline Shipping Corporation v. Adamson, [1975] QB 180, [1974] 2 WLR 824, [1974] 2 All ER 967 at 974; applying Felthouse v. Bindley, supra . 22 Gaddar Mal v. Tata Industrial Bank Ltd., AIR 1927 All 407 at 410 (DB), (1927) 49 All 674; Raj Kumar v. Shiva Prasad Gupta, AIR 1939 Cal 500 at 501; Moti Lal Madan Lal v. Kishori Lal d' Brothers, AIR 1930 Lah 374 at 375 (DB); Perala Krishnayyan Chettiar v. G Padmanathan Chettiar, AIR 1917 Mad 13 at 14 (DB). 23 Hulas Kunwar v. Allahabad Bank Ltd., AIR 1958 Cal 644. 24 SM Bholat v. Yokohama Specie Bank Ltd., AIR 1941 Rang 270; Bank of India v. Rustom Fakirji Cowasjee, AIR 1955 Bom 419; Karan Singh Chandan Singh v. Collector, Chhatarpur, AIR 1980 MP 89; Urmila d' Co. Pvt. Ltd. v. JM Baxi d' Co., AIR 1986 Del 336 at 340. 25 Robophone Facilities Ltd. v. Blank, [1966] 3 All ER 128 per Lord Denning; dissenting at p. 136. 26 Felthouse v. Bindley, (1862) 11 CBNS 869, 142 ER 1087 aaa. 27 Fairline Shipping Corporation v. Adamson, [1974] 2 All ER 967. 28 Alexander Hamilton Institute v. Jones, (1924) III App 444; Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998 'CONTRACT', para 655; Chitty on Contracts, 28th edn., at p. 118, para 2-065.
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29 Roberts v. Hayward, (1828) 3 C&P 432; Spiro v. Lintern, [1973] 3 All ER 319, [1973] 1 WLR 1002(CA) ; Spiro v. Lintern, [1973] 3 All ER 319(CA) . 30 Halsbury's Laws of England, 4th edn., Reissue, 30 June 1998. Vol. 9(1), 'CONTRACT', para 656. 31 Chitty on Contracts, 28th edn., at p. 118; Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, 'CONTRACT', para 656. 32 Goddarmal Hiralal v. Chandrabhan Agarwal & Co., AIR 1968 All 292. 33 Ibid; Jugal Kishore Rameshwardas v. Goolbai Hormusji, AIR 1955 SC 812, [1955] 2 SCR 857. 34 Chitty on Contracts, 28th edn., at p. 120 (conduct raising an estoppel); Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue 30 June 1998, 'CONTRACT', para 656. 35 Bharat Petroleum Corpn. Ltd. v. Great Eastern Shipping Co. Ltd., AIR 2008 SC 357, (2008) 1 SCC 503. 36 Alliance Bank v. Broom, (1864) 2 Drew & Sm 289, 34 LJ 259(Ch) . 37 Hyderabad Municipal Corpn. v. M Krishnaswami Mudaliar, AIR 1985 SC 607. 38 Robophone Facilities Ltd. v. Blank, [1966] 3 All ER 128; but see Lord Denning MR contra (No agreement without signature of plaintiff and communication of acceptance). 39 AIR 1981 SC 2085 at 2092. 40 Chitty on Contracts, 28th edn., at p. 119, para 2-065.
Communication of Exemption Clauses and Other Special Conditions in Printed Documents Often a document containing printed conditions, particularly exemption clauses or other onerous clauses, is handed over to a party at the time or after making the contract. He may not read the terms, moreover, he may not also be aware that the document contains such conditions. Such special terms or conditions would either exclude or restrict the liability of the person issuing the document, or may impose onerous obligations on the party to whom the document is given. Particularly where an invitation of offer leads to business, the terms of any resulting agreement are often determined by reference to the terms of the invitation. These terms very often leave no room for bargaining on details and contain the whole terms of the kind of agreement contemplated. A question arises whether and how far these conditions bind the parties. The answer depends upon whether the terms and conditions have been effectively communicated to him. Such exemption clauses may be of various types, for example:
(i) (ii)
an exclusion clause, whereby the parties alter the primary obligations which would otherwise arise under the contract, or whereby the parties agree not to undertake particular primary obligations and are therefore not liable for their non- performance; or a limitation clause, whereby the parties alter their secondary obligation to pay damages in the event of particular primary obligations of the contract, where the parties agree to limit the damages otherwise payable as a result of a breach of the contract, or seek to deny or limit the right to rescind the contract, or specify a time limit for the exercise of the right to rescind or claim damages. Such clause may also limit the right to file a suit, for example by specifying the place where the action can be filed.
Whether such clauses would have contractual effect or not, would depend upon the nature of the document, the adequacy of notice to the party sought to be bound, the time at which such terms are brought to his notice, and the course of dealings between the parties.41
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Nature of the Document Such clauses would have contractual effect if incorporated into documents of a class which the party receiving it would know or would expect to contain contractual conditions.42 Thus a turnpike ticket,43 a ticket for a deck-chair,44 a ticket handed at a public bath,45 a parking ticket issued by an automatic machine46 are not such documents, and the party receiving it can put it in his pocket unread.47 The same is the case with a cheque book.48 On the other hand, a railway49 or steamship ticket50 and a receipt of goods deposited51 have been held to be contractual documents. The conditions may be set out in the document itself or incorporated therein by reference, provided reasonable notice of the conditions is given. Notice Before or at the Time of the Contract The conditions must be brought to the notice of the party before or at the time the contract is made. The party will then be bound by those conditions. The Indian Airlines Corporation, at the door of its Calcutta office, affixed a board on which the conditions of carriage were given in bold letters. In the ticket issued to the passengers, it was stated that the ticket was issued subject to the conditions of carriage which were printed inside the cover page in very small letters. It was held that the conditions displayed on the board gave reasonably sufficient notice of the conditions and must be deemed to have been accepted by a person buying the ticket.52 The nature of contract will decide whether a clause requires special notice. Thus in an insurance contract, an insurer need not draw attention of an insured to every limitation and procedural requirement, because the very nature of an insurance policy is to limit the insurer's risk. What are onerous clauses in ordinary commercial contracts may not be of that nature in insurance contracts.53 If the conditions are communicated to the party after the contract is concluded, they do not have any effect. The plaintiff lost his articles from a hotel room due to the negligence of the hotel staff. The register on which he had signed on his arrival did not contain any exemption clauses. A notice inside the hotel room sought to disclaim liability for lost or stolen articles. It was held that the notice was of no effect as the plaintiff was not made aware of the conditions before the contract was made.54 A receipt issued by a launderer contained a condition restricting the liability of the launderer for loss to the lesser of the amount of twenty times the laundering charges or half of the price of unreturned articles. It was held that the contract of bailment was complete as soon as the clothes were entrusted to the launderer at the counter. The receipt being issued subsequently, was not a 'contractual document'. The burden lay on the defendant to prove that plaintiff had assented to the condition expressly or by necessary implication, and that the stipulation was liable to be considered as a contractual term. The plaintiff was entitled to claim the full value of the clothes.55 The mere writing on bills of medical practitioners that interest of one per cent per month will be charged cannot amount to a contract to pay that interest.56 Previous Course of Dealings A contract would also be binding where there has been a previous course of dealings between the parties.57 Where an indemnity clause was contained in the plaintiff's form never signed by the defendant, the clause was held incorporated into the terms of the contract since the condition was common to all firms doing similar business and the defendant knew that the condition was the same as his own.58 If the party against whom the clause is sought to be enforced has on previous occasions been put to notice of the operation of the condition, it may operate even though it is contained in a document like a confirmation note issued much later after the contract is made.59 Subsequent Incorporation Such a condition may be incorporated into the contract subsequently by variation. For this purpose, documents of contractual effect in formation of contract must be distinguished from documents used in performance of a contract. Variation will not occur through presentation of documents of
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performance, namely, a time-sheet, invoice or statement of account. These documents record the performance of existing obligations under the contract, and do not usually contain the terms of a contract. Mere signature on such a document containing or incorporating reference to contractual terms is not sufficient to incorporate the new terms into an existing contract. Whether such a signature varies an existing contract will depend upon a consideration of a number of substantive factors; the nature and purpose of the document, the circumstances of its use between the parties and the parties' understanding of its purpose at the time.60 Reasonable Notice of Exclusion and similar Onerous Clauses It is not sufficient that the exclusion clause be incorporated into the contract; the party against whom it is to operate must be given reasonable notice of its existence. When there is no act ual knowledge, the party will not be bound if he has no reason to believe that the document containing the clause contained contractual terms.61 If such party to be bound has actual knowledge of the clause when the contract is concluded, he is bound by it.62 If he has reason to believe that the document given to him contains contractual terms, he may be bound by those terms even though he has not read the document,63 but only if the terms are brought to the attention of the reader in the document, namely by words 'for conditions, see back', written on the face of the document; and yet he will not be liable if such words are obliterated by date stamp.64 The more unreasonable the term, the greater the notice which must be given of it.65'Some clauses which I have seen', said Denning LJ, 'would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient'.66 If the party seeking to enforce the clause has done what is normally sufficient to give reasonable notice of the clause, it binds the other party, even though the other party is disabled, or is unable to understand the clause, e.g., because of illiteracy.67 But if the party seeking to enforce knows of the disability, he must take further steps to bring the clause to the notice of such person under disability. The more onerous the consequences of the exclusion clause, the more effective must the notice be.68 The party enforcing the clause may show that the other party assented to the clause. The mere printing of the words 'subject to Madras jurisdiction' in the letter could not become part of contract unless it was agreed to by the addressee.69 But where the party signed an order form with bold printed letters 'subject to Madras jurisdiction', the jurisdiction of other Courts would be excluded.70 The consignor signed a consignment note containing a clause limiting liability of the courier to USD 100. Despite clear notice to that effect, the consignor had not disclosed the contents of the cover at the time of consignment, nor had purchased insurance cover for the consignment. The clause was binding on the consignor and liability of the courier limited to USD 100.71 The question whether the party tendering the document did all that was reasonably sufficient to give the other notice of the exclusion clause is a matter of fact.72 The burden of proving that it was brought to the notice of the other party, or that the other party assented73 to the exclusion clause lies on the party seeking to enforce it. But it is for the Court to decide whether there is sufficient evidence to show that the notice is reasonably sufficient. In InterGlobe Aviation Ltd. v. N. Satchinand, 74 conditions of carriage had an exclusive urisdiction clause. The e-ticket did not give complete conditions of carriage, but incorporated these by reference. Interested passenters could ask the airline for a copy of the contract, or could read these on the web-site. It was stated:
&uot;Placing the conditions of carriage on the website and referring to the same in the e-ticket and making copies of conditions of carriage available at the airport counters for inspection is sufficient notice in regard to the terms of conditions of the carriage and will bind the parties. The mere fact that a passenger may not read or may not demand a copy does not mean that he will not be bound by the terms of contract of carriage.&uot;
Shrinkwrap Licences
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The 'shrinkwrap' licence gets its name from packages (usually of retail software) covered in plastic or cellophane 'shrinkwrap', having written licences, mostly unsigned, which state that acceptance on the part of the user to the terms of the licence is indicated by opening the shrinkwrap packaging or other packaging of the software, by use of the software or by some other specified means. This licence is a direct contract between the software producer and the user or ultimate customer, and is separate from the contract of sale by which the user acquired the software from the distributor or retailer. The terms of licence in standard form would usually contain the licence to use the software with restrictions, prohibition of copying, altering, modifying or adapting the software. The customer purchasing the software would know about the licence only after purchasing the software, and would be able to read the terms only after the package is opened. The extent to which such licences are enforceable has been decided from various points of view. In Beta Computers (Europe) Ltd. v. Adobe Systems Ltd., 75 it was held that the contract of sale of standard package made over the telephone was not complete until the customer had seen and accepted the licence terms inside the shrinkwrap packing. Since the customer had rejected the software, the terms were not accepted and there was no contract. But the Court observed that had the customer accepted the terms by opening the package, the contract in the licence would have been enforceable. In the US, some cases suggest that such licences are unenforceable, as they attempt to modify the terms of the contract already made and understood by the buyer and seller. In Step-Saver Data Systems lnc v. WYSE Technology ;76 the Court concluded that the shrinkwrap licence was 'best seen as one more form in a battle of forms', and applying UCC s. 2-207,77 held that the contract was concluded with the placing of the order and the acceptance on the telephone, and the disclaimers and warranties in the shrinkwrap licence sent to the customer after this contract, materially altered the terms of the contract, and therefore were not part of the agreement. But in ProCD Inc v. Mathew Zeidenberg, 78Z purchased from a retail store a CD-ROM disc containing a database called Selectphone which was a compilation of telephone directories made by P. A notice was printed outside the package that the use of the CD-ROM was restricted by the terms of the licence contained inside the package, which restricted the use of the database for non-commercial purpose. Z sold the information contained in the database to third parties in violation of the terms of the licence. P sought an injunction restraining Z from disseminating the information. The district court held that the licence was ineffective because its terms did not appear on the outside of the package, and the buyers did not have any opportunity to object to the proposed user agreement or review it before purchase, nor did they assent to the terms explicitly after they learnt of them. Reversing this decision, the Court of Appeal held that shrink wrap licences were enforceable unless their terms are objectionable on grounds of positive law or are unconscionable. It held that P had made an offer to license its product which was accepted by the conduct of Z in choosing to use the software, and hence Z was bound by the terms. As to the argument of Z that the placing of the package of software on the shelf was the offer and payment of price was the acceptance, the Court observed that one of the terms on which Z agreed to purchase the software was that the transaction was subject to a licence and treated the licence as ordinary contract accompanying the sale of products. It held that terms inside a package of software bind consumers who use the software after an opportunity to read the terms and reject the product. It observed:
Notice on the outside, terms on the inside, and a right to return the software for a refund if the terms are unacceptable (a right that the license expressly extends), may be a means of doing business valuable to buyers and sellers alike... Transactions in which the exchange of money precedes the... communication of detailed terms are common... In the purchase of insurance the buyer goes to an agent, who explains the essentials... and remits the premium to the home office, which sends back a policy... In the purchase of the airline ticket the traveller calls the agent, is quoted a price, reserves a seat, pays, and gets a ticket in that order. The ticket contains elaborate terms, which the traveller can reject by cancelling the reservation. To use the ticket is to accept the terms, even terms that...are disadvantageous. Consumer goods work the same way. Someone wants to buy a radio set visits a store, pays, and walks out with a box. Inside the box is a leaflet containing some terms, the most of which usually is the warranty, read for the first time in the comfort of the home...Drugs come with a list of ingredients on the outside and an elaborate package insert inside.
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Following this analysis in the ProCD case, the Seventh Circuit held in Hill v. Gateway 2000 Inc, 79 that the terms of a hardware sales agreement not provided at the time of the sale were binding upon the buyers of the computer hardware, although buyers could not review the terms kept inside the computer's shipping box until after the computer had arrived. The Court expressly rejected the buyers' suggestion that the Court limit the ProCD holding to the context of software licenses. It observed:
Practical considerations support allowing vendors to enclose the full legal terms with their products. Cashiers cannot be expected to read legal documents to customers before ringing up sales. If the staff at the other end of the phone for direct-sales operations such as Gateway's had to read the four-page statement of terms before taking the buyer's credit card number, the droning voice would anaesthetize rather than enlighten many potential buyers. Others would hang up in a rage over the waste of their time. And oral recitation would not avoid customers' assertions (whether true or feigned) that the clerk did not read term X to them, or that they did not remember or understand it. Writing provides benefits for both sides of commercial transactions. Customers as groups are better off when vendors skip costly and ineffectual steps such as telephonic recitation, and use instead a simple approve-or-return device.
Clickwrap Agreements On the internet, an end user may be required to agree to a specific set of terms and conditions as a prerequisite for access to a particular online site or service. These contracts may often provide that the end user will abide by the rules of the online site, or be entitled to privacy protections provided in the system rules, pay for goods or services purchased at the site, waive any claims that the online site is liable for errors or harms suffered by the user, not infringe others' intellectual property rights, not violate other applicable laws or lose access to the site if the rules are violated. Very typically, one party will display its terms on its website subject to which it offers to sell its goods or provide services. The purchaser will indicate the assent to the terms by clicking on the button 'I agree', very often without reading the terms, which would conclude the contract on the terms displayed. The terms of these agreements are non-negotiable. But they are enforceable unless they violate public policy. In the dicta, the Court in the ProCD case80 approved of clickwrap agreements. 41 For rules of construction of exemption and limitation clauses, see s. 9 below: 'Construction of Exemption Clauses'. (For validity of such clauses, particularly in standard form contracts, see s. 23 below 'Unconscionable Agreements'.) 42 Chitty on Contracts, 28th edn., at p. 587, para 12-009. 43 Parker v. South Eastern Rail Co., (1877) 2 CPD 416, 422, [1874-80] All ER Rep 1661. 44 Chapelton v. Barry Urban District Council, [1940] 1 KB 532; [1940] 1 All ER 356(CA) . 45 Taylor v. Glasgow Corpn., AIR 1952 SC 440. 46 Thornton v. Shoe Lane Parking Ltd., [1971] 2 QB 163, [1971] 1 All ER 686(CA) . 47 Parker v. South Eastern Rail Co., (1877) 2 CPD 416, [1874-80] All ER Rep. 1661. 48 Burnett v. Westminster Bank Ltd., [1966] 1 QB 742, [1965] 3 All ER 81 (notice appeared on new cheque books which had not appeared on the previous cheque book). 49 Thompson v. London, Midland & Scottish Rail Co., [1930] 1 KB 41, [1929] All ER Rep 474. 50 Hood v. Anchor Line (Henderson Bros) Ltd., [1918] AC 837, [1918-19] All ER Rep 98. 51 Parker v. South Eastern Rail Co., (1877) 2 CPD 416 at 422, [1874-80] All ER Rep 1661. 52 Mukul Dutta Gupta v. Indian Airlines Corpn., AIR 1962 Cal 311. 53 Mcllroy (Swindon) Ltd v. Quinn Insurance Ltd, [2011] EWCA Civ 825. 54 Olley v. Marlborough Court Ltd., [1949] 1 KB 532, [1949] 1 All ER 127(CA) ; Thornton v. Shoe Lane Parking Ltd., [1971] 2 QB 163, [1971] 1 All ER 686 (ticket from an automatic machine); Dillon v. Baltic Shipping Co., [1991] 2 Lloyd's Rep 155 (ship ticket).
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55 RS Deboo v. MY Hindlekar, AIR 1995 Bom 68, following Lily White v. R Munuswami, AIR 1966 Mad 13. 56 Deputy Commr Kheri v. Ram Kumar Saxena, AIR 1941 Oudh 254. 57 British and Overseas Trading (Bristles) Ltd. v. Brooks Wharf and Bull Wharf Ltd., [1967] 2 Lloyd's Rep 51 (contractual relations spanning 50-80 years of course of dealings was sufficient enough to incorporate the term from previous contracts in an oral contract); McCutcheon v. David Macbrayne Ltd., [1964] 1 All ER 430, [1964] 1 WLR 125(HL) (no consistent course of dealing); Hollier v. Rambler Motors (AMC) Ltd., [1972] 1 All ER 399, [1972] 2 QB 71(CA) (three or four transactions not sufficient to constitute such a course of dealing). 58 British Crane Hire Corp. Ltd. v. Ipswich Plant Hire Ltd., [1974] 1 All ER 1059(CA) . 59 Henry Kendall d' Sons v. William Lillico d' Sons Ltd., [1969] 2 AC 31, [1968] 2 All ER 444(HL) ; J Spurling Ltd. v. Bradshaw, [1956] 2 All ER 121(CA) ; British and Overseas Trading (Bristles) Ltd. v. Brooks Wharf and Bull Wharf Ltd., [1967] 2 Lloyd's Rep 51. 60 Grogan v. Robin Meredith Plant Hire, (CA), noted in Cambridge Law Journal, MacMillan, 1996, p. 427, 53 Con LR 371. 61 Chapleton v. Barry UDC, [1940] 1 All ER 356; RS Deboo v. MV Hindlekar, AIR 1995 Bom 68. 62 Parker v. South Eastern Railway, (1877) 2 CPD 416, at 422 (CA). 63 Parker v. South Eastern Railway, (1877) 2 CPD 416(CA) ; Hood v. Anchor Line (Henderson Bros) Ltd., [1918] AC 837(HL) ; Mendelssohn v. Normand Ltd., [1969] 2 All ER 1215(CA) . 64 Sugar v. London, Midland and Scottish Ry Co., [1941] 1 All ER 172. 65 Kaye v. Nu Skin UK Ltd., [2009] EWHC 3509(Ch), [2010] 2 All ER 832(Comm) . 66 J Spurling Ltd. v. Bradshaw, [1956] 1 WLR 461 at 466. 67 Thomson v. London, Midland and Scottish Rly Co., [1930] 1 KB 41(CA), [1929] All ER Rep 474CA . 68 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, 'CONTRACT', para 802. 69 C Satyanarayana v. Kanumarlapudi Lakshmi Narasimham, AIR 1968 AP 330. 70 S Manuel Raj and Co. v. J Manilal and Co., AIR 1963 Guj 148. 71 Bharahi Knitting Co. v. DHL Worldwide Express Courier Division of Airfreight Ltd., AIR 1996 SC 2508, (1996) 4 SCC 704 (a case under the Consumer Protection Act, 1986). 72 Pollock,[1934] 50 LQR 29. 73 RS Deboo v. MV Hindlekar, AIR 1995 Bom 68. 74 (2011) 7 SCC 463. 75 [1996] FSR 367 (Scotland). 76 939 F 2d 91 (3d Cir 1991). 77 Section 2-207 of UCC:1. A definite and reasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.2. The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless;(a) the offer expressly limits acceptance to the terms of the offer;(b) they materially alter it; or(c) notification of objection to them has already been given or is given within reasonable time after notice of them is received. 78 86 F 3d 1447 (Seventh Cir 1996). 79 105 F 3d 1147 (Seventh Cir 1997); See also Mortenson v. Timberline Software Corporation, 93 Wash. App. 819, 970 P. 2d 803 (1999); but see Specht v. Netscape Communications Corp., 306 F.3d 17 (2d Cir 2002) (plaintiff did not have reasonable notice of licence terms). 80 ProCD Inc. v. Mathew Zeidenberg, 86 F3d 1447 (Seventh Cir 1996); See also I Lan Sys Inc. v. Netscout Serv Level Corp., 183 F Supp 2d 328, 336 (D Mass. 2002); Register.com Inc. v. Verio Inc., 356 F.3d 393 (2d. Cir. 2004); Feldman v. Google Inc., 513 F Supp 2d 229 (ED Pa 2007); but see Bragg v. Linden Research Inc., 487 F Supp 2d 593 (E D Pa 2007).
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Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER I Of Communication, Acceptance and Revocation of Proposals/S. 4.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER I Of Communication, Acceptance and Revocation of Proposals S. 4. Communication when complete.-The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made. The communication of an acceptance is complete-as against the proposer, when it is put in the course of transmission to him, so as to be out of the power of the acceptor; as against the acceptor, when it comes to the knowledge of the proposer. The communication of a revocation is complete, as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it; as against the person to whom it is made, when it comes to his knowledge. Illustrations (a) (b)
A proposes, by letter, to sell a house to B at a certain price. The communication of the proposal is complete when B receives the letter. B accepts A's proposal by a letter sent by post.
The communication of the acceptance is complete, as against A, when the letter is posted; as against B, when the letter is received by A. (c)
A revokes his proposal by telegram.
The revocation is complete as against A, when the telegram is despatched. It is complete as against B when B receives it. B revokes his acceptance by telegram. B's revocation is complete as against B when the telegram is despatched, and as against A when it reaches him.
Introduction This section deals with the completion of communication of a proposal, acceptance and revocation. The provisions of the section are applied with ss. 2 and 3 to determine the place where the contract is
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made, and therefore to decide the jurisdiction of the Court,81or the applicability of the Act as the lex causae in a case involving foreign elements,82 or the time at which the contract is concluded. The section is also in the nature of an interpretation clause to s. 5. The provisions of the section are applied for ascertaining whether a contract has been concluded at all; if it has, the rights and obligations will arise under it. 81 Bhagwandas Goverdhandas Kedia v. Girdharlal Parshottamdas, AIR 1966 SC 543, [1966] 1 SCR 656; See below: 'Place of Contract'; also s. 28 below: Agreements prescribing Jurisdiction. 82 See s. 1 above: 'Applicable Law in the Absence of Choice'.
Communication of a Proposal A proposal is communicated when it comes to the knowledge of the offeree. Unless a proposal is communicated to the person to whom it is made, it is not complete, and is inchoate and inconclusive.83 Hence, an acceptance without knowledge of the proposal is not an acceptance and does not result into a contract.84 Consequently, cross-offers do not make a contract, even though their terms are identical.85 Although the section requires imparting actual knowledge of the proposal to the offeree, it is sufficient if in respect of standard form contracts, the proposer does all that might reasonably be expected to give notice of its terms to the intended offeree.86 Whether a proposal has or has not come to the knowledge of the person to whom it is made is purely a question of fact. A proposal by letter must be deemed to have reached the addressee when the letter ordinarily would be delivered at the addressee's residence. Any delay in addressee act ually receiving it in his hands, caused owing to his failure to make proper arrangements to receive the communication, will not be considered.87 A proposal by letter is made not at the place where it is posted but where the offer is received or the letter delivered,88 because a proposal is not complete unless and until it comes to the knowledge of the person to whom it is made.89 83 Baroda Oil Cakes Traders v. Parshottam Narayandas Bagulia, AIR 1954 Bom 491; Dalpatri Jhanjhnari v. West End Watch Co., AIR 1953 MB 38; Bengal Insurance and Real Property Co. v. Velayammal, AIR 1937 Mad 571. 84 Fitch v. Snedaker, (1868) 38 NY 248; Lalman Shuklal v. Gauri Dutt, (1913) 11 All LJ 489. 85 Tinn v. Hoffmann d' Co., (1873) 29 LT 271. 86 See 'Reasonable Notice of Exclusion Clauses'. 87 Firm Sheikh Ahmad Mohammed Amin v. Firm Bachu lal d' Gajandhar Lal, AIR 1927 Lah 50. 88 Dhanraj Mills Limited Liability Co. v. Narsingh Prasad Bodona, AIR 1949 Pat 270 (post office is an agent of the sender, not the addressee); Ratan Lal Gattani v. Harcharan Lal, AIR 1947 All 337. 89 Firm Kanhaya Lal v. Dinesh Chandra, AIR 1959 MP 234; Baroda Oil Cakes Traders v. Parshottam Narayandas Bagulia, (1954) ILR 1137, AIR 1954 Bom 491.
Communication of Acceptance It is necessary to make a binding contract, not only that the proposal be accepted, but also that the acceptance be notified.90 An acceptance is not complete unless and until it is communicated to the proposer in some perceptible form which may be by speech, writing or other acts or omissions. The reason is that the proposer is entitled to know whether a contract has been concluded by the acceptance, and it would be unfair to hold him bound by an acceptance of which he has no
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knowledge. 90 Carlill v. Carbolic Smoke Ball Co., [1891-94] All ER Rep 127, [1893] 1 QB 256 (stated as a general proposition); s. 2(b) above.
Communication of Electronic Messages The Information Technology Act, 2000 provides that unless otherwise agreed, the despatch of an electronic record occurs when it enters a computer resource91 outside the control of the originator.1 If the addressee has designated a computer resource for receipt of an electronic record (for instance in the case where an offer expressly specifies the address to which acceptance should be sent), and it is sent to such resource, it will be considered as received when the electronic record enters the designated computer resource.2 If instead of sending it to the designated computer resource, it is sent to a computer resource which is not the designated computer resource, the record is considered as received when it is retrieved by the addressee.3 If the addressee has not designated a computer resource along with specified timings, the record is received when it enters the computer resource of the addressee.4 The sender of the electronic record is entitled to stipulate that the record sent shall be binding only on receipt of acknowledgment.5 91 The Information Technology Act, 2000, s. 2(1)(k) defines 'computer resource' to mean computer, computer system, computer network, data, computer database or software. 1 The Information Technology Act, 2000, s. 13(1). 2 The Information Technology Act, 2000, s. 13(2)(a)(i). 3 The Information Technology Act, 2000, s. 13(2)(a)(ii). 4 The Information Technology Act, 2000, s. 13(2)(b). 5 The Information Technology Act, 2000, s. 12; for details see below s. 7 below: 'Acknowledgement of Electronic Records'.
General Rule The general rule is that acceptance must be communicated to the proposer.6 The act of acceptance becomes effective so as to bind the acceptor completely when the acceptance comes to the knowledge of the proposer.7 In the case of a contract consisting of mutual promises, the proposer must receive intimation that the offeree has accepted his offer and has signified his willingness to perform his promise.8 Accordingly, there is no contract where the acceptance is not communicated to the proposer, the reason being that it would be unfair to hold the proposer bound by an acceptance of which he has no knowledge. Silence or receipt or retention of premium by the insurance company was not construed as acceptance and the contract of insurance was concluded only when the party to whom the offer was made, accepted it unconditionally and communicated his acceptance to the offeror.9 There can be no contract where a third party without the authority of the offeree communicates the acceptance to the proposer.10 Exceptions to the General Rule An acceptance is binding without communication in certain cases. First, if the proposer has waived the
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requirement of communication, namely, where proposer requires performance of conditions of the proposal, and therefore requires acceptance by conduct (see s. 8). There is a material distinction between acceptance of a proposal that asks for a promise and a proposal that asks for an act on the condition of the proposal becoming a promise. In the former case where the acceptance is to consist of a promise, there must be communication to the proposer.11But in the latter class of cases, as for example, dispatching goods ordered by post, the rule is that no further communication of acceptance is necessary than performance of proposed act. Mere performance of the act prescribed by the proposal is sufficient acceptance of such proposal and converts it to a promise even without further communication of acceptance (s. 8).12 Secondly, where the acceptance, though received, is not read or where 'the listener on the telephone does not catch the words of acceptance but nevertheless does not ask for them to be repeated'.13 Lastly, where the acceptance is sent by post, the acceptance binds the offeror even though it never reaches him; a case expressly provided in the second paragraph of the section. Parties at a Distance When the parties are in the presence of each other, the proposer and the acceptor know that the acceptance has been communicated. If they are at a distance, they depend upon other modes of communication. The mode used may be instantaneous, namely, telephone, telex, etc. or they may choose other modes namely, post or courier, telegram. They may also use the fax or e-mail for communication. Instantaneous Mode of Communication: Telephone, Telex Where the acceptor uses the telephone or telex for communication, the acceptor will generally know if his communication has not reached the proposer, and can try to send it again. The rule is sound and practical because the oral acceptance may be drowned by the noise of a flying aircraft, or the telephone may go dead or feeble and indistinct, and not be heard. Such a contract is concluded when the acceptance reaches the proposer. In the Entores case14 the offer was made by telex in Amsterdam and notification of the acceptance was received in London also by telex; it was held that in the case of oral communication or by telex or telephone, an acceptance is communicated when it is actually received by the proposer and the contract resulting thereupon was held to be made in London. In the US and Canada, the contract in such cases is made where the acceptance is spoken. However, the rule in the Entores case has been accepted in India as applicable to acceptance by telephone,15 and by telex.16. 6 Holwell Securities Ltd. v. Hughes, [1974] 1 All ER 161(CA) . 7 Baroda Oil Cakes Traders v. Parshottam Narayandas Bagulia, AIR 1954 Bom 491; Dhanraj Mills Limited liability Co. v. Narsingh Prasad Bodona, AIR 1949 Pat 270(DB) . 8 Bhagwandas Goverdhandas Kedia v. Girdharlal Parshottamdas, AIR 1966 SC 543, [1966] 1 SCR 656. 9 LIC of India v. Raja Vasireddy Kamalavalli Kamba, AIR 1984 SC 1014; earlier cases to the contrary would no longer be good law; Hindustan Co-operative Insurance Society Ltd. v. Shyam Sunder, AIR 1952 Cal 691. 10 Chitty on Contracts, 28th edn., at p. 109, para 2-041; Powell v. Lee, (1908) 99 LT 284; Allied Marine Transport Ltd. v. Vale do Rio Doce Navegaceo SA (The Leonidas D), [1985] 1 WLR 925 at 937, [1985] 2 All ER 796; Fairline Shipping Corpn. v. Adamson, [1974] 2 All ER 967 at 974. 11 LIC of India v. Raja Vasireddy Kamalavalli Kamba, AIR 1984 SC 1014. 12 State of Bihar v. Bengal Chemical and Pharmaceutical Works, AIR 1954 Pat 14; S Sadiq Hasan v. Mumtaz Bank Ltd., AIR 1929 Lah 656. 13 Entores Ltd. v. Miles Far East Corpn., [1955] 2 QB 327 AT 333, [1955] 2 All ER 493.
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14 Ibid. 15 Bhagwandas Goverdhandas Kedia v. Girdharlal Parshottamdas, AIR 1966 SC 543, [1966] 1 SCR 656, (per majority); Firm Kanhaya Lal v. Dinesh Chandra, AIR 1959 MP 234. 16 Triveni Oil Field Service Ltd. v. Oil and Natural Gas Commission, AIR 2006 Del 331.
Non-Instantaneous Mode of Communication: 'The Postal Rule' The provision about communication of acceptance in the section, as shown by the illustrations, is mainly intended to meet the questions raised by the formation of agreements between parties at a distance. The first part of the provision provides that the acceptance is binding on the proposer when the acceptor puts the acceptance into such course of transmission as to be beyond the power of the acceptor, and it is binding on the acceptor when the acceptance comes to the knowledge of the proposer. There is therefore a certain time, while the acceptance is on its way, when the intended receiver shall be bound and the sender is not. The proposal becomes a promise before it is certain that there is any consideration for it. This is a deliberate and large departure from the common law rule requiring the promise and the consideration to be simultaneous. This section also does not deal with an acceptance, which is put into a course of transmission, but does not reach the proposer. This seems to result from the language of the second paragraph that the proposer must be deemed to have received the acceptance at the moment when it was despatched so as to be 'out of the power of the acceptor', and that accordingly it becomes a promise on which the acceptor can sue. The acceptance may not become a promise by this mode (i.e., at the moment of despatch) if the consideration on the acceptor's part was not promise but performance--for example, the sale of goods despatched at the proposer's request without previous negotiation. The Act certainly does not say that the intending purchaser must be deemed to have received goods which have never arrived; at most that he must be deemed to have been aware of their despatch. But if the consideration on the acceptor's part was a promise, it would seem that the proposer cannot say that he has not received that consideration; for he cannot say that the acceptance has not been communicated to him, and there is no difference between having the communication of a promise and having the promise itself. Consequently, where the agreement is to consist in mutual promises, a binding contract appears to be formed by a letter of acceptance despatched in the usual way,17 even if it does not arrive at all, unless the proposal was expressly made conditional on the actual receipt of an acceptance within a prescribed time, or in due course, or unless the acceptor sends a revocation as provided for by the latter part of the section and explained by illustration (c). Justification for the Postal Rule The provisions about communication of acceptance in various legal systems fall into three broad categories.18 First, the system of information, under which the proposer must be notified; and the contract is formed only when the proposer is so informed. Secondly, the system of declaration, under which the contract is formed from the moment when the recipient of the offer declares his acceptance, even without the knowledge of the proposer. In some systems, the declaration alone is sufficient, and in others with the system of expedition, the sending of the acceptance by post is enough though not a bare declaration, and in those following the system of reception, the reaching of the letter is the decisive factor, whether the letter is read or not. Thirdly, the mixed or electric system, in which the contract is formed when the acceptance is received but it relates back to the time when the acceptance was sent. The provisions of the Act follow the system of expedition. When the proposer and acceptor are at a distance, and the acceptor posts his acceptance, it stands communicated to the proposer. This postal rule favours the offeree. While the proposer is ignorant about the actions of the offeree, the offeree is fully aware of the position of acceptance. The proposer also bears the risk of the acceptance being lost or delayed in transit.19However, the rule is justified on
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the ground that the proposer can avoid this risk and protect himself by requiring act ual notification of the acceptance.20 The rule also limits the power of the proposer to revoke the acceptance by disabling him from revoking the proposal after the offeree has acted upon the offer. The rule is justified, not on the basis of logic, but commercial convenience. Under the UNIDROIT Principles, acceptance is complete when it reaches the offeror; the reason for adoption of the 'receipt' principle being that the risk of transmission is better placed on the offeree than on the offeror, since it is the former who chooses the means of communication, who knows whether the chosen means of communication is subject to special risks or delay, and who is therefore best able to take measures to ensure that the acceptance reaches, its destination.21 The Postal Rule If the acceptance is sent by post or telegram, the acceptance is effective when the letter is posted or the telegram handed over for transmission to the offeror.22 The letter is posted or telegram handed over when it is handed over to the post office or a person authorised to receive it.23 The postal rule was laid down in Adams v. Lindsell. 24 To the extent the provision in the second paragraph of the section provides that the acceptance is complete when the letter is posted, it follows the rule of English law. However, it departs from the English law to the extent that the acceptance is binding only on the proposer when the letter is posted, and on the acceptor only after the letter has reached the proposer. During the time it is in transit, it is binding only on one of the parties, i.e., the proposer, and the acceptor is able to revoke it by a faster means of communication. (See s. 5). Where the parties must, from the context, have reasonably assumed that the post might be used as a means of communicating the acceptance of an offer, the acceptance is complete as soon as it is posted.25 English authorities support the application of the postal rule in three situations. First, a postal acceptance prevails over a withdrawal of an offer which was posted before the acceptance but which had not reached the offeree when the acceptance was posted. Secondly, a postal acceptance takes effect even though it never reaches the proposer because it is lost through the accident in the post. Thirdly, the same rule applies where an acceptance is merely delayed through an accident in the post.26 If the proposer has stated that the acceptance shall be notified to him, the acceptance is not effective until it reaches the proposer. An offer to sell a house was made in the form of an option to be exercised by notice in writing to the intending vendor. Such a notice was posted but did not arrive, and it was held that there was no contract of sale. The offer on its construction required act ual communication of acceptance.27 Telegrams The rule with regard to telegraphs is the same as in the case of letters by post, i.e., the acceptance is complete when the telegram is handed for despatch to the telegraph office.28 When, by agreement, course of conduct or usage of trade, acceptance by telegram is authorised, the bargain is struck and the contract is complete when the acceptance is put into course of transmission by the offeree dispatching a telegram. Acceptance Lost or Delayed in Transit The Act omits to consider the situation of an acceptance not arriving at all. It is uncertain whether this was a deliberate omission or meant to be an implied exception on the ground that want of any final consent between the parties would prevent the formation of a contract. The draft of 1866 assumed that act ual communication was necessary.29
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A contract is concluded even if the acceptance gets lost in the post and never reaches the proposer, particularly when sent to the offeror on the address given by the offeror.30 The contract is concluded at the time the acceptance is posted. This rule is, it seems,31independent of the rule that, if the proposer of an agreement has prescribed or authorised any particular mode of communicating acceptance (s. 7), he cannot dispute the sufficiency of that mode, and must take any risks of delay or miscarriage attaching to the acceptor's action in conformity with the request or authority. On the one hand, it may be hard to hold the proposer liable on an acceptance which has never reached him for no fault of his. On the other hand, it is equally hard to deprive the offeree of the benefit of acceptance if he has taken all necessary steps to communicate it. Further, each party may have taken steps based on his own view of the situation, the proposer assuming there is no acceptance, and hence no contract, and the offeree assuming there is one. However, the English and the Indian law favour the offeree. The reason appears to lie in that the proposer can protect himself by stipulating in the offer that the acceptance must be act ually notified to him. In Household Fire Insurance Co. Ltd. v. Grant, 32 the defendant applied for shares in the plaintiff company. A letter of allotment was posted but it never reached the defendant. The company went into liquidation, and it was held that the defendant was a shareholder and liable for calls on the shares. The same rule would apply if the acceptance was delayed through an accident in the post.33 The contract is concluded at the time the letter is posted. However, if a last date or time is prescribed for receipt of an acceptance, it must reach the offeree before that time.34 Proper Address and Delivery A letter of acceptance misdirected by the acceptor's fault, namely, because of incorrect address of the proposer or insufficient postage stamp, is not effectually put in a course of transmission to the proposer35 as against the case where the proposer himself has furnished an insufficient address.36 There the proposer's own want of care obviously cannot extenuate, but will, if possible, aggravate, the risk imposed on him by the general rule of law. Proof of Despatch and Receipt Whether a particular letter or writing has been posted, delivered, or actually received by the addressee, is a question of fact.37 When the intimation of acceptance does not reach the proposer, it has to be shown that the letter or telegram was correctly addressed.38 The act ual despatch of a letter of acceptance must be established by evidence and it cannot be presumed from any course of business followed by the offeree.39 This rule applies equally to revocation of proposal or acceptance. A purchaser alleging revocation and failing to produce the postal acknowledgment receipt to show the receipt of the letter of revocation by the addressee, thereby failed to prove the revocation, and was held liable to compensate seller for damages for breach of contract.40 The bare statement by the forest authorities inviting the tender that the letter of acceptance of the tender was sent to the petitioner was not enough. The date, the mode of transmission and the address on which the letter was posted or despatched or delivered through personal messenger should have been pleaded, and documents, if any, should also have been filed to prove acceptance of the offer.41 Exclusion of Postal Rule Postal rule can be excluded by the terms of the offer. Whether it is excluded or not is a question of construction.42 If it is expressly agreed that the acceptance to be binding must not only be in writing but had to reach the proposer, and the mere posting was not enough, there would be no contract till this condition was fulfilled.43 17 Bhagwandas Goverdhandas Kedia v. Girdharlal Parshottamdas, AIR 1966 SC 543, at 548.
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18 Winfield,[1939] 55 LQR 499. 19 Household Fire and Carriage Accident Insurance Co. Ltd. v. Grant, (1879) 4 ExD 216, [1874-80] All ER Rep 919(CA) . 20 Holwell Securities Ltd. v. Hughes, [1974] 1 All ER 161(CA) ; New Hart Builders Ltd. v. Rindley, [1975] Ch 342, [1975] 1 All ER 1007. 21 UNIDROIT Principles, comment below Art 2.6. 22 Compare with the Art. 18(2) of the United Nations Convention on Contracts for International Sale of Goods, 1980 and Art. 2.6(2) of the UNIDROIT Principles under which an acceptance of an offer becomes effective at the moment the indication of assent reaches the offeror. 23 Chitty on Contracts, 28th edn., at p. 111, para 2.043. 24 (1818) 1 B & Ald 681. 25 Henthorn v. Fraser, [1892] 2 Ch 27, [1891-94] All ER Rep 1064(CA) . 26 Per Thesiger L in Household Fire Insurance Co. v. Grant, (1879) 4 ExD 216 at 222, [1874-80] All ER Rep 919; Dunlop v. Higgins, (1848) 1 HLC 381; Chitty on Contracts, 28th edn., at p. 112-13, paras 2- 048-2-051. 27 Holwell Securities Ltd. v. Hughes, [1974] 1 WLR 155, [1974] 1 All ER 161; New Hart Builders Ltd. v. Bindley, [1975] Ch 342, [1975] 1 All ER 1007. 28 Bhagwandas Govardhandas Kedia v. Girdharilal Parshottamdas and Co., AIR 1966 SC 543, [1966] 1 SCR. 656; Cowan v. O'Connor, [1888] 20 QBD 640(telegraph) ; Tinn v. Hoffmann & Co., 29 LT 271 at 274, 278; Santosh Kr Ranka v. Food Corporation of India, AIR 2011 Pat 114 (Acceptance by telegram). 29 3A. Proposal to enter into a contract may be retracted, or the terms of it altered by the party making it, at any time before it is accepted.Explanation.--A proposal is said to be accepted when an expressed acceptance of it has been communicated to the proposer, or when a letter of acceptance is posted or a telegraphic message delivered at the proper office, and the acceptance by letter or telegram is not cancelled by some communication which reaches the proposer before or at the same time with the letter or telegram of acceptance, or when acceptance is to be inferred form the circumstances of the case. 30 JK Enterprises v. State of Madhya Pradesh, AIR 1997 MP 68. Henthorn v. Fraser, [1891-94] All ER Rep 908(CA) . 31 Henthorn v. Fraser, [1892] 2 Ch 27, [1891-94] All ER Rep 908(CA) . 32 (1879) 4 ExD 216, [1874-80] All ER Rep 919(CA) . 33 Chitty on Contracts, 28th edn., at p. 113, para 2-050; Dunlop v. Higgins, (1848) 1 HL Cas 381. 34 R. Maheswari v. Secretary Selection Committee, AIR 1995 Mad 168 (receipt of application for admission to an educational institution). 35 Ram Das Chakarbati v. Official Liquidator of the Cotton Ginning Co., (1887) ILR 9 All 366, 385. 36 Townsend's case,(1871) LR 13 Eq 148. 37 Indian Evidence Act, 1872, ss. 16 and 114. 38 Ram Das v. Official Liquidator, Cotton Ginning Co., (1887) 9 All 366; Kalluram Keshavani v. State of Madhya Pradesh, AIR 1986 MP 204. 39 Ram Das v. Official Liquidator Cotton Ginning Co., (1887) ILR 9 All 366. 40 SKARSM Ramanathan Chettiar v. National Textile Corpn., AIR 1985 Ker 262. 41 Kalluram Keshavani v. State of Madhya Pradesh, AIR 1986 MP 204; Karan Singh Chandan Singh v. Collector Chhatarpur, AIR 1980 MP 89. 42 Holwell Securities Ltd. v. Hughes, [1974] 1 All ER 161. 43 Ibid.
Communication by Whom
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No contract is concluded unless acceptance of the proposal is communicated to the tenderer, by the competent authority. A resolution of a co-operative society was necessary for accepting the proposal application for purchase of house. Hence, the contract was not complete unless the resolution was communicated by a competent authority; casual communication by the president of the society did not conclude the contract.44 44 Subramania Mudaliar v. Ammapet Co-operative Weavers Production and Sales Society, AIR 1961 Mad 289.
Revocation of Proposal A person who has made an offer is considered as continuously making it until he has brought to the knowledge of the person to whom it was made that it is withdrawn.45 In other words, the revocation of a proposal is effectual if it reaches before the despatch of the acceptance; the time of despatching the revocation is immaterial.46The rule that the revocation of proposal is effective when it reaches the offeree and not when it is posted or put into a course of transmission, applies to revocations sent through post or telegram or any other method. A revocation of offer must be act ually communicated. It is not withdrawn by acting inconsistently with it. An offer to sell goods made to an offeree does not stand withdrawn by selling the goods to a third person.47 In M. Lachia Setty and Sons Ltd. v. Coffee Board Bangalore, 48 the special conditions regulating bids were prescribed by the Coffee Board, which barred withdrawal or retraction of bids by telegram. Withdrawal by telegram was ineffective, and the acceptance made notwithstanding the withdrawal concluded the contract. In the same case, it was also held that an oral retraction made to an officer having no authority of auction was also of no avail. It has been held that the communication of revocation need not come from the proposer, and the proposal stands revoked if the offeree knows from a reliable source that the proposer does not intend to deal with him any longer.49 This rule creates uncertainty; since the offeree may not know for certain until which moment of time he can accept the offer.50 'Comes to the Knowledge' The rule that the revocation must be act ually 'brought to the mind of the offeree' should be subject to qualifications.51 When the revocation is sent by post or telegram or fax to a commercial organisation, or at the address of business of the offeree, it is likely that the communication may reach the address, but would be opened and read in the ordinary course of business according to the usual practice. Communication received towards the end of the day may be read the next day. Communication received on a holiday, namely, received by a fax machine or in the e-mail in box, may not be read until business begins on the opening day. Moreover, it is necessary that the communication be brought to the notice of the responsible or authorised officer in the organisation. Where the offer has been made to a commercial organisation, it seems probable that the offer would be revoked when the letter of revocation is opened in the ordinary course of business or would have been so opened if the ordinary course of business were followed.52 However, if the revocation reaches the offeree, but the offeree does not read it, or is not read by him or the staff until the next day despite its arrival during business hours,53 the revocation is effective when it is received.54 Similarly, a revocation is effective if sent to the offeree's address, though the offeree may have moved out without notifying the proposer. A message sent by telex is taken to have been received by the addressee when the message is received by the telex machine and not when the addressee's attention is drawn to it. He cannot rely on his own or his servant's failure to take cognisance of the message in the normal business-like manner. Therefore, notice of withdrawal of a vessel for non-payment of hire will be taken to have been received when the message was received and not when it was brought to the notice of charterers. If
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this occurred before the payment of hire, the withdrawal would be valid.55 Where a proposal is made to the general public, it is sufficient if the proposer has taken sufficient steps to bring the revocation to the attention of such persons. A proposal is revoked if the revocation comes to the knowledge of the offeree before the offeree has posted or otherwise dispatched the acceptance.56Sections 4-6 fix the point of time after which either party is precluded from revoking the proposal or acceptance.57 45 Henthorn v. Fraser, [1892] 2 Ch 27 per Lord Herschell at 31; confirming Byrne & Co. v. Leon van Tienhoven & Co., (1880) 5 CPD 344, [1874-80] All ER Rep Ext 1432. 46 It is literally possible to read the words of s. 4 of the Act, para 3, as giving only one chance of sending a revocation, so that if a man sends a written acceptance by a slow ship, then sends a written revocation by a faster ship, and then changes his mind and confirms the acceptance by a telegram arriving before either letter, the revocation is operative, and the confirmation cancelling it is not. But this cannot be entertained, and seems sufficiently excluded by the terms of s. 5. 47 Adams v. Lindsell, (1818) 1 B & Ald 681: Stevenson, Jacques & Co. v. MacLean, [1880] 5 QBD 346. 48 M Latchia Setty & Co. Ltd. v. Coffee Board Bangalore, AIR 1981 SC 162. 49 Dickinson v. Dodds, (1876) 2 Ch D 463; s 6. 50 Such proposal was rejected by the Law Commission of India in its 13th Report, 1958, para 30. 51 Chitty on Contracts, 28th edn., at 126-27. para 2-083. 52 Eaglehill Ltd. v. J Needham Builders Ltd., [1973] AC 992 at 1011, [1972] 2 All ER 8951; NV Stoony Maats 'De Maas' v. Nippon Yusen Kaisha (The Pendrecht), [1980] 2 Lloyd's Rep 56 at 66; Tenax Steamship Co. Ltd. v. Owners of Motor Vessel Brimnes (The Brimnes), [1975] 5 QB 929 (notice withdrawing charterparty), [1973] 1 All ER 769, affirmed, [1974] 3 All ER 88(CA) ; Curtice v. London City & Midland Bank Ltd., [1908] 1 KB 293, 300(CA) (case relating to cheques). 53 Brinkibon Ltd. v. Stahag Stahl und Stahlwarenhandelsgesellschaft mbH, [1983] 2 AC 34 at 42, [1982] I All ER 293, [1982] 1 Lloyd's Rep 217, [1981] 2 WLR 264(HL) . 54 Section 130 of the German Civil Code (BGB) provides that every declaration of will, including offer, acceptance or revocation, is effective as soon as it 'arrives', that is, as soon as it comes within the sphere of influence of the addressee. The person sending the declaration takes the risk arising out of choice of medium, and the risk incident to addressee's own zone of influence must be borne by the addressee. Konrad Zweigart, Introduction to Comparative Law (translated by Tony Weir), Clarendon Press, 1998, at p. 362. 55 Tenax Steamship Co. Ltd. v. Owners of Motor Vehicle Brimnes (The Brimnes), [1974] 3 All ER 88 at p.100. 56 See s. 5. 57 Firm Kanhaiya Lal v. Dineshchandra, AIR 1959 MP 234.
Communication by Fax, e-mail, or other Electronic Modes, etc. Where the communication is made by an 'instantaneous' mode, namely, by telephone or telex, the sender is able to know immediately whether his communication has reached, and has an opportunity of making a proper communication. When communication is sent by post or by telegram, there is a risk of the letter or telegram being lost, and the sender may not know about it. Hence the postal rule constitutes an exception to the general rule. Fax and e-mail fall into an intermediate position;58 the message is transmitted immediately. However, an acceptance sent by fax may not be received at all, or may not be legible, and hence should not be effective instantaneously. An acceptance by e-mail may not reach the addressee at all. The sender's mail gets 'posted' in the addressee's 'mail-box' with the addressee's server. The addressee will receive it, the server facility being available, when the addressee accesses it and downloads the message on his computer. The despatch resembles that by
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post in that once the message is sent, it goes into a course of transmission so as to be out of the control of the sender. In the case of fax as well as e- mail, the sender is unable to know at once about the success or failure of communication. It is therefore submitted that the rules of postal communication must be made applicable to communication by fax or e-mail, or messages sent by similar electronic means, except where the sender has an opportunity of verifying immediately the proper communication of the message. However it has been held that the contract is complete where acceptance is received, where it is sent by telex,59 fax60 or email.61 58 Chitty on Contracts, 28th edn.,p. 112, para 2-046. 59 Triveni Oil Field Service Ltd. v. Oil and Natural Gas Commission, AIR 2006 Del 331. 60 Quadricon Pvt. Ltd. v. Bajarang Alloys Ltd., AIR 2008 Bom 88 (but mode of communication not proved). 61 P R Transport Agency v. Union of India, AIR 2006 All 23 (does not discuss the postal rule, and judgment proceeds on the basis that &uot;the place where the contract was completed by receipt of communication of acceptance is a place where 'part of cause of action' arises&uot;).
Time of Conclusion of a Contract It may be necessary to determine the time of contract, for example, to decide priorities between competing claims, or to determine the law applicable to a contract. Where parties are in the presence of each other, or even if at a distance, connected on the telephone or telex enabling immediate communication of proposal and acceptance, the time of the contract is not difficult to ascertain. It is the time at which the offer and acceptance take place. When the proposal and acceptance are made by letters, the contract is made at the time when the letter of acceptance is posted.62 A contract is concluded when the acceptance is posted, although the formal agreement may not have been still executed.63 In a contract for supply of imported goods, the purchaser did not sign and send the standard form sent to him for signatures by the seller. It was held that the contract was made when the purchaser accepted the offer by telex message.64 62 Kamisetti Subbiah v. Katha Venkataswamy, (1903) ILR 27 Mad 355; Protap Chandra v. Kali Charan, AIR 1952 Cal 32. 63 Shankarlal Narayandas Mundada v. New Mofussil Co. Ltd., AIR 1946 PC 97; Union of India v. A.L. Rallia Ram, AIR 1963 SC 1685; Manickam Chettiar v. State of Madras, AIR 1971 Mad 221; Maheshwari Metals and Metal Refinery v. Madras State Small Industries Corporation Ltd., AIR 1974 Mad 39; Progressive Constructions Ltd. v. Bharat Hydro Power Corporation Ltd., AIR 1996 Del 92. 64 Cotton Corporation of India Ltd. v. Alagappa Cotton Mills, AIR 2001 Bom 429.
Place of Contract The Contract Act, does not expressly deal with the place where a contract is made. Section 4 does not deal with the place where a contract takes place but with the completion of communication of a proposal, acceptance and revocation. In determining the place where a contract takes place, the interpretation clauses in s. 2, which largely incorporate the substantive law of contract, must be taken into account. Section 4 does not imply that a contract is made qua the proposer at one place and qua the acceptor at another place. The contract becomes complete as soon as the acceptor makes the acceptance, and unless otherwise agreed expressly or by necessary implication by the adoption of a special method of intimation, when the acceptance of offer is intimated to the proposer.65 The decision of the question as to whether a suit on contract is within the jurisdiction of the Trial Court must necessarily imply the decision of the question as to where the contract was made in the light of the provisions of s. 4 of this Act.66The place where the contract is concluded, being a part of 'cause of act ion', determines the jurisdiction of the Court in a case arising out of contract.67
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The contract is completed when a proposal made is accepted; it is therefore the acceptance that gives rise to the 'cause of action' and not merely the proposal.68 A contract concluded by both parties in the presence of each other is concluded at that place. In the case of a contract which consists of mutual promises, the proposer must receive intimation that the offeree has accepted his offer and has signified his willingness to perform his promise.69 Where the acceptance is sent by post or telegram, the contract is concluded not at the place where the acceptance is received, but where it is posted or telegram handed over to the telegraph office for delivery, i.e., when the acceptance of offer is put into a course of transmission to the proposer, and the Court at the place where the letter is posted or telegram delivered for despatch has jurisdiction to entertain the case,70 even if the acceptance is lost or misplaced and never reaches the proposer.71 The Court at such place will have jurisdiction, and not the place where the acceptance has been received. A question arose in Bhagwandas v. Girdharlal, 72--where and when was the communication of an acceptance complete under the Indian Contract Act, when the parties completed their contract by long distance telephone. The plaintiff made the offer from Ahmedabad by a long distance telephone call to purchase goods, and the defendant had accepted the offer at Khamgaon. The plaintiff alleged firstly that the offer being made at Ahmedabad, and secondly since the acceptance was received at Ahmedabad, the Ahmedabad Court had jurisdiction. The defendant contended that ss. 3 and 4 applied uniformly whatever the mode of acceptance, and since the words of acceptance were spoken into the telephone at Khamgaon and thereby put into a course of transmission so as to be out of the power of the defendant, the contract was concluded at Khamgaon, and plaintiff's suit was without jurisdiction. It was held that mere making of an offer did not form part of the cause of action for damages for breach of contract which resulted from acceptance of the offer. A Court would not have jurisdiction merely because an offer was transmitted from within its jurisdiction. Further question was whatever the contract was concluded by acceptance at Ahmedabad, where the acceptance was received, or at Khamgaon where the acceptance was spoken. In his dissenting judgment, Hidayatulla J. observed that the specific provision in s. 4 did not allow importing principles of English law, and the section applied in all cases where parties were at a distance although the communication was instantaneous. The language of the section was adequate to cover new inventions, which were not contemplated when the Act was enacted. He held that the language of s. 4 covered the case of communication over the telephone. The majority judgment of Wanchoo and Shah JJ. applied the English law73 where a contract made by instantaneous communication is concluded when the acceptance is received by the proposer, and that generally an acceptance must be notified to the proposer to make a binding contract. Observing that the draftsmen of the Act did not contemplate use of telephone as a means of personal conversation, they considered it reasonable to hold that the parties were in a sense in presence of one another. Hence, communication of acceptance was a necessary part of the formation of contract, and the exception of the postal rule did not apply. Thus, where the proposal and acceptance are made on the telephone, the rules relating to proposal and acceptance by post and telegrams do not apply, and the contract is made where the acceptance is received and the Court at the place where the acceptance is received will have jurisdiction.74 The contract in the above case was therefore formed at Ahmedabad, where the acceptance was communicated. The rule of acceptance in oral form has been applied to contract accepted by telex,75 fax76 and e-mail.77 Thus, where acceptance is sent by telex or fax, it is complete when it reaches the proposer. 65 Bhagwandas Goverdhandas Kedia v. Girdharlal Parshottamdas, AIR 1966 SC 543 at 548, [1966] 1 SCR 656. 66 Baroda Oil Cakes Traders v. Parshottam Narayandas Bagulia, AIR 1954 Bom 491; but see Vadada Ganeswara Rao
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v. Mummidisetti Vijaya Chamundeswari, AIR 2010 AP 74 which applies principles of section 4 to termination of a contract without reference to section 66 of this Act. 67 Section 20 of the Civil Procedure Code, 1908 provides that a suit can be filed in the court within the territorial jurisdiction of which a part or whole of the 'cause of act ion' arises. In a suit on contract, the making of the contract is a part of the cause of action for filing the suit. 68 Republic Medico Surgical Company v. Union of India, AIR 1980 Kant 168. 69 Bhagwandas Goverdhandas Kedia v. Girdharlal Parshottamdas, AIR 1966 SC 543, [1966] 1 SCR 656. 70 Kamisetti Subbiah v. Katha Venkataswamy, (1903) 27 Mad 355; Bengal Insurance & Real Property Co. Ltd. v. Velayammal, AIR 1937 Mad 571; Protap Chandra Koyall Acharjyal Iyer v. Kali Charan, AIR 1952 Cal 32; Manilal v. MP Venkatachalapathy, (1944) Mad 95, AIR 1943 Mad 471; Shimoga Oil Mills v. Radha Krishna Oil Mills, AIR 1952 Mys 111; Baroda Oil Cakes Traders v. Parshottam Narayandas Bagulia, AIR 1954 Bom 41; State (Delhi Administration) v. Sinha Govindji, AIR 1967 Del 88; American Pipe Company. v. State of Uttar Pradesh, AIR 1983 Cal 186 at 192; Progressive Constructions Ltd. v. Bharat Hydro Power Corporation Ltd., AIR 1996 Del 92; Oil and Natural Gas Commission v. Modern Construction and Company, AIR 1998 Guj 46; but see Dhanraj Mills Limited liability v. Narsingh Prasad Bodona, AIR 1949 Pat 270 (acceptance becomes complete only where it is communicated to the offeror); Union of India v. Shiboo Mal and Sons Co., AIR 1989 P&H 205 (court at the place where the acceptance is conveyed to the offeror has jurisdiction). 71 Baroda Oil Cakes Traders v. Parshottam Narayandas Bagulia, AIR 1954 Bom 491 (the receipt of the letter of acceptance by the proposer is not an integral part of the completion of communication as to constitute a part of cause of action). 72 Bhagwandas Goverdhandas Kedia v. Girdharlal Parshottamdas, AIR 1966 SC 543, [1966] 1 SCR 656. 73 Entores Ltd. v. Miles Far East Corpn., [1955] 2 All ER 493, [1955] 2 QB 327, [1955] 3 WLR 48. ...where a contract is made by instantaneous communication, eg, by telephone, the contract is complete only when the acceptance is received by the proposer, since generally an acceptance must be notified to the proposer to make a contract binding' (acceptance notified by telex). 74 Bhagwandas Goverdhandas Kedia v. Girdharlal Parshottamdas, AIR 1966 SC 543; Republic Medico Surgical Co. v. Union of India, AIR 1980 Kant 168. 75 Triveni Oil Field Service Ltd. v. Oil and Natural Gas Commission, AIR 2006 Del 331. 76 Quadricon Pvt. Ltd. v. Bajarang Alloys Ltd., AIR 2008 Bom 88 (but mode of communication not proved). 77 P R Transport Agency v. Union of India, AIR 2006 All 23 (writ petition, does not discuss the postal rule).
Place of Contract in Electronic Contracts Between the originator, namely, the person sending the electronic record or causing it to be sent, and the addressee, the record is deemed to be despatched at the place where the originator has his place of business, and deemed to have been received where the addressee has his place of business.78 This rule applies wherever the computer resource of the party for conducting such transactions is located.79 If the party has more than one place of business, the principal place of business will be taken into account.80 If the party does not have a place of business, the usual place of residence of such party will be considered (which for a body corporate shall mean the place where it is registered).81 These provisions provide a location for the despatch and receipt of the offers or acceptances in the form of electronic record. As regards jurisdiction, the normal rules as described above will apply subject to these provisions. 78 The Information Technology Act, 2000, s. 13(3);P R Transport Agency v. Union of India, AIR 2006 All 23. 79 The Information Technology Act, 2000, s. 13(4). 80 The Information Technology Act, 2000, s. 13(5)(a). 81 The Information Technology Act, 2000, ss. 13(5)(b) and (c).
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Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER I Of Communication, Acceptance and Revocation of Proposals/S. 5.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER I Of Communication, Acceptance and Revocation of Proposals S. 5. Revocation of proposals and acceptances.-A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards. Illustrations A proposes, by a letter sent by post, to sell his house to B. B accepts the proposal by a letter sent by post. A may revoke his proposal at any time before or at the moment when B posts his letter of acceptance, but not afterwards. B may revoke his acceptance at any time before or at the moment when the letter communicating it reaches A, but not afterwards. STATE AMENDMENT Uttar Pradesh In its application to the State of Uttar Pradesh, at the end of the first paragraph, the following Explanation has been inserted: Explanation.--Where an invitation to a proposal contains a condition that any proposal made in response to such invitation shall be kept open for a specified time and a proposal is thereupon made accepting such condition, such proposal may not be revoked within such time.82
Introduction While s. 4 provides the time at which communication of acceptance and of revocation of proposal and acceptance is complete, this section first states that both proposal and acceptance can be revoked, and secondly, gives the time before which the right of revocation can be exercised. Sections 4 and 5 have to be read together. A proposal can be revoked in such a manner that the revocation reaches the offeree before he accepts, or posts the acceptance as the case may be. An acceptance can be revoked in such a manner that the revocation reaches the proposer before the acceptance.
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82 UP Act 57 of 1976, s. 25 (w.e.f. 1 January 1977).
Revocation of Proposal A proposal may be revoked at any time before acceptance, even though the proposer has promised to keep the offer open for a specified time;83 and once accepted, the proposal becomes irrevocable.84 A person who has made an offer must be considered as continuously making it until he has brought to the knowledge of the person to whom it was made, that it is withdrawn.85 In other words, the revocation of a proposal is effectual if it reaches before the despatch of the acceptance. The time of despatching the revocation is immaterial, whatever be the mode of revocation. If the revocation of proposal reaches the offeree after he has accepted the proposal, or in case the acceptance is sent by post, before he has posted the acceptance, the contract is concluded and the revocation is of no consequence.86 83 Routledge v. Grant, (1828) 4 Bing 653. 84 Anson's Law of Contract, 29th edn., 2010, at p. 53, sums up the law relating to revocation of offers into these two rules. 85 Henthorn v. Fraser, [1892] 2 Ch 27, 31 per Lord Herschel; confirming Byrne D. Co. v. Leon Van Tienhoven Co., (1874-80) All ER Rep 1432. 86 Sadhoo Lal Motilal v. State of Madhya Pradesh, AIR 1972 All 137 (telegram revoking the proposal reached the offeree after the offeree had posted the letter of acceptance).
When is Acceptance Complete Where the acceptance is being sent by post or telegram, the revocation must reach the offeree before the offeree posts the letter or hands over the telegram for delivery. Where the proposal requires the doing of an act as a condition of proposal, the proposal may be revoked before the act is done. Difficulty arises where the act required is a continuing act . What is the time when acceptance would be complete? If a person is offered money for completing a work can the proposal be revoked after he has commenced the work but not completed it? According to the traditional view, the acceptance is complete when the act is completed. Allowing the revocation of proposal before the act is completed would lead to an inequitable result. It has been suggested that a distinction be drawn between the acceptance of the offer for the purposes of revocation, and conditions which have to be satisfied before the offeree can enforce the promise contained in the offer. The acceptance would be complete once the offeree has begun the performance,and the offeror should not be able to revoke the acceptance thereafter.87The offeree would not be entitled to payment until the act is performed, thus, the offeror is unable to revoke the offer once the performance of the act has commenced, but his duty to perform his obligation is conditional upon the performance of the act by the offeree.88 Another view is that an offer should not be revocable once the offeree has act ed in reliance on the offer, including doing of an act in preparation of performance.89 The English Law Revision Committee recommended90 that a promise made in consideration of the promisee performing an act should constitute a contract as soon as the promisee entered on the performance of the act, unless the promisee included expressly or by necessary implication a term that it can be revoked before the act has been completed. This view finds judicial support in England.91 The Law Commission of India has also made a similar recommendation to clear the ambiguity.92 Right of Revocation
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The proposer has the right to revoke the offer at any time before acceptance, even if he has undertaken to keep the offer open for a certain time, unless such promise is supported with consideration. A condition that the bidder at an auction shall not be entitled to retract the bid is inoperative in law,93 and cannot take away that legal right in the absence of any rule or statute,94 for a one-sided declaration cannot alter the bidder's rights under the general law; nor is there any consideration for his assenting to it, even if he could be supposed to assent by attending the sale with notice of the condition.95 However, earnest money may be liable for forfeiture according to the conditions of the tender or bid if it is withdrawn; or a bank guarantee given for the purpose can be invoked.96The statement of the claimant to the land acquisition officer that he was willing to accept the acquisition, provided a lumpsum compensation was awarded to him, amounted to a proposal in terms of this Act, and unless the offer was accepted there was no contract between the parties. The claimant was not bound to keep such offer open indefinitely and could validly withdraw the same.97 But a proposal cannot be withdrawn where a statutory rule applicable to it precludes withdrawal of a bid before communication of its acceptance or refusal.1 A statutory power to make rules for the conduct of departmental business will justify a local government in prescribing, among the conditions of tenders for public services, that a tender shall not be withdrawn before the acceptance or refusal.2 An application by an employee seeking voluntary retirement binds when accepted by the employer;3 It can be withdrawn at any time before it is accepted by the employer,4 but not if made after the time prescribed for withdrawal in the Scheme.5 Where a statutory Scheme provides that an option of voluntary retirement cannot be withdrawn, the general principles of contract law do not apply, and the employee cannot withdraw his option.6 'Keeping Offer Open' It is implied in this section that the proposer of a contract cannot bind himself (unless by a distinct contract made for a distinct consideration) to keep his offer open for any definite time, and that any words of promise to that effect can operate only for the benefit of the proposer and as a warning that an acceptance after the specified time will be too late (s. 6(2)). The offer says in effect, 'You may accept within the time specified, but the limitation is for my benefit. I make no binding promise not to revoke my offer in the meantime'. This follows the rule of common law, and is also recognised in India.7 The reason is that an undertaking to keep the offer open for a certain time is a promise without consideration, and such a promise is unenforceable. In order to be binding, the promise to keep the offer open must be supported by consideration, which may be in the form of benefit to the offeror, or a detriment incurred by the offeree. The offeree is said to have 'purchased an option'. An option given for value is not revocable.8 It is an offer together with a contract that the offer will not be revoked during the time, if any, specified in the option. If the offer is accepted within the time specified, the contract is made, but if the offeror purports to revoke the offer, it is ineffectual to prevent the formation of a contract.9 The offeree may expressly or impliedly promise to do or to refrain from doing something in exchange of the proposer's promise not to revoke the offer.10 This rule is peculiar to the legal systems following the English common law, and has been strongly criticised. It can cause hardship to an offeree who has not 'purchased an option'. The offeree may have entered into engagements or incurred expenditure on reliance of the continuation of the offer. In the U.S., the Restatement (Second) of Contracts (1981) provides in s. 87, para 2, that an offer is to be regarded as irrevocable if, as the offeror should reasonably have expected, it induces act ion or forbearance of a substantial character on the part of the offeree. Such offer is considered binding only 'to the extent necessary to avoid injustice'. In France, if an offeror has set a period for acceptance, the offer can be withdrawn before this period has expired, but the withdrawal renders the offeror liable in damages. On one view, this liability arises out of a 'preliminary contract' binding the offeror to keep the principal offer open for a certain time.11 As per the Italian Code, an offer cannot be withdrawn before the expiry of the period specified. If no period is specified, the offer can be withdrawn before acceptance, unless the offeree has relied on the offer in good faith, in which case, the offeree can claim damages for the loss he suffered in preparing to perform. In Germany, the offeror is 'bound' by
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his offer and a purported withdrawal has no effect unless the offeror has excluded the binding effect by express words.12 In England, the Law Revision Committee recommended that 'an agreement to keep an offer open for a definite period of time or until the occurrence of some specified event shall not be enforceable by reason of the absence of consideration'.13 The Vienna Convention on Contracts for the International Sale of Goods and the UNIDROIT Principles, both provide that an offer, even if irrevocable, can be withdrawn if the withdrawal reaches the offeree before or at the same time as the offer; and may be revoked before the acceptance is despatched. But an offer cannot be revoked if it indicates that it is irrevocable (by stating a fixed time of acceptance or otherwise), or where the offeree, having good reasons to treat the offer as being irrevocable, has acted in reliance of the offer.14 It is submitted that when the offeror has expressly promised to keep the offer open for a certain period of time, the offeree who has relied on the offer and incurred expenses (namely, for investigation, surveys, procuring sub-contracts, buying or hiring machinery, preparing for production, etc.) needs protection against unrestricted revocation of offer. Any revocation must make the offeror liable to compensate the offeree for the expenses incurred. The Act stands amended in its application to the State of Uttar Pradesh, where if an invitation to a proposal contains a condition that the proposal must be kept open for a specified time, the proposal made in response to the invitation must be kept open for that time.15 Revocation of Standing Offer Where a tenderer makes a standing offer to supply the goods as and when they are ordered, each order, when it is placed, is to that extent an acceptance of the standing offer, and creates a contract for the supply of goods so ordered. The standing offer may be withdrawn at any time as regards the goods not ordered.16A gives an undertaking to B to guarantee, for 12 months, the due payment of M's bills, which may be discounted by B at A's request. This is not a binding promise, but a standing proposal which becomes a promise or series of promises as and when B discounts bills on the faith of it. A may revoke it at any time, subject to his obligations as to any bills already discounted. 'The promise--or rather offer--to reply for 12 months creates no additional liability on the guarantor, but, on the contrary, fixes a limit in time beyond which his liability cannot extend'.17 Auction In an auction, the owner of each lot put up for sale, makes the auctioneer his agent to invite offers for it, and 'every bidding is nothing more than an offer on one side, which is not binding on either side till it is assented to'. Hence, a bidder may withdraw his bid at any moment before the fall of the hammer.18 A contract for sale of goods in an auction therefore comes into existence only after the auctioneer accepts the bid. A bidder at an auction merely makes a proposal which he can withdraw until it is accepted19 when the auctioneer announces its completion by the fall of the hammer.20 The bid may be retracted until such announcement is made. When the bid of an agent at an auction sale was accepted by the auctioneers kutcha-pucca (subject to sanction of the owner of the goods), and the agent agreed thereto, it did not preclude the principals of the agent from exercising their right of retracting the bid before it was accepted by the auctioneers.21 In an auction by the Court, the auction purchaser is entitled to the property only after confirmation of sale by the Court.22 A condition of sale providing that a bid shall not be retracted is not operative in law.23 Revocation of Tender The submission of tender or bid being in the nature of proposal or offer, unless the highest bid or tender is accepted by the competent authority, and acceptance is communicated to the tenderer or bidder, the contract cannot be said to be concluded between the parties.24 A tender can be withdrawn at any time before it is accepted, and if accepted by post or telegram, till such time the acceptance is posted or handed over for delivery. A tenderer revoked the tender after the letter of acceptance was posted by the government. It was held that the contract was complete as soon as the letter of
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acceptance was posted.25. Revision of tender amounts to revocation, rendering the tenderer liable for forfeiture of his deposit.26 Acceptance of the highest tender does not end the offer of other tenderers. Thus, where the highest tenderer failed to deposit the security amount, acceptance of the tender of the second highest bidder bound him.27 Revocation in Case of Conditional Acceptance of Bid/Tender Where the bid has been conditionally accepted, namely, subject to confirmation of higher authorities, the contract is concluded after the condition is fulfilled. If the acceptance of a bid in an auction sale by the sale officer or auctioneer is subject to confirmation by a superior authority, there is only a provisional or conditional acceptance, and the bidder will be bound only after such confirmation is given,28 even despite an endorsement in the bidding list by the officer conducting the auction that the sale has been concluded in favour of the highest bidder.29 If the acceptance of a bid or tender is subject to confirmation or approval of a higher officer or authority, the bid or tender can be revoked at any time before the condition is fulfilled, i.e., before the confirmation or approval,30 as there is no concluded contract.31 The auction-purchaser is then not liable for shortfall on resale. The plaintiff was the highest bidder at an auction sale of a lease in two forests. The terms and conditions of the sale notification were to form part of the agreement to be executed but the sale was subject to the confirmation of District Forest Officer or the Conservator of Forests. The plaintiff deposited the entire sale price together with security deposit as required by rules, but the bid was not confirmed by the District Forest Officer and the sale price was ordered to be refunded and second auction was held. The amounts of sale price and security deposit were deposited in Court in the second sale. The plaintiff brought a suit for declaration against the state that he was entitled to the amount deposited in Court on second sale and also to refund of the security deposit. It was held that the auction sale of a successful bidder would be one which was not only the highest but also to a person to whom intimation or confirmation of the sale had been sent.32 At an auction sale, the highest bid was accepted by the DFO subject to confirmation. The confirmation was not communicated to the highest bidder and was later settled with a third party. It was held that there was no concluded contract between the government and the highest bidder, and therefore, the settlement with the third party was invalid on that ground.33 Where after the auction, but before the acceptance, the government leased a forest to another person, the claim of the highest bidder who had deposited his instalment of bid money was negatived by the High Court as there was no enforceable ground.34 Where an auction sale was held on the express condition that the acceptance of the highest bid would be subject to the confirmation by a particular authority, the highest bidder can withdraw the offer in time before confirmation in spite of the fact that the bid was provisionally accepted or that he had deposited the earnest money or even the first instalment as per terms of the auction sale.35 A bidder at an auction sale, of a liquor contract, is not bound by his bid, even though accepted, if the bid is not binding on the government for the period of one month, during which the Excise Commissioner under the conditions of sale, can suspend or revoke the acceptance by his subordinates. The bidder can also withdraw his offer in spite of his depositing the sale price of the liquor shops.36 Withdrawing Resignation from Service In the absence of any statutory rules, a resignation is like a proposal for bringing the contract of service to an end and governed by s s. 4 and 5 of the Contract Act. It is complete when it is put in course of communication so as to be out of reach of the proposer and as against the person to whom it is made, when it comes to his knowledge.37 A resignation of an office holder can be withdrawn before it becomes effective. Therefore, where a secretary of a school committee resigned and asked for its acceptance by calling a meeting of the society at an early date, and before its acceptance by the meeting, withdrew it, the resignation became ineffectual.38 87 Sir Frederick Pollock, Principles of Contract, 13th edn., at 19.
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88 Anson's Law of Contract, 29th edn., 2010, p. 54-55. 89 UNIDROIT Principles, Art 2.4. 90 (English) Law Revision Committee, 6th Interim Report (Cmd 5449 1937). 91 Errington v. Errington, [1952] 1 KB 290, [1952] 1 All ER 149(CA) ; Daulia Ltd. v. Four Millbank Nominees Ltd., [1978] 2 All ER 557(CA) . 92 Law Commission of India, 13th Report, 1958, para 32; s. 8 below, under the heading: 'When is acceptance complete'. 93 T Linga Gowder v. State of Madras, AIR 1971 Mad 28. 94 Rajendra Kumar Verma v. State of Madhya Pradesh, AIR 1972 MP 131; Suraj Besan and Rice Mills v. Food Corpn. of India, AIR 1988 Del 224 at 227. 95 Somasundaram Pillai v. Provincial Government of Madras, AIR 1947 Mad 366 (the question whether the offer could have been withdrawn if the condition had statutory force did not arise in the case); Union of India v. S Narain Singh, AIR 1953 Punj 274. 96 National Highway Authority of India v. Ganga Enterprises, AIR 2003 SC 3823, (2003) 7 SCC 410. 97 Nutakki Sesharatanam v. Sub-Collector, Land Acquisition, Vijayawada, AIR 1992 SC 131, (1992) 1 SCC 114 at 116. 1 Bhanwarlal v. State of Rajasthan, AIR 1976 Raj 215; T Linga Gowder v. State of Madras, AIR 1971 Mad 28, distinguishing KP Chowdhry v. State of Madhya Pradesh, AIR 1967 SC 203, [1966] 3 SCR 919; the UP Amendment to this section. 2 Secretary of State for India v. Bhaskar Krishnaji Samani, (1925) 49 Bom 759, 89 IC 498, AIR 1925 Bom 485. 3 Vice-Chairman And Managing Director, APSIDC Ltd. v. R Varaprasad, AIR 2003 SC 4050, (2003) 11 SCC 572; National Textile Corporation (MP) Ltd. v. M R Jhadav, AIR 2008 SC 2449, (2008) 7 SCC 29. 4 Bank of India v. OP Swaranakar, AIR 2003 SC 858, (2003) 2 SCC 721; Food Corporation of India v. Ramesh Kumar, AIR 2007 SC 2864. 5 State Bank of Patiala v. Romesh Chander Kanoji, AIR 2004 SC 2016, (2004) 2 SCC 651, distinguishing Bank of India v. OP Swaranakar, AIR 2003 SC 858, (2003) 2 SCC 721. 6 New India Assurance Co. Ltd. v. Raghuvir Singh Narang, 2010 AIR SCW 3791, (2010) 5 SCC 335. 7 Vtsweswaradas Gokuldas v. BK Narayan Singh, AIR 1969 SC 1157. 8 Bruner v. Moore, [1904] 1 Ch 305 Per Farwell J. at p. 309; followed in Goldsbrough Mort & Co. Ltd. v. John Thomas Quinn, [1910] 10 CLR 674. 9 Commissioner of Taxes (Queensland) v. Camphin, [1937] 57 CLR 127. 10 See s. 10 below: 'Lock-out Agreements'. 11 Walford v. Miles, [1992] 2 WLR 174, [1992] 1 All ER 453; Davenport,[1991] 107 LQR 366; Neill,(1992) 108 LQR 405. 12 Konrad Zweigart, Introduction to Comparative Law, (translated by Tony Weir), Clarendon Press, Oxford, 1998, at pp. 356-64, for a comparative analysis of the various legal systems. 13 The Law Revision Committee, 6th Interim Report (Cmd 5449, 1937). 14 United Nations Convention on Contracts for International Sale of Goods, Arts. 15 and 16; UNIDROIT Principles, Arts 2.3 and 2.4. Note the distinction between a withdrawal (made before the offer reaches the offeree) and a revocation. 15 The text of the amendment is given under s. 5 above. 16 For standing offers, see s. 2(a) above under the heading: 'Tender and Standing Offer'. 17 Offord v. Davies, (1862) 12 CBNS 748; also see s. 2(a)[1861-73] All ER Rep 868. 18 Payne v. Cave, (1789) 3 TR 148, [1775-1802] All ER Rep 492; Agra Bank v. Hamlin, (1891-93) ILR 14-16 Mad 165; Raghunandhan Reddy v. State of Hyderabad, AIR 1963 AP 110. 19 Riya Travel & Tours (India) (P) Ltd. v. C U Chengappa, (2001) 9 SCC 512; Joravarmull Champalal v. Jeygopaldas Ghanshyamdas, AIR 1922 Mad 486.
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20 G Srinivasa Reddy v. Commr of Excise, Board of Revenue, AIR 1973 AP 178(FB) ; T Linga Gowder v. State of Madras, AIR 1971 Mad 28. 21 Mackenzie v. Chamroo, (1899-00) ILR 16-17 Cal 464. 22 Canara Bank v. Apple Finance Ltd., AIR 2008 Bom 16. 23 Somasundaram Pillai v. Provincial Government of Madras, AIR 1947 Mad 366; Union of India v. S Narain Singh, AIR 1953 Punj 274. 24 Executive Engineer, Sundergarh v. Mohan Prasad Sahu, AIR 1990 Ori 26. 25 Sadhoo Lal Motilal v. State of Madhya Pradesh, AIR 1972 All 137; Re Baroda Oil Cakes Traders v. Parshottam Narayandas Bagulia, AIR 1954 Bom 491. 26 Villayati Ram Mittal (Pvt.) Ltd. v. Union of India, AIR 2011 SC 301, (2010) 10 SCC 532. 27 State of Haryana v. Malik Traders, AIR 2011 SC 3574, (2011) 13 SCC 200. 28 Union of India v. Bhimsen Walaiti Ram, AIR 1971 SC 2295; Rajanagaram Village Co-op Society v. P Veerasami Mudaly, AIR 1951 Mad 322; Union of India v. S Narain Singh, AIR 1953 Punj 274. 29 Muthu Pillai v. Secretary of State, AIR 1923 Mad 582. 30 Sri Durga Saw Mill v. State of Orissa, AIR 1978 Ori 41(DB) ; State of Madhya Pradesh v. Hakim Singh, AIR 1973 MP 24(DB) ; G Srinivasa Reddy v. Commissioner of Excise, Board of Revenue, AIR 1973 AP 173(FB) ; State of Madras v. R Ranganathan Chettiar, AIR 1975 Mad 292; T Linga Gowder v. State of Madras, AIR 1971 Mad 28; Union of India v. S Narain Singh, AIR 1953 Punj 274; Rajanagaram Village Co-op Society v. P Veerawami Mudaly, AIR 1951 Mad 322; Somasundram Pillai v. Provincial Government of Madras, AIR 1947 Mad 366; Chitibobu Adenna v. Garimalla Jaggarayadu, AIR 1916 Mad 75. 31 Haridwar Singh v. Bagun Sumbrui, AIR 1972 SC 1242; Abdul Rahim Khan v. Union of India, AIR 1968 Pat 433; Karan Singh Chandan Singh v. Collector, Chhatarpur, AIR 1980 MP 89. 32 State of Madras v. R Ranganathan Chettiar, AIR 1975 Mad 298; State of Madhya Pradesh v. Hakim Singh, AIR 1973 MP 24; Sri Durga Saw Mill v. State of Orissa, AIR 1978 Ori 41. 33 Haridwar Singh v. Bagun Sumbrui, AIR 1972 SC 1242, [1972] 3 SCR 629. 34 Nilgiri Contractors' Society v. State of Orissa, AIR 1975 Ori 33, distinguishing Union of India v. Anglo Afghan Agencies, AIR 1968 SC 718, [1968] 2 SCR 368; Haridwar Singh v. Begum Sumbrui, AIR 1972 SC 1242; Executive Engineer, Sundergarh v. Mohan Prasad Sahu, AIR 1990 Ori 26. 35 State of Madhya Pradesh v. Hakim Singh, AIR 1973 MP 24; Sri Durga Saw Mill v. State of Orissa, AIR 1978 Ori 41. 36 Raghunandhan Reddy v. State of Hyderabad, AIR 1963 AP 110, Re Agra Bank v. Hamlin, (1980) 14 Mad 235 and Somasundaram Pillai v. Provincial Govt of Madras, (1947) Mad 837, AIR 1947 Mad 366, approving Pollock and Mulla's Contract Act, 18th edn., at pp 44-45; dissenting from Rajanagaram Village Co-operative Society v. Veerasami Mudaly, AIR 1951 Mad 322 and Chitibobu Adenna v. Garimalla Jaggarrayadu, AIR 1916 Mad 75, 28 Mad LJ 617; Abdul Rahim v. Union of India, AIR 1968 Pat 433 (auction sale under Displaced Persons (Compensation and Rehabilitation) Act); following Bombay Salt Chemical Industries v. LJ Johnson, AIR 1958 SC 289. 37 Janardan Misra v. State of Uttar Pradesh, AIR 1981 All 213. 38 Managing Committee of Shree Ganesh Adarsh Sanskrit High School v. State of Bihar, AIR 1981 Pat 271; Union of India v. Gopal Chandra, AIR 1978 SC 694.
Revocation of Acceptance Under this Act, an acceptance can be revoked. This is unlike the English law, where the question is not yet settled. An acceptance stands revoked if it reaches the proposer before the acceptance reaches him. Where the telegram revoking the acceptance reaches the proposer before the letter of acceptance, no contract is concluded.39 In India, however, such a revocation is made valid by the express terms of s s. 4 and 5 of the Contract Act.40 This legal position is unsettled in English law.41 The United Nations Convention on Contracts for the Sale of Goods and the UNIDROIT Principles also enable withdrawal of acceptance.42
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In an act ion for breach of contract, the Court at the place where the purported revocation was communicated also has jurisdiction,43 such communication being part of cause of action. Statement on Oath It has been held that if A offers to be bound by a special oath taken by B who accepts the offer, A cannot resile from the agreement, unless there is sufficient cause, to the satisfaction of the Court, for allowing the offeror to resile.44Having regard, however, to the provisions of the Indian Oaths Act, 1969B may be allowed by the Court to resile from the agreement.45 Offer to Abide by a Statement of Opposite Party or Another An offer of a party to litigation to abide by a statement made by the opposite party or one of them, if accepted, is binding and cannot be resiled from. But if sufficient cause is shown, the Court may allow the withdrawal of the offer or acceptance as the case may be.46 39 Dhanraj Mills Limited Liability Co. v. Narsingh Prasad Boobna, AIR 1949 Pat 270. 40 Lingo Raoji Kulkarni v. Secretary of State, AIR 1928 Bom 201. 41 Anson's Law of Contract, 29th edn., 2010, p. 52. 42 The UNIDROIT Principles, Art 2.10 (note the word 'withdrawal'). 43 Fertilizer Corporation of India Ltd. v. Sanjit Kumar Ghosh, AIR 1965 Punj 107; D Wren International Ltd. v. Engineers India Ltd., AIR 1996 Cal 424 (writ petition). 44 Saheb Ram v. Ram Newaz, AIR 1952 All 882(FB) . 45 Mahadeo Prasad v. Srjug Prasad, AIR 1952 Pat 208. 46 Florabel Skinner v. Jai Bajrang Kala Mandir Ram Lila Mandal, AIR 1980 P&H 284(FB) ; Ram Bhaj v. Duni Chand, AIR 1926 Lah 240 (Oath's case); Allah Rakha v. Punnan, AIR 1941 Lah 173.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER I Of Communication, Acceptance and Revocation of Proposals/S. 6.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER I Of Communication, Acceptance and Revocation of Proposals S. 6. Revocation how made.-A proposal is revoked-(1) (2) (3)
by the communication of notice of revocation by the proposer to the other party; by the lapse of the time prescribed in such proposal for its acceptance, or, if no time is so prescribed, by the lapse of the reasonable time, without communication of the acceptance; by the failure of the acceptor to fulfil a condition precedent to acceptance; or
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(4)
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.
Introduction Section 3 of the act states that the revocation may be communicated by any act or omission by which the proposer intends to communicate the revocation, or which has the effect of communicating it. Section 5 deals with the right of revocation and the time before which it can be effectively exercised. This section provides the mode in which a proposal can be revoked or shall stand revoked. Notice of Revocation Clause (1) requires that the notice of revocation must be given; (i) by the proposer, and (ii) to the offeree, being the other party, i.e., the person to whom the proposal is made. The clause appears to make it a condition of revocation being effectual that it shall be communicated by the proposer or by his authority. This was probably intended to correspond with the law of England at that time. The notice may be given by the offeror, or by his agent.47 It may be express or implied, e.g., by the offeror varying the terms of the offer.48 Where the offeror revises the offer, and this is accepted by the offeree, it results into a contract on the terms of the revised offer.49Where the offer is general and made to the whole world, it is sufficient if the offeror has taken suitable steps to bring the offer to the notice of the persons to whom it is made. Act ual receipt of notice by each and every offeree would not be required. It may be done with the same notoriety as the offer.50 Effect of Act Inconsistent with the Offer An offer does not stand revoked by act ing inconsistently with it. In Dickinson v. Dodds, 51 Dodds made a written offer to Dickinson to sell certain premises and promised to keep the offer open for some time. Before that time, Dodds sold the property to another without notice to Dickinson. Dickinson came to know about the sale from his own agent. Nevertheless, Dickinson accepted the offer before the time specified in the offer, and sought specific performance. The Court of Appeal held that there was no contract holding:
...beyond all question, the plaintiff knew that Dodds was no longer minded to sell the property to him as plainly and clearly as if Dodds had told him in so many words: 'I withdraw the offer'.
The earlier editors of this book have argued that the case actually decided that if an owner of immovable property made a proposal to sell it to one man, and before that proposal was answered, agreed to sell it to another, and the first with the knowledge of this fact then formally tendered an acceptance, the purchaser who first act ually accepted had the better right to specific performance. It was not decided (though the words above suggest) that knowledge about the property being sold to someone else, not communicated by the proposer, was such a revocation of the first proposal as to make acceptance by the offeree impossible. Acceptance of the proposal, which the proposer has made impossible to fulfil, is not necessarily inoperative; even if the obligation cannot be specifically performed, the promisor is bound to pay damages for default. Many obligations are from the beginning incapable of specific performance so far as any power of the Court is concerned. It would be absurd to hold that a promisor is to go scot-free because by his own action he has reduced, the possibilities of his obligation from a higher to a lower level. The true principle of such cases was stated by Langdell:52
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An offer to sell property will not be revoked by a sale of the property to someone else. As evidence of the change of mind on the part of the offeror, such an act cannot be put higher than a letter of revocation sent to the offeree by mail; and yet it is well settled that a letter of revocation will not be operative until the offeree receives it.53 Nor will subsequent sale of the property to someone else constitute any legal obstacle to the continuance of the offer. The original offeree and the subsequent purchaser cannot both acquire the property, but they can both acquire a right to it as against the seller, together with the alternative right to damages; and this is all that a contract secures to one in any case.
The earlier editors of this book have also argued that the act of selling to one man, property already offered to another, cannot be itself an act which has the effect of communicating notice to that other. Such notice must be the effect of some other act or event. As in Dickinson v. Dodds, a stranger may inform the original offeree about the other transaction.54This is not the act of the party supposed to be revoking, and therefore its effect, if any, cannot depend on the words of s. 3. Therefore, the decision is not of positive authority in India in view of the express words of the Contract Act. Another view is that that an act of proposer, inconsistent with his original intention, will be operative, if it comes in any way to the knowledge of the offeree, being an act which, under s. 3, 'has the effect of communicating' a revocation of the proposal. If this were so, Dickinson v. Dodds would be good law in India to the full extent of the reasons there given. In the opinion of the earlier editors, an act or omission would be sufficient communication under s. 3 only if it was made with an intention to communicate.55 The editors of the earlier edition rejected this view against this background. It has already been submitted that the interpretation of s. 3 points towards the objective theory of communication.56 However, the mere act or omission of the offeror inconsistent with the offer ought not to amount to revocation.57 Acceptance of the tender of the highest bidder does not liberate the other bidders from their offers. Thus, on failure of the highest tenderer to deposit security deposit, the party calling the tender can accept the proposal of the second highest tenderer within the time the offer is open.58 Having once made an offer, it is always within the power of the offeror to revoke it if he changes his mind. Any acceptance of the offer made with or without knowledge of any such inconsistency ought to bind the offeror, rendering the offeror liable in damages. Notice from Another Person It has been suggested, supported by the decision in Dickinson v. Dodds, 59 that the communication of revocation need not come from the offeror, it is sufficient if the information comes from a reliable source. This would not be the position in the Indian law in view of the express provision of cl. (a) requiring that the notice be given by the proposer. This view is also otherwise criticised on the ground that it would lead to inconvenience and uncertainty.60 If the offeree were bound by a revocation upon information of offeror's intention reaching the offeree from whatever source, whether based on the knowledge of an offeror's inconsistent act, (as described above) or on the information received from another person, the offeree would be in a dilemma. If he believed the informant were right, his acceptance would be worthless; and if the information proved to be wrong, he would lose the bargain.61 The express language of the section precludes a revocation other than one communicated by the proposer himself, and the Law Commission of India has thought fit not to make any change.62 Lapse of Time The power to accept the offer ends at the time specified in the offer. If the offer stipulates a period of time, namely, 15 days, time would run from the date of receipt of offer,63 unless the offer stipulates that time shall run from the date of the offer, or its transmission. If such offer stipulates reply by return
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post, it may be accepted by a letter posted on that date.64 But where a specific time is prescribed for the receipt of an acceptance, it must reach the addressee before that time.65 In Kalyanji Vithaldas & Sons v. State of Madhya Pradesh, 66K agreed to purchase tendu leaves for three years ending on 31 December 1970, the terms of the lease providing that it was renewable every year. K was to opt for renewal within 15 days prior to December 31 and the leases were to be renewed by issue of order by the government and acceptance by the department by 31 January next year. K offered for renewal on 7 December 1968, and it was accepted by the government on 31 January 1969 but despatched on 7 February 1969. K sought to withdraw from the offer on the ground that the government had not renewed it before 31 January 1969. It was held that it being a continuing contract, the acceptance on 31 January 1969 was in time and the lease stood renewed. If the offer does not specify any time for acceptance, it will come to an end on the lapse of reasonable time, and therefore must be accepted within a reasonable time in order to conclude a contract,67 unless the offeror has waived revocation. The reason for the rule may be supported by the view that it is an implied term of such an offer that if it is not accepted, it will be treated as withdrawn, or that if the offeree does not accept within reasonable time, he must be treated as having refused it.68 What is reasonable time is a question of fact and would depend on the purpose of the offer, its subject-matter, the method by which the offer is communicated, the subsequent conduct of the parties, renewals of the offer. An offer to sell perishable articles, or goods subject to violent price fluctuations, an offer sent by telegram or telex, would terminate after a short period of time. A person who applied for shares in a company in June was held not bound by an allotment made in November.69 Application for shares was made in March and July 1933, and December 1934. There was no allotment till August 1935. There was nothing in the conduct of the applicant amounting to waiver of revocation. Section 6(2) applied and proposal was deemed to have been revoked.70 The respondents made an offer asking the petitioner to sign a fresh draft agreement by 5 December and wrote another letter to the petitioner in January 1972 renewing the proposal and stating that a parallel supply agreement would be renewed if the petitioner signed the draft agreement. The letter did not prescribe any period for signing the agreement. The second part of s. 6(2) applied and it was necessary to accept within reasonable time.71 The proposal lapses even if the acceptor is prevented from accepting within the stipulated or reasonable time due to causes beyond his control. Where after inviting tenders for purchase of tendu leaves the Forest Corporation could not proceed to consider the tenders during the stipulated period by injunctions issued by the Court in certain litigation, it was held that since the offer of the tenderer was not accepted within the stipulated period and was revoked, there was no contract.72 Condition Precedent to Acceptance The meaning of the term 'condition precedent to acceptance' is not clear. The words were borrowed from the draft Civil Code of the State of New York, which was never adopted. A man proposing a contract may request either, a single act, or several act s, or a promise or set of promises, or both acts and promises, as the consideration for a promise which he offers. The other party may do something obviously inconsistent with performing some or one of the things requested. This amounts to a tacit refusal, and accordingly, the proposal is at an end. The parties can form a contract only by starting afresh. If the fact amounts to a refusal, there is no manifest reason for calling it a failure to fulfil a condition precedent. Everything required on the acceptor's part to complete an acceptance would rather seem to be part of the acceptance itself. The section suggests that if a condition is to be complied with by the acceptor before acceptance, its non-fulfilment will prevent the formation of a contract. A conditional proposal lapses when the offeree does not accept the condition. The employer made an offer to the trade union which was threatening to go on strike, that if the trade union withdrew the strike, the workers would be paid a certain amount from the profits arising from the transfer of the mill. The condition was not accepted by the union. There was no correspondence thereafter. The transfer took place. It was held that there was no acceptance of the condition of offer, and hence no liability to pay any amount to the workers.73
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The term is not used in this connection in English books. Under English law, an offer made expressly or impliedly subject to a condition upon which it would terminate, cannot be accepted upon the occurrence of the condition.74 The offer expressly indicates that its continuance is conditional upon the existence of circumstances other than time, and the condition may be express or implied. An offer to buy goods is subject to the implied condition that the goods will be substantially in the same state in which they were when the offer was made and cannot be accepted after they were seriously damaged.75 Similarly, an offer to insure the life of a person cannot be accepted if he sustains a serious injury.76 Death or Insanity of Proposer A proposal stands revoked on the death or insanity of the proposer, if the acceptor has notice of the death or insanity before acceptance. This provision departs substantially from the English law, where death of the offeror will terminate the offer only if the offer on its true construction so provides.77 If the proposed contract is one of 'personal service', it terminates on death of the offeror (or even of the offeree). In case of other offers not involving personal service, an irrevocable offer would not be determined by the death of the offeror or the offeree.78 The insanity of the proposer terminates the offer under the English law. A life insurance policy lapsed and the policy holder died before the revival procedure was complete. The claimants were entitled only to the paid-up value of the lapsed policy and not the full amount of policy, as renewal could take place only during the lifetime of the assured, and the rights and liabilities under the new revived contract did not begin until the new terms and conditions were accepted and complied with.79 Death of Offeree If an offer is addressed to a man who dies without having accepted or refused it, his executors have no power to accept it either in England or in India. The proposer cannot be presumed to have intended to contract with a deceased person's estate. This is very different from the case of one who accepts a proposal without knowing that the proposer is dead. According to Warrington LJ. in Reynolds v. Atherton, 80 an offer ceases by operation of law on the death of the offeree because after death there is no longer an offer at all. This offer is not intended to be made to a dead person or his executors. But this point was expressly reserved when the case went to the House of Lords. Rejection of Proposal An unambiguous intimation, express or implied, by the offeree to the offeror that he rejects the offer; terminates the offer. The rejection of a proposal by the person to whom it is made is wholly distinct from revocation, and is not provided for in this section. A proposal has been held to stand revoked by an express refusal to accept the proposal.81 After the rejection, the offer cannot be accepted again, unless it is revived by the offeror.82 A letter of acceptance given to the petitioner, an unsuccessful tenderer, after the successful tenderer failed to turn up, did not conclude the contract and the petitioner was entitled to the refund of earnest money.83 In this case, the petitioner did not get the letter of acceptance. The result, it is submitted, would be the same even if the petitioner had received the letter of acceptance. Section 7 requires that an acceptance must be absolute and unqualified. If it is not, it is a mere counter-offer, and unless accepted in turn by the original proposer, has the effect of terminating the original proposal. A counter-proposal amounts to a rejection of the original proposal.84 A resolution of a municipal committee to grant a renewal of lease to a lessee if the lessee paid an amount within a specified period, was not complied with. The lessee made a counter-proposal, which was rejected by the committee. There was no renewal, nor was there any obligation on the committee to go on negotiating with the lessee.85Z offers to take A's house on certain terms, an answer to be given within
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six weeks. A, within that time, writes a letter to Z purporting to accept, but in fact containing a material variation of the terms. Z then withdraws his offer. A writes again, still within six weeks, correcting the error in his first letter and accepting the terms originally proposed by Z. No contract is formed between Z and A, since A's first acceptance was insufficient, and the proposal was no longer open at the date of the second.86 A counter-offer proposing different terms thus has the same effect as a merely negative refusal; it is no less a rejection of the original offer. If the party making it changes his mind, it cannot treat the first offer as still open.87 An original proposal becomes superseded by the counter-proposal made by the other party and would not be revived even if the maker of the proposal rejects the counter-proposal. An offer can be rejected only by a definite indication of an intention to reject. There is no rejection if the offeree merely makes further enquiries about the offer,88 or accepts the offer but offers to enter into further contract. Seeking clarifications about the proposal is neither acceptance nor a counter-proposal, nor is the proposal rejected if the offeree expresses that a condition modified by the proposer is not acceptable.89 The rejection would operate only on being act ually received by the offeror. If the offeree changes his mind and accepts the offer, having rejected it first, and the acceptance reaches the offeror before the rejection, a contract is concluded.90 It is also suggested, on the ground of convenience,91 that if the offeree posts the letter of acceptance before the earlier rejection has come to the knowledge of the offeror, a contract will be concluded only if the acceptance reached before the rejection, and the postal rule will not apply. This avoids inconvenience to the offeror who may rely on the rejection and contract elsewhere. 47 Gilkes v. Leonino, (1858) 4 CBNS 485; Henthorn v. Fraser, [1892] 2 Ch 27(CA), [1891-94] All ER Rep 1064. 48 Villayati Ram Mittal (Pvt.) Ltd. v. Union of India, AIR 2011 SC 301, (2010) 10 SCC 532; Gilkes v. Leonino, supra . 49 Haryana State Industrial Development Corporation Ltd. v. Inderjeet Sawhney, AIR 1996 SC 2244, (1996) 7 SCC 339. 50 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, 'CONTRACT', para 644. 51 (1876) 2 Ch D 463. 52 Summary of the Law of Contract, s. 181. 53 Curtice v. London City & Midland Bank Ltd., [1908] 1 KB 293(CA) --A cheque is not effectually countermanded by a telegram delivered at the bank on which it is drawn but not in fact brought to the banker's notice. 54 (1876) 2 Ch D 463; The informant was not in fact a stranger, but the agent of the plaintiff, the original offeree. 55 Section 3 above: 'Introduction.' 56 Ibid. 57 Chitty on Contracts, 28th edn., p. 125, para 2-081; in view of Stevenson, Jacques & Co. v. MacLean, [1880] 5 QBD 346; Dickinson v. Dodds, (1876) 2 Ch D 463 to the effect that such offer may be withdrawn by acting inconsistently with it, would not be followed. 58 State of Haryana v. Malik Traders, AIR 2011 SC 3574, (2011) 13 SCC 200. 59 Chitty on Contracts, 28th edn., p. 126, para 2-082; Anson's Law of Contract, 29th edn. 2010, at p. 58. 60 Chitty on Contracts, 28th edn., p. 126, para 2-082. 61 Anson's Law of Contract, 29th edn., 2010, p. 58. 62 The Law Commission of India, 13th Report, 1958, para 30, also fears that it would open doors to perjury. 63 Barrick v. Clark, [1951] SCR 177, (1950) 4 DLR 529 (Supreme Court, Canada) (time ran from the receipt of the offer at the offeree's address, although he was away). 64 Dunlop v. Higgins, (1848) 1 HLC Cas 381.
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65 See R Maheswari v. Secretary Selection Committee, AIR 1995 Mad 168 (case relating to receipt of application for admission to an entrance examination). 66 (1996) 10 SCC 762. 67 Manchester Diocesan Council for Education v. Commercial and General Investments Ltd., [1970] 1 WLR 241, [1969] 3 All ER 1593; Hindustan Aluminium Corpn. Ltd. v. Uttar Pradesh State Electricity Board, AIR 1973 All 263; Shree Jaya Mahal Co-op Housing Society Ltd. v. Zenith Chemical Works Pvt. Ltd., AIR 1991 Bom 211; Sekhsaria Exports v. Union of India, AIR 2004 Bom 35; Commissioner, HR and CE Department, Chennai v. S Muthukrishnan, AIR 2012 Mad 43. 68 Manchester Diocesan Council for Education v. Commercial and General Investments Ltd., [1969] 3 All ER 1593. 69 Ramsgate Victoria Hotel Co. Ltd. v. Montefiore, (1866) LR 1 Ex 109, [1861-73] All ER Rep 2232, followed in Indian Co-operative Navigation Trading Co. v. Padamsey Premji, AIR 1934 Bom 97, 36 Bom LR 32, 150 IC 645 (allotment of shares); in Ramlalsao Gupta v. MER Malak, AIR 1939 Nag 225, 183 IC 748 (allotment of shares). 70 Ramlalsao Gupta v. MER Malak, AIR 1939 Nag 225. 71 Hindustan Aluminium Corporation v. UP State Electricity Board, AIR 1973 All 263; citing Manchester Diocesan Council for Education v. Commercial & General Investment Ltd., (1970) 1 WLR 271, [1969] 3 All ER 1593. 72 Shyam Biri Works Pvt. Ltd. v. Uttar Pradesh Forest Corpn., AIR 1990 All 205. Having held that no contract came into existence since there was no acceptance, the court held that the contract was frustrated under s. 56 of the Contract Act, as the corporation was gagged by litigations and could give no answer to the tenders. It is submitted that the question of applying s. 56 of the Act did not arise if contract never came into existence. 73 Pipraich Sugar Mills Ltd. v. Pipraich Sugar Mills Mazadoor Union, AIR 1957 SC 95, [1956] SCR 872 at 884. 74 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, 'CONTRACT', para 647. 75 Financings Ltd. v. Stimson, [1962] 1 WLR 1184, [1962] 3 All ER 386(CA) . 76 Looker v. Law Union and Rock Insurance Co. Ltd., [1928] 1 KB 554. 77 Chitty on Contracts, 28th edn., at p. 130, para 2-092. 78 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, 'CONTRACT', para 648. 79 Ahmedunnisa Begum v. Life Insurance Corporation of India, AIR 1981 AP 50; Harshad Shah v. Life Insurance Corpn. of India, AIR 1997 SC 2459, (1997) 5 SCC 64; LIC of India v. Jaya Chandel, AIR 2008 SC 1310, (2008) 3 SCC 382. 80 (1921) 125 LT 690 (CA), affirmed (1922) 127 LT 189(HL) . 81 Hindustan Aluminium Corporation Ltd. v. UP State Electricity Board, AIR 1973 All 263. 82 Khaled v. Athanas Bros (Aden) Ltd., 1968 EA 31(PC) ; Moolji Jaitha and Co. v. Seth Kirodimal, AIR 1961 Ker 21. 83 Sardar Surjeet Singh v. State of Uttar Pradesh, AIR 1995 All 146(DB) . 84 Rao Girdhari Lal v. Societe Beige de Banque SA, AIR 1938 Lah 341. 85 Badrilal v. Municipal Corporation of Indore, AIR 1973 SC 508. 86 Routledge v. Grant, (1828) 4 Bing 653, 130 ER 920, 29 RR 672. 87 Hyde v. Wrench, (1840) 3 Beav 334; Nihal-Chand v. Amar Nath, AIR 1926 Lah 645. 88 Stevenson, Jacques & Co. v. Maclean, [1880] 5 QBD 346 (an inquiry whether the offeror would take delivery over a period); Gibson v. Manchester City Council, [1978] 2 All ER 583 (an inquiry whether the offeror-vendor would reduce the price) [1979] All ER 972. 89 Uttar Pradesh State Electricity Board v. Goel Electric Stores, AIR 1977 All 494. 90 Anson's Law of Contract, 29th edition, 2010, p. 58-59. 91 Chitty on Contracts, 28th edn., p. 128, para 2-086.
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Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER I Of Communication, Acceptance and Revocation of Proposals/S. 7.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER I Of Communication, Acceptance and Revocation of Proposals S. 7. Acceptance must be absolute.-In order to convert a proposal into a promise the acceptance must-(1) (2)
be absolute and unqualified; be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in which it is to be accepted. If the proposal prescribes a manner in which it is to be accepted, and the acceptance is not made in such manner, the proposer may, within a reasonable time after the acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but if he fails to do so, he accepts the acceptance.
Introduction Under s. 7(1), an acceptance must be absolute and unqualified in order to convert a proposal into a promise. Section 7(2) prescribes that the acceptance must be made in a reasonable manner. If the proposer has prescribed a manner of acceptance, the acceptance must be made in that manner, if not so made, there is a contract only if the proposer 'accepts the acceptance'.
Principle The acceptance must be absolute, unqualified and without conditions.92 The offer and acceptance must correspond. This is sometimes called the 'mirror rule', i.e., the acceptance must match with the terms of the offer. When there is a variation between the offer and acceptance even in respect of any material term, acceptance cannot be said to be absolute and it does not result in the formation of a legal contract.93 The question is of interpretation in each such case whether a particular communication is to be understood as a real and absolute acceptance, or as introducing a condition or qualification which makes it only a stage in the course of negotiation, capable of leading, but not necessarily leading, to a concluded contract; and this may often involve the construction of various documents which have passed between the parties to find out the extent of the agreement. In order to decide whether there is an absolute and unqualified agreement between the parties to a contract, the entire negotiations and correspondence should be considered.94 An absolute and unqualified acceptance may, even when there is no express intimation from the offeree, be inferred from the conduct of the offeree.95
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Requested or suggested modifications of an offer will not preclude the formation of a contract where it clearly appears that the offer is positively accepted regardless of whether the requests are granted. Where the acceptance of an offer is initially unconditional, the fact that it is accompanied with a direction or request looking to the carrying out of its provisions, but which does not limit or restrict the contract, does not render it ineffectual or give it the character of a counter-offer.1
The intention of the offeree to accept must be expressed with such certainty as to leave no doubt that the terms offered by the offeror are assented to. A mere acknowledgment of an offer, or a reply that the offeree intends to place an order does not amount to an acceptance Seeking clarification of an offer neither amounts to the acceptance of the offer nor to the making of a counter-offer.2 A reply that 'I am making the necessary arrangement' to a counter-proposal was not an acceptance.3In commercial transactions, the mere act s of indulgence are not apt to create rights.4 The question whether the terms added to the proposal are intended to be part of the contract, or are merely in the nature of inquiries, will depend in each individual case upon the words used and the intention of the parties.5 It would be no acceptance if it attempts to vary the terms of the offer, whether the variation relates to the subject matter of the proposed contract or the time of performance or the place of performance, or otherwise. An attempted acceptance would not operate as such if it is made subject to some condition, or includes new or different terms.6 An acceptance does not convert a proposal into a promise if it leaves one of the essential conditions to the discretion of a third person,7 it is qualified by conditions,8 or it is in substance only a provisional arrangement subject to something more being done to complete the arrangement;9 so is an acceptance stated to be 'subject to confirmation by mail',10 or is expressly made subject to the payment accompanying the proposal being found in order.11 An acceptance which at the same time exempts the acceptor of any obligation is not an acceptance capable of creating a binding contract.12 An offer meant to be accepted by offerees jointly must be accepted by all the offerees. In exceptional circumstances, there may be an unconditional acceptance in terms of a proposal which in fact the parties do not understand in the same sense, and which neither party is estopped from understanding in his own sense. Here the acceptance is merely apparent, and no contract is formed. Such cases are dealt with in s. 13. 92 Nirod Chandra Roy v. Kirtya Nanda Singh, AIR 1922 Pat 24; Moti Lal Madan Lal v. Kishori Lal d' Bros, AIR 1930 Lah 374; Kahn and Kahn of Delhi v. Premsukh Das Rup Narain, AIR 1931 Lah 260; Deep Chandra v. Rukneeddaula Shansher Jung Nawab Mohammed Sajjad Ali Khan, AIR 1951 All 93(FB) ; Jawahar Lal Barman v. Union of India, [1962] 3 SCR 769, AIR 1962 SC 378; Union of India v. Babulal Uttamchand Bhandari, AIR 1968 Bom 294; Badri Prasad Bhandari v. State of Madhya Pradesh, AIR 1970 SC 706; Union of India v. Uttam Singh Duggal, AIR 1972 Del 110; Uttar Pradesh State Electricity Board v. Goel Electric Stores, AIR 1977 All 494; Suraj Besan and Rice Mills v. Food Corpn. of India, AIR 1988 Del 224; Trollope d' Colls Ltd. v. Atomic Power Construction Ltd., [1963] 1 WLR 333, [1962] 3 All ER 1035 (corresponding English law); Big v. Boyd Gibbins Ltd., [1971] 2 All ER 183 (what offer and acceptance constitute contract); Brown v. Gould, [1971] 2 All ER 1505 (option to renew lease in future having regard to the market value). 93 Union of India v. Uttam Singh Duggal, AIR 1972 Del 110 at 115; Chhotey Lal Gupta v. Union of India, AIR 1987 All 329 at 334; Jones v. Daniel, [1894] 2 Ch 332; but see Global Tankers Inc. v. Amercoat Europa NV, [1975] 1 Lloyd's Rep 666. 94 Dhulipudi Namayya v. Union of India, AIR 1958 AP 533; Sree Minakshi Mills Ltd. v. TC Anantarama Ayyar, AIR 1930 Mad 654; Trimex International FZE Ltd. v. Vedanta Aluminium Ltd., 2010 AIR SCW 909, (2010) 3 SCC 1 (exchange of emails); Bharat Forge Ltd. v. Onil Gulati, AIR 2005 Del 369; National Properties Ltd. v. Bata India Ltd., AIR 2001 Cal 177. 95 Bishun Padu Haldar v. Chandi Prasad d' Co., AIR 1919 All 7. 1 17A, Am Jur 2d, Contracts, 90-91; quoted with approval in D Wren International Ltd. v. Engineers India Ltd., AIR 1996 Cal 424. 2 Uttar Pradesh State Electricity Board v. Goel Electric Stores, AIR 1977 All 494. 3 Sir Mohamed Yusuf Ismail v. Secretary of State, (1920) 22 Bom LR 872, 45 Bom 8, 57 IC 971, AIR 1921 Bom 200.
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4 Tool Metal Manufacturing Co. Ltd. v. Tungsten Electric Co. Ltd., [1955] 2 All ER 657 at 660 (per Viscount Simonds); disapproving of the principle in Combe v. Combe, [1951] 1 All ER 767, [1951] 2 KB 215. 5 Moolji Jaitha & Co. v. Seth Kirodimal, AIR 1961 Ker 21 at 23. 6 Hyde v. Wrench, (1840) 3 Beav 334. 7 Rani Huzur Ara Begum v. Deputy Commr Gonda, AIR 1941 Oudh 529. 8 Henry Earnest Meaney v. EC Eyre Walker, AIR 1947 All 332. 9 Dhulipudi Namayya v. Union of India, AIR 1958 AP 533. 10 Kahn v. Jugal Kishore Gulab Singh, AIR 1930 Lah 114. 11 Life Insurance Corpn. of India v. Brazinha D'Souza, AIR 1995 Bom 223. 12 Kahn and Kahn of Delhi v. Prem Sukh Das Rup Narain, AIR 1931 Lah 260.
Negotiations No contract is concluded by an acceptance referring to future negotiations to be made for finalisation of more terms of the contract.13 Parties may carry on lengthy negotiations in anticipation of reaching an agreement. Parties may even make new demands and counter-demands. The Court then has to decide whether any contract has been concluded, and if so, on what terms. The Court is more likely to hold that the negotiations have resulted in a contract if a party has acted on the basis of existence of contract,14 or if performance under the contract has commenced or has been rendered.15 Until there is absolute acceptance of a proposal, the parties are still in the stage of negotiations and no legal obligations attach to them.16 If negotiations continue and the terms are not finalised, there is no concluded contract even though a letter allotting the contract to the tenderer has been issued.17 Analysis of offer and acceptance in formation of a contract may present some difficulties in such situations. The mechanism of offer and acceptance is a useful guideline to Courts to determine whether an agreement has been reached between the parties. The terms of contract may depend upon the analysis of the negotiations in offer, counter-offer and acceptance, and there would be no contract if there were no offer and acceptance.18 Where the question is, whether the negotiations started with the object of forming a contract were still open to bargaining, or had resulted in the formation of a contract, the decision should depend on the facts and circumstances of that particular case. In Rickmers Verwaltung GmbH v. Indian Oil Corporation, 19 the charter party between R and I was not signed. I was to furnish a stand by letter of credit, and R a performance bond, both on terms to be mutually agreed between the parties. I informed R to load the goods according to the indicated schedule,but R did not do so as the letters of credit were not approved by I. On R's request for arbitration, I contended that there was no contract. The clause in the unsigned charter party did not indicate whether furnishing of the letters of credit was a condition precedent. The Supreme Court held that there was no contract since the correspondence indicated that the finalisation of the formats of the letters of credit and the performance guarantee by the parties was considered by the parties as a condition precedent, and the fax messages also showed that the parties were still negotiating. It observed in para 12:
The Court is required to review what the parties wrote and how they act ed, and from that material to infer whether the intention as expressed in correspondence was to bring into existence a mutually binding contract.
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The intention of the parties is to be gathered only from the expressions used in the correspondence and the meaning it conveys, and in case it shows that...(the parties) had actually reached an agreement upon all material terms, then...a binding contract...(could be) spelt out from the correspondence.
In Koylsh Chunder Dass v. Tariney Churn Singhee, 20 the defendant wrote to the plaintiff:
The value of your house has been fixed through the broker at Rs 13,125. Agreeing to that value, I write this letter. Please come over to the office of my attorney between three or four this day, with the title deeds of the house and receive the earnest.
In reply, the plaintiff wrote:
You having agreed to purchase our house for Rs 13,125, have sent a letter through the broker, and we are agreeable to it, and we will be present between three and four this day at your attorney's, and receive the earnest.
The plaintiff and the defendant met at the attorney's office, but the attorney was absent, and accordingly no inspection of title deeds or payment of the earnest money took place. The plaintiff sued the defendant for specific performance, but it was held that there was no binding contract, as two important matters--namely, inspection of the deeds and the amount and payment of the earnest money--were left to be arranged at the attorney's office. Grath C.J. said:
As regards the earnest money, it must be observed that both parties treat that as an element in the bargain...Suppose the meeting had taken place and, the parties had been unable to agree as to the amount of the earnest money, how could it possibly have been said that they have arrived at any binding agreement?21
Although no contractual liability fixes if the negotiations do not result into a contract, other obligations may arise. Confidential information conveyed during the course of negotiations cannot be misused by the party to whom it was communicated for any purpose than for which it was communicated.22 A document titled 'Basis of Negotiation' involving transfer of share capital that provided for return of amount paid if certain conditions were not fulfilled. It was held it was a contract, not of sale and purchase of shareholdings, but as regards amount of Rs 50 lakhs.23 An agreement to negotiate in good faith is generally not enforceable.24 13 Satya Prakash Goel v. Ram Krishan Mission, AIR 1991 All 343. 14 Gujarat State Fertilizers Co. Ltd. v. HJ Baker d' Bros, AIR 1999 Guj 209 (force majeure clause was invoked); Geo-Group Communications INC. v. IOL Broadband Ltd., 2010 AIR SCW 209, (2010) 1 SCC 562 15 RTS Flexible Systems Ltd. v. Molkerei Alois Muller GmbH d' Co. KG (UK Production), [2010] UKSC 14, [2010] 3 All ER 1 (performance after expiry of letter of intent). 16 Haji Mohamed Haji Jiva v. E Spinner, (1900) 24 Bom 510 at 525; United Bank of India v. Shyam Sundar Banerjee, AIR 2007 Cal 87. 17 Gammon India Limited. v. Punjab State Electricity Board, AIR 1997 P&H 43 (allotment was also made subject to ratification). 18 Hispanica de Petroleos SA v. Vencedora Oceanica Navegacion SA (The Kapetan Markos NL), [1987] 2 Lloyd's Rep 323 at 331; The Aramis, [1989] 2 Lloyd's Rep 213; Pagnan SpA v. Feed Products Ltd., [1987] 2 Lloyd's Rep 601
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at 616; New Zealand Shipping Co. Ltd. v. AM Satterthwaite d' Co. Ltd. (The Eurymedon), [1975] AC 154 at 167; Gibson v. Manchester City Council, [1979] 1 WLR 294 at 297, [1979] 1 All ER 972 . 19 AIR 1999 SC 504 at 509: (1999) 1 SCC 1 at 9; Rajasthan Co-op Dairy Federation Ltd. v. Maha Laxmi Mingrate Mktg Service Pvt. Ltd., (1996) 10 SCC 405 (furnishing bank guarantee was condition precedent to formation of contract). 20 Supra(1884) ILR 10 Cal 588; Baijnath v. Kshetrahari Sarkar, AIR 1955 Cal 210. 21 There was no proof of any customary amount of earnest money intended by the parties. 22 Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] 2 SCR 574 (Supreme Court of Canada). 23 SMV Agencies Pvt Ltd v. Cross Country Heritage Hotel, CS (OS) 281/2010 decided on 11 April 2013 (Del). 24 See s. 10 below: 'Agreement to negotiate'.
'Mirror rule' There has been a growing judicial awareness of the danger that a very strict application of the requirement of certainty of the terms could result in the striking down of agreements intended by business community to have a binding force, and the Courts have been reluctant in striking down an agreement on which the parties have already act ed.25 An acceptance, apparently conditional, is valid if a new term in the acceptance merely makes express that which was implied in the offer or the proposed contract.26 Similarly, an unconditional acceptance of the original offer and the formation of the contract thereupon is not affected by the collateral term annexed to that acceptance.27 An acceptance will have legal effect if the new terms are trivial, or the acceptance is accompanied with a protest or a 'grumble', or it requests the offeror for better terms.28 An acceptance which is in form conditional may also be considered in fact absolute, on the ground that the parties did not really envisage the incorporation in the contract of any terms other than those already agreed. An offer was accepted when the acceptance used the words 'subject to the usual conditions of acceptance'. It was held that there was a binding contract, as these words were on the facts quite meaningless; the offeree had not in mind that any further terms were to be agreed, but was using a high-sounding phrase to which he attached no particular meaning.29 The rule that an acceptance must be absolute and unqualified does not mean that the offer and acceptance must match completely.30 An acceptance which contains statements which do not intend to vary the terms of the offer or to add new terms is valid even if it does not correspond with the offer. All that is required is that it must not introduce a new term or a different term, nor should it leave any material term yet to be agreed. 'Immaterial or minor differences or variances between the offer and acceptance will not prevent the formation of the contract'.31 An acceptance of tender was held to conclude the contract even though the formal contract remained to be signed and some terms were still being negotiated between the parties.32 25 Albion Sugar Co. Ltd. v. William's Tankers Ltd., (The John S Darbyshire), [1977] 2 Lloyd's Rep 457 at 464; Brown v. Gould, [1972] Ch 53 at 57; Tropwood AG of Zug v. Jade Enterprises Inc. (The Tropwind), [1982] 2 Lloyd's Rep 232; Grace Shipping Inc. and Hai Nguan v. CF Sharpe (Malaysia) Pte, [1987] 1 Lloyd's Rep 207; Didymi Corp. v. Atlantic Lines & Navigation Co. Inc., [1987] 2 Lloyd's Rep 166; affirmed in [1988] 2 Lloyd's Rep 108. 26 Stevenson, Jacques & Co. v. MacLean, (1880) 5 QBD 346; Lark v. Outhwaite, [1991] 2 Lloyd's Rep 132. 27 Dhulipudi Namayya v. Union of India, AIR 1958 AP 533; Jainarain Ram Lundia v. Surajmull Sagarmull, AIR 1949 FC 211 at 216 relied upon; Raunaq International Ltd. v. Alfred C Toepfer, AIR 1984 NOC 84(Del) . 28 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, 'CONTRACT', para 661. 29 Nicolene Ltd. v. Simmonds, [1953] 1 QB 543, [1953] 1 All ER 822; distinguishing British Electrical & Associated Industries (Cardiff) Ltd. v. Patley Pressings Ltd., [1953] 1 WLR 280, [1953] 1 All ER 94QBD ('Subject to force majeure conditions'-held too vague); Scammell v. Ouston, [1941] AC 251 ('the balance of purchase price can be had on hirepurchase terms over a period of two years'-too vague). The latter case was followed in Jai Gobind Singh v. Bagal
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Lal Singh, AIR 1950 Pat 445; Baijanth v. Kshetrahari Sarkar, AIR 1955 Cal 210 (lease subject to 'all other usual clauses' held too vague).(25) 30 Clive v. Beaumont, (1847) 1 De G & Sm 397; Butler Machine Tool Co. Ltd. v. Ex-Cell-O Corpn. (England) Ltd., [1979] 1 WLR 401, [1979] 1 All ER 965. 31 17 A, Am Jur 2d, Contracts, 90-91 quoted with approval in D Wren International Ltd. v. Engineers India Ltd., AIR 1996 Cal 424. 32 Progressive Constructions Ltd. v. Bharat Hydro Power Corpn., AIR 1996 Del 92.
Acceptance: Absolute and Unqualified Where the acceptance is not qualified, the contract is completed by acceptance.33 Parties become bound by its terms, and on breach, for damages or compensation. When an offer is accepted without any condition, the contract is formed on the terms of the offer so accepted. The offeree cannot be heard to say later that the acceptance was subject to a condition which ought to have formed part of the acceptance. Any such term incorporated into the formal document issued later will not bind on the parties.34 When the proposal of any payment is subject to any condition, the payment has to be accepted with the condition imposed and it is not permissible in law to accept the payment and ignore the condition. The payment has to be accepted with the condition or not at all.35 It is always open to a person to elect to accept or not to accept with that condition.36 The offeree cannot be heard to say that though he accepted the proposal, he was not bound by the condition.37 The plaintiff tendered to buy from the defendant 3500 tonnes of coke at Rs 31 per tonne and also deposited Rs 5000/- as security. The acceptance of the tender and the deposit of security money constituted a concluded contract. Further, the plaintiff was held to have accepted all the terms of the sale.38 A tender issued by the Government for sale of 244 tons of iron scrap, approximately, was filled by a purchaser and accepted by the Government. This was held to be a valid unconditional contract, implying that purchaser will pay more if the weight exceeded the quality tendered for and get a refund if the quality is less.39 A shareholder of a company informed the desire to purchase shares under her right of preemption. The contract was formed then, and did not depend on payment of price, which was a question of performance.40 The acceptance of the conditional offer is an acceptance of the offer and the condition attached thereto.41 The acceptance of the offer by a person of a named sum in full payment of the claim operates as a discharge of the claim. The claimant cannot accept the amount and repudiate its being payment in full discharge or claim it as payment of another claim.42 Therefore, acceptance of a cheque issued by the railway in full and final discharge of liability cannot be accepted and cashed without the liability standing discharged.43 An acceptance binds the parties to all the terms and conditions. A housing society was bound to pay enhanced price for the land allotted to it by a development authority, as it had accepted the allotment on the terms of offer made earlier, and on its failure to do so, was liable to have the earnest money forfeited.44 Where the brochure of a land development authority clearly mentioned that the cost was estimated, and that allottees will have to pay actual cost at enhanced rates as applicable in the future, the allottees are bound to pay enhanced rates.45 Such allottees cannot reopen the contract and demand part of the price or the instalments paid by them.46 The arbitration clause in the tender form binds the parties to the agreement.47 If by act ion on the part of the acceptor, the proposer cannot be restored to his former position, then the acceptor cannot be permitted to say that his acceptance should be treated as other than according to the original proposal. But in the absence of estoppel being applicable, a conditional acceptance
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cannot become absolute acceptance.48 An apparently conditional acceptance may nevertheless be interpreted as an absolute one. The offer of the new contract may be annexed to an absolute acceptance so that there is a concluded contract whether the new offer is accepted or not.49 An acceptance on condition, coupled with an admission that the condition has been satisfied, may be unconditional.50 Nor do the mere use of the words 'to be agreed' in the acceptance prevent it from being binding.51 33 Ram Dev Mool Chand v. Lakshmi Insurance Co. Ltd., AIR 1962 Punj 125. 34 Robitaille v. Madill, [1990] 1 SCR 985 (Supreme Court of Canada) (insurance policy). 35 Union of India v. Gangadhar Mimraj, AIR 1962 Pat 372; Amrit Banspati Co. Ltd. v. Union of India, AIR 1966 All 104. 36 Union of India v. Gangadhar Mimraj, AIR 1962 Pat 372 at 377 (DB). 37 State of Bihar v. Chiranjit Lal Chandha, AIR 1960 Pat 139. 38 Jagdish Prasad Kesharwani v. Fertilizers Corpn. of India Ltd., AIR 1981 Pat 58; Union of India v. Maddala Thathaiah, AIR 1966 SC 1724 distinguished. 39 Deviprasad Khandelwal & Sons v. Union of India, AIR 1969 Bom 163. 40 Claude-Lila Parulekar v. Sakal Papers Pvt. Ltd., AIR 2005 SC 4074, (2005) 11 SCC 73. 41 Kanhaiya Lal Agrawal v. Union of India, AIR 2002 SC 2766, (2002) 6 SCC 315 (tenderer offering concessional rates if tender finalised within shorter period). 42 State of Bihar v. Charanjit Lal Chadhaj, AIR 1960 Pat 139; Faithful Croft v. Benjamin Lumley, 10 ER 1459 at 1468; Sheikh Mohamad Jan v. Munshi Ganga Bishun Singh, [1910] 38 IA 80; Ishaq Abdul Karim v. Madan Lal, AIR 1965 All 34. 43 Amrit Banaspati Co. Ltd. v. Union of India, AIR 1966 All 104; s. 63 below: 'Accord and Satisfaction'. 44 Delhi Development Authority v. Grihsthapana Co-op Housing Society Ltd., AIR 1995 SC 1312. 45 Bareilly Development Authority v. Vrinda Gujarati, AIR 2004 SC 1749, (2004) 4 SCC 606; Chief Adminstrator, PUDA v. Shabnam Virk, AIR 2006 SC 1758, (2006) 4 SCC 74. 46 Shiva Pal Karan Kholi v. State of Uttar Pradesh, AIR 1988 All 268. 47 State of UP v. Combined Chemicals Co Pvt Ltd, 2011 AIR SCW 439, (2011) 2 SCC 151. 48 Union of India v. Babulal Uttamchand Bhundari, AIR 1968 Bom 294. 49 Sir Mohamed Yusuf Ismail v. Secretary of State, (1920) 22 Bom LR 872, 45 Bom 8, 57 IC 971, AIR 1921 Bom 200. 50 Roberts v. Security Co., [1897] 1 QB 111(CA) ; but see Equitable Fire & accident Office v. Ching Wottong, [1907] AC 96 at 101. 51 But an agreement to supply goods described in general terms at a price 'to be agreed' is not necessarily void for uncertainty; for a term may be implied that the goods are intended to be of reasonable quality to be sold at reasonable prices: Hilla & Co. Ltd. v. Arcos Ltd., (1932) 147 LT 503, [1932] All ER Rep 494; Foley v. Classique Coaches Ltd., [1934] 2 KB 1, [1934] All ER Rep 88. (The question is one of construction in each case, and the inclusion of an arbitration clause is in such cases an important element); May & Butcher Ltd. v. R., [1934] 2 KB 17, [1929] All ER Rep 679(HL) ; the Court takes into consideration the fact that the parties believed that they had made a contract, followed on this point in Rajkishor Mohanty v. Banabehari Patnaik, AIR 1951 Ori 291; British Bank for Foreign Trade Ltd. v. Novimex, [1949] 1 KB 623 at 630, [1949] 1 All ER 155(CA) ; The implication of a reasonable sum is assisted if the agreement had been executed on one side.
Acceptance Conditional and not Binding A valid acceptance of proposal must be absolute and unconditional.52 It must extend to all the terms of a proposal.53 If the purported acceptance is conditional or qualified, it does not create contractual relationship. It becomes a counter-proposal,54 which may become a contract on the terms offered by
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the offeree if the proposer accepts it. Such an acceptance would revoke the offer, and the contract cannot be revived on original terms by withdrawing the conditional acceptance.55 A bid can be revoked by notice if it has been accepted provisionally or with conditions.56 An absolute acceptance of an offer does not make a binding contract if it does not extend to all the terms under negotiation or it is merely a provisional arrangement subject to a further agreement to be executed between the parties.57 Where the plaintiff in his tender offered to purchase and remove 1500 MT of damaged food grains declared fit for cattle or poultry, but the defendant conveyed acceptance in respect of the higher quantity of 6200 MT of damaged paddy, it was held that such acceptance of offer was neither absolute nor unconditional and therefore there was no binding contract.58 A company requested the port authorities for lease of certain area in the western side of the port and the port trust indicated readiness to give lesser and different area on certain conditions. There was no concluded contract.59 Where an acceptance sent to a tenderer stated three conditions for his compliance, there was no contract if conditions were not complied within the time stipulated in the conditions.60 The plaintiff's goods were lost due to the negligence of the railways, which sent cheques with a form stating that the plaintiff received them in full and final settlement of the claim. The plaintiff had made clear to the railways that they would be accepting cheques only as part payment. In the suit for recovery of the balance claim, the railways claimed that the amounts were received in full and final settlement in terms of the form, which had been accepted by the plaintiff by encashing the cheque. It was held, applying s. 7, that the acceptance by the plaintiff of the cheques was not absolute and unqualified.61 The original offer of the tenderer clearly contained the term that no security deposit would be made. The Director General of Supplies and Disposals stipulated in clear terms that a sum of Rs 75,000 be deposited as security deposit. The tenderer in a telegram extended the period for acceptance of the original offer that no security deposit shall be made. It was held that there was no unconditional acceptance of the counter-offer made by the Director General of Supplies and Disposals and hence no contract was concluded between the parties.62 Where an offer was made for the purchase of certain goods which were to be ordered out from Europe, an acceptance 'free Bombay Harbour and interest,' being a term not contained in the offer, was held to be no acceptance within the meaning of this section.63 Where a cheque for an amount was received by the defendant subject to finalisation of the lease deed as per the terms and conditions indicated by the defendant, it was held that no concluded contract came into existence and the plaintiff was entitled to the refund of the amount with interest.64 Where an agreement for sale was subject to ratification by the co-heirs, such ratification was condition precedent for formation of the contract.65 A reply of 'I am making the necessary arrangement' to a counter-proposal, was not an acceptance.66 Where the proposal contains a condition, the offeree is not bound to accept at all. An auction purchaser of evacuee property repudiated his liability on the ground that the area of the property auctioned was less than the area represented at the time of sale. The authorities did not accept his proposal that he was prepared to accept the property if price were proportionately reduced. The sale was cancelled and the property was resold at a higher price. The auction purchaser could not contend that his sale should not have been cancelled. The authorities were not bound to accept his conditional proposal of reduction in price.67 When a party makes a composite offer, each part being dependant upon the other, another party cannot, by accepting a part of the offer, compel the other to confine its dispute to the accepted part.68 52 Jawahar Lal Barman v. Union of India, AIR 1962 SC 378. 53 Dhulipudi Namayya v. Union of India, AIR 1958 AP 533. 54 See below 'Counter-Proposal'.
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55 See above s. 6 'Rejection of Proposal'. 56 Abdul Rahim Khan v. Union of India, AIR 1968 Pat 433. 57 Dhulipudi Namayya v. Union of India, AIR 1958 AP 533; Hussey v. Horne-Payne, [1879] 4 AC 311, [1874-80] All ER Rep 716; Winn v. Bull, [1877] 7 Ch D 29. 58 Suraj Besan and Rice Mills v. Food Corpn. of India, AIR 1988 Delhi 224 at 228; Technocom v. Railway Board, AIR 2009 Pat 15 (acceptance of part of tendered work only). 59 Visakhapatnam Port Trust v. Bihar Alloy Steels Ltd., AIR 1991 AP 331 at 339. 60 Kerala Financial Corporation v. Vincent Paul, AIR 2011 SC 1388, (2011) 4 SCC 171. 61 Union of India v. Babulal Uttamchand Bhandari, AIR 1968 Bom 294. 62 Zodiac Electricals Pvt. Ltd. v. Union of India, AIR 1986 SC 1918, (1986) 3 SCC 522 at 526. 63 Haji Mohamed Haji Jiva v. E Spinner, (1900) 24 Bom 510; Kundan Lal v. Secretary of State, AIR 1939 Oudh 249, 183 IC 597. 64 J K Industries Limited. v. Mohan Investments & Properties Private Ltd., AIR 1992 Del 305 at 311. 65 MV Shankar Bhat v. Claude Pinto (Dec) By LRs, AIR 2004 SC 636. 66 Sir Mohamed Yusuf Ismail v. Secretary of State, (1920) 22 Bom LR 872, 45 Bom 8, 57 IC 971, AIR 1921 Bom 200. 67 Bhagat Ram Batra v. Union of India, AIR 1976 SC 2128 at 2129. 68 General Assurance Society Ltd. v. Life Insurance Corpn. of India, AIR 1964 SC 892, [1964] 5 SCR 125.
Condition Precedent and Subsequent Where acceptance is made, for example, subject to payment of deposit, planning, consent, confirmation, ratification or approval of third party; a question may arise whether such acceptance is conditional, and therefore not binding on the offeror. This would depend upon whether such a condition is a condition precedent to the formation of the contract. If it is, there is no contract. If not, it may be a condition precedent to performance, or a promissory condition. The acceptance in such cases is unconditional and results in a contract. Whether it is the one or the other is a matter of interpretation.69 Where letters of intent were issued on the term that the contractor would sign the contract and would furnish irrevocable bank guarantee of a scheduled bank; which the contractor failed to do, it was held that the two conditions were conditions precedent to the formation of the contract,70 and the revocation of the letters of intent was valid.71 Where while accepting the tender on behalf of the President of India, the Chief Engineer, Eastern Command required the plaintiff to deposit a further sum of additional security, it was held that the acceptance was unconditional, and required deposit of further sum after the tender was accepted and the contract concluded. The plaintiff was therefore not entitled to refund the amount of deposit.72 A tender for supply of oil contained conditions:
(a) (b)
that on acceptance of the tender, the contractor shall at the option of the Secretary, Department of Supply, and within the period specified by him, deposit with him the security deposit therein specified; and if the contractor is called upon to deposit security and the contractor fails to provide the security within the period, such failure will constitute a breach of the contract or/and the
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Secretary shall be entitled to make other arrangements at the risk and acceptance of the contractor. The tender was accepted by a letter stating that the tender had been accepted 'subject to your depositing 10 per cent as security'. It was argued that the letter converted the condition about deposit to one of condition precedent and hence it was no acceptance, and there was no contract. It was held that a contract was concluded as the condition was a condition subsequent.73 A contract to purchase several tons of iron scrap from the Government was concluded on acceptance of the purchaser's tender. The condition of payment of price did not make the contract conditional.74 Acceptance intimated by fax stating 'regular purchase order follows' concluded the contract, and other conditions about joint signature of the tenderer or collaborator or furnishing bank guarantee were conditions subsequent. The fax was neither a conditional acceptance nor a counter-offer.75 The conditions of the offer cannot be waived except by a competent authority. Where the conditions of the tender required the tenderer to make a deposit, an acceptance of the same without insisting upon the deposit was not valid, and there was no contract. No material was placed before the Court whether the person giving the acceptance had authority to waive this condition.76 Where an acceptance incorporates conditions, it must be shown that the conditions are fulfilled, if the acceptance is to be binding.77 69 S Kumar's Associates AKM (JV) v. South Eastern Coalfield Ltd, AIR 2013 Chhat 19(DB) (acceptance conditional on payment of security deposit). 70 Rickmers Verwaltung GmbH v. Indian Oil Corpn., AIR 1999 SC 504, (1999) 1 SCC 1. 71 Rajasthan Co-op Dairy Federation Ltd. v. Maha Laxmi Mingrate Marketing Service Pvt. Ltd., (1996) 10 SCC 405. 72 Sardar Sucha Singh v. Union of India, [1987] SCC 127(Supp) . 73 Jawahar Lal Barman v. Union of India, AIR 1962 SC 378; D Wren International Ltd. v. Engineers India Ltd., AIR 1996 Cal 424. 74 Deviprasad Khandelwal & Sons v. Union of India, AIR 1969 Bom 163. 75 D Wren International Ltd. v. Engineers India Ltd., AIR 1996 Cal 424. 76 State of Madhya Pradesh v. Firm Gobardhan Dass Kailash Nath, AIR 1973 SC 1164. 77 L K Trust v. EDC Ltd, AIR 2011 SC 2060, 2011 (6) SCC 780.
Counter-Proposal An acceptance with a variation in terms of the proposal or with a qualification is a counter-proposal,78 which must be accepted by the original offeror before a contract is made.79 Thus where a bank did not sanction the full amount of the loan applied for, and the borrower proceeded to sign documents of loan, there was a contract for repayment of the loan sanctioned.80 It is a counter-proposal where the acceptance contains conditions,81 or refers to future negotiations for finalisation of more terms,82 or requires compliance of further requirements.83 When accepted, it becomes a contract on the terms of the counter-proposal. If acceptance is made conditional, it amounts to rejection of the original offer and no concluded contract comes into existence.84 A municipality passed a resolution agreeing to renew the lease of the lessee on his paying the upset price and annual rent within the specified time. The lessee appealed to the minister but failed and then seven years later, he paid part of the money and agreed to the rest being paid in instalments, which was accepted by the municipal commissioner. But the Supreme Court held that the commissioner had no authority to do so in view of the municipality's resolution. Thus, there was a fresh offer and no contract came into existence.85 The offeree requested a tenderer to
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extend time of validity, in response to which the tenderer put a condition of reduction in rebate. Purported acceptance of the original tender did not create a contract.86 On voluntary offer made by a breweries company to supply certain quantity of rum to the army as a gesture of goodwill and not pursuant to any tender inquiry, the Government, while purporting to accept offer of the company to supply rum, issued a letter of acceptance of tender containing an arbitration clause and a default clause. The company however, never signed nor sent any acknowledgment of the receipt of the letter of acceptance of tender. It was held that the letter of acceptance of tender sent by the Government amounted in law, to a counter-offer, which was not accepted by the company as it had not signed the acknowledgment attached to it and mere payment of security deposit as per the letter did not amount to implied acceptance of all terms and conditions thereof.87 A tender was submitted with special conditions annexed to the tender. The letter of acceptance stated that it was subject to general conditions. Work commenced. It was held that the letter of acceptance was a counter-offer, and the contractor having acted upon it, it was accepted; and that the special conditions did not form part of the contract.88 A tenderer who continued to supply although the supply order did not conform to the tender conditions, was bound by the terms of the supply order.89 An original proposal stands rejected and gets superseded by the counter-proposal made by the other party, and will not revive even if the maker of the proposal rejects the counterproposal. The offeree cannot revert to the original offer and purport to accept it.90 If the offer is accepted but another term, e.g. of price, is introduced, the original offer is destroyed and cannot be accepted unless renewed.91U purchased tender documents for certain works. I approached U for joint participation. Draft agreement was prepared imposing joint responsibility in completing the work. I made material changes in the draft placing unilateral responsibility on U. U did not communicate further, but submitted the tender, and later withdrew it. In an action by I for breach, it was held that the conduct of U of submitting unilateral tender did not amount to acceptance of the counter-offer of I, and there was no concluded contract.92 Acceptance of Counter-proposal Acceptance of a counter-offer creates a binding contract. A vendor did not accept the buyer's proposal but made a counter-proposal for a higher price with a condition for an advance. The buyer sent the advance along with the letter of acceptance. There was a concluded contract.93 In such a case, the acceptance with the qualification is in its nature a counter-proposal, which, if accepted by the proposer, would constitute an agreement.94A letter accepting only the general conditions and not the special conditions given with the invitation to tender, is not an acceptance, but a counter-proposal. A contract is concluded if the counter-proposal is act ed upon, and then the special conditions are not part of the contract.95 However, if the counter-offer is made proposing changes in respect of only some of the terms of the proposal, and these are accepted, the original offer stands accepted subject to modifications made by the counter-offer.96 The sellers gave the buyers quotations for the sale of their machine tools and the terms and conditions included two clauses: (a) a price variation clause providing price ruling on the date of delivery; and (b) the terms and conditions in that letter to prevail over terms and conditions in the buyer's orders. The buyers placed an order with terms and conditions materially different from that of the sellers with no price variation clause. At the foot of the order, there was a tear-off acknowledgment of receipt of order with the words 'we accept your order on the terms and conditions stated thereon'. When the goods were ready and delivered, the price had gone up and the sellers demanded higher price. The buyers paid the price quoted and the sellers brought an action for the balance. The Trial Court upheld the claim but the Court of Appeal, basing its decision on the analysis of 'offer and acceptance', reversed the judgment for the reasons; first, that the buyer's order was a counter-offer, and the sellers by completing and sending the tear-off acknowledgment had accepted the counter-offer and could not claim the increase in price; and secondly, that the documents had to be
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read as a whole and the tear-off acknowledgment was the decisive document.97 78 Haji Mohamed Haji Jiva v. E. Spinner, (1900) 24 Bom 510(DB) ; Rao Girdhari Lal v. Societe Belge de Banque SA, AIR 1938 Lah 341. 79 Kundan Lal v. Secretary of State, (1939) 14 Luck 710, 183 IC 597, AIR 1939 Oudh 249; Haji Mohamed Haji Jiva v. E. Spinner, (1900) 24 Bom 510 at 523. In the latter case, the plaintiff maintained that the additional term was already implied in the offer by a previous course of dealing or otherwise. The defendant maintained that there was a contract without that term. The Court held that there was no contract at all. 80 Kalpana Das v. Contai Co-op Bank Ltd., AIR 2005 Cal 95 81 Chhotey Lal Gupta v. Union of India, AIR 1987 All 329; South British Insurance Co. Ltd. v. JR Stenson, AIR 1928 Bom 260 (an insurance policy containing the condition that no insurance shall be deemed to have been effected until the premium in full was paid); Benarsi Debi v. New India Assurance Co. Ltd., AIR 1959 Pat 540 (acceptance of insurance proposal on condition that first premium thereunder should be paid within 30 days); Claridges Infotech Pvt. Ltd. v. Surendra Kapur, AIR 2009 Bom 1 (plaintiffs should have confirmed offer first). 82 Satya Prakash Goel v. Ram Krishan Mission, AIR 1991 All 343; Motilal Manshi Shah v. Suryakant Sheth, AIR 2006 Bom 246. 83 Sindhu Resettlement Corporation Ltd v. Shree Om Commercial Coop Society Ltd, App from Order 240/2012 decided on 4 Mar 2013 (Guj). 84 Chhotey Lal Gupta v. Union of India, AIR 1987 All 329; Badri Prasad v. State of Madhya Pradesh, AIR 1970 SC 706; Uttar Pradesh Rajkiya Nirman Nigam Ltd. v. Indure Pvt. Ltd., AIR 1996 SC 1373, (1996) 2 SCC 667(material terms deleted from draft of agreement). 85 Badrilal v. Municipal Corpn. of Indore, AIR 1973 SC 508 at 510, [1973] 3 SCR 15. 86 DS Constructions Limited v. Rites Limited, AIR 2006 Del 98. 87 Union of India v. Mohan Meakin Breweries Ltd., AIR 1988 NOC 33(Del) . 88 Heavy Engineering Corporation Ltd. v. Crompton Greaves Ltd., AIR 1972 Cal 217 at 220. 89 Security Printing and Minting Corpn. of India Ltd. v. Gandhi Industrial Corpn., (2007) 13 SCC 236. 90 Trollope & Colls Ltd. v. Atomic Power Construction Ltd., [1963] 1 WLR 333 at 339, [1962] 3 All ER 1035(Megaw J.) . 91 Moolji Jaitha & Co. v. Seth Kirodimal, AIR 1961 Ker 21. 92 Uttar Pradesh Rajkiya Nirman Nigam Ltd. v. Indure Pvt. Ltd., AIR 1996 SC 1373, (1996) 2 SCC 667. 93 Byomkesh Banerjee v. Nani Gopal Banik, AIR 1987 Cal 92. 94 Muralidhar Jalan Chandra Chatterjee v. Paresh, AIR 1947 Cal 14, 228 IC 260. 95 Heavy Engineering Corpn. Ltd. v. Crompton Greaves Ltd., AIR 1972 Cal 217. 96 Fair,Air Engineers Pvt. Ltd. v. NK Modi, (1996) 6 SCC 385 (counter-offer concerning only technical aspects of the detail offer). 97 Butler Machine Tool Co. Ltd. v. Ex-Cell-O Corpn. (England) Ltd., [1979] 1 All ER 965 at 967; Hyde v. Wrench, (1840) 3 Beav 334; Brogden v. Metropolitan Railway Co., [1877] 2 AC 666 applied.
Battle of Forms It is quite frequent in commercial transaction that both the offeror, when making the offer, and the offeree when accepting it, each seek the contract on their own standard terms. If the offeror does not expressly accept the offeree's standard terms, the question arises whether a contract is at all concluded, and if so, on which or whose terms. In response to the offer of a party, the offeree may signify his acceptance 'on his own standard terms' or 'usual conditions'. The acceptance is really a counter-proposal, the original offeror is not bound to
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accept. His accepting of goods or services would constitute acceptance of the standard terms. In some cases, each party may support the contract with reference to its own standard terms which may conflict. If the general rules of offer and acceptance were strictly applied, there would either be no contract, or a contract on the basis of the acceptance of the 'last shot' fired. Where the plaintiffs delivered a consignment of whisky to the defendants for storage and the delivery note incorporated the plaintiffs' conditions of carriage, and the defendants stamped it with a note that it was received under the defendants' conditions, it was held that the latter amounted to a counter-offer which the plaintiffs accepted by handing over the goods and therefore the contract incorporated the defendants' conditions.1 This is the 'last-shot' doctrine--the contract finalises on the terms of the party who fired the last shot, the terms contained in the final document in the series of correspondence. In Butler Machine Tool Co. Ltd. v. Ex-Cell-O Corporation (England) Ltd., 2 The seller offered to supply a machine on terms stated which 'shall prevail' over any terms of the Myers, and which included a 'price escalation' clause under which the price was payable on the basis of price 'ruling upon the date of delivery'. The buyers placed an order on a form containing their own terms which differed from those of the seller, and stated that the price was fixed. This form contained a tear-off slip which was to be signed by the seller and returned to the buyer, and which stated that the sellers accepted the order 'on the terms and conditions stated therein'. The sellers signed and returned the slip stating that they were executing the order on the terms of their own offer. The sellers sought to invoke the price escalation clause. The buyers protested claiming that the contract had been concluded on their terms. The contract was held to be concluded on the buyer's terms. The sellers' communication was held to be an acceptance of the buyers' counter-offer contained in the tear-off slip. The sellers' reply referring to execution in terms of their own offer did not prevail, though being the 'last shot'. The reference to their own terms in this last letter was interpreted to mean not all the terms, but to the extent they identified the subject-matter. This result was achieved despite the sellers' first offer stating that their conditions would prevail. The Court of Appeal applied the traditional approach of analysing the contract on the basis of offer, counter-offer and acceptance. It has been suggested that if the sellers had reiterated that they would supply on the entire terms of their own offer, there would have been no contract.3 The 'last shot' approach has been criticised on the ground that it would encourage businessmen to fire salvos of standard forms at each other with a hope to fire the last shot and induce express or implied acceptance.4 The operation of the doctrine depends on chance and can be arbitrary. The outcome may belie the expectations of the parties; they may believe that a contract is made, and the Court may decide there is no contract.5 A minor departure from this rule has been suggested, where if the offeror who has received an acceptance with additional terms not materially altering the terms of the offer does not object to the discrepancy, the terms of the contract consist of the terms of the offer subject to the modifications contained in the acceptance. This puts the burden of objecting to the additional terms upon the offeror, and would preserve the agreement, and in effect the expectation of the parties.6 Where goods have been delivered and accepted before the finalisation of terms, as in the Butler Machine Tools case above, the delivery and acceptance may be considered as a new contract which is in neither set of written terms, but on ordinary implied terms, which would operate in the absence of agreed express terms, together with any further terms which the judge feels should be implied in the particular circumstances.7 Yet Tekdata Interconnections Ltd. v. Amphenol Ltd., 8 the Court of Appeal stressed that &uot;the traditional offer and acceptance analysis must be adopted unless the documents passing between the parties and their conduct show that their common intention was that some other terms were intended to prevail&uot;,9 or there was a clear course of dealing between the parties. This approach provides &uot;a degree of certainty which is both desirable and necessary in order to promote effective commercial relationships&uot;10 The court viewed that the traditional analysis should not be displaced unless there were sufficiently strong circumstances to do so.
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The 'last shot' doctrine would be appropriate if the parties have expressly indicated that their own standard terms shall be adopted. But on other occasions, parties may refer to their own standard terms automatically, namely, by exchanging printed order or acknowledgment of order forms, and very often without being aware of the terms set out in them. Once performance of the contract has commenced the parties should not be allowed to question the formation of contract. The solution may lie in the 'knock-out' doctrine, where a contract is concluded on the basis of the agreed terms and of any standard terms which are common in substance. The operation of this doctrine may be excluded by clearly indicating in advance, or by later document that it does not intend to be bound by any terms except its own,11 or a clear course of dealing between the parties.12 The Uniform Commercial Code13 makes an exception to the 'mirror image' rule in contracts for sale of goods made by exchanging forms. Where the forms sent by the buyer and seller do not agree in entirety, the Code provides that an acceptance is generally effective and contract created, even though the form containing the acceptance has terms additional to or different from those contained in the offering form. This is in consonance with the parties intentions and practices. This doctrine may not exactly fit within the four corners of the provisions of formation of contract prescribed in the Contract Act . 1 British Road Services Ltd. v. Arthur V Crutchley & Co. Ltd., [1968] 1 All ER 811 ('last shot' doctrine); see also OTM Ltd. v. Hydranautics, [1981] 2 Lloyd's Rep 211; Muirhead v. Industrial Tank Specialities Ltd., [1986] QB 507 at 530, [1985] 3 All ER 705(CA) ; Port Sudan Cotton Co. v. Govinda Swamy Chettiar Sons, [1977] 2 Lloyd's Rep 5. 2 [1979] 1 All ER 965, [1979] 1 WLR 401. 3 Chitty on Contracts, 28th edn., p. 105, para 2-034. 4 Rick Rawlings, (1979) 42 Modern Law Review 715. 5 Anson's Law of Contract, 29th edition, 2010, p. 42. 6 Anson's Law of Contract, 29th edition, 2010, p. 42, the Vienna Convention on the International Sale of Goods, Art 19; Gibson v. Manchester City Council, [1978] 2 All ER 583, [1979] 1 WLR 294; disapproving this approach suggested by Lord Denning MR in Butler Machine Tools Co. Ltd. v. Ex-Cell- O Corpn. (England) Ltd., [1979] 1 All ER 965, [1979] 1 WLR 401. 7 PS Atiyah, An Introduction to the Law of Contract, 15th edn., p. 70. 8 [2009] EWCA Civ 1209. 9 Tekdata Interconnections Ltd v. Amphenol Ltd., [2009] EWCA Civ 1209 per LJ. Longmore. 10 [2009] EWCA Civ 1209 per LJ. Dyson. 11 UNIDROIT Principles, Art 2.22. 12 Tekdata Interconnections Ltd. v. Amphenol Ltd., [2009] EWCA Civ 1209. 13 UCC, Art 2-207.
Post Acceptance Negotiations and Conduct If one party submits a document or documents containing terms after the making of the contract, it will not affect the existence of the contract. The new terms will become part of the contract only if they are accepted as a variation, either expressly or by conduct, namely, acceptance of goods. The plaintiff entered into a contract with the defendant for supply of glazed windows of approved design at a particular rate. After a part of the contract was performed, the defendant asked the plaintiff to supply panelled windows, for which the plaintiff demanded enhanced rates, to which the defendant never agreed. The new windows were supplied. It was held that there was no agreement for enhanced rates, as the rates for the new windows were never settled.14
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Where a complete contract was formed by unqualified acceptance of an offer at a certain date, subsequent negotiations will have no effect unless they amount to a new agreement.15 A concluded contract for the sale of a tank of oil is not affected by the subsequent demand of dharmada or a future term about time of dispatch of the wagon, sought to be imposed by the buyers. The agreement of parties as to the terms of a contract can be proved not only by their words, but also by their conduct in accordance with the maxim non refert an quis assensum suum praefert verbis, aut rebus ipsis et factis. An acceptance without qualification or condition concludes the contract. Fresh negotiations regarding other terms will not affect the main contract so concluded.16 A new collateral term annexed to an acceptance of a contract does not affect the original contract accepted absolutely.17 14 State of Punjab v. Hindustan Development Board, AIR 1960 Punj 585 (contractor was entitled to payment under s. 70 of the Act). 15 Perry v. Suffields Ltd., [1916] 2 Ch 187, [1916-18] All ER Rep Ext 1325(CA) ; Jainarain Ram Lundia v. Surajmull Sagarmull, (1949) FCR 379, 51 Bom LR 979, AIR 1949 FC 211; Hindustan Construction Company v. State of Bihar, AIR 1963 Pat 254 at 260; Dhulipudi Namayya v. Union of India, AIR 1958 AP 533; Tamil Nadu Electricity Board v. N Raju Reddiar, AIR 1999 SC 2025, (1996) 4 SCC 551 (no document in support of after-tender discussions and its acceptance). 16 Laxmi Ginning and Oil Mills v. Amirit Banaspati, AIR 1962 Punj 56. 17 Dhulipudi Namayya v. Union of India, AIR 1958 AP 533.
Waiver of Conditions of Offer Where an essential condition of the tender is not complied with, it is open to the person inviting the tender to reject the same.18 A contract may however be concluded even if the tender, instead of being rejected, is accepted without the security deposit required to be made with the tender, as such condition may be waived.19 However, mere issuing of work order in response to the tender did not conclude any contract where the tenderer intimated after opening the tender that he would accept the work order only if the suggested term relating to the revision of rates is incorporated in the agreement.20 Any such condition may be waived only with proper authority. Where the tender was accepted by the Chief Conservator of Forests without the deposit of 25 percent, required to be deposited under the rules with the submission of the tender, there was no contract as the Chief Conservator could not waive the condition.21 A condition in the tender notice requiring the tenderer to submit documents along with the tender is not a condition precedent. This condition could be relaxed and the tenderer would be required to submit documents later, else have the offer cancelled.22 A condition in a contract of insurance that the insurer would be liable only on the insured paying premium, being for the benefit of the insurer, could be waived by the insurer.23However, under s. 64VB of the Insurance Act, 1938 (inserted in 1968), an insurer is prohibited from undertaking risk or issuing a policy from a date before the payment is received or is guaranteed. Acceptance in the Sale of Land Subject to Investigation of Title An apparently conditional acceptance may be a mere expression of what the law implies. Under the English law, if an offer to sell land is accepted 'subject to the title being approved by our solicitors' it specifies the claim of the purchaser's common right of investigating the title with professional assistance and refusing to complete if the title proves bad.24 These words are a safeguard against it being supposed that the title was to be accepted without investigation. They merely assert that the title must be investigated and approved in the usual way, which would be by the solicitor of the purchaser. This is a condition, not of acceptance, but of the contract itself, and does not prevent the agreement
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being enforceable. The condition 'subject to the purchaser's solicitor's approval of the title' imports an addition to the obligation to make good title implied by law.25 It is submitted that a term such as 'subject to approval of title by the purchaser's solicitors' imports an addition to the obligation to make good title and is satisfied if the vendor proves that the solicitors did approve of it or the title tendered was such as it made it unreasonable not to approve it.26 Yet in another case, an agreement to grant a lease on approval by a party's solicitor may be construed as being merely a safeguard to ensure that the lease embodies the terms of the agreement and does not contain unusual stipulations.27 Where an agreement of sale of a lease is 'subject to the purchaser's solicitor approving the lease' the contract is conditional.28 It has been held that the lessor is bound to give the lessee a good title free from reasonable doubt, and where a prospective lessee demands title deeds from the prospective lessor for investigation and approval, it cannot be said that there is a final and concluded agreement. In this case, the Court found that the plaintiff did not intend any final lease being made until a good title had been made and until it had been approved by the plaintiff's solicitors, after investigation. This, it is submitted, was a case on its own facts.29The Indian Courts also adopt the view that an agreement containing such a provision is not a mere surplusage, or a clause meaning no more than what ss. 25(1) of the Specific Relief Act, 1963 or 55(2) of the Transfer of Property Act, 1882 imply, but the fulfilment of such condition is necessary for enforcement of contract. If not assented to by the vendor, there is no concluded contract.30 A provision in an agreement for the sale of the house that 'on approval of the title by the purchaser's solicitor, the purchase money should be paid' does not have the effect of making the completeness of the agreement, conditional upon the approval of the title by the solicitor, but of simply fixing the time for the payment of the purchase money without waiting for a conveyance.31 Acceptance Subject to Confirmation or Approval Where an offer is accepted, subject to confirmation or approval, a question arises whether acceptance is complete on the provisional or conditional acceptance, or subsequently when the confirmation or approval is given. In Chitibobu Adenna v. Garimalla Jaggarayadu, 32D, a bidder for a piece of land, was given notice of X's acceptance of his bid 'subject to the approval and orders of the special agent V'. V did approve, and a document embodying his approval was drawn up, but was not communicated to D, and in the meantime X sold the land to P. P sought to eject D, relying on s. 4, but the Court held in favor of D on the ground that the contract was complete on the fulfilment of the condition subsequent. The same Court in Somasundaram Pillai v. Provincial Government of Madras 33 held that a bidder could retract his bid before the final acceptance or confirmation. In this case, the selling officer had no power under the rules to accept the bid, and the Court termed the acceptance as 'provisional'. In Rajanagaram Village Co-op Society v. VP Veerasami Mudaly 34 property was knocked down to P, the highest bidder at an auction, 'subject to the approval of the CD bank'. The bank passed a resolution accepting the bid, but rescinded it before it was communicated to P. The Court nevertheless gave specific performance in favour of P, on the ground that communication of acceptance twice was not needed, once when the conditional acceptance was given and again when the condition was fulfilled. The question of authority of the selling officer was not raised. In the last case, S. Rao J. drew a distinction between a provisional and conditional acceptance.35 According to him, an acceptance was provisional when the auctioner had only a right to receive the bids and pass them on to his superior and he acted merely as a conduit pipe, like the sub-collector in the Somasundaram case mentioned above. But if the offeree had the full power to accept the offer, yet gave only a qualified acceptance, although the offeree was not finally bound, the offeror could not withdraw his bid. In Chitibobu's case (above), the condition was not a condition subsequent. A condition subsequent
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predicates a pre-existing obligation, which is to terminate upon the occurrence of some event. It is a resolutive condition, as distinct from a suspensive condition or condition precedent, which prevents the existence of any obligation until the condition is satisfied. Yet the Court clearly decided that there was no binding agreement at any rate until V, the special agent, approved. In other words, the Court held that the condition was a condition precedent, for had the condition been a condition subsequent, there would have been a binding contract the moment D's bid was accepted, liable to be defeated by V's failure to approve. Appropriate wording to impose a condition subsequent would have been to the effect that the bid was accepted, but if V should not approve the contract was to be at an end. If the bidder could have retracted the bid before the final acceptance, it was a condition precedent in both the Chitibobu and Rajanagaram cases. An acceptance is either absolute or conditional. There is no halfway ground between the two. If an acceptance is conditional, the offeror can withdraw at any moment until absolute acceptance has taken place.36 The distinction drawn in Rajanagaram case between provisional and conditional acceptance creates a half-way acceptance between absolute and conditional acceptance, the offeree has full power to accept, yet gives a qualified ('conditional') acceptance, and though the offeree is not finally bound, the offeror cannot withdraw his offer. The Patna High Court disagreed with the distinction between 'provisional' and 'conditional' acceptance and held that a provisional acceptance is not acceptance, because the real acceptance was yet to come.37 In Union of India v. Bhimsen Walaiti Ram, 38 the rules provided that the final bid would be subject to confirmation, and the contract not complete till the bid was confirmed. The Supreme Court held that if the acceptance of a bid in an auction sale by the sale officer or auctioneer was subject to confirmation by a superior authority, there was only a provisional or conditional acceptance, and the bidder would be bound only after such confirmation was given.39 This would be so even despite an endorsement in the bidding list by the officer conducting the auction that the sale has been concluded in favour of the highest bidder.40 The highest bidder will not have any right under the sale unless the bid is so approved or confirmed,41 although he may have deposited part of the price according to the conditions of the auction.42 The successful highest bidder will not be liable for loss incurred on account of the shortfall in price at the re-auction ordered after his failure to deposit the prescribed minimum amount, if his bid has not been sanctioned by the Excise Commissioner.43 Where the authority has not confirmed, the bidder cannot challenge the settlement made by the Government in favour of a third party.44 In the auction for tehbazari dues, it was knocked down to a bidder and affirmed by the municipal committee. That constituted a contract and was binding on the parties.45 The contract is concluded on the approval of the competent authority to the acceptance of the bid, and the auction purchaser takes the risk of the loss of goods by fire if the property in the goods has passed under the contract.46 In Haridwar Singh v. Bagun Sambrui, 47 pending confirmation of the petitioner's bid by the Government, he gave a fresh bid at reserve price. The fresh bid was confirmed by the Government and informed to the Conservator of Forests for further communication to the District Forest Officer. It was never communicated to the petitioner. The Government accepted the tender of another bidder who bid higher than the petitioner. It was held that the petitioner's first bid was not confirmed and hence never accepted absolutely, and stood revoked by his second bid. There was no contract between the petitioner and the Government. Where the acceptance is subject to approval or confirmation, the contract becomes binding on the confirmation or approval being given, and communication of such approval or confirmation is not again necessary.48 The offeror can revoke his offer until the confirmation, or approval, subject to which the acceptance has been given.49 There is no contract until such confirmation or approval is given,50 or if the higher officer or authority does not confirm or approve.51 Acceptance Subject to Formal Document Where it is contemplated that a formal document shall follow the offer and acceptance, the effect of
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such stipulation depends on whether the parties regard the offer and acceptance as sufficient to conclude the contract and intend the document to be a record of this contract, or they regard it as incomplete and do not intend it to be legally binding until the terms of the formal document are agreed and the document is duly executed in accordance with the terms of the agreement. Where parties use express words 'subject to contract' it will take strong and exceptional evidence to override the prima facie meaning of these words.52 In deciding whether a contract is a concluded contract or not, the essential question is to find out whether the formal document is of such a nature that it was the very condition of the contract or whether it was commemorative of the evidence on the point.53 In order to decide this matter, the entire negotiations, and the correspondence on which the contract depends, must be considered.54 It is a matter of construction whether the execution of a further contract is a condition of the contract or a mere expression of a desire of the parties as to the manner in which the transaction already agreed to will go through.55 Where a clause in the tender required the tenderer to execute the formal agreement by a specified date, else be liable for forfeiture of earnest money, the execution of agreement was a condition precedent to the contract.56 The fact that the parties refer to the preparation of an agreement by which the terms agreed upon are to be put in a more formal shape, does not prevent the existence of a binding contract.57 Thus a contract was made upon acceptance of tender, even if the tenderer is required to execute an agreement after acceptance of his tender.58 But there may be cases where the signing of a further formal agreement is made a conditional term of the bargain and if the formal agreement is not approved and signed, there is no concluded contract.59 A provisional allotment expressly stating to confer no rights until issue or signature of further document does not confer any right on the offeror to insist on the rights under the proposed contract.60 Parties are free to provide that the agreement shall not be complete and operative until its terms are reduced into writing, or are embodied in a formal document, and that it is a question of interpretation whether they have done so or not. Where, however, there is no such stipulation, express or implied, the mere circumstances that the parties intend to put the agreement into writing or in a formal instrument will not prevent the agreement from being enforced, assuming, of course, that an agreement otherwise complete and enforceable is proved.61Thus a document mentioning some terms with an express statement that it was a tentative draft for discussion, was nevertheless enforceable, where no further documents were contemplated, it was signed after resolutions made by board of directors, and was act ed upon by parties.62 Where there is no precise clause for reservation, but the acceptance is not obviously unqualified, it becomes a question of construction whether the parties intended that the terms agreed on should merely be put into form,63 or whether they should be subject to a new agreement, the terms of which are not expressed in detail,64 and this must be determined by examination of the whole of a continuous correspondence or negotiation. It will not do to pick out this or that portion which, if it stood alone, might be sufficient evidence of a contract.65 If the signing of a further contract is a condition of the terms of the bargain, there is no enforceable contract, either because the condition is unfulfilled, or because the law does not recognise a contract to enter into a contract. If the condition is a mere expression of the desire of the parties about the manner in which the original agreement should be performed, there is a binding contract, and reference to the formal document may be ignored.66 An endorsement on a receipt for price of property contained a term that an agreement of sale on stamp paper was to be executed within 15 days. This was a condition for the bargain, and the mere receipt was not a concluded contract.67 There was a concluded contract when the vendor agreed to sell and the purchaser agreed to purchase the property even though a clause in the agreement imposed a liability on the vendor to execute the sale deed within a certain time.68 Parties may even be bound by an oral agreement, although there is a reference to execution of formal contract.69 Where parties intend making of a formal contract, it may be evidence to show that they did not intend
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the previous negotiations to amount to any contract. This circumstance is however not conclusive, and they will be bound by the previous agreement 'if it is clear that such an agreement has been made'.70 Where the proposal is absolutely and unequivocally accepted, it binds the parties, and the non-execution of a formal document cannot absolve them of their engagement.71 In Kallipara Sriramulu v. T Awastha Narayana 72 the drawing up of a written agreement was not shown as a pre-requisite to the coming into operation of the oral agreement to sell. However, where tender of supply of cloth was accepted by Punjab State Electricity Board by a telegram and the purchase order was issued, it was held that it could not be successfully contended that in the absence of any regular document showing the execution of the agreement between the parties, there was no completed contract between them.73 The terms of a contract have retrospective application if the parties during negotiations act on that understanding and in the anticipation that on the contract being made it would govern what was being done.74 A letter attached to the tender of a controller that the tender was subject to adequate supply of labour being available as and when required, was held not to have been incorporated in the contract in Davis Contractors Ltd. v. Farenham Urban District Council, 75 as it was not listed in a clause of the formal contract. Acceptance and Article 299 of the Constitution of India Article 299 requires that all contracts made in the exercise of the executive power of the Union or of a State must be executed by a person duly authorised by the President or Governor, as the case may be, on behalf of the President or Governor, and expressed to be made by the President or Governor.76 In the contract governed by Art. 299 of the Constitution, there can be a contract by correspondence and the execution of the formal document is not absolutely essential provided the other conditions of the Article are satisfied,77 in the absence of any direction by the President or Governor under the Article prescribing the manner of entering into contracts.78 Letter of acceptance signed by the authorised officer on behalf of the President of India is a valid acceptance to conclude the contract.79
...a valid contract may result from correspondence if the requisite conditions are fulfilled. .. Section 175(3)80 uses the expression 'executed' but that does not by itself contemplate execution of a formal contract by the contracting parties. A tender of purchase of goods in pursuance of an invitation issued by or on behalf of the Governor General of India and acceptance in writing which is expressed to be made in the name of the Governor General of India and is executed on his behalf by a person authorised in that behalf would conform to the requirements of Section 175(3).81
Where the letter accepting a tender neither mentioned the fact of acceptance, nor purported to be signed on behalf of the President of India as required under Art. 299 of the Constitution of India , no contract was concluded between the tenderer and the Government.82 Acceptance and Contracts of Insurance A contract of insurance, like any other contract, is concluded by offer and acceptance. Acceptance may be expressed in writing or it may even be implied if the insurer accepts the premium and retains it. Mere receipt of proposal form premium by the insurer does not make a contract, the insurer must accept the risk, take steps to underwrite the risk and issue the policy.83In the case of the assured, a positive act on his part by which he recognises or seeks to enforce the policy amounts to an affirmation of it.
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In a case where the amount of premium initially fixed was unconditionally accepted by the Life Insurance Corporation (LIC), it was held that a concluded contract resulted between the parties, and merely because on the basis of information already furnished by the insured, namely that all his teeth except one molar were extracted, the Corporation was subsequently inclined to enhance the amount of premium marginally, it could not be permitted to wriggle out of its obligation under the policy.84 Where the LIC accepted subsequent premiums without demur and issued receipts, it was held that the Corporation would be deemed to have waived its right to withhold payment under the policy on the ground that it had lapsed by non-payment of an earlier half-yearly premium in the stipulated time.85 Where proposal for insurance of his life was made by a person in the standard form accompanied by cheque for the first premium amount, which was encashed, but deficiency of a small amount was shown due to a clerical error committed by the LIC office, the Court negatived the plea of the LIC that there was no binding contract between the parties.86 Where a rupee policy was converted into a policy of sterling value and re-delivered to the assured without any demand of repayment of the first sterling premium and the assured died before the first sterling premium could be paid, it was held that repayment of the sterling premium as a condition precedent to the right to the sterling assurance had been waived and the payment of the full amount of the sterling policy could not be avoided.87 An absolute and unequivocal acceptance of a proposal binds the parties, and the non-execution of the policy cannot absolve the parties of their engagement.88 A policy of insurance became effective where all other formalities had been completed except that 'the personal statement duly completed by the doctor had not been done' as this was held to be a mere formality,89 and also where the first premium was accepted but the insurer required the proposer to produce standard evidence of age.90 The acceptance of the proposal of life insurance does not necessarily result in a binding insurance contract. It may merely amount to an intimation of willingness of the insurer to insure on payment of the necessary premium.91 Nor is there an insurance contract where premium is received by the insurer, receipt is issued, but the cover sought by the proposer has not been decided and agreed by the insurer.92 An acceptance of the proposal by an insurer on the condition that the first premium will be paid within 30 days from the date of acceptance, is in law a counter-offer, the fulfilment of which would result in a contract.93 Or a proposal for insurance may be accepted in all its terms, but with the statement that there shall be no assurance till the first premium is paid. Here again there is no contract, but only a counter-offer, and the intending insurer may refuse a tender of the premium if there has meanwhile been any material change in the facts constituting the risk to be insured against.94 A stipulation of attachment of liability on the payment of premium is a condition precedent to the policy taking effect. But that is a condition for the benefit of the insurer and could be waived by the insurer.95However, s. 64VB of the Insurance Act inserted in 196896 prevents an insurance company from accepting any risk from a date prior to the date of payment of premium, or its guarantee. The insurer will be at risk only after premium is received. In case of general insurance, if the payment is not realised by the insurer, the policy is void ab initio.97 It has been a well-established commercial practice to send cover notes even prior to the completion of a proper proposal or while the proposal is being considered or a policy is in preparation for delivery. If the proposal is for a standard policy and the cover note refers to it, the insured is taken to have accepted the terms of the policy.98 However, if cover notes remained in the office of the insurer and were not given to the party seeking the insurance, the contract cannot be held to be concluded.1 A contract of insurance would be regarded as complete when the insurer initials a slip setting out the essential terms of the contract even though the formal policy is yet to be issued.2 It had been held that the prefix 'interim' to words 'cover note' does not bring about difference in the liability of the defendant. 'The position in law is that the cover note is in itself a contract of insurance governing the rights and liabilities of the parties in the event or a loss taking place during the currency'.3 When amount of premium is not received, issue of cover note does not amount to acceptance by the insurance company and the cover note has no binding character.4 In LIC of India v. R Vasireddy, 5 the Supreme
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Court, however, held that the mere receipt and retention of premium until after death of the applicant or the mere preparation of the policy document is not acceptance. Acceptance must be signified by some act or acts agreed on by the parties or from which the law raises a presumption of acceptance. It further observed that though in certain human relationships silence to a proposal might convey acceptance, in the case of insurance proposal, silence does not denote consent and no binding contract arises until the person to whom an offer is made says or does something to signify his acceptance. Mere delay in giving an answer cannot be construed as an acceptance, as, prima facie, acceptance must be communicated to the offeror. The general rule is that contract of insurance will be concluded only when the party to whom an offer has been made accepts it conditionally and communicates his acceptance to the person making the offer. Whether the final acceptance is that of the assured or the insurer, however, depends simply on the way in which negotiations for insurance have progressed.6However, once the policy is issued, the insurer of third party insurance under the Motor Vehicles Act, 1988 is not absolved of liability to the third parties on the ground that the cheque of premium was dishonoured.7 A lapsed insurance policy on life does not become an enforceable contract until revived and if death takes place before revival, no rights in favour of the person applying for revival arise. Revival is not automatic nor a right. Revival gives rise to a new contract and there is no revival after death.8 However, where a policy of health insurance contained a clause of renewal at the option of the insured, the insurer was bound to renew the policy.9 Manner of Acceptance The offeror being the master of his proposal, may prescribe a mode or manner of acceptance. He may prescribe that the acceptance must be sent to a particular place; it may not then be sent elsewhere and that the acceptance has to reach the offeror.10 This rule is particularly strict in case of options.11 If a last date is prescribed for receipt of an acceptance, it must reach the offeree before that date.12 An insurance company offered to revive a lapsed policy if the assured remitted the premium amount before a specified date. The assured remitted the payment by post. The policy stood revived as soon as the assured put the money into the post office, though the assured could have recalled the money thereafter. The company had prescribed the manner of acceptance and the assured had so acted.13 It is not for the acceptor to say that some other mode of acceptance which is not according to the terms of the proposal will do as well. In Surendra Nath Roy v. Kedar Nath Bose 14 an offer was made in the following terms: 'I intend to sell my house for Rs 7,000. If you are willing to have it, write to F at his address'. Instead of writing to F, the purchaser sent an agent in person to F and agreed to purchase the property for Rs 7,000. It was contended that this was not a valid acceptance, as the only manner in which the acceptance of the offer could be made was by writing to F at his address. It was held that the letter had to be read in a reasonable manner and that it did not preclude the purchaser from putting himself into direct communication with F. This reason for the decision is doubtful. The decision could have rested on the reason that the oral acceptance being communicated to the vendor, he did not insist upon the proposal being accepted in writing. It may be reasonable to use the post, even though the offer was made orally, if immediate acceptance was not required and the parties lived at a distance.15 On the other hand, it would not normally be reasonable to accept a telegraphic offer by posting a letter. A communication, by post of any demand or offer, generally authorises the post as a proper mode of conveying the answer, but a general authority to pay a sum due to remittance through the post will not authorise the unusual practice of enclosing considerable sums of coin or negotiable notes in a post letter.16 A proposal cannot be said to have been accepted by service of copy of plaint in a suit for specific performance.17 If the person making the proposal expressly or impliedly intimates in his proposal that it will be sufficient to act on the proposal without communicating acceptance of it to himself, performance of the condition is a sufficient acceptance without notification. However, some overt act must be done or words spoken by the offeree which are evidence of his intention to accept and which conform to the
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mode of acceptance indicated by the proposer. A mere tacit formation of intention cannot constitute an acceptance.18 In the absence of any express or implied directions from the proposer to the contrary, a proposal can be accepted by a letter.19 Acceptance of proposal by telegram is valid.20 Assent must be by express words or positive conduct.21 It can be in a form other than specified under s s. 7, 8 or 9.22 It may be in the form of conduct when trade or mercantile usage can be invoked to import into the transaction a promise which is not made either expressly or impliedly.23 Under the common law, acceptance by mode other than one prescribed by the offeror would amount to a counter-offer, and would result in a contract when this is in return accepted.24 However, the Court may decide as a matter of construction, the object for which the mode was prescribed (whether speed or certainty). A requirement that acceptance must be sent by letter, by post, may be for fixing the time of acceptance, and not the manner of accepting. In such a case, acceptance by telex would be sufficient.25 But an acceptance by telex may not suffice where the object of such condition is to require a signed acceptance. The Indian law differs. Under s. 7(2) of the Contract Act, if the acceptor does not send the acceptance in the manner prescribed by the offeror, the acceptance is nevertheless valid unless the offeror intimates to the acceptor that he does not 'accept the acceptance'. The present sub-section, however, throws on the proposer the burden of notifying to the acceptor that an acceptance not in the prescribed manner and form is insufficient, and he remains bound if he fails to insist on an acceptance such as he required.26 Acknowledgment of Electronic Records A person sending a message by electronic record may require the addressee to acknowledge its receipt in a particular form or by a particular method. If he has not so stipulated, the acknowledgment may be given by any form of communication or by conduct.27 Such sender (originator) of the electronic record can exclude liability for the message by stipulating that this record will not be binding on him unless acknowledgment is received. Then, if acknowledgment is not received, the 'electronic record shall be deemed to have never been sent by the originator'.28 If the originator stipulates for an acknowledgment, but has not stipulated that the electronic record shall be binding only on receipt of acknowledgment, and acknowledgment has not been received within time specified or agreed, or within reasonable time (if no time is specified), and the addressee has not sent any acknowledgment, the originator must give notice to the addressee specifying a time for receipt of acknowledgment, and if it is still not received, 'treat the electronic record as though it has never been sent'.29 Therefore, where the sender (originator) of electronic record has stipulated for an acknowledgment, failure to give acknowledgment by the addressee may absolve the sender (originator) of liability for the electronic record sent. Whether or not sending that acknowledgment amounted to accepting the offer is not dealt with by these provisions, but by the substantive law of contract; and matters of establishing despatch, receipt and acknowledgments by the law of evidence. 18 GJ Fernandez v. State of Karantaka, AIR 1990 SC 958; Sri N.O. Shetty v. Karnataka State Road Transport Corpn., AIR 1992 Kant 94. 19 Bismi Abdullah & Sons v. Regional Manager, FCI, AIR 1987 Ker 56 at 58. 20 Arvind Coal & Construction Co. v. Damodar Valley Corpn., AIR 1991 Pat 14 at 21. 21 State of Madhya Pradesh v. Firm Gobardhan Das Kailash Nath, AIR 1973 SC 1164 at 1166 (it was not proved that he had the power). 22 Mukul Kumar v. Divisional Railway Manager, AIR 1995 All 72 (writ petition by unsuccessful tenderer challenging the acceptance). 23 Abdul Azeez & Co. v. New India Assurance Co. Ltd., AIR 1954 Mad 520. 24 Hussey v. Horne-Payne, [1879] 2 AC 311 at 322 : affirming; (1878) 8 Ch D 670, [1874-80] All ER Rep 716 at 721,
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per Lord Cairns followed in Treacher d' Co. Ltd. v. Mahomedally Adamji Peerbhoy, (1910) 35 Bom 110. In such a case, the seller should show good title or satisfaction of the solicitor. 25 Hussey v. Horne Payne, (1878) 8 Ch D 670 at 678, [1874-80] All ER Rep 716(CA) ; affirmed on app [1879] 4 appeal AC 311 at 322 (HL); [1874-80] All ER Rep 716 (Lord Cairns held this does not affect a contract otherwise complete); Curtis Moffat Ltd. v. Wheeler, (1929) 2 Ch 224 (Maungham J. preferred this view of the (CA) to the contrary opinion of Lord Cairns LC, in the HL and treated it as obiter); Sreegopal Mullick v. Ram Churn Nuskur, (1882) 8 Cal 856 at 863 (observations are obiter). 26 Treacher d' Co. Ltd. v. Mohamedally Adamji Peerbhoy, (1910) 35 Bom 110; Sreegopal Mullick v. Ram Churn Nuskur, (1882) 8 Cal 856. 27 Chipperfield v. Carter, (1895) 72 LT 487 explained in Caney v. Leith, (1937) 156 LT 483 at 535, [1937] 2 All ER 532,Ch D ; Eadie v. Addison, (1882) 52 LJ Ch 80; Halsbury's Laws of England, 4th edn., Vol. 9(1), 'CONTRACT', para 670. 28 Caney v. Leith, [1937] 2 All ER 532; applying Hudson v. Buck, [1877] 7 ChD 683; Curtis Moffat Ltd. v. Wheeler, [1929] 2 Ch 224; Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, 'CONTRACT', para 670. 29 Baijnath v. Kshetrahari Sarkar, AIR 1955 Cal 210 pp. 215-16. 30 Panem Venkanarayana Shastry v. Rajupalli Chinna Iella Reddy, AIR 1959 AP 256; Treacher d' Co. Ltd. v. Mohamedally Adanji Peerbhoj, (1910) ILR 35 Bom 110; but see Krishnaji Gopinath Rele v. Ramchandra Dashinath Mastakar, 53 Bom LR 1377, AIR 1932 Bom 51 (such condition does not give the solicitor arbitrary and absolute power to reject a title. He is the sole judge if he acts reasonably. The vendor does not continued on the next page thereby surrender his right to assert or maintain that he has made out a marketable title. The court will determine whether or not the solicitor has act ed reasonably, and whether the title is or is not marketable having regard to the grounds of rejection put by the solicitor). 31 Cohen v. Sutherland, (1890) ILR 17 Cal 919. 32 AIR 1916 Mad 75 (DB). 33 (1947) Mad 837, AIR 1947 Mad 366; Union of India v. Narain Singh, AIR 1935 Punj 274. 34 AIR 1951 Mad 322. 35 Distinction was not accepted in Raghunandhan Reddy v. State of Hyderabad, AIR 1963 AP 110; Abdul Rahim Khan v. Union of India, AIR 1968 Pat 433. 36 This opinion expressed in the earlier editions of this book was approved in Abdul Rahim Khan v. Union of India, AIR 1968 Pat 433. 37 Ibid. 38 AIR 1971 SC 2295; approving Hussey v. Horne Payne, [1879] 4 AC 311 affirming, [1874-80] All ER Rep 716. 39 Union of India v. Bhimsen Walaiti Ram, AIR 1971 SC 2295; Rajanagaram Village Co-op Society v. P Veerasami Mudaly, AIR 1951 Mad 322; Hubli-Dharwad Municipal Corporation v. Chandrashekar M Shetty, AIR 2009 Kant 41. 40 Muthu Pillai v. Secretary of State, AIR 1923 Mad 582(DB) . 41 Swadesh Rubber Industries v. Sardar Singh, AIR 1994 P&H 306. 42 Veera Property Development Pvt. Ltd. v. Tamil Nadu Slum Clearance Board, AIR 1999 Mad 304 (conditions of tender provided that the bid will be considered for confirmation only after depositing stipulated part of the price). 43 State of Uttar Pradesh v. Kishorilal Minocha, AIR 1980 SC 680. 44 Nilgiri Contractors Society v. State of Orissa, AIR 1975 Ori 33(DB), This would now be subject to test of fairness in action Tata Cellular v. Union of India, AIR 1996 SC 11, (1994) 6 SCC 651. 45 Ishwardas Dayal Hingwasia v. Municipal Board Rath, AIR 1980 All 143. 46 Digamber Pershad Kirti Prasad v. State of Uttar Pradesh, AIR 1996 All 1. 47 AIR 1972 SC 1242. 48 Rajanagaram Village Co-op Society v. VP Veerasami Mudaly, AIR 1951 Mad 322. 49 Union of India v. Bhimsen Walaiti Ram, AIR 1971 SC 2295; Rajanagaram Village Co-op Society v. P Veerasami Mudaly, AIR 1951 Mad 322; Abdul Rahim Khan v. Union of India, AIR 1968 Pat 433.
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50 Seth Kashi Ram Chemicals (India) v. State of Haryana, AIR 1991 SC 478 (confirmation in court auction); Kamalabai Jageshwar Joshi v. State of Maharashtra, AIR 1996 SC 981, (1996) 1 SCC 669 (offer of land at a specified price to the government in land acquisition referred by engineer, to higher authorities). 51 New India Assurance Co. Ltd. v. Haryana Roadways, AIR 1997 P&H 257. 52 Norwest Holdings Pte Ltd v. Newport Mining, [2011] SGCA 42 (Singapore Court of Appeal); see also OCBC Capital Investment Asia Ltd v. Wong Hua Choon, [2012] SGCA 54 (Singapore Court of Appeal). 53 Gastho Behari Sirkar v. Surs' Estate Ltd., AIR 1960 Cal 752; Harichand Mancharam v. Govind Luxman Gokhale, 50 IA 25, AIR 1923 PC 47; Currimbhoy & Co. Ltd. v. LA Creet, 60 IA 297, AIR 1933 PC 29, 60 Cal 980, 141 IC 209; Shankerlal Narayandas Mundada New Muffasil Co. Ltd., 73 IA 98, AIR 1946 PC 97; Von Hatzfeldt Wildenburg v. Alexander, [1912] 1 Ch 284; Hukum Chand v. Maharaj Bahadur Singh, AIR 1933 PC 156. 54 Dhulipudi Namayya v. Union of India, AIR 1958 AP 533; Damodar Shah v. Union of India, AIR 1959 Cal 526; D Wren International Ltd. v. Engineers India Ltd., AIR 1996 Cal 424. 55 Dhulipudi Namayya v. Union of India, AIR 1958 AP 533; Currimbhoy & Co. Ltd. v. LA Creet, supra .. 56 Lotus Constructions v. Government of Andhra Pradesh, AIR 1997 AP 200. 57 Harvey Shopfitters Ltd. v. ADI Ltd., [2004] 2 All ER 982. 58 Maheshwari Metals and Metal Refinery v. Madras State Small Industries Corpn. Ltd., AIR 1974 Mad 39; Von Hatzfeltdt-Wildenburg v. Alexander, [1912] 1 Ch 284, 289, [1911-13] All ER Rep 148; approved by Privy Council in Shankarlal Narayandas Mundada v. New Moffusil Co. Ltd., AIR 1946 PC 97. 59 Kollipara Sriramulu v. T Aswatha Narayana, AIR 1968 SC 1028; Von Hatzfeldt-Wildenburg v. Alexander, [1912] 1 Ch 284 at 288; Rossiter v. Miller, [1878] 3 AC 1124, [1874-80] All ER Rep 465; Currimbhoy & Co. Ltd. v. L. A. Creet, [1932] 60 IA 297, AIR 1933 PC 29 relied upon in Satya Prakash Goel v. Ram Krishan Mission, AIR 1991 All 343 at 347; HG Krishna Reddy & Co. v. MM Thimmiah, AIR 1983 Mad 169; Y Konda Reddy v. State of Andhra Pradesh, AIR 1997 AP 121; Chairman cum Managing Director, Tamil Nadu Tea Plantation Corpn. Ltd. v. Srinivasa Timbers, AIR 1999 Mad 111 (bid accepted, confirmed and amount of security deposit paid, but no formal agreement executed); Rajni Kumar Mahto v. Uma Devi Budhia, AIR 2005 Jhar 13. 60 Haryana Industrial Development Corpn. v. Inderjeet Sawhney, (1996) 7 SCC 339; see also Ravi Gupta v. Unitech Ltd., IA No. 18828/2011 in CS(OS) 1795/2011, decided on 18 Sep 2013 (Del). 61 Whymper Co. v. Buckle, (1881) 3 All 469; citing Brogden v. Metropolitan Railway Co., [1877] 2 AC 666; Lewis v. Brass, (1877) 3 QBD 667; Bonnewell v. Jenkins, (1878) LR 8 Ch D 70. 62 Geo-Group Communications INC. v. IOL Broadband Ltd., 2010 AIR SCW 209, (2010) 1 SCC 562. 63 Harichand Mancharam v. Govind Luxman Gokhale, (1923) 50 IA 25, 47 Bom 335, 71 IC 763, AIR 1923 PC 47; Currimbhoy & Co. Ltd. v. LA Creet, (1933) 60 IA 297, 60 Cal 980, 141 IC 209, AIR 1933 PC 29; Subimalchandra Chettor v. Radhanath Ray, (1933) 60 Cal 1372, 149 IC 1000, AIR 1934 Cal 235; Gujjar Mal Ram Rattan Puri v. Governor-General of India, AIR 1942 Pesh 33; Shankarlal Narayandas Mundada v. New Mofussil Co. Ltd., (1946) 73 IA 98, 48 Bom LR 456, 224 IC 598, AIR 1946 PC 97; reversing (1941) Bom 361; LC Sitlani v. Viroosing Ramsingh, (1947) 225 IC 264, AIR 1947 Sind 6; Amritlal Maganlal v. Harkisandas Kahandas, (1945) 47 Bom LR 878, AIR 1946 Bom 149; see Deep Chandra v. Ruknuddaula Shamsher Jung Nawab Mohammed Sajjad Ali Khan, AIR 1951 All 93(FB) ; Abdul Rahiman v. Sadasiv Tripathy, AIR 1968 Ori 84. 64 Jessel MR in Winn v. Bull, (1877) 7 Ch D 29; Akoojee Jadwet and Co. v. AV and Son, AIR 1939 Rang 423, 185 IC 705; Shamjibhai v. Jagoo Hemchand, AIR 1952 Nag 220. 65 Hussey v. Horne-Payne, [1879] 4 AC 311, [1874-80] All ER Rep 716; Aryodaya S&W Co. v. Javalprasad Dolatrai, (1903) 5 Bom LR 909; D Wren International Ltd. v. Engineers India Ltd., AIR 1996 Cal 424. 66 Von Hatzfeldt Wildenburg v. Alexander, (1912) 1 Ch 284, [1911-13] All ER Rep 148; Currimbhoy & Co. Ltd. v. LA Creet, AIR 1933 PC 29; Wellman Hindustan Ltd. v. NCR Corpn., AIR 1993 Del 32. 67 HG Krishna Reddy & Co. v. MM Thimmiah, AIR 1983 Mad 175. 68 Jiwan Lal v. Brij Mohan Mehra, AIR 1973 SC 559. 69 Kollipara Sriramulu v. T Aswatha Narayana, AIR 1968 SC 1028. 70 Ridgway v. Wharton, [1857] 6 HLC 238 at 264. 71 Punjab State Electricity Board v. Abnash Textile Trading Agencies, AIR 1986 P&H 323 (tender and security deposit accepted and purchase order issued, but written agreement not executed).
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72 AIR 1968 SC 1028. 73 Punjab State Electricity Board Patiala v. Abnash Textile Trading Agencies, AIR 1986 P&H 323 at 325. 74 Trollope and Colis Ltd. d' Holland d' Hannen d' Cubbits Ltd. v. Atomic Power Construction Ltd., [1963] 1 WLR 333, [1962] 3 All ER 1035. 75 Davis Contractors Ltd. v. Fareham Urban Distt Council, [1956] 3 WLR 37 at 60, [1956] AC 696, [1956] 2 All ER 145. 76 Section 10 below: 'Contracts with Government'. 77 Union of India v. A. L. Rallia Ram, AIR 1963 SC 1685; Davecos Garments Factory v. State of Rajasthan, AIR 1971 SC 141; Manickam Chettiar v. State of Madras, (1971) 1 Mad 345, AIR 1971 Mad 221; Sardar Sucha Singh v. Union of India, [1987] Supp SCC 127. 78 Union of India v. A. L. Rallia Ram, AIR 1963 SC 1685 at 1690 (refers to direction by Governor-General under the Government of India Act, 1935);Damodar Shah v. Union of India, AIR 1959 Cal 526; KP Chowdhry v. State of Madhya Pradesh, AIR 1967 SC 203 at 206. 79 Sardar Sucha Singh v. Union of India, [1987] Supp SCC 127; following Union of India v. Rallia Ram, AIR 1963 SC 1685 (a case under the Government of India Act, 1935); but seeUnion of India v. NK Private Ltd., [1972] 3 SCR 437, AIR 1972 SC 915, [1972] 3 SCR 437 (letter of acceptance signed by person having no authority on behalf of the President). 80 Section 175(3) of the Government of India Act, 1935, same as Art 299 of the Constitution of India . 81 Union of India v. AL Rallia Ram, [1964] 3 SCR 164, AIR 1963 SC 1685 per Shah J. at 1690. 82 Union of India v. Uttam Singh Duggal, AIR 1972 Del 110. 83 S R Kharidia v. Max New York Life Insurance Co. Ltd., AIR 2009 Guj 57. 84 Babooram Jain v. Life Insurance Corpn. of India, AIR 1990 MP 351 at 353. 85 Life Insurance Corpn. of India v. OP Bhallah, AIR 1989 Pat 269; LIC of India v. Ramdas Aggarwal, AIR 1979 Pat 124; Life Insurance Corporation of India v. Omprakash Agrawalla, AIR 1977 Gau 11; Kiran Sinha v. Life Insurance Corporation of India, AIR 1983 Pat 142. 86 Life Insurance Corpn. of India v. L Kamalamma, AIR 1986 Ker 215 at 217; but see LIC of India v. R Vasireddy, AIR 1984 SC 1014 (the facts of the case clearly indicated the total absence of a contract). 87 Re An Agreement Between the Universal Life Assurance Society and MC Sterndale,(1895) ILR 23 Cal 320. 88 Muhammad Sultan v. Clive Insurance Co. Ltd., AIR 1934 All 298 (proposal of insurance was accepted, but policy was not issued). 89 Ram Dev Mool Chand v. Lakshmi Insurance Co. Ltd., AIR 1962 Punj 125; Macgillivary on Insurance, 4th edn., s. 649; for cases of misrepresentation and fraud, Harsud Co-op Mktg Soceity Ltd. v. United India Fire & General Insurance Co. Ltd., AIR 1992 Bom 341 (cover note is in itself a contract of insurance). 90 Omana Purushottaman Nair v. Life Insurance Corpn. of India Bombay, AIR 2005 Bom 152. 91 Life Insurance Corpn. of India v. Tirupathayya, AIR 1963 AP 353. 92 Marthi Crystal Salt Co. Ltd. v. Oriental Insurance Co. Ltd., AIR 2001 Mad 288. 93 Banarasi Debi v. New India Assurance Co. Ltd., AIR 1959 Pat 540. 94 Canning v. Farquhar, [1885] 16 QBD 727. 95 P Abdul Azeez & Co. v. New India Assurance Co. Ltd., AIR 1954 Mad 520, (1953) 2 MLJ 714; Ocean Accident & Guarantee Corporation Co. Ltd. v. D K Patkar, AIR 1935 Bom 236 followed; South British Insurance Co. Ltd. v. J R Stenson, 52 Bom 532, AIR 1928 Bom 260 distinguished; Equitable Fire & Accident Office v. Ching Wo Hong, [1907] AC 96. 96 Section 64VB of the Insurance Act provides: No insurer shall assume any risk in India in respect of any insurance business on which premium is not ordinarily payable outside India unless and until the premium payable is received by him or is guaranteed to be paid by such person in such manner and within such time as may be prescribed or unless and until deposit of such amount as may be prescribed, is made in advance in the prescribed manner. For the purposes of this section, in the case of risks for which premium can be ascertained in advance, the risk may be assumed not earlier than the date on which the premium has been paid in cash or by cheque to the insurer.
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97 Regulation 4 of the Insurance Regulatory and Development Authority (Manner of Receipt of Premium) Regulations, 2002. 98 General Assurance Society Ltd. v. Chandmull Jain, AIR 1966 SC 1644 at 1648. 1 Nibro Limited v. National Insurance Co. Ltd., AIR 1991 Del 25 at 39. 2 General Reinsurance Corpn. v. Forsakringsaktiebolaget Fennia Patria, [1983] QB 856, [1983] 3 WLR 318, [1983] 2 Lloyd's Rep 287; Hadenfayre Ltd. v. British National Insurance Society Ltd., [1984] 1 Lloyd's Rep 393; Citadel Insurance Co. v. Atlantic Union Insurance Co., [1985] 2 Lloyd's Rep 543. 3 Harsud Co-operative Mktg Society Ltd. v. United India Fire & General Insurance Co. Ltd., AIR 1992 Bom 341 at 344, FR Hardy Ivamy, General Principles of Insurance Law, 4th edn., p. 115. 4 Oriental Insurance Co. Ltd. v. Rukminibai, AIR 1995 Kant 18; National Insurance Co. Ltd. v. Seema Malhotra, AIR 2001 1 SC, (2001) 3 SCC 151 (premium cheque dishonoured); but see Oriental Insurance Co. Ltd. v. Inderjit Kaur, AIR 1998 SC 588, (1998) 1 SCC 371 and New India Assurance Co. Ltd. v. Rula, AIR 2000 SC 1082 (liability to third party). 5 AIR 1984 SC 1014. 6 LIC of India v. Raja Vasireddy Kamalavalli Kamba, AIR 1984 SC 1014. 7 Oriental Insurance Co. Ltd. v. Inderjit Kaur, AIR 1998 SC 588, (1998) 1 SCC 371; New India Assurance Co. Ltd. v. Rula, AIR 2000 SC 1082. 8 LIC of India v. Jaya Chandel, AIR 2008 SC 1310, (2008) 3 SCC 382; Ahmedunnisa Begum v. Life Insurance Corpn. of India, AIR 1981 AP 50 at 54; Mckenna v. City Life Assurance Co., [1919] 2 KB 491; Re P Sankuni Menon v. Empire of India Life Assurance Co. Ltd., AIR 1932 Mad 241 followed. 9 United India Insurance Company Ltd. v. Mohanlal Aggarwal, AIR 2004 Guj 191; see however United India Insurance Co. Ltd. v. Manubhai Dharamsinhbhai Gajera, AIR 2009 SC 446, (2008) 10 SCC 404 (recommends that medical insurance policies must ordinarily be renewed). 10 Chitty on Contracts, 28th edn., p. 116, para 2-058. 11 Holwell Securities Ltd. v. Hughes, [1974] 1 WLR 157, [1974] 1 All ER 161(CA) . 12 R Maheswari v. Secretary, Selection Committee, AIR 1995 Mad 168. 13 Hairoon Bibi v. United India Life Insurance Co. Ltd., AIR 1947 Mad 122. 14 AIR 1936 Cal 87, 63 Cal LJ 86. 15 Henthorn v. Fraser, [1892] 2 Ch 27, [1891-94] All ER Rep 1064. 16 Mitchell Henry v. Norwich Union Life Insurance Society, [1918] 2 KB 67, [1918-19] All ER Rep 908(CA), [1918-19] All ER Rep 1142. 17 Vishweswaradas Gokuldas v. BK Narayan Singh, AIR 1969 SC 1157. 18 Hindusthan Co-op Insurance Society Ltd. v. Shyam Sunder, AIR 1952 Cal 691; Indian Cotton Co. Ltd. v. Hari Poonjoo, AIR 1937 Bom 39. 19 Protop Chandra Koyal v. Kali Charan Acharjya, AIR 1952 Cal 32. 20 Chiranji Lal Multani RB Pvt. Ltd. v. Union of India, AIR 1963 Punj 372. 21 Gaddar Mal v. Tata Industrial Bank Ltd., AIR 1927 All 407, 49 All 674; Bhagwan Das v. Shiv Dial, AIR 1914 Lah 436. 22 Gaddarmal Hiralal v. Chandrabhan Agarwal & Co., AIR 1968 All 292, 294. 23 Gaddar Mal v. Tata Industrial Bank Ltd., AIR 1927 All 407 at 409 (DB). 24 Wettern Electric Ltd. v. Welsh Development Agency, [1983] QB 796, [1983] 2 All ER 629 at 633, QBD. 25 Tinn v. Hoffmann & Co., (1873) 29 LT 271; cf Manchester Diocesan Council v. Commercial & General Investment Ltd., [1969] 3 All ER 1593, [1970] 1 WLR 242. 26 Manchester Diocesan Council v. Commercial & General Investment Ltd., [1969] 3 All ER 1593. 27 The Information Technology Act, 2000, s. 12(1).
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28 The Information Technology Act, 2000, s. 12(2). 29 The Information Technology Act, 2000, s. 12(3).
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER I Of Communication, Acceptance and Revocation of Proposals/S. 8.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER I Of Communication, Acceptance and Revocation of Proposals S. 8. Acceptance by performing conditions, or receiving consideration.-Performance of the conditions of a proposal, or the acceptance of any consideration for a reciprocal promise which may be offered with the proposal, is an acceptance of the proposal.
Introduction Section 8 provides the acceptance of the proposal by conduct as against other modes of acceptance, i.e., verbal or written communication contemplated by ss. 7 and 9. It embraces a case, to cite an instance, of a reward for the finder of a lost article.
General The terms of the section are very wide. The division of the subject-matter of the section into two branches, 'performance of the conditions of a proposal' and 'acceptance of any consideration for reciprocal promise which may be offered with a proposal', corresponds to the general division of proposals into those which offer a promise in exchange for an act or acts and those which offer a promise in exchange for a promise.
Communication is not Necessary A proposal is said to be accepted when the person to whom it is made 'signifies his assent thereto' [s. 2(b)]. This must be read with s. 4, which tells when an acceptance is complete, and s. 7, which provides about the manner of performance. An acceptance is binding upon communication, and this section does not expressly dispense with this requirement. The section recognises the fact that in the cases in which the offeror invites acceptance by the doing of an act 'it is sometimes impossible for the offeree to express his acceptance otherwise than by performance of his part of the contract'.30 The most obvious example is where a reward is publicly offered to any person, or to the first person, who will recover a lost object, produce certain evidence, or the like. Here the party claiming the reward has not to prove anything more than that he performed the conditions on which the reward was offered, which conditions may or may not include communication by him to the proposer. A contract can come into existence by performance by the parties.31
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The general rule that acceptance must be communicated to the offeror is for the benefit of the offeror. The offeror may waive this requirement. In such cases, acceptance may be effective even before it comes to the notice of the offeror. Yet acceptance cannot be inferred from silence. There must be an express or implied intimation from the offeror indicating a mode other than communication, and there must be some overt act according to the prescribed mode showing an intention to accept. Unless the petitioner has performed the conditions of the offer act ing on the faith of or in reliance of the offer, there is no acceptance. Thus, where a reward was offered for information about murderers, and C, after being arrested for the same, gave the information as well as provided evidence leading to the arrest and conviction of the murderers, it was held that although C knew of the offer of reward, he was not entitled to it, as the offer had not induced him to give the information.32 The nature of acceptance required was considered by the English Court of Appeal in Carlill v. Carbolic Smoke Ball Co 33 The defendant company, being the proprietor of the 'carbolic smoke ball', a device for treating the nostrils and air passages with a kind of carbolic acid snuff, issued an advertisement offering GBP 100 reward if any person should contract influenza (or similar ailments as mentioned) after using the ball as directed. It was also stated that GBP 100 was deposited with a named bank, 'showing our sincerity in the matter'. The plaintiff bought one of the smoke balls by retail, used it as directed, and caught influenza while she was still using it. Hawkins J.34held that she was entitled to recover GBP 100 as on a contract by the company. The Court of Appeal held that there was an offer to anyone who performed the condition (namely, of using the smoke ball as directed) on the faith of the advertisement; and by such performance it become a contract, not absolute, but subject to the further independent condition of the user contracting influenza or the like while using the remedy, and perhaps during some reasonable time afterwards. As to the objection that to complete the plaintiff's acceptance of the offer, there must either be communication to the defendant or some act of a public nature, Bowen LJ. said:35
One cannot doubt that, as an ordinary rule of law, an acceptance of an offer made ought to be notified to the person who makes the offer, in order that the two minds may come together...But there is this clear gloss to be made upon that doctrine, that, as notification of acceptance is required for the benefit of the person who makes the offer, the person who makes the offer may dispense with the notice to himself if he thinks it desirable to do so... where a person, in an offer made by him to another person, expressly or impliedly intimates a particular mode of acceptance as sufficient to make the bargain binding, it is only necessary for the other person to whom such offer is made to follow the indicated method of acceptance; and if the person making the offer expressly or impliedly intimates in his offer that it will be sufficient to act on the proposal without communicating acceptance of it to himself, performance of the condition is a sufficient acceptance without notification.
Carlill's case shows the principle that an offer, to be capable of acceptance, must involve promise by the offeror that he will bind himself if the exact terms specified by him are accepted. If a man writes, 'send me such and such goods, and I will pay for them', is not the sending of goods an acceptance of the offer?36 A proposal is in every case accepted by performance of its conditions, i.e., by compliance with its terms. Communication by the acceptor to the proposer or his authorised agent is necessary when the terms consist of or include a counter-promise (for there is no promise at all without communication), but when only acts are required, the communication of their performance may or may not be added as a term of the offer at the will of the proposer, which may be either express or inferred from the nature and circumstances of the proposal.37There is a material distinction between acceptance of a proposal that asks for a promise and a proposal that asks for an act on the condition of the proposal becoming a promise. In the former case, where the acceptance is to consist of a promise, there must be communication to the proposer. But in the latter class of cases, as for example, dispatching goods ordered by post, the rule is that no further communication of acceptance is necessary than performance of the proposed act. Mere performance of the act prescribed by the proposal is sufficient acceptance of such proposal and converts it to a promise even without further communication of
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acceptance. This distinction is recognised in ss. 5 and 8 of the Contract Act.38 If an offer takes the form of a promise in return for an act, the performance of that act is in itself an adequate indication of assent.39 In Hindustan Cooperative Insurance Society v. Shyam Sunder, 40A signed a proposal form for insurance on his life and handed it to N, an organiser of the defendant insurance company, with a cheque for the premium. N had no authority to receive the cheque as premium, but after A had been medically examined twice, the company encashed the cheque. Two weeks later, the company wrote to N, asking him to make further enquiries regarding A's proposal, but the next day A died of pneumonia. The company denied liability, but the Court held that the contract was complete from the moment the cheque was encashed, as A had dispensed with express communication of acceptance. 30 Anson's Law of Contract, 27th edn., p. 43. 31 TTMI Sarl v. Statoil ASA, [2011] EWHC 1150. 32 Crown v. Evan Clarke, (1927) 40 CLR 217. 33 [1893] 1 QB 256, [1891-94] All ER Rep 127; see also Soulsbury v. Soulsbury, [2007] EWCA Civ 969. 34 The facts were not disputed. See report of the same case in the court below [1892] 2 QB 484. 35 [1893] 1 QB 256 at 269; cited with approval in State of Bihar v. Bengal Chemical & Pharmaceutical Works, AIR 1954 Pat 14. 36 Harvey v. Johnston, (1848) 6 CB 295 at 304, 77 RR 328 at 332 per Cresswell J. The suggestion appears to have escaped the notice of text-writers for many years; Greenmast Shipping Co. SA v. Jean Lion et Cie SA (The Saranikos), [1986] 2 Lloyd's Rep 227. 37 LIC of India v. R Vasireddy, AIR 1984 SC 1014. 38 State of Bihar v. Bengal Chemical and Pharmaceutical Works, AIR 1954 Pat 14; S. Sadiq Hasan v. Mumtaz Bank Ltd., AIR 1929 Lah 656. 39 Carlill v. Carbolic Smoke Ball Co., [1893] 1 QB 256, [1891-94] All ER Rep 127(CA) . 40 AIR 1952 Cal 691; LIC of India v. R Vasireddy, AIR 1984 SC 1014 and s. 64VB of the Insurance Act, 1938.
Acceptance by Conduct and Invitation to Treat Questions may arise in particular cases whether there was a certain offer, or whether offer was intended, or was the statement any offer at all. In the simple case of an offer for reward, the terms would be clear, and its satisfaction by the claimant manifest. An open letter for credit authorising the addressee to draw on the issuer to a specified extent, and requesting 'parties negotiating bills under it to endorse particulars', has been held to amount to a general invitation or request to advance money for the faith of such bills being accepted, and to constitute a contract with anyone so advancing money while the credit remained open.41 According to another view, the promise made in a banker's irrevocable letters of credit, cannot be explained in terms of acceptance of an offer of a unilateral contract, because, while the beneficiary makes no promise to the bank, the bank's promise is binding, no sooner it is communicated to the seller.42 Another case is of a railway company's timetable, which is a general proposal to run trains according to the table and is accepted by an intending passenger tendering the price of a ticket.43 On the other hand, performing act s in response to invitations do not result in any contract in a number of situations. When particular goods are advertised for sale by auction, the auctioneer does not contract with anyone who attends the sale intending to purchase those goods that they shall be actually put up for sale.44 An advertisement for tenders for goods to be sold is not a proposal capable of being a contract to sell to the highest bidder, but 'a mere attempt to ascertain whether an offer can
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be obtained within such a margin as the sellers are willing to adopt'; it is only an invitation for offers, which the offeree may or may not accept, and he is not bound to accept the highest or the lowest tender,45 as the case may be. Similarly, an advertisement for the award of a scholarship after holding an examination is no promise to give it to the best student.46 These situations can be distinguished on the basis of the difficulty of ascertaining the acceptor, if the announcement is treated as a proposal; or on the impracticablility of contracting with several persons who would respond to the invitation. Interpretation must be largely guided, in this class of transactions, by business usage or common sense. Where brokers in Bombay wrote to merchants in Ghaziabad stating their terms of business and the merchants afterwards placed orders with the brokers which were executed by them, it was held that the first letter was only an invitation to do business; no contract was made until the orders given by the brokers were accepted by the merchants and hence the cause of auction arose wholly in Bombay.47 A bank's letter with quotations as to particulars of interest on deposits in answer to an enquiry was not an offer but only a quotation of business terms.48 Where the owner of a property said that he would not accept less than Rs 6,000/-, he did not make an offer, but merely invited offers.49 Definite proposals (e.g., to guarantee a particular ascertained or ascertainable debt) must be distinguished from expression or undefined willingness, which only invites a proposal. Advancing money to the debtor at the request of surety and upon surety's promise to make himself responsible, amounted to acceptance of the proposal to complete the contract of guarantee.50 41 Re Agra and Masterman's Bank,(1867) LR 2 Ch App. 391. 42 Chitty on Contracts, 28th edn., p. 123, para 2-075. 43 Denton v. Great Northern Railway Co., (1856) 5 E&B 860; Thompson v. London, Midland & Scottish Rail Co., [1930] 1 KB 41, [1929] All ER Rep 474(CA), (contract is not complete till the ticket is received). 44 Harris v. Nickerson, (1873) LR 8 QB 286. 45 Spencer v. Harding, (1870) LR 5 CP 561. 46 Rooke v. Dawson, [1895] 1 Ch 480. 47 Devidat Ramniranjandas v. Shiram Narayandas, (1932) 56 Bom 324, 34 Bom LR 236, 137 IC 381, AIR 1932 Bom 291. 48 State Aided Bank of Travancore Ltd. v. Dhrit Ram, AIR 1942 PC 6, 198 IC 753. 49 Col DI MacPherson v. MN Appanna, AIR 1951 SC 184; relying on the Privy Council in Harvey v. Facey, [1893] AC 552. 50 Ranga Ram Thakur Das v. Raghbir Singh, AIR 1928 Lah 938, 113 IC 780.
Performance of Conditions In a case decided by the Privy Council,51 the plaintiff was the grandniece of P, a wealthy Hindu widow of an ex-zamindar owning property of considerable value. P desired the plaintiff to live with her although married, and promised that if the plaintiff and her husband would reside with her, she would make provision for her on the fairly ample scale by the purchase of immovable property for her. The plaintiff and her husband accordingly lived with P. In 1893, P bought a village in her own name, but assured the plaintiff that it was purchased for her. Dissatisfaction arose because it was not transferred to the plaintiff, and the husband consequently ceased to reside with P. P sent messages to the husband asking him to return, but he did not return. In October 1893, P wrote a letter in her own handwriting to the plaintiff stating that the village had been purchased for the plaintiff, and would be transferred to her upon her death. The plaintiff and her husband thereafter resided with P until P's death in 1899. After P's death, the plaintiff instituted a suit for a declaration that she was entitled to the
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village and the possession thereof. There Lordships held that the letter of October 1893, constituted a promise which was accepted by the plaintiff, and that there was a completed contract which entitled the plaintiff to possession of the village:
The Board is of the opinion accordingly that there has been a completed contract. P accomplished her desire, and she obtained the consideration, which she had so much at heart. Acceptance of her terms and compliance with her stipulation were made. The words (sic) of Lord St. Leonards in Maunsell v. Hedges, 52 might be asked here: 'Was it not a proposal, with a condition, which being accepted, was equivalent to a contract?' Their Lordships do not doubt that it was.
A promised to leave a house to a relation with the arrangement that during the lifetime of the promisor, the relation will come and live with him and share the expenses. On the basis of the promise, the relation sold his cottage and came to live with the promisor who terminated the arrangement and asked the relation to quit. This arrangement was held to be a binding contract and not merely an unenforceable family arrangement. The promisee was held entitled to damages for the loss of the benefits of living in a big house during the lifetime of the promisor and damages for the loss of prospect of inheriting the house under the promisor's Will.53 A wife act ed upon her husband's letter to her mentioning the conditions, inter alia,as to residence and alimony on which he was prepared to allow his wife to divorce him, although the acceptance was not communicated to the husband. This was held a concluded contract supported by consideration because the wife acted upon it and invited the divorce Court to act upon it.54 A creditor cashed a cheque for a small amount in full and final payment of a bigger amount without informing the debtor of his not agreeing to the condition; the creditor must be taken to have thereby agreed to the proposal. His subsequent demand did not make any difference to the position.55 But if such a cheque sent by the debtor was accepted by the creditor in part payment, the creditor would be entitled to claim the balance.56 The real emphasis is not on the acceptance of the smaller sum of money when a larger sum is due, but on the acceptance of the debtor's condition that if the tendered money be at all accepted, it must be done so in discharge of the entire debt. Where the debtor attaches no such condition and the creditor also intimates that he accepts the amount without prejudice to the balance amount due, no question of accord and satisfaction arises. If a person who finds a lost Article and restores it to the offeror, it is sufficient acceptance of the proposal to merit the reward.57 An insurance company offered to revive a lapsed policy if the assured remitted the premium amount before a specified date. The assured remitted the payment by post. The policy stood revived as soon as the assured put the money into the post office though the assured could have recalled the money thereafter. The company had prescribed the manner of acceptance and the assured had so performed.58 51 Sri Rajah Malraju Lakshmi Venkayyamma Rao Bahadur v. Rajah Venkata Narasimha Appa Rao Bahadur, (1916) 43 IA 138, 39 Mad 509, 34 IC 921, AIR 1916 PC 9. 52 (1854) 4 HLC 1039, 94 RR 532. 53 Parker v. Clark, [1960] 1 WLR 286, [1960] 1 All ER 93. 54 Nalini v. Somasundaram, AIR 1964 Mad 52, (1916) 43 IA 138 at 146, 39 Mad 509 at 522, AIR 1916 PC 9 at 12. 55 Union of India v. Rameshwarlal Bhagchand, AIR 1973 Gau 111; following Amrit Banspati Co. Ltd. v. Union of India, AIR 1966 All 104, and distinguishing as decisions under s. 63: Lala Kapurchand Godha v. Mir Nawab Himayatalikhan Azamjah, AIR 1963 SC 250, [1963] 2 SCR 168; Dipchand Golencha v. M Abhechand Co., AIR 1962 Cal 166; Shyamnagar Tin Factory Pvt. Ltd. v. Snow White Food Products Co., AIR 1965 Cal 541. 56 Shyamnagar Tin Factory Pvt. Ltd. v. Snow White Food Products Co., AIR 1965 Cal 541. 57 Union of India v. Rameshwarlal Bhagchand, AIR 1973 Gau 111 at 113. 58 Hairoon Bibi v. United India Life Insurance Co. Ltd., AIR 1947 Mad 122.
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Promissory Estoppel A representation that something will be done in the future may involve an existing intention to act in the future in the manner represented, and if the representation is act ed upon by another, it may, unless statute governing the person making representation otherwise provides, result in an agreement enforceable by law; and if law requires form, no contract may result, but law is not powerless to compel performance.59 Although, the case does not use the term, the judgment has been later interpreted as applying promissory estoppel.60 59 Century Spinning & Manufacturing Co. Ltd. v. Ulhasnagar Municipal Council, AIR 1971 SC 1021; following Union of India v. Anglo Afghan Agencies, AIR 1968 SC 718. 60 Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh, AIR 1979 SC 621, (1979) 2 SCC 409; see below s. 10: 'Promissory Estoppel'.
Accepting Consideration for Reciprocal Promise The earlier editors of this book have found that the second branch of the section dealing with 'acceptance of any consideration', is rather obscure, for the following reasons. It cannot be said with certainty which particular class or classes of transactions it covers. The words seem more appropriate to gifts or transfers of property than to contracts. It is sound principle that what is offered on conditions must be taken as it is offered. The use of the word 'reciprocal' does not even fit the most obvious case of goods sent on approval where the receiver keeps them with the intention of buying them. Here, the seller need not and commonly does not offer any promise, and there is therefore no question of reciprocal promise as defined in the Contract Act. No doubt the acceptance of an offered consideration, as such, amounts to giving the promise (whether reciprocal or not) for which it was offered, or else raises an equivalent obligation. But a thing which is offered in one right and for one purpose may be taken under a different claim of right and with a different intent; and in that case, the legal result will not be a contract between the parties unless the party receiving the thing so conducts himself as to lead the proposer reasonably to conclude that there is an acceptance according to the offer; and then the proposer can hold him liable on the universal principle that a man's reasonably apparent intent is taken in law to be his real intent. It cannot be supposed that the present section is intended to preclude all inquiries of this kind by making every receipt in fact of a thing offered by way of consideration a conclusive acceptance of the proposal. It has been applied however to the case of a bank's customer receiving notice, which he did not answer, of an increase in the rate of interest on overdrafts, and afterwards obtaining a further advance. It was held that he accepted a consideration offered by the bank within the terms of this section61 and as a consideration for that 'reciprocal promise', the bank offered to desist from discontinuing the overdraft or from immediate recall of its debt.62 Where, for several years, a constituent availed of an overdraft at a bank, periodical statements of account were sent to him showing the charging of a compound interest and no objection was taken by him, he must be taken to have agreed to the rate of interest.63 A firm had a cash credit account with a bank and every month interest was calculated on daily balance, which was added on the last day of the month of the account. This amounted to charging compound interest, and was held to be contemplated by the agreement--the expression being 'shall be charged to such account or accounts'.64 A contract between a bank issuing a credit card to its customer and the retailer who supplies the goods to the customer against the card, would fall within this second branch of the section.65 The
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bank promises the retailer that the retailer will be paid, and the retailer provides the consideration for this promise by supplying the goods to the customer.66 The second branch of the section can be said to apply to a number of other situations. An offer to supply goods sent to the offeree may be accepted by using the goods.67 A new lease may be accepted by staying on the premises.68 61 Gaddarmal v. Tata Industrial Bank Ltd., (1927) 49 All 674, 100 IC 1023, AIR 1927 All 407; followed in Behari Lal v. Radhye Shyam, AIR 1953 All 745; Hulas Kunwar v. Allahabad Bank Ltd., AIR 1958 Cal 644 (overdraft kept alive for three years). 62 Hulas Kunwar v. Allahabad Bank Ltd., AIR 1958 Cal 644; Haridas Ranchordas v. Mercantile Bank of India Ltd., (1919) 47 IA 17, AIR 1920 PC 61; Bruce v. Hunter, (1813) 3 Camp 467; Batakrishna Tramanik v. Bhawanipur Banking Corpn. Ltd., 59 Cal 662, AIR 1932 Cal 521; Gaddarmal v. Tata Industrial Bank Ltd., (1927) 49 All 674, AIR 1927 All 407. 63 Kanakalla Venkata Satyanarayana v. State Bank of India, AIR 1975 AP 113; relying on Batakrishna Tramanik v. Bhawanipur Banking Corpn. Ltd., AIR 1932 Cal 521, 59 Cal 662; Haridas Ranchordas v. Mercantile Bank of India Ltd., 47 IA 17, AIR 1920 PC 61; Hulas Kunwar v. Allahabad Bank Ltd., AIR 1958 Cal 644. 64 Ibid. 65 First Sport Ltd. v. Barclays Bank plc, [1993] 1 WLR 1228, [1993] 3 All ER 789(CA) . 66 R v. Lambie, [1982] AC 449, [1981] 2 All ER 776; Re Charge Card Services Ltd.,[1987] Ch 150, affirmed in [1989] Ch 497, [1988] 3 All ER 702(CA) . 67 Weatherby v. Banham, (1832) 5 C&P 228; See also Minories Finance Ltd. v. Afribank Nigeria Ltd., [1995] 1 Lloyd's Rep 134. 68 Roberts v. Hayward, (1828) 3 C&P 432.
When is Acceptance Complete Where acceptance takes place by performance of an act, the latter being the condition of the proposal, when does the acceptance 'become complete' as to bind the offeror? Does the word 'performance' in this section mean complete or partial performance? Insisting on completion of performance for formation of contract would cause injustice, for it may be possible for the offeror to revoke the proposal even after the offeree has commenced the performance of the act.69 The Indian Law Commission has recommended including clarification in the section to the effect that:
in the case of a promise made in consideration of the promisee's performing an act, the promisee's entering upon performance of the act is an acceptance of the proposal, unless the promise contains an express or implied term that it can be revoked before the act has been completed.70
69 Commentary below s. 4; see also above: 'When is Acceptance Complete'. 70 The Law Commission of India, 13th Report, 1958, para 32 and draft amendment, s. 8.
Place of Contract Where the acceptance of the proposal consists of the performance of the condition of the proposal,
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the contract is made at the place where the condition is performed.71 71 Sitaram Marwari v. Thompson, (1905) 32 Cal 884.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER I Of Communication, Acceptance and Revocation of Proposals/S. 9.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER I Of Communication, Acceptance and Revocation of Proposals S. 9. Promises, express and implied.-In so far as a 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.
Introduction If the proposal or the acceptance (or both) is made in words, the promise is an express one. If the proposal or acceptance (or both) are made otherwise than in words, the promise is implied. The section also assumes that the promise may be partly express and partly implied. The section explains that proposal or acceptance may be in words or without, and assumes the existence of the rule. The Law Commission of India has recommended that the section must contain the positive rule that a promise may be express or implied.72 72 Law Commission of India, 13th Report, para 33.
Express Promises A proposal or acceptance may be expressed orally or in writing. A written contract may be a single document, each party being bound by signing it. It is suggested that the first to sign makes the offer, and the second to sign, accepts.73 The parties may have two copies of the document, each party signing one copy and exchanging the signed copy, in which case, the first to deliver the copy to the other makes the offer and the second accepts when he delivers his.74 A party may send a written document as an offer to be signed by the other party by way of acceptance.75 Parties may also include terms by incorporation or reference, namely, from other standard terms76 or contracts. One party making an offer by letter and the other by accepting it may conclude a contract. The proposal and the acceptance may likewise be made by fax, telex, telegram; or by word of mouth, namely, in the presence of each other, or on telephone or voice-mail. In each of these cases, the terms may be agreed in words, and the promise may be express. The parties to a contract are free to settle any terms they please.77
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Even with the parties having a contractual document, the document may not contain all the terms agreed between them. There may be certain terms agreed on orally. The question whether the contract contains additional or contradictory oral terms, is a question of fact. Evidence of certain oral terms cannot be given in certain cases to prove the terms of written contracts or to contradict or vary them.78 Once the express terms are ascertained, their meaning is a matter of construction.79 An 'express contract' means the reciprocal promises contained in the words of the contract or resulting from a true construction of them and excludes stipulations which may arise out of any usage or custom or which may be inferred from the conduct or course of dealings between the parties.80 A term which, in the opinion of the Court, results from the true construction of the language used by the parties may be said to be implicit in that language, but in the sense of the present section it is not implied; for it is contained in the words of the agreement,81 though not apparent on the face of them. The Courts will enforce not only the terms expressly agreed between the parties, but also those which are 'logically implied' from those express terms.82 Where parties have act ed on the terms of an informal document which has passed between them, but has never been executed as a written agreement or expressly assented to by both, it is a question of fact whether their conduct establishes an implied agreement to be bound by those terms.83 73 Eg. Financings Ltd. v. Stimson, [1962] 3 All ER 386, [1962] 1 WLR 1184(CA) . 74 Eccles v. Bryant, [1948] Ch 93, [1947] 2 All ER 865(CA) . 75 L'Estrange v. F Graucob Ltd., [1934] 2 KB 394, [1934] All ER Rep 16; Curtis v. Chemical Cleaning and Dyeing Co. Ltd., [1951] 1 KB 805, [1951] 1 All ER 631(CA) . 76 Atlas Export Industries v. Kotak d' Company, AIR 1999 SC 3286 (conditions of Standard Contract No. 15 of GAFTA incorporated by reference). 77 State of Madras v. Ramalingam d' Co., AIR 1956 Mad 695 (case under Sale of Goods Act, 1930). 78 See the Indian Evidence Act, 1872, ss. 90-100; see below 'Extrinsic Evidence'. 79 See below 'Construction of Contracts', s. 20. 80 Alapaty Ramamoorthy v. Polisetti Satyanarayana, AIR 1958 AP 550 at 554. 81 It often depends on the true construction of an agreement whether it is a contract or not; and for this purpose, there is no difference between express and implied terms; see Meherulla v. Sariatulla, (1929) 57 Cal 1093 at 1095, AIR 1930 Cal 596. 82 A E Farr Ltd. v.The Admiralty,[1953] 2 All ER 512, [1953] 1 WLR 965; Tappenden v. Artus, [1964] 2 QB 185, [1963] 3 All ER 213(CA) ; Gardiner v. Moore, [1969] 1 QB 55, [1966] 1 All ER 365. 83 Brogden v. Metropolitan Railway Co., [1877] 2 App Ca 666, (this might also be regarded as a case of acceptance by acting on the terms of a proposal); Bajranglal Maniram Singhvi Agarwal v. Anandilal Ramchandra Potdar, (1944) Nag 101, AIR 1944 Nag 124; (the conduct of the parties coupled with a chitti found sufficient to prove an agreement to pay).
Incorporating or Reference to Other Documents Questions may arise whether all the terms of another document are incorporated in a contract, when the contract refers to that document. The terms of the document can be incorporated by reference,84 when they are not inconsistent with the express terms of the incorporating document, and are not repugnant to the transaction which that document represents.85 A contract can also incorporate by reference statutes or rules, instead of merely referring to them. However circulars not issued under any statute and meant for use internally in an office, are not binding unless they are incorporated into the contract.86
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In M R Engineers and Contractors Pvt. Ltd. v. Som Datt Builders Ltd., 87 a sub-contract provided that it shall be carried out on the terms and conditions as applicable to the main contract. While deciding that this did not incorporate by reference into the sub-contract the arbitration clause in the main contract, the Supreme Court explained:
... there is difference between reference to another document in a contract and incorporation of another document in a contract, by reference. In the first case, the parties intend to adopt only specific portions or part of the referred document for the purposes of the contract. In the second case, the parties intend to incorporate the referred document in entirety, into the contract. Therefore when there is a reference to a document in a contract, the Court has to consider whether the reference to the document is with the intention of incorporating the contents of that document in entirety into the contract, or with the intention of adopting or borrowing specific portions of the said document for application to the contract.
... If a contract refers to a document and provides that the said document shall form part and parcel of the contract, or that all terms and conditions of the said document shall be read or treated as a part of the contract, or that the contract will be governed by the provisions of the said document, or that the terms and conditions of the said document shall be incorporated into the contract, the terms and conditions of the document in entirety will get bodily lifted and incorporated into the contract. When there is such incorporation of the terms and conditions of a document, every term of such document, (except to the extent it is inconsistent with any specific provision in the contract) will apply to the contract. If the document so incorporated contains a provision for settlement of disputes by arbitration, the said arbitration clause also will apply to the contract.
... On the other hand, where there is only a reference to a document in a contract in a particular context, the document will not get incorporated in entirety into the contract. For example, if a contract provides that the specifications of the supplies will be as provided in an earlier contract or another purchase order, then it will be necessary to look to that document only for the limited purpose of ascertainment of specifications of the goods to be supplied. The referred document cannot be looked into for any other purpose, say price or payment of price. Similarly if a contract between X and Y provides that the terms of payment to Y will be as in the contract between X and Z, then only the terms of payment from the contract between X and Z, will be read as part of the contract between X and Y. The other terms, say relating to quantity or delivery cannot be looked into.
84 JK Jain v. Delhi Development Authority, (1995) 6 SCC 571; Soon Kok Tiang v. DBS Bank Ltd, [2010] SGHC 360 (Singapore High Court), [2011] 2 SLR 716. 85 Dwarkadas & Co. v. Daluram Goganmull, AIR 1951 Cal 10 at 19. 86 Bharat Sanchar Nigam Ltd. v. BPL Mobile Cellular Ltd., AIR 2009 SC 1005(Supp), (2008) 13 SCC 597. 87 AIR 2009 SC (Supp) 1786, (2009) 7 SCC 696.
Implied Contracts The word 'implied' is sometimes used to indicate contracts where proposal or the acceptance or both are signified not by words but by act s or conduct. For example, where an act is done by one person at the request of another, which act is not tortious to the knowledge of the person doing it, and such act turns out to be injurious to the rights of a third party, the person doing it is entitled to indemnity from him who requested that it should be done.88 Where a tenderer carries the tender of his sub-contractor in his own tender, he has sub-contracted the work to the sub-contractor, subject to
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acceptance of his own tender.89 The act s or conduct must be such that it can only give rise to the inference that there must have been an implied offer and an acceptance. If they are not consistent with there being an offer and acceptance, they cannot give rise to a tacit or implied contract.90Thus, an agreement between partners to vary the terms of the partnership contract may 'either be express or be implied from a uniform course of dealing' [s. 11(1) of the Indian Partnership Act, 1932]. When a customer of a bank has not objected to a charge of compound interest in accordance with the usual course of business, there is an implied promise to pay the charge.91 88 Sheffield Corpn. v. Barclay, [1905] AC 392; approved in Secretary of State v. Bank of India Ltd., AIR 1938 PC 191 (implied indemnity). 89 Naylor Group Inc. v. Ellis-Don Construction Ltd., [2001] 2 SCR 943 (Supreme Court of Canada). 90 Umedsingh Hamirasingh v. Marsden Mills Ltd., AIR 1959 Bom 143. 91 Haridas Ranchordas v. Mercantile Bank of India, (1920) 47 IA 17, 44 Bom 474, 55 IC 522, AIR 1920 PC 61 (distinguished in Gaddar Mal v. Tata Industrial Bank Ltd., (1927) 49 All 674, 100 IC 1023, (noted as 1927 All), AIR 1927 All 407, where no usual course of business was proved); Hulas Kunwar v. Allahabad Bank Ltd., AIR 1958 Cal 644; Bruce v. Hunter, (1813) 3 Camp 467; Batakrishna Pramanik v. Bhawanipur Banking Corpn. Ltd., 59 Cal 662, AIR 1932 Cal 521; Kanakalla Venkata Suryanarayan v. State Bank of India, AIR 1975 AP 113 at 119.
Implied Terms A contract may be partly express and party implied. The language of the section thus also applies to what are called 'implied terms' in promises, terms which a Court 'imports' into a contract, generally for giving effect to the intention, the presumed intention, of the parties. Nearly every contract leaves matters to be implied; what matters are to be implied must be determined with reference to the surrounding circumstances and the parties who made them,92 or may be imported under trade, mercantile or local usage.93A contract, whether implied or express, gives an equal cause of act ion.94 The question, whether contract is express or implied, is one of inference to be drawn from the facts. An express contract can be proved by written or spoken words, which constitute an agreement between the parties, while an implied promise may be proved by circumstantial evidence of an agreement.95 The process of implying a term is not one of inferring or presuming the existence of a term in an express contract.96 Necessity of Implying a Term The necessity for implying a term into the contract may arise because the parties have not expressly stated them, out of forgetfulness, or because of bad drafting, or because they may have thought the obligation so 'obvious' that it 'went without saying'. They may be content to state expressly only the most important terms agreed between them, leaving the others to be understood. They may have had the terms in their mind but did not express them or would probably have expressed them if the question had been brought to their attention. Otherwise, they may have understood the obligations according to the practices already established between them, or arising out of custom or trade usage applicable to their business. Later disputes will show that they did not provide for some contingencies in their contract. It may then become necessary to find out whether terms can be implied to provide for the contingency. Courts are required to imply a term to give efficacy to the contract, to prevent 'the enjoyment of the rights conferred by the contract (being) rendered nugatory, worthless, or, perhaps,...seriously undermined'.97 Some terms may also be implied by the Court, whether the parties had them in mind or not, because of the Court's view of fairness, policy or in consequence of the rules of law.98 In Malik v. BCCI, 99 while implying a term into a contract of employment that an employer shall not without reasonable and proper cause, conduct itself in a manner calculated and likely to destroy or seriously damage the relationship of confidence and trust between the employer and the
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employee, the Court observed that the evolution of the term was a recent and sound development, brought about by a change in legal culture, with far greater duties imposed on the employer to care for the welfare of the employee. Types of Implied Terms The terms implied may be of three types:100
(i) (ii) (iii)
terms implied by custom; terms implied by law; and other terms implied by Courts.
The common law also makes a distinction between terms implied in fact and terms implied by law. A term implied by law arises from the nature, type or class of contract in question. Some terms are implied by statutes in contracts of a particular class, for example, sale of goods. Certain terms are presumed to apply because of custom of a trade or business. Other terms are implied by common law, because though originally based on the intentions of parties to specific contracts of particular descriptions, they become so much part of the common understanding as to be imported into all transactions of the particular description. These are implied in fact, and purport to give effect to the presumed intention of the parties to the contract in respect of a matter that they have not mentioned but on which presumably they would have agreed should be part of the contract.1 The terms implied by law and implied by fact may tend to merge into each other. Whether or not a term is implied usually depends upon the intention of the parties as gathered from the words of the agreement and the surrounding circumstances.2 Such implication may be made in one or both situations, i.e., first, to give business efficacy to the contract, and secondly, to bring forth the obvious, but unexpressed, intention of the parties. Both these criteria depend on the presumed intention of the parties. This inquiry has difficulties, as it is based on an assumption that the parties have a common or joint intention, when in fact the parties may have no views in the matter, or may have contradictory views once they apply their minds to the question. Relationship between Parties The relationship between the parties or the nature of the contract is of prime importance in determining the implied term of any of the types mentioned above. It is not sufficient only to inquire into the intention of the parties in the particular case. Over the course of time, Courts have grouped together terms likely to be imported because of the relationship between the parties arising out of the type of transaction. In certain types of contracts, these terms may become standardised. Once these terms are well-settled, the real issue then remains of classifying the type of contract, by determining the relationship between the parties. Such implication depends not only on the intention of parties, but also on more general considerations. In the case of commercial documents familiar to commercial parties, terms can be implied, in particular as to the mode of carrying out of contract.3 An implied contract to pay compound interest may arise from a long course of dealings.4 Where both parties to a contract were hirers of plants, a term was implied that the usual standard form of conditions of hire applied.5 Although a duty of good faith may not be generally implied in all contracts, particular implication of such duty is possible in a commercial contract based on presumed intention of parties.6 Implication by Custom or Usage
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In certain contracts, the parties are presumed to have contracted with tacit reference to some custom or usage well-known in the district or in the trade, and whatever is prescribed by that usage becomes an additional term of the contract, if not excluded by express agreement. Evidence can be given of custom and usage to annex incidents to written contracts in matters in which the contract is silent.7 Such terms are certainly implied from a general interpretation of the transaction with reference to the usual understanding of persons entering in like transactions in like circumstances.8 The parties are presumed to have intended to be bound with reference to these usages without expressing these into their contracts. By virtue of s. 1, any such custom or usage will be recognised even if it is contrary to any of the provisions of this Act. The grounds on which usage of this kind are enforced is not that they have any intrinsic authority, but that the parties are deemed to have contracted with reference to them. They need not, accordingly, be ancient or universal. A Court may import into a contract any local custom or usage which is notorious, certain, legal and reasonable, provided it is shown that persons in the circumstances and condition of the parties in fact generally observe them. In India, most of the cases of this kind, which have been reported in the High Courts, appear to be on implied contracts to pay interest. Such a contract may exist by reason of mercantile usage.9 It has been held that the liability to pay interest cannot be imported into a contract containing no stipulation to that effect either under Hindu or English law, unless there is a mercantile usage.10 Implication by Law A term may be implied into a contract by statute, namely, sale of goods, insurance, hire purchase, etc.11 These implied conditions or covenants may be varied or supplemented, or also excluded by particular conditions provided in the contract between the parties. These terms may not always be taken to reflect the presumed intention of the parties; parties may not have thought about them at all. One view suggests that these are not 'implied terms' at all, but duties which (unless contrary intention is expressed in the contract) are imposed by law in the case of the particular contracts.12 Although these terms do not reflect the intention or presumed intention of the parties, they may be imposed upon them on considerations of public policy. Under the law, apart from the terms imported by mercantile usage, the Court may imply terms, which are necessary in order to repair an intrinsic failure of the expression in the contract, in other words, which will implement the presumed intention and give 'business efficacy' to the contract,13 which is such a term that if at the time the contract was being negotiated some one had suggested some express provision for a matter in the agreement, the parties would testily suppress him with a common 'oh, of course!'14 The principle of business efficacy was stated by Bowen LJ. in The Moorcock:15
Now, an implied warranty...as distinguished from an express contract or express warranty, really is in all cases founded upon the presumed intention of the parties, and upon reason. The implication which the law draws from what must obviously have been the intention of the parties, the law draws with the object of giving efficacy to the transaction and preventing such a failure of consideration as cannot have been within the contemplation of either side; and I believe if one were to take all the cases...of implied warranties or covenants in law, it will be found that in all of them the law is raising an implication from the presumed intention of the parties with the object of giving to the transaction such efficacy as both parties must have intended that at all events it should have.
The doctrine in The Moorcock is applied as a last resort where, without the implied term, the contract will not be workable. The doctrine can only be invoked to give business efficacy to the transaction as must have been intended; if an obligation is not clearly intended as such, it must fail to take effect unless some obvious oversight is to be remedied, or it is something so obvious that it goes without saying.16 The Court will imply a term if it was so obviously a stipulation in the agreement that it goes without saying that the parties must have intended itto form a part of a contract. This test overlaps the
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business efficacy test. In the words of Jenkins LJ.:17
I do not think that the Court will read a term into a contract unless, considering the matter from the point of view of business efficacy, it is clear beyond a peradventure that both parties intended a given term to operate, although they did not include it in so many words.
Sellers were held to warrant absolutely that they would obtain an export licence because of the clause 'Delivery: prompt as soon as licence granted' which meant that licence would be granted, the only thing was when. In such cases, the warranty is to use reasonable diligence to get the licence.18 Variation clauses were retrospectively applied because a stipulation was necessary for the business efficacy of the contract.19 Where the provisions of a lease cannot be carried out and must remain inoperative without implying an easement of necessity into the lease, the Court should read the lease in such a way that ut res magis valeat quam pereat and therefore the right course is to imply an easement of necessity.20 To give efficacy to the contract, the Courts are willing to imply a term on the ground that without it the contract will not work.21 Thus, a term has been implied into a contract for driving lessons that the vehicle provided would be covered by insurance;22 into a contract for the Turkish bath that the couches for reclining on were free from vermin;23 and into a contract of agency that the principal would not deprive the agent of his commission by committing a breach of contract between himself and a purchaser who released the purchaser from the obligation to pay the price.24 When will a Term be Implied Whether a term will be implied is a question of law for the Court. It will not be implied so as to contradict any express term.25 It ought not to be implied unless on considering the whole matter in a reasonable manner, it is clear that the parties have intended that there should be the suggested term. The Court has no discretion to make a new contract for the parties. As observed by Lord Atkin in Bell v. Lever Bros :26
Nothing is more dangerous to allow oneself the liberty to construct for the parties contracts which they have not in terms made by importing implications which would appear to make the contract more businesslike or more just. The implications to be made are to be no more than are 'necessary' for giving business efficacy to the transaction... a condition should not be implied unless the new state of facts makes the contract something different in kind from the contract in the original state of facts.
The Privy Council in an appeal from Australia has held,27 that in the first instance an implied term must be equitable. The other conditions are:
(i) (ii) (iii) (iv) (v)
it must be reasonable and equitable; it must be necessary to give business efficacy to the contract and no term can be implied if contract is effective without it; it must be so obvious that 'it goes without saying'; it must be capable for clear expression; it must not contradict any express term of the contract.
Express Terms Prevail A promise which is excluded by the express terms of a contract cannot be implied.28 Courts will also
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not imply a term which is inconsistent with or contradicts the express terms of the contract.29 An unexpressed term could only be implied if it was necessary to give business efficacy to a contract, but it must be a term which the Courts finds the parties must have contemplated to be a term of their contract. If, however, the terms of the contract are explicit and clear and free from ambiguity, those terms will be applied even if the Court considered that some other term would be more appropriate. Therefore, in a building contract, if it was clear that Phase III was to be contemplated by the particular date, no term for extension could be implied because of the delay in completion of a penultimate phase.30 In a contract for supply of 'screened zira' for Jamalpur Railway Station, it was provided that the railway administration would not be liable for 'anything that may happen to the suppliers' commodities until the same passed into the physical possession of the buyer (and not as a carrier) at a place of delivery noted in the Purchase Order'. This condition was held to be a clear indication of keeping the liability of the railway carrier and purchaser separate and distinct. In such a case, in the absence of a contract, express or implied, the supply of wagons by the railway administration would not be a condition precedent to the supply of the commodities within the time specified by the contract.31 An implied term, that when a broker is invited to produce an offer, there is a promise by the invitor that it would be accepted, unless just excuse for refusal existed, was not raised in Luxor (Eastbourne) Ltd. v. Cooper .32 A term was not implied for extra payment for the work of dewatering required on meeting soft strata during excavation, when the tender mentioned excavation of hard strata,33 or for renewing an agreement when the words 'if it is not renewed' were used in an agreement of supply of electrical energy.34 Where a member of a Committee had a two year term, its rules did not provide for his removal, a term could not be implied conferring power of removal.35 Implication of Term Rejected A term ought not to be implied simply because it is reasonable to make a particular implication36 or that it would make the performance of the contract more convenient,37 or it would improve the contract,38 or that it is consistent with the express terms agreed between the parties.39 The Court refused to imply into an agreement 'subject to contract', a collateral agreement to negotiate in good faith for an unspecified period.40 A term will not be implied if the contract is effective without it.41 The test is of necessity and not merely reasonableness.42 No term was implied in a contract of service that wages were not to be paid during absence of an employee owing to illness;43 into a lease that the lessor would keep a drain in repair;44 into a contract for the services of a handwriting expert that he should not render assistance to the opposite party;45 into a voyage charter party that the charterers would indemnify the shipowners against claims made by the cargo-owners;46 into a contract between banker and customer that the customer would take reasonable precautions in his business to prevent forgeries by his employees;47 into a debenture that the debenture holder could appoint a receiver if his security was in jeopardy;48 into an arbitration agreement that the claimant would proceed with the arbitration without undue delay;49 and into a contract between the insurer and the assignee of the policy to inform him that the insured was dishonestly jeopardising the cover provided by the insurer.50 The Court of Appeal refused to imply into the contract a term providing a lock to the dressing room of an act or whose clothes were stolen (a case of master's liability towards servant).51 No term was implied to the term of employment of a house physician who had to reside at a neighbouring hostel provided by the hospital and he was required to leave the key of his bedroom in the lock (also a case of master and servant);52 or into a contract for a sale of a patent that the patent would be kept alive by the seller;53 or into a contract for sale of jute which required licence of the Government of India that it was subject to the necessary licences and shipments should be subject to 'quota system'; it being within the knowledge of the sellers how much quota they had.
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The Court would read an implied term only where both parties intended that term to operate;54 or into a contract, where it was within the power of the owners and outside the power of the charterers, to obtain permission to load, the obligation 'expected to load' in the charter party being sufficient for business efficacy;55 or into a contract, where parties have made express contract for remuneration, the amount of and conditions under which it will become payable must be ascertained by reference to the terms of the contract.56 From the phrase 'purchaser to use diligence to obtain approval of scheme,' there is no implied term to appeal to the minister if the scheme was not approved by the planning authority.57 A term cannot be implied that wholesaler who has collected tax from retailers, the levy of which was later declared invalid, were bound to refund it to the retailers, because had the parties thought of the contingency, they would not have agreed to refund the amount.58 An obligation to indemnify is an onerous one, and the courts would be slow to imply such an obligation into a contract.59 No Implied Contract under Article 299 of the Constitution There can be no implied contract between the Government and another person because that would nullify the provisions of Art. 299(1)60 and, therefore, no contract can be inferred from the facts and circumstances of the case, and a contract not complying with the provisions of Art. 299(1) is not a contract at all and is not enforceable against or by the Government.61 Implied Terms 'generally in all contracts' Not to Prevent Performance A term may be implied into a contract that neither party shall prevent the other from performing it.62 If a contract is subject to a condition precedent, a term will be implied that the parties do nothing to prevent the fulfilment of the condition.63 In the absence of any express provision to the contrary, it will be implied that it was not the intention of the parties that either should be entitled to rely on his own breach of the contract to avoid the contract or obtain a benefit under it.64 If a term can be implied that the party will not do an act that, if done, would prevent the fulfilment of a condition precedent, then the doing of that act will be a breach of contract; if a term can be implied that a party will not do an act that, if done, would cause a condition subsequent to be fulfilled, then the doing of that act will be a breach of contract. But if a suitable term cannot be implied into the contract, it will take effect according to its tenor.65 A Government works contractor was entitled to costs of delay that could have been prevented if the Government had stepped in to maintain law and order and prevent interruption of work by antisocial elements, thereby implying this as an obligation of the Government.66 Duty to Co-operate A promise may be implied on the part of each party to do all that is necessary to secure the performance of the contract.67 Thus 'where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectively be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect'.68 A contract is not merely a meeting point for conflicting interests but must also be viewed, to a certain extent, as a common project. This view can be said to relate to the principle of good and fair dealing,69 and to the obligation to mitigate the harm in the event of non-performance. The degree of cooperation is determined not by what is reasonable, but to the limited extent of what is necessary to make the contract workable, to be determined by the obligations imposed, expressly or impliedly, upon the party by the agreement itself, and the surrounding circumstances.70 The duty must be so limited as not to upset the allocation of duties in the performance of the contract, for some contracts may involve a duty not to interfere in the course of performance by the other party, while others may envisage active cooperation from parties. The UNIDROIT principles require from a party such cooperation as may be reasonably expected for the performance by the other party.71
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Duty to Achieve Specific Result and Duty of Best Efforts The duty of diligence required in the performance of the contract varies according to the nature of obligation incurred. Where the party has undertaken to exert best efforts, eg, 'to take best efforts in promoting and sales', a duty is implied upon that party to exert such efforts as a reasonable person would exert in the same circumstances. If a party has agreed to achieve a specific result, e.g., 'to achieve sales of Rs 1 lakh in a month', a duty is implied upon the party to achieve that result.72 The nature of the duty would depend upon various factors, which may include, apart from the express terms in the contract, for example, the price, the degree of risk involved in achieving the result, the qualifications, expertise and experience of the party, and the ability of the other party to influence the performance of the obligation. Where the contract is contingent upon the happening of an event, there is no undertaking by either party that the event shall occur, but a term may also be implied that one of the parties will use all reasonable efforts to secure the fulfilment of the condition or bring about the event,73 without any absolute undertaking that the efforts would succeed. If a property cannot be transferred under the provisions of a statute without the permission, consent or approval of an authority, the agreement to transfer the property must be deemed subject to an implied condition that the transferor will obtain the sanction of the authority concerned.74 It is also implied that such permission or sanction must be obtained within reasonable time.75 Performance in Foreign Country Where a contract requires an act to be done in a foreign country, it is generally an implied term of the continuing validity of the contract that the act will not be illegal by the law of that country.76 Payment of Price Price is a material term of a contract, but if it is not expressed, a term may be implied that a fair and reasonable price was intended by the parties.77 In a contract for purchase of several tons of iron scrap belonging to the government, it not being possible to weigh such quantities to the last ounce, it was an implied term that if on act ual weighing, the goods were found to be less than the approximate quantity, the excess price was to be refunded and vice versa.78 Termination of Contract Whether a contract containing no express provision for its termination can be determined by reasonable notice by one or both of the parties, depends upon implication of term to that effect, moreover, it may be a question of construction of ascertaining the common intention of the parties to that effect when they entered into the agreement.79 A provision of termination by giving reasonable notice has been implied in contracts where there was no provision of determination, e.g., contracts of licence to occupy a theatre,80 between agent and principal for terminating the agency,81 between solicitor and client,82 between manufacturer and distributor for terminating the distributorship,83 between employer and employee for terminating the employment.84 In Her Highness Maharani Shantidevi P. Gaikwad v. Savjibhai Haribhai Patel, 85 the contract provided that the development agreement could not be terminated after the owner gave possession to the developer. The Supreme Court held that this meant that it could be terminated at will before possession. This, it is submitted is too wide an approach.86 A power to terminate ought not to be implied easily. Implied Terms in Written Contracts A Court may be reluctant to imply a term where the parties have entered into a detailed and carefully drafted contract.87 A term permitting quarrying of minerals could not be implied into a lease deed on a basis that what was not expressly prohibited was deemed to be permitted.88 If a contract is reduced into writing, no unexpressed condition should be considered as implied in the contract except such terms as are necessary to give the transaction the efficacy which the parties must have intended to give it. Therefore, if the contract can be performed as it stands and is effective, no term or condition
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can be imported simply because it would seem reasonable to imply such a term.89'The touchstone is always necessity not reasonableness.'90 The reference in the purchase order to respondent's general conditions of contract obtainable on request was sufficient to incorporate into the contract between the parties the general conditions of contract and the meaning reasonably to be attributed to the reference was that the conditions referred to were those current at the date of the contract.91 Implied Terms in Particular Contracts Agency A term may be implied to remunerate for extra work done by the agent.92 In the absence of any provision in the termination clause in the contract enabling termination without cause with immediate effect, a provision requiring reasonable notice of termination would be implied in the contract of exclusive distributorship.93 No term is implied in a contract where one person employs another as an agent on commission to provide him with the means of earning his commission;94 or in a contract between an estate agent and a vendor that the prospective purchaser should be able and willing to purchase,95 or that a good title would be made out.96 Loans, Debts, Lending, Banking A covenant to repay is implied in every transaction of loan.97 An implied contract to pay compound interest may arise from a long course of dealings.98 The liability to pay interest cannot be imported into a contract containing no stipulation to that effect either under Hindu or English law, unless there is a mercantile usage.99 There is an implied term that the lender must exercise an express power to vary the rate of interest payable b7 its customer &uot;without dishonesty, capriciousness or for an improper purpose&uot;.100 No terms were implied into a contract between a banker and customer that the customer would take reasonable precautions in his business to prevent forgeries by his employees.101 A person accepting money for appropriation upon a certain contingency is under an implied promise to refund the same if the contingency does not arise and there is no appropriation of the amount.102 Employment A term is implied in a contract of service that the employee will observe good faith towards his employer,1 will not divulge information obtained in the course of his employment,2 and will not be required to do any unlawful act.3 It is an implied term of a contract of service that the employer would give to the employee sufficient work to enable him to earn what the parties have contemplated he should earn.4 An employer is under an implied obligation that he would not conduct his business in a manner likely to destroy or seriously damage the relationship of confidence and trust between employer and employee; he would not conduct a dishonest or corrupt business.5 This duty to look to the employee's interests includes a duty not to do damage to the employee's future employability. There is no implied term to improve the employee's future job prospects, but only to refrain from damaging them.6 This implied term of mutual trust and confidence does not require the employer to warn an employee of more financially advantageous ways of exercising his rights.7 A term is implied in a contract of employment that if a reference was supplied by the employer in respect of his employee, past or present, to a prospective future employer, due care and skill would be exercised in its preparation.8 This term would be implied where the contract related to an engagement of a class where it was the normal practice to require a reference from a previous employer before employment was offered, and the employee could not enter into that class of employment except on the basis of the reference given by his ex-employer.9 There is an implied term allowing the employer to claim against the employee if he has taken more leaves than his entitlement.10 A term may be implied in a contract for employment of a director, that the articles of the company will not be altered and then act ed upon so as to terminate his contract of service.11 No term was implied in a contract of service that wages were not to be paid during absence of an
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employee owing to illness;12 or that the employer would indemnify the employee in respect of torts committed in the course of employment;13 or that he would insure the employee when abroad, against accidental injury, or advise the employee to obtain such insurance for himself.14 Nor can a term be implied in an ordinary contract of master and servant, giving the right to the employer to suspend the employee in the sense of right to forbid the servant to work. Such power can be created by statute or an express term in the contract.15 In Johnstone v. Bloomsbury, 16 the contract of employment allowed the employer to require junior doctors to work 48 hours overtime a week. A question arose whether a term could be implied that the employee could not be called on to work at such hours as it endangered his own health. The Court of Appeal held that the implied term was subordinate to express ones, but it was suggested17 that where the express term was subject to the employer's discretion, then the discretion, though not the term itself, could be fettered by the implied term. Export and Import Licences The parties to an international contract for sale of goods may expressly provide who is to assume the responsibility of obtaining any necessary licence, but, in the absence of any express term, there may be an implied term to this effect.18 Assuming there is such a term, it is a matter of construction whether the party placed under the duty promised: (i) to use his best endeavours to obtain a licence;19 or (ii) undertook absolutely that a licence would be obtained.20 A promise to co-operate with one another for obtaining the licence may also be implied.21 A contractor for the shipping of goods from Brazil was 'subject to any Brazilian export licence' but the goods could not be shipped as the Bank of Brazil could not give a licence except on payment of prices, higher than the contract prices. The Court did not insert an implied term that if the sellers could not obtain a licence at the contract prices, they would have an option to cancel.22 Housing, Building, Construction A contract by which dwelling units in a council block were let to tenants contained 'conditions of tenancy' which imposed obligations upon the tenants but was silent as to the obligations of the landlord. The House of Lords implied an obligation on the part of the landlord to take reasonable care to keep the essential means of access and other communal facilities in reasonable repair.23 A term may be implied into a building contract where work commenced long before the contract was made, that the agreement would operate retrospectively;24 or that the time of completion of a phase of the work should be extended so as to take into account delays in the completion of an earlier phase of the contract.25 A term was not implied into a construction contract for payment for extra unexpected de-watering work required in the foundation.26 But where the contract required the contractor to pay 'fair wages' to the labour employed by him, a term could be implied that the employer would reimburse the increased expense to the contractor on account of rise in the minimum wages prescribed by law.27 A term may be implied in a contract by an architect to prepare plans for a site, an implied licence to use those plans for all purposes connected with the buildings on the site;28 and in a contract by consultant engineers to design a building for a particular purpose, that the design should be fit for the purpose;29 in a contract to design a building at a nominal fee for the purpose of obtaining planning permission, that the client was entitled to use the plan for the purpose of erecting the building.30 No term was implied in a contract for exchange of two incomplete housing estates that the building work was of good quality.31 No term is implied in a contract for sale of a piece of land with a house on it, that the house is habitable;32 but where a vendor sells a piece of land and covenants to build or complete a house on it, there is an implied term at common law that:
(i) (ii)
the work will be done in a good and workmanlike manner; that he will supply good and proper materials; and
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(iii)
that the house will be reasonably fit for human habitation when built or completed.33
Insurance No contract is implied into a contract of insurance that the insurers would indemnify the insured in respect of expenditure incurred by him in preventing or minimising a loss which might fall to them under the policy;34 into a contract between insurers and the assignee of the policy to inform him that the insured was dishonestly jeopardising the cover provided by the insurers;35 into a contract between insurers and a reinsurer that they could recover a pro rata share of their costs of investigating, settling or defending claims on the underlying policies.36 Leases Where the provisions of a lease cannot be carried out and must remain inoperative without implying an easement of necessity into the lease, the Court should read the lease in such a way that ut res magis valeat quam pereat and therefore the right course is to imply an easement of necessity.37 In a lease to run a ferry with steamers owned by the lessor, it is an implied term that the lessor has to supply steamers in working order at the commencement of the lease.38 No term was implied into a lease that the leased premises are or will be fit for habitation or for any particular use;39 or that the lessor would keep a drain in repair.40 No term could be implied into a lease granted for quarrying blue metal rough stone permitting the lessee to quarry any mineral; for what is not specifically permitted must be deemed to have been impliedly prohibited.41 Supply of Services In the case of a contract under which a person agrees to carry out a service, other than a contract of service or apprenticeship, where the supplier is acting in the course of business, there is an implied term that the supplier will carry out the service with reasonable care and skill, and if the person has agreed merely to arrange for services provided by others, there will be an implied term that he would use reasonable care and skill in selecting those other persons.42 It is implied that a contractor will provide properly skilled and qualified labour to carry out the contract work.43In England, this is implied under s. 13 of the Supply of Goods and Services Act, 1982. The service is of an artisan, it must be carried out in a good and workmanlike manner.44 Whether the supplier warrants that his services will produce a particular result, or only that the product of his service will be reasonably fit for the purpose for which it is required, would depend on the circumstances of the case.45 In a contract for services, a covenant is implied to pay for any work done;46 in a contract for laying a carpet, that it should be done in a proper and workmanlike manner.47 If a contract for work is found to be invalid, it is assumed, unless the express contract excludes it, that there is an implied contract to pay the contractor reasonably for the work done.48 If the contract is one for supply of professional services, the degree of care and skill required of a professional man is that which is to be expected of a member of his profession (that of a specialist if he is one) of ordinary competence and experience.49 The standard of care imposed on an engineer preparing tender documents does not require him to advise prospective contractors of the need to obtain permits or approvals to do the work by the particular method they propose.50 An adviser charging his client on the basis of time and effort spent has an implied duty to provide account to his client in a sufficiently organised form, and to give details of the work performed over the time.51 No term can be implied in the contract between a doctor and patient entitling the patient to access to all the matters in his medical record.52 Transport and Carriage A term is implied in a contract for the shipment of tractors, that the tractors would be carefully loaded.53 No implied term was implied into a voyage charter party that the charterers would indemnify
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the shipowners against claims made by the cargo-owners;54 or that the shipowners would use due diligence to obtain, and would obtain, any necessary Government permission to load;55Bilticut contracts include the liability of the seller to take the goods to the railway station and get the railway receipts prepared at his own expense; and in the case of 'station delivery' contracts, it is the seller's duty to take the goods to the railway station but expenses of getting the railway receipt prepared are borne by the buyer. In either case, the railway freight is paid by the buyer.56 Miscellaneous The headmasters of secondary schools allow their pupils to appear for examinations of the secondary board under implied terms of the contract of education.57 A term may be implied in a father's contract to pay for such of his child's expenses as could be capable of being approved by him, that such consent should not be unreasonably withheld;58 in an arbitration agreement, that the arbitration award should be in such a form that it would be capable of being enforced as a judgment under a relevant statute;59 in a contract between a driving school and its customer, that any car provided under the contract would be covered by insurance.60 A term was implied into the Articles of Association that the directors of an insurer could not exercise their discretion in a manner as would defeat the reasonable expectation of policyholders.61 A term is implied that in a contract of Turkish bath, the couches for reclining on are free from vermin.62 No term was implied into a contract for the sale of a patent to a company that the company would keep the patent alive.63 Construction of Terms When the parties differ in their views about the meaning of their contract, and its effect on their rights and obligations, it falls upon the Court to settle these differences. Such settlement often depends upon a proper construction of the terms of the contract. The object of construction is to discover the mutual intention of parties. 'The expression 'construction', as applied to a document... includes two things: first the meaning of the words; and secondly, their legal effect, or the effect which is to be given to them'.64 Although, the former is referred to as interpretation,65 and the latter as construction, these terms are used interchangeably. Once the true meaning of the words in the instrument has been ascertained as a fact, construction becomes a question of law. Rules of construction are aids for ascertaining the intention of the parties and need not be resorted to when the intention of the parties is unequivocally expressed.66 A rule of construction is a presumption rather than a rule of law. They are merely guidelines to the presumed intention of the parties in the light of events which have occurred. Accordingly, a rule of construction will be applied only when a contrary intention is not expressed in the contract. Purpose of Construction The purpose of construction is to discover the actual intentions of the contracting parties. This is determined objectively, because the parties cannot give direct evidence of the intention they had at the time of making the contract. Although, the purpose of construction is to ascertain the intention of the parties, this does not correctly express the act ual task of construction. First, the parties cannot give evidence as to what their intention was at the time of making the contract. Secondly, the words selected may not exactly express what they wish to achieve. They may have been selected, yet the parties may express rival points of view. Further, the contract may have been made by their lawyer or some other person. Therefore, the real object of construction is to ascertain the presumed intention of the parties, on the assumption that both parties are reasonable.67 Rather than apply the rules of construction rigidly, the modern approach is 'to assimilate the way in which documents are interpreted by judges to the common-sense principles by which any serious utterance would be interpreted in ordinary life'.68 Ascertaining the Intention of the Parties The intention of the parties must be ascertained from the language they have used, considered in the
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light of the surrounding circumstances and the object of the contract, in so far as that has been agreed or proved. The UNIDROIT Principles expressly provide that in ascertaining the intention of the parties, be it the subjective intention or the 'reasonableness' test, regard shall be had to the following circumstances:
(a) (b) (c) (d) (e) (f)
preliminary negotiations between the parties; practices which the parties have established between themselves; the conduct of the parties subsequent to the conclusion of the contract; the nature and purpose of the contract; the meaning commonly given to terms and expressions in the trade concerned; usages.69
The first three may be more relevant in applying the 'subjective' test, and the latter in applying the 'reasonableness test'. Ascertain Intention from Document Itself There is no intention independent of the meaning of the words used in the contract by the parties. The word 'intention' is not used here to mean motive, purpose, desire, as a state of mind, but as meaning intention as expressed.70 When the Court ascertains the intention, it does not study what the parties intended to do, but what the language employed shows that they did; 'in other words, they are not constructing a contract on the lines of what may be thought to have been what the parties intended, but they are construing the words and expressions used by the parties themselves'.71 The construction of a contract cannot be governed or affected by the intention or belief of one of the parties not communicated to the other.72 The importance of this rule lies, first because parties are unlikely to use language in a sense different from that usually attached to it, and secondly, because even if this were to be the case, it would be difficult, once dispute has arisen, to prove that a particular meaning claimed by one party to have been their common intention was shared by the other party when they made the contract. In construing a contract, the Court must look primarily at the words used in the contract itself,73 unless they are such that one may suspect that they do not convey the intention correctly. If the words are clear, there is very little the Court can do about it.74 This precludes the parties from giving direct evidence to show that their real intention was different from that reflected in the document.75 Where the terms of a policy of burglary insurance described burglary to mean theft by use of force or violence or threat, the insurer was not liable where the goods insured were found to be stolen without use of force.76 Where tenders were invited for collection and purchase of a lot, and a lot was described as the quantity in a godown, the seller was liable to sell the entire quantity in the godown even if it exceeded the notified quantity.77 A policy covering theft of jewellery contained a clause that excluded loss occassioned by theft of dishonesty by any customer in respect of property insured 'entrusted' to them by the insured. In a claim for theft of jewellery by customer, it was held that the insurer was liable because jewellery was not entrusted to him.78 It was held that the terms of an airway bill applied to loss of goods from a truck after it had left the airport, because parties had agreed that delivery will be made in accordance with consignee's instructions, and the definition of 'carrier' indicated services incidental to air carriage.79 Where an assignment of copyright was silent about the term, but the negative covenant and payment of royalty was limited to 25 years, the assignment was not absolute in terms of time.80 The principles of construction of contracts are applicable also to compromise decrees.81 The UNIDROIT Principles in a separate chapter for the purpose, provide the rules of interpretation of contracts. The Principles provide that a contract shall be interpreted according to the common intention of the parties. It is only when the intention cannot be established, that the contract shall be
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interpreted according to the meaning that reasonable persons of the same kind as the parties would give it in the same circumstances.82 Objective Test 'When one speaks of the intention of the parties to the contract one speaks objectively...and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties'.83 As stated by Mason J. in Codelfa Construction Pty Ltd. v. State Rail Authority of NSW :84
... when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, 'aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which 'the contract came into existence, and to the parties' presumed intention in this setting. We do not take into account the act ual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.
The UNIDROIT Principles provide as regards unilateral statements, that the statements and other conduct of a party shall be interpreted according to that party's intention if the other party knew or could not have been unaware of that intention; else according to the meaning that a reasonable person of the same kind as the other party would give to it in the same circumstances.85 Surrounding Circumstances For correct interpretation of the contract, the Courts have to look primarily to the document itself, but may also take into consideration surrounding circumstances,86 namely, circumstances in which it was written, the drafting abilities of the parties, the intention which the writing was to convey and how the parties act ed under it.87 In the construction of written instruments, it is legitimate in order to ascertain the true meaning of the words used and if that be doubtful, then to have regard to the circumstances surrounding their creation and the subject matter to which it was designed and intended to apply.88 But if the words are clear in the context of the surrounding circumstances, the Court cannot rely on them to attribute to the author an intention contraryto the plain meaning of the words used in the document.89 The producer of a film assigned to X all 'negative rights' in the film. The claim of the assignee of X to the television and video rights of the film was negatived on the ground that the claimant could not claim a right which was not contemplated at the time of the original assignment in the year 1961, when neither party could have foreseen the scientific advancement of videos, satellites.90 Similarly, the right of consumers of electricity supply to claim rebate was not lost by a specific clause in the agreement under which they agreed to pay charges at such rates as may be revised by the electricity board from time to time, since the development rebate was beyond the contemplation of the parties at the time of the agreement.91 Prior Negotiations and Correspondence In construing written contracts, the Courts ought not to resort to evidence of prior negotiations except to the extent necessary for clarifying what is ambiguous in the contract;92 then the Court would place itself in the position of the parties to ascertain their intention. There are sound policy reasons for excluding evidence of precontract negotiations. '[P]recontractual negotiations will be drenched in subjectivity and may, if oral, be very much in dispute', and admission of such evidence 'would create greater uncertainty of outcome in disputes over interpretation and add to the cost of advice, litigation or arbitration'.93 It has been stated:
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The reason for not admitting evidence of these exchanges is not a technical one or even mainly one of convenience, (though the attempt to admit it did greatly prolong the case and add to its expense). It is simply that such evidence is unhelpful. By the nature of things, where negotiations are difficult, the parties' positions, with each passing letter, are changing and until the final agreement, though converging, still divergent. It is only the final document which records a consensus. If the previous documents use different expressions, how does construction of those expressions, itself a doubtful process, help on the construction of the contractual words? If the same expressions are used, nothing is gained by looking back: indeed, something may be lost since the relevant surrounding circumstances may be different. And at this stage there is no consensus of the parties to appeal to.94
An arbitrator's interpretation based on pre-contract negotiations was upheld by the Supreme Court.95 The meaning of the term 'factory-cum-godown' in an insurance policy was interpreted to exclude goods lying in the open, having regard to the answers given by the insured in his proposal.96 Subsequent Conduct 'One may not look at what the parties did under the contract for the purpose of construing the terms'.97 The true construction of an agreement must depend upon the import of the words used and not upon what the parties choose to say afterwards.98 Nor does subsequent conduct of the parties in the performance of the contract affect the true effect of the clear and unambiguous words used in the contract.1'Otherwise, one might have the result that a contract meant one thing on the day it was signed, but by reason of subsequent events, meant something else a month or a year later'.2 But where the meaning of an instrument is ambiguous, subsequent interpreting statement is admissible.3 Where the agreement is partly written and partly oral,4 or where there is no writing,5 subsequent conduct may be examined for the purpose of determining what were the full terms of the contract. Subsequent conduct may be relevant to show that the contract exists, or to show variation in the terms of the contract, or waiver or estoppel.6 The Court can also take into account how the parties understood the terms.7 Custom of Trade When a custom is relied upon, there is necessarily a variation from the written contract, but the variation must not be in contradiction of, or repugnant to, the written word.8 Extrinsic evidence is allowed to prove custom or usage.9 Custom or usage of a trade cannot modify the express term of a contract which is clear and unambiguous.10 Other Documents Where the document is expressed to be supplemental to another document, the whole of such other document may be looked into. Where the terms and conditions of the supply of the first contract were incorporated by reference in the second contract, only the normal incidents of terms and conditions of supply which are connected with supply such as, its mode and process, time factor, inspection and approval, if any, reliability for transit, incidental expenses, etc., stood incorporated in the second contract and not the arbitration clause. The arbitration clause of an earlier contract can, however, by reference be incorporated in a latter contract, provided it is not repugnant to or inconsistent with the terms of the contract in which it is incorporated.11 A contract must be interpreted by itself and without reference to another contract, unless the expressions used in both and the facts and surrounding circumstances also are the same or identical.12 Where parties entered into two agreements, one for construction and the other for interior designing, and only the construction agreement enabled reference to arbitration of issues arising under that agreement but also connected disputes, it was held that disputes under both the contracts would be covered by the arbitration clause in the construction agreement.13 In the words of Lord Wright in Luxor (Eastbourne) Ltd. v. Cooper, 14 however similar the contracts may appear, the decision as to each must depend on the consideration of the language of the particular contract and in the light of material circumstances of the parties in view of which the contract is made.15 Where the question was what exactly were the terms and conditions of a contract of carriage by sea in a
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particular case, reference to other bills of lading issued by the shipping company in connection with the same voyage also cannot be made.16 A contract must be construed according to its own terms and cannot be explained or interpreted by any antecedent contract;17 even a formal antecedent contract cannot be looked at, to control the terms of the conveyance, much less mere communications, which would only show what they intended to do but cannot show what they did.18 But an agreement to sell may be used to clear an ambiguity in the sale deed.19 The Courts have sometimes been ready to read an earlier oral statement and a later formal document forming together a single comprehensive contract, i.e., the parties have made their contract partly in writing and partly by word of mouth.20 A preliminary contract is governed by the subsequent deed, if there be a difference between them,21 but two agreements can be read together in order to find out the intention of the parties and to arrive at the terms finally agreed.22 Meaning of Words and Language 'A word is not a crystal; transparent and unchanged; it is the skin of a living thought and may vary greatly in colour and content according to the circumstances and the time in which it is used'.23
...Law is not concerned with the speaker's subjective intentions. But the notion that the law's concern is therefore with the 'meaning of his words' conceals an important ambiguity. The ambiguity lies in a failure to distinguish between the meanings of words and the question of what would be understood as the meaning of a person who uses words. The meaning of words, as they would appear in a dictionary, and the effect of their syntactical arrangement, as it would appear in a grammar, is part of the material which we use to understand a speaker's utterance. But it is only a part; another part is our knowledge of the background against which the utterance was made. It is that background which enables us, not only to choose the intended meaning when a word has more than one dictionary meaning but also...to understand a speaker's meaning, often without ambiguity, when he has used the wrong words.24
The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammar; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.25 Plain (ordinary) Meaning In construing all written instruments, the grammatical and ordinary sense of the words is to be adhered to, unless that would lead to some absurdity, or some repugnance or inconsistency with the rest of the instrument, in which case the grammatical and ordinary sense of the words may be modified, so as to avoid that absurdity and inconsistency, but no further.26 An author of a formal document intended to be acted upon by others should be presumed to have used words with meaning.27 Contracts ought to be construed according to the primary and natural meaning of the language chosen by the parties,28 and grammatical or natural or usual meaning given to the words used in the contract.29 This does not mean the dictionary meaning of the word, but that in which it is generally understood.30 Oral evidence can be adduced to show how that word is to be understood.31 The Court must, as far as possible, avoid a construction which would render the words used by the author of a document meaningless and futile or reduce to silence any part of document and make it inapplicable.32 Therefore, where an insurance policy provided that the 'insurance may be terminated at any time at the request of the insured' and 'the insurance may be terminated at any time at the instance of the company' the words 'at any time' can only mean at any time the party concerned likes, or to put it differently, it means either party may at its will terminate the policy.33 An agent who agreed to receive commission on completion of the sale of a property was not entitled to commission, based on the clear language of the terms, where the buyer purchased shares of the company that owned that property, rather than the property itself.34
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But it is not necessary that the same meaning ought to be given to an expression in every part of the document in which it appears.35 A heading of a clause cannot control the interpretation of the clause if its meaning is otherwise plain and unambiguous, but it can certainly be referred to as indicating the general drift of the clause and affording a key to a better understanding of its meaning.36 Technical Words and Words with Special Meaning When a word has both an ordinary meaning and a special meaning, the specialised meaning will be applied only when it is proved that the parties intended to use the word in the latter sense. The words of s. 98 of the Indian Evidence Act, 1872 must have their technical meaning given to them unless something can be found in the context to exclude it. The Indian Evidence Act, 1872 allows extrinsic evidence to be given to show that technical words are used in a peculiar sense. The presumption is that a certain word was to bear a proper technical meaning, and something must be found in the context, or in the surrounding circumstances so as to justify in giving the word a qualified meaning.37 Commercial Contracts Commercial transactions couched in easy and understandable language contained in a contract have to be respected according to their tenor, because the parties have entered into them with open eyes and are conscious of the merit of the letter and spirit of the contract's clauses.38The Courts should not, in commercial transactions, defeat the efficacy of documents which parties have act ed on. The Court should put itself in a frame of mind which would make itself possible to understand how commercial minds work.39 The House of Lords in Adamastos Shipping Co. Ltd. v. Anglo-Saxon Petroleum Co. Ltd., 40 summarizing the rules applicable to construction of commercial documents laid down that effort should be made to construe commercial agreements broadly and one must not be astute to find defects in them or reject them as meaningless. The dealings of men should, as far as possible, be treated as effective and the law may not incur the reproach of being the destroyer of bargains.41 In case of ambiguity, that interpretation will follow that most accords with &uot;business common sense&uot;.42 But in certain cases, the Court may relieve the parties from the contract of their duty on the ground of public policy.43 Mere difficulty of interpretation is not synonymous with vagueness. Contracts should not be readily declared invalid for uncertainty or vagueness. If the Court is satisfied that there was ascertainable and determinative intention, it must give effect to that intention. Documents embodying business agreements should be construed fairly and broadly so as to give business efficacy.44 A bank guarantee given for &uot;money that may become payable by our said client to you in relation to the said goods whether on account of security or of the price of the said goods as dispatched or delivered by you&uot; covered demand for sales tax and entry tax in respect of the supplies.45 In Sumitomo Heavy Industries Ltd. v. Oil and Natural Gas Company, 46 the contract provided for compensation in the event the contractor was subjected to extra cost arising on account of change of law. The question arose whether reimbursement of tax made by the contractor to his sub-contractor arising from an amendment to income tax law could be recovered from the employer. It was argued that this must be interpreted strictly, as the Court would construe contracts of indemnity or insurance. The Supreme Court upheld the wide interpretation given by the arbitral tribunal from the point of view of the commercial purpose. However, restrictive provisions made in contracts of commercial nature between parties having benefit of legal advice need not be given wide interpretation.47 Specific contracts Certain contracts will be construed more strictly than others. Thus, a contract of indemnity or of insurance will be strictly interpreted.48 Interpretation of Some Words The addition of the word 'usual' refers to something which is invariably to be found in contracts of a
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particular type.49Force majeure is not a French version of vis major. It is a term of wider import. Strikes, breakdowns of machinery though not included in vis major are included in force majeure. By use of the term 'force majeure', the intention is to save the performing party from the consequences of anything over which he has no control. Force majeure clauses may assume a variety of forms and must be construed in the light of the nature of the contract and its general terms. Where the word 'usual' is used with the words 'force majure', its meaning may be made certain to the parties by leading evidence about their intention.50 But the term does not include the inability of a seller to get an export licence except at a sale price which was higher than the contract price.51 Unlike a situation that 'prevents' in a force majeure clause, a situation that 'hinders' or 'disrupts' does not render performance impossible, and might cover situations of commercial impracticability.52 The expressions 'arising out of' or 'concerning' or 'in connection with' or 'in consequence of' or 'relating to the contract' in an arbitration clause are of sufficient amplitude to take in a dispute as to the validity of an agreement.53 The use of the word 'approximately' in a tender issued by the government for the sale of iron scrap which is filled in by a buyer and accepted by the government only means that in case the quantity is slightly less, the buyer will get a refund to that extent and if it is more he will have to pay for the excess.54 Where the contract for supply of manganese ore mentioned that it may have 'phosphorus minimum 0.23 percent (...approximately)', the clause regarding approximation could not be read so as to allow a percentage below the rejection limits.55 Where a variation clause allowed the employer to vary the extent of a contract work both upwards and downwards up to 25 percent and entitled the contractor to a revised rate for any variation beyond that limit, the clause was applicable where the sum total of additions and deletions exceeded 25 percent of the contract price and not the basis of net difference between increass and decreases.56 The term 'bilticut' means a contract for the price being payable against the delivery of railway receipt.57 The ordinary meaning of the word 'compensation' in an insurance policy meant all damages of whatever character, including exemplary damages, especially in the light of the terms of the policy covering claims against assault, wrongful arrest, malicious prosecution and false imprisonment, which by their nature attracted claims for exemplary damages.58The term 'free of income-tax' in the case of salary to be paid to an officer meant 'free of taxes on incomes' and to include super-tax also, super-tax being additional income-tax; because although the Income Tax Act, 1961 made a distinction between the two, the parties cannot be attributed the same wisdom of making this distinction.59 The use of the word 'may' in a clause that the parties 'may refer the dispute to arbitration' was an enabling provision, and did not disclose any intention that arbitration was to be the sole remedy.60 A burglary insurance policy covered loss of cash or jewellery in a 'safe'. Where valuables were stolen from a cash box, it was held not to be a 'safe' and hence not covered by the policy.61'Inherent vice' in the exclusion of a marine insurance policy meant the risk of deterioration of the goods because of their natural behaviour in the ordinary course of the voyage without the intervention of any fortuitous external accident or casualty.62 Where it was agreed that any necessary and reasonable cost caused by changes in legal provisions would be paid, it was held that the term 'cost' would include payments arising from refund of some other party's tax.63 The question whether some money paid at the time of making the contract is a deposit or earnest money or advance or part payment depends upon not the words used, but the intention of the parties and surrounding circumstances.64 The meaning of the words 'on demand' depend on the context. When applied to a loan, they mean 'always payable'; and when applied to a deposit, they mean 'when demand is made'.65 Where one party has agreed not to do something without written consent of the other, 'which consent shall not be unreasonably withheld', the withholding party need not show that the consent was correct or justified; it is enough if the refusal is reasonable in the circumstances, which is a question of fact. In
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deciding what is reasonable, he is only required to consider his own interests, and need not balance his interests with the party seeking consent.66 Ut Res Magis Valeat Quam Pereat: Words with two Meanings Where different parts of an instrument are inconsistent, effect must be given to that part which is calculated to carry into effect the real intention of the parties as gathered from the instrument as a whole and that part which would defeat it, must be rejected. A term may be rejected if it is repugnant to the intention of the parties as it appears from the written contract. However, an effort should be made to give effect to each clause of the agreement and a clause should not be rejected unless it is manifestly inconsistent with or repugnant to the rest of the agreement.67 If apparent inconsistency is found in the literal construction of the words used, and it can be reconciled with any other possible construction,68 the words must receive a meaning which will make the instrument valid rather than void and ineffective. Where a deed was capable of two interpretations, one favouring or advancing the right to sue, and the other hampering it, the proper construction was the one which favoured the right to sue, which was the liberal of the two.69 The appellants carried out the annual overhaul of the respondent's electrical equipment every year. In their last purchase order to the appellants of July 1970 for an overhaul, there was reference to the respondents' conditions of contract '24001, obtainable on request'. There were three versions of these conditions, the latest being of March 1970. It was held that the conditions of March 1970, being the latest, were intended to be and were incorporated inthe contract between the parties. If the appellants had asked for the conditions, they would have been supplied the latest version.70 Ex antecedentibus et consequentibus fit optima interpretatio: The Whole of the Agreement The deed must be read as a whole in order to ascertain the true meaning of its several clauses, and the words of each clause should be interpreted so as to bring them into harmony with the other provisions of the deed if that interpretation does no violence to the meaning of which they are naturally susceptible.71 The document must be construed as a whole in order to ascertain the meaning of several clauses.72 All terms in the contract must be given effect rather than deprive some of them of the effect.73 This is because when drafting their contract, parties would not use the words without a purpose.74 Where royalty was payable on manufacture of salt, and the manufacturer failed to manufacture the minimum quantity specified in the agreement, on construction, it was held that royalty was payable on the stipulated minimum quality.75 In principle, there is no hierarchy among the terms in one contract, and their importance for interpretation of the remaining part of the contract is the same regardless to the order in which they appear, unless parties themselves expressly provide for a hierarchy among the different provisions or part of the contract. In case of conflict, the provisions of a specific character prevail over general provisions. Expressio Unios Est Exclusio Alterius Where there is an express mention in the instrument of a certain thing, it will exclude any other thing of a similar nature. A mortgage was stated to mortgage an iron foundry and two dwelling-houses together with fixtures in them. This was held to exclude fixtures in the foundry.76 One clause in a distributorship agreement enabled termination with immediate effect by the manufacturer, in the event of breach of agreement by the distributor. Another clause provided for termination by either of the parties at any time with or without cause. Applying this rule and construing the clause contra proferentum, it was held that the distributorship could not be terminated without cause with immediate effect, and without giving reasonable notice.77 Ejusdem Generis Rule Where the particular things named have some common characteristic which constitutes them a genus and the general words can be properly regarded as in the nature of a sweeping clause designed to
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guard against accidental omissions, then the rule ejusdem generis will apply, and the general words will be restricted to things of the same nature as those which have already been mentioned.78 Where a particular enumeration is followed by such words as 'or other', the latter expression ought, if not enlarged by the context, be limited to matters ejusdem generis with those specially enumerated.79 The meaning of general words may be narrowed or restricted by specific and particular descriptions of the subject-matter to which they are to apply. In a charterparty, liability to deliver cargo was excluded if it was not possible to do so by reason of 'war, disturbance, or any other cause'. The words 'any other cause' were interpreted to restrict to causes like war or disturbance, but did not cover ice.80 A contract of sale of fallen and standing trees provided for the sale of &uot;excluding sandalwood, coconut, arecanut and all specified fruit trees and tamarind trees or 10 or 15 silver oak trees of below 36' girth grown and standing in...Estate&uot;. It was argued that mango and jackfruit being fruit trees were excepted because mango and jackfruit trees are considered timber, but there was no clause of the contract which excluded these trees which were also timber, and fruit trees. Hence, the contention was repelled.81 A power-of-attorney giving power to the attorney to present for registration, documents 'such as sale-deeds', could be interpreted to give him the authority to present a deed of mortgage for registration.82 Verba Chartarum Fortius Accipiuntur Contra Proferentum: Words of Written Documents are Construed More Forcibly against the Party Putting Forward the Document The words of written documents must be construed more forcibly against the party putting forward the document. If the terms supplied by one party are unclear, an interpretation against that party is preferred,83 since that party is responsible for the formulation of the term, and therefore should bear the risk of possible lack of clarity. An agreement in restraint of trade, in the event of ambiguity, must receive a narrower construction than the wider.84 In case of ambiguity, an insurance policy must be construed in favour of the insured.85 Thus, the term 'impact' in the insurance policy was not confined to forcible contract, but also included damage caused to building and machinery arising from a bulldozer being driven on a road close to the building.86 Where an escalation clause provided that the contractor shall not claim extras for fluctuation of price and the contract shall not be subject to any rise and fall of prices, it would not apply to escalation beyond the time for completing the contract arising from delay caused by the employer; such a clause was construed in favour of the contractor.87 Additions to Printed Forms In the event of any inconsistency between the printed and the written provisions, the printed words cannot be discarded; attempt to derive the real meaning must be made from the printed as well as the written words,88 and between them, greater weight must be given to written clauses89 or type-written clauses90 than the printed clauses, because, as Lord Ellenborough said in a judgment repeatedly approved,91'... where a contract is partly printed in a common form and partly written, the words added in writing are entitled, if there should be any reasonable doubt upon the sense and meaning of the whole, to have a greater effect attributed to them than to the printed words; inasmuch as the written words are the immediate language and words selected by the parties themselves for the expression of their meaning, and the printed words are a general formula adapted equally to their case and that of all other contracting parties upon similar occasions and subjects'. So also a special agreement or clause between parties added to the printed form must be given greater weight than the clauses of the printed form.92 Where a typed 'paramount clause'93 was included in a charterparty without words of limitation, all the rules referred to in the paramount clause would form part of the terms of the charterparty and would take precedence over the printed terms of the charter party.94 But where a document consists otherwise, of print, type and ink writing, the most natural inference to draw of an addition to that in pencil is that it is not, and is not intended to be operative and final alteration.95 Name of the Document and Nature of the Transaction Unless prohibited by statute, the Court can go behind the document to determine the nature of the
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transaction, irrespective of the form of the document,1 or the name or title given to it,2 or the description of the party in the contract;3 for the party cannot escape the consequences of law merely by describing an agreement in a particular form though in substance it may be a different transaction.4 The name given by the parties is not conclusive to determine its real legal nature and effect.5 For determining the category of the document, the Court must look at the substance of the agreement, and not the words describing its category.6 Although the nomenclature and description given to a contract is not determinative of the real nature of the document or of the transaction thereunder, these have to be determined from all the terms and clauses of the document and all the rights and results flowing therefrom and not by picking and choosing certain clauses and the ultimate effect or result to bring it within the ambit of a particular statute relevant for the purpose of the dispute before the Court.7 In a Madras case, the question to be decided was whether a deed described as a partnership between the plaintiffs and the defendants was really a partnership, it was held that it was never intended to be act ed upon as such as there was intrinsic evidence that it was only a working arrangement between the parties.8 A document described as receipt in the title but containing all essential ingredients of an agreement of sale of a plot of land and signed by both the parties was a contract which could be specifically enforced.9 But where the parties to a contract of leave and licence were not ordinary persons but companies, it could be presumed that the agreement was made after full understanding, and the words mentioned to avoid any wrong inference of intention. When the parties were capable of fully understanding their rights, and expressly agreed and declared that the document should not be construed as a tenancy agreement, such relationship could not be inferred.10 Whether a contract is an option to repurchase or an agreement of sale would depend on the interpretation of its provisions.11 A document called 'memorandum of understanding' (MOU) can be enforceable.12 In the absence of words like 'unequivocal', 'unconditional', 'absolute' etc in the document, and the language, the contract was held to be one of indemnity given by a bank and not a bank guarantee.13 Mere use of the name 'joint venture' or 'collaboration' for an agreement between a land owner and a developer will not make it so; where there is no joint control, parties are not accountable to each other, and the owner shall not interfere with construction, there was no community of interest, nor joint control or management, nor sharing of profits and losses.14 Although a 'letter of comfort' suggests lack of contractual intention,15 it can be binding if read as a whole it shows the intention of being bound.16 Condition Precedent In Ganga Saran v. Firm Ram Charan Ram Gopal, 17 one of the terms of the contract was, 'We shall continue sending goods as soon as they are prepared to you ... we shall go on supplying goods to you of the Victoria Mills as soon as they are supplied to us by the said Mill'. The Supreme Court agreeing with the interpretation of somewhat similar phrase in Harnandrai Fulchand v. Pragdas Budhsen 18 held that the words did not mean that the goods will not be supplied at all. The words 'prepared by the Mills' were only a description of the goods to be supplied and the expression 'as soon as they are prepared' and 'as soon as they are supplied to us by the said Mill' simply indicated the process of delivery. The Bombay High Court in Navnit Lal & Co. v. Kishanchand & Co.,19 held that the term 'the goods will be shipped to your friends as soon as they are delivered to us by the Allegappa Textile Cochin Ltd' was not a term of contingency or any condition precedent to the performance of the contract. The words of the term are regulatory of the mode of performance and not of the very obligation to perform the contract. Assignability Absence of a specific clause against transferability is not conclusive, and it would be legitimate to take into account the surrounding circumstances for ascertaining the intention of the parties.20 What has to be seen is whether it would be held on a reasonable interpretation of the contract aided by such considerations as can legitimately be taken into account that the agreement was not to be transferred.21 A contract for delivery of goods at a future date, even though for a specific price and of
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specific quality of goods, can be excluded from the definition of non-transferability, if it is shown on a reasonable interpretation of the contract, that it is not transferable.22 Extrinsic Evidence Extrinsic evidence is admissible to determine the effect of the instrument if there remains a doubt about its true meaning.23 Sections 91 and 92 of the Indian Evidence Act, 1872 define the cases in which documents are exclusive evidence of the transactions they embody. Sections 93-98 provide allowing extrinsic evidence for interpretation of documents. When the terms of a contract, or of a grant, or of any other disposition of property, have been reduced to the form of a document, and in all cases in which any matter is required by law to be reduced to the form of a document, no evidence shall be given in proof of the terms of such contract, grant or disposition, or of such matter, except the document itself.24 This section applies only when the parties have reduced all the terms of a contract, etc., into writing. If they have intended only to reduce to writing a portion of the terms, they are entitled to give oral evidence of the terms which they did not intend to reduce to writing.25 It does not exclude oral evidence to show that there was no agreement between the parties, and therefore no contract; nor does it preclude evidence to show that the real contract26 was different from what was found in the deed.27 When such terms of a contract, etc., or matter referred above is proved by producing the document, no oral agreement or statement can be admitted as between the parties to any such document for the purpose of contradicting, varying, adding to, or subtracting from its terms.28 But such oral agreement or statement can be admitted to prove:29
(i) (ii) (iii) (iv) (v) (vi)
any fact which would invalidate the document, or entitle any person to any decree or order relating thereto, such as fraud, intimidation, illegality, failure of consideration, mistake in fact or law; separate oral agreement as to any matter on which the document is silent, and which is not inconsistent with its terms; separate oral agreement constituting a condition precedent to the attaching of any obligation under the document; subsequent oral agreement to rescind, or modify any such contract, except where such contract is required to be in writing, or has been registered; any usage or custom by which incidents not expressly mentioned in any contract are usually annexed to such contracts, if they are not repugnant to or inconsistent with its express terms; any fact which shows in what manner the language of the document is related to existing facts.
This bar also applies where the written instrument appear s to contain the whole contract,30 and does not preclude giving of evidence to show that the transaction itself was different than what it purported to be.31 Sections 93-98 of the Indian Evidence Act, 1872 deal with rules of construction of documents:
Section 93. Exclusion of evidence to explain or amend ambiguous document.--When the language used in a document is, on its face, ambiguous or defective, evidence may not be given of facts which would show its meaning or supply its defects. Section 94. Exclusion of evidence against application of document to existing facts.--When language used in a document is plain in itself, and when it applies accurately to existing
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facts, evidence may not be given to show that it was not meant to apply to such facts. Section 95. Evidence as to document unmeaning in reference to existing facts.--When language used in a document is plain in itself, but is unmeaning in reference to existing facts, evidence may be given to show that it was used in a peculiar sense. Section 96. Evidence as to application of language which can apply to one only of several persons.--When the facts are such that the language used might have been meant to apply to anyone, and could not have been meant to apply to more than one, of several persons or things, evidence may be given of facts which show which of those persons or things it was intended to apply to. Section 97. Evidence as to application of language to one of two sets of facts, to neither of which the whole cottectly applies.--When the language used applies partly to one set of existing facts, and partly to another set of existing facts, but the whole of it does not apply correctly to either, evidence may be given to show to which of the two it was meant to apply. Section 98. Evidence as to meaning of illegible characters, etc.--Evidence may be given to show the meaning of illegible or not commonly intelligible characters, of foreign, obsolete, technical, local and provincial expressions, of abbreviations and of words used in a peculiar sense. Entire Agreement Clauses A contract may contain a clause indicating that the document completely embodies the terms on which the parties have agreed, namely, 'this contract contains the entire agreement between the parties'. By this clause, the parties express their intention that the document is to contain all the terms of the agreement. The terms of such a document cannot be contradicted or supplemented by evidence of prior statements or agreements, nor can extrinsic evidence be given to prove terms other than those in the document. However, such statements or agreements may be used to interpret the document. The effect of such a term would depend upon its precise wording. Thus, a clause superseding any prior provisions, agreements, representations, undertakings or implications, will exclude claims for breach of collateral warranty, but not liability for claims based on misrepresentations; any such exclusion must be clearly stated.32 Standard Forms In AIB Group (UK) plc v. Martin, 33 a bank lent money to X and Y together for which they charged several properties that they owned jointly under the terms of the bank's standard form mortgage under which the mortgagor covenanted to pay all sums advanced to the mortgagor by the bank. The deed also provided that if the mortgagor was more than one person, the expression shall be construed as referring to all and/or any of those persons, and the obligations of such persons shall be joint and several. The bank also lent to X and Y separately for property mortgaged in their own respective names. A question arose whether X was liable for the debt of Y secured by Y's mortgage. Holding that he was liable, it was stated:
'A standard form is designed to be used in a wide variety of different circumstances. It is not context specific. Its value would be much diminished if it could not be relied upon as having the same meaning on all occasions. Accordingly the relevance of the factual background of a particular case to its interpretation is necessarily limited. The danger ... is that a standard form may be employed in circumstances for which it was not designed. Unless a particular case shows that this has happened, however, the interpretation of the form ought not to be affected by the factual background'.
Construction of Exemption Clauses Exemption clauses in standard form contracts deserve special rules of construction because they are often ungenerous or unfair in their application.34 Such clauses in standard form contracts are binding
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only if brought sufficiently to the notice of the contracting party whom they are sought to bind. Clauses excluding jurisdiction or limiting liability must be brought to the notice of the consignor specifically and adequately before the contract.35This aspect has been dealt with in the comments below s. 3 of the Contract Act.36 The rules of construction of such clauses have also been evolved so as to work in favour of the party seeking to establish the liability in question. Exemption clauses perform a useful function in business contracts. They anticipate future contingencies likely to hinder or prevent performance; they may contain procedures for making claims, and mainly provide for the allocation of risks as between parties to the contract.37 An exemption clause indicates which of the parties must insure for the risk of the contract. The rules of construction are not designed to make the contract ineffective. The principles of construction of exemption clauses are also applicable to clauses by which one party agrees to indemnify the other party against the consequences of the other's liability to third parties;38 and to clauses regulating the time within which claims must be made under the contract;39 and also, though not as rigourously, to clauses limiting a party's liability for breach of contract.40 Although such clauses are strictly construed in cases of consumer contracts and standard form contracts, in commercial contracts 'negotiated between businessmen capable of looking after their own interests and of deciding how risks...can be most economically borne...it is wrong to place a strained construction upon words in an exclusion clause which are clear and fairly susceptible of one meaning'.41 An express warranty given at or before the written contract will override an exemption clause contained in the contract.42 Strict Interpretation 'If a person is under a legal liability and wishes to get rid of it, he can only do so by using clear words'.43 The exemption clause must cover exactly the nature of the liability in question. It has been held that a clause excluding liability for 'latent defects' did not exclude condition as to fitness of purpose;44 that for excluding any guarantee or warranty did not exclude breach of condition;45 that for excluding implied conditions and warranties did not exclude express term;46 or a clause restricting liability for loss or damage of goods in a carriage contract did not apply to loss caused by unauthorised delivery.47 A clause exempting liability from any loss suffered by 'any person' meant loss of a third party, and not losses suffered by the plaintiff because of the defendant's breach.48 A clause that excluded liability in contract for any loss profits suffered by the contractor was held to be restricted to liability for defective performance only, and not to loss of profits.49 A clause that exempted liability arising from an accident where a passenger of a motor coach 'occupied a ... seat fitted with a safety belt if the safety belt was not worn', applied only to the times when the passenger was seated, and not when the passenger stood up or moved around the coach.50 The degree of strictness may vary according to the extent of the exemption sought to be conferred by the exemption clause. In Photo Production Ltd. v. Securicor Transport Ltd., Lord Diplock stated:51
Since the presumption is that the parties entered into the contract intended to accept the implied obligations, exclusion clauses are to be construed strictly and the degree of strictness appropriate to the construction may properly depend on the extent to which they involve departure from the implied obligations.
The Contra Proferentum Rule When there is a doubt or ambiguity in the words of an exclusion clause, the words are construed more
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forcibly against the party putting forth the document, and in favour of the other party.52 Exclusion of Liability for Negligence, Wilful Default and Fraud The Unfair Contract Terms Act, 1977 restricts in England, the ability of the parties to exclude the liability for negligence.53 But even otherwise, Courts have construed such clauses strictly on the ground that it is inherently improbable that the innocent party would have agreed to the exclusion of the negligence of the party breaking the contract. Thus, where a contract of bailment provided that the goods in the godown shall be at the risk of the borrower-bailor, the bailee could not avoid liability for negligence resulting in loss of goods while in bailee's possession.54 Exclusion of such liability will not be construed unless it is excluded clearly and unambiguously, or unless that party has no liability other than a liability in negligence.55 There must be clear and unmistakable reference to the word 'negligent' or 'negligence'.56 Liability for negligence stood excluded by use of the words 'will not in any circumstances be responsible',57'arising from any cause whatsoever',58 or 'will not be liable for any damage however caused'.59 Once liability under contract for negligence is excluded, it does not permit the other party to sue in tort.60 Goods were stolen from the bailee's premises under circumstances that indicated it an 'inside job'. A limitation clause in their contract provided &uot;the company's liability howsoever arising and notwithstanding that the cause of the loss or damage is unexplained shall not exceed ...&uot;. It was held that dishonesty of employees was a foreseeable risk in the storage business, and hence the limitation clause was binding. It was possible to exclude liability arising from wilful default of one's own employees.61 While liability for negligent misrepresentation can be excluded, as also liability for fraud of an agent, liability for one's own fraud cannot be excluded.62 Limitation Clauses The approach of construction of clauses limiting liability (but not excluding it) is less rigorous. Although the contra proferentem rule is applicable, such clauses are not to be construed with the same strict standard as the clauses excluding liability altogether, the reasons being first, that a contracting party would more probably agree to a clause limiting liability than one totally excluding it, and secondly, that such clauses are directly concerned with the risks allocated under the contract in terms of the charges for the thing contracted for. A limitation clause is 'related to other contractual terms, in particular to the risks to which the defending party may be exposed, the remuneration which he receives and possibly also the opportunity of the other party to insure'.63 The (English) Unfair Contract Terms Act,1977 This Act prohibits certain exemption clauses and subjects many others to a requirement of reasonableness. The Act confers power to strike down a term which excludes or restricts liability, and not any other term of a contract on the ground of unfairness or unreasonableness. Exclusion or restriction of liability for death or personal injury resulting from negligence by reference to any contract term is prohibited. The act covers terms:
(i) (ii) (iii)
making the liability or its enforcement subject to restrictive or onerous conditions; excluding or restricting any right or remedy in respect of liability, or subjecting a person to any prejudice in consequence of his pursuing any right or remedy; or excluding or restricting rules of evidence or procedure.
Such terms may be rendered ineffective, or may become effective only to the extent it satisfies the test of reasonableness.
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Fundamental Breach It was a doctrine developed in the 1950s and early 1960s by the Court of Appeal that where one party had committed a fundamental breach of the contract, he was not permitted to rely on the provisions in the contract which excluded or limited his liability.64 This applied as a rule of law, irrespective of the intention of the parties. But in Photo Production Ltd. v. Securicor Transport Ltd., 65 the House of Lords held that there was no rule of law which prevented an exemption clause from applying in the case of a fundamental breach of contract '...the question whether, and to what extent, an exclusion clause is to be applied to a fundamental breach, or a breach of a fundamental term, or indeed to any breach of contract, is a matter of construction of the contract.' The presumption that parties do not intend that either should be able to rely on their own breach to avoid a contract is subject to any clear provision to the contrary in the contract.66 However, in BV Nagaraju v. Oriental Insurance Co. Ltd., 67 a goods vehicle was entitled to carry six workmen; and its insurance policy did not cover use for carrying passengers in the vehicle except employees, and excluded liability if more employees were carried. At the time of accident, it was carrying some passengers picked up by the driver and cleaner in the vehicle. It was held that this was not so fundamental a breach as to afford ground to exclude liability. The exclusion clause was read down in the light of the 'main purpose' of the contract. Release Although a party can, especially in a compromise agreement supported by valuable consideration, agree to release claims or rights of which he was not, and could not be aware, the Court would also be slow to infer that he had done so, in the absence of clear language to that affect. Whether the parties intended to provide for release and surrender of claims which they could not have contemplated at all at the time of release or compromise is a matter of construction.68 Exemption Clauses under the UNIDROIT Principles The Principles recognise that exemption clauses are common in international contract practices, and also that they tend to give rise to much controversy between the parties. Although the Principles do not contain a general rule permitting a Court to strike down abusive or unconscionable contract terms, Art. 7.1.6 gives a broad discretionary power to the Court. A clause which limits or excludes one party's liability for non-performance or which permits one party to render performance substantially different from what the other party reasonably expected, may not be invoked if it would be grossly unfair to do so, having regard to the purpose of the contract. This provision applies to a term requiring a non-performing party to pay a specified sum to the aggrieved party for non-performance, if it has the effect of limiting compensation due to the aggrieved party .69 92 Jiwibai v. Ramkuwar Shriniwas Murarka Agarwala, AIR 1947 Nag 17, 24 (FB). 93 Gaddar Mal v. Tata Industrial Bank Ltd., AIR 1927 All 407. 94 Imam Din v. Dittu, AIR 1925 Lah 174. 95 Sardar Gulab Singh v. Punjab Zamindara Bank Ltd., AIR 1942 Lah 47. 96 KA Mathai v. Kora Bibbikutty, (1996) 7 SCC 212, where the word 'implied' is used to indicate that the court was presuming a term to exist in a written agreement which was not before the court. 97 Nullagine Investments Pty Ltd. v. Western Australia Club Inc., (1993) 177 CLR 635, at 647-48. 98 See Williams,(1945) 61 LQR 71. 99 Malik v. Bank of Credit and Commerce International SA (in liquidation), [1997] 3 All ER 1(HL) . 100 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, 'CONTRACT', para 778. 1 The Moorcock,[1889] 14 PD 64, [1886-89] All ER Rep 530(CA) ; BP Refinery (Westernport) Pvt. Ltd. v. Shire of Hastings, (1977) 180 CLR 266, (1976) 52 ALJR 20.
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2 Insurance Co. of Africa v. Scor (UK) Reinsurance Co. Ltd., [1983] 1 Lloyd's Rep 541. 3 Scammell v. Outston, [1941] AC 251, [1941] 1 All ER 14; Hillas & Co. v. Acros Ltd., (1932) 147 LT 503, [1932] All ER Rep 494. 4 Haridas Ranchordas v. Mercantile Bank of India Ltd., AIR 1920 PC 61. 5 British Crane Hire Corp. Ltd. v. Ipswich Plant Hire Ltd., [1975] QB 303, [1974] 1 All ER 1059(CA) . 6 Yam Seng Pte Ltd v. International Trade Corporation Ltd, [2013] EWHC 111(QB) : duty of providing honest information, and a duty not to approve a domestic retail price for a product which undercut the duty free retain price; see also Hamsard 3147 Ltd v. Boots UK Ltd, [2013] EWHC 3251, [2013] All ER 12(D) (Nov) . 7 See the Indian Evidence Act, 1872, s. 92, proviso (5) (to the extent annexing of such incident would not be repugnant to, or inconsistent with, the express terms of the contract). 8 See Jiwibai v. Ramkuwar Shriniwas Murarka Agarwala, (1946) Nag 824 at 838, AIR 1947 Nag 17(FB) ; Federal Bank Ltd. v. ISM Jog Engineering Ltd., AIR 2001 SCC 3166, (2001) 1 SC 663 (even though the Uniform Customs and Practices for Documentary Credits formulated by the International Chamber of Commerce do not apply in a contract unless expressly incorporated, they may be taken into account as part of mercantile customs and practices). 9 Juggomohun Ghose v. Manickchand, (1859) 7 MIA 263, a new trial was ordered on the ground that the evidence of mercantile usage had not been sufficiently considered. On the new trial, the evidence was found insufficient, and on a fresh appeal, the Privy Council refused to disturb the judgment--Juggomohun Ghose v. Kaisreechund, (1862) 9 MIA 256; Alapaty Ramamoorthy v. Polisetti Satyanarayana, AIR 1958 AP 550; Deviprasad Khandelwal d' Sons v. Union of India, AIR 1969 Bom 163. 10 Juggomohun Ghose v. Kaisreechand, (1862) 9 MIA 256(PC) . 11 See for example, s. 55 (rights and liabilities of buyer and seller), s. 65 (impied contract by mortgagor), s. 108 (rights and liabilities of lessees) of the Transfer of Property Act, 1882; ss. 14-17 (implied conditions and warranties) and s s. 20-4 (terms implied about passing of property) of The Sale of Goods Act, 1930. 12 Southern Foundries,(1926) Ltd. v. Shirlaw, [1940] AC 701 at 717, [1940] 2 All ER 445(HL), per Lord Atkin. 13 Navnitlal d' Co. v. Kishanchand d' Co., AIR 1956 Bom 151; Umedsingh Hamirasingh v. Marsden Mills Ltd., AIR 1959 Bom 143; Gulabchand Gambhirmal v. Kudilal Govindram, AIR 1959 MP 151; Koduri Krishnarao v. State of Andhra, AIR 1962 AP 249; Nadiad Borough Municipality v. Nadiad Electric Co. Ltd., AIR 1964 Guj 30; Deviprasad Khandelwal d' Sons v. Union of India, AIR 1969 Bom 163; Re an Arbitration between the Anglo-Russian Merchant Traders Ltd. v. John Batt d' Co. (London) Ltd., [1917] 2 KB 679. 14 Shirlaw v. Southern Foundries (1926) Ltd., [1939] 2 KB 206 per MacKinnon LJ. at 227. 15 (1889) 14 PD 64, [1886-90] All ER Rep 530 (it was safe for the ship to be at the wharf); see also Kleinert v. Abosso Gold Mining Co. Ltd., (1913) 58 Sol Jo 45; Delhi Cloth d' General Mills Ltd. v. KL Kapur, AIR 1958 Punj 93 at 101 (if it is so obvious that it goes without saying); Kotharaju Narayana Rao v. Tekumalla Ramachandra Rao, AIR 1959 AP 370 at 374; UGS Finance v. National Mortgage Bank of Greece and National Bank of Greece, [1964] 2 Lloyd's Rep 446, 543 per Pearson LJ. 16 Delhi Cloth and General Mills Co. Ltd. v. KL Kapur, AIR 1958 Punj 93; Koduri Krishnarao v. State of Andhra Pradesh, AIR 1962 AP 249; Delhi Cloth d' General Mills Co. Ltd. v. K L Kapur, AIR 1958 Punj 93. 17 KC Sethia,(1944) Ltd. v. Partabmull Rameshwar, [1950] 1 All ER 51 at 59 (CA); Compagnie Algerienne de Munerie v. Katana Societa di Navigatione Marittima SpA, [1960] 2 QB 115, [1960] 2 All ER 55; Deviprasad Khandelwal d' Sons v. Union of India, AIR 1969 Bom 163. 18 Peter Cassidy Seed Co. Ltd. v. Osuustukkukauppa, [1957] 1 All ER 484. 19 Trollope and Colls Ltd. d' Holland d' Hannen d' Cubbits Ltd. v. Atomic Power Construction Ltd., [1962] 3 All ER 1035. 20 Wong v. Beaumont Property Trust Ltd., [1964] 2 WLR 1325 at 1333 (CA). 21 See Liverpool City Council v. Irwin, [1975] 3 All ER 658(CA), [1976] 2 All ER 39, [1977] AC 239(HL) ; Tai Hing Cotton Mills Ltd. v. Liu Chong Hing Bank Ltd., [1986] AC 80, [1985] 2 All ER 947(PC) . 22 British School of Motoring Ltd. v. Simms, [1971] 1 All ER 317. 23 Silverman v. Imperial London Hotels Ltd., (1927) 137 LT 57, [1927] All ER Rep 712. 24 Alpha Trading Ltd. v. Dunnshaw-Patten Ltd., [1981] 1 Lloyd's Rep 122, [1981] 1 QB 290, [1981] 1 All ER 482(CA) .
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25 See below: 'Express Terms Prevail'. 26 Bell v. Lever Bros Ltd., [1932] 1 AC 161, 1931 1 KB 337, [1931] All ER Rep 1 at 32 (per Lord Atkin). 27 BP Refinery (Westernport) Pty Ltd. v. Shire of Hastings, (1977) 180 CLR 266, (1976) 52 ALJR 20; Codelfa Construction Pty Ltd. v. State Rail Authority of New South Wales, (1982) 149 CLR 337; The Moorcock, [18891 14 PD 64, [1886-91 All ER Rep 530 (CA). 28 D Vanjeeswara Ayyar v. District Board, South Arcot, AIR 1941 Mad 887; Lynch v. Thorne, [1956] 1 WLR 303, [1956] 1 All ER 744; Hancock v. B W Brazier (Anerley) Ltd., [1966] 2 KB 113, [1966] 2 All ER 901 at 904, [1966] 1 WLR 1317. 29 Ruttonsey Rawji v. Bombay United Spinning and Manufacturing Co. Ltd., AIR 1916 Bom 4; AK Abdul Azeez v. VC Ramalingam, AIR 1961 Mad 281 (no term implied with reference to custom); Duke of Westminster v. Guild, [1985] QB 688 at 700; Eurico Spa v. Phillipp Brothers, [1987] 2 Lloyd' s Rep 215 at 219; Johnstone v. Bloomsbury Health Authority, [1991] 2 WLR 1362, [1992] 1 QB 333, [1991] 2 All ER 293(CA), per Browne-Wilkinson VC and Legatt LJ at 302-304; Rashtriya Ispat Nigam Ltd v. Dewan Chand Ram Saran, AIR 2012 SC 2829, 2012 (5) SCC 306. 30 Trollopes & Colls Ltd. v. NW Metropolitan Regional Hospital Board, [1973] 2 All ER 260(HL) . 31 Union of India v. Vasudeo Agarwal, AIR 1960 Pat 87; Girija Proshad Pal v. National Coal Co. Ltd., AIR 1949 Cal 472. 32 [1941] 1 All ER 33 at 39 (HL). 33 State of Maharashtra v. Saifuddin Mujjaffarali Saifi, AIR 1994 Bom 48. 34 Nadiad Borough Municipality v. Nadiad Electric Co. Ltd., AIR 1964 Guj 30. 35 Foo Jong Peng v. Phua Kiah Mai, [2012] SGCA 55 (Singapore Court of Appeal), [2012] 4 SLR 1267. 36 Navnitlal & Co. v. Kishanchand & Co., AIR 1956 Bom 151; Reigate v. Union Mfg Co. (Ramsbottom) Ltd., [1918] 1 KB 592, [1918-19] All ER Rep 143(CA) ; British Movietonews Ltd. v. London and District Cinemas Ltd., [1952] AC 166, [1951] 1 KB 190, [1951] 2 All ER 617(HL) ; Adamastos Shipping Co. Ltd. v. Anglo-Saxon Petroleum Co. Ltd., [1959] AC 133 at 174, [1958] 1 All ER 725 at 744 (HL). 37 Russell v. Duke of Norfolk, [1949] 1 All ER 109(CA) . 38 Trollope & Colls Ltd. v. North West Metropolitan Regional Hospital Board, [1973] 1 WLR 601 at 609. 39 FA Tamplin Steamship Co. Ltd. v. Anglo-Mexican Petroleum Products Co. Ltd., [1916] 2 AC 397 at 422 per Lord Parker, [1916-17] All ER Rep 104(HL) . 40 Walford v. Miles, [1992] 2 WLR 174, [1992] 2 AC 128, [1992] 1 All ER 453. 41 In re an arbitration between Nott and the Corporation of Cardiff,[1918] 2 KB 146 at 168 (CA); on appeal sub nom Brodie v. Cardiff Corpn., [1919] AC 337(HL) . 42 Liverpool City Council v. Irwin, [1977] AC 239 at 266, [1976] 2 All ER 39(HL) partly affirming [1975] 3 All ER 658(CA) ; B P Refinerty (Westenport) Pty Ltd. v. Shire of Hastings, (1977) 180 CLR 266, (1976) 52 ALJR 20. 43 Orman v. Saville Sportswear Ltd., [1960] 1 WLR 1055, [1960] 3 All ER 105. 44 Duke of Westminster v. Guild, [1985] QB 688. 45 Harmony Shipping Co. SA v. Davis, [1980] 1 Lloyd's Rep 44, [1979] 3 All ER 177. 46 Ben Shipping Co. (Pte) Ltd. v. An Bord Bainne The (Joyce), [1986] 2 Lloyd's Rep 285, [1986] 2 All ER 177QBD . 47 Tai Hing Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd., [1986] AC 80. 48 Cryne v. Barclays Bank, (1987) BCLC 548(CA) . 49 Bremer Vulkan Schiffban and Maschinenfabrik v. South India Shipping Corpn. Ltd., [1981] AC 909, [1981] 1 All ER 289(HL) . 50 Bank of Nova Scotia v. Hellenic Mutual War Risks Association (Bermuda) Ltd., [1992] 1 AC 233, [1991] All ER, reversing [1990] 1 QB 818, [1989] 3 All ER 628, reversing [1988] 1 L Loyal's Rep, 514(CA) . 51 Deyong v. Shenburn, [1946] 1 All ER 226. 52 Edwards v. West Herts Group Hospital Management Committee, [1957] 1 All ER 541. 53 Re Railway & Electric Appliances Co.,(1888) 38 Ch D 597.
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54 KC Sethia,(1944) Ltd. v. Partbmull Rameshwar, [1951] 2 All ER 352(HL) . 55 Compagnie Algerenne de Meuniere v. Katana Societa, [1960] 2 WLR 719 at 724, [1960] 2 QB 115, [1960] 2 All ER 55(CA) ; dictum of Scrutton LJ, In re an arbitration between Comptoir Commercial Anversois & Power Son & Co., [1920] 1 KB 868 at 899, [1918-19] All ER Rep 661 applied: 'It must be such a necessary term that both parties must have intended that it should be a term of the contract and have only not expressed it'. 56 Jones v. Lowe, [1945] KB 73, [1945] 1 All ER 194; Raja Ram Jaiswal v. Ganesh Prasad, AIR 1959 All 29. 57 Ha eaves Transport Ltd. v. Lynch, [1969] 1 WLR 215, [1969] 1 All ER 455. 58 = v. Rothmans of Pall Mall Australia Limited, [2001] HCA 68 (High Court of Australia), (2001) 208 CLR 516. 59 Tan Juay Pah v. Kimly Construction Pte Ltd and others, [2012] SGCA 17 (Singapore Court of Appeal), [2012] 2 SLR 549. 60 KP Chowdhry v. State of Madhya Pradesh, AIR 1967 SC 203 at 206; s. 10 below: 'Contracts with Government', and s. 65. 61 Ibid at 206-07; State of Bihar v. Karam Chand Thapar & Brothers Ltd., AIR 1962 SC 110, [1962] 1 SCR 827; Bikhraj Jaipuria v. Union of India, AIR 1962 SC 113, [1962] 2 SCR 880; State of West Bengal v. BK Mondal & Sons, AIR 1962 SC 779, [1962] Supp 1 SCR 870; Union of India v. AL Rallia Ram, [1964] 3 SCR 164, AIR 1963 SC 1685; s. 10 below. 62 Rhodes v. Forwood, (1876) 1 App Cas 256, [1874-80] All ER Rep 476(HL) ; Southern Foundries, (1926) Ltd. v. Shirlaw, [1940] AC 701, [1940] 2 All ER 445(HL) ; William Cory d' Son Ltd. v. City of London Corpn., [1951] 2 KB 476 at 484, [1951] 2 All ER 85 at 88. 63 Inchbald v. Western Neilgherry Coffee, Tea and Cinchona Plantation Co. Ltd., (1864) 17 CBNS 733, [1861-73] All ER Rep 436; MacKay v. Dick, (1881) 6 App Cas 251(HL) ; Hickman d' Co. v. Roberts, [1913] AC 229, [1911-13] All ER Rep Ext 1485(HL) ; George Trollope d' Sons v. Martyn Bros., [1934] 2 KB 436(CA) . 64 Amalgamated Building Contractors Ltd. v. Waltham Holy Cross Urban District Council, [1952] 2 All ER 452; Alghussein Establishment v. Eton College, [1988] 1 WLR 587; see also Cheall v. Association of Professional, Executive, Clerical and Computer Staff, [1983] 2 AC 180, [1983] 1 All ER 1130; Thompson v. ASDA-MFI Group plc, [1988] Ch 241, [1988] 2 All ER 722Ch D . 65 Thompson v. ASDA-MFI Group plc, [1988] 2 All ER 722. 66 K N Sathyapalan v. State of Kerala, (2007) 13 SCC 43 67 MacKay v. Dick, (1881) 6 App Cas 251 at 263 (HL), per Lord Blackburn; Sprague v. Booth, [1909] AC 576 at 580 (PC), per Lord Dunedin; Kleinert v. Abosso Gold Mining Co. Ltd., (1913) 58 Sol Jo 45(PC) ; Luxor (East bourne) Ltd. v. Cooper, [1941] AC 108 at 118, [1941] 1 All ER 33 at 39 (HL); per Viscount Simon LC; A v. Pound d' Co. Ltd. v. M W Hardy d' Co. Inc., [1956] AC 588 at 608, [1956] 1 All ER 639 at 648 (HL), per Viscount Simonds at 611 and per Lord Somervell at 650; Sunbeam Shipping Co. Ltd. v. President of India, [1973] 1 Lloyd's Rep 482 at 486; Metro Meat Ltd. v. Fares Rural Co. Pty Ltd., [1985] 2 Lloyd's Rep 13; Nissho Iwai Petroleum Inc. v. Cargill International SA, [1993] 1 Lloyd's Rep 80. 68 MacKay v. Dick, [1881] 6 AC 251 at 263 (HL). 69 LTNIDROIT Principles, Art 1.7; this principle does not form part of common law of contract. 70 MacKay v. Dick, (1881) 6 App Cas 251 at 263 (HL); Hargreaves Transport v. Lynch, [1969] 1 WLR 215, [1969] 1 All ER 455; Liverpool City Council v. Irwin, [1977] AC 239, [1976] 2 All ER 39(HL) partly affirming [1975] 3 All ER 658(CA) . 71 UNIDROIT Principles, Art. 5.3. 72 UNIDROIT Principles, Art. 5.4. 73 Motilal v. Nanhelal, AIR 1930 PC 287 at 290. 74 Nathulal v. Phoolchand, AIR 1970 SC 546 at 547; relying on Motilal v. Nanhelal, AIR 1930 PC 287 (issue of contingent contract was not argued); Chandnee Vtdyawati Madden v. C L Katyal (Dr), AIR 1964 SC 978 (defendant had agreed to obtain permission); Bishambhar Nath Agarwal v. Kishan Chand, AIR 1998 All 195 (whether term about permission stipulated or implied). 75 HPA International v. Bhagwandas Fateh Chand Daswani, AIR 2004 SC 3858, (2004) 6 SCC 537. 76 Foster v. Driscoll, [1929] 1 KB 470(CA), [1928] All ER Rep 130CA ; Ralli Bros v. Compania Naviera Sotay Aznar, [1920] 2 KB 287, [1920] All ER Rep 427; Kahler v. Midland Bank, [1950] AC 24, [1949] 2 All ER 621(HL) ; Zivnostenska Banka National Corpn. v. Frankman, [1950] AC 57, [1949] 2 All ER 671; Regazzoni v. K C Sethia, (1944)
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Ltd., [1958] AC 301, [1957] 3 All ER 286(HL) . 77 Gulabchand Gambhirmal v. Kudilal Govindram, AIR 1959 MP 15l; HDFC Bank Ltd v. Delhi Gymkhana Club Ltd, AIR 2013 Del 10 (payment for charges for publishing advertisements). 78 Deviprasad Khandelwal d' Sons v. Union of India, AIR 1969 Bom 163. 79 Winter Garden Theatre (London) Ltd. v. Millennium Productions Ltd., [1948] AC 173, [1947] 2 All ER 331; Martin-Baker,Aircraft Co. Ltd. v. Canadian Flight Equipment Ltd., [1955] 2 QB 556, [1955] 3 WLR 212, [1955] 2 All ER 722; Staffordshire Area Health Authority v. South Staffordshire Waterworks Co., [1978] 1 WLR 1387, [1978] 3 All ER 769. 80 Winter Garden Theatre (London) Ltd. v. Millennium Productions Ltd., [1948] AC 173, [1947] 2 All ER 331. 81 Martin-Baker Aircraft Co. Ltd. v. Canadian Flight Equipment Ltd., [1955] 2 QB 556, [1955] 3 WLR 212, [1955] 2 All ER 722. 82 JH Milner d' Son v. Percy Bilton Ltd., [1966] 1 WLR 1582, [1966] 2 All ER 894. 83 Hillis Oil and Sales v. Wynn's Canada, [1986] 1 SCR 57(Supreme Court, Canada) . 84 Machtinger v. HOJ Industries Ltd., [1992] 1 SCR 986(Supreme Court of Canada) . 85 AIR 2001 SC 1462, (2001) 5 SCC 101 86 See Nilima Bhadbhade, Supreme Court on a Development Contract: an Analysis based on Principles of Contract and Specific Relief,(2006) AIR Jour 177. 87 Jones v. St John's College Oxford, (1870) LR 6 QB 115; Lynch v. Thorne, [1956] 1 WLR 303; Shell UK Ltd. v. Lostock Garage Ltd., [1976] 1 WLR 1187, [1977] 1 All ER 481; J Lauritzen A/S v. Wijsmuller BV, [1990] 1 Lloyd' s Rep l. 88 State of Tamil Nadu v. M Malayandi, AIR 1996 Mad 1. 89 AIR 1956 Bom 151 at 153; Harmandrai Fulchand v. Pragdas, 50 IA 9, AIR 1923 PC 54 relied on; Ganga Saran v. Firm Ram Charan Ram Gopal, [1952] SCR 36, AIR 1952 SC 9; the observations of Seller J quoted in Brauer d' Co. (Great Britain) Ltd. v. James Clark (British Materials) Ltd., [1952] 2 All ER 497 at 500. 90 Liverpool City Council v. Irwin, [1977] AC 239, [1976] 2 All ER 39(HL) ; partly affirming [1975] 3 All ER 658(CA) ; Harmony Shipping Co. 'SA' v. Davis, [1980] 1 Lloyd's Rep 44, [1979] 3 All ER 177; Tai Hing Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd., [1986] AC 808; National Bank of Greece SA v. Pinios Shipping Co. (No. 1), [1988] 2 Lloyd's Rep 126 at 219, CA Hevered in [1990] 1 All ER 781, [1989] 1 All ER 213(CA) . 91 Smith v. South Wales Switchgear Co. Ltd., [1978] 1 All ER 18. 92 SVAR Vellayam Chetty v. KLST Kulandaveluappa Chetty, AIR 1915 Mad 931. 93 Hillis Oil d' Sales v. Wynn's Canada, [1986] 1 SCR 57 (Supreme Court of Canada). 94 Rhodes v. Forwood, (1876) 1 App Cas 256, [1874-80] All ER Rep 476(HL) ; Northey v. Trevillion, (1902) 18 TLR 648; Moon v. Camberwell Corpn., (1903) 89 LT 595(CA) ; but see Turner v. Goldsmith, [1891] 1 QB 544(CA), [1891-94] All ER Rep 384; Devonald v. Rosser d' Sons, [1906] 2 KB 728, [1904-07] All ER Rep 988; and Bauman v. Hulton Press Ltd., [1952] 2 All ER 1121 (implied term that a master would give to the servant reasonable work and wages until termination). 95 Scheggia v. Gradwell, [1963] 3 All ER 114, [1963] 1 WLR 1049(CA) . 96 Blake d' Co. v. Sohn, [1969] 3 All ER 123, [1969] 1 WLR 1412. 97 Joykrishna Mohapatra v. Radha Krishna Mohopatra, AIR 1934 Pat 433. 98 Haridas Ranchordas v. Mercantile Bank of India Ltd., AIR 1920 PC 61. 99 Juggomohan Ghose v. Kaisreechand, (1862) 9 MIA 256(PC) . 100 Juggomohun Ghose v. Kaisreechand, (1862) 9 MIA 256(PC) . 101 Tai Hing Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd., [1986] AC 80, [1985] 2 All ER 947(PC) . 102 Union of India v. Bhagwan Industries Ltd., AIR 1957 All 799(DB) . 1 Robb v. Green, [1895] 2 QB 315, [1895-99] All ER Rep 1053(CA) .
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2 Kirchner & Co. v. Gruban, [1909] 1 Ch 413, [1908-10] All ER Rep 242. 3 Gregory v. Ford, [1951] 1 All ER 121 (implied term that the employer would insure the lorry against third party risks). 4 Bauman v. Hulton Press Ltd., [1952] 2 All ER 1121; Turner v. Goldsmith, [1891] 1 QB 544(CA) ; Devonald v. Rosser & Sons, [1906] 2 KB 728, [1904-07] All ER Rep 988.. 5 Malik v. Bank of Credit and Commerce International SA (in liquidation), [1997] 3 All ER 1(HL) . 6 Ibid; Hedley, [1997] Cambridge Law Journal 485. 7 University of Nottingham v. Eyett, [1999] 2 All ER 437 (information about better pension entitlements if retired on later date). 8 Spring v. Guardian Assurance plc, [1994] 3 All ER 129(HL) . 9 [1994] 3 All ER 129 (HL) per Lord Woolf, at 179. 10 Lim Suat Hua v. Singapore Health Partners Pte Ltd, [2012] 2 SLR 805 (Singapore High Court). 11 Southern Foundries Ltd. v. Shirlaw, [1940] AC 701, [1940] 2 All ER 445(HL) . 12 Orman v. Saville Sportswear Ltd., [1960] 1 WLR 1055, [1960] 3 All ER 105. 13 Lister v. Romford Ice and Cold Storage Co. Ltd., [1957] AC 555, [1957] 1 All ER 125(HL) . 14 Reid v. Rush & Tompkins Group plc, [1990] 1 WLR 212, [1989] 3 All ER 228(CA) . 15 Management Hotel Imperial v. Hotel Workers' Union, [1960] 1 SCR 476, AIR 1959 SC 1342; T Cajee v. U Jormanik Siem, AIR 1961 SC 276. 16 [1992] 1 QB 333, [1991] 2 WLR 1362, [1991] 2 All ER 293. 17 1991] 2 All ER 293 per Sir Nicolas Browne Wilkinson at 305 (All ER). 18 HO Brandt & Co. v. HN Morris & Co. Ltd., [1917] 2 KB 784(CA) . 19 In re an arbitrations between the Anglo-Russian Merchant Traders Ltd. and John Batt & Co. (London) Ltd.,[1917] 2 KB 679(CA) ; Brauer & Co. (Great Britain) Ltd. v. James Clark (Brush Materials) Ltd., [1952] 2 All ER 497(CA) . 20 Mitchell Cotts & Co. (Middle East) Ltd. v. Hairco Ltd., [1943] 2 All ER 552 at 555 (CA); Peter Cassidy Seed Co. Ltd. v. Osuustukkukauppa, [1957] 1 All ER 484, [1957] 1 WLR 273. 21 AV Pound & Co. Ltd. v. MW Hardy & Co. Inc., [1956] AC 588 at 608, [1956] 1 All ER 639 at 648 (HL), per Viscount Simonds at 611 and Lord Somervell at 650. 22 Brauer & Co. (Great Britain) Ltd. v. James Clark (Brush Materials Ltd.), [1952] 2 All ER 497 at 500. 23 Liverpool City Council v. Irwin, [1977] AC 239, [1976] 2 All ER 39(HL), partly allowing, [1975] 3 All ER 658(CA) ; Duke of Westminster v. Guild, [1985] QB 688; Sim v. Rotherham Metropolitan Borough Council, [1987] Ch 216.. 24 Trollope Colls Ltd. and Holland, Hannen and Cubbits Ltd. v. Atomic Power Constructions Ltd., [1962] 3 All ER 1035, [1963] 1 WLR 333. 25 Trollope & Colls Ltd. v. North West Metropolitan Regional Hospital Board, [1973] 2 All ER 260, [1973] 1 WLR 601(HL) . 26 State of Maharashtra v. Saifuddin Mujjaffarali Saifi, AIR 1994 Bom 48. 27 Tarapore & Co. v. State of Madhya Pradesh, (1994) 3 SCC 521. 28 Blair v. Alan S Tomkins and Frank Obsorne, [1971] 2 QB 78, [1971] 1 All ER 317, [1971] 2 WLR 503(CA) . 29 Greaves & Co. (Contractors) Ltd. v. Baynham Meikle and Partners, (1974) 118 Sol Jo 595, [1975] 3 All ER 99. 30 Stovin-Bradford v. Volpoint Properties Ltd., [1971] Ch 1007, [1971], 3 All ER 570, [1971] 3 WLR 256(CA) . 31 Barratt Southampton Ltd. v. Fairclough Building Ltd., (1988) 27 Const LR 623. 32 Hoskins v. Woodham, [1938] 1 All ER 692; Lynch v. Thorne, [1956] 1 WLR 303, [1956] 1 All ER 744. 33 Lawrence v. Cassel, [1930] 2 KB 83, [1930] All ER Rep 733; Miller v. Cannon Hill Estates Ltd., [1931] 2 KB 113, [1931] All ER Rep 93; Jennings v. Tavener, [1955] 1 WLR 932, [1955] 2 All ER 769; Hancock v. BW Brazier (Anerley)
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Ltd., [1966] 2 All ER 901 at 903, [1966] 1 WLR 1317, [1966] 2 KB 113. 34 Yorkshirewatn Water Services Ltd. v. Sun Alliance & London Insurance plc, [1997] 2 Lloyd's Rep 21. 35 Bank of Nova Scotia v. Hellenic Mutual War Risks Assn '(Bermuda)' Ltd. (the Goodluck), [1990] 1 QB 818 (reversed on other grounds, [1992] 1 AC 283, [1989] All ER 628 reversed on other grounds, [1991] 3 All ER 1. 36 Baker v. Black Sea & Baltic General Insurance Co. Ltd., [1998] 1 WLR 974. 37 Wong v. Beaumont Property Trust Ltd., [1964] 2 WLR 1325, 1333(CA) . 38 Koduri Krishnarao v. State of Andhra, AIR 1962 AP 249. 39 Edler v. Auerbach, [1950] 1 KB 359, [1949] 2 All ER 692; Hills v. Harris, [1965] 2 QB 601, [1965] 2 All ER 358(CA) . 40 Duke of Westminster v. Guild, [1985] QB 688. 41 State of Tamil Nadu v. M Malayandi, AIR 1996 Mad 1. 42 Wong Mee Wan v. Kwan Kin Travel Services, [1995] 4 All ER 745(PC) (case from Hong Kong). 43 Kay Lim Construction & Trading Pte Ltd v. Soon Douglas (Pte) Ltd, [2012] SGHC 186(Singapore High Court), [2013] 1 SLR 1. 44 Kimber v. William Willett Ltd., [1947] KB 570, [1947] 1 All ER 361(CA) . 45 Samuels v. Davis, [1943] KB 526, [1943] 2 All ER 3; Greaves & Co. 'Contractors' Ltd. v. Baynham Meikle and Partners, (1974) 118 Sol Jo 595, [1975] 3 All ER 99; St Alban's City and District Council v. International Computers Ltd., [1996] 4 All ER 481. 46 D Vanjeeswara Ayyar v. District Board, South Arcot, AIR 1941 Mad 887. 47 Kimber v. William Willett Ltd., [1947] KB 560, [1947] 1 All ER 361(CA) . 48 D Vanjeeswara Ayyar v. District Board, South Arcot, AIR 1941 Mad 887. 49 Bolam v. Friern Hospital Management Committee, [1957] 1 WLR 582, [1957] 2 All ER 118QBD ; Chin Keow v. Government of Malaysia, [1967] 1 WLR 813; Greaves & Co. (Contractors) Ltd. v. Baynham Meikle and Partners, [1975] 1 WLR 1095, [1975] 3 All ER 99; Saif Ali v. Sydney Mitchell & Co., [1980] AC 198, [1978] 3 All ER 1033; Whitehouse v. Jordan, [1981] 1 WLR 246, [1981] 1 All ER 267(HL) ; Maynard v. West Midlands Regional Health Authority, [1984] 1 WLR 634, [1985] 1 All ER 635; Bolitho v. City and Hackney Health Authority, [1998] AC 232, [1997] 4 All ER 771; Chappell v. Newcastle upon Tyne Hospitals NHS Foundation Trust, [2013] EWHC 4023(QB), [2013] All ER 232(D) (Dec) ; Ali Shah v. North West London Hospital NHS Trust, [2013] EWHC 4088(QB), [2014] All ER 38(D) (Jan) . 50 Auto Concrete Curb Ltd. v. South Nation River Conservation Authority, [1993] 3 SCR 201(Supreme Court, Canada) . 51 Kay Lim Construction & Trading Pte Ltd v. Soon Douglas (Pte) Ltd, [2012] SGHC 186(Singapore High Court), [2013] 1 SLR 1. 52 Julie Breen v. Cholmondeley W Williams, FC 96/025, (High Court of Australia), the Court refused to imply such term in the contract, and refused the right even on the grounds of existence of fiduciary relationship; Sidaway v. Governors Bethlem Royal Hospital Authority, [1985] AC 871 per Lord Templeman at 904, [1985] 1 All ER 643; R v. Mid Glamorgan Family Health Services Authority, [1995] 1 WLR 110, [1995] 1 All ER 356; but see McInerney v. MacDonald, [1992] 2 SCR 138 (Supreme Court of Canada, recognised the right of access arising out of fiduciary relationship between doctor and patient). 53 A Hamson d' Son (London) Ltd. v. S Martin Johnson d' Co. Ltd., [1953] 1 Lloyd's Rep 553. 54 Ben Shipping Co. Pvt. Ltd. v. An-Board Bainne, [1986] 2 Lloyd's Rep 285. 55 Compagnie Algerienne de Meunerie v. Katana Soci Di Navigotione Marittima Spa, [1960] 2 QB 115, [1960] 2 All ER 55, [1960] 2 WLR 719(CA) . 56 Firm Bachhraj Amolakchand v. Firm Nand Lal Sitaram, AIR 1966 MP 145. 57 Sophy Kelly v. State of Maharashtra, AIR 1968 Bom 156 at 168-69. 58 Addison v. Brown, [1954] 1 WLR 779, 786, [1954] 2 All ER 213. 59 Margulies Brothers Ltd. v. Dafnis Thomaides d' Co. (UK) Ltd., [1958] 1 All ER 777, [1958] 1 WLR 398;
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Jugoslavenska Oceanska Plovidba v. Castle Investment Co. Inc., [1973] 3 All ER 498, [1973] 3 WLR 847(CA) . 60 British School of Motoring Ltd. v. Simms, [1971] 1 All ER 317. 61 Equitable Life Assurance Co. Ltd. v. Hyman, [2000] All ER 1026(D), [2002] 1 AC 408. 62 British School of Motoring Ltd. v. Simms, [1971] 1 All ER 317. 63 Silverman v. Imperial London Hotels Ltd., [1927] All ER Rep 712, (1927) 137 LT 57. 64 Chatenay v. Brazilian Submarine Telegraph Co., [1891] 1 QB 79 per Lindley LJ at 85, [1886-90] All ER Rep 1135 at 1138. 65 State of Jammu and Kashmir v. Thakur Ganga Singh, AIR 1960 SC 356 at 359. 66 K Appukuttan Panicker v. SKRAKR Athappa Chettiar, AIR 1966 Ker 303. 67 Kim Lewison, The Interpretation of Contracts, 2nd edn., p. 3. 68 Investors Compensation Scheme Ltd. v. West Bromwich Building Society, [1998] 1 WLR 896 per Lord Hoffman at 912. 69 UNIDROIT Principles, Art. 4.3. 70 Inland Revenue Commissioners v. Raphael, [1935] AC 96 per Lord Wright at 145, [1934] All ER Rep 740 at 779 (HL). 71 Great Western Railway v. Bristol Corpn., (1918) 87 LJ Ch 414 per Lord Shaw. 72 Hepburn v. A Tomlinson (Hauliers) Ltd., [1966] AC 451, [1966] 1 All ER 418, [1966] 2 WLR 453 at 456 (HL); Waters v. Monarch Fire & Life Assurance Co., (1856) 5 E&B 870. 73 State of Gujarat v. Variety Body Builders, AIR 1976 SC 2108, (1976) 3 SCC 500. 74 Central Bank of India v. Hartford Fire Insurance Co. Ltd., AIR 1965 SC 1288. 75 The Indian Evidence Act, 1872, s. 92;British Movietonews Ltd. v. London and District Cinemas Ltd., [1952] AC 166, [1951] 2 All ER 617(HL) ; Waters v. Monarch Fire & Life Assurance Co., (1856) 5 E&B 870. 76 United India Assurance Co. Ltd. v. Harichand Rai Chandan Lal, AIR 2004 SC 4794. 77 State of Madhya Pradesh v. Ramswaroop Vaishya, AIR 2003 SC 1067, (2003) 2 SCC 254. 78 National Insurance Co. Ltd. v. Ishar Das Madan Lal, AIR 2007 508(Supp), (2007) 4 SCC 105 (held that burden lay on insurer to show that the exclusion applied, and explains with reference to contra proferentem rule) 79 Siemens Ltd. v. Schenker International (Australia) Pty Ltd., [2004] HCA 11(High Court of Australia) . 80 Saregama India Ltd. v. Suresh Jindal, AIR 2006 Cal 340. 81 Balkishen Das v. W F Legge, (1899) 22 All 149, (1899) 27 IA 58, (1899) 2 Bom LR 523; Maung Kyin v. Ma Shwe Law, (1918) 45 Cal 320, AIR 1917 PC 207, (1918) 20 Bom LR 278 (between parties to absolute conveyance, oral evidence to show that the transaction was intended to be a mortgage is excluded). See also Habib Main v. Mukhtar Ahmad, AIR 1969 All 296. 82 The UNIDROIT Principles, Art. 4.1. 83 Reardon-Smith Line Ltd. v. Hansen Tangen, [1976] 3 All ER 570 per Lord Wilberforce at 575. 84 (1982) 149 CLR 337 at 352. 85 UNIDROIT Principles, Art 4.2; Lakshmi Prasad v. Gopi Prasad, AIR 1964 All 526. 86 Govindram Mihamal v. Chetumal Villardas, AIR 1970 Bom 251, 72 Bom LR 653. 87 Raja Ram Jaiswal v. Ganesh Prasad, AIR 1959 All 29; Union of India v. Nand Kishore, AIR 1966 HP 54 (if language is vague). 88 Rajah Vatsavaya Venkata Subhadrayyamma Jagapati Bahadur Garu y Poosapati Venkatapati Raju Garu,AIR 1924 PC 162 Gulabchand Gambhirlal v. Kudilal Govindram, AIR 1959 MP 151, AIR 1966 SC 1734; Prenn v. Simmonds, [1971] 3 All ER 237 (pre-contract negotiations cannot be looked at, but contract constructed in view of surrounding circumstances and object of the contract).
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89 Kamla Devi v. Takhatmal, AIR 1964 SC 859. 90 Raj Video Vision v. K Mohanakrishnan, AIR 1998 Mad 294; but see Maganlal Savam v. Rupam Pictures, AIR 2000 Bom 416 (the term 'exploitation' used in an assignment of the film rights held to cover all scientific and technological devices invented in the future, and hence, would include satellite rights). 91 Pawan Alloys and Casting Pvt. Ltd. v. Uttar Pradesh State Electricity Board, AIR 1997 SC 3910, (1997) 7 SCC 251. 92 Joseph Darmanin v. Carmel Micallef, AIR 1946 PC 50; Miryala Venkateswarlu & Co. v. Battula Venkataperaiah and Venkateswarlu and Co., AIR 1969 AP 88. 93 Chartbrook Ltd. v. Persimmon Homes, [2009] 4 All ER 677, [2009] UKHL 38, per Lord Hoffman. 94 Prenn v. Simmonds, [1971] 3 All ER 237, [1971] 1 WLR 1381 per Lord Wilberforce at 1384. 95 Sumitomo Heavy Industries Ltd. v. Oil and Natural Gas Company, AIR 2010 SC 3400, (2010) 11 SCC 296. 96 Polymat India P Ltd. v. National Insurance Co. Ltd., AIR 2005 SC 286, (2005) 9 SCC 174. 97 L Schuler AG v. Wickman Machine Tool Sales Ltd., [1974] AC 235, [1973] 2 All ER 39 per Lord Kilbrandon at 631 (HL). 98 Ganga Saran v. Firm Ram Charan Ram Gopal, [1952] SCR 36 at 40, AIR 1952 SC 9, [1952] SCR 36; Gastho Behari v. Surs' Estate Ltd., AIR 1960 Cal 752 (merely calling it a contract not enough); Dhulipudi Namayya v. Union of India, AIR 1958 AP 533; Central Bank of India v. Hartford Fire Insurance Co., AIR 1965 SC 1288. 1 Ottoman Bank of Nicosia v. Ohanes Chakarian, AIR 1938 PC 26 at 29; Union of India v. Kishorilal Gupta & Bros., AIR 1959 SC 1362; State of Jammu & Kashmir v. Mohd Khalil, AIR 1959 J&K 24; State of Orissa v. Harichandan Babu, AIR 1964 Ori 73; Jaykumar Jain v. Om Prakash, AIR 1970 MP 119. 2 James Miller and Partners Ltd. v. Whitworth Street Estates (Manchester) Ltd., [1970] AC 583, [1970] 1 All ER 796 per Lord Reid at 798, [1970] 2 WLR 728. 3 Godhra Electricity Co. Ltd. v. State of Gujarat, [1975] 2 SCR 42, AIR 1975 SC 32 at 37-38: (1975) 1 SCC 199. 4 Wilson v. Maynard Shipbuilding Consultants AB, [1978] QB 665, [1978] 2 All ER 78. 5 Gannmani Anasuya v. Parvatini Amarendra Chowdhary, AIR 2007 SC 2380 6 James Miller and Partners Ltd. v. Whitworth Street Estates (Manchester) Ltd., [1970] AC 583, [1970] 1 All ER 796 at 805, [1970] 2 WLR 728(HL) . 7 Rashtriya Chemicals and Fertilizers Ltd. v. Chowgule Brothers, AIR 2010 SC 3543, (2010) 8 SCC 563. 8 Ruttonsi Rawji v. Bombay United Spinning and Weaving Co. Ltd., (1916) 41 Bom 518, AIR 1916 Bom 4, 18 Bom LR 532. 9 Hind Mercantile Corpn. Ltd. v. Miryala Venkateshwarlu & Co., AIR 1959 AP 545; Bejoy Krishna Saha v. North Bengal Sugar Mills Co. Ltd., AIR 1949 Cal 490; Juggomohun Ghose v. Manickchund and Kaisreechund, (1857-60) 7 MIA 263(PC) . The Indian Evidence Act, 1872, s. 92, proviso (5): Any usage or custom by which incidents not expressly mentioned in any contract are usually annexed to contracts of that description, may be proved; provided that the annexing of such incident would not be repugnant to, or inconsistent with, the express terms of the contract. 10 Magnum Films v. Golcha Properties Pvt. Ltd., AIR 1984 Del 162. 11 Alimenta SA v. National Agricultural Co-op Mktg Federation of India Ltd., (1987) 1 SCC 615 at 620. 12 Patiram Banerjee v. Kankinarra Co. Ltd., AIR 1916 Cal 548 at 550; Navnit Lal & Co. v. Kishanchand & Co., AIR 1956 Bom 151 at 152. 13 Olympus Superstructures Pvt. Ltd. v. Meena Vijay Khetan, AIR 1999 SC 2102. 14 [1941] AC 108, [1941] 1 All ER 33 at 48; Kotharaju Narayana Rao v. Tekumalla Ramchandra Rao, AIR 1959 AP 370 at 374. 15 KC Sethia (1944) Ltd. v. Partabmull Rameshwar, [1950] 1 All ER 51(CA), on appeal [1951] 2 All ER 352. 16 Muhammadi Steamship Co. v. Keserishih Vallabdas, AIR 1957 TC 133 at 134. 17 Nawabjada K Atikulla v. Md Mobarak Hossein, AIR 1949 Cal 174; Gulabchand Gambhirlal v. Kudilal Govindram, AIR 1959 MP 151 at 161 (FB); Raghunath Enamels Ltd. v. Union of India, AIR 1962 Punj 383 at 384.
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18 Bomanji Ardeshir Wadia v. Secretary of State, 56 IA 51, AIR 1929 PC 34, 53 Bom 322 (PC). 19 Desikhacharyulu v. Narasimhacharyulu, AIR 1958 AP 278; following Suleman Vadu v. Trikamji Velji, 12 Bom HCR 10. 20 Birch v. Paramount Estate Ltd., [1956] 167 EG 396; cited in Oscar Chess Ltd. v. Williams, [1957] 1 All ER 325 at 329. 21 D Kondal Rao Naidu v. Dhauakoti Ammal, AIR 1938 Mad 81. 22 Buland Sugar Co. Ltd. v. Union of India, AIR 1962 All 425 at 429. 23 Towne v. Eisner, (1918) 245 US 416 per Holmes J at 425. 24 Mannai Investment Co. Ltd. v. Eagle Star Life Assurance Co. Ltd., [1997] AC 749 per Lord Hoffman at 775, [1997] 3 All ER 352 at 376. 25 Investors Compensation Scheme Ltd. v. West Bromwich Building Society, [1998] 1 WLR 896 per Lord Hoffman at 913. 26 Grey v. Pearson, (1857) 6 HL Cas 61 per Lord Wensleydale at 106, [1843-60] All ER Rep 21. 27 Ramana Dayaram Shetty v. International Airport Authority of India, AIR 1979 SC 1628 at 1633. 28 Panchanan Pal v. Nirode Kumar Biswas, AIR 1962 Cal 12; Lakshmi Prasad v. Gopi Prasad, AIR 1964 All 526; Pran Krishna Das v. Controller of Estate Duty, AIR 1968 Cal 496; Teamco Private Ltd. v. TMS Mani, AIR 1967 Cal 168. 29 China Cotton Exporters v. Beharilal Ramcharan Cotton Mills Ltd., AIR 1961 SC 1295 at 1296; Sohanlal Pachisia & Co. v. Bilasray Khemani, AIR 1954 Cal 179 at p.182; Ramamoni v. Kasinath, AIR 1960 Ori 199 at 202. 30 Robertson v. French, (1803) 4 East 130 at 135, [1803-13] All ER Rep 350. 31 The Indian Evidence Act, 1872, ss. 93-99. 32 Ramana Dayaram Shetty v. International Airport Authority of India, AIR 1979 SC 1628 at 1633. 33 Central Bank of India v. Hartford Fire Insurance Co, AIR 1965 SC 1288. 34 Estafnous v. London & Leeds Business Centres Ltd, [2011] EWCA Civ 1157. 35 S Kadir Ibrahim Rowther v. Noor Mohammad Rowther, AIR 1966 Mad 60 relying on John Lachlan McGillivray Watson v. Bertha Elinor, AIR 1928 PC 115. 36 Union of India v. Raman Iron Foundry, AIR 1974 SC 1265 at 1270-73. 37 Surajmani v. Rabi Nath Ojha, (1908) ILR 30 All 84 at 89 (PC). 38 Kamala Sugar Mills Ltd. v. Ganga Bishen Bhajan Singh, AIR 1978 Mad 178, (1977) 1 Mad LJ 149. 39 Navnit Lal & Co. v. Kishanchand & Co., AIR 1956 Bom 151 at 153; Sirius International Insurance Co. (Publ) v. FAI General Insurance Ltd., [2005] 1 All ER 191, [2004] UKHL 54. 40 [1959] AC 133 at 158, [1958] 1 All ER 725(HL) ; Dhanrajamal Gobindram v. Shamji Kalidas & Co., [1961] 3 SCR 1020 at 1035, AIR 1961 SC 1285. 41 Hillas & Co. Ltd. v. Acros Ltd., (1932) 147 LT 503 per Lord Tomlin at 512, [1932] All ER Rep 494 at 499; Coffee Board Bangalore v. Janab Dada Haji Ibrahim Halari, AIR 1966 Mys 118; Dhanrajamal Gobindram v. Shamji Kalidas & Co., [1961] 3 SCR 1020, AIR 1961 SC 1285. 42 Rainy Sky SA v. Kookmin Bank, [2011] UKSC 50, [2012] 2 AllER 1137. 43 Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406, AIR 1959 SC 781 at 795; Pearl Insurance Co. v. Atma Ram, AIR 1960 Pun 236(FB) . 44 Union of India v. DN Revri & Co., AIR 1976 SC 2257 at 2262; Kandamath Cine Enterprises Pvt. Ltd. v. John Philipose, AIR 1990 Ker 198. 45 Punj Lioyd Ltd. v. India Cements Ltd., AIR 2005 Del 389. 46 AIR 2010 SC 3400, (2010) 11 SCC 296. 47 BDW Trading Ltd (T/A Barratt North London) v. JM Rowe (Investments) Ltd, [2011] EWCA Civ 548.
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48 Deokar Exports (P) Ltd. v. New India Assurance Co. Ltd., AIR 2009 SC 2026, (2008) 14 SCC 598; Sumitomo Heavy Industries Ltd. v. Oil and Natural Gas Company, AIR 2010 SC 3400, (2010) 11 SCC 296; Kay Lim Construction & Trading Pte Ltd v. Soon Douglas (Pte) Ltd, [2012] SGHC 186 (Singapore High Court), [2013] 1 SLR 1. 49 Dhanrajamal Gobindram v. Shamji Kalidas & Co., AIR 1961 SC 1285 at 1291. 50 Dhanrajamal Gobindram v. Shamji Kalidas & Co., [1961] 3 SCR 1020, AIR 1961 SC 1285 at 1291; Lebeaupin v. Richard Crispin & Co., [1920] 2 KB 714, [1920] All ER Rep 353; Cf English Electrical and Associated Industries (Cardiff) Ltd. v. Patley Pressings Ltd., [1953] 1 All ER 94 (subject 'force majeure conditions' held vague) Scammell v. Ouston, [1941] AC 251, [1941] 1 All ER 14(HL) ('on hire purchase terms' held vague) distinguished; Shamrock SS & Co. v. Storey & Co., (1899) 5 Com Cas 21, (1899) 81 LT 413(CA) ; referred to in Bishop and Baxter Ltd. v. Anglo-Eastern Trading and Industrial Co. Ltd., [1944] 1 KB 12, [1943] 2 All ER 598CA ; Hillas & Co. Ltd. v. Acros Ltd., (1932) 147 LT 503, [1932] All ER Rep 494(HL) ; Adamastos Shipping Co. Ltd. v. Anglo-Saxon Petrolium Co. Ltd., [1959] AC 133 at 158, [1958] 1 All ER 725(HL) (board meaning to be given to commercial documents). 51 Brauer & Co. (Great Britain) Ltd. v. James Clark (Brush Materials) Ltd., [1952] 2 All ER 497; Coloniale Import-Export v. Loumidis Sons, [1978] 2 Lloyd's Rep 560 at 562 (refusal of licence). 52 Holcim (Singapore) Pte Ltd v. Precise Development Pte Ltd, [2011] SGCA 1 (Singapore Court of Appeal), [2011] 2 SLR 106 (increase in prices). 53 Khardah Company Ltd. v. Rayman & Co. (India) Private Ltd., [1963] 3 SCR 183, AIR 1962 SC 1810; Ruby General Insurance Co. Ltd. v. Pearey Lal Kumar, AIR 1952 SC 119, [1952] 1 SCR 501. 54 Deviprasad Khardelwal & Sons v. Union of India, AIR 1969 Bom 163. 55 State Bank of India v. Manganese Ore (India) Ltd., AIR 1997 SC 254, (1996) 11 SCC 113. 56 National Fertilizers v. Puran Chand Nangia, AIR 2001 SC 53, (2000) 8 SCC 343. 57 Moolji Jaitha and Co. v. Seth Kirodimal, AIR 1961 Ker 21; Firm Seth Hajarimal v. Gulabchand Udechand Firm, 1955 Nag 722, AIR 1956 Nag 118. 58 Lancashire County Council v. Municipal Mutual Insurance Ltd., [1996] 3 All ER 545. 59 Bharat Fire & General Insurance Ltd. v. Parameshttari Prasad Gupta, AIR 1968 Del 68, distinguishing State of Madhya Pradesh v. Sirajuddin Khan, AIR 1965 SC 198; Re Reckitt, Reckitt v. Reckitt, [1932] 2 Ch 144, [1932] All ER Rep 961. 60 Wellington Associates Ltd. v. Kirit Mehta, (2000) 4 SCC 272, AIR 2000 SC 1379. 61 Oriental Insurance Co. Ltd. v. Samayanallur Primary Agricultural Coop Bank, AIR 2000 SC 10. 62 Global Process Systems Inc v. Syarikat Takaful Malaysie Berhad, [2011] LJKSC 5. 63 Sumitomo Heavy Industries Ltd. v. Oil and Natural Gas Company, AIR 2010 SC 3400, (2010) 11 SCC 296. 64 Videocon Properties Ltd. v. Bhalchandra Laboratories, AIR 2004 SC 1787, (2004) 3 SCC 711. 65 Syndicate Bank v. Channaveerappa Beleri, AIR 2006 SC 1874, (2006) 11 SCC 506 (a guarantor who has agreed to pay on denand is not liable unless demand is made). 66 Porton Capital Technology Funds v. 3M UK Holdings Ltd, [2011] EWHC 2895(Comm) . 67 See Adamastos Shipping Co. Ltd. v. Anglo-Saxon Petroleum Co. Ltd., [1959] AC 133, [1958] 1 All ER 725; Bremer Handelsgesellschaft GmbH v. J H Rayner & Co. Ltd., [1979] 2 Lloyd's Rep 216; Sudatlantica Navegacion S A v. Devamor Shipping Corporation, [1985] 2 Lloyd's Rep 271; Pagnan SPA v. Tradox Ocean Transportation SA, [1987] 2 Lloyd's Rep 342 at 349, [1987] 3 All ER 565. 68 Raneegunge Coal Association Ltd. v. Tata Iron and Steel Co. Ltd., AIR 1940 PC 151 at 152-53; Karan Raj v. Chunnilal, AIR 1964 Raj 72 at 75. 69 Karan Raj v. Chunnilal, AIR 1964 Raj 72 at 75; Jethmal v. Ambsingh, AIR 1955 Raj 97(FB) . 70 Smith v. South Wales Switchgear Ltd., [1978] 1 WLR 165, [1978] 1 All ER 18 at pp. 21-23 (HL). 71 North Eastern Rail Co. v. Lord Hastings, [1900] AC 260, per Lord Davey at 267, [1900-3] All ER Rep 199, quoting Lord Watson in Chamber Colliery Co. v. Twyerould, 1893 reported in [1915] 1 Ch 268 at 272. 72 Thakkar Hemraj Keshavji v. Shah Haridas Jethabhai, [1964] 3 SCR 686, AIR 1964 SC 1526; Navnit Lal d' Co. v. Kishanchand d' Co., AIR 1956 Bom 151; State of WB v. Narendra Nath Roy, AIR 1958 Cal 21, Gulabchand Gambhirlal v. Kudilal Govindram Rati Lal Bhagwandas d' Co. on appeal, AIR 1959 MP 151(FB) ; Soundararajan and Co. Ltd. v.
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KPAT Annamalai Nadar, AIR 1960 Mad 480; Ram Lal Jagan Nath v. State of Punjab, AIR 1966 Punj 436(FB) ; Abdul Kader Laskar v. State of West Bengal, AIR 1967 Cal 99; LTNIDROIT Principles, Art. 4.4. 73 M Arul Jothi v. Lajja Bal, (2000) 3 SCC 723, AIR 2000 SC 1122. 74 Life Insurance Corpn. of India v. Dharam Vir Anand, (1998) 7 SCC 348 (the terms 'date of policy' and 'date on which the risk under the policy has commenced' were different dates). 75 State of Gujarat v. Dhrangadhra Chemical Works Ltd., AIR 1985 SC 609. 76 Hare v. Horton, (1833) 5 B & Ad 715. 77 Hillis Oil & Sales v. Wynn's Canada, [1986] 1 SCR 57 (Supreme Court of Canada). 78 Halsbury's Laws of England, Vol. 9(1), 4th edn. Reissue 30 June 1978, 'CONTRACT', para 773. 79 Sun Fire Office v. Hart, [1889] 14 AC 98 per Lord Watson at 103 (HL). 80 Tillmans v. Steamship Knutsford Ltd., [1908-10] All ER Rep 174 affirmed in [1908] AC 406; Thorman v. Dowgate Steamship Co. Ltd., [1910] 1 KB 410, [1908-10] All ER Rep 549. 81 TA Sankunni v. BJ Philips, AIR 1972 Mad 272 at 274; Pirthi Din v. Ram Lal, AIR 1926 Oudh 136; Krishnarao v. Babaji, (1900) 24 Bom 31. 82 Ali Abbas v. Babu Moghal Sah, AIR 1958 Pat 63, (1957) 5 BLJR 641. 83 LTNIDROIT Principles, Art 4.6. 84 Superintendence Company of India (P.) Ltd. v. Krishna Murgai, AIR 1980 SC 1717; see also below: 'Construction of Exemption Clauses.' 85 Peacock Plywood (P) Ltd. v. Oriental Insurance Co. Ltd., (2006) 12 SCC 673. 86 United India Insurance Co. Ltd. v. Pushpalaya Printers, AIR 2004 SC 1700, (2004) 3 SCC 694. 87 Associated Construction v. Pawanhans Helicopters Pvt. Ltd., AIR 2008 SC 2911, (2008) 16 SCC 128. 88 Paul Beier v. Chotalal Javerdas, (1904) 30 Bom 1. 89 China Cotton Exporters v. Beharilal Ramcharan Cotton Mills Ltd., [1961] 3 SCR 845, AIR 1961 SC 1295 at 1297; Noorbhai Gulam Hussein Makali v. M Allabux d' Co., 42 IC 820, AIR 1917 Bom 246 at p. 248, (1917) 19 Bom LR 845; Ratilal M Parikh v. Dalmia Cement d' Paper Marketing Co. Ltd., AIR 1943 Bom 229 at 236; Bengal Agency and Stores Syndicate v. T N Khanna, AIR 1949 Cal 231 at p. 233; United Bank of India Ltd. v. Nederlandsche Standard Bank, AIR 1962 Cal 325 at 330. 90 Ratilal M Parikh v. Dalmia Cement d' Paper Marketing Co. Ltd., AIR 1943 Bom 229; Sha Moolchand Kesarimull v. Associated Agencies, (1941) 2 Mad LJ 281, AIR 1942 Mad 139; The Athinoula, [1980] 2 Lloyd's Rep 481. 91 Robertson v. French, (1803) 4 East 130 at 135, [1803-13] All ER Rep 350; Glynn v. Margeston, [1893] AC 351 at 357 (CA); Noorbhai Gulam Hussein Makali v. M Allabux d' Co., 42 IC 820, AIR 1917 Bom 246, (1917) 19 Bom LR 845; Sha Moolchand Kesarimull v. Associated Agencies, (1941) 2 Mad LJ 281, AIR 1942 Mad 139; Riley v. Coglan, [1967] 1 WLR 1300 at 1308, [1968] 1 All ER 314; China Cotton Exporters v. Beharilal Ramcharan Cotton Mills Ltd., AIR 1961 SC 1295, [1961] 3 SCR 845; Gesselschaft Burgerlichen Rechts v. Stockholms Rederiaktiebolog Svea (The Brabant), [1967] 1 QB 588, [1966] 1 All ER 961. 92 Riley v. Coglan, [1967] 1 WLR 1300 at 1308, [1968] 1 All ER 314; China Cotton Exporters v. Beharilal Ramcharan Cotton Mills Ltd., AIR 1961 SC 1295, [1961] 3 SCR 845 (manuscript prevails over printed matter); but see Jacques v. Lloyd D George d' Partner Ltd., [1968] 1 WLR 625 (a printed form containing an unreasonable clause cannot be enforced in the case of an estate agent); but see Ram Tahal Modi v. Ratan Lal, AIR 1989 Pat 13 at 20 (since the case statutorily prescribed form for rent receipt did not provide for incorporating any terms and conditions of tenancy printing of a term on the inner foil of the rent receipt that rent was payable by fifth of the next following month did not constitute a contract). 93 A 'paramount clause' is a clause which incorporates the Hague Rules into the contract. Its purpose is to give the Hague Rules contractual force; so that, although the bill of lading may contain very wide exceptions, the Rules are paramount and override any express exemption or condition inconsistent with it. 94 Nea Agrex SA v. Baltic Shipping Co. Ltd., [1976] 2 All ER 842, applying Adamastos Shipping Co. Ltd. v. Anglo-Saxon Petroleum Co. Ltd., [1959] AC 133 at 158, [1958] 1 All ER 725. 95 Cooperative Bank plc v. Tipper, [1996] 4 All ER 366Ch D .
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1 Sundaram Finance Ltd. v. State of Kerala, AIR 1966 SC 1178 at 1185; Ratan Chand Chordia v. Special Assistant Commercial Tax Officer, (1967) 1 Mad LJ 352. 2 State of Orissa v. Titaghur Paper Mills Company Limited, AIR 1985 SC 1293 (document a Will, and not a gift deed); CIT Punjab v. Panipat Woollen and General Mills Co. Ltd., AIR 1976 SC 640. 3 Employees State Insurance Corpn. v. Tata Engineering and Locomotive Co. Ltd., AIR 1966 Pat 445 (apprentice or workman). 4 CIT Punjab v. Panipat Woollen and General Mills Co. Ltd., AIR 1976 SC 640. 5 Laiqram v. Agar Das, AIR 1967 HP 29. 6 Damodar Valley Corpn. v. State of Bihar, AIR 1961 SC 440 at 446; Suresh Kumar v. Dignity Motors Finance Ltd, AIR 2011 HP 123 (hire purchase agreement, or agreement of loan); Subodh Lallubhai Bhansali v. Pandarinath Moreshwar Dahanukar, AIR 2012 Bom 144 (agreement of sale or or loan). 7 State of Orissa v. Titaghur Paper Mills Company Limited, AIR 1985 SC 1293 at 1346, 1347--overruling State of Madhya Pradesh v. Orient Paper Mills Ltd., AIR 1977 SC 687. 8 KEM Mohamed Ibrahim Marcan v. Perumal Padayachi, (1974) 1 Mad LJ 507 at 513. 9 Nanak Builders and Investors Pvt. Ltd. v. Vinod Kumar Alag, AIR 1991 De1 315 at 318; relying upon Nawab Major Sir Mohammad Akbar Khan v. Attar Singh, AIR 1936 PC 171; CIT, Punjab v. Panipat Woollen and General Mills Co. Ltd., AIR 1976 SC 640. 10 Delta International Ltd. v. Shyam Sundar Ganeriwalla, (1999) 4 SCC 545. 11 V Pechimuthu v. Gowrammal, AIR 2001 SC 2446, (2001) 7 SCC 617; Shanmugam Pillai v. Annalakshmi Ammal, AIR 1950 FC 38. 12 Narinder Kumar Malik v. Surinder Kumar Malik, 2009 AIR SCW 6561, (2009) 8 SCC 743 (enforceability not disputed). 13 State Bank of India v. Mula Sahakari Sakhar Karkhana Ltd., AIR 2007 SC 2361, (2006) 6 SCC 293. 14 Faqir Chand Gulati v. Uppal Agencies (P) Ltd., (2008) 10 SCC 345. 15 United Breweries (Holding) Ltd v. Karnataka State Industrial Investment, AIR 2012 Kant 65 (a mere recommendatory letter). 16 Associated British Ports v. Ferryways NV, [2009] EWCA Civ 189, (2008) Lloyds Rep 353. 17 [1952] 1 SCR 36, AIR 1952 SC 9. 18 (1922) 50 IA 9, AIR 1923 PC 541. 19 AIR 1956 Bom 151; Harnandrai Fulchand v. Pragdas Budhsen, (1922) 50 IA 9, AIR 1923 PC 54; Ganga Saran v. Firm Ram Charan Ram Gopal, [1952] 1 SCR 36, AIR 1952 SC 9. 20 Khardah & Co. Ltd. v. Raymon & Co. (India) Pvt. Ltd., [1963] 3 SCR 183, AIR 1962 SC 1810; Virjee Daya & Co. v. Ramkrishana Rice & Oil Mills, AIR 1956 Mad 110 approved; Thakkar Hemraj Keshavji v. Shah Haridas Jethabhai, [1964] 3 SCR 686, AIR 1964 SC 1526; Modi Co. v. Union of India, AIR 1969 SC 9. 21 Modi Co. v. Union of India, AIR 1969 SC 9; Thakkar Hemraj Keshavji v. Shah Haridas Jethabhai, [1964] 3 SCR 686, AIR 1964 SC 1526; Adamastos Shipping Co. Ltd. v. Anglo-Saxon Petroleum Co. Ltd., [1959] AC 133 at 158, [1958] 1 All ER 725; Dhanrajamal Gobindram v. Shamji Kalidas & Co., [1961] 3 SCR 1020 at 1025, AIR 1961 SC 1285. 22 Thakkar Hemraj Keshavji v. Shah Haridas Jethabhai, [1964] 3 SCR 686 at pp. 697-8; AIR 1964 SC 1526 at 1530; Khardah & Co. Ltd. v. Raymon & Co. (India) Pvt. Ltd., AIR 1962 SC 1810; relied on [1963] 3 SCR 183. 23 Godhra Electricity Co. Ltd. v. State of Gujarat, [1975] 2 SCR 42, AIR 1975 SC 32 at 37-8, (1975) 1 SCC 199. 24 The Indian Evidence Act, 1872, s. 91. 25 Jamna Doss v. Srinath Roy, (1889) 17 Cal 176 at 177; Ramgopal v. Tulshi Ram, (1928) 51 All 79, AIR 1928 All 641; Ghasilal v. Deobai, AIR 1953 MB 303. 26 Tyagaraja Mudaliyar v. Vedathanni, 59 Mad 446, 38 Bom LR 373, (1936), AIR 1936 PC 70. 27 Arumoorthi Chettiar v. Secondary Education Committee, AIR 1962 Mad 360.
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28 The Indian Evidence Act, 1872, s. 92. 29 Ibid. 30 GM Cutts v. TF Brown, (1880) 6 Cal 328 at 337. 31 Heirs of Jatashankar Fulchand Mehta v. Heirs of Mavji Trikam, AIR 1969 Guj 169. 32 AXA Sun Life Services Plc v. Campbell Martin Ltd, [2011] EWCA Civ 133. 33 [2002] 1 All ER 353, [2001] UKHL 63. 34 The 199th Report of the Law Commission of India, 2006, makes detail recommendations about identifying and dealing with unfair contract terms. 35 Road Transport Corpn. v. Kirloskar Brothers Ltd., AIR 1981 Bom 299, (1981) 83 Bom LR 173 (condition behind a consignment note issued by a common carrier); Singhal Transport v. Jesaram Jamumal, AIR 1968 Raj 89. 36 Section 3: above 'Communication of Exemption Clauses and Other Special Conditions in Printed Documents'. 37 Anson's Law of Contract, 29th edition, 2010, p. 172. 38 Canada Steamship Lines Ltd. v. R, [1952] AC 192, [1952] 1 All ER 305(PC) ; Lictor Anstalt v. Mir Steel UK Ltd, [2012] EWCA Civ 1397. 39 Atlantic Shipping and Trading Co. Ltd. v. Louis Dreyfus & Co., [1922] All ER Rep. 559, [1922] 2 AC 250(HL) ; s. 28 below: 'Such Clauses may be Void Under this Act'. 40 Ailsa Craig Fishing Co. Ltd. v. Malvern Fishing Co. Ltd., [1983] 1 All ER 101; [1983] 1 WLR 964; George Mitchell (Chesterhall) Ltd. v. Finney Lock Seeds Ltd., [1983] 2 AC 803, [1983] 2 All ER737. 41 Photo Production Ltd. v. Securicor Transport Ltd., [1980] AC 827, [1980] 1 All ER 556 per Lord Diplock at 565; see also Frans Maas (UK) Ltd. v. Samsung Electronics (UK) Ltd., [2005] 2 All ER 783(Comm), [2004] EWHC 1502(Comm) . 42 Anti-Corrosion Pte Ltd v. Berger Paints Singapore Pte Ltd, [2011] SGCA 57 (Singapore Court of Appeal), [2012] 1 SLR 427. 43 Alison (J Gordon) Co. Ltd. v. Wallsend Shipway and Engineering Co. Ltd., (1927) 43 TLR 323 per Scrutton J at 324. 44 Kendall (Henry) & Sons v. Lillico (William) & Sons Ltd., [1969] 2 AC 31, [1968] 2 All ER 444(HL) . 45 Baldry v. Marshall Ltd., [1925] 1 KB 260, [1924] All ER Rep. 155CA . 46 Andrew Brothers (Borremouth) Ltd. v. Singer & Co. Ltd., [1934] 1 KB 17, [1933] All ER Rep 479CA . 47 Federal Chemical Works Ltd. v. Nutso (Nigeria) Ltd., AIR 2001 Del 25. 48 Kay Lim Construction & Trading Pte Ltd v. Soon Douglas (Pte) Ltd, [2012] SGHC 186(Singapore High Court), [2013] 1 SLR 1. 49 Kudos Catering (UK) Ltd v. Manchester Central Convention Complex Ltd, [2013] EWCA Civ 38. 50 Insight Vacations Pty Ltd v. Young, [2011] HCA 16(High Court of Australia) . 51 [1980] AC 827, [1980] 1 All ER 556 per Lord Diplock at 567. 52 John Lee & Son (Grantham) Ltd. v. Railway Executive, [1949] 2 All ER 581; Billyack v. Leyland Construction Co. Ltd., [1968] 1 WLR 471, [1968] 1 All ER 783; Tor Line AB (the TFL prosperity) v. Alltrans Group of Canada Ltd., [1984] 1 All ER 103, [1984] 1 WLR 48(HL) ; Ghaziabad Developmeent Authority v. Union of India, AIR 2000 SC 2003, (2000)6 SCC 113 (clause excluding liability to pay interest could not avail of the party at fault); National Insurance Co. Ltd. v. Ishar Das Madan Lal, AIR 2007 508(Supp), (2007) 4 SCC 105. 53 See s 2(1). 54 Canara Bank v. Bhavani Oil Co., AIR 2004 Ker 273. 55 Rutter v. Palmer, [1922] 2 KB 87(CA), [1922] All ER Rep. 3671. 56 Smith v. South Wales Switchgear Co. Ltd., [1978] 1 WLR 165, [1978] 1 All ER 18 per Viscount Dilhorne at 22; Lamport & Holt Lines Ltd. v. Coubro & Scrutton (M&l) Ltd., [1982] 2 Lloyd's Rep 42. 57 Harris Ltd. v. Continental Express Ltd., [1961] 1 Lloyd's Rep 251; John Carter (Fine Worsteds) Ltd. v. Hanson Haulage (Leeds) Ltd., [1965] 2 QB 495, [1965] 1 All ER 113(CA) .
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58 AE Farr Ltd. v. The Admiralty, [1953] 2 All ER 512, [1953] 1 WLR 965; Lamport & Holt Lines Ltd. v. Coubro & Scrutton (M&I) Ltd., [1982] 2 Lloyd's Rep 42. 59 Joseph Travers & Sons Ltd. v. Cooper, [1915] 1 KB 73, [1914-15] All ER Rep 104; Ashby v. Tolhurst, [1937] 2 KB 242, [1937] 2 All ER 837(CA) ; White v. Blackmore, [1972] 2 QB 651, [1972] 3 All ER 158. 60 Hall v. Brooklands Auto-Racing Club, [1933] 1 KB 205 per Scrutton LJ at 419, [1932] All ER Rep 208; Tai Hing Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd., [1986] AC 80 per Lord Scarman at p.107, [1985] 2 All ER 947 at 957. 61 Frans Maas (UK) Ltd. v. Samsung Electronics (UK) Ltd., [2005] 2 All ER 783(Comm), [2004] EWHC 1502(Comm) . 62 HIH Casualty and General Insurance Ltd. v. Chase Manhattan Bank, [2003] 1 All ER 349(Comm), [2003] UKHL 6. 63 Ailsa Craig Fishing Co. Ltd. v. Malvern Fishing Co. Ltd., [1983] 1 All ER 101, [1983] 1 WLR 964. 64 Karsales (Harrow) Ltd. v. Wallis, [1956] 1 WLR 936, [1956] 2 All ER 866. 65 Photo Production Ltd. v. Securicor Transport Ltd., [1980] AC 827, [1980] 1 All ER 556. 66 BDW Trading Ltd (T/A Barratt North London) v. JM Rowe (Investments) Ltd, [2011] EWCA Civ 548. 67 (1996) 4 SCC 647; following Skandia Insurance Co. Ltd. v. Kokilaben Chandrawadan, (1987) 2 SCC 654, AIR 1987 SC 1184. 68 Bank of Credit and Commerce International SA v. Ali, [2000] 3 All ER 51(CA) affirmed [2001] 1 All ER 961(HL) . 69 See comment below Art. 7.1.6 of the LTNIDROIT Principles.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER II Of Contracts, Voidable Contracts and Void Agreements/S. 10.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER II Of Contracts, Voidable Contracts and Void Agreements S. 10. What agreements are contracts.-All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Nothing herein contained shall affect any law in force in India, and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents.
Introduction A contract is an agreement enforceable by law. In order to be enforceable, the agreement must satisfy the requirements given in this section. The first paragraph gives the requirements of substantial or essential validity, and the second paragraph about the formalities. The conditions of essential validity are:
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(i) (ii) (iii) (iv) (v) (vi)
competent parties (ss. 11, 12); existence of consent of parties (s. 13); consent being free (s s. 14-22); existence of consideration (s s. 2(d), 25); consideration and object being lawful (s. 23); and the agreement not being expressly declared to be void (s s. 23-30).
The Contract Act does not lay down any requirement of formalities. However, formalities of writing, attestation, and registration may be prescribed by other laws in force.
Freedom of Contract A contract is a consensual act and the parties are free to settle any terms as they please.1 This freedom has been evident in the recognition of the right of the parties to limit or exclude liability in damages, in the reluctance of the courts to strike down contracts only on the ground of inequality of bargaining power, in the refusal to imply a term into a contract because it would be reasonable to do so, or in the rules of construction for giving effect to the express terms provided by the parties. This freedom lies in choosing the party with whom to contract, in the freedom to fix the terms of the contract, in excluding or limiting the liability for damages or limiting the remedies available for the breach. This freedom is subject to certain exceptions. Statutes may prohibit refusing to enter into certain contracts some on the grounds of caste,2 race,3 or sex4 of a person. Bodies providing services of public utility like water or electricity cannot refuse supply of these services,5 or discriminate or show undue preference to any person.6 The Government may control sale of certain commodities by regulating their supply, distribution, price as well as production.7 A statute may also compel a person to enter into a contract. A person who owns a motor vehicle for the purposes of plying on a public road must have an insurance policy to cover certain third party risks, whether he wishes to so insure or not.8 A person wanting to enter into a contract may always be totally free to determine the terms. The freedom may be restricted because one party, usually a consumer, is unable to negotiate or seek variation in the 'standard form' of contract offered by the other party, and is forced to contract on terms which he may not have liked to, if he had the choice. A number of contractual relationships, namely, in the areas of consumer protection, employment, landlord and tenant, hire purchase, building and construction of ownership flats, etc. may be regulated by statutes, which may restrict terms,9 impose or imply terms,10 some of which terms a party cannot contract out of.11 Statutory provisions may also override the terms of an agreement or contract.12 The voluntary aspect of the contract appears in the choice available to one party whether to enter into a contract or not, and if so, with whom, and in respect of certain terms which under the statute can be avoided by providing to the contrary. Once the relationship forms, the obligations flow from the statute. There may be other indirect techniques of regulating contracts. Laws requiring the carrying on of certain businesses or profession, subject to licences or authorisations affect the freedom of contract. Laws relating to prevention of monopolistic and restrictive trade practices also affect contracts. These can be seen either as an intervention in the market, thereby restricting the freedom of contract; or as mechanisms to ensure proper functioning of the market, and therefore promoting the principle of freedom of contract,13 or for preventing deception of the public.14 Where the parties do not enjoy freedom in the making of the contract, can the relationship be
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described as a contract at all? In Vishnu Agencies (Pvt) Ltd. v. Commercial Tax Officer, 15a question arose whether cement sold to various allottees under orders passed under the Cement Control Act of West Bengal was a sale. It was stated:16
Although the terms of the contract...are predetermined by law, it cannot be said that there is no area at all in which there is no scope for the parties to bargain... The circumstance that in these areas, though minimal, the parties to the transactions have the freedom to bargain, militates against the view that the transactions are not consensual...It is not obligatory on a trader to deal in cement nor on anyone to acquire it...the decision of the trader to deal in an essential commodity is volitional...The consumer too, who is under no legal compulsion to acquire or possess cement, decides as a matter of his volition to obtain it on the terms of the permit or the order of allotment issued in his favour...Thus though both parties are bound to comply with the legal requirements governing the transaction, they agree as between themselves to enter into transaction on statutory terms... It is therefore not correct to say that the transactions between the appellant and the allottees are not consensual. They, with their free consent, agreed to enter into the transaction.
So long as the parties trade under controls at fixed price and accept these as any other law of the realm because they must, the contract is at a fixed price, both sides having, or deemed to have agreed, to such price. It is no less a contract because it lacks volition, or is made under compulsion. An agreement which is made under the requirement of law is a contract within s. 10.17 Although a permit-holder for a stage carriage, by reason of a condition in the permit, is under an obligation to carry for remuneration mails when called upon to do so by the postal authorities, the agreement is still a contract.18 The legal consequence of a concluded contract will remain irrespective of how a particular party in a given situation might abuse the rights flowing from it. The possibility of abuse of a right cannot determine whether the right exists as a matter of law.19 1 State of Madras v. Ramalingam & Co., AIR 1956 Mad 695 at 701; Sat Narain v. Union of India, AIR 1961 Pun 314 at 316. 2 Protection of Civil Rights Act, 1955, s s. 5, 6. 3 In the UK Race Relations Act, 1976. 4 In the UK Sex Discrimination Act, 1975. 5 The Electric (Supply) Act, 1948. 6 See the Electricity Act, 2003, s s. 45, 62; the Electricity (Supply) Act, 1948, s. 49(4) (in fixing tariff and conditions for the supply of electricity); the Railways Act, 1989, s. 70 (no undue or unreasonable preference or advantage to or in favour of any person, or any particular description of traffic in the carriage of goods). 7 The Essential Commodities Act, 1955, s. 3. 8 The Motor Vehicles Act, 1988, s. 146; s. 196 of the Motor Vehicles Act, 1988 makes it punishable; the Public Liability Insurance Act, 1991, s. 4; Inland Vessels Act, 1917, s. 54(c). 9 See the Foreign Exchange Regulation Act, 1973 (repealed by the Foreign Exchange Management Act, 1999), s. 47(i): No person shall enter into contract or agreement which would directly or indirectly evade or avoid in any way the operation of any provision of the Act; (see also the Patents Act, 1970, s. 140, and the Designs Act, 2000, s. 42) which prohibit insertion in contracts and licences relating to sale or manufacture or working of a patented Article, or Article in respect of which design is registered etc, of restrictive conditions stated in the section. 10 Foreign Exchange Regulation Act, 1973 (repealed by the Foreign Exchange Management Act, 1999), s. 47(2):Implying term in every contract that anything agreed to be done by an term of that contract which is prohibited to be done under the provisions of the Act except with the permission of the Central Government or the Reserve Bank of India, shall not be done unless such permission is granted. 11 Employers' Liability Act, 1938, s. 3A; the Minimum Wages Act, 1948, s. 25; the Payment of Wages Act, 1936, s. 23; the Workmen's Compensation Act, 1923, s. 17.
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12 Beedi & Cigar Workers (Conditions of Employment) Act, 1966, s. 40; the Cine-Workers and Cinema Theatre Workers (Regulation of Employment) Act, 1981, s. 21;the Contract Labour (Regulation and Abolition) Act, 1970, s. 30; the Maternity Benefit Act, 1961, s. 27; the Motor Transport Workers' Act, 1961, s. 37; the Payment of Bonus Act, 1965, s. 34A; the Payment of Gratuity Act, 1972, s. 14; the Sales Promotion Employees (Conditions of Service) Act, 1976, s. 11A; the Working Journalists and Other Newspaper Employees (Conditions of Service) Act, 1955, s. 16. 13 See the Competition Act, 2002 - s. 3 (Prohibition of agreements likely to cause adverse effect on competition within India), s. 6 (notice of agreement of combination), s. 19 (inquiry into certain agreements), s. 27 (Orders of Commission after inquiry into agreements); see also the Consumer Protection Act, 1986, s. 14(f) (orders to discontinue unfair trade practices as defined in s. 2(1)(r)); the Trade Marks Act, 1999, s. 40 (restriction on assignment or transmission of trade marks to prevent creation of multiple exclusive rights) and s. 41 (like restriction to prevent creation of multiple exclusive rights in different parts of India); the Patents Act, 1970, s. 140 (avoidance of certain restrictive conditions). 14 See the Trade Marks Act, 1999, s. 42 (conditions for assignment of unregistered trade mark otherwise than in connection with the goodwill of a business), s. 43 (limits on assignability and transmissibility of certification trade marks), s. 44 (similar limits on associated trade marks). 15 AIR 1978 SC 449, overruling the majority judgment and approving the dissenting judgment of Hidayatulla J in New India Sugar Mills Ltd. v. Commr of Sales Tax, AIR 1963 SC 1207, [1963] Supp 2 SCR 459. 16 AIR 1978 SC 449, per Chandrachud J. for majority; Andhra Sugars Ltd. v. State of Andhra Pradesh, AIR 1968 SC 599. 17 Andhra Sugars Ltd. v. State of Andhra Pradesh, AIR 1968 SC 599; distinguishing New India Sugar Mills Ltd. v. Commissioner of Sales Tax, AIR 1963 SC 1207, [1963] Supp 2 SCR 459 distinguished; Coffee Board of Karnataka v. Commissioner of Commercial Taxes, AIR 1988 SC 1487; see also Siddheshwar Sahakari Sakhar Karkhana Ltd. v. CIT Kolhapur, AIR 2004 SC 4716. 18 N. Satyanathan v. K. Subramanyan, AIR 1955 SC 459. 19 Claude-Lila Parulekar v. Sakal Papers Pvt. Ltd., AIR 2005 SC 4074, (2005) 11 SCC 73.
Requirements for Enforceability Parties A valid contract may be made by natural persons, and by any other persons who have a legal personality, namely, corporations, companies, universities, statutory corporations, Governments (the Union of India or the state), and foreign states. Some bodies cannot contract except through their constituents, namely, partnership firms, trusts, clubs, and registered societies. Some persons may be incompetent to contract, namely minors, persons of unsound mind,20 etc.; the contractual capacity of others like corporations, companies or Governments may be restricted in extent or as to manner. A contract implies two parties.21 A contract can only be bilateral. The same party cannot be a party to a contract on both sides and hence there cannot be a contract between A on one side and A and B on the other side.22However, s. 5 of the Transfer of Property Act, 1882 clearly envisages transfer of property by a person to 'one or more living persons or to himself, or to himself and one or more other living persons'. Therefore, a transfer of property between a person with himself and others is valid.23 It is necessary and sufficient that the identity of the parties be ascertainable.24 A question may arise whether a person enters into a contract on his own behalf or on behalf of some one else.25 A person may contract for himself or on behalf of another. If he contracts on behalf of another, the capacity of that other is relevant. Consent From the language used in the s s. 10, 13 and 14, it can be concluded, first, that in order to constitute a contract, both the parties must consent to the agreement, and secondly, even if both the parties
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have consented to the agreement, consent of one of them may not be said to be free if the same had been obtained by coercion, undue influence, etc. The distinction between the total lack of consent and a tainted consent is real. It is only in those cases in which a tainted consent has been obtained or procured from one of the parties that a contract at his instance shall be held to be voidable and may be set aside.26 Consideration Consideration has been defined in s. 2(d) of the Contract Act as an act, forbearance or promise done or given at the desire of the promisor. Consideration must be real and of some value in the eyes of law. It need not be adequate. Section 25 of the Contract Act states that an agreement without consideration is void, unless it falls within the three exceptions given in that section. A gift validly made, cannot be challenged on the ground of lack of consideration. Lawful Consideration and Object The consideration and object of the contract must be lawful. Section 23 states that consideration or object is not lawful if it is prohibited by law, or it is such as would defeat the provisions of law, for instance, if it is fraudulent or involves injury to the person or property of another, or the court regards it as immoral and opposed to public policy. Not Expressly Declared Void If the agreement is declared void by the Contract Act (s s. 23-30) or by any other law, it is not enforceable. 20 See ss. 11 and 12 below. 21 Bouwang Raja Challaphroo Chowdhury v. Banga Behary Sen, AIR 1916 Cal 771. 22 S Magnus v. Commr of Income Tax, AIR 1958 Bom 467. 23 Life Insurance Corporation of India v. India Automobiles & Co., (1990) 4 SCC 286, at 292. 24 Gastho Behari Sirkar v. Surs' Estates Ltd., AIR 1960 Cal 752 (mention of the name not necessary unless personality is an essential part of the contract). 25 Budhan v. Lala Harbans Lai AIR 1973 All 63 at 66. 26 Deo Nandan v. Chhote, AIR 1983 All 9 at 11.
Formalities The Contract Act provides that a contract is concluded in the manner set out in ss. 2 to 10 of the Act, and does not require any writing or form. Formal requirements may be prescribed for special or particular contracts by statute. The function of the provisions of law specifying formal requirements is first, to provide clear evidence of the conclusion of contract and its contents and terms, and exclude the testimony of witnesses for the purpose;27 secondly, to enable persons with an opportunity of giving thoughtful consideration to the transaction, to urge them to take benefit of legal advice, and to protect them from surprise, and thereby discourage hasty and ill-considered contracts; thirdly, to confirm the seriousness of intention; fourthly, to help make a demarcation between a finalised transaction and the negotiations preceding it. Formal requirements, especially when they require that an agreement must be in a form prescribed for the purpose, are a device to protect the weaker party to the contract.
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The formalities required by different statutes may vary. Statutes may require an instrument, general writing, note or memorandum. Some statutes may specify even the size of lettering and colour of print and paper.28 Non-observance of formalities may produce various effects under the statutes. It may make the agreement unenforceable. It may preclude the document from being used as evidence of the transaction,29 allowing its use for collateral purposes. Sometimes, failure to comply with the formal requirements may also be a criminal offence.30 The requirements of formalities in the second paragraph must be read with the first paragraph of the section which prescribes conditions of enforceability. It is therefore submitted, that unless the statute prescribing the formalities specifically provides a specific effect for noncompliance, an agreement should not be enforceable unless the formality is complied with. Where any law prescribes formalities, those should be complied with for creating a contract capable of attaching liability. A party act ing upon a contract, which the law requires to be executed in a particular manner or form and not so executed, cannot sue for breach of such contract. If not so executed, the Court cannot look at the terms of the contract even to determine the nature of the transaction.31 However, if the provisions of the special law are not mandatory, the contract does not become unenforceable if not executed according to its provisions.32 Oral and Written Contract Oral Contract An oral contract by which itself the parties intend to be bound is valid and enforceable,33 unless required by any other law to be in writing; but, oral agreements require clear and satisfactory evidence about formation and contents.34 Where a party seeks to enforce an oral agreement, heavy burden of proof lies on such party to prove that a contract is concluded and the terms of the contract were meant to be given effect to. Contract in Writing A written contract may be a single document, each party being bound by signing it. The parties may have two copies of the document, each party signing one copy and exchanging the signed copy. A party may send a written document as an offer to be signed by the other party by way of acceptance. One party making an offer by letter and the other by accepting it may conclude a contract. The contract may likewise be formed by applying for membership of an association, or by recording the minutes of agreement after discussion. A statute may prescribe that the contract may be made simply in writing, an 'instrument',35 or may be derived from exchange of letters,36 or emails.37 A written document may be handwritten in any language, or may be printed or made in any mechanical equivalent of handwriting. Documents in electronic form are treated as equivalent of writing.38 Electronic form includes information generated, sent, received or stored in media, magnetic, optical, computer memory, micro film, computer generated microfiche or similar device. The court may go behind the document and look at the substance of the transaction to determine the nature or type of contract for ascertaining the formalities required. The title, description or form are not decisive of its nature.39 Contracts Required in Writing The following Acts require contracts to be in writing:
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(i) (ii) (iii) (iv) (v) (vi) (vii) (vii) (viii) (ix) (x) (xi) (xii)
The Apprentices Act, 1961, s. 4; The Arbitration and Conciliation Act, 1996, s. 7: arbitration agreements; The Cine-Workers and Cinema Theatres Workers (Regulation of Employment) Act, 1981, s. 3; The Indian Contract Act, 1872, s. 25(1): agreement without consideration between near relations; s. 25(3): promise to pay a time-barred debt; s. 28, Exception 2: agreement to refer to arbitration; The Companies Act, 1956, s. 15: memorandum of Association; s. 30: Articles of Association; s. 46: form of contracts by companies; s. 108 (transfer of shares and debentures of a company); The Copyright Act, 1957, s. 19: assignment of copyright, s. 30A: license of copyright; The Designs Act, 2000, s. 30(3) : assignment, mortgage, licence or creation of any interest in a design The Income Tax Act, 1961, s. 269UC: any transaction for transfer of immovable property having such value of more than 5 lakhs as may be prescribed shall be by an agreement reduced in writing; The Limitation Act, 1963, s. 18: acknowledgment to pay a debt (not strictly a contract); The Patents Act, 1970, s. 68: assignment, mortgage, licence, etc, of patent; The Trade Marks Act, 1999, ss. 38-39 read with s. 2(b): assignment of a registered or unregistered trade mark; The Transfer of Property Act, 1882, s. 54: sale of immovable property; s. 59: mortgage; s. 107: lease; s. 123: gift; s. 130: assignment of act ionable claim; The Indian Trusts Act, 1882, s. 5: trust of immovable property (these are not strictly contracts).
Signature It is not necessary for the existence of a written agreement that parties should put their signatures to the document embodying the terms of the agreement.40 However, statutory provisions requiring signature must be complied with, else there is no contract.41 A contract in writing does not require signature of both the parties. A bond signed by one party and delivered to the other and accepted by him completes the agreement.42 A contract for sale of land signed by the vendor, but not by the purchaser, can be enforced.43 If it is definitely ascertained that a party who has signed an instrument intended to be bound by it as a concluded contract, the fact that his signature is not at the end of the document as usual but at some other place on the document will not render the execution ineffective.44A signature does not necessarily mean writing a person's Christian name and surname, but any mark which identifies it as the act of the party. In order to render a document operative, the signature should be accompanied by an intention to do so.45 But where a person has signed a document, which is intended to affect legal relations, and there is no question of misrepresentation, duress, mistake, or any other vitiating element, the fact that the person has signed the document without reading it does not put the other party in the position of having to show that due notice was given of its terms.46 Although notarisation is not essential for validity of any contract, it can enable a court to assume that the instrument is genuine.47 Some States have prescribed procedures for notarisation, viz. numbering in serial order and entry in notarial register, which must be fulfilled.48 When a document is required to be executed, it involves not mere signing, but all acts necessary to make the parties to the contract bound thereby. It has been held that where the mortgagors signed the contract but never put it into possession of any other person, there was no execution.49 A subscriber of a digital signature50 or electronic signature51 can authenticate electronic record by using the digital signature or electronic signature.52 Attestation by Witnesses
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Statutes may provide that a contract be executed in the presence of a certain number of witnesses, and the manner in which it is to be so signed by the executant and the witnesses. Section 3 of the Transfer of Property Act, 1882 prescribes that when a document is required to be attested under that Act, such a document must be signed by the executant in the presence of the witness(es), or the witness(es) must have received an acknowledgment from the executant about his signature. It is not necessary that the witnesses should have signed in the presence of each other. Nor is it necessary that the witnesses must have seen the executant sign or been present at the time of the signature of the executant. Some contracts that require execution in the presence of witnesses by law are, the Transfer of Property Act, 1882, s. 59 (mortgage, except one by deposit of title deeds); s. 22 (gift of immovable property). Registration The Registration Act, 1908 The obligation to register a document is given by the provisions of the substantive law, namely, the Transfer of Property Act, 1882 while the Registration Act, 1908 provides the machinery for registering those documents.53 If such a document is not registered, the transfer is void,54 there is no transfer and the property described in the instrument does not pass,55 for example, a mortgage does not become complete and enforceable until it is registered. Unlike the Transfer of Property Act, 1882 the Registration Act, 1908 strikes only at documents and not at transactions. The Registration Act, 1908 does not lay down that any transaction, in order to be valid, must be effected by a registered instrument. It provides that any written instrument of the type specified in s. 17 of the Registration Act, 1908 must, and other instruments may be, registered under the Registration Act, 1908. This Act does not provide that the transaction is rendered void.56 If a document required by s. 17 of the Registration Act, 1908 is not registered, neither shall it affect any immovable property, nor shall it be received as evidence of the transaction, unless it has been registered in accordance with the provisions of that Act. The arbitration clause in such an instrument is separable.57 Under s. 49, it can be read in evidence to show existence of agreement in a suit for specific performance,58 or injunction,59and as evidence of possession under s. 53A of the Transfer of Property Act, 1882.60 Such a document cannot be read 'as' evidence of the transaction, but it can be admitted 'in' evidence for other purposes. It can be used to show factum of the transaction, but not the content.61 It cannot be used to prove an important term.62 A document not so registered has been held to be admissible for other collateral purposes,63 namely, to prove the fact of possession,64 to show that the transferee is in possession,65 the date when the possession of the transferee began,66 the date of termination of possession,67 the nature of possession,68 as evidence of collateral transaction,69 to show payment of earnest money,70 as an acknowledgment of liability,71 or to show the state of mind of an executant who alleges undue influence or fraud.72 Other Laws Requiring Registration Other statutes may require registration of agreements with authorities implementing the statute, and may also state the effect of non-registration, which may include rendering the transaction ineffective or invalid, or also in some cases, punishable. Registration is compulsory under some; it may also be optional, conferring the benefit of presumption of validity after registration. Transactions requiring such registration are:
(i) (ii)
employment agreements under the Cine Workers and Cinema Theatre Workers (Regulation of Employment) Act, 1981, s. 3; agreement under the Apprentices Act, 1961, s. 4.
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(iii)
assignment, mortgage, licence etc of design under the Designs Act, 2000, s. 30(3)
Registration of assignment or licence under the Copyright Act, 1957 is optional, and if registered, gets the benefit of presumption under s. 48 of that Act. Registration of assignment, transmission, mortgage or licence of a patent is not compulsory; however, a suit for infringement cannot be filed, nor can the patent be assigned or licenced by the assignee without registration.73 Agreements in Prescribed Forms If a statute requires an agreement to be in a form, or according to a prescribed form,74 it is sufficient compliance if the agreement is substantially in that form and a minor variation does not amount to a violation or non-compliance of the statute,75 unless the terms in the form are mandatory.76 If there be any discrepancy between the contract and the prescribed form, it may affect the valid formation of a contract.77 Statutes may also prescribe the contents of agreements and contracts. Article 299 of the Constitution of India Article 299 of the Constitution of India requires that all contracts made in the exercise of the executive power of the Union or of a State must be executed by a person duly authorised by the President or Governor, as the case may be, on behalf of the President or Governor, and expressed to be made by the President, or by the Governor.78 A contract may validly be made as much by a formal written document as by an informal document, by correspondence, by an offer and acceptance in writing, provided the conditions of Art. 299 are satisfied.79 A lawful agreement of lease is a contract. When such contract was not made in accordance with Art. 299 of the Constitution of India , it was not a valid or binding document.80If the contract is not in conformity with the provisions of Art. 299 of the Constitution, such contract, though unenforceable against the Government, is binding upon the officer who act ually made the contract.81 Payment of Stamp Duty An instrument not duly stamped82 is incapable of being used as evidence until it is stamped properly.83 A plaint cannot, however, be rejected merely because the instrument on which suit is based is not duly stamped.84 Executing an instrument not duly stamped is punishable.85 27 Indian Evidence Act, 1872, s s. 91-100. 28 State rules made under the Registration Act, 1908; in the UK, regulations under the Hire Purchase Act, 1965; the Consumer Credit Act, 1974; the Unsolicited Goods and Services Act, 1971. 29 The Registration Act, 1908, s. 17 read with s. 49. 30 The Forward Contracts Regulation Act, 1952, s. 20;State of Gujarat v. Manilal Joitaram & Co., AIR 1968 SC 653 at 656-57; the Securities Contracts Regulation Act, 1956, s. 23. 31 New Delhi Municipal Committee v. HS Rikhy, AIR 1956 Punj 181. 32 Vishwanath v. Amarlal, AIR 1957 MB 190. 33 Shankarlal Narayandas Mundade v. New Mofussil Co. Ltd., AIR 1946 PC 97. 34 Terai Tea Co Ltd v. Nathmal Kedia, AIR 2012 Cal 43. 35 The Transfer of Property Act, 1882, s. 54 (sale of immovable property), s. 59 (mortgages), s. 107 (lease) and s. 123 (gifts); the Companies Act, 1956, s. 108 (transfer of shares and debentures of a company). 36 The Arbitration and Conciliation Act, 1996, s. 7. 37 Trimex International FZE Ltd v. Vedanta Aluminium Ltd, 2010 AIR SCW 909, (2010) 3 SCC 1; Golden Ocean Group Ltd v. Salgaocar Mining Industries PVT Ltd, [2012] EWCA Civ 265(CA) (a guarantee); Nicholas Prestige Homes v. Neal, [2010] EWCA Civ 1552. 38 The Information Technology Act, 2000, s. 4 provides:'Where any law provides that information or any other matter
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shall be in writing or in the typewritten or printed form, then, notwithstanding anything contained in such law, such requirement shall be deemed to have been satisfied if such information or matter is (a) rendered or made available in an electronic form; and (b) accessible so as to be usable for a subsequent reference. See for example SM Integrated Transware Pte Ltd. v. Schenker Singapore (Pte) Ltd., [2005] SGHC 58 (Singapore Supreme Court); Trimex International FZE Ltd. v. Vedanta Aluminium Ltd., 2010, AIR SCW 909, (2010) 3 SCC 1. 39 Sundaram Finance Ltd. v. State of Kerala, AIR 1966 SC 1178; Damodar Valley Corporation v. State of Bihar, AIR 1961 SC 440. 40 Seth Banarsi Dass v. Cane Commr, AIR 1956 All 725; Singhal Transport v. Jesaram Jamumal, AIR 1968 Raj 89; Union of India v. Himco (India) Pvt Ltd., AIR 1965 Cal 404. 41 Municipal Board Khumber v. Yadu Nath Singh, AIR 2004 Raj 79 (signatures of specified officers required under statute). 42 Bouwang Raja Challaphroo Chowdhury v. Banga Behary Sen, AIR 1916 Cal 771; Radha Govinda Raj v. Khas Dharmaband Colliery Co. Ltd., AIR 1963 Pat 160. 43 Aloka Bose v. Parmatma Devi, AIR 2009 SC 1527, (2009) 2 SCC 582; Moh Abdul Hakeem v. Naiyaz Ahmed, AIR 2004 AP 299 44 Birbal v. Thaman Singh, AIR 1955 Raj 91. 45 Sundar Chaudhari v. Lalji Chaudhari, AIR 1933 Pat 129; Re Kuttadan Velayudhan,AIR 2001 Ker 123 (burden lies on party alleging so as to prove that he had signed on a blank paper). 46 Toll (Fgct) Pty Limited v. Alphapharm Pty Limited, [2004] HCA 52 (High Court of Australia) 47 Moumita Poddar v. Indian Oil Corporation Ltd, AIR 2011 SC 424(Supp) . 48 Nirav Deepak Modi v. Najoo Behram Bhiwandiwala, AIR 2012 Bom 50. 49 Sundar Chaudhari v. Lalji Chaudhari, AIR 1933 Pat 129 50 Authentication of any electronic record by a subscriber by means of an electronic method and procedure in accordance with the provision of s. 3; s. 3 provides that the authentication of the electronic record shall be effected by the use of asymmetric crypto system and hash function which envelop and transfer the initial electronic record into another electronic record; s. 3 further describes the meaning of the 'hash function' 51 It means authentication of any electronic record by a subscriber by means of the electronic technique specified in the Second Schedule and includes digital signature. 52 The Information Technology Act, 2000, s s. 3 and 3A. 53 Law Commission of India, 6th Report, 1957, para 6. 54 GHC Ariff v. Jadunath Majumdar, 58 Cal 1235, AIR 1931 PC 79, (1931) 58 IA 91, 131 IC 762. 55 Kaliram Majumdar v. Dularam Choudhury, AIR 1933 Cal 544. 56 Kaita Mia v. Sukhamayee Chadhurani, AIR 1959 Assam 60; Syed Abdullah Sahib v. Syed Rahmatulla Sahib, AIR 1960 Mad 274. 57 SMS Tea Estates Pvt Ltd v. Chandmari Tea Co Pvt Ltd, 2011 AIR SCW 4484. 58 S Kaladevi v. v. R Somasundaram, AIR 2010 SC 1654, (2010) 5 SCC 401; SMS Tea Estates Pvt Ltd v. Chandmari Tea Co Pvt Ltd, 2011 AIR SCW 4484 (in arbitration); Sukhwinder Kaur v. Amarjit Singh, AIR 2012 P&H 97 (after the amendment to the Registration Act 1908 w.e.f. 24 Sep 2001). 59 R Palanisubramanian v. Trans Medica (India) Ltd., AIR 2009 Mad 110 (restraining seller from disturbing possession or alienating property agreed to be sold) 60 Subject to the provisions of s. 17(1A) of the Registration Act, 1908 w.e.f. 24 Sep 2001; seeSardar Kamaljit Singh v. Suresh Chand, AIR 2010 Raj 152 (such an agreement need not be registered if there is no stipulation indicating possesion of land handed over to the purchaser) 61 Nand Singh v. Sewa Singh, AIR 1959 Punj 609. 62 K B Saha and Sons Pvt Ltd. v. Development Consultant Ltd., AIR 2008 850(Supp) (unregistered lease cannot be used to show purpose of lease) 63 SMS Tea Estates Pvt Ltd v. Chandmari Tea Co Pvt Ltd, 2011 AIR SCW 4484 (also in arbitration proceedings
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concerning a compulsorily registrable instrument containing an arbitration clause). 64 Jagannath Marwari v. Chandni Bibi, AIR 1921 Cal 647. 65 Jainaddin v. Salimaddin Munshi, AIR 1920 Cal 822; Syam Kishore De v. Umesh Chandra Bhattacharjee, AIR 1920 Cal 388. 66 Abdullah Khan v. Mahomed Maqbul Hussain, 45 All 565, AIR 1923 All 603; Haran Chandra Chakravarti v. Kaliprasanna Sarkar, 59 Cal 396, AIR 1932 Cal 83(2). 67 Khimjee Thakarsee v. Pioneer Fibre Co. Ltd., AIR 1941 Bom 337, 43 Bom LR 576. 68 Haranchandra Chakrabarti v. Kaliprasanna Sarkar, 59 Cal 396 ,AIR 1932 Cal 83 (2). 69 Kanbi Karshan Jaram v. Kanbi Harkha Hari, AIR 1953 Sau 56; Sohan Lal v. Mohan Lal, AIR 1928 All 726(FB) . 70 Chhuttan Lal v. Mul Chand, AIR 1917 Lah 40. 71 Davinder Singh v. Lachhmi Devi, AIR 1930 Lah 985; S. Rm. M. Rm. Ramanathan Chettiar v. HH Maharana Dowlat Singjee Thakore Sahib of Limbdi, AIR 1938 Mad 865. 72 Maung Po Kin v. Maung Shwe Bya, AIR 1924 Rang 155; Mir Syed Hasan v. Taiyaba Begam, AIR 1914 Oudh 52. 73 The Patents Act, 1970, ss. 69, 104 read with section 2 (p). 74 Jaikishan Dass Mull v. Luchhiminarian Kanoria & Co., AIR 1974 SC 1579 (form prescribed by bye-laws framed under s. 15 (3A) of the Forward Contracts Act). 75 Jaikishan Dass Mull v. Luchhiminarian Kanoria, AIR 1974 SC 1579 (must contain all terms and conditions in the form, but literal compliance not necessary); Seth Banarsi Dass v. Cane Commissioner, AIR 1956 All 725. 76 Jayantilal Investments v. Madhuvihar Coop Housing Society, AIR 2007 SC 1011, (2007) 9 SCC 220. 77 Fort Gloster Industries Ltd. v. Sethia Mercentile Private Ltd., AIR 1968 SC 1308. 78 See below 'Contracts with the Government'. 79 Union of India v. AL Rallia Ram, AIR 1963 SC 1685 (case under s. 175 of the Government of India Act, 1935);Union of India v. Maddala Thathaiah, AIR 1966 SC 1724, [1964] 3 SCR 774, but see State of Haryana v. Chaman Lal Mukhija, AIR 2012 P&H 104 (on facts and evidence held no acceptance). 80 Sri Narayan Gosain v. Collector Cuttack, AIR 1986 Ori 46. 81 Union of India v. Gandhar Mimraj, AIR 1962 Pat 372 (case under the Government of India Act, 1935);Chatturbhuj Vithaldas Jasani v. Moreshwar Parashram, AIR 1954 SC 236; See below: 'Contracts with Government'. 82 Shankar Lal v. Sukhrani, (1882) 4 All 462 at 469, 477-78; Subramanian Chettiar v. Revenue Divisional Officer, AIR 1956 Mad 454; Gulzarilal Marwari v. Ramgopal, AIR 1937 Cal 765. 83 The Indian Stamp Act, 1899, s. 35, and similar provision in State Stamp laws.Purna Chandra Chakrabarty v. Kalipada Roy, AIR 1942 Cal 386; Joyman Bewa v. Easin Sarkar, AIR 1926 Cal 877. 84 Hyundai Motor India Ltd. v. Opal Metal Engineering Pvt Ltd., AIR 2009 Delhi 1 85 The Indian Stamp Act, 1899, s. 62.
Effect of Validity Once the contract is concluded, its terms cannot be changed according to the will of one party.86 A true contract requires the agreement of parties freely made with full knowledge and without any feeling of restraint. A party cannot compel the state to have certain conditions which will be advantageous to him for the contract. Thus, a condition that cash deposit of 50 percent of the bid amount before contract must be given, could not be challenged in a writ petition on the ground that only moneyed people could take part in the auction.87 A contract for collection of tehbazari entered into with the free consent of parties--the contractor and the municipality--competent to contract for a lawful purpose and lawful consideration and not being void under any law would be a contract within s. 10.88 A licence (an electricity licence in this case), which gives an option of purchase is a contract,
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and does not involve compulsory acquisition within the meaning of Art. 31 of the Constitution.89 The administrative rules framed by the education board are binding on the students when they agree to take up examination in accordance with those rules which are binding on the students as terms of contract between the examinees and the authorities conducting the examination.90 The subsequent waiver by a party of any of his rights is not relevant to the question whether a binding contract was concluded between the parties on the day on which it is alleged to have been entered into.91 When a contract is invalid, every part of it including an arbitration clause, is invalid and perishes with it.92 86 Karnal Distillery Co. (P) Ltd. v. Union of India, AIR 1977 SC 509; Ishwar Dass Nassa v. State of Haryana, AIR 2012 SC 852, 2012 (1) SCC 753. 87 S Balakrishnan v. State of Tamil Nadu, AIR 1990 Mad 159. 88 Ishwar Dayal Hingwasia v. Municipal Board Rath, AIR 1980 All 143. 89 GM Contractor v. Gujarat Electricity Board, (1972) 4 SCC 764. 90 Ratiram Singh Yadav v. Principal Government Polytechnic, AIR 1990 MP 129 at 132. 91 Bajinath v. Kshetrahari Sarkar, AIR 1955 Cal 210, Nirmala Bala Dasi v. Sudarsan Jana, AIR 1980 Cal 258. 92 Jaikishan Dass Mull v. Lunchhiminarain Kanoria & Co., AIR 1974 SC 1579 at 1582; Khardah Company Ltd. v. Raymon & Co. (India) Pvt Ltd., [1963] 3 SCR 183, AIR 1962 SC 1810; Waverly Jute Mills Co. Ltd. v. Raymon & Co. (India) Pvt Ltd., AIR 1963 SC 90, [1963] 3 SCR 209.
Evidence The Act does not deal with the kind of proof required to establish the facts constituting a contract. The making of the contract, or its terms may be proved like any other fact, i.e., by oral or documentary evidence. However, when the terms of a contract, grant or other disposition of property have been reduced to the form of a document, or any matter required by law to be in the form of a document, no evidence shall be given of the terms of such contract, grant or disposition of property or of such matter, except the document itself, or secondary evidence of its contents in cases in which secondary evidence would be admissible.93 Further, no evidence of any oral agreement or statement shall be admitted, as between the parties to any such instrument or their representatives in interest, for the purpose of contradicting, varying, adding to or subtracting from its terms94. However95, oral evidence may be given of facts which would invalidate the document or prove fraud, intimidation, illegality, failure of consideration, mistake of fact or law; or of a separate oral agreement as to any matter on which the document is silent, or which constitutes a condition precedent to the attaching of any obligation under the document. In spite of the fact that an agreement is embodied in a document, if the parties could show even by oral evidence that when the document was signed, they intended that it should not operate as an agreement, then there is no contract at all.96 The burden of proof lies upon the party who alleges that the contract was not intended to be acted upon.97 Oral evidence can also be given to prove any subsequent oral agreement to modify or rescind a contract, unless such a contract is required by law to be in writing or registered. According to established commercial usage, if there is a variation between bought and sold notes, there is no binding contract and if the bye-laws make it obligatory on the parties to have a contract in writing, no evidence may be led apart from the bought and sold notes to prove the terms of a contract.98 93 The Indian Evidence Act, 1872, s. 91.
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94 The Indian Evidence Act, 1872, s. 92. 95 The Indian Evidence Act, 1872, see provisos (1)-(6) of s. 92; ss. 93-100. 96 Tyagaraja Mudaliyar v. Vedathanni, AIR 1936 PC 70 at 74. 97 Sardar Arjun Singh v. Sahu Maharaj Narain, (1950) ILR All 32 at 45. 98 Fort Gloster Industries Ltd. v. Sethia Mercantile Private Ltd., AIR 1968 SC 1308; Radhakrishna Sivadutta Rai v. Tayeballi Dawoodbhai, AIR 1962 SC 538, [1962] Supp 1 SCR 81.
Incomplete Agreements Although the parties may have reached 'an agreement' by the process of offer and acceptance, the contract may not be concluded because the terms are uncertain99 or the parties have left some points unresolved, or they contemplate another future agreement between them. Unless all the material terms of the contract are agreed, there is no binding obligation. An agreement to agree in the future is not a contract; nor is there a contract if a material term is neither settled nor implied by law and the document contains no machinery for ascertaining it.100 If the terms of a contract provide a basis for determining the existence of a breach and for giving an appropriate remedy, the court is likely to hold the contract enforceable.1 The court will put a fair construction on the express terms and their conduct, and try to make 'certain' the terms of the bargain. It may have regard to the express terms, the conduct of parties, the context in which the parties have expressed the terms, the relative importance of the unsettled matter and whether the parties have provided machinery for settling it. Whereas, on the one hand, the law is anxious to uphold bargains, on the other hand, the court should not impose a new contract upon the parties. Even where the court decides that there is no contract, liability for payment for benefits received or work done may arise under the principle of quantum meruit,2 or in tort, e.g., for misrepresentation. If the parties have not resolved all the terms or matters, a question may arise whether the agreement is complete. After lengthy negotiations and agreement on certain points, differences may arise, and one party may assert that a contract has been made, and the other may insist that matters have not travelled beyond the stage of discussion or negotiation. The court may hold the parties to the contract, if the correspondence shows that an agreement was reached at any moment of its course. If the correspondence shows that the parties have definitely come to terms, even though certain material points are left open, subsequent negotiations would not affect the contract. For example, in Perry v. Suffields Ltd., 3 an offer to sell a public house with vacant possession for GBP 7000 was accepted without qualification. It was held that there was a binding contract even though many important points, e.g., the date for completion, and the question of paying a deposit, were left open. However, if there are some terms still in the stage of negotiations and the parties do not intend to conclude a contract without settling them, there would be no contract. Law does not recognise a contract to enter into a contract.4 Reference to Further Agreement Where the parties have agreed on material terms, but contemplate executing further contract; it is a question of construction whether the execution of the further contract is a condition or term of the bargain, or it is a mere expression of the desire of the parties as to the manner in which the transaction already agreed will go through.5 Letters of Intent During negotiations, parties may reach 'points of agreement', record the terms already agreed in the form of a 'memorandum of understanding', or may exchange 'letters of intent'6 or 'letters of comfort'.7 By doing so, they do contemplate that a formal document would be drawn up later. If such letter or
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document expressly negatives contractual intention, there would be no contract. However, if the language of the document does not indicate so, the courts might hold the parties bound to the document. The question whether a binding contract has been concluded, is a matter of interpretation for the court, and depends on the facts of each case.8 In construing whether a particular agreement does or does not amount to a contract, the court would look for the intention of the parties, the nature of the transaction, the language employed in the informal agreement and other relevant circumstances. None of these is conclusive in itself. Parties may have commenced performance on the basis of the informal agreement pending the execution of the formal contract. In such cases, if the formal contract is executed, the court may imply a term that the formal contract would have retrospective effect from point of the informal agreement.9 The fact that parties contemplate that the letters or an informal agreement would be superseded by a more formal one, does not prevent it from taking effect as a contract.10 If the letter of intent is acted upon,11 especially for a length of time, the court is likely to hold the parties bound to the contract. If no formal contract is executed, liability may still arise for work done or goods delivered under the principle of quantum meruit.12 Where the contractor commenced preparatory work for a contract after the issue of letter of intent on condition for payment for such work, the court construed an ancillary contract for the preliminary work.13 Agreement to Negotiate An agreement to negotiate is not a contract because it is too uncertain to have any binding force. No obligations attach to such an agreement, nor is there any obligation to use best endeavours to reach agreement. An agreement to negotiate in good faith is not enforceable.14 In Courtney and Fairbairn v. Tolaini Brothers (Hotels) Ltd., 15C agreed with T to introduce a financier who would finance the proposed project of T on condition that the building contract would be given to C. The parties could not agree on the price of construction and the contract fell through. T employed other contractors to do the work and C claimed that T was in breach of the contract in employing others. It was held that T agreeing to give the building contract to C, under conditions mentioned above, did not give rise to an enforceable contract and a contract to negotiate, even though supported by consideration, was not a contract known to the law since it was too uncertain to have any binding force.16 However, the Singapore Court of Appeal has held that an express agreement that they shall negotiate in good faith is not against public policy, and can be upheld.17 The court will not imply a term that parties must negotiate in good faith, because such a term is too uncertain to enforce;18 other reasons being:
... it is difficult (if not impossible) to say whether a termination of negotiations is in good faith or bad; ... that since it can never be known whether good faith negotiations would have produced an agreement at all, or what terms would have been agreed if one was reached, it is impossible to assess loss....19
A negotiating party is entitled to advance his own interests during negotiations. It has been suggested that if the parties have reached agreement on essential points, but have left others open, and they intend to be legally bound by the agreement, the court may imply a term that they must negotiate in good faith to settle the outstanding details.20 Whether a concluded contract has been made or not, is a question of fact to be determined in each case by considering all relevant circumstances and facts and does not depend on the parties' or solicitors' description of the situation either as a contract or as negotiation.21 Thus, a document titled
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'Basis of Negotiation' was held enforceable for enabling return of amount paid according to its terms, but not for enforcing compensation for breach of the contract which was being negotiated.22 But so long as one of the parties to the transaction could back out of it at his choice, there can be no binding or concluded contract between the parties, although they have an agreement on the material terms.23 Lock-out Agreements A lock-out agreement, whereby one party for good consideration agrees, for a specified period of time, not to negotiate with anyone except the other party in relation to the sale of his property, is an enforceable agreement. However, an agreement to negotiate in good faith for an unspecified period was not enforceable and nor could a term to that effect be implied in a lock-out agreement for an unspecified period, since the vendor was not obliged under such an agreement to conclude a contract with the purchaser, as he would not know when he was entitled to withdraw from the negotiations. Also, in Walford v. Miles, 24 the High Court could not be expected to decide whether, subjectively, a proper reason existed for the termination of negotiations.25 Lord Ackner stated:
There is a clearly no reason in English contract law why A, for good consideration, should not achieve an enforceable agreement whereby B agrees for a specified period of time not to negotiate with anyone except A in relation to the sale of his property. There are often good commercial reasons why A should desire to obtain such an agreement from B. B's property, which A contemplates purchasing, may be such as to require the expenditure of not considerable time and money before A is in a position to assess what he is prepared to offer for its purchase or whether he wishes to make any offer at all. A may well consider that he is not prepared to run the risk of expending such time and money unless there is a worthwhile prospect, should he desire to make an offer to purchase, of B, not only then still owning the property, but of being prepared to consider his offer. A may wish to guard against the risk that, while he is investigating the wisdom of offering to buy B's property, B may have already disposed of it or alternatively, may be so advanced in negotiations with a third party as to be unwilling or for all practical purposes unable to negotiate with A, but I stress that this is a negative agreement--B, by agreeing not to negotiate for a fixed period with the third party, locks himself out of such negotiations. He has in no legal sense locked himself into negotiations with A. What A has achieved is an exclusive opportunity, for a fixed period, to try and come into terms with B, an opportunity for which he has, unless he makes his agreement under seal, to give good consideration.
In a later case, a vendor's promise not to negotiate with third parties for two weeks was held to be sufficiently certain, since the purchaser had provided consideration for it by promising in turn to complete the transaction within that time.26 Marriage Agreements An agreement between a man and a woman to marry, both being sui juris, is a contract, the promise of the one being the consideration for the promise of the other, but not an agreement between the parents of a minor boy and a minor girl, for their marriage.27A betrothal is in the nature of a contract to which the Contract Act has been applied.28 Settlement, Compromises in Court Proceedings A compromise decree is a creature of an agreement, on which it is based, and is subject to all incidents of such agreement. It is a contract with the command of the judge added to it. In construing its provisions, the principles governing the construction of contract are applicable.29 Doctrine of Promissory Estoppel The doctrine of promissory estoppel is based on an obiter dictum of Lord Denning J. in Central London Property Trust Ltd. v. High Trees House Ltd. 30
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In this case, the plaintiff leased a block of flats to the defendant in 1937 for 99 years at a rent of GBP 2500 per annum. On account of the Second World War, many flats were empty in 1940, and the plaintiff agreed to reduce the rent to GBP 1250. The situation returned to normal in 1947 and the flats were all occupied. The plaintiff brought action for recovery of full original rent for the last two quarters of 1945 and for the future. Lord Denning observed that it was the intention of the parties that the reduced rent was a temporary measure for the time the flats were not fully let out, and when the situation returned to normal, full rent was payable for the last quarter of 1945. Had the plaintiff sued for the full rent between 1940 and 1945 the plaintiff would have been estopped by his promise from asserting his strict legal right to demand payment in full. Later, Lord Denning LJ explained the principle in Combe v. Combe :31
The principle is that where one party has by his words or conduct, made to the other a promise or assurance which was intended to affect the legal relations between them and to be act ed upon accordingly, then once the other party has taken him on his word and acted upon it, the one who gave the promise or assurance cannot afterwards be allowed to revert to the previous legal relations as if no such promise or assurance had been made by him, but he must accept their legal relations, subject to the qualification, which he himself has so introduced, even though it is not supported in point of law by any consideration, but only his word.
Earlier in Hughes v. Metropolitan Rail Co., 32 Lord Cairns had described the principle as follows:
If parties who have entered into definite and distinct terms involving certain legal results--certain penalties or legal forfeiture--afterwards by their own act or with their own consent enter upon a course of negotiation which has the effect of leading one of the parties to suppose that the strict rights arising under the contract will not be enforced, or will be kept in suspense, or in abeyance, the person who otherwise might have enforced those rights will not be allowed to enforce them where it would be inequitable having regard to the dealings which have thus taken place between the parties.
Under English law, the principle has been invoked that in case of a clear and equivocal promise (express or implied), where one party to a contract, in the absence of a fresh consideration, agrees not to enforce his rights, since it is inequitable for the promisor to go back on such promise, since the promisee must have 'altered his position' in reliance of the promise made, which need not necessarily be detrimental. The promisor can resile from his promise on giving reasonable notice, which may not be formal, giving the promisee a reasonable opportunity of resuming his position. The promise would become 'final and irrevocable' if the promisee cannot resume his position.33 Promissory estoppel serves to suspend and not wholly extinguish the existing obligation.34 The principle applies not only to contractual relationship, but also to statutory rights, or to a relationship between neighbouring landowners. The principle of promissory estoppel has been stated in India thus:
Where one party has by his words or conduct made to the other a clear and unequivocal promise, which is intended to create legal relations or affect a legal relationship to arise in the future, knowing or intending that it would be acted upon by the other party to whom the promise is made and it is in fact so act ed upon by the other party, the promise would be binding on the party making it and he would not be entitled to go back upon it, if it would be inequitable to allow him to do so having regard to the dealings which have taken place between the parties, and this would be so irrespective of whether there is any pre-existing relationship between the parties or not.35
The US Restatement (Second) on Contracts, 90 states:
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A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such act ion or forbearance is binding if injustice can be avoided only by enforcement of the promise.36
Promissory Estoppel in India Long before the doctrine of promissory estoppel was formulated, the Calcutta High Court recognised that the doctrine of estoppel was not confined only to the law of evidence, but that a person may be estopped from doing acts or relying on particular arguments or contention.37 In a later case, the Bombay High Court enabled the municipality to resist the claim of the Secretary of State to be ejected from the ground which the municipality had leveled, and erected movable stables, in the belief that they had an absolute right not to be turned out unless other suitable ground was furnished, a belief which was referable to an expectation created by the Government which the Government knew that the municipality would act upon.38 Much later, the Supreme Court applied the principle (with one judge actually using the term 'promissory estoppel') to preclude the Government from assessing land revenue in relation to a market site, when it had earlier resolved not to charge any rent on markets for 'markets would be like other public buildings'.39 But it was in Union of India v. Anglo Afghan Agencies 40 that the doctrine of promissory estoppel 'found its most eloquent exposition'.41In this case, the writ-petitioner had relied on the export promotion scheme issued by the Central Government and exported woollen goods, and then claimed the import entitlement certificate for the full value under the scheme. The petitioner based its claim on reliance, and the Government pleaded executive necessity. The Supreme Court negatived the defence of executive necessity, and pointed out that it did not release the Government from its obligation to honour the promise made by it, if the citizen, act ing in reliance on the promise, had altered his position, and that too, notwithstanding that the promise was not recorded in the form required by Art. 299 of the Constitution. Later, in Century Spinning and Manufacturing Co. Ltd. v. Ulhasnagar Municipal Council, 42 the doctrine was applied to enforce a promise of exemption from payment of octroi duty given by a municipal corporation. The court drew the distinction between representation of the existing fact and representation that something would be done in future was spelt out and it was observed:
A representation that something will be done in the future may result in a contract if another person to whom it is addressed acts upon it. A representation that something will be done in future is not a representation that it is true when made...If the representation is act ed upon by another person it may, unless the statute governing the person making the representation provides otherwise, result in an agreement enforceable at law...
Ultimately, in Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh, 43 the Supreme Court dealt with the doctrine of promissory estoppel at great length and held that it did afford a cause of action. In this case, the Government of Uttar Pradesh declared a scheme exempting all new industrial units from sales tax for three years in the newspaper. The appellant sugar company got the representation confirmed from the Secretary, Industries Department, the Director of Industries, and the Chief Secretary, stating that in view of the sales tax exemption announced by the Government, it intended to set up a hydrogenation plant for vanaspati.It was held that the categorical representation contained in the letters on behalf of the Government of Uttar Pradesh, on the basis of which the appellant borrowed money from financial institutions and set up a plant, invoked the doctrine of promissory estoppel and the Government was bound to carry out the representation and exempt the appellant from the payment of sales tax in respect of manufactured goods for a period of three years. The Supreme Court has observed that the doctrine of promissory estoppel is a principle evolved by equity to avoid injustice, and though commonly named 'promissory estoppel', it is neither in the realm
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of contract nor in the realm of estoppel, but it is a doctrine evolved by equity in order to prevent injustice where promise is made by a person knowing that it would be act ed upon by the person to whom it is made and in fact it is so acted upon and it is inequitable to allow the party making the promise to go back upon it, The decision in Motilal Padampat Sugar Mills case has been affirmed by the Supreme Court in a later case.44 Promissory Estoppel as a Cause of Action Under the English law, promissory estoppel does not create new cause of act ion; 'it is a shield and not a sword'.45 The justification for limiting the scope of the equitable doctrine in the words of Roskill LJ. is 'that it would be wrong to extend the doctrine of promissory estoppel, whatever its precise limits at the present day, to the extent of abolishing in this back-hand way the doctrine of consideration'.46 It has been consistently held by the English courts,47that the doctrine of promissory estoppel was a defence and did not afford any cause of action; but it can be a part of cause of act ion.48 Allowing promissory estoppel to be used as a cause of action has been criticised 'as an attack on the doctrine of consideration...' and 'to give a plaintiff a cause of act ion on a promissory estoppel must be little less than to allow an action in contract where consideration is not shown'. However, the Supreme Court of India in the Motilal Padampat Sugar Mills'case recognised that 'to allow promissory estoppel to base a cause of act ion would seriously dilute the principle which requires consideration to support a contractual obligation',49 and yet held that this was no reason why it should not be allowed to operate and furnish a cause of action.50 The High Court of Australia has also allowed it to operate as a cause of act ion,51 and in circumstances where neither pre-existing contractual relationship nor any other legal relationship existed between the parties.52 Application of Promissory Estoppel In the Motilal Padampat Sugar Mills' case,53 the Supreme Court, after a review of Indian, English and American cases, held that:
(i) (ii) (iii) (iv) (v) (vi)
(vii) (viii) (ix)
the principle can furnish a cause of action; the applicability of the doctrine is not restricted to parties already contractually bound to one another or having a pre-existing legal relationship;54 the doctrine is not based on estoppel, nor can its operation be shackled by consideration. It is not necessary to show any consideration for the applicability of the doctrine of promissory estoppel; the principle would be applied where the facts are such that injustice can be avoided only by enforcement of promise; it is immaterial if no detriment is shown to have been caused, it is enough if there is a change of position; the state is not immune from liability for promissory estoppel and it cannot rely on the doctrine of executive necessity not to fetter its future executive act ion. It may be applied against the State, even in its Governmental or public or sovereign capacity, if its application is necessary to prevent fraud or manifest injustice. Executive necessity is no defence; the doctrine of promissory estoppel must yield to equity when required, but it is not enough to say that public interest will suffer. It will be for the court to decide if the Government shows reasons therefor; there is no promissory estoppel against the State in its legislative capacity; the fact that the promise is not in the form of a formal contract required by Art. 299 of the Constitution will not affect the applicability of the doctrine.
Exceptions to the Doctrine of Promissory Estoppel
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The following limits of the doctrine are recognised in the Motilal Padampat Sugar Mills' case:
(i)
(ii)
(iii)
The doctrine must yield to equity when required. The promise may not be enforced against the Government if it would be inequitable to hold the Government to it.55 If the Government contends that public interest would suffer by enforcement, the Government will have to show the facts and circumstances to the court, and it would be for the court to decide whether those would render it inequitable to enforce liability against the Government.56 Mere plea of change of policy is not enough, it would have to be justified. It is only if the court is satisfied on proper and adequate material placed by the Government, that overriding and overwhelming public interest requires that the Government should not be held bound by the promise (the burden of showing it lies on the Government), the court would refuse to enforce it; No representation or promise made by an officer can preclude the Government from enforcing a statutory prohibition. The doctrine cannot be availed to permit or condone a breach of law. Nor can the Government or public bodies be compelled to carry out the representation if it is contrary to law, or beyond their authority or power.57 Nor can it be invoked against exercise of Legislative power. The legislature also cannot be precluded by this doctrine from exercising its function; The promisor may be excused from performing the promise in exceptional cases, where the subsequent events make it impossible or inequitable for the promisor to perform his original obligation.58
Promise The representation or promise relied upon must be unambiguous and unequivocal,59 and not a matter of inference, or a mere hope or possibility.60 A mention of subsidy on loan interest in five year plans or one-year-plan of a Union Territory did not entitle the petitioner to subsidy.61 Mere acts of indulgence, particularly in commercial transactions, do not create rights.62 While an intention to affect legal relationship must be established, such an intention may be deduced objectively, i.e., it may be shown that the promisor in his own mind intended to affect legal relationship or that he voluntarily so conducted himself that he cannot be heard to say that he did not intend this to be the result. When promissory estoppel is invoked, the promise or assurance necessary to support it is inevitably less than a promise binding on the parties in contract--it would not be necessary to invoke the doctrine of promissory estoppel at all if the promise held contractual force. But, nevertheless, the promise supporting a promissory estoppel is closely analogous in many respects to a promise having contractual effect. One of its essential attributes is the same degree of 'unequivocality', which with the giving of full consideration would have clothed it with contractual effect.63 In the Court of Appeal, Lord Denning MR referred to 'the extraordinary consequences' of holding that an assurance ineffectual (by reason of indefiniteness) to vary a contract was yet definite to support a promissory estoppel bringing about the same result.64 Detriment To attract the applicability of the doctrine, it is not necessary that the promisee, act ing in reliance on the promise, should have suffered any detriment. What is only necessary is that the promisee should have altered his position in reliance on the promise,65'only...that he must have been led to act differently from what he would otherwise have done'.66 Altering position should mean such alteration in the position of the promisee as it makes it appear to the court that holding the promisor to his representation is necessary to do justice between the parties.67 The alteration of position need not involve any detriment to the promisee unless 'by detriment is meant injustice to the promisee which would result if the promisor was to recede from his promise'.68 The development authority that accepted transfer of an industrial plot by its original allottee was not entitled to cancel the allotment after the transferee had constructed on the plot, even though the transfer violated regulations that
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required the authority to call for tenders.69 The Law Commission of India disagreed with the view that detriment was not necessary,70 and recommended that so much detriment was necessary as that damage or loss which the promisee was likely to suffer if the promisor was allowed to go back on the promise or representation. Promise Irrevocable The promisor may revoke his promise, unless it is inequitable for him to go back on it. It would be inequitable if the promisee, having act ed in reliance on the promise, cannot be restored to the position in which he was before he took action. If the promisee can be restored to that position, the promisor may go back on his promise. It has been held that even where there is no overriding public interest, the promisor may resile from the promise by giving reasonable notice, giving the promisee reasonable opportunity for resuming his position, provided it is possible for the promisee to restore status quo ante. But if the promisee cannot resume his position, the promise becomes final and irrevocable.71 Where the State Government has fixed the price of raw material, it cannot increase it, and it has no defence that its calculations were based on assumptions not later approved by the Central Government.72 The doctrine must yield to larger public interest. Thus concessions declared to be for fixed period can be withdrawn in public interest.73 Remedies The doctrine is based on reliance, and it developed for preventing injustice. Any remedy should therefore be moulded for the purposes of preventing it.74 The promise can be enforced by specific enforcement, by injunction, mandatory or preventive. A fundamental question arises about the basis of granting compensation instead of the above, when the nature of the transaction demands or when the above remedies are inadequate. When remedies in contract are concerned 'to put the plaintiff in as good a position as he would have occupied had the defendant performed his promise', they are said to fulfill the expectations engendered and to protect the 'expectation interest' of the plaintiff. On the other hand, protection of reliance interest is concerned with putting 'the plaintiff in as good a position as he was in before the promise was made', i.e., to put the plaintiff in the status quo.75This can be illustrated with the following examples, the first where the doctrine is used as a cause of act ion, and the second where it is used as a defence.
(i) (ii)
If A says to B, 'I want to buy a car'. B says, 'Well, I will give you USD 1000'. A then proceeds to buy the car for USD 500. Is B liable to pay A USD 500 (being the amount spent by A relying on the promise) or USD 1000 (the amount promised)?76 X promises Y that he will not enforce a debt owed of GBP 2000. In reliance on this, Y incurs a commitment, which he cannot escape from, to the tune of GBP 800. Can X now claim the amount of GBP 1200?77
If promissory estoppel is used for protecting the 'status quo' interest of A and X respectively, A will be entitled to claim USD 500 and X, GBP 1200. If promissory estoppel is used for protecting their 'expectation interest', A would be entitled to USD 1000, and X, nothing. Section 90 of the Second Restatement on Contracts (USA) provides that such a 'promise...is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires'. The words 'binding' and 'enforcement' seem to indicate that the promisee would be entitled to its performance (and hence damages equivalent to it). It has been suggested that the last sentence permits the remedy to be 'limited'.78 The recommendations of the Law Commission
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of India (see below) in the 13th Report seek to equate such a promise with a contract, and that in the 108th Report is silent about the remedy, but says that the promise shall be 'binding'. Decisions applying the doctrine have granted remedies in the nature of specific enforcement or preventive relief. The questions whether the compensation granted for breach of such promise should put the plaintiff into the position before the promise was made, or the position as if the promise were performed (as applied under s. 73 of the Contract Act) is required to be addressed in the future. Law Commission of India and Promissory Estoppel The Law Commission of India in its 13th Report sought to undo the injustice done when a promise is made knowing that it would be act ed upon, and which is then acted upon, and then it is held that the promise is unenforceable on the ground of want of consideration. It recommended adding an exception to s. 25.79 After considering the later developments, particularly the law laid down in the Motilal Padampat Sugar Mills',80 it gave its 108th Report on promissory estoppel, where it recommended not only an express provision to make such promises enforceable, but also gave the circumstances in which such promise would or would not be enforceable.81 Promissory Estoppel and Private Parties In the Century Spinning case,82 Shah J., speaking on behalf of the Court observed: 'Public bodies are as much bound as private individuals to carry out representations of facts and promises made by them, relying on which other persons have altered their position to their prejudice,' thus refusing to make a distinction between private individual and a public body as regards application of the doctrine of promissory estoppel83. It was suggested that the obligation could arise ex contractu, and if the law required the contract to be in a certain form, it could be enforced in equity. The Motilal Padampat Sugar Mills' case84, after discussing the doctrine of promissory estoppel in general, decided to what extent the doctrine was applicable against the Government. The judgment however alludes to application of the doctrine to private parties, observing: 'It is true that promissory estoppel cannot be invoked to compel the Government or even a private party to doan act prohibited by law';85or '...promissory estoppel cannot be invoked to compel the Government or even a private party to do an act prohibited by law'86; and while it refers with approval to the observations in Radhakrishna Agarwal v. State of Bihar: 87'... public bodies or the State are as much bound as private individuals to carry out obligations incurred by them...'.88 In all the Indian cases referred above, the representations constituting the promises were made by or on behalf of the State or public bodies. The doctrine has thereafter developed in India mainly in the field of administrative law.89 The main issue in Motilal Padampat Sugar Mills' case concerned the applicability of the doctrine to the Government in its various functions, and the court proceeded to decide the same after deciding the scope of the doctrine. There is no case expressly applying the doctrine between private parties.90 Except for a solitary observation that the principle has been held applicable to administrative law and not between private parties,91 there is no observation precluding the application of the principle between private parties (not Government or public bodies). Nor has the Supreme Court limited the application of the doctrine while formulating it. It is therefore submitted that the doctrine as propounded in the Motilal Padampat Sugar Mills' case, applies with equal force to promises made by persons other than the Government or public bodies. Promissory Estoppel and Contract The principle of promissory estoppel applies, when it does, only in absence of a concluded contract.92 It could not be invoked where a specific term in the contract empowered a bank to terminate the loan agreement;93 or the administration cancelled the licence to run telephone booths on expiry of the term;94 or where the authority refused to extend the mining licence beyond the agreed period of six months;95 or where in respect of agency agreements for operating pay phones, rate of commission
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was reduced and the amount of security deposit enhanced and the agreement gave such powers to the Telephone Department.96 But the principle has been applied to compel the Municipal Board to execute a lease deed, where consequent upon a communication from the Board about allotment, the petitioner had spent amounts on obtaining water and electricity connections, and put up construction on the plot;97 or to prevent the Electricity Board from withdrawing the rebate promised, even though the standard agreement with the electricity consumer expressly provided that the consumers shall pay 'such rates as may be revised by the Board from time to time';98 the principle has been invoked, it is submitted, without occassion, and applied for granting compensation in a case involving breach of contract.1 The principle has been also applied to prevent town or housing development authorities from making changes to schemes of allotments or to individual allotment of plots or houses;2 or to compel such authorities to allot or hand over plots or houses;3 or even to prevent such authorities from making changes in allotments by revising their policies.4 It has also been applied to enforce promises of financial institutions to give finance or loans.5 Estoppel and Promissory Estoppel Estoppel involves representation of an existing fact and not as to the future,6 which has been termed promissory estoppel.7 The latter can apply where there is no such representation of the existing fact, but only one of intention as to the promisor's future conduct, or a promise.8 While a representation of existing fact is necessary for the foundation of a true estoppel, the words or conduct necessary to support a promissory estoppel are essentially different in quality. They consist of a promise or assurance as to the future conduct of a promisor on which the promisee relies to act to his detriment. Not only does this follow ex termini from the very term promissory estoppel, but it is clearly stated as a principal attribute of the estoppel as stated in the cases from which the doctrine takes its origin.9 The equitable doctrine may operate even though there is no such 'detriment' as is required to attract the doctrine of estoppel. It is enough if the promisee has altered his position relying on the promise so that it becomes inequitable to allow the promisor to act inconsistently with it.10 Under the English law, the equitable doctrine is suspensive in nature,11 while estoppel, where it operates, has permanent effect. 99 See s. 29 below. 100 Foley v. Classique Coaches Ltd., [1934] 2 KB 1 per Maugham LJ at 13, [1934] ALL ER Rep 88. 1 US Restatement (2d), s. 33(2). 2 See s. 65 below: 'Quantum Meruit'. 3 [1916] 2 Ch 187, [1916-17] All ER Rep Ext 1325. 4 HG Krishna Reddy and Co. v. MM Thimmiah, AIR 1983 Mad 169. 5 See s. 7 above: 'Acceptance subject to Formal Document.' 6 See s. 2(b) above: 'Letters of intent'; see Dresser Rand S A v. Bindal Agro Chem Ltd., AIR 2006 SC 871, (2006) 1 SCC 751; Rajasthan Co-op Dairy Federation Ltd. v. Maha Laxmi Mingrate Marketing Service Pvt Ltd., (1996) 10 SCC 405 7 See s. 2(a) above: 'Intention to Create Legal Relations'. 8 See for example Dresser Rand S A v. Bindal Agro Chem Ltd., AIR 2006 SC 871, (2006) 1 SCC 751 (the letter merely provided that the offer will be kept open); Harvey Shopfitters Ltd. v. ADI Ltd., [2004] 2 All ER 982. 9 Trollope & Colls Ltd. v. Atomic Power Constructions Ltd., [1962] 3 All ER 1035, [1963] 1 WLR 333. 10 See s. 7 above: Acceptance Subject to Formal Document.'
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11 Bhoruka Power Corpn Ltd. v. State of Haryana, AIR 2000 P&H 245. 12 British Steel Corpn. v. Cleveland Bridge and Engg Co. Ltd., [1984] 1 All ER 504; see s. 65 below: 'Quantum Meruit'. 13 Turiff Construction Ltd. v. Regalia Knitting Mills, [1971] 9 BLR 20, (1971) 22 EG 169. 14 Walford v. Miles, [1992] 1 All ER 453(HL) ; Petromec Inc v. Petroleo Brasileiro SA Petrobras, [2005] EWCA Civ 891; Georgi Velichkov Barbudev v. Eurocom Cable Management Bulgaria, [2012] EWCA Civ 548. 15 [1975] 1 All ER 716. 16 Courtney and Fairbairn Ltd. v. Tolaini Brothers (Hotels) Ltd., [1975] 1 WLR 297, [1975] 1 All ER 716; Mallozzi v. Carapelli SPA, [1976] 1 Lloyd's Rep 407; Nile Co. For Export of Agricultural Crops v. H & JN Bennett (Commodities) Ltd., [1986] 1 Lloyds Rep 555; Voest Alpine Intertrading GmbH v. Chevron International Oil Co. Ltd., [1987] 2 Lloyd's Rep 547; Star Steamship Society v. Beogradska Plovidba, (The Junior K), [1988] 2 Lloyd's Rep 583; Walford v. Miles, [1992] 1 All ER 453(HL) ; Petromec Inc v. Petroleo Brasileiro SA Petrobras, [2007] EWCA Civ 1372. 17 HSBC Institutional Trust Services (Singapore) Ltd v. Toshin Development Singapore Pte Ltd, [2012] SGCA 48 (Singapore Court of Appeal) 18 Walford v. Miles, [1992] 2 AC 128, [1992] 1 All ER 453(HL) ; 'Lock-out Agreements' below. 19 Petromec Inc v. Petroleo Brasileiro SA Petrobras, [2005] EWCA Civ 891 per Longmore J. para 116. 20 Chitty on Contracts, 28th edn, p. 147, para 2-127. 21 Gastho Behari Sirkar v. Surs' Estates Ltd., AIR 1960 Cal 752. 22 SMV Agencies Pvt Ltd v. Cross Country Heritage Hotel, CS (OS) 281/2010 dec on 11 April 2013 (Del). 23 Bajinath v. Kshetrahari Sarkar, AIR 1955 Cal 210. 24 [1992] 2 AC 128, [1992] 1 All ER 453(HL), at 461. 25 Walford v. Miles, [1992] 2 AC 128, [1992] 1 All ER 453(HL), approving Courtney and Fairbairn Ltd. v. Tolaini Brothers (Hotels) Ltd., [1975] 1 All ER 716. 26 Pitt v. PHH Asset Management Ltd., [1994] 1 WLR 327, [1993] 4 All ER 961. 27 Janak Prasad v. Gopi Krishna Lai, AIR 1947 Pat 132. 28 Rajendra Bahadur Singh v. Roshan Singh, AIR 1950 All 592; Tulshiram Maroti Kohad v. Roopchand Laxman Ninawe, AIR 2006 Bom 183. 29 Habib Mian v. Mukhtar Ahmad, AIR 1969 All 296. 30 [1947] KB 130, [1956] 1 All ER 256; relying on Hughes v. Metropolitan Rail Co., (1877) 2 App Cas 439, [1874-80] All ER Rep 187. 31 Combe v. Combe, [1951] 2 KB 215 at 220; [1951] 1 All ER 767 at 770; Tool Metal Mfg Co. Ltd. v. Tungsten Electric Co. Ltd., [1955] 2 All ER 657 at 660; [1955] 1 WLR 761(HL) . (Viscount Simonds held observations in Combe v. Combe to be too widely stated). 32 [1877] 2 AC 439. 33 See for application of the doctrine, Hughes v. Metropolitan Rail Co., (1877) 2 App Cas 439, [1874-80] All ER Rep 187; Robertson v. Minister of Pensions, [1949] 1 KB 227, [1948] 2 All ER 767; Charles Rickards Ltd. v. Oppenheim, [1950] 1 KB 616, [1950] 1 All ER 420; Tool Metal Manufacturing Co. Ltd. v. Tungsten Electric Co. Ltd., [1955] 2 All ER 657, [1955] 1 WLR 761(HL) ; Lyle (Westminister Ltd.) Meller v. A Lewis & Co., [1956] 1 WLR 29, [1956] 1 All ER 247; statement in Combe v. Combe, [1951] 2 KB 215 at 220, [1951] 1 All ER 767, doubted by Lord Simonds in Tool Metal Manufacturing Co. case as being too widely stated. 34 See Anson's Law of Contract, 29th edn, 2010 p. 122; Birmingham and District Land Co. v. London and North Western Rail Co., (1888) 40 Ch D 268, [1886-90] All ER Rep 620; Emmanuel Ayodeji Ajayi v. R T Briscoe (Nigeria) Ltd., [1964] 1 WLR 1326 at 1330, [1964] 3 All ER 556(PC) . 35 Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh, [1979] 2 SCR 641, AIR 1979 SC 621, (1979) 2 SCC 409 at 425. 36 Quoted in Motilal Padampat Sugar Mills Co. Ltd. v. The State of Uttar Pradesh, [1979] 2 SCR 641, AIR 1979 SC 621 at 636-37, (1979) 2 SCC 409.
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37 Ganges Manufacturing Co. v. Sourujmull, (1880) ILR 5 Cal 669; but doubted in RS Maddanappa v. Chandramma, AIR 1965 SC 1812. 38 Municipal Corporation of the City of Bombay v. Secretary of State for India, (1905) 7 Bom LR 27, (1904) 29 Bom 580. 39 Collector of Bombay v. Municipal Corporation of the City of Bombay, [1952] SCR 43, AIR 1951 SC 469. 40 AIR 1968 SC 718, [1968] 2 SCR 366. 41 Motital Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh, AIR 1979 SC 621, (1979) 2 SCC 409. 42 AIR 1971 SC 1021, (1970) 1 SCC 582. 43 AIR 1979 SC 621, (1979) 2 SCC 409. 44 Union of India v. Godfrey Phillips India Ltd., AIR 1986 SC 806, (1985) 4 SCC 369 at 383-9, 393, setting at rest the doubts expressed in Jit Ram Shiv Kumar v. State of Haryana, AIR 1980 SC 1285 about the doctrine expressed in the Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh, AIR 1979 SC 621, (1979) 2 SCC 409. 45 Combe v. Combe, [1951] 1 All ER 767; Brikom Investments Ltd. v. Seaford, [1981] 1 WLR 863, [1981] 2 All ER 783; Argy Trading Development Co. Ltd. v. Lapid Developments Ltd., [1977] 3 All ER 785, [1977] 1 WLR 444, [1977] 1 Lloyd's Rep 67. 46 Brikom Investments Ltd. v. Carr, [1979] QB 467 at 486, [1979] 2 All ER 753; Drexel Burnham Lambert International NV v. El Nasr, [1986] 1 Lloyd's Rep 357 at 365. 47 Combe v. Combe, [1951] 2 KB 215, [1951] 1 All ER 767; Beesly v. Hallwood Estates Ltd., [1960] 2 All ER 314; Argy Trading Development Co. Ltd. v. Lapid Developments Ltd., [1977] 3 All ER 785[1977] 1 WLR 444, [1977] 1 Lloyd's Rep 67; distinguishing Central London Property Trust Ltd. v. High Trees House Ltd., [1947] KB 130, [1956] 1 All ER 256. 48 Combe v. Combe, [1951] 2 KB 215 at 220, [1951] 1 All ER 767 at 770; Beesly v. Hallwood Estates Ltd., [1960] 2 All ER 314; Crabb v. Arun District Council, [1975] 3 All ER 865 (proprietory estoppel). 49 Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh, [1979] 2 SCR 641, AIR 1979 SC 621 at 635, (1979) 2 SCR 641, para 12-13. 50 (1979) 2 SCR 641, para 9-10. 51 Legione v. Hateley, (1983) 152 CLR 406. 52 Waltons Stores (Interstate) Ltd. v. Maher, (1988) 164 CLR 387. 53 Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh, [1979] 2 SCR 641, AIR 1979 SC 621, (1979) 2 SCC 409, quoting with approval Robertson v. Minister of Pensions, [1949] 1 KB 227, [1948] 2 All ER 767, explaining Howell v. Falmouth Boat Construction Co. Ltd., [1951] AC 837, [1951] 2 All ER 278; see also Turner Morrison and Co. Ltd. v. Hungerford Investment Trust Ltd., AIR 1972 SC 1311, [1972] 3 SCR 711; Assistant Custodian v. Brij Kishore Agarwala, AIR 1974 SC 2325, [1973] 2 SCR 759, (statutory prohibition and enforcement); State of Kerala v. Gwalior Rayon Silk Mfg Co. Ltd., [1974] SCR 671, AIR 1973 SC 2734 (legislature can never be precluded); Excise Commr v. Ram Kumar, AIR 1976 SC 2237, [1976] Supp SCR 572; (no promissory estoppel against legislature); distinguishing Bihar Eastern Gangetic Fisherman Co-operative Society Ltd. v. Sipahi Singh, AIR 1977 SC 2149; explaining N Rama Natha Pillai v. State of Kerala, [1974] 1 SCR 515, AIR 1973 SC 2641. 54 Evenden v. Guildford City Association Football Club Ltd., [1975] 3 All ER 269. 55 Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh, [1979] 2 SCR 641, AIR 1979 SC 621 at 644, (1979) 2 SCC 409 at 443; Union of India v. Godfrey Phillips India Ltd., AIR 1986 SC 806, (1985) 4 SCC 369. 56 Surendra Prasad Misra v. Oil and Natural Gas Commission, AIR 1987 Cal 1. 57 Delhi Cloth & General Mills Ltd. v. Union of India, AIR 1987 SC 2414. 58 WJ Alan d' Co. Ltd. v. El Nasr Export d' Import Co., [1972] 2 QB 189, [1972] 2 All ER 127 per Lord Denning MR at 139, 142; Ogilvy v. Hope-Davies, [1976] 1 All ER 683 at 688; cf Voest Alpine Alpine International GmbH v. Chevron International Oil Co. Ltd., [1985] 2 Lloyds's Rep 547 at 560; Nippon Yusen Kaisha v. Pacific Navegacion S A (The Ion), [1980] 2 Lloyd's Rep 245; Maharaj v. Chand, [1986] AC 898, [1986] 3 All ER 107. 59 China-Pacific SA v. Food Corpn of India (The Winson), [1980] 3 All ER 556 at 566-67; reversed on other grounds in [1982] AC 939, [1981] 3 All ER 688. 60 Ude Ram v. State of Haryana, AIR 1994 P&H 175.
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61 Ras Resorts and Apart Hotels Limited v. Union of India, AIR 2010 SC 2599 62 Per Lord Simonds in Tool Metal Mfg Co. Ltd. v. Tungsten Electric Co. Ltd., [1955] 2 All ER 657 at 660, [1955] 1 WLR 761(HL) . 63 Woodhouse AC Israel Cocoa Ltd. v. Nigerian Produce Marketing Co. Ltd., [1972] AC 741, [1972] 2 All ER 271(HL) per Lord Pearson--such definiteness found lacking; affirming [1971] 2 QB 23, [1971] 1 All ER 665(CA) . 64 [1971] 2 QB 23, [1971] 1 All ER 665 at 672 (CA). 65 Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh, [1979] 2 SCR 641, AIR 1979 SC 621 at 650, (1979) 2 SCC 409 at 452; followed in Union of India v. Godfrey Phillips India Ltd., AIR 1986 SC 806, (1985) 4 SCC 369; Delhi Cloth d' General Mills Ltd. v. Union of India, AIR 1987 SC 2414. 66 WJ Alan d' Co. Ltd. v. El Nasr Export d' Import Co., [1972] 2 All ER 127. 67 State of Himachal Pradesh v. Ganesh Wood Products, AIR 1996 SC 149, (1995) 6 SCC 363. 68 Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh, AIR 1979 SC 621, (1979) 2 SCC 409. 69 Sunil Pannalal Banthia v. City and Industrial Development Corpn of Maharashtra Ltd., AIR 2007 SC 1529, (2007) 10 SCC 674 70 See Law Commission of India, 108th Report, para 2.17; see below: 'Law Commission of India and Promisory Estoppel'. 71 See Emmanuel Ayodeji Ajayi v. RT Briscoe (Nigeria) Ltd., [1964] 1 WLR 1326 at 1330, [1964] 3 All ER 556 at 559 (PC); Birmingham and District Land Co. v. London and North Western Rail Co., (1888) 40 Ch D 268 per Bowen LJ at 286, [1886-90] All ER Rep 620 at 627, affirmed by the House of Lords in Tool Metal Manufacturing Co. Ltd. v. Tungsten Electric Co. Ltd., [1955] 2 All ER 657, [1955] 1 WLR 761(HL) where authorities were reviewed, and no encouragement was given to the view that the principle was capable of extension so as to create rights in the promise for which he had given no consideration. 72 State of Orissa v. Mangalam Timber Products Ltd., AIR 2004 SC 297, (2004) 1 SCC 139. 73 Sharma Transport v. Govt of AP, AIR 2002 SC 322, (2002) 2 SCC 188. 74 See the US Restatement of Contracts (2d), 90: 'The remedy granted for the breach may be limited as justice requires'. 75 Fuller and Perdue, Yale Law Journal, Vol. 46, 1936-37, p. 52; Burrows[1983] 99 LQR 217 (who prefers to use the term 'status quo interest' instead of 'reliance interest'); Walton Stores (Interstate) Ltd. v. Maher, (1988) 164 CLR 387. 76 Burrows,[1983] 99 LQR 217 at 243; Friedman,[1995] 111 LQR 628 at 643. 77 Burrows,[1983] 99 LQR 217. 78 Friedman,[1995] 111 LQR 628. 79 The Law Commission recommended (in its 13th Report 1958) adding in this Act : 25(4). It is a promise, express or implied, which the promisor knew or should reasonably have known would be relied upon by the promisee, where the promisee has altered his position to his detriment in reliance on the promise. 80 Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh, [1977] 2 SCR 641, AIR 1979 SC 621, (1979) 2 SCC 409. 81 The Law Commission recommended (in its 108th Report) adding in this Act:25A.(1) Where--(a) a person has, by his words or conduct made to another person, an unequivocal promise which is intended to create legal relations or to affect a legal relationship to arise in the future; and(b) such person knows or intends that the promise would be act ed upon by the person to whom it is made; and(c) the promise is, in fact, so acted upon by the other person, by altering his position, then, notwithstanding that the promise is without consideration, it shall be binding on the person making it, if, having regard to the dealings which have taken place between the parties, it would be unjust not to hold him to be so bound.(2) The provisions of this Section apply whether or not there is a pre-existing relationship between the parties.(3) The provisions of this Section shall not apply--(a) Where the events that have subsequently happened show that it would be unjust to hold the promisor to be bound by the promise; or(b) Where the promisor is the Government and the public interest would suffer if the Government is held to be bound by the promise; or(c) Where the promisor is the Government, and enforcing the promise would be inconsistent with an obligation or liability imposed on the Government by law.Explanation (1). Where a question arises whether public interest could suffer within the meaning of clause (b), the court shall have regard to the amount of harm likely to be causedto the promise if the promise is not enforced and the extent of injury to be caused to the public interest if the promise is enforced, and shall decide the matter of a balance of the two considerations.Explanation (2). In this Section, 'Government' includes all public bodies.
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82 Century Spinning and Manufacturing Co. Ltd. v. Ulhasnagar Municipal Council, supra, Radhakrishna Agarwal v. State of Bihar, (1977) 3 SCC 457, AIR 1977 SC 1496 83 Century Spinning and Manufacturing Co. Ltd. v. Ulhasnagar Municipal Council, supra, Radhakrishna Agarwal v. State of Bihar, supra . 84 Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh, supra . 85 Ibid. 86 (1979) 2 SCC 409 at 446-47, AIR 1979 SC 621 at 647. 87 AIR 1977 SC 1496, (1977) 3 SCC 457. 88 Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh, [1979] 2 SCR 641, AIR 1979 SC 621 at 649, (1979) 2 SCC 409 at 450. 89 SP Sathe, Administrative Law, 7th edn, 2004, p. 620. 90 But see Nrimal Kumar Moulik v. Champabala Roy, AIR 1971 Cal 407 (a decision based the doctrine of estoppel) where the plaintiff was held estopped from resuming land earlier shown as park in the plans given to prospective purchasers of plots in a residential colony. The Court held that though the park was in not in existence at the time of representation, it did exist in the form of undeveloped land. 91 Observation in Hamir Ram v. Varisingh Raimal, AIR 1998 Guj 165. 92 Transmission Corporation of A P Ltd v. SAI R P Pvt Ltd 2011 AIR SCW 2086; CV Enterprises v. Braithwaite & Co. Ltd., AIR 1984 Cal 306; Nagarmal Mahavir Prasad v. Manager United Bank of India, AIR 1987 Cal 88; Nagappa v. State of Karnataka, AIR 1994 Kant 77; Trident Tubes Ltd. v. Government of Bihar, AIR 1995 Pat 50; Kalpana Das v. Contai Co-op Bank Ltd., AIR 2005 Cal 95. 93 Gwalior Ispat Pvt Ltd. v. State Bank of India, AIR 1995 Del 199. 94 Ashok Kumar v. Union Territory Chandigarh, AIR 1995 SC 461. 95 Navayuga Exports Ltd. v. AP Mineral Development Corpn, AIR 1998 AP 391. 96 Union of India v. Binani Consultants (P) Ltd., AIR 1995 Cal 234. 97 Kulu Chand v. State of Rajasthan, AIR 1998 Raj 33; Subhash Chandra Goel v. Secretary Delhi Development Authority, AIR 1985 Del 466. 98 Pawan Alloys and Casting Pvt Ltd. v. Uttar Pradesh State Electricity Board, AIR 1997 SC 3910, (1997) 7 SCC 251. 1 Food Corporation of India v. Babulal Agrawal, AIR 2004 SC 2926, (2004) 2 SCC 712 2 Urban Improvement Trust v. Laxmi Chand Bhandari, AIR 1992 Raj 153. 3 Anokh Singh v. Stale of Punjab, AIR 1994 P&H 157. 4 Ibid; Sheelawanti v. D D A, AIR 1995 Del 212; Atam Nagar Cooperative House Bldg Society Ltd. v. State of Punjab, AIR 1979 P&H 196. 5 Gujarat State Financial Corpn v. Lotus Hotels Pvt Ltd., AIR 1983 SC 848; affirming Gujarat State Financial Corpn v. Lotus Hotels Pvt Ltd., AIR 1982 Guj 198; Bharat Enterprises Ltd. v. Pradeshiya Industrial and Investment Corpn of Uttar Pradesh Ltd., AIR 1994 All 123; Kranti Hotels (Pvt) Ltd. v. Slate of Jammu d Kashmir, AIR 1997 J&K 91. 6 Jorden and wife v. Money, (1854) 5 HL Cas 185, [1843-60] All ER Rep 350; Argy Trading Development Co. Ltd. v. Lapid Development Ltd., [1977] 3 All ER 785; TCB Ltd. v. Gray, [1988] 1 All ER 108 [1986] ch 621 at 634. 7 Central London Property Trust Ltd. v. High Trees House Ltd., [1947] KB 130, [1956] 1 All ER 256 at 258; China-Pacific S A v. Food Corpn of India (The Winson), [1980] 3 All ER 556 at 567, reversed on other grounds in [1982] AC 939, [1981] 3 All ER 688 (distinction between the two discussed). 8 Woodhouse AC Israel Cocoa Ltd. v. Nigerian Produce Marketing Co. Ltd., [1972] AC 741 at 758, [1972] 2 All ER 271(HL) ; Ogilvy v. Hope-Davies, [1976] 1 All ER 683 at 689; Ets Soules d Cie v. International Trade Development Co. Ltd., [1980] 1 Lloyd's Rep 129 at 133; Amherst v. James Walker Goldsmith d Silversmith Ltd., [1983] Ch 305 at 316, [1983] 2 All ER 1067. 9 Spencer Bower and Turner, Estoppel by Representation, 3rd edn, 1977, p. 375; quoted by the Privy Council in China-Pacific SA v. Food Corpn of India (The Winson), [1980] 3 All ER 556 at 567; reversed on other grounds in [1982] AC 939, [1981] 3 All ER 688.
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10 James v. Heim Galleries, [1980] 256 EG 819 at 825. 11 Chitty on Contracts, 28th edn, p. 215, para 3-091; Hughes v. Metropolitan Rail Co., [1874-80] All ER Rep 187.
Contracts with Government Formalities: Article 299 of the Constitution of India The executive power of the Union of India and the states to carry on any trade or business, acquire, hold and dispose of property and make contracts is affirmed by Art. 298 of the Constitution of India .12 If the formal requirements required by Art. 299 are complied with, the contract can be enforced against the Union or the states. The public policy and the public interest underlying Art. 299(1) is that 'the State should not be saddled with liability for unauthorised contracts which do not show on their face that they are made on behalf of the State'.13 Article 299 of the Constitution of India provides:
299. (1) All contracts made in the exercise of the executive power of the Union or of a State shall be expressed to be made by the President, or by the Governor of the State, as the case may be, and all such contracts and all assurances of property made in the exercise of that power, shall be executed on behalf of the President or the Governor by such persons and in such manner as he may direct or authorise.
(2) Neither the President nor the Governor shall be personally liable in respect of any contract or assurance made or executed for the purposes of this Constitution, or for the purposes of any enactment relating to the Government of India heretofore in force, nor shall any person making or executing any such contract or assurance on behalf of any of them be personally liable in respect thereof.
The formalities required by this Article apply to a contract made in the exercise of the executive power of the Union or of the state,14 and not to a contract made by a statutory authority in exercise of its powers conferred by the statute,15 or to a compromise by parties during pendency of a suit where one of the parties is the Government.16 In order to comply with Art. 299, the contract:
(i) (ii) (iii)
must be executed by a person duly authorised by the President or Governor,17 as the case may be; must be executed by such person 'on behalf of' the President or Governor,18 as the case may be; must be 'expressed to be made by', the President or Governor, i.e., in the name of the President or the Governor.19
The use of the words 'expressed to be made' and 'executed' in the Article indicate that there must be a formal written document.20 Where a contract is made by tender and acceptance, the acceptance must be made by a duly authorised person and on behalf of the President, and a valid contract may result from correspondence.21 Where conditions of loan bonds in favour of the Government were incorporated into a Government Order signed by authorised officers, the contract was valid even without signatures of officers on the loan agreements.22 Acceptance of tender by telegram cannot constitute a contract where authorisation is not proved.23 No contract can be implied under this Article.24 All the conditions are mandatory,25 and none of them can be waived.26 Agreement in the
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form of minutes drawn after discussions in meetings did not comply with Art. 299.27 The authority of the President or the Governor may be conferred by a general order or an ad hoc order upon a particular officer for a particular contract. It may be proved by a notification28 or by any other evidence.29 A special authority may validly be given in respect of a particular contract or contracts by the Governor to an officer other than the officer notified.30 Allotment of a parra by the tehsildar under authority of rules framed by the Mandi Committee and approved by the rajpramukh was held to be done on behalf of the Governor, though the agreement was not expressed in terms of Art. 299.31 A contract complying with the Article can be enforced by or against the Government. It is subject to the general provisions of the contract law,32 and its terms cannot be changed by resorting to Art. 14 of the Constitution.33 A contract not complying with any of the conditions of Art. 299(1) of the Constitution is not binding on or enforceable by the Government, and is absolutely void,34 though not so for collateral purposes,35 and cannot be ratified.36 No damages can be claimed for breach unless the contract is complete under this Article.37 An officer who entered into a contract without complying with the terms of the Article will be personally liable. Even if the Government is not bound for non-compliance of Art. 299, the officer will be personally liable under s. 230(3) of this Act .38 Although, no suit can lie against the Government on the basis of contract, relief can be had on restitutionary principles of s s. 6539 or 7040 of this Act for goods or services provided.41 Non-compliance of the conditions of the Article will also not bar enforcement of rights and liabilities arising out of statute which is independent of contract.42 The defence of invalidity of contract for non-compliance of Art. 299 must be specifically pleaded,43 unless it is patent from allegations in the plaint or evidence adduced by the plaintiff.44 This question has arisen in three types of cases:
(i) (ii) (iii)
cases under s s. 7 (d) and 9A of the Representation of People's Act, 1951 in connection with disqualification from being elected to the Parliament or state legislatures; where the contracts did not comply with the exact requirements of Art. 299 (1); and contracts entered in the exercise of statutory powers.
An agreement not complying with Art. 299 was held to be a contract for the purposes of disqualifying a candidate for election,45 but not when the contract was not ratified by the Government.46 The reasoning of Chhaturbhuj's case that Art. 299, though mandatory, did not render the contract void, as it was capable of ratification, is no longer sustained by later decisions,47 but it has been suggested that the conclusion that it would disqualify a candidate is correct. While public policy requires that strict meaning should be given to the word 'contract', public policy underlying s. 7(d) requires that popular meaning should be given to the word 'contract', for the section is directed to the existence of business dealings between the candidate and the Government as a fact, and not the form in which the dealing is cast.48 12 Patel Engineering Ltd v. Union of India AIR 2012 SC 2342, (2012) 11 SCC 257: includes the power not to make a contract. 13 Bhikraj Jaipuria v. Union of India, AIR 1962 SC 113, [1962] 2 SCR 880. 14 Lalji Khimji v. State of Gujarat, (1993) Supp 3 SCC 567 at 572; State of Haryana v. Lal Chand, (1984) 3 SCC 634. 15 Karamshi Jethabhai Somayya v. State of Bombay, AIR 1964 SC 1714, [1964] 6 SCR 984 (agreement for permanent supply of water); Ajodhya Prasad Shaw v. State of Orissa, AIR 1971 Ori 158 (auction sale for liquor retail); Shree Krishna Gyanoday Sugar Ltd. v. State of Bihar, AIR 1975 Pat 123; Lalji Khimji v. State of Gujarat, (1993) Supp 3 SCC 567 (under the Bombay Irrigation Act); State of Haryana v. Lal Chand, (1984) 3 SCC 634(under the Punjab Excise Act);Steel Authority of India v. State of Madhya Pradesh, AIR 1999 SC 1630, (1999) 4 SCC 76 (under Madhya Pradesh Land Revenue Code ).
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16 State of Haryana v. Lal Chand, (1984) 3 SCC 634(under the Punjab Excise Act). 17 Bhikraj Jaipuria v. Union of India, AIR 1962 SC 113, [1962] 2 SCR 880. 18 Chaturbhuj Vithaldas Jasani v. Moreshwar Parashram, AIR 1954 SC 236, [1954] SCR 817. 19 State of Punjab v. Om Prakash Baldev Krishan, AIR 1988 SC 2149 (not binding if not signed in the name of the Governor). 20 Bhikraj Jaipuria v. Union of India, AIR 1962 SC 113, [1962] 2 SCR 880; Karamshi Jethabhai Somayya v. State of Bombay, AIR 1964 SC 1714, [1964] 6 SCR 984; New Marine Coal Co. (Bengal) Private Ltd. v. Union of India, AIR 1964 SC 152, [1962] 2 SCR 859; Union of India v. Hanuman Oil Mills Ltd., (1987) Supp SCC 84. 21 Union of India v. AL Rallia Ram, AIR 1963 SC 1685. 22 State of UP v. Raza Buland Sugar Co. Ltd., AIR 2006 All 61 23 Hanuman Oil Mills v. Union of India, AIR 1974 Del 51. 24 KP Chowdhry v. State of Madhya Pradesh, AIR 1967 SC 203, [1966] 3 SCR 919. 25 State of West Bengal v. BK Mondal Sons, AIR 1962 SC 779 at 783, [1962] Supp 1 SCR 876; New Marine Coal Co. (Bengal) Private Ltd. v. Union of India, AIR 1964 SC 152 at 15, [1962] 2 SCR 859; State of Uttar Pradesh v. Murari Lal and Brothers Ltd., (1971) 2 SCC 449 at 451, AIR 1971 SC 2210. 26 Bihar Eastern Gangetic Fishermen Co-operative Society Ltd. v. Sipahi Singh, [1978] 1 SCR 375, AIR 1977 SC 2149. 27 Bishandayal and Sons v. State of Orissa, AIR 2001 SC 544. 28 Timber Kashmir Pvt Ltd. (M/s) v. The Conservator of Forests, Jammu, AIR 1977 SC 151. 29 Bhikraj Jaipuria v. Union of India, AIR 1962 SC 113, [1962] 2 SCR 880; Karamshi Jethabhai Somayya v. State of Bombay, AIR 1964 SC 1714, [1964] 6 SCR 984; Union of India v. Hanuman Oil Mills Ltd., (1987) SCC 84(Supp) . 30 State of Bihar v. Karam Chand Thapar & Brothers, AIR 1962 SC 110; Bhikraj Jaipuria v. Union of India, AIR 1962 SC 113, [1962] 2 SCR 880. 31 Behari Lal v. Bhuri Devi, AIR 1997 SC 1879 at 1882. 32 Union of India v. Steel Stock Holders Syndicate, AIR 1976 SC 879 at 882; State of Rajasthan v. Bootamal Sachdeva, AIR 1989 SC 1811. 33 Bareilly Development Authority v. Ajay Pal Singh, AIR 1989 SC 1076 at 1082-83. 34 State of West Bengal v. BK Mondal & Sons, AIR 1962 SC 779 at 783; New Marine Coal Co. (Bengal) Private Ltd. v. Union of India, AIR 1964 SC 152 at 155, [1962] 2 SCR 859; KP Chowdhry v. State of Madhya Pradesh, AIR 1967 SC 203, [1966] 3 SCR 919; State of Uttar Pradesh v. Murari Lal and Brothers Ltd., (1971) 2 SCC 449 at 451, AIR 1971 SC 2210. 35 New Marine Coal (Bengal) Private Ltd. v. Union of India, AIR 1964 SC 152, [1962] 2 SCR 859 (for relief under s. 70). 36 Laliteshwar Prasad Sahi v. Bateshwar Prasad, AIR 1966 SC 580, [1966] 2 SCR 63; Mulamchand v. State of Madhya Pradesh, AIR 1968 SC 1218; Bihar Eastern Gangetic Fishermen Co-operative Society Ltd. v. Sipahi Singh, [1978] 1 SCR 375, AIR 1977 SC 2149; Timber Kashmir Pvt Ltd. v. Conservator of Forests, AIR 1977 SC 151. 37 State of Uttar Pradesh v. Kishorilal Minocha, AIR 1980 SC 680; Union of India v. Bhimsen Walaiti Ram, AIR 1971 SC 2295. 38 Chaturbhuj Vithaldas Jasani v. Moreshwar Parashrram, AIR 1954 SC 236. 39 State of West Bengal v. BK Mondal & Sons, AIR 1962 SC 779 at 781, [1962] (Supp) 1 SCR 876; New Marine Coal Co. (Bengal) Private Ltd. v. Union of India, AIR 1964 SC 152 at 155, [1962] 2 SCR 859; KP Chowdhry v. State of Madhya Pradesh, AIR 1967 SC 203, [1966] 3 SCR 919; State of Uttar Pradesh v. Murari Lal and Brothers Ltd., (1971) 2 SCC 449 at 451, AIR 1971 SC 2210. 40 New Marine Coal Co. (Bengal) Private Ltd. v. Union of India, AIR 1964 SC 152, [1962] 2 SCR 859 (for relief under s. 70). 41 State of West Bengal v. B K Mondal & Sons, [1962] Supp 1 SCR 876, AIR 1962 SC 779; New Marine Coal Co. (Bengal) Private Ltd. v. Union of India, [1962] 2 SCR 859, AIR 1964 SC 152; Dharmeswar Kalita v. Union of India, AIR
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1955 Assam 86; Dominion of India v. Preety Kumar Ghosh, AIR 1958 Pat 203; A K T K M Sankaran Namboodiripad v. State of Kerala, AIR 1963 Ker 278; Mulamchand v. State of Madhya Pradesh, AIR 1968 SC 1218; Hansraj Gupta & Co. v. Union of India, AIR 1973 SC 2724. 42 A Damodaran v. State of Kerala, AIR 1976 SC 1533; Haji Mumtaz Hussain v. State of Uttar Pradesh, (2000) 9 SCC 38 (claim for unlawful detention of goods purchased at an auction but delivery prevented). 43 Kalyanpur Lime Works Ltd. v. State of Bihar, AIR 1954 SC 165, [1954] SCR 958(s. 30 of the Government of India Act, 1915); but seeBishandayal and Sons v. State of Orissa, AIR 2001 SC 544 (defence considered in appeal). 44 Dominion of India v. Raj Bahadur Seth Bhikhraj Jaipuria, AIR 1957 Pat 586; reversed on another point in Bhikraj Jaipuria v. Union of India, AIR 1962 SC 113, [1962] 2 SCR 880. 45 Chhaturbhuj Vithaldas Jasani v. Moreswar Parashram, AIR 1954 SC 236, [1954] SCR 817; Konappa Rudrappa Nadgouda v. Vishwanath Reddy, AIR 1969 SC 447. 46 Laliteshwar Prasad Sahi v. Bateshwar Prasad, AIR 1966 SC 580, [1966] 2 SCR 63. 47 AIR 1966 SC 580; Mulamchand v. State of Madhya Pradesh, AIR 1968 SC 1218; Hansraj Gupta & Co. v. Union of India, AIR 1973 SC 2724; State of Uttar Pradesh v. Murari Lal and Brothers Ltd., (1971) 2 SCC 449, AIR 1971 SC 2210; Bihar Eastern Gangetic Fishermen Co-op Society Ltd. v. Sipahi Singh, [1978] 1 SCR 375, AIR 1977 SC 2149; Timber Kashmir Pvt Ltd. (M/s) v. The Conservator of Forests, Jammu, AIR 1977 SC 151. 48 Seervai, Constitutional Law of India, 4th edn, Vol. 2, p. 2121.
Public Contracts Public authorities which invite tenders should not be under any liability, under the traditional rules of offer and acceptance, until the tender is accepted. But those who tender are entitled that their tenders should be fairly considered according to the terms of the invitation to tender. Public interest also requires that the tenders are properly considered so as to obtain the best value for the tax-payer's money. A Government contract is seen as a privilege or a largess, and unlike a private person who may choose with whom to contract, the Government or public body has to use its power of contracting in public interest, as regards the person with whom it would contract, as well as the terms of the contract. The principles of judicial review would therefore apply to the exercise of contractual powers by the Government and Government bodies to prevent arbitrariness or favouritism under the principles laid down in Art. 14 of the Constitution.49 There are inherent limitations in the exercise of that power, because although the Government is the guardian of finances of the state and is expected to protect the financial interest of the State, the right to refuse the lowest or any tender is always available to the Government. The right to choose is not an arbitrary power, and there is no question of infringement of Art. 14 if the Government tries to get the best person or the best quotation. But if the power is exercised for collateral purpose, the exercise of that power will be struck down. Judicial Review in Contractual Matters Judicial quest in administrative matters has to find the right balance between the administrative discretion to decide matters contractual or political in nature, or issues of social policy and the need to remedy any unfairness. A State need not enter into a contract with anyone, but when it does so, it must do so fairly without discrimination and without unfair procedure;50 and its act ion is subject to judicial review under Art. 14 of the Constitution of India . Unlike a private party, whose acts uniformed by reason and influenced by personal predilections in contractual matters may result in adverse consequences to it alone without affecting the public interest, any such act of the State or a public body even in this field would adversely affect the public interest. Where the Government is dealing with the public, whether by way of giving jobs or entering into contracts or issuing quotas or licences or granting other form of largesse, it cannot arbitrarily use its power of discretion and in such matters must conform to certain standard or norm which is not arbitrary, irrational or irrelevant.51 There must
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be shown a public law element to the contractual decision, before the principles of judicial review are exercised by a Government body of its contractual powers.52 While setting aside the general order issued by the Government of Uttar Pradesh, terminating the appointments of all Government counsels in all the districts from a specified date, and directing fresh panels for making appointments in place of the existing incumbents as arbitrary and violative of Art. 14 of the Constitution, the Supreme Court observed:53
...with the diversification of State activity in a Welfare State requiring the State to discharge its wide ranging functions even through its several instrumentalities, which require entering into contracts also, it would be unreal and not pragmatic, apart from being unjustified to exclude contractual matters from the sphere of the State act ions required to be non-arbitrary and justified on the touchstone of Art. 14...In our view, bringing State activity in contractual matters also with the purview of judicial review is inevitable and is a logical corollary to the stage already reached in the decisions of the court so far...In our opinion, decisions in Dwarakadas Marfatia & Sons54 and Mahabir Auto Stores55 also lead in the same direction without saying so in clear terms. This appears to be also the trend of the recent English decisions. It is in consonance with our commitment to openness which implies scrutiny of every State act ion to provide an effective check against arbitrariness and abuse of power.
Legitimate Expectation Where persons are legitimately entitled to expect that certain entitlements would continue with them, but they are not continued, the courts insist that the decision affecting such expectation should be taken after giving to such persons an opportunity of being heard.56 For example, a highest bidder has a legitimate expectation to have his tender accepted. It has been stated:57
If by reason of the existing state of affairs, a party is given to understand that the other party shall not take away the benefit without complying with the principles of natural justice, the said doctrine would be applicable. The legislature, indisputably, has the power to legislate but where the law itself recognizes existing right and did not take away the same expressly or by necessary implication, the principles of legitimate expectation of a substantive benefit may be held to be applicable.
Expectation is not the same as anticipation. It is different from a wish, however earnest and sincere, or a desire, or a hope. It is distinguishable from a genuine expectation. The legitimacy of expectation can be inferred only if it is founded on the sanction of law or custom or an established procedure followed in regular and natural sequence. A case of legitimate expectation would arise when a body by representation or by past practice aroused expectation which would be within its powers to fulfil. It gives the applicant a sufficient locus standi for judicial review. It entitles the person having the expectation to a fair hearing.58 The mere reasonable or legitimate expectation of a citizen may not by itself be a distinct enforceable right, but failure to consider and give weight to it may render the decision arbitrary.59 A decision or action disappointing an expectation is unfair without the expectant person being heard; but if founded on policy, or in public interest, whether by legislation, rules, or Government Orders, the decision denying legitimate expectation will not be interfered with, unless it amounts to abuse of power.60 Larger public interest may outweigh the legitimate expectation of the claimant.61 Contractual Obligation to Consider the Tender The jurisprudence in some other common law jurisdictions takes the approach that, depending upon the intentions of the parties, an invitation to tender can give rise to contractual obligations upon the submission of a bid.62 By one view, when public authorities invite tenders and prescribe clear
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procedures for their acceptance, the obligation to consider conforming tenders and to adhere to the specified requirements can be implied;63 and may give rise to a claim for damages. In Blackpool and Fylde Aero Club v. Blackpool Borough Council, 64 the council invited tenders from seven selected contractors and fixed a date for submitting the tenders. The club submitted the tender in time, but the staff of the authority did not clear the letterbox until the next day, and that tender was rejected as received late. The club commenced act ion against the authority claiming breach of contract contending that the council had warranted that if the tender was received before the deadline, it would be considered, and the council had acted in breach of warranty. It was held that where tenders were solicited from selected parties, all of whom were known to the invitor, and invitation to tender prescribed a clear, orderly and familiar procedure, which included draft contract conditions available for inspection but not open to negotiation, a prescribed common form of tender, the supply of envelopes designed to preserve the absolute anonymity of tenderers and an absolute deadline, it was to be implied that if an invitee submitted a confirming tender before the deadline, he would be entitled as a matter of contractual right to have his tender opened and considered along with any other tenders that were considered. The case had come up only on the preliminary issue of liability, the question of quantum damages to be decided later. In Hughes Aircraft Systems International v. Airservices, Australia, 65 the petitioners contended that the public corporation inviting tenders had not taken proper account of the priority rankings set out in the criteria and had allowed the successful tenderer to make a substantial reduction in price at a very late stage in the bidding. The court implied a term that the corporation should conduct the tender evaluation fairly as between the tenderers, and was under a contractual obligation to apply the criteria scrupulously. This case was also heard on the preliminary issue of liability under contract. In MJB Enterprises of Canada v. Defence Construction, 66 the tender conditions contained a 'privilege clause' providing that the lowest of any tender would not necessarily be accepted. The lowest bid was accepted, though it did not comply with the tender conditions. A question arose whether the 'privilege clause' in the tender documents allowed the person calling tenders to disregard the lowest bid in favour of any other tender, including a noncompliant one. Allowing the appeal, the Supreme Court of Canada held that submitting a tender in response to an invitation to tender gave rise to a contractual obligation (contract A) quite apart from the obligations associated with the construction contract to be entered into after acceptance of the tender (contract B). Contract A arose when a person called for tenders which offered by inviting tenders, through a formal tendering process, that involved complex documentation and terms, to consider bids for contract B. Although, there was no express term in contract A imposing an obligation to award the contract to the lowest tenderer, the effort and expense of tendering, the risk of not being awarded the contract at all and the significant amount of security deposit indicated that '... it was difficult to accept that the appellant or any of the other contractors would have submitted a tender unless it was understood by all involved that only a compliant tender would be accepted', and the Court implied a term to that effect. In submitting the tender, the tenderers accepted this offer. The consideration for the promise of the person calling tenders arose out of the significant cost incurred by the tenderers and the giving of the security deposit amount. Under contract A, the person calling tenders owed an obligation to the other tenderers that it would accept only non-compliant tender; its breach gave rise to a claim for 'expectation' damages. The petitioner in this case was the second-lowest tenderer and was likely to be awarded the contract if the lowest tenderer was rejected for non-compliance. The petitioner was therefore entitled to damages being the amount of profits which it would have realised had it been awarded contract B. The question whether a party who incurred expenses in anticipation of entering into a contract could recover them from the other party if the other party rightly declined to enter into a contract, was left open by the Supreme Court.67 Scope of Judicial Review in Public Contracts
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Judicial review will be concerned in reviewing not the merits of the decision made, but the decision making process itself. Neither is a court equipped nor is it desirable for it to review the merits of the decision. If the contract has been entered without ignoring the procedure which can be said to be basic in nature and after an objective consideration of different options available taking into account the interest of the State and the public, then the court cannot act as an appellate authority by substituting its opinion in respect of selection made for entering into the contract.68 The grounds on which administrative action would be subject to control by judicial review could be classified as:
(i) (ii)
(iii)
illegality (namely, failure to give effect to the law that regulates the decision making power); irrationality, namely Wednesbury unreasonableness, the question 'whether or not they [the local authority] have taken into account matters which they ought not to have taken into account, or...have refused to take into account or neglected to take into account matters which they ought to take into account';69 and procedural impropriety.
Tata Cellular v. Union of India 70recognised the above principles as applicable in the judicial review of administrative act ion in contract matters, and the Court also mentioned two more facets of irrationality, namely: (a) a court could review the decision-makers' evaluation of facts and intervene where the facts taken as a whole could not logically warrant the conclusion of the decision-maker; and (b) a decision would be unreasonable if it is impartial and unequal in its operation as between different classes. In the contractual sphere, as in all other State actions, the State and all its instrumentalities have to conform to Art. 14 of the Constitution of India , in which non--arbitrariness is a significant facet.71 However, in contracts having commercial elements, some more discretion has to be conceded to authorities so that they can enter into contracts with persons, keeping an eye on the augmentation of revenue; they have the liberty to assess the overall situation for the purposes of deciding to whom the contract shall be awarded and on what terms; and the court must grant a measure of freedom of 'play in the joints' to the executive.72 The award of contract, whether it is by a private party or by a public body or the State, is essentially a commercial transaction. Decisions in such transactions are arrived at with commercial considerations. The State can choose its own method to arrive at a decision. It can fix its own terms of invitation to tender, which will not be open to judicial scrutiny. It can negotiate before deciding to accept the tender. It may not accept the offer even though it is the highest or the lowest. But it is bound to adhere to the norms, standards and procedures laid down by them, and cannot depart from them arbitrarily.73 If the decision relating to award of contracts is bona fide and is in public interest, courts will not exercise the power of judicial review and interfere.74 In the matters of contract, the court can interfere in three categories of cases, i.e., quasi-judicial matters, administrative matters like price-fixing, and award of contracts. Judicial review does not mean that the court should take over the contracting powers. It can interfere in the matters which would be mala fide, biased, or so arbitrary to the extent of perversity. The standard of proof of bias is higher after the decision of awarding the contract is reached.75 There should be fair play in act ion;76 the action should be legitimate and fair, and without any aversion, malice or affection. There should be no impression of favouritism or nepotism.77 The cases in which power under Arts. 226 or 14 of the Constitution can be exercised for breaches of alleged obligations of the state, or its agents, can be divided into four types:
(i)
Where a petitioner makes a grievance of breach of promise on the part of the state in
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(ii) (iii)
(iv)
cases where on assurance or promises made by the state, he has act ed to his prejudice and predicament, but the agreement is short of a contract within the meaning of Art. 299 of the Constitution; Where the contract entered into between the person aggrieved and the state is in exercise of a statutory power under certain Acts or Rules framed thereunder and the petitioner alleges a breach on the part of the state; Where the contract entered into between the state and the person aggrieved is non-statutory and purely contractual and the rights and liabilities of the parties are governed by the terms of the contract, and the petitioner complains about breach of such contract by the State;78 and Where the contract entered into between the State and the person aggrieved is non-statutory and purely contractual, but such a contract has been cancelled on a ground de hors any of the terms of the contract, and which is per se violative of Art. 14 of the Constitution.79
Principles The principles deduced by the Supreme Court in Tata Cellular v. Union of India are:80
(i) (ii) (iii) (iv)
(v)
(vi)
The modern trend points to judicial restraint in administrative act ion; The court does not sit as a court of appeal but merely reviews the manner in which the decision was made; The court does not have the expertise to correct the administrative decision. If a review of the administrative decision is permitted, it will be substituting its own decision without the necessary expertise which itself may be fallible; The terms of the invitation to tender cannot be open to judicial scrutiny because the invitation to tender is in the realm of contract. Normally speaking, the decision to accept the tender or award the contract is reached by the process of negotiations through several tiers. More often than not, such decisions are made qualitatively by experts; The Government must have freedom of contract. In other words, a fair play in the joints is a necessary concomitant for an administrative body functioning in an administrative sphere or quasi-administrative sphere. However, the decision must not only be tested by the application of Wednesbury principle of reasonableness (including its other facts pointed out above) but must be free from arbitrariness not affected by bias or actuated by mala fides; Quashing decisions may impose heavy administrative burden on the administration and lead to increased and unbudgeted expenditure.
In Asia Foundation and Construction Ltd. v. Trafalgar House Construction (I) Ltd., 81 the Supreme Court held that judicial review of contractual transactions of public bodies was permissible to prevent arbitrariness, favouritism and use of power for collateral purposes, and further, where it would be detrimental in public interest to interfere. The later emphasis is on allowing certain flexibility in administrative decision-making; and a decision can be challenged on the Wednesbury Principle of Unreasonableness, i.e., the decision was so unreasonable that no sensible person would have arrived at it; else, it should not be disturbed; and that if a reasonable procedure had been followed, the decision should not be challenged except on the Wednesbury Principle of Unreasonableness.82 Public Interest Even if a case is made out under Art s. 14 or 226, the High Court may not interfere only because it is lawful to do so. It may refuse to interfere in the larger interest of the public,83 especially when time had elapsed after acceptance of tender and the work had started;84 and damages awarded85 instead of directing reconsideration of tenders. Relief has, for example, been refused on the ground of urgency in a contract relating to drinking water supply facility.86
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In Raunaq International Ltd. v. IVR Construction Ltd., 87 the Supreme Court discussed and stated the principles for and the extent to which a court could interfere in cases challenging awards of contract by public authorities or the Government. It held that:
(i)
(ii) (iii)
When a writ petition is filed in a High Court challenging the award of a contract by a public authority or the state, the court must be satisfied that there is some element of public interest involved in entertaining such a petition, especially so when the dispute is purely between the two tenderers (the successful and the disappointed tenderers). The court must also consider that its intervention may delay the project and escalate the cost far more than any saving, which the order of the court could effect in public money, by deciding the dispute in favour of one or the other tenderer. Therefore, unless the court is satisfied that there is a substantial amount of public interest, or the transaction is entered into mala fide, the court should not intervene under Art. 226 in disputes between rival tenderers; The court must satisfy itself that the party which has brought the litigation is litigating bona fide for public good. The public interest litigation should not be a mere cloak for attaining private ends of a third party or of a party bringing the petition; The court must weigh the conflicting public interests, especially since any delay in the project would ultimately be paid for by the public in terms of escalated costs, or would have to be short of the very service for which the project is undertaken. The court should intervene when there is an overwhelming public interest in entertaining it, even when the allegation is of mala fide in the transaction.
Locus Standi Where the public authority accepted a tender when the tenderer was not qualified in terms of the qualifications laid down in the invitation to tender, the act ion could be challenged at a petition filed by a person who had not submitted a tender at all; because if it were known to him that non-fulfilment of the condition of eligibility would be no bar to 8 consideration of the tender, he also would have submitted the tender.88 Any member of the public could challenge the disposal of property by the Government without auction.89 But the sub-contractors engaged by the contractor whose contract has been terminated by the authority under the terms of his contract, were not entitled to seek extension of time for completion of work.90 Relief Relief, in a writ proceeding, of cancelling the tender procedure is refused when work has commenced and expenses already incurred;91 or where there is an urgency to carry out the work;92 or in large projects of high costs for which loans from international bodies have been taken after following the specifications and procedure of such bodies.93 In Raunaq International Ltd. v. IVR Construction Ltd., 94 the court held that any interim order should be moulded to provide for restitution. It stated:
The party at whose instance interim orders are obtained has to be made accountable for the consequences of the interim order. The interim order could delay the project, jettison finely worked financial arrangements and escalate costs. Hence the petitioner asking for interim orders in appropriate cases should be asked to provide security for any increase in cost as a result of such delay, or any damages suffered by the opposite party in consequence of an interim order. Otherwise public detriment would outweigh public benefit in granting such interim orders. Stay order or injunction order, if issued, must be moulded to provide for restitution.95
and later:
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in granting an injunction or stay order....the court has to satisfy itself that the public interest in holding up the project far outweighs the public interest in carrying it out within reasonable time. The court must also take into account the cost involved in staying the project and whether the public would stand to benefit by incurring such cost.96
Where an unsuccessful tenderer filed a writ petition, in which the contract was stayed, and the subject matter of the contract was damaged in the meantime, the successful tenderer could not be compelled to deposit the price and carry away the goods.97 Judicial Review in the Tender Process The most frequent instances of judicial review in public contracts are in connection with the actions in the area of the process of inviting and accepting tenders, an area where a civil court would not interfere in matters between private parties. The entire process of selection of contractors in public contracts, upto the conclusion of the contract, would be liable to scrutiny on principles described above, in writ proceedings in the High Court or the Supreme Court respectively under Arts. 226 and 14 of the Constitution. Principles of judicial review are summarized by the Supreme Court as follows:98
(i) (ii) (iii) (iv)
(v)
(vi) (vii)
If there are essential conditions, the same must be adhered to; If there is no power of general relaxation, ordinarily the same shall not be exercised and the principle of strict compliance would be applied where it is possible for all the parties to comply with all such conditions fully; If, however, a deviation is made in relation to all the parties in regard to any of such conditions, ordinarily again a power of relaxation may be held to be existing; The parties who have taken the benefit of such relaxation should not ordinarily be allowed to take a different stand in relation to compliance of another part of tender contract, particularly when he was also not in a position to comply with all the conditions of tender fully, unless the court otherwise finds relaxation of a condition which being essential in nature could not be relaxed and thus the same was wholly illegal and without jurisdiction. When a decision is taken by the appropriate authority upon due consideration of the tender document submitted by all the tenderers on their own merits and if it is ultimately found that successful bidders had in fact substantially complied with the purport and object for which essential conditions were laid down, the same may not ordinarily be interfered with. The contractors cannot form a cartel. If despite the same, their bids are considered and they are given an offer to match with the rates quoted by the lowest tenderer, public interest would be given priority. Where a decision has been taken purely on public interest, the Court ordinarily should exercise judicial restraint.
In Jagdish Mandal v. State of Orissa, 1 a tender was rejected on the basis of complaint and without hearing the tenderer on the ground that the entries in the pass book concerning deposit of earnest money were found tampered. While upholding the rejection, the Supreme Court set out two questions that would answer the decision to interfere:
(i)
Whether the process adopted or decision made by the authority is mala fide or intended to favour someone, or
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whether the process adopted or decision made is so arbitrary and irrational that the court can say: &uot;the decision is such that no responsible authority act ing reasonably and in accordance with relevant law could have reached&uot;; and (ii) whether public interest is affected. If the answers are in the negative, there should be no interference by the court. Selection Process Public auction or inviting of tenders should be the general rule; it ensures fairness, legitimacy, non-discrimination and removes the impression of bias, favouritism and nepotism. The object of inviting tenders for contracting a work are threefold; first, to locate or select highly proficient and competent persons to do the work; secondly to get the work done at a reasonably low cost; and thirdly, to give opportunity to all the eligible tenderers to submit their tenders.2 Any departure from this rule should be only in the rarest of rare, and exceptional cases, where it is not possible to hold public auction or tender; and supported by sound, compelling rational and cogent reasons, and not for convenience and compromise.3 Disposal of property of the Government must be by public auction;4 but that an exception could be made if some directive principle contained in Part IV of the Constitution was sought to be achieved.5 For example, where the highest bidder for the sale of disputed property failed to pay the tender amount, the property could be offered to the next highest bidder.6 Awarding the contract on first-come-first-served basis,7 or by negotiating with one party only, or distributing the work among few parties after tenders are invited, without accepting or rejecting tenders would be arbitrary;8 but where only two parties submitted the tenders for setting up five star hotels, and the Government negotiated with one of them, the action was upheld;9 as was the entrustment of the work to a non-tenderer, even after inviting the tender for spraying insecticides, because it had a helicopter at its disposal.10 The contract can be made directly by negotiation with one party if the method of auction or inviting tenders is not feasible,11 or in rare and exceptional cases, stated as 'natural calamities, emergencies declared by Government, procurement is possible from a single source only, supplier or contractor has exclusive rights over goods and no reasonable alternative or substitute exists, where auction was held on seveal dates, but there were no bidders, or bids were too low, etc'.12 In special works requiring special skill and expensive equipment, spending finances within a time frame, direct invitations for negotiation without advertisement can be given to agencies who have done similar jobs with other similar corporations.13 In Ramdas Shriniwas Nayak v. Union of India, 14 a contract between the Maharashtra State Electricity Board and the Dabhol Power Corporation for setting up a project for generation of electricity at Dabhol was challenged as arbitrary, on the ground that though being a contract of a vast magnitude, it was finalised without resorting to competitive bidding by inviting global tenders, and that finalisation of a contract by negotiations was not the permissible mode of awarding such contracts by the state or its instrumentalities. In this case, consequent upon the decision of the Government of India to encourage and invite private entrepreneurs for setting power projects, only Enron Power Corporation (of which Dabhol Power Corporation was a subsidiary) had responded to the offer of the Government to set up a power project in Maharashtra and took interest in negotiating the deal. No other entrepreneur having the necessary expertise and experience came forward. There had been prolonged and detailed negotiations for three years between the various authorities and contracting parties, and all expertise from India and abroad was made use of for evaluating the project. Widest publicity was given to the project at every stage. It was held that in this case negotiation only was the appropriate mode, and not the inviting of tenders. Therefore, agreement by negotiation with Dabhol Power Corporation (a subsidiary of Enron) without inviting global bids was held not arbitrary, illegal or against public policy. Qualifications A condition limiting the tender to persons who had already worked for their employer was not arbitrary, the purpose being to get more experienced persons for increasing efficiency;15 nor was it arbitrary to restrict the tenders to manufacturers only and excluding manufacturer's representatives.16 The Government may give or may direct the authorities to give preference to parties with special capabilities, cooperative societies,17 public sector undertakings,18 registered small scale industrial
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units,19 or units based in a geographical area, especially backward tribal areas.20 Restricting entry to companies incorporated in India or those having majority shareholding from companies of Japanese origin was not arbitrary in respect of a contract for running a Japanese hotel cum restaurant.21 However, a condition in a tender for compiling, printing and supplying telephone directories requiring the tenderer to have local experience was irrational and arbitrary, and it could not be supported by the reason that such condition will ensure timely delivery of the directories.22 Similarly, requiring tenderers to have three similar completed works during previous three years was arbitrary with reference to the value of the contract for which tenders were called,23 as also a condition in a contract for supply of medicines requiring that the tenderer shall have a GMP (Good Manufacturing Practices) Certificate.24 Where tenders are invited from tenderers with certain qualifications, those persons who do not fulfil them are not eligible to submit the tender. The object of restricting competition to a certain category or kind of contractors with some credentials is to have a person with some experience, ability and infrastructure as also necessary machinery and equipment with technically competent personnel to complete the work.25 The authorities inviting tenders can lay down a criteria not to deal with contractors who had abandoned any earlier project,26 have a stated extent of prior experience,27 or have the stated average and minimum average production.28 Where conditions of tender required that tenderers shall have specified experience of similar works, a partner's experience ought to be counted as experience of his firm.29 Where conditions of bid required that the bidder shall have experience of completed work, a bidder who had works in force was not qualified.30 The Government may short list contractors from a restricted class for special projects, namely, high-tech projects, without issuing public notice, provided it was done after selection of contractors by pre-qualification on the basis of advertisement.31 Pre-qualification The object of pre-qualification of contractors is to finalise the process of awarding contract by an expert body as expeditiously as possible. It has been held that if hearing to tenderers is required at this stage, the process would be unduly impeded and would also add to the cost. The tenderer for a Government contract is not entitled to a hearing before his claims are rejected at a stage of determination of pre-qualification. Where the Government refuses to enter into a works contract with a particular contractor on the ground of his relative unsuitability, the rejection does not involve forfeiture of any pre-existing right or interest. However, when an expert body is enjoined to evaluate the relative suitability of the intending contractors, their decisions must not be arbitrary or capricious;32but where the selection is made qualitatively by experts and according to conditions in the invitation, the act ion of the committee cannot be interfered with.33 The conditions requiring greater degree of experience in similar nature of work would not be unjustified in works involving heavy costs and requiring special skills, and no personal hearing will be necessary where short-listing of tenderers is done on the basis of materials and information supplied with the tenders.34 Any reclassification on the basis of new criteria, in the lists of contracts maintained by the Government or departments cannot be given retrospective effect, and cannot deprive a tenderer from consideration of his tender when he qualifies according to the classification laid down in the tender notice.35 Where the joint venture agreement furnished by the tenderer stated that the responsibilities under the contract were undertaken jointly and severally, and one of the partners of the venture satisfied the qualification required, it was held that the rejection of the application on the basis of the particulars furnished in the statements without looking at the joint venture agreement was without application of mind, and was liable to be set aside.36 Blacklisting Blacklisting of a tenderer prevents him from the privilege and advantage of entering into contracts with the Government. His reputation is tarnished by such order. It prevents him from carrying on lawful trade. An order of blacklisting has civil consequences, especially affecting future business prospects.
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In Erusian Equipment and Chemicals Ltd. v. State of West Bengal, 37 it was stated:
Blacklisting has the effect of preventing a person from the privilege and advantage of entering into lawful relationship with the Government for purpose of gains. The fact that a disability is created by the order of blacklisting indicates that the relevant authority is to have an objective satisfaction. Fundamentals of fair play require that the person concerned should be given an opportunity to represent his case before he is put on the blacklist.
Hence, a person put on the blacklist is entitled to be heard before he is blacklisted,38 even if rules allow such action without giving prior notice.39 Such an order must give reasons.40 Blacklisting of tenderers cannot be done when investigations are pending;41 or merely because an FIR had been lodged against the tenderer.42 Where under the conditions of tender, the only liability for withdrawing the bid was that of forfeiture of earnest money, an order of blacklisting passed against a contractor for not extending his tender and withdrawing his bid was arbitrary, when such condition was not a condition of the tender.43 The act ion of a Municipal Corporation of debarring the petitioner from tendering for three years and communicating the same to other Departments dealing with the execution of construction works was disproportionate and arbitrary, once it had cancelled the contract and forfeited the earnest money. Such action was equivalent to blacklisting;44 so also deletion of the name from the panel of qualified painting contractors.45 But the decision of rejecting the tender on comparative considerations and on non-performance in previous works did not amount to blacklisting.46 A contractor is entitled to an opportunity of being heard and to represent his case before he is included in the blacklist,47 even if the rules do not require notice to be given.48 An order of blacklisting after the contractor failed to supply the goods, and after he was given opportunity of being heard, was not arbitrary.49 Once a contractor is blacklisted, even though by another Department of the Government, it is not necessary for the authority to give him any hearing before rejecting his tender in later works.50 In Patel Engineering Ltd v Union of India, 51 it has been observed: &uot;The authority of State to blacklist a person is a necessary concomitant to the executive power of the State to carry on the trade or the business and making of contracts for any purpose, etc. There need not be any statutory grant of such power.&uot; The source of such authority is Article 298 of the Constitution of India , which includes the right not to enter into a contract. Invitation to Tender Tenderers cannot challenge terms and conditions of the tender.52The terms of invitation to tender are not normally open to judicial review, because the authority issuing the notice knows how to get the best person and has a right to choose the lowest or any other tender. In reviewing such administrative act ion, the court will not substitute its own views as an appellate authority, but can interfere if Art. 14 of the Constitution is violated. For example, the action of hiking the cost of the tender documents to Rs. 8,000/-, and the amount of earnest money to R s. 20 lacs to be retained in deposit for 270 days was held to be arbitrary and unreasonable.53 Thus, it is not for the court to order furnishing earnest money by bank guarantee where the tender notice had a condition that earnest money shall be paid by demand draft or pay order.54 Whatever procedure the Government proposes to follow in accepting the tender must be clearly stated in the tender notice.55 Tender conditions can be relaxed where the authority has power to do so.56 If a tender notice contains mistakes, it is the duty of the authority issuing the tender either to issue a corrigenda or a fresh tender notice.57 If the original terms of the tender notice are changed, all the tenderers should be given an opportunity to resubmit their tenders in conformity with the changed terms; eligibility and new conditions58 cannot be imposed which were not disclosed in the tender
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notice.59 Publicity It is necessary to publish the notice inviting tenders in the local newspapers even though the rules allow the Government to invite tenders by alternative modes like pasting in public places in the municipal area.60 Tender notices can be published on websites, especially for avoiding costs of publication in newspapers.61 Publication in only one newspaper, and not many, was held inadequate in circumstances of the case,62 as also notice displayed on a notice board.63 Availability of Tender Form Where a contractor is qualified, the tender form cannot be withheld from him.64 In a case, the tender conditions required that the tenderer should have completed two works of the type specified; denial of the tender forms to a tenderer who had completed a major part of such works was correct.65 Failure to furnish documents relating to work experience and annual turnover, required to be given as a pre-condition for supply of tender books, makes the tenderer liable to be excluded from consideration.66 But a tenderer whose tender was rejected for non-payment of fees could not be denied the tender forms when the tenders were renotified.67 Eligibility If the tender of a person not satisfying the conditions of qualifications is accepted, the act ion is arbitrary and is liable to be struck down.68 Award of a contract to a tenderer on the ground that he possessed special machinery, the requirement of which was not mentioned in the tender notice, was arbitrary.69 Relaxing the condition of eligibility of the tenderer by taking into account the experience of its partners collectively, when the tenderer firm did not satisfy the condition, was held to be arbitrary, when the petitioner could also have satisfied the condition in this manner.70 However, it has also been held that a tender could not be rejected when the constituents of a joint venture company possessed the experience required for eligibility.71 Besides, hiring the services of an engineer with the requisite qualifications by the contractor was held to be sufficient compliance of eligibility by the technical authorities.72 Compliance with Tender Conditions When the procedure for giving approval was not prescribed, the condition in the tender document that only a tenderer having that approval on the opening date of bids could apply was arbitrary. Where the tender invited by the Department of Telegraphs (DoT) required approval of DoT for the item under tender, but the authority for approval was not indicated, the petitioner could not be disqualified from participating in the tender on the ground that it did not possess such type of approval, when it had obtained approval from another authority--the Structural Training Research Centre.73 State undertakings could be exempt from depositing earnest money.74 Mandatory and Directory Conditions An authority inviting tenders cannot be expected to give effect to every term mentioned in the notice in meticulous detail, and is entitled to waive even a technical irregularity of little or no significance. The requirements in a tender notice may be classified into two categories; first, the essential conditions of eligibility which the authority must enforce rigidly; secondly, ancillary or subsidiary conditions, in which case the authority may deviate or may not insist strict compliance.75 The following have been held to be essential or mandatory conditions, non-compliance of which justified rejection of tenders, supplying security deposit in a specified form ;76 a condition entitling rejection of the tender in the event of discrepancy between the rates quoted in words and in figures;77 supplying the balance sheet and proof of experience as required by the invitation to tender;78 making full signature in the tender,79 producing a valid and active ISO 9001:2000 certificate,80 using stated types of machines in manufacture,81 requirement of joint and several liability of all members of a joint
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venture that submitted the tender.82 A condition requiring deposit of earnest money and documents along with the tender is not a condition precedent, and can be relaxed; the contractor can be asked to pay the amount and furnish the documents later.83 In Raunaq International Ltd. v. IVR Construction Ltd., 84 the Supreme Court held that where relaxation is granted in the requirements included in the tender conditions, for bona fide reasons, if permitted by the tender conditions, and the decision is arrived at for legitimate reasons after fair consideration of all offers, the court should hesitate to intervene. The following have been held non-essential conditions or collateral matters, the noncompliance of which would not justify rejection of tender; deposit of earnest money in the form of term deposit receipt instead of the prescribed mode of demand draft;85 the requirement of submitting character certificate, experience certificate,86 no-dues certificate and non-submission of revenue stamp (these were satisfied if substantially fulfilled);87 payment of earnest money by certified cheque instead of demand draft on the prescribed bank,88 submitting a bank guarantee of place other than that mentioned in the tender notice.89 Opening Tenders In Blackpool and Fylde Aero Club Ltd. v. Blackpool Borough Council, 90 a local authority was held contractually bound to consider tenders submitted before the deadline, where invitations were sent to selected parties, known to the authority and the invitation stated that the tenders submitted after the deadline would not be considered. Where the tenders were not opened until the expiry of the period for which they were to be kept open, and the plaintiff apprehended that this was deliberately done so as to enable calling fresh tenders, the plaintiff was held to have a cause of act ion for filing a suit.91 The fact that the train ran unusually late and delayed the arrival of a tenderer was not a justifiable ground for accepting the tender after the time fixed by the tender notice.92 Allowing a tenderer after the opening of tenders to correct mistakes in the bid which were neither arithmetical nor clerical, and which were attributed to faulty computer functioning, was invalid.93 However, the deadline for submitting bids can be extended if provided in the notice inviting tenders.94 Discretion of Acceptance and Rejection of Tenders The Government is 'perfectly entitled to enter into a contract with a private party, and for this purpose, it can choose a person to their liking'.95 If the Government reserves the right to accept or reject the lowest offer, the condition is valid, but if done on a policy, should be on grounds which are rational and reasonable.96 The Government may enter into a contract with any person, but in doing so, the state or its instrumentalities may not act arbitrarily. The tenders should be adjudged on their intrinsic merits and according to the terms and conditions of the tender notice. Article 14 is not violated merely because one person is chosen in preference to the other. The Government is entitled to make a choice. But the choice cannot be arbitrary or fanciful.1 The Government had a right to enter into a contract with a person well-known to it, especially one who has faithfully performed his contracts in the past, in preference to an undesirable, unsuitable or untried person.2 The Andhra Pradesh High Court has upheld a decision not to accept the highest tender of an existing contractor who was in arrears and had dragged the authority into litigation.3 Ordinarily, the courts should not interfere in the matter of accepting or rejecting the tender, as the Government inviting the tenders was the appropriate authority to take decision in the matter.4 The Government may accept a lower tender in preference to the highest one, if it thinks that the person offering the lower tender is on an overall consideration to be preferred to the higher tenderer.5But where the tender notice stipulates that the highest rate would be accepted, the highest bidder has a legitimate expectation, and the act ion allotting a quantity to another will be arbitrary.6 The Government was entitled to split the work between the tenderers, especially when the tender conditions expressly sought quotations for all the items of works and separately for each item of the
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works, and the Government had the right to delete any item of work.7 Upon the direction under the Toddy and Arrack Shop Rules by the Collector for re-auction, and there being no higher bid at the re-auction, the acceptance of the highest bid in the original auction, was valid.8 Practical considerations and extreme urgency can justify reconducting the tenders, where no tender qualified, and the only other option was to scrap the process.9 A clause in the tender that tenders may be rejected without assigning reasons is neither illegal, nor opposed to public policy.10 Rejection The acceptance of the second lowest tender on comparative considerations and suitability of the performance does not violate the principles of natural justice, and hence, no notice or opportunity of hearing need be given before rejecting the lowest tender.11 Calling fresh auction when an important condition was not inserted in the earlier auction notice, was not illegal or arbitrary, and did not amount to rejection of the highest bid.12 Rejection of tender is valid when tenders are received beyond the time fixed for the purpose.13 A tenderer is not entitled to opportunity of hearing where the tender is rejected as defective, even where it is based on a complaint received.14 The government can cancel or anull the tender process, and in public interest call for fresh tenders.15 A tender was rightly rejected when it declared liability of one of the two parties of a joint venture, when the notice inviting tenders required liability to be joint and several.16 A tender could not be rejected on the ground that the tenderer had deposited the money by a term deposit receipt instead of a demand draft as prescribed,17 or on the ground that the firm did not have requisite qualifications ignoring the partner's qualifications which complied with the conditions.18 When a bid is not accepted for a collateral purpose of diverting the contract to a particular person, and not for the purpose of obtaining the best possible price, the auction was struck down as mala fide, and no contract was concluded.19 Negotiation before Acceptance If the party calling the tenders desires to negotiate before acceptance, all tenderers must be treated equally in matters of negotiation.20 The procedure, where a meeting of the participating tenderers was held, and on the basis of the information received, the criteria for selection were laid down, a list of five tenderers prepared from whom selection was done, was not unfair.21 Where the highest bid was inadequate, and the Government ignored it and negotiated with all the tenderers giving them the opportunity to revise their tenders in order to fetch a higher price, the procedure was fair;22 so also where negotiations were conducted with the second highest bidder after the highest bidder could not pay the required earnest money, and the price raised during negotiations;23 or when the petitioner had earlier informed that he would not be prepared to work below a specified rate.24 In Cambatta Aviation Ltd. v. Cochin International Airport Ltd., 25 a public sector undertaking established for setting up new private international airport, invited tenders from experienced companies for ground handling facilities at the new airport. Its high level committee accepted the limited global competitive bidding norms and tentatively recommended awarding the contract to Cambatta, who made the highest offer. However, its board of directors invited only Air India (the other tenderer) for negotiations and sought a final offer, on the grounds that being an airline and a national carrier, it would be in a position to handle more traffic of Air India and other domestic airlines. This decision was not arbitrary. No tenderer or bidder is entitled as a matter of right to insist that the authority inviting tenders shall make further negotiations, unless the terms and conditions of notice provides for such negotiations.26 Withdrawal of Tender The tenderer is entitled to withdraw the proposal and get the refund of earnest money, when, because of pending litigation, the Government was not in a position to accept or reject the tender.27 Decision of Acceptance or Rejection
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No person has the right to enter into a contract, and the Government may decide not to deal with anyone.28 The terms and conditions of the notice inviting tenders may include a provision entitling the authority calling tenders to accept any tender or to reject all tenders, including the right to accept a tender higher than the lowest. The Government has, for good and sufficient reasons, the right not to accept the lowest tender,29 or not to accept any tender at all. But this does not give the Government the power of conducting secret negotiations with one of the tenderers only.30 It is not obligatory on the Government to accept the lowest quotation,31 nor does the highest bidder have any right to compel acceptance when the invitation reserves the right to reject any tender.32 It was held that the Government cannot depart from accepting the lowest bid in a supply contract (or the highest bid in a purchase contract) where no question of policy was involved, namely, in a contract for supply of fresh milk.33 Where very limited number of tenders were received and the board desired to have a better price, it was justified in rejecting all the tenders. This is not a violation of the principles of legitimate expectation.34 Decisions of Expert Committees The decisions of the expert or technical or commercial committees in scrutinizing the tenders will not be interfered with, unless the decision is taken with a mala fide intention or is arbitrary.35 The court should not substitute its own decision for the decision of the expert evaluation committee.36 The Government is not bound to accept the recommendations of the committees set up for the purpose of evaluating the tenders; and may decide to call fresh tenders;37 but where the recommendations of technical experts and the finance department requiring further negotiations on technical aspects were ignored by the authority, and the decision was taken merely on the recommendation of the tender and purchase committee without discussion or examining those recommendations, the decision of the authority was arbitrary and unreasonable.38 Judicial Review in Concluded Contracts The State Acts purely in its executive capacity at the stage of entry into the field when it chooses persons with whom it could contract, and is bound by the obligations which dealing of the state with the individual citizens import into every transaction entered into in exercise of its constitutional powers. However, after the state or its agents have entered into the field of ordinary contract, the relations are no longer governed by the constitutional provisions but by the contracts, which would determine the rights and obligations of the parties inter se. In this sphere, they can only claim rights conferred upon them by contract and are bound by the terms of the contract only, unless some statute steps in and confers special statutory power or obligation on the state apart from the contract. Ordinarily a court will not in its writ jurisdiction enforce the terms of a contract.39 In commercial contracts, the breach of contract can be properly adjudicated in a civil suit and not in a writ petition;40 a civil suit is the proper remedy when disputed questions of interpretation of contract or of facts are involved, as also where the contract provides for alternate remedy.41 The doctrine of legitimate expectations also does not apply after the contract is concluded.42 The court's jurisdiction of judicial review in matters of formation of contract are much wider than in cases of enforcement of conditions of contract.43 Unilateral Termination under Powers Conferred by Contract The question of contractual obligations cannot, as a rule, be gone into in the writ jurisdiction of the High Court or the Supreme Court, e.g., termination of a contract under the terms of the contract. Thus, where the state Government leased forest land to the lessee for collecting sat seeds for 15 years on payment of royalty at a certain rate, and it then revised the rate of royalty under the express provisions in the lease, the cancellation of the lease did not violate Art. 14 of the Constitution, because the contract (of lease) governed the relations between the parties.44 Nor is the term conferring power on
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the state to terminate unilaterally the contract against public policy.45 The courts have, for example, refused to interfere in termination under the provisions of the contract of a storage agency;46 and an agreement with retailers for the distribution of levy sugar;47 recall of loan amount by a bank from the borrower,48 or termination for reason of increase in international prices.49 But even where the contract has been cancelled on a ground de hors any of the terms of the contract, and which is per se violative of Art. 14 of the Constitution, the termination can be challenged in the writ jurisdiction.50 It has been held that the authority must give opportunity to the contractor before termination to explain why the contract should not be terminated;51 a show cause notice is sufficient, personal hearing is not necessary.52 But the court may interfere where the contract is terminated in an arbitrary manner, contrary to the binding executive instructions issued by the Government;53 or to order refund of amount in the event of termination,54 or to quash an order of resuming a plot on the ground the allottee did not construct on the plot within the stipulated period.55 The last decision was based on the ground that the terms of allotment provided for penalty and interest in the event of delay in payment, and when two remedies were available, powers under the contract ought to be exercised reasonably, and a harsher remedy should be avoided. But in the case of a contract for collection of royalty under Rule 34 of the Rajasthan Mineral Rules, it was held that it could not be terminated on the ground of 'public interest' under condition 16 of the contract without showing a nexus between 'public interest' and such termination, and this issue was justiciable. The mere fact that the state was losing lakhs in revenue did not justify termination on that ground;56 nor was a termination valid on the ground of public interest where it was sought to be justified on the basis that the contractor would earn large profits. Enforcement of Other Terms A petitioner who had accepted the counter proposal of the employer to do only part of the tendered work for which he had originally submitted the tender, could not challenge the decision of the employer to award the remaining part to another as arbitrary.57 The court would not interfere in the question of the discharge of loans to banks on the ground that such a course would result in the deprivation of their right to carry on the business and the matter fell within the domain of the law of contract.58 No writ lay for preventing the enforcement of bank guarantee given to the Government;59 or for deciding whether the deductions made towards sales tax and retention of that amount by the Government were valid under the terms of the contract;60 or in respect of a claim for amount due offered in full and final settlement of the contract and disputed by the contractor;61 or where the financial agency did not disburse an instalment of loan on account of breach by the petitioner.62 But a writ was issued directing the authority to pay the rent which was in arrears, and payment of which was not done for administrative reasons;63 for directing the Government to execute and register the lease deed where it was not done, despite the allottee having paid the entire price;64 for directing a nationalised insurer to renew health insurance (mediclaim) policy;65 for setting aside an order arbitrarily reducing prices, even though price was subject to rates fixed by a committee;66 for ordering payment of amount due;67 By virtue of the Government Grants Act, 1895 the rights, privileges and obligations of any grantee of the Government are completely regulated by the terms of the grant, even if such terms are inconsistent with the provisions of any other law.68 Revision of Price, Rates, Payment Terms etc In Bareilly Development Authority v. Ajay Pal Singh, 69 a brochure inviting applications for purchase of flats constructed by the Bareilly Development Authority, contained a clause that the price indicated therein was only an estimated cost and it would increase or decrease, according to the rise or fall in the cost at the time of the completion of flats as may be revised by it. The authority then revised the cost and demanded enhanced price from the allottees. It was held that the authority, even if was a 'state' under Art. 12 of the Constitution, was no longer governed by the constitutional provisions after
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entering the field, and the relations of the parties inter se were governed by the terms of the contract. The allottees, having voluntarily accepted the conditions imposed by the development authority, could only claim the rights conferred upon them by the contract, and were bound by the terms of the contract. The Government has the right to reduce the rates of commission receivable by the telephone operators, because it had the right under the licence granted to them under the Indian Telegraph Act, 1885 to modify the terms of the agreement;70 or to revise the rates of deposit and call charges.71 Where a term in the contract allowed enhancement of rent by the Government, the lessees were bound to pay the rent so increased.72 Contract Binding on the Government Tenders were invited by a Government company, the Hindustan Steel Works Construction Ltd., from Indian suppliers of goods of foreign manufacturers, and the petitioner's tender was the lowest and was accepted. The purchaser company could not thereafter cancel the contract on the ground that it could have procured the goods directly from a foreign supplier at a much cheaper rate.73 Exceptions Statutory Contracts.--There is a distinction between contracts which are executed in exercise of the executive powers of the Union or the state under Art. 299(1) and contracts which are statutory in nature. While in the former case, compliance of requirement of Art. 299(1) is mandatory and there is no question of estoppel or ratification, in the latter case, compliance of statutory requirements is needed.74In a contract by a state with a person in exercise of the statutory power under the Contract Act or the Rules framed under an Act, where the aggrieved party alleged breach on the part of the state, it was held that the latter was bound by its constitutional obligation to act in a reasonable, just and fair manner and the contract could not be arbitrarily or unreasonably terminated;75 this was justiciable in a writ petition.76 Relief in Exceptional Circumstances.--Specific performance has been granted in a writ petition enabling a petitioner to lift the items purchased by him in an advertised sale.77 An order for payment of final bills was made in a writ petition where the works were delayed by the changes made by the Government, the work was admittedly delayed for no fault of the contractor and escalation rates were also sanctioned by the Government, but final bills were not paid.78 Holding that relief can be 'rarely and sparingly' granted in a writ petition for breach of a concluded contract when the circumstances were exceptional, where facts were not disputed,79 and there was considerable delay in delivery of goods by the authority, the Madras High Court ordered the authority to issue effect delivery on the delivery order already issued to the petitioner.80 Statutory Contracts A contract may be governed by statutory provisions, namely, by the provisions of an Act or Rule, which provide for the terms and conditions subject to which the parties shall have a contract. A number of cases have arisen in the context of exercise of the writ jurisdiction in matters, especially relating to contracts for supply of electricity and of liquor licences. The terms and conditions of such contracts are governed respectively by the Electricity Act, the Electricity (Supply) Act or the Excise or Abkari statutes, and the Rules framed under these. In such 'contracts', the relationship is governed by the statute. The rights and obligations have to be ascertained as a matter of statutory construction and interpretation of the scheme of the Act and Rules alone.81 It has been held, for example, that the provisions relating to arbitration in the Electricity Act, 1910 (now the Electricity Act, 2003) will prevail over the provisions of the Arbitration Act, and will override any provision in the contract relating to arbitration; thus matters not covered by the Electricity Act, 1910 could not be referred to arbitration.82 Merely because the written agreement is executed, it does not make the terms contractual.83A contract does not become statutory simply because it has been awarded by a statutory body for the
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construction of a public utility. Contractual or commercial activities of a statutory body need not necessarily raise issues of public law. Disputes arising from such act ivities must be settled according to the principles of the law of contract.84 Nor does a contract become statutory because it is made in the exercise of an enabling power conferred by a statute. It would be a statutory contract if the statute compels incorporation of the terms and conditions in it, and it is statutory to the extent of such terms incorporated. Such contract may contain some terms settled by mutual agreement.85 The service conditions of teachers were laid down under an Ordinance made under the University of Saugar Act, 1946. The ordinance also required the teachers to have written contracts in prescribed form. It was held that the remedies for the teachers lay not merely under the contract, but also under the statute, and the teacher could claim remedies under the ordinance, though not provided by the contract.86 But the statute requiring the terms and conditions to be incorporated into the contract itself did not have statutory force, the terms would not apply unless incorporated into the contract.87 Where a voluntary retirement scheme is statutory, and does not permit withdrawal of application after a specified date, the scheme prevails over rights under this Act . The rule giving the power to the applicant to withdraw his application does not apply, and the employee cannot withdraw his application.88 The conditions of supply of energy notified by the electricity board in the exercise of its powers under the Electricity Act and Rules become part of statutory terms and conditions, and govern the relationship between the parties. When notified, they apply to all consumers availing supply.89 Neither party can depart from those conditions of agreement stated in the statutes.90 It is not open to any officer, even a minister, to modify, alter or amend the conditions.91 Where the contract is not a statutory contract, it is governed by the provisions of the Contract Act or the Sale of Goods Act, 1930 if applicable. Any dispute relating to interpretation of the terms and conditions of such a contract cannot be agitated in a writ petition.92 A writ petition under Art. 226 of the Constitution of India is not maintainable where the matter is in the realm of private contract, whether it relates to interpretation,93 enforcement,94 or recovery of amounts due under the contract,95 or to compel the authorities to remedy a breach of contract pure and simple.96 Although, the writ jurisdiction cannot be invoked to avoid obligations voluntarily incurred, a party to such a contract is not precluded from enforcing statutory provisions governing the contract. Violation of every such provision does not furnish a ground to interfere. If the provision is directory, substantial compliance of the provision is enough. Unless it is established that violation of a directory provision has resulted in loss or prejudice to the party, no interference is warranted. But if it is a mandatory provision, the court should enquire in whose interest it is conceived. It can be waived, if it is not conceived in the public interest.97 In Norweb plc v. Dixon, 98 a question arose whether the relationship between a public electricity supplier and a tariff customer, for the supply of electricity pursuant to the (English) Electricity Act, was not a contractual relationship, since the legal compulsion exercised by a statute over the parties, both as to the creation of the relationship and the fixing of its terms, was inconsistent with the existence of a contract. The supplier was obliged to supply electricity to a customer when requested to do so and had no discretion not to supply. The terms of supply, including tariff, were fixed by the Act and imposed on the customer by the supplier not as a result of any bargaining but by the supplier exercising the power conferred on it by the Act . The Act drew clear distinction between the above and supplies under special agreements, the latter being governed by those agreements. The relationship was governed by statute and not by contract. 49 Article 14 of the Constitution of India provides: 'The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India'. 50 Erusian Equipment & Chemicals Ltd. v. State of West Bengal, AIR 1975 SC 266, (1975) 1 SCC 70. 51 Ramana Dayaram Shetty v. International Airport Authority of India, AIR 1979 SC 1628, [1979] 2 SCR 1014.
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52 GB Mahajan v. Jalagaon Municipal Council, AIR 1991 SC 1153; R v. Lord Chancellor, ex p. Hibbit & Saunders, [1993] COD 326; noted in Arrowsmith, (1994), Cambridge Law Journal, at 104. 53 Kumari Shrilekha Vidyarthi v. State of Uttar Pradesh, AIR 1991 SC 537, (1991) 1 SCC 212. 54 Dwarkadas Marfatia & Sons v. Board of Trustees of the Port of Bombay, AIR 1989 SC 1642, (1989) 3 SCC 293. 55 Mahabir Auto Stores v. Indian Oil Corpn, AIR 1990 SC 1031, (1990) 3 SCC 752. 56 SP Sathe, Administrative Law, 7th edn, 2004, p. 184. 57 Southern Petrochemical Industries Co. Ltd. v. Electricity Inspector and E T I O, AIR 2007 SC 1984, (2007) 5 SCC 447 58 Union of India v. Hindustan Development Corpn, AIR 1994 SC 988. 59 Food Corpn of India v. Kamdhenu Cattle Feed Industries, AIR 1993 SC 1601, (1993) 1 SCC 71; State of West Bengal v. Niranjan Singha, 2000, AIR SCW 4547, (2001) 2 SCC 326; Raj Chowdhury v. Union of India, AIR 2000 Cal 232 (doctrine cannot be invoked to modify or vary express terms of written contract). 60 Union of India v. Hindustan Development Corpn, AIR 1994 SC 988 at 1020; NavJyoti Coo-Group Housing Society v. Union of India, AIR 1993 SC 155; (1992) 4 SCC 477. 61 Food Corpn of India v. Kamdhenu Cattle Feed Industries, AIR 1993 SC 1601, (1993) 1 SCC 71. 62 Blackpool and Fylde Aero Club Ltd. v. Blackpool Borough Council, [1990] 3 All ER 25(CA) ; Hughes Aircraft Systems International v. Airservices Australia, (1997) 146 ALR 1 (Federal Court of Australia); Pratt Contractors Ltd. v. Palmerston North City Council, [1995] 1 NZLR 469 (High Court of New Zealand); MJB Enterprises of Canada v. Defence Construction, [1999] 1 SCR 619, (1999) 170 DLR (412) 577 (Supreme Court of Canada). 63 R v. Lord Chancellor, ex p Hibbit & Saunders, [1993] COD 326; Blackpool and Fylde Aero Club Ltd. v. Blackpool Borough Council, [1990] 3 All ER 25, [1990] 1 WLR 1195(CA) ; Fairclough Building Ltd. v. Port Talbot BC, [1992] CILL 779, (1992) 62 BLR 82. 64 [1990] 3 All ER 25, [1990] 1 WLR 1195; Adams and Bronsword,(1991) 54 MLR 281; Davenport,[1991] 107 LQR 201 (the invitor may still avoid liability by making an express provision). 65 (1997) 146 ALR 1 (Federal Court of Australia). 66 [1999] 1 SCR 619, (1999) 170 DLR (412) 577 (Supreme Court of Canada). 67 Rajasthan Co-op Dairy Federation Ltd. v. Maha Laxmi Mingrate Mktg Service Pvt. Ltd., (1996) 10 SCC 405. 68 Sterling Computers Ltd. v. M&N Publications Ltd., AIR 1996 SC 51 at 56, (1993) 1 SCC 44; Centre for Public Interest Litigation v. Union of India, AIR 2001 SC 80; (2000) 8 SCC 606 (manner of development of oil fields on joint venture basis and price fixation: no interference). 69 Associated Provincial Picture Houses Ltd. v. Wednesbury Corpn, [1948] 1 KB 223, [1947] 2 All ER 680. 70 AIR 1996 SC 11, (1994) 6 SCC 651 at 680. 71 Food Corpn of India v. Kamdhenu Cattle Feed Industries, AIR 1993 SC 1601, (1993) 1 SCC 71. 72 Sterling Computers Ltd. v. M &N Publications Ltd., AIR 1996 SC 51, (1993) 1 SCC 445. 73 Cambatta Aviation Ltd. v. Cochin International Airport Ltd., (2000) 2 SCC 617. 74 B S N Joshi and Sons Ltd. v. Nair Coal Services Ltd., AIR 2007 SC 437, (2006) 11 SCC 548; Siemons Public Communication Pvt Ltd. v. Union of India, AIR 2009 SC 1204 75 Tata Cellular v. Union of India, AIR 1996 SC 11, (1994) 6 SCC 651 at 671. 76 Ram and Shyam Company v. State of Haryana, AIR 985 SC 1147. (1985) 3 SCC 267. 77 Haji TM Hassan Rawther v. Kerala Financial Corporation, AIR 1988 SC 157, (1988) 1 SCC 166 at 173. 78 The three categories (a), (b) and (c) stated in Radhakrishna Agarwal v. State of Bihar, AIR 1977 SC 1496. 79 The fourth type formulated in Pancham Singh v. State of Bihar, AIR 1991 Pat 168(FB) . 80 AIR 1996 SC 11, (1994) 6 SCC 651. 81 (1997) 1 SCC 738.
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82 Delhi Science Forum v. Union of India, AIR 1996 SC 1356, (1996) 2 SCC 405. 83 B S N Joshi and Sons Ltd. v. Nair Coal Services Ltd., AIR 2007 SC 437, (2006) 11 SCC 548; Siemons Public Communication Pvt Ltd. v. Union of India, AIR 2009 SC 1204; Jai Bharat Transport Company v. Central Coal Fields Limited, AIR 1989 Pat 170. 84 Chinnamman and Co., Kadamparai Dam v. Tamil Nadu Electricity Board, Madras, AIR 1986 Mad 302. 85 AIR 1986 Mad 302, BG Ahuja v. State of Maharashtra, AIR 1991 Bom 307 (quantum not decided). 86 Dewan and Co. v. Municipal Corpn of Delhi, AIR 1995 Del 1. 87 AIR 1999 SC 393, (1999) 1 SCC 492; Process Systems v. Agency of Non-Conventional Energy and Rural Technology, AIR 2000 Ker 209. 88 Central London Property Trust Ltd. v. High Trees House Ltd., [1947] KB 130, [1956] 1 All ER 256 at 258; China-Pacific S A v. Food Corpn of India (The Winson), [1980] 3 All ER 556 at 567, reversed on other grounds in [1982] AC 939, [1981] 3 All ER 688 (distinction between the two discussed). 89 Bhupal Anna Vibhute v. Collector of Kolhapur, AIR 1996 Bom 314. 90 Tamil Nadu State Construction Corporation Ltd. v. J Banu, AIR 1996 Mad 466. 91 Gammon India Limited v. Punjab State Electricity Board, AIR 1997 P&H 43 (contract must be protected in larger public interest). 92 Hindustan Door Oliver Ltd. v. Vadodara Municipal Corpn, AIR 1999 Guj 1; PLR Projects Pvt Ltd v. Govt of Andhra Pradesh, AIR 2012 AP 179. 93 Asia Foundation and Construction Ltd. v. Trafalgar House Construction (I) Ltd., (1997) 1 SCC 738. 94 AIR 1999 SC 393, (1999) 1 SCC 492. 95 Ibid. 96 AIR 1999 SC 393, See also Assistant Collector of Central Excise Chandannagar v. Dunlop India Ltd., AIR 1985 SC 330 at 334, [1985] 2 SCR 190; Ramniklal N Bhutta v. State of Maharashtra, AIR 1997 SC 1236, (1997) 1 SCC 134. 97 Mohammed Gazi v. State of Madhya Pradesh, AIR 2000 SC 1806, (2000) 4 SCC 342. 98 B S Njoshi and Sons Ltd. v. Nair Coal Services Ltd., AIR 2007 SC 437, (2006) 11 SCC 548. 1 (2007) 14 SCC 517 2 Esteco Coal Services Limited. v. Karnataka Power Corporation Limited, AIR 1997 Kant 220. 3 Haji TM Hassan Rawthar v. Kerala Financial Corpn, AIR 1988 SC 157; Orissa Law Reviews v. Registrar Civil Courts, AIR 1997 Ori 127 (purchase of law-books for district courts); Praveen Kumar Singh v. Nagar Palika Parishad Deoria, AIR 1998 All 13. 4 Centre for Public Interest Litigation v. Union of India, AIR 2012 SC 3725. 5 Bhupal Anna Vibhute v. Collector of Kolhapur, AIR 1996 Bom 314. 6 Haji TM Hassan Rawthar v. Kerala Financial Corpn, AIR 1988 SC 157. 7 Centre for Public Interest Litigation v. Union of India, AIR 2012 SC 3725. 8 See Autotronic Elevator Services v. Electrical Engineer, AIR 1986 AP 358; Nitin Industrial Associates v. Slate of Maharashtra, AIR 1986 Bom 298. 9 Sachidanand Pandey v. State of West Bengal, AIR 1987 SC 1109. 10 Plantation Corpn of Kerala Ltd. v. PL Agro Technologies Ltd., AIR 1996 Ker 127 (public interest is the guiding principle). 11 GD Zalani v. Union of India, AIR 1995 SC 1178, (1995) Supp 2 SCC 512 (necessity to obtain the best possible technology). 12 Nagar Nigam v. Al Faheem Meat Exports (P) Ltd., (2006) 13 SCC 382 13 Ashok C Vora v. State of Gujarat, AIR 1999 Guj 43; Micro Mechanics Pvt Ltd. v. Saurashtra Kutch Stock Exchange Ltd., AIR 1999 Guj 105.
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14 AIR 1995 Bom 235. 15 Vijai Kumar Ajay Kumar v. Steel Authority of India Limited, AIR 1994 All 182. 16 Modern Malleables Ltd. v. Grid Corpn of Orissa Ltd., AIR 1998 Ori 183. 17 Surinder Singh v. State of Haryana, AIR 1986 P&H 222 (preference in unskilled works to cooperative labour and construction societies). 18 Babu Ram Gupta v. Mahanagar Telephone Nigam Ltd., AIR 1995 Del 223; Mitsui Babacock Energy (India) Pvt Ltd. v. Union of India, AIR 2000 Ori 1700. 19 Danya Electric Company v. State of Tamil Nadu, AIR 1994 Mad 180. 20 MP Oil Extraction v. State of Madhya Pradesh, (1997) 7 SCC 592. 21 Mahesh Kapoor v. Haryana State Industrial Development Corporation Ltd., AIR 2007 P&H 191 22 Integrated Databases India Ltd. v. Union of India, AIR 1996 Del 343 (condition quashed). 23 Dhingra Construction Co. v. Municipal Corporation of Delhi, AIR 2005 Del 247 24 State of Gujarat v. Baroda Surgical (I) Pvt Ltd, AIR 2011 Guj 48. 25 Indian Hume Pipe Co. Ltd. v. Bangalore Water Supply and Sewerage Board, AIR 1990 Kant 305; DDA Builders Assoc. v. DDA, AIR 1996 Del 364; Punjab Drug Manufacturer's Association v. State of Punjab, AIR 1998 P&H 76. 26 SAB Industrie Ltd. v. Chief Executive Officer, AIR 1997 Del 326. 27 Mega Enterprises v. State of Maharashtra, AIR 2007 Bom 156 (experience of minimum one year of collection of octroi of 50% of amount of the estimated offer of realisation); Shagun Mahila Udyogik Sahakari Sanstha Maryadit v. State of Maharashtra, 2011 AIR SCW 4844. 28 Jai Balaji Industries Ltd v. Union of India, AIR 2011 Gau 109. 29 C K Asati v. Union of India, AIR 2005 MP 96 30 IVRCL and SEW-JV v. State of J and K, AIR 2006 J&K 39 31 Globe Construction Co. v. Govt. of NCT of Delhi, AIR 1999 Del 322. 32 Syed Moose Quadri v. Special Officer, Municipal Corpn of Hyderabad, AIR 1987 AP 6 at 11, 14; Sri Rama Engineering Contractors v. Construction Engineer, Civil Engineeing Dept of Space, Government of India, AIR 1981 AP 165. 33 C Sivanandan v. State of Kerala, AIR 1995 Ker 354. 34 Michigan Rubber (India) Ltd v. State of Karnataka, AIR 2012 SC 2915, 2012 (8) SCC 216; Deepak Builders v. State of Rajasthan, AIR 1996 Raj 178; Nagesh M Daivajna v. State of Goa, AIR 1998 Bom 166. 35 BG Ahuja v. State of Maharashtra, AIR 1991 Bom 307. 36 Asia Foundations & Constructions Ltd. v. State of Gujarat, AIR 1986 Guj 185 at 206-07. 37 Erusian Equipment and Chemicals Ltd. v. State of West Bengal, [1975] 2 SCR 674, AIR 1975 SC 266, (1975) 1 SCC 70; Dandapani Roula v. State of Orissa, AIR 1986 Ori 220; SP Timber Industries v. Union of India, AIR 1990 Del 312. 38 Nand Kishore Fogla v. State of Jharkhand, AIR 2008 Jhar 1 39 Raghunath Thakur v. State of Bihar, AIR 1989 SC 620. 40 Veekay Connectors (P) Ltdv National Small Industries Corporation Ltd.,AIR 2005 All 57 41 Erusian Equipment & Chemicals Ltd. v. State of West Bengal, AIR 1975 SC 266, (1975) 1 SCC 70. 42 Navayuga Engineering Co. Ltd. v. Vishakhapatnam Port Trust, AIR 1998 AP 222. 43 Bhim Sain v. Union of India, AIR 1981 Del 260. 44 VK Dewan and Co. v. Municipal Corpn of Delhi, AIR 1994 Del 304. 45 Southern Painters v. Fertilizers & Chemicals Travancore Ltd., AIR 1994 SC 1277, (1994) 2 SCC 699(Supp) .
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46 Amarchand Sharma v. Union of India, AIR 1988 AP 45. 47 Erusian Equipment and Chemicals Ltd. v. State of West Bengal, [1975] 2 SCR 674, AIR 1975 SC 266, (1975) 1 SCC 70; Southern Painters v. Fertilizers & Chemicals Travancore Ltd., AIR 1994 SC 1277, (1994) 2 SCC 699(Supp) . 48 Raghunath Thakur v. State of Bihar, AIR 1989 SC 620. 49 Nova Steel (India) Ltd. v. MCD, AIR 1995 SC 1057, (1995) 3 SCC 334. 50 Patna Regional Development Authority v. Rashtriya Pariyojana Nirman Nigam, AIR 1996 SC 2074, (1996) 4 SCC 529. 51 AIR 2012 SC 2342, (2012) 11 SCC 257. 52 Meerut Development Authority v. Association of Management Studies, AIR 2009 SC 2894, (2009) 6 SCC 171. 53 Fylflot (I) Ltd. v. Union of India, AIR 1996 Cal 291. 54 Global Energy Ltd. v. Adani Exports Ltd., AIR 2005 SC 2653, (2005) 4 SCC 435. 55 Dutta Associates Pvt. Ltd. v. Indo Merchantiles Pvt Ltd., (1997) 1 SCC 53. 56 Master Marine Services Pvt Ltd. v. Metcalfe and Hodgkinson Pvt Ltd., AIR 2005 SC 2299. 57 Goraknath Upadhyaya v. State of Uttar Pradesh, AIR 1994 All 283. 58 Monarch Infrastructure Pvt Ltd. v. Commr Ulhasnagar Municipal Corpn, AIR 2000 SC 2272; affirming Konark Infrastructure Pvt Ltd. v. Commr Ulhasnagar Municipal Corpn, AIR 2000 Bom 389 (photocopy of demand draft submitted with tender instead of original); but See Monarch Infrastructures Pvt Ltd. v. Commr Ulhasnagar Municipal Corpn, AIR 2000 SC 2272 (photocopy of demand draft submitted instead of original); Kirloskar Bros Ltd. v. State of Tripura, AIR 2000 Gau 143 (certificate issued by Sales Tax Authorites); Bibu Bhushan Choudhary v. Union of India, AIR 2000 Gau 192 (fixed deposit receipt for earnest money issued through bank's mistake in the name of another officer). K K Enterprise, Guwahati v. Union of India, AIR 2012 Gau 151 (revision in estimate of work). 59 Golam Mohammad v. Supdt NRS Medical College and Hospital, AIR 2000 Cal 5. 60 Sudhir Prasad Singh v. State of Bihar, AIR 1994 Pat 72. 61 Mahendra Kumar Mohanty v. Collector, AIR 2007 Ori 170. 62 Vyapari Sangh v. State of MP, AIR 2005 MP 99. 63 K K Chire and Sons v. State of Nagaland, AIR 2013 Gau 20. 64 Southern Painters v. Fertilizers & Chemicals Travancore Ltd., AIR 1994 SC 1277, (1994) 2 SCC 699(Supp) ; K Soosalrathnam v. Divisional Enigneer. National Highways, AIR 1995 Mad 90. 65 Shapers Construction (P) Ltd. v. Airport Authority of India, (1996) 10 SCC 760; distinguishing New Horizons Ltd. v. Union of India, (1995) 1 SCC 478. 66 GJ Fernandez v. State of Karnataka, AIR 1990 SC 958, (1990) 2 SCC 488; Eureka Engineers Co-op Society Ltd. v. Superintending Engineer Mahananda Barrage Circle, AIR 1998 Cal 12; NIranjan Nath v. State of West Bengal, AIR 1998 Cal 16. 67 BC Raju v. Commr Karnataka Housing Board, AIR 1996 Kant 84. 68 Ramana Dayaram Shetty v. International Airport Authority of India, AIR 1979 SC 1628, [1979] 2 SCR 1014. 69 Braj Kishore Singh & Co. v. State of Bihar, AIR 1996 Pat 32 (hot mix plan in a contract of road repair). 70 Margadarsi Borewells v. Singareni Collieries Co. Ltd., AIR 1997 AP 188 (experience of the individual partners is not the experience of the firm). 71 New Horizons Ltd. v. Union of India, (1995) 1 SCC 478. 72 Dewan and Co. v. Municipal Corpn of Delhi, AIR 1995 Del 1. 73 Victoria Engineering Works v. Union of India, AIR 1995 Del 253. 74 Global Energy Ltd. v. Adani Exports Ltd., AIR 2005 SC 2653, (2005) 4 SCC 435. 75 Poddar Steel Corpn v. Ganesh Engg Works, AIR 1991 SC 1579, (1991) 3 SCC 273; GJ Fernandez v. State of Karnataka, AIR 1990 SC 958, (1990) 2 SCC 488; Goraknath Upadhyaya v. State of Uttar Pradesh, AIR 1994 All 283.
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76 Sri NO Shetty v. Karnataka State Road Transport Corpn, AIR 1992 Kant 94 (in the form of banker's guarantee); Laba Baruah v. State of Assam, AIR 2007 Gau 164 (deposit of cooperative bank not accepted, when condition enabled earnest money in three specified modes); PLR Projects Pvt Ltd v. Govt of Andhra Pradesh, AIR 2012 AP 179. 77 N Suryanarayana Reddy v. State of Andhra Pradesh, AIR 1999 AP 30. 78 Bet-on Projects v. State of Punjab, AIR 1999 P&H 17; Monarch Infrastructure Pvt Ltd. v. Commr Ulhasnagar Municipal Corpn, AIR 2000 Bom 389:(photocopy of demand draft submitted with tender instead of original). 79 RN Ghosh v. State of Tripura, AIR 2000 Gau 114. 80 Goldyne Technoserve Ltd v. State of MP, AIR 2011 SC 2574, 2011 (5) SCC 103. 81 Shagun Mahila Udyogik Sahakari Sanstha Maryadit v. State of Maharashtra, 2011 AIR SCW 4844. 82 Agrico Steel Engineering Works, Bishrampur v. South Eastern Coalfield Ltd, AIR 2012 Chhat 74. 83 Mukul Kumar v. Divisional Railway Manager, AIR 1995 All 72 (acceptance of tender subject to deposit of documents). 84 AIR 1999 SC 393, (1999) 1 SCC 492. 85 Jyothi Krishna Engineers v. State Bank of Hyderabad, AIR 1993 AP 327; BD Yadav and MR Meshram v. Administrator of the City. Nagpur, AIR 1984 Bom 351; but See Monarch Infrastructures Pvt Ltd. v. Commr. Ulhasnagar Municipal Corpn, AIR 2000 SC 2272 (photocopy of demand draft submitted instead of original). 86 Kesulal Mehta v. Rajasthan Tribal Areas Development Co-operative Federation Ltd., AIR 2005 Raj 55. 87 Goraknath Upadhyaya v. State of Uttar Pradesh, AIR 1994 All 283; Kirloskar Brothers Ltd. v. State of Tripura, AIR 2000 Gau 143 (certificate issued by Sales Tax Authorities). 88 Poddar Steel Corpn v. Ganesh Engineering Works, AIR 1991 SC 1579, (1991) 3 SCC 273; Bibhu Bhushan Choudhary v. Union of India, AIR 2000 Gau 192 (fixed deposit receipt for earnest money issued through bank's mistake in the name of another officer). 89 GRD Constructions Pvt Ltd. v. State of Jharkhand, AIR 2006 Jhar 38. 90 [1990] 3 All ER 25, [1990] 1 WLR 1195(CA) ; Fairclough Building Ltd. v. Port Talbot BC [1992] CILL 779, (1992) 62 BLR 82. 91 Rameshwar Dass Bishan Dayal v. Steel Authority of India Ltd., AIR 1995 Del 263; State of Jammu & Kashmir v. Qazi Nazir Ahmed, AIR 2000 J&K 73. 92 B Rajkumar Patra v. Union of India, AIR 1981 Ori 143; Sailen Konwar Dutta v. Satya Capital Services Pvt Ltd., AIR 2000 Gau 152 (rejection of tender delayed by five minutes. not invalid). 93 West Bengal Electricity Board v. Peter Engineering Co. Ltd., AIR 2000 SC 682, (2000) 2 SCC 45. 94 Pioneer Construction v. State of West Bengal, AIR 2011 Cal 199. 95 CK Achutan v. State of Kerala, AIR 1959 SC 490. 96 Union of India v. Hindustan Development Corpn, AIR 1994 SC 988. 1 Ramana Dayaram Shetty v. International Airport Authority of India [1979] 2 SCR 1014, AIR 1979 SC 1628. 2 Purxotoma Ramanata Quenim v. Makan Kalyan Tandel, AIR 1974 SC 651 per Khanna J at 655. 3 B Jaya Babu v. Regional Manager (GR) APSRTC, AIR 1996 AP 30. 4 D P Kumar v. State of West Bengal, AIR 1987 Cal 39 at 44. 5 Trilochan Mishra v. State of Orissa, AIR 1971 SC 733, (1971) 3 SCC 153. 6 Mogo Nagi v. State of Nagaland, AIR 1995 Gau 6. 7 VSN Benarji Engineers & Contractors v. State of Andhra Pradesh, AIR 1998 AP 29; Namita Paul v. Food Corpn of India, AIR 1998 Gau 38. 8 A Veeriah Thevar v. Commr for Excise and Prohibition, AIR 1995 Mad 288. 9 Reliance Airport Developers (P) Ltd. v. Airports Authority of India, (2006) 10 SCC 1.
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10 Adhir Ghosh v. State of West Bengal, AIR 1998 Cal 317. 11 Amarchand Sharma v. Union of India, AIR 1988 AP 45; Niyaz Ahmed Vanu v. Municipal Corporation of Gr Mumbai, AIR 2013 Bom 35. 12 Arun Kumar v. Chief Engineer, PWD, AIR 1989 MP 288; State of Orissa v. Harinarayan Jaiswal, AIR 1972 SC 1816. 13 Sailesh Kumar Rusia v. State of Uttar Pradesh, AIR 1995 All 237; Sailen Konwar Datta v. Satya Capital Services Pvt Ltd., AIR 2000 Gau 152 (delay of five minutes). 14 Jagdish Mandal v. State of Orissa, (2007) 14 SCC 517 (entry in pass book concerning earnest money found tampered). 15 Rosmerta Technologies Pvt Ltd v. State of Orissa, AIR 2013 Ori 35 (price quoted by bidder is much higher compared to bid finalised in other states). 16 Agrico Steel Engineering Works, Bishrampur v. South Eastern Coalfield Ltd, AIR 2012 Chhat 74 17 Jyotth Krishna Engineers v. State Bank of Hyderabad, AIR 1993 AP 327. 18 C K Asati v. Union of India, AIR 2005 MP 96. 19 Ashok Kumar v. State of Uttar Pradesh, FB, AIR 1989 All 109 (holding that though there was no concluded contract, writ petition was maintainable); Zilla Parishad Muzaffarnagar v. Udai Veer Singh, AIR 1989 All 64. 20 See GJ Fernandez v. State of Mysore, AIR 1967 SC 1753; New India Distillery v. State of J&K, AIR 1997 J&K 1; Jagdhatri Coke Manufacturers v. Hindustan Zinc Ltd., AIR 1997 Raj 182; Paruchuri Vasu v. General Manager, 7 Star Buildings Telecom, AIR 1998 AP 154; Umesh Kumar Poddar v. State of Orissa, AIR 2011 Ori 90. 21 Malca Constructions (India) Pvt Ltd. v. Madhya Pradesh Housing Board, AIR 1990 MP 49. 22 Food Corpn of India v. Kamdhenu Cattle Feed Industries, AIR 1993 SC 1601, (1993) 1 SCC 71. 23 Haji TM Hassan Rawther v. Kerala Financial Corporation, AIR 1988 SC 157, (1988) 1 SCC 166. 24 Dilip Kumar Patnaik v. State of Orissa, AIR 1998 Ori 213; see also G N Engineers v. Union of India, AIR 2011 J&K 91. 25 (2000) 2 SCC 617 reversing, AIR 1999 Ker 368. 26 Meerut Development Authority v. Association of Management Studies, AIR 2009 SC 2894, (2009) 6 SCC 171. 27 Shyam Biri Works Pvt Ltd. v. Uttar Pradesh Forest Corpn, AIR 1990 All 205. 28 Ramana Dayaram Shetty v. International Airport Authority of India, AIR 1979 SC 1628, [1979] 2 SCR 1014. 29 Rashtriya Pari Yojana Nirman Nigam Limited v. Orissa Water Supply and Sewerage Board, AIR 1998 Ori 11 (lowest tender considered not feasible). 30 Indian Hume Pipe Co. Ltd. v. Bangalore Water Supply and Sewerage Board, AIR 1990 Kant 305. 31 Nameirakpam Pishak Singh v. Forest Officer, AIR 1962 Mani 47. 32 Union of India v. Bhimsen Walaiti Ram, AIR 1971 SC 2295. 33 Harminder Singh Arora v. Union of India, AIR 1986 SC 1527; Rasbihari Panda v. State of Orissa, AIR 1969 SC 1081 (sale of kendu leaves). 34 KM Pareeth Labba v. Kerala Livestock Development Board Ltd., AIR 1994 Ker 286. 35 Akhtar Brothers v. State of Madhya Pradesh, AIR 1996 MP 93; Damania Industries Ltd. v. State of Orissa, AIR 1998 Ori 2; NV Calcutta Construction Co. v. National Aluminum Co. Ltd., AIR 2000 Ori 186. 36 Raunaq International Ltd. v. IVR Construction Ltd., AIR 1999 SC 393, (1999) 1 SCC 492; Riaz Construction Co. v. Union of India, AIR 2001 J&K 7. 37 Y Konda Reddy v. State of Andhra Pradesh, AIR 1997 AP 121. 38 Thermax Ltd. Pune v. North Eastern Electric Power Corporation Ltd., AIR 1999 Gau 90. 39 Karnataka State Forest Industries Corporation v. Indian Rocks, AIR 2009 SC 684, (2009) 1 SCC 150; ABL International Ltd. v. Export Credit Guarantee Corpn of India Ltd., (2004) 3 SCC 553; DFO South Kheri v. Ram Sanehi Singh, AIR 1973 SC 205, (1973) 3 SCC 864; Kumud Kumari v. Union of India, AIR 2011 Pat 175.
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40 CK Achutan v. State of Kerala, AIR 1959 SC 490; Radhakrishna Agarwal v. State of Bihar, AIR 1977 SC 1496; Life Insurance Corpn of India v. Escorts Ltd., AIR 1986 SC 1370; Noble Resources v. State of Orissa, AIR 2007 SC 119, (2006) 10 SCC 236; Alguddin Mallick v. State, AIR 1996 Cal 130; D Mohan v. Regional Manager APSRTC, AIR 2000 AP 334; Director of Supply and Disposals v. Vijay Shree Ltd., AIR 2006 Cal 46. 41 Pimpri Chinchwad Municipal Corporation v. Gayatri Construction Company, AIR 2008 211(Supp) . 42 D Wren International Ltd. v. Engineers India Ltd., AIR 1996 Cal 424; Santosh Kumar Roy v. State of West Bengal, AIR 1997 Cal 168. 43 United India Insurance Co. Ltd. v. Manubhai Dharamsinhbhai Gajera, AIR 2009 SC 446, (2008) 10 SCC 404. 44 Radhakrishna Agarwal v. State of Bihar, AIR 1977 SC 1496 at 1500; Erusian Equipment and Chemicals Ltd. v. State of West Bengal, AIR 1975 SC 266 at 268, (1975) 1 SCC 70; Bhartiya Magas Vargiya Zopadpatti Mahila Sarwangin Vikas Sanghatana v. Best Bread Co., AIR 1988 Bom 150 at 154; Ronix Polymers Private Limited v. State of West Bengal, AIR 1997 Cal 321; Praveen Kumar v. Union of India, AIR 1999 All 248; Zee Laboratories v. State of Jharkhand, AIR 2011 Jhar 38; Khursheed Ahmed Zaz v. Union of India, AIR 2011 J&K 121. 45 Food Corpn of India v. Jagannath Dutta, AIR 1993 SC 1494. 46 Food Corpn of India v. Jagannath Dutta, AIR 1993 SC 1494. 47 S Chandra Sekharan v. Govt of Tamil Nadu, AIR 1974 SC 1543; Shitla Prasad v. M Saidullah, AIR 1975 All 344 FB; Jagat Bhadur v. District Supply Officer, AIR 1990 All 113. 48 Gwalior Ispat Pvt. Ltd. v. State Bank of India, AIR 1995 Del 199. 49 Noble Resources v. State of Orissa, AIR 2007 SC 119, (2006) 10 SCC 236 (this may be the reason for breach, but is not so arbitrary). 50 Pancham Singh v. State of Bihar, AIR 1991 Pat 168. 51 D Wren International Ltd. v. Engineers India Ltd., AIR 1996 Cal 424. 52 Mavjibhai Maganbhai Parmar v. Hindustan Petroleum Corpn, AIR 1995 Guj 4. 53 MS Desai & Co. v. Hindustan Petroleum Corpn Limited., AIR 1987 Guj 19 at 24; Rashmikant Babubhai Patel v. Gujarat Electricity Board, AIR 1986 Guj 12; Divisional Forest Officer v. Bishwanath Tea Co. Ltd., AIR 1981 SC 1368 (contractual right could not be enforced in a writ petition); but see Gujarat State Financial Corpn v. Lotus Hotels Pvt Ltd., AIR 1983 SC 848 (promise to give loan construction of a hotel: statutory body cannot arbitrarily back out); Haryana Financial Corporation v. Rajesh Gupta, AIR 2010 SC 338, (2010) 1 SCC 655 (Government bound to perform act promised, yet security deposit forfeited). 54 Karnataka State Forest Industries Corporation v. Indian Rocks, AIR 2009 SC 684, (2009) 1 SCC 150. 55 MD, HSIDC v. Hari Om Enterprises, AIR 2009 SC 218, (2009) 16 SCC 208. 56 Pusha Ram v. Modern Construction Co. Pvt Ltd., AIR 1981 Raj 47; Yarlagadda China Rattaya v. Donepud Venkataramayya, AIR 1959 AP 551. 57 Nair Coal Services Pvt Ltd. v. Maharashtra State Electricity Board, AIR 1994 Bom 163. 58 Canara Bank v. Taraka Prabhu Publishers Pvt Ltd., AIR 1991 AP 258. 59 AC Roy Co. v. Union of India, AIR 1995 Cal 246. 60 State of Uttar Pradesh v. Bridge & Roof Co. (India) Ltd., AIR 1996 SC 3515, (1996) 6 SCC 22. 61 Padmavathi Constructions v. AP Industrial Infrastructure Corpn Ltd., AIR 1997 AP 1 (proper forum was the civil court). 62 Tripura Fibre Glass Industries v. State of Tripura, AIR 1998 Gau 40. 63 Manmatha Nath Kayal v. District Manager, 24 Perganas, FC of India, AIR 1996 Cal 316. 64 Green Hut Private Limited v. State of West Bengal, AIR 1997 Cal 214. 65 United India Insurance Co. Ltd. v. Manubhai Dharamsinhbhai Gajera, AIR 2009 SC 446, (2008) 10 SCC 404. 66 Bhupendra S Bhatia v. State of MP, AIR 2007 1359(Supp) . 67 Orissa Agro Industries Corporation Ltd. v. Bharati Industries, AIR 2006 SC 198, (2005) 12 SCC 725.
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68 Hajee SVM Mohamed Jamaludeen Bras & Co. v. Government of Tamil Nadu, AIR 1997 SC 1368, (1997) 3 SCC 466. 69 AIR 1989 SC 1076; Premji Bhai Parmar v. Delhi Development Authority, AIR 1980 SC 738 (increase in price of fiats); Chief Adminstrator, PUDA v. Shabnam Virk, AIR 2006 SC 1758, (2006) 4 SCC 74 (escalation in costs); Avtar Singh Sahi v. State of Haryana, AIR 1991 P&H 298 (increase in compensation awarded in land acquisition); Sheelawanti v. D D A, AIR 1995 Del 212(FB) (increase in cost of land and flats); but see Vrinda Gujarati v. Bareilly Development Authority, AIR 1997 All 107. 70 Union of India v. Binani Consultants (P) Ltd., AIR 1995 Cal 234; S Narayan Iyer v. Union of India, AIR 1976 SC 1986 (telephone tariff rates). 71 KAS Senthilnathan v. Union of India, AIR 1997 Mad 208. 72 Santosh Kumar Roy v. State of West Bengal, AIR 1997 Cal 168. 73 Niranjan Pipalia v. Hindustan Steel Works Construction Ltd., AIR 1994 Cal 232. 74 State of Haryana v. Lal Chand, (1984) 3 SCC 634 (under the Punjab Excise Act). 75 DFO South Kheri v. Ram Sanehi Singh, AIR 1973 SC 205; KN Guruswamy v. State of Mysore [1955] 1 SCR 305, AIR 1954 SC 592; Gujarat State Financial Corpn v. Lotus Hotels Pvt Ltd., AIR 1983 SC 848. 76 See below: 'Statutory Contracts'. 77 Kalyani Spinning Mills Ltd. v. Sudha Sashikant Shroff, AIR 1995 Cal 48. 78 Ghulam Mohammed Dar v. State ofjammu and Kashmir, AIR 1995 J&K 92. 79 SM Khalil Ahmad v. Union of India, AIR 1999 Pat 256. 80 Aluminium Industries Ltd. v. Mineral and Metals Trading Corpn of India Ltd., AIR 1998 Mad 239(FB) . 81 Sunnam Sattiah v. State of Andhra Pradesh, AIR 1980 AP 18. 82 Punjab State Electricity Board v. Bassi Cold Storage, (1994) 2 SCC 124(Supp) (claim for damages for disconnection of supply). 83 Hyderabad Vanaspathi Ltd. v. Andhra Pradesh State Electricity Board, (1998) 4 SCC 470. 84 Kerala State Electricity Board v. Kurien E Kalathil, (2000) 6 SCC 293. 85 India Thermal Power Ltd. v. State of Madhya Pradesh, AIR 2000 SC 1005, (2000) 3 SCC 379. 86 Prabhakar Ramakrishna Jodh v. AL Pande [1965] 2 SCR 713. 87 Vidya Ram Misra v. Managing Committee, Shri Jai Narain College, AIR 1972 SC 1450, (1972) 1 SCC 623. 88 State Bank of Patiala v. Romesh Chander Kanoji, AIR 2004 SC 2016, (2004) 2 SCC 651; See HFC Voluntary Retd Employees Welfare Society v. Heavy Engineering Corpn Ltd., AIR 2006 SC 1420, (2006) 3 SCC 708 (contract law applies to formation and determination if scheme is not statutory). 89 Hyderabad Vanaspathi Ltd. v. Andhra Pradesh State Electricity Board, (1998) 4 SCC 470; Bihar State Electricity Board v. Panneshwar Kumar Agarwala, (1996) 4 SCC 686 (but these did not override the terms and conditions of the earlier contract in the instant case). 90 Assistant Excise Commr v. Isaac Peter, (1994) 4 SCC 104; see also Mary v. State of Kerala, 2013 (13) SCALE 151. 91 Assistant Excise Commr v. Isaac Peter, (1994) 4 SCC 104. 92 State of Uttar Pradesh v. Bridge & Roof Co. (India) Ltd., AIR 1996 SC 3515, (1996) 6 SCC 22; State of Gujarat v. Meghji Pethraj Shah Charitable Trust, (1994) 3 SCC 552; Arun Kumar Jain v. Uttar Pradesh Financial Corpn, AIR 1998 All 226. 93 State of Uttar Pradesh v. Bridge & Roof Co. (India) Ltd., AIR 1996 SC 3515, (1996) 6 SCC 22. 94 Amar Singh v. Union Territory, AIR 1993 P&H 100; Shakti Tubes v. State of Bihar, AIR 1994 Pat 162(FB) . 95 State of Uttar Pradesh v. Bridge & Roof Co. (India) Ltd., AIR 1996 SC 3515, (1996) 6 SCC 22; Winmaxx Management Service Pvt Ltd v. UCO Bank, AIR 2011 Gau 217. 96 Radhakrishna Agarwal v. State of Bihar, AIR 1977 SC 1496, [1977] 3 SCR 249, (1977) 3 SCC 457; Premji Bhai Parmar v. Delhi Development Authority [1980] 2 SCR 704, (1980) 2 SCC 129; DFO v. Biswanath Tea Co. Ltd. (1981) 3
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SCR 662, (1981) 3 SCC 238; Bareilly Development Authority v. Ajai Pal Singh, AIR 1989 SC 1076, (1989) 2 SCC 116. 97 Rajendra Singh v. State of Madhya Pradesh, (1996) 5 SCC 460. 98 [1995] 3 All ER 952 (QB) (question whether the amount was a 'debt due under a contract', coercion for settlement for which was punishable); Pfizer Corpn v. Ministry of Health [1965] 1 All ER 450 (supply of medicines under National Health Service).
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER II Of Contracts, Voidable Contracts and Void Agreements/S. 11.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER II Of Contracts, Voidable Contracts and Void Agreements S. 11. Who are competent to contract.-Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind and is not disqualified from contracting by any law to which he is subject.
Introduction The section deals with personal capacity of three types: (a) arising from age; (b) arising from soundness of mind; and (c) arising from provisions of law. This section deals with personal competency of individuals only.
Competency and Authority Competency to contract must be distinguished from authority to contract. This section provides about inherent incompetency to contract. It does not cover cases of legal artificial persons, who are competent to contract if authorised by statute or by their constitution. A statutory person is not on the same footing with an individual in the matter of capacity. While the capacity of a minor individual is an inherent one, the statutory person suffers from no such incapacity. The statutory person can exercise the power only subject to its complying with the formalities imposed by the statute. Such restriction on the exercise of power is not the same as inherent disqualification or incapacity.99 The competency of such legal persons flows from the law under which they are constituted. However, competency of such persons is also discussed below. 99 Ram Nagina Singh v. Governor General in Council, AIR 1952 Cal 306; Dharmeswar Aalita v. Union of India, AIR 1955 Assam 86.
Contractual Incompetency
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The function of the provisions relating to personal competency is to protect those whose mental powers are undeveloped or underdeveloped, by preventing them from doing themselves an injury by their legal declarations. Exception to this policy is necessary; else no one would make a contract with such a person even if it were essential. Refusing to enforce agreements against such persons can cause hardship to those who deal with them in good faith or ignorance of lack of capacity. Any provisions of law must therefore balance these two interests, the interest of the protection of such incompetent persons, and the interests of persons dealing with them. The aim of protecting such persons takes precedence over the needs of business. Thus, a person dealing with a minor has no defence if he reasonably believed the minor to be of age, or even if the minor has fraudulently misrepresented the age and induced such person to enter into a contract. However, the balance is found in the provisions of section 68 of this Act, which enables recovery for necessaries supplied to incompetent persons. 'To Contract' This term means 'to bind himself by promise'. Therefore, an incompetent person cannot bind himself by a promise; he is competent to enforce a promise made by another to him. Thus, a minor who gives value, without promising any further performance, to a person competent to contract, is entitled to sue him for the promised equivalent.1 1 Firm Bhola Ram Harbans Lal v. Bhagat Ram, (1926) 99 IC 318, AIR 1927 Lah 24.
Age of Majority Section 3 of the Indian Majority Act, 1875 provides:
(1) (2)
Every person domiciled in India shall attain the age of majority on his completing the age of eighteen years and not before. In computing the age of any person, the day on which he was born is to be included as a whole day and he shall be deemed to have attained majority at the beginning of the eighteenth anniversary of that day.
The Indian Majority Act, 1875 was amended in 19992 to provide for a uniform age of majority for all persons domiciled in India, i.e., eighteen years of age. Before its amendment, contracting capacity was not uniform. A person became major at eighteen years. However, a minor of whose person or property or both a guardian had been appointed by the court, or of whose person or property the superintendence was assumed by a Court of Wards, before the age of 18 years, attained majority on completing 21 years. If a guardian had been appointed for a minor by the court, an agreement made by the minor before completing 21 years of age was void.3 It was also held that an order discharging the guardian of a minor did not terminate the minority.4 Such a provision worked injustice upon a person contracting with another who has completed 18 years of age without knowing that he had a guardian appointed. While age of a person can be enquired and ascertained easily, information about any court order of appointment of guardian may not be easily available. Even the person, whose age is in issue, may be unaware of such appointment. Earlier editions of this work recommended that the age of contractual capacity should be fixed at 18 years for all persons. Such is now the law. The age of majority being 18 years, a person less than that age even by a day would be a minor for the purposes of contracting.5 Law to which he is subject
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The law to which the contracting party is subject determines his age of majority and his competency to contract. The capacity of a person to enter into a contract may be seen as an emanation of his status and hence governed by his domicile, or as a factor affecting the validity of the contract, and therefore governed by the proper law of contract, i.e., the law of the country with which the contract is most substantially connected.6 The general principle of English law, that the capacity of a person to enter into a contract is decided by the law of his domicile,7 occurs mostly in relation to capacity to marry, and such contracts must be distinguished from capacity to contract. In times of easy and rapid transport and great mobility of persons, it would often lead to inconvenience and injustice if the validity of a contract made in one country, or plainly mostly connected with one country, were allowed to depend on the law of the foreign domicile of one party with which the other party could not be expected to be familiar.8 The opinion under the English law now has swung towards the law governing contracts rather than the lex loci contractus, and the application of the latter even to mercantile contracts has been doubted9, for such place may be a pure matter of chance, especially in contracts made by post, telegram, and moreover by electronic mode. Dicey and Morris state that the capacity of an individual to enter into a contract is governed by the law of the country with which the contract is most closely connected, or by the law of his domicile and residence.10 The express provision in this section appears to preclude the application of any law other than that of a person's domicile for determining his capacity to contract, unless the term 'law to which he is subject' is interpreted to include rules of private international law of the legal system to which he is subject. The Indian courts have recognised that all cases may not be governed by the same rule. In Kashiba Bin Narsapa Nikade v. Shripat Narshiv, 11 a Hindu widow above the age of 16 and under the age of 18 years, whose husband had his domicile in British India, executed a bond in Kolhapur (outside the British India), where she was then residing. Her domicile had remained that of her deceased husband's at the time of his death, i.e., British India. The question arose whether her liability on the bond was governed by the Contract Act being the law of British India (law of domicile), or by the law of Kolhapur (lex loci contractus),under which she could make a valid contract on completing the age of 16 years. It was held that her capacity to contract was governed by the Contract Act, being the law of her domicile, and that therefore, she was not liable on the bond. But the Madras High Court12 has held that where a person aged 18 years, domiciled in British India, endorsed certain negotiable instruments in Ceylon, by the law of which he was a minor, he was not liable as an endorsee, the contract being a mercantile one, and governed by the lex loci contractus. 2 The Indian Majority (Amendment) Act, 1999, w.e.f. 16 December 1999. 3 Jambagathachi v. Rajamannaswami Nadalwar, AIR 1920 Mad 661; Ajudhia Prasad v. Chandan Lal, (1937) All 860, 170 IC 934, AIR 1937 All 610(FB) . 4 Subramaniam Chetti v. Doraisinga Tevar, (1913) 24 Mad LJ 49 (discharge obtained by the fraud practised upon the court). 5 Bhim Mandal v. Magaram Corain, AIR 1961 Pat 21. 6 The latter is advocated in Dicey and Morris, Conflict of Laws, twelfth edn, Vol. II, p. 1275. 7 Cooper v. Cooper [1888] 13 AC 88 at 105, 108; Republic of Gautemala v. Nunez [1927] 1 KB 669. 8 Dicey and Morris, Conflict of Laws, 12th edn, Vol. 2, p. 1273. 9 Dicey and Morris, Conflict of Laws, 12th edn, Vol. 2, p. 1274. 10 Dicey and Morris, Conflict of Laws, 12th edn, Vol. 2, p. 1271, r. 181. 11 (1895-96) ILR 19-20 Bom 466; Rohilkhand and Kumaun Bank Ltd. v. Row, (1885) ILR 7 All 490. 12 TNS Firm v. VPS Muhammad Hussain, AIR 1933 Mad 756, 65 Mad LJ 458, 146 IC 608 (no reference to provisions
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of s. 11).
Effect of Minority on an Agreement Under this Act, any agreement made by a minor is void ab initio.13 Unlike the common law,14 this section does not make any distinction between types of contracts. Without depending on the statement of English law at the time of enactment of this Act, this section has been literally construed.15 Under the common law,16a minor's contract is generally not void but voidable at his option; if it appears to the court to be for his benefit, it may be binding, and especially so if the contract is for necessaries. Contracts are divided into two types: first, positive voidable contracts, where the minor acquires interest of permanent or continuous nature, namely, land, shares, etc. are valid until the minor disclaimed them; and secondly, the others termed negative voidable contracts, are not binding on the minor unless he ratified them after attaining majority. A contract for 'necessaries', enforceable as a contract under the common law, is separately dealt under section 68 of the Indian Contract Act . Minor's Agreement is Void If this first branch of the rule laid down in the section be converted into a negative proposition, it reads thus: No person is competent to contract who is not of the age of majority according to the law to which he is subject; in other words, a minor is not competent to contract. This proposition is capable of two constructions, either that a minor is absolutely incompetent to contract in which case his agreement is void, or that he is incompetent to contract only in the sense that he is not liable on the contract, though the other party is, in which case there is a voidable contract. If the agreement is void, the minor can neither sue nor be sued upon it, and the contract is not capable of ratification in any manner; if it is voidable, he can sue upon it though he cannot be sued by the other party, and the contract be ratified by the minor on his attaining majority. Indian decisions initially followed the English law holding the minor's contract voidable at his option.17 In 1903, this question arose before the Privy Council in Mohori Bibee v. Dhurmodas Ghose. 18 In this case, D, a minor, executed a mortgage in favour of B a money-lender. Before the execution of the mortgage, a notice was issued on behalf of D's mother to B about the fact of D's minority. Despite this notice, B got a declaration signed by D that D was a major, and then advanced to D part of the money agreed; and the mortgage-deed was executed. D filed a suit for cancellation of the mortgage, it being void due to his minority. B contended first, D was of full age; secondly, that D was estopped from pleading minority by reason of the declaration; thirdly, that if D were a minor, the contract was only voidable and not void; and lastly, that in the event the court cancelled the mortgage-deed, the court should order repayment of moneys advanced. The Privy Council held that 'the Act makes it essential that all contracting parties should be competent to contract', and the Act especially provides in s. 10 that a person who, by reason of infancy, is incompetent to contract cannot make a contract within the meaning of the Act. It was accordingly held that a mortgage made by a minor was void, and the moneylender who had advanced money to the minor on the security of the mortgage was not entitled to repayment of the money under ss. 64 and 65 upon the decree declaring the mortgage invalid.19 This decision leaves no doubt that a mortgage by a minor being void, no decree could be passed on the mortgage either against the mortgagor personally or against the mortgaged property. An agreement with a minor is therefore void ab initio and cannot be sued upon. A transaction with a minor is void only when it is an essential part of the transaction. If it is not necessary to depend upon any contract entered into by him for upholding a transaction, his rights
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should be maintained by the courts.20 Although, an agreement with a minor is void, a compromise of a suit to which a minor is a party and which is made a decree of the court is not void but voidable. If therefore, the minor desires to enforce it, it is not open to the defendant to plead that the compromise was void on the ground that the guardian did not obtain the consent of the court,21 since a decree is not void unless set aside by proceedings. If a minor has undertaken liability jointly with an adult, immunity of the minor cannot absolve the adult promisor from liability.22 As between the principal and third persons, even a minor may become an agent; but he will not be responsible to the principal.23 A minor can also draw, endorse, deliver and negotiate any negotiable instrument so as to bind all parties except himself.24 Fraudulent Misrepresentation and Equity Although a minor is not liable under a contract even if he has fraudulently represented himself of full age, equity has intervened to prevent him from taking advantage of his fraud. In a transaction between an adult and a minor, where the minor seeks unfairly to retain the benefit under the transaction while setting up its invalidity (and particularly in the case of an minor fraudulently misrepresenting his age) the English courts have not allowed the minor to retain the unfair advantage under equity.25 In Stocks v. Wilson, 26 a minor obtained furniture and other Articles from the plaintiff by representing himself to be of age and promised to pay GBP 300 for these. The goods were not necessaries. He sold a portion of the goods for GBP 30 and granted a bill of sale for the rest as security for an amount of GBP 100 lent to him by a third party. He then sold the goods to the grantee of the bill of sale. The court held that he was liable in equity to account to the plaintiff for GBP 130, which was the benefit of what had been obtained by reason of his fraud. The judgment was in personam and was criticised in R Leslie Ltd. v. Sheill 27 but not overruled. Where an minor obtains a loan by falsely representing his age, he cannot be made to pay the amount of the loan as damages for fraud, nor can he be compelled in equity to repay the money.28 As to the extent to which the aid of equity can be invoked in cases of fraudulent misrepresentation as to age, Lord Sumner, in R Leslie v. Sheill had said:29
...when an minor obtains an advantage by falsely stating himself to be of full age, equity required him to restore his ill-gotten gains or to release to party deceived from obligations or act s in law induced by the fraud, but scrupulously stopped short of enforcing against him a contractual obligation entered into while he was an infant, even by means of a fraud. Restitution stopped where repayment began.
His Lordship then proceeded:
The money was paid over in order to be used as the defendant's own, and he has so used it and spent it. There is no question of tracing it, no possibility of restoring the very thing got by the fraud, nothing but compulsion through a personal judgment to pay an equivalent sum out of his present or future resources, in a word, nothing but a judgment in debt to repay the loan. I think this would be nothing but enforcing a void contract. So far as I can find, the Court of Chancery never would have enforced any liability under circumstances like the present, any more than a court of law would have done so.
The principle in R Leslie Ltd. v. Sheill was applied by the Privy Council to a case from the Straits
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Settlements where the loan was also secured by a mortgage of the minor's property.30 If the defendant is an minor and the cause of action is in substance ex contractu and is so directly connected with the contract of loan that the act ion would be an indirect way of enforcing that contract, the action would fail. There are no cases in which the minor was ordered to pay the plaintiff a sum equal to the principal sum borrowed.31 An infant became a member of a building society and obtained advances of which part was paid by the society to the vendor for a piece of land which the infant had agreed to purchase and the remainder was expended on improvement of the land. The infant gave mortgage in the original form of a building society mortgage to secure advances and interest. The minor brought an act ion in the Chancery Division for a declaration that the mortgage was void and she was entitled to have delivered from her and cancelled. The mortgage was declared void, but the society was held to have a lien on the land for the portion of the advances which had been paid to her.32 The court can also relieve the party deceived of obligations imposed upon him by the minor's fraud. In Clarke v. Cobley, 33 at the time of her marriage with D, a woman was indebted to P on two promissory notes. After the marriage, D gave his bond for the amount of the notes, which notes P then delivered to D. P sued D on the bond. D pleaded infancy. Arden MR, in the Chancery Court, ordered D to return the notes, and any action P might bring on them, directed D to refrain from pleading any defence that could not have been pleaded when the bond was given. Estoppel If a minor procures a loan or enters into any other agreement by representing that he is of full age, is he estopped by s. 115 of the Indian Evidence Act, 187234 from setting up his minority. In Mohori Bibee v. Dhurmodas Ghose, 35 this issue was raised, but not decided. It was stated:
The Courts below seem to have decided that this section does not apply to minors; but their Lordships do not think it necessary to deal with the question now. They consider it clear that the section does not apply to a case like the present, where the statement relied upon is made to a person who knows the real facts and is not misled by the untrue statement. There can be no estoppel where the truth of the matter is known to both parties, and their Lordships hold, in accordance with the English Authorities, that a false representation, made to a person who knows it to be false, is not such a fraud as to take away the privilege of infancy.
The earlier conflicting views were settled by Nawab Sadiq Ali Khan v. Jai Kishori 36 where the deed executed by a minor was held to be a nullity and incapable of founding a plea of estoppel. This is based on the principle that there can be no estoppel against the statute.37 Relief of Declaration and Cancellation of Instrument Where an agreement or instrument is void ab initio, it is not necessary to seek a declaration or cancellation to set it aside, as it is a nullity. The incompetent party can simply seek further relief, viz possession.38However, reliefs of declaration and cancellation can be sought under the Specific Relief Act, 1963. In Mohori Bibee v. Dhurmodas Ghose, 39a money-lender sought an order for return of the advanced money under s. 41 of the Specific Relief Act, 1877;40 under which, on adjudging the cancellation of an instrument, the court could exercise its discretion to require the party to whom such relief was granted, to make any compensation to the other which justice might require. In this case, the court of first instance decided that under the circumstances of the case, justice did not require them to order the return of money advanced with the moneylender having full knowledge of his minority, and there was 'no reason for interfering with the discretion so exercised'.41This decision has been considered later as an authority that the court may, on adjudging the cancellation of an instrument at the instance of a minor, require the minor according to the circumstances of the case, to compensate the other party to the instrument under s. 41 of the said Act.42
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A minor cannot be made to repay the monies received under his agreement in a suit for avoiding it, except in the exercise of discretion under s. 41 of the Specific Relief Act, 1877.43 The discretion will not be exercised to restore the consideration in favour of a vendee who has knowledge about the minority44 or who is negligent.45 The minor should be ordered to restore the benefit received by him where he has induced the other party to enter into contract by misrepresenting his age.46 Mere non-disclosure of minority is not misrepresentation or fraud.47 It has accordingly been held that where a mortgage of property by a minor is set aside by the court, the court may order compensation to the lender if the minor had obtained the loan by fraudulently representing that he was of full age,48 or may require a minor to make restitution to the purchaser for the benefit he has obtained under a sale.49 There appears to be some difference of judicial opinion whether something in the nature of fraud on the part of the minor must be shown before the court will exercise the powers given under s. 41.50 It is submitted that the court's direction is not to be fettered, though it will always be more ready to exercise its discretion where the element of fraud is present. Once the minor has obtained a declaration that an agreement entered into by him is void, he cannot enforce it later by claiming it under a provision beneficial to him.51 Restitution and the Specific Relief Act, 1963 Section 33 of the Specific Relief Act, 1963 gives the court power 'to make any compensation which justice may require' to the party to whom the relief is granted in cases where cancellation of a void or voidable written instrument is ordered. The question is whether the court, in exercising this power, is bound to follow the principles adopted by the English courts and so lucidly described by Lord Sumner inR Leslie Ltd. v. Sheill. 52 In Ajudhia Prasad v. Chandan Lal, 53 two minors borrowed money under a mortgage deed. They fraudulently concealed that they had a guardian appointed by the court, and hence they were minors (i.e., between 18 and 21 years of age) The mortgagee was not entitled to a mortgage decree, nor was he entitled to a decree for the principal money under equitable principles other than those recognised in England. The Lahore High Court has held that the power to give equitable relief was more extensive in India than in England and ordered monetary compensation in a case where the minor had misrepresented his age.54 The court may impose terms on the minor if he seeks its aid as a plaintiff and it may refuse to exercise its jurisdiction if he happens to be a defendant. In deciding whether relief against fraud practised by an minor should or should not be granted, the court will also consider the fact that the minor is a defendant and not a plaintiff.55 It was submitted in the earlier editions of this book that the judgment of Shadi Lal CJ, in the Lahore case was correct. In India, the court derives its power from the statutory enactment which is expressed in the widest terms, where the word used is 'compensation', and not 'restitution'. In ordering compensation, the court is not necessarily giving effect to the contract, which is in law a nullity, but is doing its best to put the parties, so far as possible, in the position which they occupied before the void transaction took place and from which one of them was only induced to depart by reason of the minor's fraud. This is not a performance of the contract, but a negation of it. The relief is in equity against fraud and not on the contract.56This view received legislative recognition in the new Specific Relief Act, 1963.57 Accepting the view of the editors of this book, the Law Commission expressed an opinion that the judicial committee in the Mohri Bibee v. Dhurmodas Ghose 58 did not properly interpret the applicability of s. 65 to a minor's agreement, and recommended that the section should be applicable where a minor entered into an agreement on false representation of his age.59 The nature of the compensation 'which justice may require' must depend on the circumstances of each case, and there is nothing which requires that justice be interpreted as the exact counterpart of the English rules of equity. A claim for interest was not allowed as part of the compensation for that meant enforcing one of the stipulations of the contract.60
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A party who has parted with goods to a quondam minor can trace them to him and can recover them from him on the basis of title, which is not lost.. But neither can damages be recovered for breach from the minor, nor the price. Nor can money lent to such a minor be recovered because if that were to be allowed, it would be tantamount to enforcing the contract. However, if the quondam minor seeks relief from a court on the ground that the agreement was void, he will be compelled to make restitution.61In England, the court can exercise discretion under s. 3 of the Minors Contracts Act, 1987 to require a minor defendant to transfer to the plaintiff any property acquired by the defendant under the contract, or any property representing it. Minor's Liability in Tort A minor is generally liable in tort, but he cannot be made liable for what was in truth a breach of contract by framing the action ex delicto. 'You cannot convert a contract into a tort to enable to sue an minor',62 where it was held that an minor was not liable in tort for overriding a hired mare. A minor is not liable in tort, if the tort is directly connected with the contract and is the means of effecting it and is a parcel of the same transaction.63 But if a wrongful act, though concerned with the subject-matter of a contract, is such that, but for the contract, there would have been no opportunity of committing it, the act is nevertheless independent of the contract in the same sense of not being an act of the kind contemplated by it, and the minor is liable. A minor defendant hired a horse for riding, but not for jumping, and allowed his companion to use the horse for jumping, whereby it was injured and died. It was held that using the horse in this manner was positively forbidden by the contract and was a mere trespass, for which the defendant was liable.64 The same view was adopted in an action in tort brought to recover from an minor certain Articles lent to him, which he had lent without authority to a friend.65 Minor as Promisee A minor can enforce a contract made in his favour for valuable consideration, the reason being that although he cannot incur liability, he is not debarred from acquiring title to anything valuable.66 A minor can sue on a promissory note67 or a bond68 executed in his favour. A minor in whose favour a mortgage has been executed can sue to recover the principal and the interest of the amount advanced by him.69 A person receiving goods from the minor is liable to pay the price.70 Sales, Mortgages and Leases in favour of Minors Section 7 of the Transfer of Property Act, 1882 provides that every person competent to contract and entitled to transferable property is competent to transfer such property. But it is not provided anywhere in the Act that a person not competent to contract is incapable of being a transferee of property. Therefore, a duly executed transfer by way of sale71 or mortgage72 in favour of a minor, who has paid the price agreed, is not void, and it is enforceable by him or any other person on his behalf. A minor, therefore, in whose favour a deed of sale is executed, is competent to sue for possession of the property conveyed.73 A minor ousted from the property he has purchased in suit by third parties is entitled to recover from his vendor the purchase money paid.74 A mortgage executed in favour of a minor who has advanced the mortgage money is enforceable by him or by any other person on his behalf.75 A gift in favour of a minor is also valid.76 However, a lease to a minor is void because it imposes obligations on the minor to pay rent and perform covenants.77 A lease by a minor confers no rights of possession on the lessee.78 A minor lessor can avoid the lease because the covenants do not bind him. But he must elect to avoid the lease as a whole or adopt it.79 A guardian of a Mohammedan minor can lease a minor's property. A minor may not be bound by the lease if it is in excess of the guardian's power or not beneficial to him. But it is not the same thing as saying that the agreement is void and the other party can ignore it. Such minor can sue for the recovery of rent.80 A minor may bind himself to the lease for the whole period including his minority, if he has taken up and carried on after attaining majority, the arrangement of lease entered into on his behalf by a person
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without authority.81 If the minor approves on attaining majority of a mining lease of his land granted by his guardian during his minority, and strikes his own bargain with the lessee by a patta, the lease is governed by the terms of the patta and not the original agreement.82 Possession, which is lawful at the inception, does not become adverse under an arrangement made with a minor, as the minor cannot give consent. Therefore, if the mortgagor is a minor at the time of the agreement, changing nature of possession, the possession of the mortgagee does not become adverse as the minor is incapable of giving consent.83 Partnership A minor cannot be a partner, but can be admitted into the benefits of partnership.84 An agreement of partnership making a minor full-fledged partner is invalid qua all partners.85 But if the guardian of a minor agrees to get a share of profits in lieu of interest on the minor's monies advanced by the guardian to a partnership, the agreement is not void.86 Purchase of Shares in a Company Since a person's name may be registered as a member only if he 'agrees in writing' to be a member of a company,87a question arises whether a minor can be a member of a company. On the one hand, it has been held that a minor may be a member, because s. 41 of the Companies Act, 1956 does not use the words 'contracts in writing',88 on the other hand, it has also been held that where shares are issued and registered in a minor's name, the agreement would be void, and neither the minor nor the guardian would be liable on the calls.89 It has also been held by the Company Law Board that a minor can be registered as a member in respect of fully paid up shares of a company.1 Where a father purchased shares as guardian, he was held personally liable.2 Whether a guardian of a minor can or cannot make a contract for purchase of shares in a given set of circumstances or whether a minor can be placed on the register of members was raised before a full Bench of the Delhi High Court, but not decided in Golconda Industries Pvt Ltd. v. Registrar of Companies. 3 The Department has issued clarifications that if shares are owned by a minor, the name of the guardian and not the minor, be shown as member in the register of members; and that the minor's name can be entered in the register if he receives shares by transmission.4 Membership of Societies Under the English statute law, subject to certain conditions, a minor can become a member of a friendly society, an industrial and provident society, a trade union or building society.5 It is submitted that in India the law would not be different, provided such memberships are for the benefit of the minor or a requirement of conditions of service or for the welfare of the minor or his family. A minor may be admitted to the membership of certain societies.6 A person who has attained 15 years of age can become a member of a trade union.7 Powers of a Minor's Guardian Guardians of minors can contract on behalf of minors.8 This applies to legal guardians.9Section 8 of the Hindu Minority and Guardianship Act confers on the natural guardian of a minor the power to do all acts which are necessary or reasonable and proper for the benefit of the minor or for the realisation, protection or benefit of the minor's estate; but such guardian cannot bind the minor by a personal covenant. The guardian cannot, however, mortgage, charge, or transfer by way of sale, gift, exchange, or lease any immovable property without permission of the court, for more than five years or for a term extending more than one year beyond the date of which the minor would attain majority;10 and any disposal of immovable property in contravention of above provisions is voidable at the option of the minor.11It is also within the competence of the certified guardian appointed by statute, such as the Guardians and Wards Act, 1890 or the various Courts of Wards Acts to enter into a contract for the purchase or sale of immovable property on behalf of the minor with the sanction of the court.12 Any transaction entered into on behalf of a minor by a self-appointed guardian, not
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otherwise having any authority, is a void transaction and is not binding on the minor,13 even if the guardian is the mother, not being under the personal law, the legal guardian.14An agreement of a minor mentally retarded child made by his mother as guardian appointed by court could be specifically enforced even though the appointment was not under the Mental Health Act .15 A contract within the competence of the guardian and for the benefit of the minor is valid and binding on the minor, but the minor may avoid the transaction on attaining majority,16which he may do so by filing a suit, or by any other act or omission.17 Such avoidance operates from the inception of the transaction,18 for the minor's dissent is '... in relation to the transaction as such and not merely to the possession of the alienee on the date of such dissent. The effect...is therefore to get rid of the transaction...as if the transaction had never taken place.'19 If he chooses to take advantage under the transaction, he cannot repudiate the personal liability under the same transaction.20A minor challenging the transfer of an immovable property through his natural guardian in contravention of ss. 8(1) and 8(2) of the Hindu Minority and Guardianship Act, 1956 and seeking possession of the property, can bring the suit under Art. 60 of the Indian Limitation Act, 1963, only within the prescribed period of three years after attaining majority.21 Where the guardian of a minor enters into a contract, the minor incurs no personal liability,22 but only the minor's estate is liable.23 If the minor does not avoid the transaction after becoming a major within three years, or he accepts it, the agreement can be enforced.24 A de facto guardian of a minor had entered into a contract on the minor's behalf for the purpose of insuring property belonging to the minor. It was held that the guardian had authority to effect the insurance and, that being so, the minor for whose benefit it was made, could sue on it in his own name in order to recover on the policy.25 The principle on which this decision is based is not altogether easy to understand. If the guardian contracts as the minor's agent, it is the minor's contract and therefore a nullity. If it is the guardian's contract, he should alone be entitled to sue, though he may be under an obligation to hold any benefit under the contract for the minor's benefit. The court expressly disclaimed any intention of following such cases as Madhab Koeri v. Baikuntha Kannaker 26 and Rose Fernandes v. Joshep Gonsalves, 27 but it is not very easy to distinguish them; and all the cases seem to be have been really decided on the ground that the contract was for the minor's benefit and that it would be unjust in the circumstances to deprive the latter of the benefit. In Raj Rani v. Prem Adib, 28a film producer made an agreement with a minor girl to act in a film, and the same agreement was made by the father of the minor on her behalf with the producer. On a breach of agreement, the minor sued the producer through her father, as next friend. Desai J. held that the agreement with the father was void, seeing that the consideration moving from the father was the minor's promise to act, and as the minor could not, in law, promise, there was no consideration. On the other hand, had the consideration moved from the father in the shape of an undertaking by him that his daughter should act, the father could have sued, but could recover only the damages he had suffered. It has also been held that a transfer of a minor's property by a de facto guardian is in the nature of an ultra vires act and it is open to the minor when he attains majority to repudiate it, if it was not for his benefit or for his necessity. He can repudiate it by merely refusing to accept the transfer and continue to enjoy and possess the property so transferred in his own rights or by claiming recovery of possession thereof if he had been dispossessed, it is not necessary to have a judicial rescission of such a transfer because the transfer in substance being by an unauthorised person is not rendered valid except upon ratification.29 Specific Performance of Minor's Agreement and Mutuality A minor's agreement being void, cannot be specifically enforced. As regards specific performance by the minor of an agreement made by his guardian during minority, in Mir Sarwarjan v. Fakharuddin Mahomed Chowdhury, 30 it was stated:
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...it is not within the competence of a manager of a minor's estate or within the competence of a guardian of a minor to bind the minor or the minor's estate by a contract for a purchase of immovable property, and, as the minor in the present case as not bound by the contract, there was no mutuality and the minor who has now reached his majority cannot obtain specific performance of the contract... even though purchase was advantageous, as there was no mutuality.
But later, in Sri Kakulam Subramanyam v. Kurra Subba Rao, 31 it was held that such a contract can be specifically enforced by or against the minor, if the contract is one within the competence of the guardian to enter into on his behalf so as to bind him by it, and if it is for the benefit of the minor. But if either of these two conditions is missing, the contract cannot be specifically enforced at all.32 Where the guardian or manager of the estate of the minor makes a contract, being competent to alienate the property under Hindu law, the case differed.33 In Vadakattu Suryaprakasam v. Ake Gangaraju, 34 the Full Bench of the Andhra Pradesh High Court held that as a result of the decision in Sri Kakulam Subramanyam v. Kurra Subba Rao, 35 all the decisions based on Mir Sarwarjan's case were overruled, and a contract entered into by a guardian of a Hindu minor for sale or purchase of immovable property was specifically enforceable against the minor; but whether a court of equity would give a decree or not, would depend upon the circumstances of each case. Subba Rao CJ. was of the opinion that the judgment of the Privy Council in Subramanyam'scase was an authority for saying that in the case of contracts entered into by guardians act ing within the powers prescribed by law, the contract could be specifically enforced both against and by the minor, and further since in view of the legal competence of the guardian, the question of mutuality did not arise at all. Viswanath Sastri J.36 criticized the applicability of the doctrine of mutuality to cases of contracts of minors and held that when a guardian of a minor entered into a contract for the sale of property of the minor for purposes considered as necessary under Hindu law, the contract would be specifically enforced against the minor, and the line of authorities beginning with Mir Sarwarjan's case had no application to such circumstances. The Bombay High Court has held that a guardian of a minor had no authority to sell property on behalf of his ward,37 holding that the principle in Sri Kakulam Subramanyam v. Kurra Subba Rao 38was no longer good after the Hindu Minority and Guardianship Act, 1956. This is, it is submitted, too broadly stated as the power of a guardian to sell would depend on the extent of the powers of a guardian, which under Hindu law extends to necessity or benefit to the estate. The principle of mutuality was applied on the separate property of a minor and not where he was a coparcener or co-tenant with adults and the contract was with regard to coparcenery of co-tenancy property.39 A lessee cannot avoid a lease on the ground of the lessor's infancy.40 A court may, in such cases, refuse specific performance and award damages.41 The Supreme Court in Manik Chand v. Ramchandra, 42 did not follow the judgment in Mir Sarwarjan'scase, and granted specific performance of an agreement of purchase of property effected on behalf of minors by a guardian competent under s. 8 of the Hindu Minority and Guardianship Act, 1956 holding:
...after the passing of the Hindu Minority and Guardianship Act, 1956 the guardian of a Hindu minor has power to do all act s which are necessary or reasonable and proper for the benefit of the minor or for realisation, protection or benefit of the minor's estate:...It is not disputed in this case that the contract entered into by the guardian is for the benefit of the minor.... We are unable to accept the plea that in a contract for purchase of property, the guardian would be binding the minor by his personal covenant. In the result we find that the contract entered into by the guardian on behalf of the minors is enforceable.43
Under section 20(4) of the Specific Relief Act, 1963 the mere want of mutuality is not a ground of refusing specific performance.
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Marriage A contract to marry in the future made by a minor is void.44The Indian Majority Act, 1875 does not affect the age for marriage. A Mohammedan, who is a major for the purpose of marriage under his personal law, was competent to make a contract of marriage and dower, though not major under this Act.45 The case of an agreement for marriage made for an underage daughter by her guardian, such being the custom of the parties' community has been treated as exceptional, and damages were awarded against the intended husband for breaking it.46 This case was approved and followed where the parties were Hindus.47 Burden of Proof There is a presumption in favour of competency to contract. The burden of proving minority lies on the party who alleges that he was a minor on the date of the contract.48 The person disclaiming liability on an instrument on the ground of his minority at its execution must strictly establish his minority.49 A mistake in stating age in an instrument can be explained.50 13 Mohori Bibee v. Dhurmodas Ghose, (1903) 30 IA 114, (1903) 30 Cal 539. 14 That applies in the UK subject to the (English) Minors Contracts Act, 1987. 15 Mohori Bibee v. Dhurmodas Ghose, (1903) 30 IA 114, (1903) 30 Cal 539; followed in Mir Sarwarjan v. Fakharuddin Mahomed Chowdhury, (1929) 39 IA 1; also see Ma Hnit v. Hashim Ibrahim Meter, (1920) 22 Bom LR 531, 55 IC 793. 16 See generally Halsbury's Laws of England, Vol. 5(3), 4th edition 2008, Reissue, 1st Dec 2008, CHILDREN AND YOUNG PERSONS, paras 12-14; Anson's Law of Contract, 29th edn (2010), p. 233. 17 Jamsetjee N Tata v. Kashinath J Manglia, (1901) 26 Bom 326; Mahamed Arif v. Saraswati Debya, (1891) 18 Cal 259; Khairunessa Bibi v. Lokenath Pal, (1899) 27 Cal 276; Sadashiv Vaman Dhamankar v. Trimbak Divakar Karandikar, (1898) 23 Bom 146; ad other cases cited in Mohori Bibee v. Dhurmodas Ghose, (1903) 30 IA 114, (1903) 30 Cal 539. 18 (1903) 30 IA 114, (1903) 30 Cal 539. 19 Repayment of money would not be ordered under s. 41 of the Specific Relief Act, 1877 (now s. 31 of the Specific Relief Act, 1963) as the money-lender had knowledge of the plaintiff's minority. 20 Munia Konan v. Perumal Konan (1911) 37 Mad 390, AIR 1915 Mad 412. 21 Hashem Howladar v. Sreenath Mistri, AIR 1946 Cal 438. 22 Jamna Bai Saheb Mohitai Avergal v. Vasanta Rao Ananad Rao Dhaybar, (1916) 43 IA 99 at 103, (1916) 39 Mad 409; Sulochana v. Pandiyan Bank Ltd., AIR 1975 Mad 70. 23 The Indian Contract Act, 1872, s. 184. 24 The Negotiable Instruments Act, 1881, s. 26. 25 Valentini v. Canali, [1889] 24 QBD 166 (infant not allowed to keep the goods purchased and recover price without making restitution); Pearce v. Brain, [1929] 2 KB 310(infant trading goods for others not permitted to recover them back while retaining benefit); see s s. 20 and 33 of the Specific Relief Act, 1963. 26 Stocks v. Wilson, [1913] 2 KB 235, 108 LT 834. 27 [1914] 3 KB 607 at 619, [1914-15] All ER Rep 511 (per Lord Sumner). 28 [1914-15] All ER Rep 511 at 518, Atiyah,(1959) 22 MLR 273. 29 [1914] 3 KB 607 at 618. 30 Mahomed Syedol Ariffin Bin Mahomed Ariff v. Yesh Ooi Gark, (1916) 43 IA 256, 39 IC 401, AIR 1916 PC 242. 31 Kennedy LJ in R Leslie Ltd. v. Sheill, [1914] 3 KB 607, [1914-15] All ER 511 at 519. 32 Nottingham Permanent Benefit Building Society v. Thurstan [1903] AC 6, [1900-03] All ER 830 referred to in Mohari Bibee v. Dharmodas Ghose 30 IA 114, 30 Cal 539.
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33 (1789) 2 Cox 173, 30 ER 80. 34 When one person has by his declaration, act or omission intentionally caused or permitted another person to believe a thing to be true, and to act upon such belief, neither he nor his representative shall be allowed in any suit or proceeding between himself and such person or his representative to deny the truth of that thing. 35 (1903) 30 IA 114 at 122, 30 Cal 539 at 545; referred to by Lord Sumner in his judgment in R Leslie Ltd. v. Sheill [1914] 3 KB 607 at 615; Bhim Mandal v. Magaram Corain, AIR 1961 Pat 21. 36 AIR 1928 PC 152, 30 Bom LR 1346, 109 IC 387; Khan Gul v. Lakha Singh, (1928) 9 Lah 701, 111 IC 175, AIR 1928 Lah 609(FB) ; Bakaram Januji v. Kashirao Baliramji, (1945) Nag 1005, AIR 1945 Nag 288 (where estoppel by res judicata was negatived, in the absence of proof that the minor had knowledge of his infancy at the relevant time). 37 Sarat Chunder Dey v. Gopal Chunder Laha, 19 IA 203, (1892) 20 Cal 296; Khan Gul v. Lakha Singh, (1928) 9 Lah 701 at 712, 111 IC 175, AIR 1928 Lah 609(FB) ; cf Mohori Bibee v. Dhurmodas Ghose, (1903) 30 IA 114, (1903) 30 Cal 539; Gadigeppa Bhimappa Meti v. Balangowda Bhimangouda, (1931) 55 Bom 741, 135 IC 161, AIR 1931 Bom 561 reversing its former course of decisions. 38 Prem Singh v. Birbal, (2006) 5 SCC 353 (but claim barred by limitation). 39 Mohori Bibee v. Dhurmodas Ghose, (1903) 30 IA 114, (1903) 30 Cal 539. 40 Now s s. 31-33 of the Specific Relief Act, 1963. 41 Mohori Bibee v. Dhurmodas Ghose, (1903) 30 IA 114, (1903) 30 Cal 539 at 549; Thurston v. Nottingham Permanent Building Society, [1903] AC 6; Bhim Mandal v. Magaram Corain, AIR 1961 Pat 21. 42 Dattaram Govindbhai Guzar v. Vinayak Balkrishna Agashe, (1903) 28 Bom 181 at 190; Manmatha Kumar Saha v. Exchange Loan Co., AIR 1936 Cal 567 (but relief of interest being ex contractucannot be granted); s. 33 of the Specific Relief Act, 1963. 43 Now s. 31 of the Specific Relief Act, 1963.Mohori Bibee v. Dhurmodas Ghose, (1903) 30 IA 114, (1903) 30 Cal 539; Muhammad Anwar Khan v. Jhanda Singh, AIR 1922 Oudh 271. 44 Bachai v. Hayat Mohammed, AIR 1937 Oudh 521; Mohori Bibee v. Dhurmodas Ghose, (1903) 30 IA 114, (1903) 30 Cal 539 (discretion not exercised as the money-lender had knowledge of the minority). 45 Mahomad Said v. Bishambhar Nath, (1923) 45 All 644, 85 IC 79, AIR 1924 All 156; Umar Din v. Abdul Haq, AIR 1934 Lah 304 (1). 46 Hamidan Bibi v. Nanhe Lal, AIR 1933 All 371; Lilla Dhar v. Piarey Lal, AIR 1921 All 326; T R Appasami Ayyangar v. Narayanaswami Iyer, AIR 1930 Mad 945. 47 Sher Khan v. Akhtar Din, AIR 1937 Lah 598. 48 Kamla Prasad v. Sheo Gopal Lal, (1904) ILR 26 All 342; Vaikuntarama Pillai v. Authimoolam Chettiar, (1914) ILR 38 Mad 1071 (no fraud). 49 Jagar Nath Singh v. Lalta Prasad, (1908) 31 All 21; Shiam Lal v. Ram Piari, (1909) 32 All 25; Mahamad Said v. Bishambhar Nath, (1923) 45 All 644, 85 IC 79, AIR 1924 All 156 (no compensation if no proper enquiry made of age); see s. 33 of The Specific Relief Act, 1963. 50 Mo Maung U v. Ma Bla On, (1939) Rang 543, AIR 1939 Ran 399, 185 IC 733 (on facts, declaration of the minor had no influence on the transaction-no refund because no misrepresentation); Harimohan v. Dulu Miya, (1934) 61 Cal 1075, 155 IC 1017, AIR 1935 Cal 198 (no evidence that the minor had held himself declaredas being of age); contra Hanumantha Rao v. Sitharamayya, (1939) Mad 203, 182 IC 639, AIR 1939 Mad 106 (neither knowledge of alienee nor misrepresentation by minor--refund ordered). 51 Thakur Dei v. Dharam Raj, AIR 1953 All 134. 52 [1914] 3 KB 607, [1914-15] All ER Rep 511. 53 (1937) All 860, 170 IC 934, AIR 1937 All 610(FB) . 54 Khan Gul v. Lakha Singh, (1928) 9 Lah 701, 111 IC 175, AIR 1928 Lah 609 at 617 (FB); the decision clearly goes beyond the English doctrine of following property which was the ground of Stocks v. Wilson, [1913] 2 KB 235; s. 33 of the Specific Relief Act, 1963. 55 Khan Gul v. Lakha Singh, (1928) 9 Lah 701, 111 IC 175, AIR 1928 Lah 609 at 617 (FB); Kennedy LJ in R Leslie Ltd. v. Sheill, [1914] 3 KB 607, (1914-15) All ER Rep 511 at 519; Latcharao v. Bhimayya, AIR 1956 AP 182 (restitution necessary). (Lahore view not accepted).
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56 Khan Gul v. Lakha Singh, (1928) 9 Lah 701 at 722, 111 IC 175, AIR 1928 Lah 609 at 618 (FB). 57 The Specific Relief Act, 1963, s s. 31 and 33. 58 Mohori Bibee v. Dhurmodas Ghose, (1903) 30 IA 114, (1903) 30 Cal 539. 59 The Law Commission of India, Thirteenth Report, para 37. 60 Manmatha Kumar Saha v. Exchange Loan Co., (1937) 1 Cal 283, AIR 1936 Cal 567, 165 IC 363. 61 Latcharao v. Bhimayya, AIR 1956 AP 182; disapproving Khan Gul v. Lakha Singh, (1928) 9 Lah 701, 111 IC 175, AIR 1928 Lah 609(FB) ; s s. 31-33 of the Specific Relief Act, 1963. 62 Jennings v. Rundall, (1799) 8 TR 335, 4 RR 680; Ajudhia Prasad v. Chandan Lal, AIR 1937 All 610(FB) . 63 Liverpool Adelphi Loan Association v. Fairhurst, (1854) 9 Ex 422; 96 RR 778; Khan Gul v. Lakha Singh, (1928) 9 Lah 701 at 714, 111 IC 175, AIR 1928 Lah 609 at 614 (FB). 64 Burnard v. Haggis, (1863) 14 CBNS 45, (1863) 32 LJ 189(CP) . 65 Ballett v. Mingay, [1943] 1 KB 281, [1943] 1 All ER 143(CA) . 66 Firm Bhola Ram Harbans Lal v. Bhagat Ram, (1926) 99 IC 318, AIR 1927 Lah 24. 67 Sharfat Ali v. Noor Mahomed, AIR 1924 Rang 136; Rangarazu Sathrurazu v. Maddura Basappa, (1913) 24 Mad LJ 363. 68 Hanmant Laxman v. Jayarao Narsinha, (1889) ILR 13 Bom 50. 69 Madhab Koeri v. Baikuntha Karmaker, (1919) 4 Pat LJ 682, AIR 1919 Pat 561. 70 Abdul Ghaffar v. Firm Piare Lal Salig Ram, AIR 1934 Lah 480. 71 Ulfat Rai v. Gauri Shanker, (1911) 33 All 657; Narain Das v. Musammat Dhania, (1916) 38 All 154, 35 IC 23; Munni Kunwar v. Madan Gopal, (1916) 38 All 62, 31 IC 792; Munia Konan v. Perumal Konan, (1911) 37 Mad 390; Meghan Dube v. Pran Singh, (1908) 30 All 63 (purchase by a joint Hindu family in the name of a minor member); Collector of Meerut v. Lala Hardian Singh, (1945) All 204, AIR 1945 All 156. 72 AT Raghava Chariar v. Srinivasa, (1917) 40 Mad 308, AIR 1917 Mad 630(FB), overruling Navakotti Narayana Chetty v. Logalinga Chetty, (1909) 33 Mad 312; Madhab Koeri v. Baikuntha Karmaker, (1919) 4 Pat LJ 682, AIR 1919 Pat 561; Zafar Ahsan v. Zubaida Khatun, 121 IC 398, (1929) All LJ 1114, AIR 1929 All 604; Rai Satyadeva Narayan Sinha v. Tirbeni Prasad, AIR 1936 Pat 153; Bharat Bhai v. Nanhe Mal, AIR 1928 All 102. 73 Ulfat Rai v. Gauri Shanker, (1911) 33 All 657; Narain Das v. Musammat Dhania, (1916) 38 All 154, 35 IC 23, AIR 1916 All 366; Munni Kunwar v. Madan Gopal, (1916) 38 All 62, 31 IC 792; Munia Konan v. Perumal Konan, (1911) 37 Mad 390, AIR 1915 Mad 412; Meghan Dube v. Pran Singh, (1908) 30 All 63 (purchase by a joint Hindu family in the name of a minor member); Collector of Meerut v. Lala Hardian Singh, (1945) All 204, AIR 1945 All 156. 74 Walidad Khan v. Janak Singh, (1913) ILR 35 All 370. 75 AT Raghava Chariar v. Srinivasa, AIR 1917 Mad 630. 76 K Balakrishnan v. K Kamalam, AIR 2004 SC 1257. 77 Pramala Basidas v. Jogeshar Mandal, (1918) 3 Pat LJ 518, 46 IC 670, AIR 1918 Pat 626; s. 107 of the Transfer of Property Act, 1882 has thereafter been amended and a lease must now be executed by both parties. A minor therefore cannot be lessor or lessee;AT Raghava Chariar v. Srinivasa, (1917) 40 Mad 308 at 355, AIR 1917 Mad 630(FB) . 78 Doo Doo Meah v. Kasim AU, AIR 1924 Rang 288. 79 Rajah Kocherlakoa Venkata Jagannatha Rao Garu v. Venkata Kumara Mahipati Surya Rao Bahadur Zamindar Garu 54 Mad 163, AIR 1931 Mad 140; Zeebunnissa Begum v. HB Danagher, AIR 1936 Mad 564. 80 Zeebunnissa Begum v. H B Danagher, (1936) 59 Mad 952, AIR 1936 Mad 564. 81 Nihalchand Mewaram v. Mir Jan Mahomed Khan, AIR 1937 Sind 310 at 311 (DB). 82 Tikait Umed Narain Singh v. Equitable Coal Co., AIR 1942 PC 1 at 3. 83 Padma Vithoba Chakkayya v. Mohammad Multani, AIR 1963 SC 70. 84 The Indian Partnership Act, 1930, s. 30.
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85 Dharam Vir v. Jagan Nath, AIR 1968 Punj 84; referring to Commissioner of Income Tax v. Dwarka Das [1961] 41 ITR 523, [1962] 2 SCR 821, AIR 1961 SC 680; distinguishing Jamna Bai Saheb Mohitai Avergal v. Vasanta Rao Ananad Rao Dhaybar, (1916) 43 IA 99, (1916) 39 Mad 409; Durga Charan Gangopadhyaya v. Akkari Das, AIR 1949 Cal 617; a Mahomedan widow cannot make a partnership contract for her minor children; AA Khorasany v. C Acha, (1928) 6 Rang 198, 110 IC 349, AIR 1928 Rang 160. 86 Gursaran Lal v. Seral Kumar, AIR 1956 All 136. 87 The Companies Act, 1956, s. 41. 88 Fazalbhoy Jaffar v. Credit Bank of India, AIR 1914 Bom 128. 89 Palaniappa Mudaliar v. Official Liquidator Ltd. Pasupathi Bank, AIR 1942 Mad 470. 1 Nandita Jain v. Bennett Coleman & Co. Ltd., App No 27 of 1972 dtd 17 February 1978; referred to in A Ramaiya, Guide to the Companies Act, 14th edn, p. 382; following Diwan Singh v. Minerva Films Ltd., AIR 1959 Punj 106. 2 Beharilal v. Official Liquidator, AIR 1918 Lah 138. 3 AIR 1968 Del 170 (FB). 4 A Ramaiya, Guide to the Companies Act, 14th edn, pp. 382-84; Datta, Company Law, 5th edn, pp. 166-68. 5 Chitty on Contracts, 28th edn, p. 484, para 8-057. 6 The Maharashtra Co-op Societies Act, 1960, s. 22, which provides that a person competent to contract can become a member of a co-op society, but allows minors to be admitted to a society exclusively formed for the benefit of students of a school or a college. 7 The Trade Unions Act, 1926, s. 21. 8 Jakiuddin Badruddin v. Vithoba Jagannath Gadali, AIR 1939 Nag 301; Rajubala Dasi v. Nidhuram Pandit, AIR 1960 Cal 65; Amir Ahmmad v. Meer Nizam Ali, AIR 1952 Hyd 120 (Muslim de jure guardian). 9 Karim Khan Mahtab Khan v. Jaikaran Gadadmal Marwadi, AIR 1937 Nag 390 (Muslim mother). 10 See The Guardians and Wards Act, 1890, s. 29. 11 Under s. 8 of the Hindu Minority and Guardianship Act, 1956. 12 Babu Ram v. Said-Un-Nissa, (1913) ILR 35 All 499. 13 Manu Pande v. Sukhlalia, AIR 1958 Pat 79. 14 Chiranji Lal v. Khatoon Bi, AIR 1995 MP 238. (Sunni Mohammedan mother only a de facto guardian.) 15 M C Nagalakshmi v. M A Farook, AIR 2007 Kant 105. 16 Surta Singh v. Pritam Singh, AIR 1983 P&H 114. 17 Jagdamba Prasad Lalla v. Anadi Nath Roy, AIR 1938 Pat 337; Lalit Kumar Das Choudhury v. Nogendra Lal Das, AIR 1940 Cal 589; Sivanmalai Goundan v. Arunachala Goundan, AIR 1938 Mad 822; Hari Satya Banerjee v. Mahadev Banerjee, AIR 1983 Cal 76. 18 G Annamalai Pillai v. District Revenue Officer, (1993) 2 SCC 402 (lease for more than five years without permission of the court). 19 SNR Sundara Rao & Sons v. Commr of Income Tax, AIR 1957 Mad 451(quoted with approval in G Annamalai Pillai v. District Revenue Officer, (1993) 2 SCC 402. 20 Hiralal Dayaram Patil v. Bhikari Sampat Shinde, (1971) 73 Bom LR 481. 21 Surta Singh v. Pritam Singh, AIR 1983 P&H 114. 22 Narain Das v. Musammat Dhania, (1916) 38 All 154, 35 IC 23, AIR 1916 All 366, DB; Vadakattu Suryaprakasam v. Ake Gangaraju, AIR 1956 AP 33, FB; Waghela Rajsanji v. Sheikh Masludin, 16 IA 89 at 96, (1887) 11 Bom 551 at 561. 23 Vadakattu Suryaprakasam v. Ake Gangaraju, AIR 1956 AP 33; Rajah Kocherlakoa Venkata Jagannatha Rao Garu v. Venkata Kumara Mahipati Surya Rao Bahadur Zamindar Garu, 54 Mad 163, AIR 1931 Mad 140. 24 M C Nagalakshmi v. M A Farook, AIR 2007 Kant 105. 25 Great American Insurance Co. Ltd. v. Madanlal Sonulal, (1935) 59 Bom 656, 37 Bom LR 461, 158 IC 554, AIR 1935
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Bom 353, approved in dicta by Desai J. in Raj Rani v. Prem Adib, (1949) 51 Bom LR 256, AIR 1949 Bom 215 at 222, and in Vijaykumar Motital v. New Zealand Insurance Co. Ltd., AIR 1954 Bom 347. 26 AIR 1919 Pat 561. 27 AIR 1925 Bom 97. 28 AIR 1949 Bom 215. 29 Hari Satya Banerjee v. Mahadev Banerjee, AIR 1983 Cal 76. 30 (1912) 39 IA 1, (1912) 39 Cal 232, IC 331 reversing (1906) 34 Cal 163; but see s. 20(4) of the Specific Relief Act, 1963. 31 AIR 1948 PC 95; see also Brahamdeo Sao v. Hara Singh, AIR 1935 Pat 237; Ramalingam Reddi v. Babanambal Ammal, AIR 1951 Mad 431. 32 Singara Mudali v. Ibrahim Baig Sahib, AIR 1947 Mad 94; Pandit Krishna Chandra v. Seth Rishabha Kumar, AIR 1939 Nag 265; Abdul Haq v. Mohammed Yehia Khan, AIR 1924 Pat 81 (de facto guardian); in the following cases specific performance was refused although legal necessity had been proved: Srinath Bhattacharjee v. Jotindra Mohan Chatterjee, AIR 1926 Cal 445; Hari Mohan Pal v. Sew Narayan Kurmi, AIR 1949 Assam 57; but in Nageswara Rao v. Mandava, AIR 1928 Mad 830, there was no proof of legal necessity and specific performance was rightly refused. 33 Mulla's Hindu Law, 17th edn, Vol. 1, pp. 744-57, Vol. 2, pp. 392-98; Zeebunnissa Begum v. HB Danagher, AIR 1936 Mad 564 (Mahommedan law). 34 AIR 1956 AP 33. 35 AIR 1948 PC 95. 36 Ramalingam Reddi v. Babanambal Ammal, AIR 1951 Mad 431; Gujoba Tulsiram v. Nilkanth, AIR 1958 Bom 202. 37 Gopalkrishna Govind v. Tukaram Narayan, AIR 1956 Bom 566. 38 Sri Kakulam Subramanyam v. Kurra Subba Rao, AIR 1948 PC 95. 39 NB Sitarama Rao v. Venkatarama Reddiar, AIR 1956 Mad 261. 40 Zeebunnissa Begum v. HB Danagher, AIR 1936 Mad 564. 41 Ibid. 42 AIR 1981 SC 519 reversing Ramchandra v. Manikchand, AIR 1968 MP 150; decision in Chodavarupu Narayana Row v. Chennuru Venkatasubba Row, AIR 1920 Mad 423 would no longer be good law. 43 AIR 1981 SC 519 at 521. 44 Ma Pwa Ky We v. Maung Hmat Gyi, AIR 1939 Rang 86; Ma E Thwe v. U Tha Yin, AIR 1941 Rang 179. 45 Moxharul Islam v. Abdul Gani Ala, AIR 1925 Cal 322. 46 Rose Fernandez v. Joshep Gonsalves, (1924) 48 Bom 673, 85 IC 587, AIR 1925 Bom 97; Khimji Kiwerji Shah v. Lalji Karamsey, (1941) Bom 211, 43 Bom LR 35, 196 IC 858, AIR 1941 Bom 129; Narakoti Daniel v. Ingilala Mariamma, AIR 1951 Mad 466; Tulshiram Maroti Kohad v. Roopchand Laxman Ninawe, AIR 2006 Bom 183. 47 Khimji Kiwerji Shah v. Lalji Karamsey, AIR 1941 Bom 129; but see Ma Pwa Ky We v. Maung Hmat Gyi, AIR 1939 Rang 86, 181 IC 755 (Burma Buddhists); Narakoti Daniel v. Ingilala Mariamma, AIR 1951 Mad 466. 48 Jagannath Prasad Singh v. Syed Abdullah, AIR 1918 PC 35, (1918) 45 IA 97; Bibi Jai Kishori v. Ali Ahmed Khan, AIR 1925 Oudh 487; Kandhai Lal v. Debi Prasad, AIR 1925 All 399; Patel Prabhudas Hargovandas v. Heirs of Patel Babubhai Kachrabhai, AIR 2007 Guj 148. 49 Jagannath Prasad Singh v. Syed Abdullah, AIR 1918 PC 35, (1918) 45 IA 97; Narain Singh v. Chiranji Lal, 46 All 568, 79 IC 945, AIR 1924 All 730 (2); followed in Surja v. Joti Prasad, (1925) 47 All 493, 87 IC 445. 50 Patel Prabhudas Hargovandas v. Heirs of Patel Babubhai Kachrabhai, AIR 2007 Guj 148.
Sound Mind
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The definition of soundness of mind is given in s. 12 of Contract Act below. This section makes a minor's agreement wholly void, and it is clear that a person of unsound mind in India be held absolutely incompetent to contract.51 An agreement entered into by a person who was of unsound mind at the time of making it, is void.52 The supply of necessaries to such persons is dealt with by s. 68 of the Contract Act. On the other hand, by English law, a contract by a person lacking mental capacity is not void, but voidable at his option, if he can show first, that owing to his mental condition he did not understand what he was doing, and secondly, that other party was aware of his insanity at the time of making the contract.53In a case, a vendor was of unsound mind, but that fact was not apparent to the purchaser, and the vendor appeared to be advised by a solicitor who had proposed the terms of the bargain. The Privy Council held that the contract could not be set aside on the ground of lack of mental capacity, unless the vendor's capacity was known to the purchaser; nor as unconscionable because the purchaser had act ed with complete innocence. Lord Brightman said that there ought to be procedural unfairness, such as undue influence or some other form of victimisation.54 In Imperial Loan Co v. Stone 55 Lord Esher MR, laid down the rule in the case of contracts other than for necessaries as under:
When a person enters into a contract, and afterwards alleges that he was so insane at the time that he did not know what he was doing, and proves the allegation, the contract is as binding on him in every respect, whether it is executory or executed, as if he had been sane when he made it, unless he can prove further that the person with whom he contracted knew him to be so insane as not to be capable of understanding what he was about.
A deed of gift made by a person of unsound mind is void ab initio.56 A son of a lunatic could not alienate joint family property without obtaining any order appointing him as manager of that joint family property by an order of the competent court57 under the Lunacy Act, 1912.58 51 J Machaima v. Usman Beari, (1907) 17 Mad LJ 78; Amina Bibi v. Saiyid Yusuf, AIR 1922 All 449; Johri v. Mahila Draupati, AIR 1991 MP 340 at 343; Salu Bai v. Bajat Khan, AIR 1917 Nag 215 at 223 (FB). 52 Monosseh Jacob Monosseh v. Shapurji Hormusji Harver, (1908) 10 Bom LR 1004; Indar Singh v. Parmeshwardhari Singh, AIR 1957 Pat 491. 53 Imperial Loan Co. v. Stone, (1892) 1 QB 599, [1891-94] All ER Rep 412(CA) confirming previous authorities. 54 Hart v. O'Connor, [1985] 2 All ER 880. 55 (1892) 1 QB 599 at 601, [1891-4] All ER Rep 412(CA) ; Hart v. O'Connor, [1985] AC 1000, [1985] 2 All ER 880; Re Roberts,[1978] 1 WLR 653, [1978] 3 All ER 225 (capacity to marry). 56 Tarkeshwar Upadhaya v. Mahesh Kahar, AIR 1981 Pat 348 (the question of unsoundness of mind can be decided by consolidation authorities under the the Bihar Consolidation of Lands and Prevention of Fragmentation Act). 57 Tribhovandas Baribhai Tamboli v. Gujarat Revenue Tribunal, AIR 1991 SC 1538, (1991) 3 SCC 442. 58 Now the Mental Health Act, 1987.
Persons Otherwise Disqualified by Law Certain classes of persons may be disqualified under certain enactments from entering into contracts in respect of matters specified in those enactments. A person in Oudh declared as 'disqualified proprietor' under the provisions of the Oudh Land Revenue Act, 1876 was not competent to alienate his property, and the same incapacity extended to contracts entered into by him, though they related to property situated outside the Province of Oudh.59A person whose estate was under the Court of
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Wards, was incompetent to enter into any contract involving pecuniary liability under s. 31 of the Central Provinces Court of Wards Act, 1899.60 Certain classes of persons may be disqualified from contracting in respect of certain types of contracts which would, if allowed, place them in a position in which they may be tempted to use influence or information which they have acquired by virtue of their possible connection with the business involving such transactions. No judge, legal practitioner or officer connected with any court of justice shall buy or traffic in, stipulate for or agree to receive any share of, or interest in any actionable claim.61 Officers and employees of the patent office are incapable, during the period in which they hold their appointments, to acquire or take any right or interest in any patent issued by that office.62 No forest officer shall, as principal or agent, trade in timber or forest produce, or be or become interested in, any lease of any forest or in any contract for working in any forest, except with the permission of the state Government in writing.63 An English barrister, enrolled as an advocate of an Indian High Court, is not a person 'disqualified from contracting by any law to which he is subject' so as to prevent him from suing for his fees in India, qua advocate the law to which he is subject to is that of the bar where he is practising.64A foreigner is not disqualified from becoming a member of a cooperative society, or to act as trustee.65 Members of a Hindu Undivided Family are like other individuals and are not disabled from making a contract between themselves or with a stranger.66 59 Lachmi Narain v. Fateh Bahadur Singh, (1902) 25 All 195 at 202; Shah Jethalal Lalchand v. Darbar Shri Amarwala Laxmanwala, AIR 1953 Sau 177. 60 Lal Chandradwaj Deo v. Lal Artraran Deo, AIR 1936 Nag 15. 61 The Transfer of Property Act, 1882, s. 136. 62 The Patents Act, 1970, s. 75 (except by inheritance or bequest). 63 The Indian Forest Act, 1927, s. 75. 64 Nihal Chand Shastri v. Dilawar Khan, (1933) 55 All 570, 143 IC 727, AIR 1933 All 417(FB) ; Reg v. Doutre, [1884] 9 AC 745(PC) . 65 Shantiniketan Co-Op Housing Society Ltd. v. District Registrar, Co-Operative Societies, AIR 2002 Guj 428. 66 Commissioner of Income Tax v. Hukamchand Mannalal, AIR 1971 SC 383 at 385; Chandrakant Manilal Shah v. Commr of Income Tax, AIR 1992 SC 66 at 73.
Married Women The capacity of a woman to contract is not affected by her marriage either under the Hindu or Mohammedan law. A Hindu female is not, on account of her sex, absolutely disqualified from entering into a contract; and marriage does not take away or destroy any capacity possessed by her in that respect.67Her husband's consent is not required. When she makes a contract with the consent or authority of her husband, she act s as his agent, and binds him by her act; and she may bind him by her contract, in certain circumstances,68 even without his authority, the law empowering her on the ground of necessity to pledge her husband's credit. Otherwise, a married woman cannot bind her husband without his authority, but she is then liable on the contract to the extent of her stridhanam (separate property).69 Similarly, a married Hindu woman may contract jointly with her husband, but then she is liable to the extent of her stridhanam only.70 The Indian Succession Act, 1925, s. 20, and the Married Women's Property Act, 1874 create separate property of married women, and impliedly confer upon them, as an incident of such property, the capacity to contract in respect thereof.71Section 20 of the Succession Act provides that no person shall, by marriage, acquire any interest in the property of the person whom he or she marries, nor
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become incapable of doing any act in respect of his or her own property, which he or she could have done, if unmarried. Thus, on or after 1st January 1866, all married women to whose marriages the Act applied, became absolute owners of all property vested in, or acquired by them, and their husbands did not by marriage acquire any interest in such property.72 The Married Women's Property Act, 1874 enacted that the wages and earning of any married woman acquired or gained by her after the passing of that Act in any employment, occupation or trade carried on by her, and all money or other property acquired by her through the exercise of any literary, artistic, or scientific skill, should be deemed to be her separate property (s. 4). The Act also provides that a married woman may sue and may be sued in her own name in respect of her separate property (s. 7), and that a person entering into a contract with her with reference to such property may sue her, and to the extent of her separate property recover against her, as if she were unmarried (s. 8). 67 Kanhayalal Bisandayal Bhiwapurkar (Dr) v. Indarchandji Hamirmalji Sisodia, AIR 1947 Nag 84. 68 Pusi v. Mahadeo Prasad, (1880) 3 All 122 at 124, (1880-82) ILR 3-4 All 67 (in case of pressing necessity). 69 Per cur in Nathhubhai Bhailal v. Javher Raiji, (1876) 1 Bom 121; under s. 14 of the Hindu Succession Act, 1956, a woman is an absolute owner of any property acquired by her by any means. 70 Govindji Khimji v. Lakmidas Nathubhoy, (1879) 4 Bom 318; Narotam v. Nanka, (1882) 6 Bom 473. 71 The Married Women's Property Act, 1874, s. 2, and the Indian Succession Act, 1925, s. 20. 72 The Indian Succession Act, 1925, s. 20 (2).
Insolvent There is no prohibition against a contract by an insolvent after the insolvency proceedings have commenced but before adjudication. Insolvency does not determine a contract nor operate per se rescission thereof.73 There is no statutory prohibition against the sale of property by an insolvent after insolvency proceedings have been initiated. The vesting of the property in the Official Receiver is for the benefit of the creditors, and so does not purport to affect the transactions between the insolvent and other persons except in so far as they affect the administration of the insolvent's estate for the benefit of the creditors. As far as the parties to the transaction are concerned, they are binding on them. A sale deed executed by the insolvent, before the insolvency petition was filed, but registration whereof took place, in the course of insolvency proceedings, was held valid and binding on the parties.74 73 Kusampadi Sunadra Rama Raju v. Official Receiver, AIR 1964 AP 299; Presidency Towns Insolvency Act, 1900, s. 65; Provincial Insolvency Act, 1920, ss. 53, 54. 74 Sakhamuri Peraya v. Nimmaraju Kondayya, 1948 Mad 872, AIR 1948 Mad 430; Mulla's Law of Insolvency in India, 4th edn, p. 195: Effect on transactions.
Deity The analogy of minor cannot be applied to deities. A deity is not a perpetual minor and a contract for sale of immovable property belonging to a private deity made by a 'marfatdar' (trustee) is specially enforceable against the deity when it is for legal necessity.75 75 Sri Durga Thakurani Bije Nijigarh v. Chinatamoni Swain, AIR 1982 Ori 158 at 162.
Alien Enemy
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The disability of alien enemies to sue in our courts without licence is a matter of general public policy and does not come under this head. Their competency to sue, or liability to be sued is stated in section 83 of the Code of Civil Procedure , 1908.
Ratification Since an agreement by an incompetent person is void, there can be no question of ratifying it.76 Such a provision prevents minors from being pressurized into making enforceable a promise that was once unenforceable.
&uot;A lender would be able to advance money to an inexperienced boy, knowing that as soon as the boy became of age, he, the lender, could use as a lever to extract a fresh promise the argument that it was a debt of honour and shame him into making a fresh promise to discharge an obligation which he had incurred at a time when, ex hypothesi, he was not capable of judging for himself.&uot;77
Ratification in law is treated as equivalent to a previous authority, and it follows that, as a general rule, a person, or body of persons, not competent to authorize an act, cannot give it validity by ratifying it. Ratification is based on an assumption that authority could have been conferred at the date when the act s were performed.78 A promissory note given by a person after attaining majority, in settlement of an earlier one, signed by him during minority cannot be enforced in law, and void for want of consideration.79 However, such promise will be enforced if supported by fresh consideration. S signed a bond after attaining majority, promising to pay within a year R s. 7000/- towards the price of goods sold to him during his minority, and also to repay Rs. 76/- advanced to him for necessaries. The obligee sued S on the bond. It was held that S was liable.80 The Court said:
Here the contract on which the suit is brought is by a defendant of full age, it is a new contract, but the plaintiff has debarred himself from suing until the expiration of one year after the date of the contract for moneys which are alleged to be due at the date of the contract, and he had made an advance of Rs. 76/-. There was thereupon a new consideration for the promise on which the defendant is sued.
The only difference between this and the earlier case is that in the Madras case, there was a promissory note signed during minority and was renewed by the defendant on attaining majority, while in the later case, the bond was executed for the first time after attaining majority. This circumstance cannot make any difference in principle, nor is there anything in the judgment in the later case to show that the decision proceeded upon any such difference. The Calcutta High Court found new consideration for the promise on which the defendant was sued. It is difficult to see how either the forbearance to sue or the advance for necessaries could be regarded as a new consideration, and the decree so far as it awarded to the plaintiff, the price of the goods sold, appears erroneous in law.81 Where a person on attaining majority pays a debt incurred by him during minority, the question of ratification does not arise. He cannot sue for return of the amount later, and the payment must be regarded as a gift.82 In the English law, a minor was once prevented from ratifying his contract after majority, and from making a fresh agreement to pay a debt contracted during minority.83After the Minors Contract Act, 1987 a minor is bound by a promise confirming a promise made during minority, even if such promise is without consideration. Thus, a creditor can induce a former minor to satisfy a previously
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unenforceable debt, or to repay a previously unenforceable loan, or to perform a previously unenforceable contract, after majority. A fresh agreement and an act of ratification made after majority are both equally binding. 76 Govind Ram v. Piranditta, (1935) 16 Lah 456, 158 IC 243, AIR 1935 Lah 561(FB) ; Nazir Ahmad v. Jiwan Das, AIR 1938 Lah 159, 177 IC 388; Tukaram Ramji Shendre v. Madhorao Manaji Bhange, (1947) Nag 710, AIR 1948 Nag 293; Hari Satya Banerjee v. Mahadev Banerjee, AIR 1983 Cal 76 (release of property sold during minority). 77 See observation of Boys J in Suraj Narain Dube v. Sukhu Aheer, AIR 1928 All 440. 78 Tukaram Ramji Shendre v. Madhorao Manaji Bhange, AIR 1948 Nag 293. 79 Ramaswami Pandia Thalavar v. Anthappa Chettiar, (1906) 16 Mad LJ 224; Arumugan Chetti v. Duraisinga Tevar, (1914) 37 Mad 38, 12 IC 568, (1914) ILR 37 Mad 38; Suraj Narain Dube v. Sukhu Aheer, (1928) 51 All 164, 112 IC 159, AIR 1928 All 440. 80 Kundan Bibi v. Sree Narayan, (1906) 11 Cal WN 135, followed in Karm Chand v. Basant Kaur, 11 IC 321. 81 The opinion here expressed was approved by the Lahore High Court in Firm Bhola Ram Harbans Lal v. Bhagat Ram, (1926) 99 IC 318, AIR 1927 Lah 24; Karim Khan Mahtab Khan v. Jaikaran Godadmal Marwadi, (1937) Nag 458, 170 IC 543, AIR 1937 Nag 390; the decision in Narain Singh v. Chiranji Lal, (1924) 46 All 568, 79 IC 945, AIR 1924 All 730 (2), seems of doubtful validity. 82 Tukaram Ramji Shendre v. Madhorao Manaji Bhange, (1947) Nag 710, AIR 1948 Nag 293. 83 Section 2 of the (English) Infants' Relief Act, 1874, and section 5 of the Betting and Loans (Infants) Act, 1892, both repealed by the Minors' Contract Act, 1987.
Liability for Necessaries Section 68 of this Act provides for liability in respect of necessaries supplied to a person incapable of entering into a contract. A minor is a person incapable of contracting within the meaning of that section,84 and therefore, the provisions of that section apply to his case, as well as that of a person of unsound mind. The property of such person is liable to reimburse for necessaries supplied to him, and no personal liability is incurred by him.85 84 Watkins v. Dhunno Baboo, (1881) ILR 7 Cal 140 at 143; Mohori Bibee v. Dhurmodas Ghose, (1903) 30 IA 114, (1903) 30 Cal 539. 85 See notes to s. 68 below.
Competency of Legal Persons The object of the Contract Act requires that the word 'person' should have an extended sense.86 Not only individuals, but other legal persons can also enter into contracts. Government Under the Constitution of India, the executive power of the Union and of each state extends, inter alia, to the making of contracts for any purpose.87Every contract is an agreement between parties who are 'persons' within the meaning of the Contract Act, and hence the Central or State Government 'is a 'person' within the meaning of s. 72 and enters into contracts as such person.88 The Government of India or Government of a state is not incompetent to enter into contracts like a minor is.89 Foreign States and their Rulers are competent to contract. Suits to enforce contracts against them is subject to sections 86 and 87 of the Code of Civil Procedure , 1908, and requires consent of the
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Central Government;90 but such consent may not be necessary to file proceedings under special statutes.91 Companies and Statutory Corporations A statutory person is not on the same footing as a minor in the matter of capacity of contract. While a minor's capacity is an inherent one, the statutory person suffers from no such incapacity. It can exercise its power subject to the formalities imposed by statute, and any restriction on the exercise of power does not amount to inherent disqualification or incapacity.92 While some statutes expressly confer upon the corporation or statutory body formed under them the capacity to enter into contracts,93 others assume that such corporation has the capacity to contract,94 and confer the authority of contracting upon a body within the corporation.95The Companies Act, 1956 also assumes that a company can contract, and provides in s. 46, the mode of executing contracts by the company, and that such contracts shall bind the company. However, a contract purported to be made by a company incorporated after the contract is made but not by its promoters, cannot be enforced.96 Hence a contract made for a company before its incorporation must be expressed as made by a promoter of a company that is to be incorporated. Pre-incorporation Contracts Before its incorporation, a company has no capacity to contract. In common law, nobody can contract for a pre-incorporated company as its agent, because an act which cannot be done by the principal himself cannot be done by him through an agent. A pre-incorporation contract cannot even be ratified by the company after its incorporation. The pre-incorporation contract must be made by its promoters; if stated as made by the company before its incorporation, it cannot be enforced.1The company may, on incorporation, enter into a new contract to implement the terms of the pre-incorporation contract. In India, s. 15(h) of the Specific Relief Act, 1963 provides that the company can enforce a pre-incorporation contract if it is warranted by the terms of incorporation and the company has accepted the contract and communicated such acceptance to the other party.2Section 19(e) of that Act covers the converse position where the third party can enforce such contract against the company. These provisions are concerned with executory contracts and do not apply to conveyances of immovable property.3 Illiteracy, Weakness of Mind,PardanashinWomen Illiteracy, weakness of mind short of unsoundness, immaturity, absence of skill or knowledge about the matter being transacted, inequality of bargaining power, and unfamiliarity with language do not affect competency. Adult pardanashin women4 of sound mind are sui juris and cannot be treated like minors or as incapable of conducting their own business.5 86 State of Uttar Pradesh v. Kanhaiya Lal Makund Lal Sarraf, AIR 1956 All 383. 87 The Art. 298. Constitution of India, 88 The Arts. 298 and 299 Constitution of India, ; the General Causes Act. 1897, s. 3; State of Uttar Pradesh v. Kanhaiya Lal Mukund Lal Sarraf, AIR 1956 All 383. 89 State of West Bengal v. BK Mondal & Sons, AIR 1962 SC 779 at 789, [1962] 1 SCR 876 (applicability of s. 70 to a contract of the Government). 90 Mirza Ali Akbar Kashani v. United Arab Republic AIR 1966 SC 230; V D S Rostock (DSP Lines) Deptt of GDR v. N C Jute Mills Co Ltd AIR 1994 SC 516 91 Ethiopian Airlines v. Ganesh Narain Saboo, AIR 2011 SC 3495, 2011 (8) SCC 539 (Consumer Protection Act, 1986);H H the Maharana Sahib Shri Bhagwat Singh Bahadur of Udaipur v. State of Rajasthan AIR 1964 SC 444 (Industrial Disputes Act);
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92 Ram Nagina Singh v. Governor-General in Council, AIR 1952 Cal 306; Dharmeswar Kalita v. Union of India, AIR 1955 Assam 86. 93 See s. 5 of the Advocates Act, 1961: 'Every Bar Council shall be a body corporate having perpetual succession... with power to...contract....' See also the Airports Authority of India Act, 1994, s. 3(2); Auroville Foundation Act, 1988, s. 10(2); Bureau of Indian Standards Act, 1986, s. 3; Cantonments Act, 1924, s. 11; Coffee Act, 1942, s. 5 (coffee board); Food Corporation of India Act, s. 3(2); Trade Unions Act, 1926, s. 13; Unit Trust of India Act, 1963, s. 3, and other statutes. 94 Chartered Accountants Act, 1949; the Life Insurance Corporations Act, 1956; the State Bank of India Act, 1955 and other statutes. 95 The Aligarh Muslim University Act, s. 17(f), (executive council). 96 Andhra Pradesh Tourism Development Corporation v. Pampa Hotels Ltd., AIR 2010 SC 1806, (2010) 5 SCC 425 (arbitration agreement) 1 Andhra Pradesh Tourism Development Corporation v. Pampa Hotels Ltd., AIR 2010 SC 1806, (2010) 5 SCC 425 (arbitration agreement). 2 Jai Narain Parasrampuria v. Pushpa Devi Saraf, (2006) 7 SCC 756; Indowind Energy Ltd. v. Wescare (I) Ltd., AIR 2010 SC 1793, (2010) 5 SCC 306. 3 Vali P Rao v. Sri Ramanuja Ginning & Rice Factory (P) Ltd., AIR 1984 AP 176 at 186-87. 4 See s. 16 below, under the heading: Pardanashin Women. 5 Suraj Prasad v. Makhna Devi, AIR 1946 All 127 at 131.
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The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER II Of Contracts, Voidable Contracts and Void Agreements S. 12. What is a sound mind for the purposes of contracting.-A person is said to be of sound mind for the purpose of making a contract, if, at the time when he makes it, he is capable of understanding it and of forming a rational judgement as to its effect upon his interests. A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind. Illustrations (a) (b)
A patient in a lunatic asylum, who is, at intervals, of sound mind, may contract during those intervals. A sane man, who is delirious from fever, or who is so drunk that he cannot understand the terms of a contract, or form a rational judgement as to its effect on his interests,
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cannot contract whilst such delirium or drunkenness lasts.
Introduction The section gives the test of soundness of mind. It provides that the soundness must exist at the time of making of the contract. The second and the third paragraphs provide for cases where a person may usually, or occasionally be of unsound mind. The effect of an agreement made by such person is discussed in the preceding section.
Test of Soundness of Mind Mental incapacity, arising out of any reason, deprives a person not only of a full understanding of a transaction, but also of the awareness that he does not understand it. This distinguishes it from lack of ability arising out of illiteracy and unfamiliarity with language.6 The test of unsoundness of mind is whether the person is incapable of understanding the business concerned and its implications.7 The understanding of the party to a contract required to uphold the validity of transaction would depend on the nature of the transaction.8 Therefore, there cannot be a fixed standard of sanity for all transactions.9 A person may be normal by appearance, but if he is incapable of forming a judgment as to what is in his own interest, the law would protect him.10 For a valid contract, the test of soundness of mind must be satisfied at the time the contract is made.11 Mere weakness of mind is not unsoundness of mind.12 Nor does mere loss of memory make a person unfit for management of his own affairs in his lifetime.13 Questions of undue influence and of incapacity by reason of unsoundness of mind involve totally different issues.14 A person, though apparently of sound mind, may still be incapable of understanding the nature of the transaction or to judge whether it is to his benefit or not. To such a person, the principles applicable to a pardanashinlady will apply. A man incapable of judging the consequences of his act should not be held to be bound by his contract.15 Unsoundness of mind may arise due to old age. Lack of capacity due to old age is inferred only if the mind has become vacuous.16 A man aged 70, gifted properties to his daughter. He suffered at that time from delusions that he held thousands of acres of land, when in fact he held about 15-20 acres in India and 100 acres in Rangoon. He was held to have lacked contractual capacity, as he could not assess the effect of the gift on his own interest.17 6 Chitty on Contracts, 28th edn, p. 462, para 8-001. 7 Kanhaiyalal v. Harsing Laxman Wanjari, AIR 1944 Nag 232; Indar Singh v. Parmeshwardhari Singh, AIR 1957 Pat 491; Ram Sunder Saha v. Kali Narain Sen Choudhury, AIR 1927 Cal 889, 104 IC 527; Mahomed Yakub v. Abdul Quddus, AIR 1923 Pat 187. 8 Manches v. Trimborn, (1946) 115 LJKB 305; Gibbons v. Wright, (1954) 91 CLR 423; Bennett v. Bennett, [1969] 1 WLR 430, [1969] 1 All ER 539; Mason v. Mason, (1972) Fam 302, [1972] 3 All ER 315 (consent to decree of divorce); Re Roberts,[1978] 1 WLR 653, [1978] 2 All ER 225 (capacity to marry); Re Beaney,[1978] 1 WLR 770, [1978] 2 All ER 595. 9 Gibbons v. Wright, (1954) 91 CLR 423. 10 Indar Singh v. Parmeshwardhari Singh, AIR 1957 Pat 491 at 493. 11 Tilok Chand Charan Das v. Mahandu, AIR 1933 Lah 458, 144 IC 741; Nilima Ghosh v. Harjeet Kaur, AIR 2011 Del 104. 12 Kanhaiyalal v. Harsing Laxman Wanjari, (1944) Nag 698, AIR 1944 Nag 232.
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13 Rajkumar Sen Chowdhury v. Ram Sundar Shaha, AIR 1932 PC 69. 14 Sayad Muhammad v. Fatteh Muhammad, (1894) 22 IA 4 at 12, (1894) 22 Cal 324; Durga Bakhsh Singh v. Mirza Muhammad Ali Beg, (1904) 31 IA 235; Ram Sunder Saha v. Kali Narain Sen Choudhury, AIR 1927 Cal 889, 104 IC 527. 15 Indar Singh v. Parmeshwardhari Singh, AIR 1957 Pat 491. 16 Ram Sundar Saha v. Kali Narain Sen Choudury, AIR 1927 Cal 889. 17 Govindswami Naicker v. KN Srinivasa Rao, AIR 1940 Mad 73 (senile dementia).
Contract in Lucid Interval The second paragraph of the section provides that a person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind.18 Thus, even a patient in a lunatic asylum19 may contract during lucid intervals [see illustration (a)]. Where unsoundness of mind is proved by definite medical evidence, the fact that the person was in a lucid interval when he made the contract must also be proved by as strong and as much demonstrative evidence.20 The earlier editors of this book have been of the view that where a committee or a manager of the estate of a lunatic, adjudged to be so, is appointed under the Indian Act relating to lunacy, no contract could be entered into by a lunatic in respect of his estate, even though at the time of the contract he may be in a lucid interval; but neither the Indian Lunacy Act, 1912 nor the Mental Health Act, 1987 expressly prohibit such contracts. It is submitted that an appointment of a guardian or manager under the Mental Health Act, 1987 merely confers powers on a guardian or manager so appointed. The capacity of such 'mentally ill person' to contract during a lucid interval must be judged under the provisions of this section, the adjudication of a person as a lunatic or 'mentally ill person' under the law relating to mental health would only shift the burden of proof upon the person who alleges sanity.21 18 See for an illustration the facts in Jai Narain v. Mahabir Prasad, AIR 1926 Oudh 470 (contract by an alcoholic when of sound mind). 19 Now a 'mentally ill person' in a 'mental health institution' under the Mental Health Act, 1987. 20 U Aung Ye v. Ma E Mai, AIR 1932 Rang 24, 137 IC 766; Bahadur Singh Chhetri v. Bir Bahadur Singh, AIR 1956 Cal 213. 21 Bahadur Singh Chhetri v. Bir Bahadur Singh, AIR 1956 Cal 213.
Drunkenness Unsoundness of mind may arise from being drunk; this is suggested by illustration (b) to this section. Under the Indian Contract Act, such an agreement made in a state of drunkenness is void and therefore unenforceable.22 But a drunken person is liable for necessaries supplied to him while suffering from incapacity to contract. A similar approach would be taken of agreements made under the influence of other intoxicating substances. Under English law, the test of incapacity by reason of drunkenness was the same as that for persons with mental disorder. In Pitt v. Smith, 23 it was held that a person in a state of complete drunkenness 'has no agreeing mind'. In a later case, it was held that if a party was drunk when he signed an agreement, the document is a nullity.24 Equity has a wider jurisdiction to set aside an unfair or unconscionable transaction entered into by a person affected by drink.25 Equity will not enforce a contract by specific performance where a party has taken advantage of another's intoxication.26 Specific performance was refused in the case of a sale where the seller had been indulging in bouts of
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drunkenness, the consideration was inadequate-- at the time of the contract of the sale for GBP 25,000; GBP 5 was paid as deposit; the consideration was payable in more than four years and the interest thereon was only four per cent pa.27 Under English law, the contract is voidable if the intoxicated person could not understand the transaction and the other party knew it,28 unless it was ratified when sober.29 22 See Chacko v. Mahadevan, AIR 2007 SC 2967, (2007) 7 SCC 363 for an instance of a sale set aside as being signed under influence of liquor, though it is not clear whether the sale has been set aside as void under this section, or fraud; see also Yogendra Singh v. Prem Lata, RFA 36/2005, decided on 27 Sep 2013 (Del). 23 (1811) 3 Camp 33, 13 RR 741. 24 Fenton v. Holloway, (1815) 1 Stark 126. 25 Cooke v. Clayworth, 34 ER 222, (1811) 18 Ves 12; Butler v. Mulvihill, (1823) 1 Bligh 137; Wiltshire v. Marshall, (1866) 14 LT 396(NS) ; Bromley v. Ryan, (1956) 99 CLR 362; Chitty on Contracts, 28th edn, p. 491, para 8-077. 26 Malins v. Freeman, (1837) 2 Keen 25. 27 Bromley v. Ryan, (1956) 99 CLR 362 at 405; see also Yogender Singh v. Prem Lata, RFA 36/2005, decided on 27 Sep 2013 (Del). 28 Gore v. Gibson, (1845) 13 M&W 623 at 34. 29 Mathews v. Baxter, (1873) LR 8 Exch 132 at 406.
Evidence and Burden of Proof The presence or absence of soundness of mind at the time of making the contract is in all cases a question of fact.30 Previous or subsequent mental disorder may not be material except to create a suspicion of the likelihood of such disorder at the time of making the contract.31 There is a presumption in favour of sanity. The onus of proving insanity is on the person who alleges it.32 The allegation of unsoundness of mind must be established by evidence, showing that the person was incapable of understanding the business and of forming a rational judgment as to the effect of the transaction on his interests,33 at the time of making the contract.34 Where a person is usually of unsound mind, the burden of proving that at the time he was of sound mind lies on the person who affirms it. Once it has been established that a person is of unsound mind, the onus is on the person who alleges that the document was executed during a lucid interval to prove it.35 In cases, however, of drunkenness or delirium from fever or other causes, the onus lies on the party who sets up that disability to prove that it existed at the time of the contract. In order to establish the plea of being incapable of comprehending the meaning and effect of an agreement, it has to be shown that the party was so drunk as to be unable to do so, and, under the English law, also that the other party was aware of his condition.36 The question whether a contract is invalidated by unsoundness of mind does not depend merely on the belief or disbelief of the witnesses examined before the court, but largely on the inference to be drawn from the evidence.37 Circumstances evincing insanity must be considered together and not individually, and their cumulative effect seen.38 A registrar's endorsement on a registered document about the mental condition of an executant is relevant.39 Treatment of mental disorder under the law relating to mental health,40 or of addiction to liquor,41 or a finding that the person was incapable of managing property or administering his affairs,42 may constitute only prima facie evidence of mental disorder. An order in lunacy,43though not a conclusive judgment under s. 41 of The Indian Evidence Act, 1872 is relevant and binding upon the parties and those who claim under them.44
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30 U Aung Ye v. Ma E Mai, AIR 1932 Rang 24, 137 IC 766; Tilok Chand Charan Das v. Mahandu, AIR 1933 Lah 458, 144 IC 741; Hazrabi v. Fatmabi, AIR 1938 Nag 204, 177 IC 80: medical evidence is almost essential: Kanhaiyalal v. Harsing Laxman Wanjari, (1944) Nag 698, AIR 1944 Nag 232; Chunilal Bhoopal v. Chandra Dutta, AIR 1953 Assam 94. 31 M'Adam v. Walker, (1813) 1 Dow 148(HL) ; Lakshmi v. Ajay Kumar, AIR 2006 P&H 77. 32 Mahomed Yakub v. Abdul Quddus, AIR 1923 Pat 187; Sham Nath Madan v. Mohammed Abdullah, AIR 1967 J&K 85; Jyotirindra Bhattacharjee v. Sona Bala Bora, AIR 2005 Gau 12; see also Tilok Chand Charan Das v. Mahandu, AIR 1933 Lah 458, 144 IC 741. 33 Indar Singh v. Parmeshwardhari Singh, AIR 1957 Pat 491; Ram Sunder Saha v. Kali Narain Sen Choudhury, AIR 1927 Cal 889, 104 IC 527; Mahomed Yakub v. Abdul Quddus, AIR 1923 Pat 187. 34 Lakshmi v. Ajay Kumar, AIR 2006 P&H 77. 35 Mohanlal Madangopal Marwadi v. Vinayak Sadasheo Sonak, AIR 1941 Nag 251, 196 IC 660; Bahadur Singh Chhetri v. Bir Bahadur Singh, AIR 1956 Cal 213; Subrahmanya Sastri v. Lakshminarasamma, AIR 1958 AP 22; Clara Auroro de Branganca v. Sylvia Angela Alvares, AIR 1985 Bom 372 (person on parole from the mental hospital). 36 Bromley v. Ryan, (1956) 99 CLR 362 at 405; Cooke v. Clayworth, 34 ER 222, (1811) 18 Ves 12 (inadequacy of consideration). 37 Ram Sunder Saha v. Kali Narain Sen Choudhury, AIR 1927 Cal 889, 104 IC 527; Jyotirindra Bhattacharjee v. Sona Bala Bora, AIR 2005 Gau 12. 38 Mohanlal Madangopal Marwadi v. Vinayak Sadasheo Sonak, AIR 1941 Nag 251, 196 IC 660. 39 Hazrabi v. Fatmabi, AIR 1938 Nag 204, 177 IC 80. 40 The Mental Health Act, 1987. 41 Chacko v. Mahadevan, AIR 2007 SC 2967, (2007) 7 SCC 363. 42 Bahadur Singh Chhetri v. Bir Bahadur Singh, AIR 1956 Cal 213; Lakshmi v. Ajay Kumar, AIR 2006 P&H 77 (unsoundness of mind not established). 43 Now an order that a person is a 'mentally ill person' under ss. 51-54 of the Mental Health Act, 1987. 44 Subba Naicker v. Solaiappa Naicker, AIR 1933 Mad 624.
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The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER II Of Contracts, Voidable Contracts and Void Agreements S. 13. 'Consent' defined.-Two or more persons are said to consent when they agree upon the same thing in the same sense.
Introduction This section defines consent. Parties are said to consent when they not only agree upon the same
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thing, but also agree upon that thing in the same sense.
Apparent and Real Consent Earlier editors have opined that the language of this section is, on the face of it, more judicial or expository than legislative. As an authoritative definition, it does not seem to define very much. It would need some courage to maintain that persons can be said to consent when they do not agree upon the same thing, or that if they do not agree in the same sense, they can be said to agree in any sense at all. The phrase comes originally from the New York Civil Code, but it has judicial sanction, and the passage in which it was used by the late Lord Hannen, before this Act was passed, is perhaps the best commentary on the general significance of the present section:
It is essential to the creation of a contract that both parties should agree to the same thing in the same sense. Thus if two persons enter into an apparent contract concerning a particular person or a ship, and it turns out that each of them, misled by a similarity of name, had a different person or ship in his mind, no contract would exist between them.45
But in case this mistake is caused by the fault of the other party, it may not invalidate the consent. One of the parties to an apparent contract may, by his own fault, be precluded from setting up that he had entered into it in a different sense to that in which it was understood by the other party. Thus, in the case of a sale by sample where the vendor, by mistake, exhibited a wrong sample, it was held that the contract was not avoided by this error of the vendor.46 In Central National Bank Ltd v. United Industrial Bank Ltd, 47 one B agreed to sell shares to M and handed over the shares and transfer papers to UI Bank with instructions to deliver them to M on receiving payment. M hoodwinked the official of the UI Bank, took away the papers and pledged them with CN Bank for a loan, which M did not pay, and absconded. CN Bank sold the shares to a broker who paid a cheque, payment of which was later stopped. In criminal proceedings, the police took possession of the shares. UI Bank claimed the return of shares in these proceedings. CN Bank then filed a suit for declaration that it was entitled to possession, alleging that it had received the shares under a valid pledge from M in good faith and without notice of defect in title of M, and M being in possession of the shares with the consent of B,the pledge was effective under s. 30(2) of the Sale of Goods Act, 1930.48A question arose whether 'consent' for the purposes of s. 30(2) of the Sale of Goods Act should be free consent. It was held that 'consent' meant agreeing with the same thing in the same sense. A consent induced by false representation may not be free, but it can nevertheless be real, and then the effect of the fraud or misrepresentation is to render the transaction voidable only and not void. Whether there is a consent or not had to be proved as a fact in accordance with the principles of the law of contract, and when it is proved to exist, its existence cannot be nullified by application of any rule of criminal law. The Court also observed that if the fraud was of such a character as would prevent there being any consent at all, namely of the type whereA obtains possession of the goods from the owner by falsely representing himself to be B, the agreement would be void.49 45 Raffles v. Wichelhaus, (1864) 2 H&C 906. 46 Scott v. Littledale, (1858) 8 E&B 815, (the sale was of a specific cargo, and the seller misled the buyer, though innocently). If anyone was entitled to set aside the contract, it was the buyer; See also clause (3) of s. 18. 47 AIR 1954 SC 181. 48 Under this section, if a buyer obtains possession of the goods with the consent of the seller before the property in them has passed to him, he may sell, pledge etc. the goods to a third person, and if such third person obtains delivery of the goods in good faith and without notice of any lien or other right of the original seller in respect of the goods, he
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will get a good title to them. 49 Central National Bank Ltd. v. United Industrial Bank Ltd., AIR 1954 SC 181.
'Thing' The word 'thing' must obviously be taken as widely as possible, though it seems most appropriate where the contract has to do with corporeal property. The 'same thing' must be understood as the whole content of the agreement, whether it consists, wholly or in part, of delivery of material objects, or payment, or other executed act s or promises. No effective contract can come into existence unless the parties are ad idem on all the essential terms of the transaction.50 50 Dhulipudi Namayya v. Union of India, AIR 1958 AP 533.
Mistakes A distinction must be made between a mutual shared mistake or common mistake on the one hand and a mutual mistake on the other.51 The former is a mistake 'possessed or shared alike by both or all the persons or things in question', and nullifies a consent which exists in an agreement. The latter is where the parties misunderstand each other and are at cross purposes; it is a mistake 'possessed or entertained by each of two persons towards or with regard to each other', and it negates consent. Common Mistake A mutual shared mistake or common mistake as to some fact which by the common contention of the parties to a contract, whether express or implied, constitutes the underlying assumption, without which the parties would not have made the contract they did, and which, therefore, affects the substance of the whole consideration, is sufficient to render the contract void.52 Such a mistake might render a contract void, provided it rendered the subject matter essentially and radically different from what the parties believed to exist.53 This is a mistake of both parties as to a matter of fact essential to the agreement as contemplated by s. 20 below. If the mistake is not common, it may happen, in very exceptional cases, that by reason of an ambiguous name, or the like, each party is mistaken as to the other's intention and neither is estopped from showing of his own intention.54 Otherwise, a contract (assuming the other conditions for the formation of a contract to be satisfied) can be affected by such a mistake, not common to both parties, only where it is induced by fraud or misrepresentation. Under s. 18, wilful acquiescence in the other party's mistake is equivalent to misrepresentation under certain circumstances. If the mistake is common, it can seldom, if ever, be said that there was no consent. A simpler and more correct explanation is to say that there was an agreement subject to a condition understood or implied in the nature of the agreement itself, though not expressed, and that condition has not been fulfilled. It may be that at the date of the agreement, the condition is already incapable of fulfilment by reason of some fact unknown to the parties, as in the case of an agreement for the sale of a horse, which in fact is dead, or a specific cargo which in fact, is lost. In that case, no operative obligation ever arises under the agreement. But this may be the case with any conditional contract. The interposition of a time of suspense, during which it cannot be known whether there will be an operative contract or not, can make no difference to the legal nature of the transaction. This particular class of cases is dealt with by s. 20 of the Act. Unilateral Mistake
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A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact (s. 22 below). If one party is caused to commit a mistake by the other party, however innocently, as to the substance of the thing which is the subject of the agreement, the contract is voidable at the option of the party mistaken under s. 18, clause (3). A mistake of one party, to render an agreement void, must be as to a term in the agreement, and not as to quality or substance of the thing contracted for. But such mistake would vitiate the contract, if the mistake is known to the other party. Mistake Negating Consent: No Agreement Sometimes, parties may not be ad idem,though there may be an apparent agreement. This may happen if one party thinks that the offeree or the offeror is some person other than what he really is, or mistakes the thing offered for something different, or the terms offered by the other party are different from what are act ually proposed. 51 See s. 20, under the heading: 'Types of Mistakes'. 52 Bell v. Lever Bros Ltd., [1932] AC 161, [1931] All ER Rep 1; Uttar Pradesh Government v. Lala Nanhoo Mal Gupta, AIR 1960 All 420. 53 Associated Japanese Bank International Ltd. v. Credit du Nord SA, [1989] 1 WLR 225 at 266-68, [1988] 3 All ER 902 at 912-13. 54 Raffles v. Wichelhaus, (1864) 2 H&C 906; Falck v. Williams, [1900] AC 176,(PC) where an offer made by an ambiguous code message was accepted unconditionally, but in fact not in the proposer's sense, and there was no contract.
Objective Test of Intention In such cases, agreement may often reasonably be inferred from the facts viewed objectively. The intention of the parties must be inferred from their words and conduct as interpreted by a reasonable person, i.e., it must be construed objectively. 'If the parties exhibit all the outward signs of agreement, the law will hold that they have agreed.'55 It was stated in Smith v. Hughes: 56
If, whatever a man's real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that the other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party's terms.
Generally, parties who have concurred in purporting to express a common intention by certain words cannot be heard to deny that what they did intend was the reasonable effect of those words; and that effect must be determined, if necessary, by the court, according to the settled rules of interpretation. Whoever becomes a party to a written contract 'agrees to be bound, in case of dispute, by interpretation which a Court of law may put upon a language of the instrument,' whatever meaning he may attach to it in his own mind.57 Exceptions to this rule are admitted only for special and carefully limited reasons. Although, there may be apparent consent to the terms between the parties, real consent may not be found, and hence agreement negatived in the following situations:
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(i) (ii) (iii)
offer and acceptance do not coincide; mistake as to identity of the person contracted with; mistake in relation to a written document: non est factum.
Offer and Acceptance do not Coincide: Mutual Misunderstanding For a valid contract to occur, acceptance of an offer must be in the same sense in which the offer was made.58 Owing to the mistake of one party, an offer may be innocently accepted in a different sense from that in which it was intended by the offeror and the terms in which the contract is expressed may suffer from such latent ambiguity that it is impossible to say that the conduct of the parties point to one solution rather than another. The contract will be void because the terms of the offer and the acceptance did not coincide.59A may have contracted with reference to term or subject-matter 'X' and B may have accepted it as referring to term or subject matter 'Y'. When the question of enforcing the agreement arises, one party may say that he did not attach the same meaning to the terms as the other party, and objectively viewed, the meaning attached by the first party may be possible. It would then turn out that the contract is void because the terms of the offer and acceptance do not match. In Raffles v. Wichelhaus, 60 the defendants contracted to buy a cargo of cotton to arrive 'ex Peerless from Bombay'. There were two ships of that name and both sailed from Bombay, but one left in October and the other in December. Here, both parties were behaving reasonably, but had different things in mind. There was no contract. The court, considering the matter objectively, was unable to determine which ship was the contract ship. In Henkel v. Pape, 61 the defendant wanted to order three rifles by telegraph, and a blunder in transmitting the message turned three into three, which the plaintiff naturally took as referring to the number fifty, mentioned in the previous letter. Here, it was held that the telegraph clerk had no authority to send the message except as it was delivered to him, so that the message as communicated to the plaintiff was not the defendant's offer at all. This, again, had nothing to do with mistake in point of law. It was immaterial whether the wrong message was sent by the clerk's mistake, or by fraudulent alteration, or through some external accident, such as a thunderstorm, affecting the instruments. Similarly, if the addressee of a cipher or code message, conveying a proposal, misreads the proposal, not unreasonably, and accepts it according to his own understanding, he cannot be held bound to the contract which the proposer intended. If bought and sold notes showed a material variation, neither of them, nor both of them taken together could be relied upon for the purposes of proving the terms of the contract, but if the two notes did not show any variation or disparity, they would constitute a binding contract.62 Where matter was inserted into an instrument after signatures, but before registration, it did not bind the parties.63 Mistake as to Terms There is no consent when the parties intend to contract on different terms, e.g., when A intends to buy for GBP 30 but B intends to sell for 30 guineas.64 If A buys oats believing them to be old oats when in fact they are new, A cannot plead that the agreement is void for mistake, A must prove that he believed that the seller warranted them to be old oats. The difference, as Blackburn J. puts in Smith v. Hughes, 65 is between buying a horse believed to be sound, and buying a horse believed to be warranted sound. The former case is one of mistaken motive, giving no relief to the disappointed buyer, whereas in the latter case, the buyer has proved the first essential in establishing operative mutual mistake. Secondly, the mistake as to a term in the agreement must either be known to the other party, or be reasonable in the circumstances. In Scriven Brothers & Co. v. Hindley, 66 a buyer purchased tow at an auction, believing he was buying hemp, a more valuable commodity. The Court held that there was no contract: the mistake was reasonable in the circumstances, as the catalogue was misleading, and also it was unique for hemp and tow to bear the same shipping marks. But where the defendants offered for sale to the plaintiffs a quality of Argentine hare skins, but by mistake the price was indicated at so much per pound instead of so much per piece, and the previous dealings were found in conformity with the trade practice on the basis of price per piece, the Court held in an
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action for damages and non-delivery, that the plaintiffs must have known that the offer did not express the true intention of the defendants and the contract was therefore void.67 Ambiguous Term Sometimes, an apparent agreement can have some terms which are ambiguous, and there has been a misunderstanding without fault on either side. Such cases, however, are in fact extremely rare. If the terms are really ambiguous, there is nothing in such a case which either party can enforce.68 Applying the objective test mentioned above, the Court can clear the ambiguity. It may then turn out either that the terms have an ascertained sense by which both parties are bound, and there is a contract which neither can dispute, whatever either of them may profess to have thought, or that, when the facts are established, there was really never a proposal accepted according to its terms, and therefore the conditions of a binding contract were not satisfied. Mistakes as to Identity of Parties There is no branch of law of contract which is more uncertain and difficult than that involved in cases where the question of identity of the promisor is involved.69 The test is 'How ought the promisee to have interpreted the promise' and not Pothier's test 'What did the promisor intend when he made the promise', which if taken literally, seems to involve inquisition into the 'feelings' and motives of the promisor.70 Mistake as to Identity of the Person A mistake may occur where A contracts with B, assuming B to be C. Where there is such an error as to the identity of the party contracted with, there is no consent.71 Such mistake can occur when a party has in mind a definite and identifiable person with whom he intends to contract, and then is mistaken about his identity. Where a general offer is made, e.g., by advertisement, the offeror cannot say he was mistaken as to the identity of the acceptor.72 Mistake as to Attributes and not Identity If the mistake is not about the identity of the other party but as to his attributes, e.g., solvency or social position, then the mistake is insufficient to void the contract. In King's Norton Metal Co. Ltd v. Edridge, Merrett & Co. Ltd, 73 the plaintiff supplied metal wire to Wallis who sent the order under the name of a non-existing firm Hallam & Co, making it appear a substantial firm with a large factory. The plaintiffs had intended to contract with the writer of the letter, and hence, the contract was held not void on the ground of mistake, but voidable for fraud. The purchaser from Wallis got a good title as there was no mistake as regards his identity. There was no third person in existence with whom the plaintiff intended to contract. Identity Must be Material Further, the identity of the person contracted with must be material at the time of the making of the contract. The identity of the person with whom the contract is made74 may often be of no importance. For example, an auctioneer who accepts a bid at a public auction is generally not concerned with the identity of the bidder; nor can one, who invites an offer by advertisement, say that he was mistaken as to the identity of the acceptor.75 However, where personal considerations enter into a contract, error as to the person with whom the contract is made, annuls the contract.76 Therefore, where the plaintiff knew that a theatre would not contract with him by the sale of a ticket, and yet purchased one through and under the name of another, the plaintiff could not constitute himself a contractor with the theatre. If he was evicted, there would be no breach of the contract.77 In direct face to face dealings, the offeror must be taken prima facie to have intended to enter into contract with the person present, and none else. There will, however, be no contract if it is shown that 'there was no objective agreement, e.g., that the offer was, objectively speaking, made to one person and (perhaps as a result of fraud) objectively speaking, accepted by another'.78 But a person cannot
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constitute himself a contracting party with one, whom he knows or ought to know, has no intention of contracting with him.79 A mistake as to the person dealt with, prevents the contract from coming into existence for want of assent.80 But the effect of the mistake as to the identity of the borrower in the case of a mortgage has been held to be not fundamental to the transaction.81 An issuing bank was deceived into issuing a banker's draft to a receiving bank, which then paid the amount of the draft in cash to a fraudster who claimed to have an account with the issuing bank and had forged signature of the persons authorised to operate the account. It was held that the issuing bank and not the receiving bank had to bear the loss; because the delivery of the banker's draft from the issuing bank to the receiving bank with the authority of the issuing bank, although the authority was induced by fraud, established a contract, albeit a voidable contract, between the two banks under which title to the draft passed directly from the issuing bank to the receiving bank. The fact that delivery was by means of the fraudster did not affect the formation of the contract because he was a mere conduit and his identity was not of fundamental importance to the validity of the issuing bank's authority for delivering the draft to the receiving bank. Accordingly, the issuing bank could not claim that title had not passed on the basis that they had contracted with someone other than the real account-holder, and its claim was dismissed.82 Mistake as to the identity of a person may occur in two situations: (a) where the parties are dealing with each other from a distance; and (b) where the parties are in each other's presence. Parties at a Distance In Boulton v. Jones, 83 there had been dealing between Jones and one Brocklehurst against whom Jones had a set-off and who had recently transferred his business to his foreman Boulton. Jones sent an order to Brocklehurst, which was complied with by Jones, without disclosing the change of ownership, Jones refused to pay. The Court held he was not liable; the rule being that if A intends to contract with B, C cannot give himself any right under it, but the buyer would be bound as on a new contract, if after notice, he treated the sale as subsisting. In Cundy v. Lindsay, 84 one Blenkarn, pretending to be the owner of a respectable firm Blenkiron & Co, fraudulently induced the respondents to send the goods to his address and then sold the goods to the appellant. The respondents sued for the return of the goods. The House of Lords held that the contract never came into existence and was void ab initio and not merely voidable, and therefore, the respondents were entitled to succeed. In this case, the offeror knew that the acceptor was under a misapprehension. However, in Upton-on-Severn Rural District Council v. Powell, 85 the defendant called the Upton fire brigade, in mistake for the Pershore fire brigade, in whose area he was and might therefore be entitled to services without payment. The Upton fire brigade accepted the call in good faith. It was held that the defendant was contractually bound to pay for the services despite his mistake, and despite the fact that neither party thought they were entering into a contract; the defendant thought he was calling a fire brigade of his area and hence entitled to its services without payment of charges, but the fire brigade was answering a call within their area for which there would be no charge. Parties in the Presence of Each Other A difficult situation arises in cases where transactions are made between parties in each other's presence. In such cases, the party contracting has to prove not only that he did not intend to contract with the person with whom the contract was made, but with a third identifiable person with whom he intended to make the contract.86 There will be no contract if it is shown that 'there was no objective agreement, e.g., that the offer was, objectively speaking, made to one person and (perhaps as a result of fraud) objectively speaking, accepted by another.'87 Impersonation by one party to a purported contract makes the contract void. So that if the seller believes that he is entering into a contract with the person impersonated and the impersonator knows it, then there is no contract.88
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In Hardman v. Booth, 89 one of the plaintiffs was fraudulently persuaded by one Edward Gandell that he was a member of Gandell & Co, which in fact consisted only of Thomas Gandell. It was held that there was no contract, since the plaintiff's offer was made to Thomas only as Edward knew to be the fact, and therefore, he could not accept it himself. In Phillips v. Brooks Ltd, 90 one North went into a shop and inspected goods for a considerable time and selected some pieces of jewellery. He then wrote out a cheque saying 'I am Sir George Bullough'--a person known by reputation to the plaintiff. He took away the goods and pledged them with the defendant who accepted them in good faith. The plaintiff's act ion failed as it was held that the contract was with 'the person present and identified by sight and hearing' and was not therefore void on the ground of mistake, but voidable on the ground of fraud. This case was distinguished in Lake v. Simmons 91 where it was pointed out that the misrepresentation by North of his identity had not occurred until after the sale had concluded and property had passed. Dr Goodhart, on the other hand opines92 in Phillips v. Brooks Ltd: 93
...did the shopkeeper believe that he was entering into the contract with Sir George Bullough and did North know it? If both answers are in the affirmative then it is submitted that there was no contract. Therefore if A appears in person before B impersonating C, an innocent purchaser from A gets the property in the goods against B.
In Lake v. Simmons, 94 a jeweller entrusted jewellery to a customer who had purchased articles of small value and paid for them. She misrepresented herself to be the wife of a certain person and wanted to show the jewellery to her husband and another person for approval, but she disposed it off for her benefit. Her conduct was held fraudulent and she was guilty of larceny by trick, and therefore the transaction was not within the exemption clause of the insurance policy, i.e., 'loss by theft or dishonesty committed by...any customer...in respect of goods entrusted to them by the assured'. In Ingram v. Little, 95 a person calling himself Hutchinson came to two Ingram sisters and offered to buy their car which was advertised for sale. He offered to give them a cheque which they refused. Then one of the sisters went to the post office and ascertained from the telephone directory that there was such a person as Hutchinson at the address given by the rogue. The cheque was accepted and the car taken away by the rogue, and sold to a third person who took it in good faith. The cheque was discovered to be worthless. The contract was held to be void on the ground that it was Hutchinson that the ladies intended to deal with, and not the person who was physically present before them, and the swindler knew this. The offer was, therefore, one which was not capable of being accepted by him. It is difficult to reconcile the decisions in Phillips v. Brooks Ltd 1 and Ingram v. Little. 2 In the former, the shopkeeper at least knew of the existence of Sir George Bullough; in the latter, the plaintiffs had never heard of Hutchinson, and therefore there was less reason for attributing to them an intention to deal with him rather than with the person identified by sight and hearing. In all cases of these types, the vital factor in the mind of the seller is the ability of the buyer to pay, but there seems to be little substantial difference between a mistaken reliance upon the credit worthiness of a non-existent person and of the person who indeed exists but of whom the mistaken party has never heard.3 In Lewis v. Averay, 4 a man appeared before Lewis who had a car to sell, purchased the car impersonating a film actor Richard Green, and gave a cheque for GBP 450 signing it in the name of R A Green. He convinced the vendor by showing his special pass in the name of Richard A Green with a photograph of himself. Being convinced, the vendor gave the car and the log book as well as the registration certificate to the impersonator. The latter, now pretending to be Lewis, sold the car to Averay, a music student who paid GBP 200 for the car. The cheque in favour of Lewis was dishonoured, and Lewis brought a suit claiming the car as his. The question before the Court was which of the two innocent persons must suffer. The Court of Appeal held in favour of the ultimate buyer Averay. Denning MR observed that Lewis should suffer because he made it possible for the
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rogue to commit the fraud. He further observed that when two parties have come to a contract, the fact that one of the party is mistaken as to identity of the other does not mean that there is no contract. Further, when a deal is made between a seller and a buyer and the presumption in law is that there is a contract in spite of fraudulent representation, although, such a contract is voidable for fraud, it is a good contract till it is set aside. He differentiated between the two earlier cases holding that in Philips, the contract of sale was concluded before the rogue made the fraudulent misrepresentation, whereas in Ingram, it was on the basis of such misrepresentation that the contract was concluded. Where A contracts with B in the belief that B is not B, and B knows of this error, the situation creates further difficulty. In this situation, there is no third person to whom the offer was addressed. One view is that the answer to the validity of the contract would depend upon whether a term could be implied into the offer to exclude B.5 In Gordon v. Street, 6 one Issac Gordon, a self-confessed extortionate and usurious money-lender, offered to lend money to the public under a concealed identity of Addison. The defendant borrowed from him on a promissory note which he would not have done had he known the identity of the lender. The contract was held voidable for fraud and not void. But in Sowler v. Potter, 7 the defendant had previously been convicted under the name Ann Robinson for keeping a disorderly cafe. Concealing her identity, she took the plaintiff's premises on lease under the name Ann Potter. The contention of the plaintiff that the contract was void for mistake, was upheld by Tucker J. It has been stated that no stipulation as stated above or excluding the defendant could be found, and therefore the contract should have been held not void. The decision has been criticised.8 Mistaken identity : void or voidable In Shogun Finance Ltd v. Hudson, 9 a rogue told that he was one Patel, bought a car on hire purchase, and sold it to Hudson. The rogue produced Patel's licence. The paper-work of the purchase was done in Patel's name, which was sent to the finance company, which checked Patel's credit. There was no verification of the rogue's identity. If the hire-purchase was valid, Hudson had a good title. The House of Lords was required to make a choice: &uot;either to uphold the approach in Cundy v. Lindsay 10 and overrule the decisions in Phillips v. Brooks Ltd. 11 and Lewis v. Averay, 12 or to prefer these later decisions to Cundy v. Lindsay . It was held that the contract was with Patel, and there was no contract between the finance company and the rogue. While adopting this approach, it was observed:
It is in line with the direction in which, under the more recent decisions, the law has now been moving for some time. It accords better with basic principle regarding the effect of fraud on the formation of a contract. It seems preferable as a matter of legal policy. As between two innocent persons the loss is more appropriately borne by the person who takes the risks inherent in parting with his goods without receiving payment. This approach fits comfortably with the intention of Parliament in enacting the limited statutory exceptions to the proprietary principle of nemo dat non quod habet.13
Mistake as to Nature of Transaction:Non Est Factum Mistakes as to nature of transaction is peculiar to written documents. A person who has put his name to an instrument of one kind, understanding it to be an instrument of a wholly different kind, may be entitled, not only to set aside against the other party on the ground of any fraud or misrepresentation which caused his error, but to treat it as an absolute nullity, under which no right can be acquired against him, by anyone.14 The doctrine is illustrated by Howatson v. Webb, 15 where H took a lease of land in the same name as his employee D. When D was leaving H's service, H required him to execute transfer of the leasehold property in H's favour. D of course agreed, but the document on which H procured D's signature was in fact a mortgage to W, acknowledging that D had received GBP 1000 from W, a client of H, for whom H had agreed to find an investment. H retained the GBP 1000 advanced by W and paid back only GBP 200. P, W's assignee, ultimately sued D for the balance of GBP 800. D pleaded non est
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factum, but the Court of appeal held D bound, although he was a victim of H's fraud, seeing that a mistake was only as to contents. D realised the document dealt with the leasehold property, merely believing it to be a deed to transfer instead of a mortgage deed. In Foster v. Mackinnon, 16 the defendant was induced to endorse a bill of exchange which he was told was a guarantee. The plaintiff was a subsequent holder of value, and therefore the fact that the defendant's signature was obtained by fraud would not have protected him in this act ion. But the Court held that his signature, not being intended as an endorsement of a bill of exchange, or as a signature to any negotiable instrument at all, was wholly inoperative, as much so as if the signature had been written on a blank piece of paper first and a bill or note written on the other side afterwards. Fraud is not a necessary element in such cases. A signature attached to a document supposed to be of a wholly different kind, or not to contain a clause so important as substantially to alter its character, is invalid unless the signor is estopped by negligence from denying that he understood what he was signing, and this 'not merely on the ground of fraud, where fraud exists, but on the ground that the mind of the signer did not accompany the signature; in other words, that he never intended to sign, and therefore in contemplation of law, never did sign, the contract to which his name is appended'.17 The doctrine operates when the mistaken party shows that the transaction is in substance or in kind different from the transaction intended, that there was a 'radical' or 'essential' or 'fundamental' or 'serious' or 'very substantial' difference between the document signed and that which the person signing intended to sign.18 In Oriental Bank Corpn v. John Fleming, 19 there was misrepresentation by inadvertence, but no question of fraud. The defendants firm had suspended its payments, and at a creditors' meeting, it was resolved that the business of the defendants' firm should be wound up by voluntary liquidation under the supervision of a committee. This resolution was confirmed at a subsequent meeting, and it was further resolved that a composition deed should be prepared in pursuance of the above resolutions. No mention was made at either of the meeting of any releases of the claims of the creditors. The plaintiff was one of the creditors. After a few days, a deed was tendered by one of the defendants' firm to the plaintiffs' agent for execution. He was then engaged with urgent business, and he decided to sign it without being able to read it. The debtor then earnestly pressed him to execute the document at once, stating that it was of utmost importance that no time should be lost, and adding that the deed was nothing more than an assignment to trustees for the benefit of creditors as agreed to at the creditors' meeting. Upon the faith of that assurance, the plaintiffs' agent executed the deed. As a matter of fact, the deed contained 11 releases by the creditors to the debtors. As soon as the plaintiffs' agent came to know of this, he repudiated his signature and refused to be bound by the deed. The plaintiffs sued to have the signature of their agent to a composition deed cancelled, and to have it declared that the deed was not binding on the plaintiffs. On behalf of the plaintiffs, it was contended that the deed, so far as it operated as a release, was a different deed, from that which that plaintiffs' agent intended to execute, for he believed he was signing a deed for the benefit of the creditors, whereas in fact it was for the benefit of the debtors, and that his signature could not therefore be held to be a consent of its contents. This argument was upheld, and it was declared that the deed was not the deed of the plaintiffs, but void ab initio and a nullity, so far as it purported to operate as a release to the debtors. Although, the Court also held that s. 18, clause 2 applied, but having found that the supported contract was void because there was no contract at all, the Court had no need to consider whether or not the consent, if any, was free within the meaning of s. 14. In this case, the mistake as to the nature of the transaction was caused by the misrepresentation of the other contracting party. Similarly, in Banku Behari Shaha v. Krishto Gobindo Joardar, 20 where a document was signed only on the first page, but was not signed on other pages, the executants having discovered that it was not in accordance with the terms previously agreed upon, it was held that the document was a nullity. The decision in Oriental Bank Corporation v. John Fleming, 21 although supportable on the ground that the deed was voidable for misrepresentation, is, in so far as it holds the deed void ab initio, contrary to English decisions on non est factum, which require a mistake not merely as to the
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contents, but as to the character of the instrument signed. Banku Behari Shaha v. Krishto Gobindo Joardar, 22 is open to the same objection, and is also not supportable even on the alternate ground, as the plaintiff has to prove the deed void and not merely voidable. The real principle is that A, who has misled B, however innocently, is estopped from disputing the validity of the contract as against B, if it turns out to be in B's interest to affirm it. But still the transaction is void in the sense that even innocent third persons cannot acquire rights under it against B's will. Doctrine of Narrow Limits Those too lazy or too busy to read through a document before signing it cannot rely upon the defence of non est factum.23 It would not avail a party seeking to avoid any condition in a contract executed by him on a printed form to plead either that he did not read it24 or that it was in a language not understood by him. In the latter case, it is for him to ask for an explanation of the terms in a language he understands. He can avoid a condition, especially one which is usually found in such contracts, only by showing that he signed the contract on the assurance given to him that he would not be bound by them.25 Where a person was told that a stipulation in a written contract would not be enforced, it was held that she could not be said to have assented to it and therefore that the document did not represent the real agreement between the parties.26 Indian decisions hold that where a person is induced to execute a deed of one kind under the belief that he is signing an instrument of a wholly different kind, the transaction is void, and not voidable.27 The fact that a document is in a language which is not known to its executant also does not necessarily lead to a conclusion that he did not understand its contents.28 But if a deed is falsely read over to an illiterate man, and he executes the deed relying on the false reading as being the true substance of the transaction, his act is wholly void.29 Where the document was executed by an illiterate man, and the contents of the documents were merely read out, but not explained to him, there was no consent.30 In normal circumstances, a person is not allowed to deny that he consented to that which he has in fact done, or enabled to be done with his apparent authority. Thus, when a person entrusts to his own man of business, a blank paper duly stamped as a bond and signed and sealed by himself, in order that the instrument may be drawn up and money raised upon for his benefit, if the instrument is afterwards duly drawn up and money obtained upon it from a person who has no reason to doubt the good faith of the transaction, it is presumed that the bond was drawn in accordance with the obligor's wishes and instructions.31 Where a person signed after stating that he had understood the terms, he was bound by the contract.32 The doctrine of non est factum therefore does not apply unless there is a misrepresentation inducing a mistaken belief as to the class and character of the supposed document, and not a misrepresentation simply as to its contents. The transaction is invalid not merely due to fraud, but because the 'mind of the signor did not accompany the signature' and therefore in contemplation of law, he never did sign the contract that he did not intend to sign.33 A widow gave a power of attorney to her brother for pursuing pending litigation, soon after her husband's death. The attorney sold her property to the attorney's son using powers in the power of attorney. She never intended to give a general power of attorney. It was held the doctrine of non est factum applied. The facts that litigation was pending when the document was made, and that the document mentioned in the beginning that it was for pursuing litigation, and that the power of sale was given in the later part of the document, were considered relevant. Hence the sale was invalid.34 An old illiterate woman agreed that she would sell land to the plaintiff after proceedings were decided. The agreement had her thumb impression. Allegation of plaintiff that he paid 7 out of the 8 lakhs of the amount of price agreed to the woman in cash was disbelieved. Specific performance was refused.35 Non est factum and Estoppel A signatory may be estopped by negligence from pleading non est factum. The Court of appeal has, however, held in Carlisle & Cumberland Banking Co. Ltd. v. Bragg, 36 that a signatory can treat as a
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nullity a document in a category different from the one he intended to sign, even though he has been negligent, unless he has in fact signed a negotiable instrument. This case has been much criticised,37 mainly on the ground that it is arbitrary and illogical to hold that the need for the signatory to take care and his consequent liability should ever depend upon the document he has in fact signed, irrespective of what he believed he was signing, when ex hypothesi he is ignorant of its nature.38Carlisle and Cumberland Banking Co. Ltd. v. Bragg 39 was eventually reconsidered by the House of Lords in Saunders v. Anglia Building Society, 40 and was overruled. It was held that no matter what class of document was in question, negligence or carelessness on the part of the person signing the document would exclude the defence of non est factum. This does not depend on the principle of estoppel but on the principle that no man can take advantage of his own wrong.41 The Australian High Court has, however, held that the question of negligence under a plea of non est factum is not relevant where no innocent third party is involved. If there are only two parties of whom one is aware of facts justifying the other's plea of non est factum, the presence of negligence is immaterial.42 Inchoate Negotiable Instruments Where a person signs and delivers an instrument properly stamped as a negotiable instrument, which is blank or incomplete, he thereby gives a right to the holder to make or complete it.43 55 Anson's Law of Contract, 29th edn, 2010, p. 254. 56 (1871) LR 6 QB 597 per Blackburn J. at 607. 57 Stewart v. Kennedy, (No 2), (1890) 15 AC 75, at 123 per Lord Watson; Sunitibala Debi v. Manindra Chandra Roy Choudhury, AIR 1930 PC 217, 52 Cal LJ 435, 127 IC 739. 58 Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas, AIR 1966 SC 543. 59 Anson's, Law of Contract, 29th edn, 2010, p. 254. 60 (1864) 2 H&C 906. 61 (1870) LR 6 Exch 7. 62 Radhakrishna Sivadutta Rai v. Tayeballi Dawoodbhai, [1962] Supp 1 SCR 81, AIR 1962 SC 538; John Cowie v. Willam Remfry, (1845) 3 MIA 448; Sievewright v. Archibald, (1851) 117 ER 1221, 17 QB 103; Ah Shain Shoke v. Moothia Chetty, (1899) 27 IA 30, 27 Cal 403,(PC) ; but see Fort Gloster Industries Ltd. v. Sethia Mercantile Private Ltd., AIR 1968 SC 1308, (no contract concluded). 63 D R Rathna Murthy v. Ramappa, (2011) 1 SCC 158. 64 GH Treitel, The Law of Contract, 10th edn, p. 279; but see Tarsem Singh v. Sukhminder Singh, AIR 1998 SC 1400, (1998) 3 SCC 471, (contract for sale of land where one party thought in terms of area in bighas, and the other in karnals, but agreement held void under s. 20. 65 (1871) LR 6 QB 597 at 608. 66 [1913] 3 KB 564; Van Praagh v. Everidge, [1903] 1 Ch 434. 67 Hartog v. Colin & Shields, [1939] 3 All ER 566; Bell River Community Arena Inc v. Kaufmann Co. Ltd., (1978) 87 DLR, 761(3d) ; Centrovincial Estates plc v. Merchant Investors Assurance Co. Ltd., (1983) Com LR 158. 68 Falck v. Williams, [1900] AC 176,(PC) . 69 Ingram v. Little, [1961] 1 QB 31, [1960] 3 All ER 332 at 338; quoting Goodhart,(1941) 57 LQR 228 at 240. 70 Ingram v. Little, supra, per Sellers LJ; Goodhart,(1941) 57 LQR 228 at 244. 71 Central National Bank Ltd. v. United Industrial Bank Ltd., AIR 1954 SC 181 at 184. 72 Dennant v. Skinner, [1948] 2 KB 164, [1948] 2 All ER 29; Ingram v. Little, [1961] 1 QB 31 at 57, [1960] 3 All ER 332. 73 (1897) 14 TLR 98; distinguished in Ingram v. Little, [1961] 1 QB 31, [1960] 3 All ER 332 at 337; Cf Newborne v. Sensolid, (Great Britain) Ltd., [1954] 1 QB 45, [1953] 1 All ER 708, (a contract with a company not registered a nullity).
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74 Goodhart,[1941] 57 LQR 228; Wilson,(1954) 17 MLR 515; Unger,(1955) 18 MLR 259. 75 Dennant v. Skinner, [1948] 2 KB 164, [1948] 2 All ER 29; Ingram v. Little, [1961] 1 QB 31 at 57, [1960] 3 All ER 332; Smith v. Wheatcroft, [1876] 9 Ch D 223, [1874-80] All ER Rep. 693. 76 Smith v. Wheatcroft, [1876] 9 Ch D 223 at 230, [1874-80] All ER Rep. 693. 77 Said v. Butt, [1920] 3 KB 497. 78 Whittaker v. Campbell, [1984] QB 318 at 327, [1983] 3 All ER 582 per Robert Goff LJ. at 586. 79 Anson's Law of Contract, 29th edn, p. 2010, p. 269. 80 Fawcett v. Star Car Sales Ltd., (1960) NZLR 406 at 414, (Gresson P); but contra at pp. 426, 430, (majority); also contra per Barwick CJ. in Porter v. Latec Finance, (QLD) Pty Ltd., (1964) 111 CLR 177. 81 Porter v. Latec Finance, (QLD) Pty Ltd., (1964) 111 CLR 177 per Barwick CJ. At 186-87, 188, (though it would be a motivating fact in the decision to make payment to the borrower). 82 Citibank NA v. Brown Shipley d' Co. Ltd. Midland Bank plc v. Brown Shipley d' Co. Ltd.,[1991] 2 All ER 690; distinguishing Cundy v. Lindsay, [1878] 3 AC 459, [1874-80] All ER Rep 1149; Barclays Bank Ltd. v. WJ Simms Son d' Cooke, (Southern) Ltd., [1979] 3 All ER 522. 83 (1857) 2 H & N 564, at 565, 115 RR 695. 84 [1878] 3 AC 459 at 465, [1874-80] All ER Rep 1149; quaere: What would have been the result if by some lucky accident the goods had been delivered to Blenkiron & Co? It seems they might have treated the goods as offered to them. They would not, of course have been bound to accept them; see Shogun Finance Ltd. v. Hudson, [2003] UKHL 62, [2004] 1 All ER 215; see below: &uot;Mistaken identity: void or voidable&uot;. 85 [1942] 1 All ER 220. 86 Goodhart,[1941] 57 LQR 228; Unger,(1955) 18 MLR 259. 87 Whittaker v. Campbell, [1983] 3 All ER 582. 88 Ingram v. Little, [1961] 1 QB 31, [1960] 3 All ER 332, but see Delvin LJ at 346; Phillips v. Brooks Ltd., [1919] 2 KB 243, [1918-19] All ER Rep 241; Lake v. Simmons, [1927] AC 487, [1927] All ER Rep 49; Porter v. Latec Finance, (QLD) Pty Ltd., (1964) 111 CLR 177 at 194; Goodhart,(1941) 57 LQR 228. 89 (1863) 1 H & C 803, [1861-73] All ER Rep 1847. 90 [1919] 2 KB 243, [1918-19] All ER Rep 246; Goodhart,(1941) 57 LQR 228 at 241 distinguished in Ingram v. Little, [1961] 1 QB 31, [1960] 3 All ER 332; Lewis v. Averay, [1972] 1 QB 198, [1971] 3 All ER 907., (Sale to a rogue who posed as a famous actor. Sale not voidable as identity was not shown to be of vital importance. The mistake was as to credit-worthiness). 91 [1927] AC 487, [1927] All ER Rep 49; distinguished in John Rigby, (Haulage) Ltd. v. Reliance Marine Insurance Co. Ltd., [1956] 3 All ER 1 at 6; and Ingram v. Little, [1961] 1 QB 31 at 71, [1960] 3 All ER 332 at 343. 92 Goodhart,[1941] 57 LQR 228, at 240, quoted by Seller LJ. in Ingram v. Little, [1961] 1 QB 31, [1960] 3 All ER 332 at 338; but see Devlin LJ dissenting; but the Phillip's case was approved in Lewis v. Averay, [1972] 1 QB 198, [1971] 3 All ER 907. 93 [1919] 2 KB 243, [1918-19] All ER Rep 246. 94 [1927] AC 487, [1927] All ER Rep 49. 95 [1961] 1 QB 31, [1960] 3 All ER 332, (Devlin J. dissenting); Goodhart, (1941) 57 LQR 228 at 231 quoted with approval; but distinguished and doubted in Lewis v. Averay, [1972] 1 QB 198, [1971] 3 All ER 907. 1 [1919] 2 KB 243, [1918-19] All ER Rep 246. 2 [1961] 1 QB 31, [1960] 3 All ER 332. 3 Lewis v. Averay, [1972] 1 QB 198, [1971] 3 All ER 907. 4 [1972] 1 QB 198, [1971] 3 All ER 907,(CA) ; applying King's Norton Metal Co. Ltd. v. Edridge, Merrett & Co. Ltd., (1897) 14 TLR 98. 5 Ansons' Law of Contract, 29th edn, 2010, p. 273.
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6 [1899] 2 QB 641 CA. 7 [1940] 1 KB 271, [1939] 4 All ER 478. 8 Solle v. Butcher, [1950] 1 KB 671 per Denning LJ at 691, [1949] 2 All ER 1107 at 1120; Goodhart,(1941) 57 LQR 228. 9 [2003] UKHL 62, [2004] 1 All ER 215. 10 [1878] 3 AC 459 at 465, [1874-80] All ER Rep 1149. 11 [1919] 2 KB 243, [1918-19] All ER Rep 246. 12 [1972] 1 QB 198, [1971] 3 All ER 907,(CA) . 13 Shogun Finance Ltd. v. Hudson, [2003] UKHL 62 per Lord Nicholls, para 34, [2004] 1 All ER 215. 14 See also s. 18 below: 'Non Est Factum: the Doctrine'. 15 [1908] 1 Ch 1; followed in Mohd Hussain v. Fida Hussain, AIR 1952 Punj 224. 16 (1869) LR 4 CP 704, [1861-73] All ER Rep 1913; principle approved in Saunders v. Anglia Building Society, [1971] AC 1004, [1970] 3 All ER 961; Williams,[1945] 61 LQR 179 where it has been observed that it is arguable that the case was not one of non est factum at all, since the defendant was assured he was signing a guarantee, whereas in fact he put his signature to an endorsement of a bill of exchange, which is a guarantee for many purposes. 17 Foster v. Mackinnon, (1869) LR 4 CP 704 at 711, [1861-73] All ER Rep 1913; followed in Sarat Chunder Gupta v. Kanai Lal Chuckerbutty 26 CWN 479, AIR 1921 Cal 786; Raja Singh v. Chaichoo Singh, AIR 1940 Pat 201, 185 IC 816; Appanna v. Jami Venkattappadu, AIR 1953 Mad 611. 18 See also s. 18 below: 'Non Est Factum: The Doctrine'. 19 (1879) ILR 3 Bom 242. 20 (1902) ILR 30 Cal 433. 21 (1879) ILR 3 Bom 242. 22 (1903) ILR 30 Cal 433. 23 Anson's Law of Contract, 29th edn, 2010, at pp. 259. 24 Naba Kishore Lal Singh Deo v. Panchanan Mahto, AIR 1930 Pat 601. 25 Standard Oil Co. v. Haridas Velji, AIR 1921 Sind 121. 26 Tyagaraja Mudaliyar v. Vedathanni, (1935) 63 IA 126, 59 Mad 446, 160 IC 384, AIR 1936 PC 70, (no contract). 27 Ningawwa v. Byrappa Shiddappa Hireknrabar, AIR 1968 SC 956; Dularia Devi v. Janardan Singh, AIR 1990 SC 1173; Pratap v. Puniya Bai, AIR 1977 MP 108; Patal Bala Debi v. Santimoy Majumdar, AIR 1956 Cal 575; Raja Singh v. Chaichoo Singh, AIR 1940 Pat 201, 185 IC 816; Umrao Begum v. Sheikh Rahmat Ilahi, AIR 1939 Lah 439, (transaction set aside). 28 Rameswar Nathany v. Nurul Haq Choudhury, AIR 1949 FC 78. 29 Thoroughgood's case, (1584) 2 Co. Rep 9a and other books cited in Foster v. Mackinnon ; supra; Deo Nandan v. Chhote, AIR 1983 All 9. 30 Parasulla Mallick v. Chandra Kanta Das, AIR 1918 Cal 546. 31 Wahidunnessa v. Surgadass, (1879) 5 Cal 39; as to inchoate negotiable instruments, see s. 20 of the Negotiable Instruments Act, 1881. 32 Firm Mitha Shah v. Firm Devi Dass, AIR 1944 Pesh 33; Rameswar Nathany v. Nurul Haq Choudhury, AIR 1949 FC 78. 33 Bismillah v. Janeshwar Prasad, (1990) 1 SCC 207 at 211, AIR 1990 SC 540. 34 Harmesh Kumar v. Maya Bai, AIR 2006 P&H 1. 35 Anil Singh Thakur v. Kholbaharin Bai, AIR 2009 Chhat 6. 36 [1911] 1 KB 489, [1908-10] All ER Rep 1977.
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37 Hudson,[1912] 28 LQR 190. 38 JAP,[1930] 46 LQR 263 states that Foster v. Mackinnon is only a weak authority for the view that negligence defeats a plea of non est factum where a negotiable instrument has in fact been signed. 39 [1911] 1 KB 489, [1908-10] All ER Rep 1977. 40 [1971] AC 1004 at 1071, 1019, 1038, [1970] 3 All ER 961. 41 Gallie v. Lee, [1969] I All ER 1062 per Salmon LJ at 1081. 42 Petelin v. Cullen, (1975) 132 CLR 355. 43 Section 20 of the Negotiable Instruments Act, 1881 provides:Where one person signs and delivers to another a paper stamped in accordance with the law relating to negotiable instruments then in force in India, and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby gives prima facie authority to the holder thereof to make or complete, as the case may be, upon it a negotiable instrument, for any amount specified therein and not exceeding the amount conveyed by the stamp. The person so signing shall be liable upon such instrument, in the capacity in which he signed the same, to any holder in due course for such amount, provided that no person other than a holder in due course shall recover from the person delivering the instrument anything in excess of the amount intended by him to be paid thereunder.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER II Of Contracts, Voidable Contracts and Void Agreements/S. 14.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER II Of Contracts, Voidable Contracts and Void Agreements S. 14. 'Free consent' defined.-Consent is said to be free when it is not caused by (1) (2) (3) (4) (5)
coercion, as defined in section 15; or undue influence, as defined in section 16; or fraud, as defined in section 17; or misrepresentation, as defined in section 18; or mistake, subject to the provisions of the sections 20, 21, and 22.
Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation or mistake.
Introduction Not only consent, but free consent is declared by s. 10 to be necessary to the complete validity of a contract. This section defines when consent is free. This section declares in general the causes which may exclude freedom of consent which are more fully explained by the later sections.
Consent not Free
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Consent is free when it works without obstacles to impede its exercise. Where there is no consent or no real and certain object of consent,44 there can be no contract at all. Where there is consent, but not free consent, there is generally a contract voidable at the option of the party whose consent was not free.45 A general averment that consent was not freely obtained is not enough, and it is necessary to set up one of the vitiating elements enumerated in this section.46 The language of the section when read together with that of the other relevant sections, seems to assume that there are cases in which a contract is voidable on the ground of mistake. Certain kinds of mistake may exclude consent altogether. In such cases, no real agreement is ever formed, or there is no real object on which the parties are agreed, and the seeming agreement is wholly void. Otherwise mistake, if not induced by misrepresentation or fraud, is inoperative. The Act does not give any specific exceptions to this rule. In Bell v. Lever Bros Ltd, 47 all three judges discussed Cooper v. Phibbs, 48 and held that an agreement induced by mistake was void. The English Court of Appeal held in Solle v. Butcher 49 that the contract in the case was voidable in equity on the ground of mutual mistake. In this case, D proposed to let a flat to P. It was doubtful whether the flat was subject to the Rent Restriction Acts, and therefore to a maximum rent of GBP 140 per annum. The parties believed that the flat had changed its identity because of rebuilding, and was no longer subject to this maximum. A lease for seven years was executed at a rent of GBP 250 per annum. The Court held that there had been no change in identity, and that the parties had been labouring under a mistake of fact. They granted rescission to D on the ground of mutual mistake. The advantage of rescission to D was that before the new lease, he could serve a notice on P under the Rent Restriction Acts making lawful increases in the rent of GBP 140. During the running of a lease, such a notice would be ineffective. The agreement was voidable in equity for mistake. 44 See also s. 29 below. 45 Deo Nandan v. Chhote, AIR 1983 All 9 at 11; Central National Bank Ltd. v. United Industrial Bank Ltd., AIR 1954 SC 181 at 184. 46 Bal Gangadhar Tilak v. Shrinivas Pandit, AIR 1915 PC 7 at 13-14; but see s. 15 below, under the heading: 'Economic Duress' and the possibility of this principle being used as a factor vitiating consent; s. 16 below, under the heading: Unconscionability as a General Doctrine. 47 [1932] AC 161, [1931] All ER Rep 1. 48 (1867) LR 2 HL 149, [1861-73] All ER Rep 2109. 49 [1950] 1 KB 671, [1949] 2 All ER 1107.
'Caused the Consent' Even if there be undue influence or coercion, but if it does not appear that it was instrumental in making the promisor to do the act in question, the existence of coercion, etc., would be of no avail. The word 'cause' is not a term of art, but it is a term of science. Nothing can be said to be the cause of a particular effect, unless it is the proximate and immediate cause of that effect. When a particular effect is said to be caused by a particular factor, it must be clearly and cogently established that the effect is the direct outcome of that particular cause. If the alleged cause is remote and not proximate, is distant and not immediate, such a cause cannot be said to be the cause in legal parlance.50 Where the undue influence or coercion was not instrumental in making the party to do the act in question, the existence of such factor was of no avail.51 Consent is said to be free when it is not caused by coercion, undue influence, fraud,
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misrepresentation or mistake. Consent can be regarded as informed when it is an act of reason accompanied with deliberation of a mind which knows right from wrong, good and evil and it postulates an active will on the part of the person giving consent to permit the doing of the act complained of with full knowledge of the nature of the act that is being done and the rights and obligations of the parties involved in the commission of the act . Where consent was given on the strength of a representation which, when made, was not intended to be really acted upon, it was held to have been obtained upon a misrepresentation.52 50 Vijaysinh Mohansinh Solank v. Transport Manager, Ahmedabad Municipal Transport Service, AIR 1982 Guj 307. 51 Ibid. 52 Nokhia v. State of Himachal Pradesh, AIR 1985 HP 88 at 90.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER II Of Contracts, Voidable Contracts and Void Agreements/S. 15.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER II Of Contracts, Voidable Contracts and Void Agreements S. 15. 'Coercion' defined.-'Coercion' is the committing, or threatening to commit, any act forbidden by the Indian Penal Code (45 of 1860), or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. Explanation.--It is immaterial whether the Indian Penal Code (45 of 1860) is or is not in force in the place where the coercion is employed. Illustration A, on board an English ship on the high seas, causes Bto enter into an agreement by an act amounting to criminal intimidation under the Indian Penal Code (45 of 1860). A afterwards sues B for breach of contract in Calcutta. Ahas employed coercion, although his act is not an offence by the law of England, and although section 506 of the Indian Penal Code (45 of 1860) was not in force at that time when or place where the act was done.
Introduction This section defines coercion as committing any act forbidden by the Indian Penal Code, 1860 or unlawful detaining of property, or threatening to commit these acts. Coercion invalidating a contract need not proceed from a party to the contract, or be immediately directed against a person whom it is intended to cause to enter into the contract.53 It includes unlawful detention of property.
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53 Chikkam Ammiraju v. Chikkam Seshamma, AIR 1917 Mad 288; affirmed in, (1918) 41 Mad 33, AIR 1918 Mad 414.
Coercion and Duress Coercion under this Act is much wider than what was duress in the English law. It includes unlawful detention of property, may be committed by any person not necessarily party to the contract, and may be directed against any person, even a stranger; and unlike duress, causing of immediate violence or unnerving a person of ordinary firmness of mind are not necessary under the Indian law.54 54 Karuppay Ammal v. Karuppiah Pillai, (1987) 2 Mad LJ 138 at 148; but see below 'Duress' for the changed concept of the term in English law.
'Act Forbidden by the Penal Code ' The words 'act forbidden by the Indian Penal Code' make it necessary for the Court to decide in a civil action, whether the alleged act of coercion is such as to amount to an offence.55 In Banda Ali v. Banspat Singh, 56the High Court of Allahabad refused to enforce a bond executed by a judgment-debtor in favour of the decree holder to procure his release from custody in execution of a decree of a court, which had no jurisdiction to entertain the suit. The Court held that the bond was obtained when the judgment-debtor was in duress, but the decision does not state whether the alleged act of coercion amounted to an offence within the meaning of the Penal Code .57 The judgment of the High Court assumes that the arrest of a judgment-debtor in execution of an apparently regular decree amounts to the offence of wrongful confinement, if the Court is ultimately found to have no jurisdiction, and to that extent, the judgment is open to question. This is a dangerous doctrine to adopt in India, where the majority of suitors consist of illiterate and ignorant persons, who cannot be expected to understand the respective jurisdictions of the courts of various grades spread over different parts of the country. Further, assuming that the defendant abetted the offence of wrongful confinement, it does not appear that he did it with the intention of causing the plaintiff to execute the bond, though the plaintiff may have signed the bond with the object of procuring his release from custody. In Ranganayakamma v. Alwar Setti, 58the High Court of Madras held that an adoption by a Hindu widow was not binding upon her, when the relatives of the adopted boy obstructed the removal of the corpse of her husband from her house until she consented to the adoption. The decision proceeded on the ground that the widow's consent to the adoption was not free. The Court seems to have held that the relatives' act in obstructing the removal of the corpse was within the present section as being forbidden by the Indian Penal Code, 1860, but it does not appear under what section of the Code the Court held it punishable. The section possibly applicable to this act might be s. 297, which enacts,inter alia,that whoever with the intention of wounding the feelings of any person, or with the knowledge that the feelings of a person are likely to be wounded, offers an indignity to any human corpse, or causes disturbance of any person assembled for the performance of funeral ceremonies, is liable to imprisonment or fine or both. On the facts of the case, there is no doubt that the act was done with the intention to wound the widow's feelings, or at any rate with the knowledge that her feeling would be wounded. The fact, therefore, would constitute an offence if obstructing the removal of the corpse could be regarded as an indignity offered to the corpse, or as a disturbance to the person assembled to perform the funeral ceremonies. In any event, there would have been no difficulty in holding that the widow's consent was obtained by undue influence within the meaning of s. 16 of the Act. In a later case Ammiraju v. Seshamma, 59a question arose as to whether a release executed by a
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wife and son in consequence of a threat of committing suicide had been obtained by coercion within the meaning of this section. Wallis CJ. and Seshagiri Aiyar J. answered the question in the affirmative, holding that the word 'forbidden' was wider than the term 'punishable', and that though a threat to commit suicide was not punishable under The Indian Penal Code, 1860, it must be deemed to be forbidden, as an attempt to commit suicide was punishable under the Penal Code (s. 309). Oldfield J. answered the question in the negative, on the ground that the present section should be construed strictly, and that an act that was not punishable under, the Penal Code could not be said to be forbidden by that Code. This view seems to be correct. A Penal Code forbids only what it declares punishable. The earlier editors of the book opined that the section must be amended to include expressly acts 'an attempt to commit which is forbidden'. Under the language of the section as it stands, a threat to commit an offence under any law other than The Indian Penal Code, 1860, may not amount to coercion. Recognising this, the Law Commission of India had recommended a wider expression to include penal laws other than The Indian Penal Code, 1860.60 It has been held that an agreement to refer matters in dispute to arbitration entered into during the pendency and in fear of criminal proceedings could not be avoided on the ground of 'coercion', though the agreement may be void as opposed to public policy within the meaning of s. 23.61 Refusal to withdraw a prosecution, unless a bond was executed for the amount due, was not covered by this section;62 nor a threat of strike.63 Threat of bringing Criminal Charges Mere threat of bringing a criminal charge does not amount to coercion, as it is not per seforbidden by the Penal Code.64 But threat of bringing a false charge with the object of making another do a thing was coercion;65 for although threatening another with criminal prosecution was not per seforbidden by the Indian Penal Code 1860, such act was forbidden by it when the threat related to a false charge. A receipt for surrender of possession of the disputed site under a threat that if the plaintiff did not do so, he would be arrested and detained under the Maintenance of Internal Security Act, 1971 was vitiated by coercion.66 55 Chikkam Ammiraju v. Chikkam Seshamma, AIR 1917 Mad 288 at 290; affirmed in, (1918) 41 Mad 33, AIR 1918 Mad 414. 56 40 IC 352, (1882) ILR 4 All 352. 57 See extract from judgment of the District Judge in, (1882) 4 All 352 at 354. 58 (1889) ILR 13 Mad 214. 59 (1918) 41 Mad 33, AIR 1918 Mad 414; affirming, AIR 1917 Mad 288; Purabi Banerjee v. Basudeb, AIR 1969 Cal 293: threat to commit murder. 60 The Law Commission of India, 13th Report, 1958, para 15: recommended amending the section by substituting the words 'act is punishable by any law for the time being in force' in place of 'any act forbidden by the Indian Penal Code '. 61 Gobardhan Das v. Jai Kishen Das, (1900) ILR 22 All 224; Masjidi v. Mussammat Ayisha, (1882) Punj Rec No 135. 62 Rameshwar Marwari v. Upendranath Das, AIR 1926 Cal 455. 63 Workmen, Appin Tea Estate v. Industrial Tribunal, Gauhati, AIR 1966 Assam 115. 64 Widya Wanti v. Jai Dayal 13 Lah 356, AIR 1932 Lah 541; s. 16 below: 'Threats of Prosecution'. 65 Chuni Lal v. Maula Bakhsh, AIR 1936 Lah 6 (threat to bring a false suit). 66 Kishan Lal Kalra v. NDMC, AIR 2001 Del 402.
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Unlawful Detaining of Property Consent can be said to be caused by coercion, if it is caused as a result of unlawful detaining of property, or a threat to do so. A refusal on the part of a mortgagee to convey the equity of redemption except on certain terms, is not an unlawful detaining or threatening to detain any property within the meaning of this section.67 Where an agent, whose services were terminated, detained accounts to obtain his release, the release was induced by coercion.68 Where in order to realise fine due from a son, the Government attached the property belonging both to him and his father; payment then made by the father in order to save the property from being sold was held to have been made under coercion.69 67 Bengal Stone Co. Ltd. v. Joseph Issac Joseph Hyam, AIR 1918 Cal 307, (detaining office books, etc, left in the hands of an outgoing agent may fall under the section). SPM Muthiah Chetti v. Muthu KRAR Karuppan Chettiar, (1927) 50 Mad 786, 105 IC 5, AIR 1927 Mad 852, (reported chiefly on an independent question of counsel's authority to compromise). 68 SPM Muthiah Chetti v. Muthu KRAR Karuppan Chettiar, (1927) 50 Mad 786, 105 IC 5, AIR 1927 Mad 852. 69 Bansraj Das v. Secretary of State, AIR 1939 All 373.
'To the Prejudice of any Other Person' The section does not contemplate mere sentimental prejudice. Some legal injury must flow in order that a person may be said to have been prejudiced. Where the threat by a husband to commit suicide caused the wife to release the property, it was held that the wife was prejudiced. The possibility of the husband leaving the wife and the child uncared for was sufficient in the eye of law to furnish a ground of prejudice.70 70 Chikkam Ammiraju v. Chikkam Seshamma, (1918) 41 Mad 33, AIR 1918 Mad 414; affirming, AIR 1917 Mad 288.
Proof of Coercion and Burden of Proof The defendant relying on the defence of coercion, should set out all the facts constituting these invalidating circumstances.71 The burden on him is heavy.72 A suspicion or mere probability is not sufficient to support a plea of coercion.73 In a contract made between parties where duress was not the sole reason for entering into a contract, there is no burden on the party threatened to show that but for the threat, no agreement would have been made. Such an agreement was void (under the English law), unless the party who made the threats could show that the threats contributed nothing to the other party's decisions to enter into a promise.74 The burden of proof does not lie on the innocent party to show that but for the threats, no contract would have been signed. It is for the party using the alleged threats to establish that the act s of alleged threats or unlawful pressure contributed nothing to the consent of the other party to the contract. 71 Palanippa Mudaliar v. Kandaswamy Mudaliar, (1971) 1 Mys LJ 258, relying on Bishundeo Narain v. Seogeni Rai, AIR 1951 SC 280, [1951] 2 SCR 548; Purushottam Daji Mandlik v. Pandurang Chintaman, (1915) 39 Bom 149, AIR 1915 Bom 68, (1915) 17 Bom LR 157. 72 Alva Aluminium Ltd. v. Gabriel India Ltd, (2011) 1 SCC 167. 73 Purushottam Daji Mandlik v. Pandurang Chintaman, (1915) 39 Bom 149, AIR 1915 Bom 68, (1915) 17 Bom LR 157.
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74 Barton v. Armstrong, [1976] AC 104, [1975] 2 All ER 465,(PC) .
Power of the Court under the Specific Relief Act, 1963 Where the terms of the contract or the conduct of the parties at the time of making of the contract, though not rendering the contract voidable, gave the plaintiff an unfair advantage over the defendant, the Court may refuse specific performance to the plaintiff. Similarly, specific performance may be refused if the defendant had entered into the contract under circumstances which make it inequitable to enforce specific performance.75 75 Specific Relief Act, 1963, s. 20(2).
'Coercion' under Section 72 The definition contained in this section is for the purpose of considering whether the consent to a contract was free under s. 14. It does not govern the meaning of the term as used in s. 72 of the Contract Act,76 where every kind of compulsion would be covered, even if it did not measure up to the definition under s. 15.77 76 Kanhaya Lal v. National Bank of India Ltd., (1913) 40 IA 56, (1913) 40 Cal 598 per Lord Moulten at 612, (PC); Petlod Bulakhidas Mills Co. v. Union of India, AIR 1970 Guj 59; see s. 72 below. 77 TGM Asadi v. Coffee Board, AIR 1969 Mys 230.
Compulsion of Law Compulsion of law is not coercion under this section; and the contract is, in the eyes of the law, freely made.78 In Andhra Sugars Ltd v. State of Andhra Pradesh, 79 a case of the exigibility of the sales tax on 'sale' of sugar, the cane-grower was not bound to offer cane to the factory of his area but if he did, the factory was bound to accept it under the Andhra Pradesh Sugar (Regulation of Supply and Purchase) Act, 1961. This was held to be an agreement not caused by coercion, undue influence, fraud, misrepresentation or mistake. The contract was neither void nor voidable, but was valid under s. 10.80 Bachawat J. relied on Indian Steel and Wire Products Ltd v. State of Madras, 81 a case of 'sale' under the orders of the Steel Controller by the company (assessee) of its steel products to a third party, where it was held that the company had certain amount of flexibility and maneuverability, and it could not be said that nothing was left to mutual 'assent'. The Controller's directions were confined within narrow limits and there were several matters which the parties could decide by mutual assent. Freedom to contract was merely confined to narrower limits because of economic compulsions. It is submitted that the Andhra Sugar case goes much further than the Indian Steel case, in that there was neither maneuverability nor mutual assent. It cannot be said that the occupier of a factory who accepts and is compelled to accept the sugarcane offered to him under threat of prosecution is exercising free consent, so as to result in a contractual relationship.82 It is also submitted that where law is to be changed because it no longer conforms to the prevailing social philosophy, the proper forum for that is the legislature and not the courts.83 In Vishnu Agencies (Pvt) Ltd. v. Commercial Tax Officer, 84a question arose whether cement supplied under the orders of the Cement Control Act of West Bengal was a sale, and the Court held that85 it was no less a contract because it lacked volition, or was made under compulsion. So long as mutual assent was not totally absent, it was a contract.86
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78 Andhra Sugars Ltd. v. State of Andhra Pradesh, AIR 1968 SC 599; Palaniappa Mudaliar v. Kandaswamy Mudaliar, (1971) 1 Mys LJ 258; Rameshwar Marwari v. Upendranath Das, AIR 1926 Cal 455; Coffee Board Karnataka v. Commr of Commercial Taxes, AIR 1988 SC 1487. 79 Andhra Sugars Ltd. v. State of Andhra Pradesh, AIR 1968 SC 599. 80 Ibid; following Indian Steel and Wire Products Ltd. v. State of Madras, AIR 1968 SC 478; Ridge Nominee Ltd. v. Inland Revenue Commissioners, [1962] 2 WLR, 3, [1961] 2 All ER 354,Ch D, [1961] 3 All ER 1108,(CA) ; distinguishing New India Sugar Mills Ltd. v. Commr of Sales Tax, AIR 1963 SC 1207, [1963] Supp 2 SCR 459; cf Pfizer Corpn v. Ministry of Health, [1965] AC 512, [1965] 1 All ER 450, (drugs supplied under Public Health Scheme is no sale). 81 AIR 1968 SC 478. 82 See Indian Contract Act, 1872, s. 14 and the comment thereunder. 83 Scruttons Ltd. v. Midland Silicones Ltd., [1962] AC 446, [1961] 2 WLR 189 at 191, [1962] 1 All ER 1 per Viscount Simonds at 7. 84 AIR 1978 SC 449; overruling the majority judgment and approving the dissenting judgment of Hidayatulla J. in New India Sugar Mills Ltd. v. Commr of Sales Tax, AIR 1963 SC 1207, [1963], 2 SCR 459(Supp) ; see also Siddheshwar Sahakari Sakhar Karkhana Ltd. v. CIT Kolhapur, AIR 2004 SC 4716; Uttar Pradesh Co-operative Cane Unions Federations v. West Uttar Pradesh Sugar Mills Association, AIR 2004 SC 3697. 85 AIR 1978 SC 449, per Chandrachud J. for majority; Andhra Sugars Ltd. v. State of Andhra Pradesh, AIR 1968 SC 599. 86 Coffee Board Karnataka v. Commr of Commercial Taxes, AIR 1988 SC 1487; Indian Steel and Wire Products Ltd. v. State of Madras, AIR 1968 SC 478 at 485; Union of India v. M V Damodar, AIR 2005 Bom 137.
Duress Under the English law, actual or threatened violence to the victim's person has long been recognised to amount to duress,87but duress may consist of act ual or threatened imprisonment,88 now also includes wrongful threats to property or threats to seize goods,89 and wrongful or illegitimate threats to his economic interests,90 where the victim has no practical alternative but to submit.91 In Lynch v. Director of Public Prosecutions for, Northern Ireland 92 all five members of the House of Lords rejected the notion that duress deprives a person of his free choice, or makes his acts non-voluntary. Duress does not deprive the victim of all choice; it leaves him with a choice of evils. A person act ing under it intends to do what he does, but does so unwillingly. 'Duress deflects without destroying the will of one of the contracting parties.'93 Though earlier cases have required that the duress must negate true consent and render the victim's actions non-voluntary,94 later cases have applied the test of whether the victim had a practical choice.95 Effect on Contract A contract obtained by means of duress exercised by one party over the other is at very least voidable,96 and not void;97but if it is voluntarily act ed upon by the party entitled to avoid, it will become binding on him.98 Causation It is sufficient that a threat to the victim's person was a reason for the victim entering into the contract, and it was not necessary for him to show that he would not have entered into the contract without the threat, and the other party could show that the threat had not influenced the victim.1 In Barton v. Armstrong, 2 there was a struggle for power between A and B over L Ltd, and A had threatened B on various occasions with death if L Ltd did not agree to pay a sum of money and purchase his shares. The evidence showed that B was frightened by those threats, but they had not influenced him in executing a deed on behalf of L Ltd. B sought a declaration that the deed was secured under duress
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and was void. The Privy Council held that if a person threatens another with unpleasant consequences and if the other does not act in a particular manner, he must take the risk that the impact of his threat may be accentuated by extraneous circumstances for which he is not, in fact, responsible. They further held that A's threats may have been unnecessary, but it would be unrealistic to hold that they played no part in making B decide to execute the documents. The proper inference to be drawn from the facts found was that though it may be that B would have executed the documents even if A had made no threats and exerted no unlawful pressure to induce him to do so, the threats and unlawful pressure in fact contributed to B's decision to sign the documents and recommend their execution. The Privy Council made the declaration that the deeds in question were executed by B under duress and were void so far as the rights or obligations inter se of the parties to the deed were concerned. Nature of Threats Not all threats are improper or illegitimate. A threat to commit a crime or tort is improper. A threat to break a contract may not amount to duress on the ground simply that the victim was influenced by the threatened breach of contract and could not avoid the threatened act ion. Something more than commercial pressure is required.3 A threat to prosecute would be unlawful if the charge is known to be false, and the threat is for improper motive, but a threat to institute civil proceedings cannot amount to duress.4 Threatening to break a contract unless a demand for extra payment or consideration is given, may well amount to legitimate commercial pressure, especially where unexpected difficulties arise in the performance of the contract and that party is genuinely unable to perform the contract without extra payment. Threat to carry out something within one's rights is not duress, unless coupled with unreasonable demands. It has been observed that though in certain circumstances, a threat to perform a lawful act coupled with a demand for payment may amount to economic duress, extending such duress in commercial context would have far reaching implications, and would introduce a substantial and undesirable element of uncertainty in the commercial bargaining process, in the sense that it would enable bona fide settled accounts to be reopened when parties to commercial dealings fell out.5 87 Kesarmal SO Letchman Das v. Valliappa Chettiar SO Nagappa Chettiar, [1954] 1 WLR 380,(PC) ; Barton v. Armstrong, [1975] 2 All ER 465,(PC) . Friedeberg Seeley v. Klass, (1957) 101 SJ 275; Barton v. Armstrong, [1976] AC 104, [1975] 2 All ER 465,(PC) . 88 Cumming v. Ince, [1847] 11 QB 112, (woman forcibly taken to lunatic asylum); but see Biffin v. Bignell, (1862) 7 H & N 877, (distinction between a threat and a mere warning). Duke de Cadaval v. Colins, (1836) 4 Ad & El 858, (money is obtained from a person as a condition of his release from arrest, a fraudulent use having been made of legal process, (CA)n be recovered); Earl of Northumberland's case, (1583) 4 Leon 91, (wrongful detention); Nicholls v. Nicholls, (1737) 1 Atk 409, (arrest by due process); Bromley v. Norton, (1872) 27 LT 478, (arrest of woman for debt of husband). 89 Lloyd's Bank Ltd. v. Bundy, [1975] QB 326, [1974] 3 All ER 757; North Ocean Shipping Co. Ltd. v. Hyundai Construction Co. Ltd., [1979] QB 705;, [1978] 3 All ER 1170; Pao On v. Lau Yiu, [1980] AC 614, [1979] 3 All ER 65. 90 Universe Tankships Inc of Monrovia v. International Transport Workers, Federation, [1983] AC 366 at 383, 391, [1982] 2 All ER 67, [1982] 2 WLR 803,(HL) . 91 Chitty on Contracts, 28th edn, p. 411, para 7-001. 92 [1975] AC 653 at 670, 675, 680, 690-91, 703, 709, [1975] 1 All ER 913. 93 [1975] AC 653 per Lord Simon at 695. 94 Pao On v. Lau Yiu, [1980] AC 614, [1979] 3 All ER 65; relying on Barton v. Armstrong, [1976] AC 104 at 108, [1975] 2 All ER 465 at 476-77. 95 Chitty on Contracts, 28th edn, pp. 412-13; para 7-003; Bd'S Contracts d' Design Ltd. v. Victor Green Publications Ltd., [1984] ICR 419. 96 Lynch v. Director of Public Prosecutions of Northern Ireland, [1975] AC 653, [1975] 1 All ER 913; North Ocean
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Shipping Co. Ltd. v. Hyundai Construction Co. Ltd., [1979] QB 705, [1978] 3 All ER 1170; Halsbury's Laws of England, Vol. 9(1), 14th edn, Reissue, 30 June 1998, CONTRACT, para 710. 97 There is no direct authority but the point; but see Lanham,(1966) 29 MLR 615. 98 Ormes v. Beadel, (1860) 2 De GF & J 333. 1 Barton v. Armstrong, [1976] AC 104 at 120, [1975] 2 All ER 465 at 475. 2 [1976] AC 104 at 120, [1975] 2 All ER 465 at 475-76. 3 Pao On v. Lau Yiu, [1980] AC 614, [1979] 3 All ER 65; Occidental Worldwide Investment Corpn v. Skibs A/S Avanti, (The Siboen v. The Sibotre), [1976] 1 Lloyd's Rep 293 noted in Beatson,(1976) 92 LQR 496. 4 Powell v. Hoyland, (1851) 6 Exch 67; Ex p. Hall,(1882) 19 Ch D 580. 5 CTN Cash & Carry Ltd. v. Gallaher Ltd., [1994] 4 All ER 714(CA) .
Economic Duress Economic duress is now recognised in England as a factor vitiating the contract, and a contract can be set aside also for economic duress. In a contractual situation, commercial pressure is not enough. The commercial pressure alleged to constitute duress must be such that the victim entered into the contract against his will and must have had no alternative course open to him and must have been confronted with coercive act s. In determining whether there was a coercion of will such that there was no true consent, it is material to enquire whether the person alleged to have coerced did or did not protest; whether, at the time he was allegedly coerced into making the contract, he had an alternative course open to him such as an adequate legal remedy; whether he was independently advised; and whether after entering the contract, he took steps to avoid it. Thus, where after considering the matter thoroughly and with a view to avoid litigation, the defendants formed the opinion that the risk in giving the guarantee was more apparent than real, it was held by the Privy Council that though there was commercial pressure, it did not amount to coercion and the guarantee was not void on the ground that it was induced by economic duress on the plaintiff's part.6 North Ocean Shipping v. Hyundai Construction Co. Ltd. 7 involved a shipbuilding contract, in which the price was to be paid in US dollars. On the devaluation of the dollar, the builders demanded corresponding increase in installments of price remaining unpaid and threatened to terminate the contract. After some time, the owners agreed to pay the increased price without protest and the builders agreed to increase the amount of the letter of credit for repayment. When the vessel was ready, the owners took delivery of the vessel without protest. They then laid claim to the return of the increase in price on the ground of economic duress which made the contract voidable. It was held that the agreement was voidable. But as the owners had affirmed the contract by failing to protest, the owners were not entitled to the return of the increase. In B&S Contracts & Designs Ltd v. Victor Green Publications Ltd, 8 the plaintiffs had contracted to erect an exhibition stand for the defendants at Olympia, but their workmen went on strike. To get the work done, the defendants agreed to contribute GBP 4500 to pay off the workmen's claims. The Court of Appeal, applying the doctrine of economic duress, held that this promise was made under duress as the defendants had no realistic alternative but to promise to pay, given the serious threat to their economic interests. It was, however, stressed that it is not 'on every occasion when the party unwillingly agrees to a variation of a contract, that the law would consider that he had acted by reason of duress'. In Atlas Express Ltd v. Kafco (Importers and Distributors) Ltd, 9 a carrier sought increase of charges and refused to carry goods unless the consignor agreed to pay the increased charges. It was held that the carrier could not sue to recover the amount owing under the new rate since the pressure applied by the plaintiff to the defendants to renegotiate the terms of the contract amounted to economic duress which vitiated the contract. Where a party to a contract was forced by the other party to renegotiate the terms of the contract to his disadvantage and had no alternative but to accept the
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new terms offered, his apparent consent to the new terms was vitiated by economic duress. The danger of the doctrine of economic duress being widely used to invalidate contracts requires some limits on its use.10 First, the threat must be strongly coercive, leaving the innocent party with no effective alternative but to submit. Secondly, the challenge should come at the outset and the innocent party should take the immediate opportunity to thrash out the issue in the court. Referring to small scale monopolies, termed 'micro-monopolies', like sole suppliers in local areas, or parties already locked in relationships and negotiating with each other, or that arising out of constraints of time out of immediate need of supplies, Atiyah observes that all such monopoly is not wrongful, but 'it seems clear that one of the major causes of coercion, and hence of unfair contracts, arises from these monopolies'. UNIDROIT Principles The UNIDROIT Principles enable a party to avoid a contract when it has been caused by the other party's unjustified threat which, having regard to the circumstances, is so imminent and serious as to leave the first party no reasonable alternative. Mere threat is therefore not sufficient. It must be so imminent and so serious that the threatened person has no reasonable alternative, judged from an objective standard, but to conclude the contract on the terms proposed by the other party. The threat must also be unjustified. For example, it may be unjustified when the act or omission of the threat is wrongful in itself, namely physical attack, or where the act or omission is legal, but the purpose achieved is wrongful, namely, bringing Court act ion for the sole purpose of inducing consent to the contract. The threat may not necessarily be made against a person or property, but may also affect one's reputation or purely economic interests.11 Economic Duress in India In Dai-ichi Karkaria Pvt Ltd v. Oil and Natural Gas Commission, 12 the plaintiff alleged a concluded and binding commitment on the part of the purchaser to pay the domestic price of the goods including the customs duty, which induced the plaintiff to invest a large amount. Thereafter, the purchaser coerced the plaintiff to renegotiate the contract with the threat that the original contract will not be performed, and required the plaintiff to furnish a bank guarantee, which not only stipulated refund of the amount of customs duty to be passed on to the purchaser, but also provided that the amount described as ad hoc payment in the guarantee would in any event be refunded to the purchaser within six months of the guarantee. The plaintiff sought an injunction restraining the invocation of the bank guarantee, alleging that it was given under duress. It was held that prima facie the defendant-purchaser was not entitled to invoke the bank guarantee unless the refund of custom duty was made available to the plaintiff, and that the defendant had procured the consent of the plaintiff to the stipulation in the bank guarantee about its invocation irrespective of non-receipt of the amount of refund of custom duty as a result of economic duress and fraud committed by it on the plaintiff. The plaintiff was 'entitled to an injunction against encashment of the bank guarantee (subject to certain conditions). The Court also held that whenever duress resulted in a varied contract, the victim of duress may refuse to abide only by the new terms introducing variation, and may seek an injunction restraining enforcement of the impugned term imposed on him by use of economic duress without setting aside the entire transaction.13 The basis of relief on the ground of economic duress is not clear from the judgment. First, the decision has been given in proceedings seeking interim injunction, where the Court had to decide whether interim injunction ought to be issued. The decision can be sustained solely on the equitable principles on which the Court may refuse to grant injunctions,14 without requiring to consider the effect of the duress on the contract in question. Secondly, the Court has discussed the effect of 'economic duress' as a ground of invalidating a contract on the basis of a prima faciecase in an interlocutory proceedings. Thirdly, the effect of such duress on the contract, i.e., whether it is voidable for lack of
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free consent, or is void being against public policy is not clear from the judgment. On the one hand the decision stresses that a plaintiff could rely upon s s. 14 and 15 of the Contract Act 'as well as the general principles of economic duress now being recognised in English, American and Australian legal system' and the Court observes that s. 15 brought within its sweep, the concept of economic duress and observes: 'India has begun to recognise the possibility of an unconscionable bargain which could be brought about by economic duress even between parties who may not in economic terms be situated differently'. On this basis, the contract alleged as caused by economic duress would be voidable. On the other hand, it bases its decisions15 chiefly on the principles laid down by the Supreme Court in Central Inland Water Transport Corporation Ltd v. Brojo Nath Ganguly, 16 which struck down an unfair and unreasonable term as void on the ground that it was opposed to public policy. 6 Pao On v. Lau Yiu, [1980] AC 614, [1979] 3 All ER 65 at 78-79, (PC); Barton v. Armstrong, [1976] AC 104;, [1975] 2 All ER 465 at 476, (PC); Occidental Worldwide Investment Corpn v. Skibs A/S Avanti, (The Siboen v. the Sibotre), [1976] 1 Lloyd's Rep 293 at 336. 7 North Ocean Shipping Co. Ltd. v. Hyundai Construction Co. Ltd., [1979] QB 705, [1978] 3 All ER 1170 at 1182-84; applying Smith v. William Charlick Ltd., [1924] 34 CLR 38 at 56. 8 B&S Contracts and Designs Ltd. v. Victor Green Publications Ltd., (1984) ICR 419. 9 Atlas Express Ltd. v. Kafco, (Importers and Distributors) Ltd., [1989] 1 All ER 641,QBD .. 10 PS Atiyah, An Introduction to the Law of Contract, 5th edn, pp. 269-72. 11 UNIDROIT Principles, Art. 3.9. 12 AIR 1992 Bom 309. 13 Dai-ichi Karkaria Pvt Ltd. v. Oil and Natural Gas Commission, AIR 1992 Bom 309, at 337. 14 See s. 38(2) read with s. 20(2) of the Specific Relief Act, 1963. 15 AIR 1992 Bom 309, at 336-37. 16 [1986] 2 SCR 278, AIR 1986 SC 1571, (1986) 3 SCC 156.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER II Of Contracts, Voidable Contracts and Void Agreements/17[S. 16.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER II Of Contracts, Voidable Contracts and Void Agreements 17[S.
16.
'Undue Influence' defined.-(1) (2) (a)
A contract is said to be induced by 'undue influence' where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. In particular and without prejudice to the generality of the foregoing principle, a person is deemed to be in a position to dominate the will of another-where he holds a real or apparent authority over the other, or where he stand in a
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(b) (3)
fiduciary relation to the other; or where he makes a contract with a person whose mental capacity is temporarily or permanently affected by the reason of age, illness, or mental or bodily distress. Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall be upon the person in a position to dominate the will of the other.
Nothing in the sub-section shall affect the provisions of section 111 of the Indian Evidence Act, 1872 (1 of 1872). Illustrations (a) (b) (c) (d)
A having advanced money to his son, B, during his minority, upon B's coming of age obtains, by misuse of parental influence, a bond from B for a greater amount than the sum due in respect of the advance. A employs undue influence. A, a man enfeebled by disease or age, is induced, by B's influence over him as his medical attendant, to agree to pay B an unreasonable sum for his professional services. B employs undue influence. A, being in debt to B, the money-lender of his village, contracts a fresh loan on terms which appear to be unconscionable. It lies on B to prove that the contract was not induced by undue influence. A applies to a banker for a loan at a time when there is a stringency in the money market. The banker declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms. This is a transaction in the ordinary course of business, and the contract is not induced by undue influence.]
Introduction The first sub-section, defines undue influence as the use by one party to the contract of his dominant position for obtaining an unfair advantage over the other party. Sub-section 2 describes the various situations in which one party to a contract can be said to dominate the will of another. The last sub-section raises a rebuttable presumption where a contract takes place between parties in such a position and the transaction is unconscionable. 17 Subs. by the Indian Contract (Amendment) Act, 1899 (6 of 1899), s. 2.
Amendment Before its amendment in 1899,18 the section stood as follows: Undue influence' is said to be employed in the following cases.--
(1)
(2)
When a person in whom confidence is reposed by another, or who holds a real or apparent authority over that other, makes use of such confidence or authority for the purpose of obtaining an advantage over that other which, but for such confidence or authority, he could not have obtained. When a person whose mind is enfeebled by old age, illness, or mental or bodily distress, is so treated as to make him consent to that to which, but for such treatment, he would
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not have consented, although such treatment may not amount to coercion. Section 16 of the Act, as it stood till 1899, did not adequately represent the generality of the English doctrine. Yet, one decision gave a bold and beneficial decision on the general principles of English equity without fettering itself by the precise words of the Act. The amendment also added the important question of burden of proof and the illustrations.19 18 Indian Contract, (Amendment) Act, 1899, (6 of 1899). 19 Raghunath Prasad Sahu v. Sarju Prasad Sahu, (1923) 51 IA 101, AIR 1924 PC 60, (1923) 3 Pat 279, (1923) 82 IC 817.
Undue Influence A party to a transaction, though consenting to it, may not give a free consent because he is exposed to such influence from the other party as to deprive him of the free use of his judgment. In such a case, the transaction will be set aside. If property has passed, equity will order restitution, and, if necessary, follow the property into the hands of third parties. 'Influence' has been defined as the ascendancy acquired by one person over another; it may be used wisely, judiciously and helpfully.20'Undue influence' is improper use by the ascendant person, of such ascendancy, for the benefit of himself or someone else so that the acts of the person influenced are not, in the fullest sense of the word, his free, voluntary act s. It is any influence brought to bear upon a person entering into an agreement, which having regard to the age and capacity of the party, the nature of the transaction, and all the circumstances of the case appears to have been such as to preclude the exercise of free and deliberate judgment.21 It means the domination of a weak mind by a strong mind to an extent which causes the behaviour of the weaker person to assume an unnatural character.22 The person influenced is constrained to do against his will that, which, but for the influence, he would have refused to do if left to exercise his own judgment.23 It is said to be a subtle species of fraud, whereby mastery is obtained over the mind of the victim, by insidious approaches and seductive artifices. Sometimes, the result is brought about by fear, coercion, importunity or other domination, calculated to prevent expression of the victim's true mind. It is a constraint undermining free agency overcoming the powers of resistance, bringing about a submission to an overmastering and unfair persuasion to the detriment of another.24 More than mere influence must be proved, so as to render influence as 'undue' in the language of law.25 In Lingo Bhimrao Naik v. Dattatraya Shripad Jamadagni, 26 the difference between legitimate persuasion and undue influence has been described:27
Advice and persuasion in the case of a person who does not readily agree to do a thing would not be proof of undue influence.
Persuasion, appeal to the affections or ties of kindred, to a gratitude of sentiment for past services, or pity for future destitution or the like are all legitimate and may be fairly pressed on a promisor. Pressure of whatever character, whether acting on the fear or the hopes, if so exerted as to overpower the volition without convincing the judgment, is a species of restraint under which no valid contract or transaction can be made. Importunity or threats such as the promisor has not the courage to resist, moral command asserted and yielded for the sake of peace and quiet, or of escaping from distress of mind or social discomfort, these, if carried to a degree in
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which the free play of the promisor's judgment, discretion or wish is overborne, will constitute undue influence, though no force is either used or threatened. A party may be led but not driven and his will must be the offspring of his own volition and not someone else's.
The Court held that since the plaintiff was surrounded and pressed by all persons whose interest clearly lay in the execution of the deeds, and that there was no independent advice, the deed was vitiated because of undue influence. Thus, if a person enters into a contract after it is explained to him that his honour requires it, or he would be saved from future worries, it would be pressure no doubt but need not be undue influence or coercion.28 Further, 'courts of equity have never set aside gifts on the ground of the folly, imprudence or want of foresight on the part of donors.'29 20 Poosathurai v. Kannappa Chettiar, (1919) 47 IA 1, AIR 1920 PC 65 at 66, 43 Mad 546, 55 IC 447. 21 Syed Noor v. Qutbuddin, AIR 1956 Hyd 114 at 117; Ram Kalap Pande v. Bansidhar, AIR 1947 Oudh 89 at 91, 227 IC 9. 22 Rambali Prasad Singh v. Kishori Kuer, AIR 1937 Pat 362 at 363, (undue influence does not mean advice by a close friend or relative); Amir Chand Tota Ram v. Sucheta Kripalani, AIR 1961 Pun 383 at 386. 23 Amir Chand Tota Ram v. Sucheta Kripalani, AIR 1961 Pun 383. 24 Mahboob Khan v. Hakim Abdul Rahim, AIR 1964 Raj 250; Kamal Distillery Co. v. Ladli Prasad Jaiswal, AIR 1958 Punj 190. 25 Afsar Shaikh v. Soleman Bibi, [1976] 2 SCR 327, AIR 1976 SC 163 at 169; Alok Kumar Aich v. Asoke Kumar Aich, AIR 1982 Cal 599; Hajra Bai v. Jadavbai, AIR 1986 MP 106.. 26 Lingo Bhimrao Naik v. Dattatraya Shripad Jamadagni, AIR 1938 Bom 97, 39 Bom LR 1233; quoting with approval Hall v. Hall, (1868) LR 1 P & D 481 at 482; Shrimati v. Sudhakar R Bhatkar, AIR 1998 Bom 122. 27 Lingo Bhimrao Naik v. Dattatraya Shripad Jamadagni, AIR 1938 Bom 97 at 107, 39 Bom LR 1233; Alok Kumar Aich v. Asoke Kumar Aich, AIR 1982 Cal 599, (Will); Raja Shiba Prasad Singh v. Tincouri Banerji, AIR 1939 Pat 477; Amir Chand Tota Ram v. Sucheta Kripalani, AIR 1961 P&H 383 at 386; P Saraswathi Ammal v. Lakshmi Ammal, AIR 1978 Mad 361. 28 Lingo Bhimrao Naik v. Dattatraya Shripad Jamadagni, AIR 1938 Bom 97, 39 Bom LR 1233. 29 Allcard v. Skinner, (1887) 36 Ch D 145 per Lindley LJ. at pp. 82-83, [1886-90] All ER Rep 90.
Principle of Equity The principle of undue influence is a doctrine of equity. Undue influence is a comprehensive phrase covering cases of undue influence in particular situations, as also cases of domination or pressure outside those special relations. 'The courts have always been careful not to fetter this useful jurisdiction by defining the exact limits of its exercise.'30 'The principle applies to every case where influence is acquired and abused, where confidence is reposed and betrayed',31 or, as Sir Samuel Romilly expressed it in his celebrated argument in Huguenin v. Baseley, 32 which has been made authoritative by repeated judicial approval, 'to all the variety of relations in which dominion may be exercised by one person over another'. 'As no Court has ever attempted to define fraud, so no Court has ever attempted to define undue influence, which includes one of its many varieties'.33 The doctrine of undue influence applies as much to gifts as to transactions in the form of contract.34 30 Tate v. Williamson, (1866) LR 2 Ch App 55, 61 per Lord Chelmsford.
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31 Smith v. Kay, (1859) 7 HLC 750 at per Lord Kingston at 779; quoted in Karnal Distillery Co. Ltd. v. Ladli Parsad Jaiswal, AIR 1958 Punj 190 at 204, (reversed by the Supreme Court but not on this point); Sathi Sattema v. Sathi Subbi Reddy,, AIR 1963 AP 72 at 75. 32 (1807) 14 Ves 273, 33 ER 526, [1803-13] All ER Rep 1. 33 Allcard v. Skinner, (1887) 36 Ch D 145 per Lindley LJ. at 183, [1886-90] All ER Rep 90 at 99. 34 Ladli Parshad Jaiswal v. Kamal Distillery Co. Ltd., AIR 1963 SC 1279, [1964] 1 SCR 270 at 300; Subhas Chandra Das Mushib v. Ganga Prosad Das Mushib, AIR 1967 SC 878, [1967] 1 SCR 331 at 334.
Classes of Undue Influence under English Law The cases on the subject are divisible into two groups, according to the charge against the donee, namely, that of aggressive circumvention or of abusing the opportunities given by a duty. They were classified in Allcard v. Skinner 35 by Cotton LJ. as follows:
First where the Court is satisfied that the gift was the result of influence expressly used by the donee for the purpose; second, where the relations between the donor and donee have at or shortly before the execution of the gift been such as to raise a presumption that the donee had influence on the donor...The first class of cases may be considered as depending on the principles that no one shall be allowed to retain any benefit arising from his own fraud or wrongful act . In the second class of cases, the Court interferes not on the ground that any wrongful act has in fact been committed by the donee, but on the ground of public policy, and to prevent relations between the parties and the influence arising therefrom being abused.
Later, in Barclays Bank plc v. O'Brien, 36 a classification earlier laid down37 was made between (1) Act ual undue influence, (2) Presumed undue influence; the latter being further classified into (A): cases of presumed undue influence where the law presumes the legal relationship between the parties to be one of trust and confidence, and (B): where the claimant must establish by affirmative evidence that he or she was accustomed to repose trust and confidence in the alleged wrongdoer.
This classification has been questioned later in Royal Bank of Scotland v. Etridge (No 2) .38 Yet it is viewed that this distinction is important.39 35 (1887) 36 Ch D 145 at 171, [1886-90] All ER Rep 90 at 93. 36 [1994] 1 AC 180 at 189-90, [1993] 4 All ER 417,(HL) . 37 Bank of Credit and Commerce International SA v. Aboody, [1990] 1 QB 923 at 953, [1992] 4 All ER 955 per Slade LJ. at 964, [1989] 2 WLR 759,(CA) . 38 [2001] UKHL 44, [2001] 4 All ER 449, [2001] 3 WLR 1021 39 Halsbury's Laws of England, Vol. 16(2), 4th edn, Reissue, 2003, 'EQUITY', para 417.
Sub-section 1 The first paragraph gives the elements of undue influence a dominant position and the use of it to obtain an unfair advantage. It requires the Court trying a case to consider two things:40
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(i) (ii)
are the relations between the donor and the donee such that the donee is in a position to dominate the will of the donor; and has the donee used that position to obtain an unfair advantage over the donor?41
Both the conditions have ordinarily to be established by the person seeking to avoid the transaction.42 Relationship It is not necessary that the parties should be related by blood, marriage or adoption, but that their relations towards each other are such that one is in a superior position over the other. Mere relationship is not sufficient for a Court to assume that one relation was in a position to dominate the will of the other.43 The section is not restricted to cases where strictly or technically fiduciary relationship is established; and it applies to all varieties of relations where the possibility of exercising undue influence exists from confidence created or established,44 or relations in which dominance may be exercised by one person over another.45
The relationships which may develop a dominating influence of the one over another are infinitely various. There is no substitute in this branch of law for a meticulous examination of the facts... There is no precisely defined law setting limits to the equitable jurisdiction of a Court to relieve against undue influence. This is a world of doctrine, not of neat and tidy rules.46
Mere near relationship between the parties cannot lead to the presumption of undue influence.47 Dominating Position Relationships which exist between a guardian and his ward, father and son, patient and his medical adviser, solicitor and client, trustee and the cestui que trust and other like persons, fall within the ambit of sub-s. 1 of this section.48 The position of a person to dominate the will of another may arise not merely from the fact of parties being relatives of each other;49 or from the fact that the relationship is such that one of them relies upon the other for advice;50 it may also arise as a result of the circumstances in which the contract was entered into.51 A position of dominance, if proved to exist, is deemed to continue till its termination is established. When once it has been established that one party to the contract possessed a general influence and dominance over the will of another, it need not be shown how in the particular instance it was used, and it will be presumed to have been used unless contrary is shown.52 Where it is proved that a person is in a position to dominate the will of another, such proof being furnished either by evidence or by the presumption arising under sub-s. (2), and he enters into a transaction with that person, which on the face of it or on the evidence adduced, appears to be unconscionable, the burden of proving that the transaction was not induced by undue influence lies upon the person in a position to dominate the will of the other.53 Use of the Position The law says that: (a) not only must the defendant have a dominant position; but (b) he must use it.54 The Privy Council observed in Poosathurai v. Kappanna Chettiar :55
It is a mistake...to treat undue influence as having been relied established by a proof of the relations of the parties having been such that the one naturally relied upon the other for advice, and the other was in a position to dominate the will of the first in giving it. Up to that point 'influence' alone has been made out. Such influence may be used wisely, judiciously and helpfully. But whether by the law of India or the law of England, more than
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mere influence must be proved so as to render influence, in the language of the law, 'undue'. It must be established that a person in a position of domination has used that position to obtain unfair advantage for himself.
Both these elements were held to be present when enforcement was refused of an agreement entered into by a Hindu widow to adopt a boy, it appearing on the evidence that the relatives of the boy obstructed the removal of her husband's corpse from the house until she consented to the adoption;56 and also in setting aside a deed of gift executed by an indigent Brahman to a temple of which the defendant had charge, it having been found that the gift left the donor without any means, and that the defendant had motives of personal gain in procuring it.57 This gift was made while the donor was living in the defendant's house and was fed and maintained by him, and during the pendency of a suit to recover the property prosecuted by the defendant on behalf of the donor at his own expense. While discussing the question of undue influence in a case regarding a threat to file criminal proceedings, it was held that the plaintiff must show that the complainant or some other person on his behalf took advantage of the state of the accused to apply pressure upon him to procure his consent.58 Unfair Advantage The words 'unfair advantage' must be taken with the context. They do not limit the jurisdiction to cases where the transaction would be obviously unfair as between persons dealing on an equal footing. The expression 'unfair advantage' is used as meaning an advantage obtained by unrighteous means.59 It would exist where the bargain is in favour of the influencer and unfair to the other.60 A mere finding that the promisee obtained an unfair advantage over the promisor is not sufficient to establish undue influence, unless it is also shown that the promisee was in a position to dominate the will of the promisor, and did so to use that position.61 Unlike the English law, which requires that the person influenced must show manifest disadvantage to him,62 this section requires an unfair advantage to the person exercising undue influence. Manifest Disadvantage in the English Law Under the English law, the House of Lords, reversing the decision of the Court of appeal in National Westminster Bank plc v. Morgan, 63 had held that the presumption that undue influence was used, arose only if the transaction was 'manifestly disadvantageous' to the person influenced. Later in CIBC Mortgages plc v. Pitt, 64 it was held that manifest disadvantage need not be shown in cases of actual undue influence, the Class 1 type65 of undue influence. Therefore, in all other cases in which a plea of undue influence was put forward, the party relying on such a plea had to show that the transaction in question was manifestly disadvantageous to him.66 There would be manifest disadvantage where the transaction brought the weaker party significant benefit, but the benefit significantly outweighed the risks involved.67 The question depended on two factors, namely: (a) the seriousness of the risk of enforcement to the giver, in practical terms; and (b) the benefits gained by the giver in accepting the risk.68 Where a wife created a charge to secure the husband's business debts, it could not be to her financial advantage if the wife had no direct pecuniary interest in the business,69 but may not be manifestly disadvantageous if the business in which the wife would receive substantial benefits had a chance of surviving.70 If the chances of the survival of the business were not good, or if the marriage was already in difficulties, leaving the wife without her home, the transaction may be manifestly disadvantageous.71 The requirement of manifest disadvantage has now been discarded, since it leads to ambiguity.72The true position is that in these cases if the gift is so large as not to be reasonably accounted for on the ground of friendship, relationship, charity or other ordinary motives on which ordinary persons act, the burden is on the donee to support the gift. There must be evidence that the transaction itself was wrongful in that it constituted an advantage taken of the person subjected to the influence which, failing proof to the contrary, was explicable only on the basis that undue influence had been exercised
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to procure it.73 40 Subhas Chandra Das Mushib v. Ganga Prasad Das Mushib, AIR 1967 SC 878 at 880, [1967] 1 SCR 331 at 334; Ladli Parshad Jaiswal v. Kamal Distillery Co. Ltd., AIR 1963 SC 1279, [1964] 1 SCR 270 at 300; Raghunath Prasad Sahu v. Sahu Sarju Prasad, (1923) 51 IA 101, AIR 1924 PC 60, (1923) 3 Pat 279, (1923) 82 IC 817. 41 Afsar Shaikh v. Soleman Bibi, AIR 1976 SC 163, [1976] 2 SCR 327. Kartari v. Kewal Krishan, AIR 1972 HP 117; Thakkadi Syed Mohamed v. Ahmed Fathummal, AIR 1973 Mad 302; Chinnamma v. Devanga Sangha, AIR 1973 Mys 338. 42 Ladli Parshad Jaiswal v. Kamal Distillery Co. Ltd., AIR 1963 SC 1279, [1964] 1 SCR 270; Poosathurai v. Kannappa Chettiar, AIR 1920 PC 65 at 66, 47 IA 1; Govinda Naik Gurunath Naik v. Gururao Puttanbhat Kadekar, AIR 1971 Mys 330 at 333; Chinnamma v. Devanga Sangha, AIR 1973 Mys 338 at 348; Subhas Chandra Das Mushib v. Ganga Prasad Das Mushib, AIR 1967 SC 878 at 880, [1967] 1 SCR 633; Raghunath Altia v. Arjuno Altia, AIR 1973 Ori 76 at 78, (must give particulars under O VI, r 4 of the CPC); Afsar Shaikh v. Soleman Bibi, AIR 1976 SC 163, [1976] 2 SCR 327, (onus probandi). 43 P Saraswathi Ammal v. Lakshmi Ammal, AIR 1978 Mad 361. Raghunath Prasad Sahu v. Sarju Prasad Sahu, (1923) 51 IA 101, AIR 1924 PC 60, (1923) 3 Pat 279, (1923) 82 IC 817; Subhas Chandra Das Mushib v. Ganga Prosad Das Mushib, [1967] 1 SCR 331, AIR 1967 SC 878. 44 Mahboob Khan v. Hakim Abdul Rahim, AIR 1964 Raj 250. 45 Dent v. Bennet, (1839) 4 My & Cr App R 269; Smith v. Kay, (1859) 7 HLC 750; Earl of Aylesford v. Morris, [1873] 8 Ch App. 484 at 491, [1861-73] All ER Rep 300; Johnson v. Buttress, (1936) 56 CLR 113 at 119, (a case of an illiterate and weak minded person). Huguenin v. Baseley, (1807) 14 Ves 273, 33 ER 526, [1803-13] All ER Rep 1. 46 National Westminster Bank plc v. Morgan, [1985] AC 686, [1985] 1 All ER 821 per Lord Scarman at pp. 830-31. 47 M Rangasamy v. Rengammal , AIR 2003 SC 3120, (2003) 7 SCC 683; Subhas Chandra Das Mushib v. Ganga Prosad Das Mushib, [1967] 1 SCR 331, AIR 1967 SC 878. 48 Subhas Chandra Das Mushib v. Ganga Prosad Das Mushib, [1967] 1 SCR 331, AIR 1967 SC 878 at 881; Lakshmi Chand v. Pt Niader Mal, AIR 1961 All 295 at 297; Ganesh Narayan Nagarkar v. Vishnu Ramchandra Saraf, (1907) 32 Bom 37 at 44. 49 Misrilal Jalamchand v. Sobhachand Jalamchand, AIR 1956 Bom 569, (two brothers); Thakkadi Syed Mohamed v. Ahmed Fathummal, AIR 1973 Mad 302. 50 Santhappa Rai v. Santhiraja, AIR 1938 Mad 426 at 428. 51 Ranee Annapurni Nachiar v. Swaminatha Chettiar, (1910) 34 Mad 7 at 10; London and Lancashire Insurance Co. Ltd. v. Binoy Krishna Mitra, AIR 1945 Cal 218. 52 Karnal Distillery Co. Ltd. v. Ladli Prasad Jaiswal, AIR 1958 Punj 190, (presumption may also cover other transactions). 53 See below sub-section 3. 54 Amjadennessa Bibi v. Rahim Buksh Shikdar, (1914) 42 Cal 286, AIR 1916 Cal 74; Ladli Parshad Jaiswal v. Karnal Distillery Co. Ltd., [1964] 1 SCR 270, AIR 1963 SC 1279; Poosathurai v. Kannappa Chettiar, (1919) 47 IA 1, AIR 1920 PC 65 at 66, 43 Mad 546, 55 IC 447; Raghunath Prasad Sahu v. Sarju Prasad Sahu, (1923) 51 IA 101, AIR 1924 PC 60, (1923) 3 Pat 279, (1923) 82 IC 817; Bhola Ram Lieri v. Peari Devi, AIR 1962 Pat 168; Sathi Sattema v. Sathi Subbi Reddy, AIR 1963 AP 72; Alok Kumar Aich v. Asoke Kumar Aich, AIR 1982 Cal 599, (Will). 55 (1919) 47 IA 1, AIR 1920 PC 65, 43 Mad 546, 55 IC 447; quoted with approval in Subhas Chandra Das Mushib v. Ganga Prosad Das Mushib, [1967] 1 SCR 331 at 334, AIR 1967 SC 878 at 881. 56 Ranganayakamma v. Alwar Setti, (1889) 13 Mad 214, (1888-90) ILR 11-13 Mad 861. 57 Sital Prasad v. Parbhu Lal, (1888) ILR 10 All 535. 58 Gobardhan Das v. Jai Kishen Das, (1900) ILR 22 All 224 at 227; citing Jones v. Merionethshire Permanent Benefit Building Society, [1892] 1 Ch 173. 59 Ganesh Narayan Nagarkar v. Vishnu Ramchandra Saraf, (1907) 32 Bom 37 at 4, (1907-08) ILR 31-32 Bom 439. 60 Poosathurai v. Kannappa Chettiar, (1919) 47 IA 1, AIR 1920 PC 65 at 66, 43 Mad 546, 55 IC 447; Daulat v. Gulabrao, AIR 1925 Nag 369, 88 IC 295; Panchi Dasi v. Kshiroda Dasi, AIR 1926 Cal 171 at 172. 61 Homeshwar Singh v. Maharajidhiraj Kameshwar Singh Bahadur of Darbhanga, AIR 1935 PC 146 at 148; Sundar
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Koer v. Rai Sham Krishen, (1907) 34 IA 9, (1906) 34 Cal 150 at 154, (PC); Elias Saleh Mohamed Sait v. Khanmull, AIR 1959 Mys 102 at 105; reversed on another point in K Manick Chand v. Elias Saleh, AIR 1969 SC 671. 62 See below: Manifest Disadvantage in the English Law. 63 [1985] AC 686, [1985] 1 All ER 821,(HL) ; followed in Bank of Credit and Commerce International SA v. Aboody, [1990] 1 QB 923, [1992] 4 All ER 955, [1989] 2 WLR 759,(CA) . 64 [1994] 1 AC 200, [1993] 4 All ER 433; explaining National Westminster Bank plc v. Morgan, [1985] AC 686, [1985] 1 All ER 821,(HL) ; overruling on this question Bank of Credit and Commerce International SA v. Aboody, [1990] 1 QB 923, [1992] 4 All ER 955, [1989] 2 WLR 759,(CA) . 65 See above: 'Classes of Undue Influence under English law'. 66 Allcard v. Skinner, (1887) 36 Ch D 145, [1886-90] All ER Rep 90,(CA) ; National Westminster Bank plc v. Morgan, [1985] AC 686, [1985] 1 All ER 821,(HL) ; Coldunell Ltd. v. Gallon, [1986] QB 1184, [1986] 1 All ER 429,(CA) ; Goldsworthy v. Brickell, [1987] Ch 378, [1987] 1 All ER 853,(CA) ; Midland Bank plc v. Shephard, [1988] 3 All ER 17,(CA) ; Bank of Baroda v. Shah, [1988] 3 All ER 24,(CA) ; Bank of Credit and Commerce International SA v. Aboody, [1990] 1 QB 923, [1992] 4 All ER 955, [1989] 2 WLR 759,(CA) . 67 Cheese v. Thomas, [1994] 1 All ER 35, [1994] 1 WLR 129. 68 Bank of Credit and Commerce International,SA v. Aboody, [1990] 1 QB 923 at 965, [1992] 4 All ER 955, [1989] 2 WLR 759,(CA) . 69 Barclays Bank plc v. O'Brien, [1994] 1 AC 180 at 199, [1993] 4 All ER 417 at 432, (HL). 70 Bank of Credit and Commerce International SA, v. Aboody, [1990] 1 QB 923 at 965, [1992] 4 All ER 955, [1989] 2 WLR 759,(CA) . 71 Royal Bank of Scotland v. Etridge, (No 2), [1998] 4 All ER 705, at 716-17. 72 Royal Bank of Scotland v. Etridge, (No 2), [2001] UKHL 44, [2001] 4 All ER 449, [2001] 3 WLR 1021. 73 Halsbury's Laws of England, Vol. 16(2), 4th edn, Reissue, 2003, EQUITY, para 420.
Sub-section 2 This sub-section lays down a special presumption that a person is deemed to be in a position to dominate the will of another:
(i) (ii)
where he holds a real or apparent authority over; or where he stands in a fiduciary relation to another; or (iii) where he enters into the transaction with a person whose mental capacity is temporarily or permanently affected by reasons of age, illness or mental or bodily distress.74
The second paragraph of the present section makes a division of the subject-matter on a different principle, according to the origin of the relation of dependence, continuing or transitory, which makes undue influence possible. Such a relation may arise:
(i) (ii)
from a special authority or confidence committed to the donee; or from the feebleness in body or mind of the donor.
It is impossible to find plain and clear cut categories for transactions which are often obscure and complicated, and sometimes purposely made so. In Subhas Chandra Das Mushib v. Ganga Prasad Das Mushib, 75 Mitter J, observed:
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Generally speaking the relation of solicitor and client, trustee and cestui que trust, spiritual advisor or devotee, medical attendant and patient, parent and child are those in which such a presumption arises. Section 16(2) of the Contract Act shows that such a situation can arise wherever the donee stands in a fiduciary relationship to the donor or holds a real or apparent authority over him.
Real and Apparent Authority A person in authority is in a position to dominate the will of the person over whom his authority can be exercised. Such authority may be real, as between employer and employee, an officer and his subordinate, an income-tax officer and an assessee, a police officer and an accused. The authority is apparent where real authority does not exist, but the person is able to approach the other with a show of authority. Fiduciary Relationship A fiduciary relationship arises between parties when one of them stands in a position of trust to the other,76 or in such a position that the latter naturally reposes confidence in him, a confidence such that an influence grows out of that confidence.77 Such relationship may exist regardless of the origin of the confidence and the source of influence. It is enough if one places his trust in the other and relies upon him. Where such relationship subsists, the probability of one party dominating the will of the other arises from the nature of the relationship, or from a particular handicap or disability of the other party.78 The mere existence of fiduciary relationship raises the presumption of undue influence.79 Fiduciary relationship subsists between parent and child, solicitor and client, trustee and cestui que trust, doctor and patient etc, and has also been held to exist between a brother to his unmarried and uneducated sister living under his care,80 and advocate to his old illiterate woman client;81 teacher and student82 Relief in equity is not restricted to cases of fiduciary relationship strictly so called.83 In order to establish the existence of a fiduciary relationship, it is necessary to show that one party relies on the other to such an extent that complete trust and confidence is placed in the other enabling him to influence the former. In Tate v. Williamson, 84 a contract for sale was set aside because the purchaser, who owed a fiduciary relation to the vendor, did not advise him that the estate had been valued at a much higher price. The existence of a fiduciary relationship does not necessarily preclude a transaction in which some advantage is given to the person holding the fiduciary position. All that equity requires is that if such person in the fiduciary position wants to hold the benefit, he must make it clear that the intention on the part of the transferor was not the result of his influence.85 Following these principles, gift of the whole of his property by a Hindu, well-advanced in years, to his guru was set aside, where the only reason for the gift as disclosed by the deed, being the donor's desire to secure benefits to his soul in the next world.86 Similarly, where a cestui que trust had no independent advice, it was held that a gift by him to the trustee of certain shares forming part of the trust funds was set aside, though in the same case, a gift of shares which did not form part of the trust funds was upheld.87 The case of Wajid Khan v. Ewaz AU Khan, 88 in which the Privy Council set aside a deed of gift executed by a old illiterate Mohammedan lady in favour of her confidential managing agent, came under this head; so did the case of refusal to enforce an agreement executed by a poor woman in favour of her mookhtear (manager-agent) by which she bound herself to give him, by way of remuneration of his services, one half of the property which she might recover by his assistance.89 While the relationship of banker and customer is not automatically characterised as one to which the doctrine of undue influence attaches, nevertheless, on particular facts, the necessary quality of reliance and confidence can be established.90 In Lloyd's Bank Ltd v. Bundy, 91 an old man was advised by his bank, where a company started by his son also had an account, to guarantee the
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overdraft of the company and also to mortgage his farm to guarantee the same. The company failed and the bank sought to enforce the guarantee and the mortgage. The Court of Appeal held:
(i) (ii) (iii) (iv)
that there was a special relationship of trust and confidentiality between the bank and the defendant; the execution of the mortgage and the guarantee was of benefit to the bank and it involved a conflict of interest and it could have left the defendant destitute in his old age; the bank was under a duty to advise the defendant to have independent advise to the wisdom of the transaction; and the bank was in breach of its duty of care to the defendant.
The guarantee and the mortgage were therefore, set aside. A person standing in a fiduciary relation to another has a duty to protect the interest given to his care and the Court watches with jealousy all transactions between such persons so that the protector may not use his influence or the confidence to his advantage. When the party complaining shows such a relation, the law presumes everything against the transaction and the onus is cast upon the person holding the position of confidence or trust to show that the transaction is perfectly fair and reasonable and that no advantage has been taken of his position. The rule has been clearly established in England that in the case of a stranger, equity will not set aside a voluntary deed or donation however improvident it may be, if it be free from imputation of fraud, surprise, undue influence and spontaneously executed or made by the donor with his eyes open. When fraud, misrepresentation or undue influence is alleged by a party in a suit, normally, the burden is on him to prove such fraud, undue influence or misrepresentation. But when a person is in an act ive, confidential or fiduciary relationship with another and the latter is in a position of active confidence the burden of proving the absence of fraud, misrepresentation or undue influence is upon the person in the dominating position. The age and capacity of the donor and the nature of benefit are very relevant.92 Parent and Child A parent stands in a fiduciary relation towards his child, and a presumption of undue influence arises in the relation of parent and child,93 as also between adoptive parent and child,94 and guardian and ward.95 Any transaction between them by which any benefit is procured by the parent to himself or to a third party at the expense of the child will be viewed with jealousy by courts of equity; and the burden will be on the parent or third party claiming the benefit, of showing that the child in entering into the transaction had independent advice, that he thoroughly understood the nature of the transaction, and that he was removed from all undue influence when the gift was made.96 On grounds of public policy, the Court raises a strong presumption of undue influence, even though there is no act ual unfairness.97 The child is presumed to be under the exercise of parental influence as long as the dominion of the parent lasts;1 even when the child is actually of age at the time the transaction takes place.2 In ascertaining whether at the time of the transaction the child was independent from the influence of the parents, it is not its being of full age that matters, but whether the child was on that day completely emancipated from the special relationship of confidence which existed between him and his parent.3 The duration of the presumption is a question of fact and degree in the circumstances of each case. The donee of a gift must show that the donor was emancipated or had taken independent advice.4 Family arrangements may be viewed more leniently, but an arrangement where the parent gets a disproportionate advantage may be set aside.5 Upon these principles, the High Court of Madras refused to enforce against an adopted son a deed of trust of joint family property executed by him and his adoptive father, under which annuities were
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created in favour of certain relations of the father, where a suit was brought by them for recovery of arrears of annuities after the father's death. The son had executed the deed soon after he attained majority, and there was no evidence to show that the son had independent advice, or that he understood the nature of the transaction, or that his father's influence had ceased when the document was executed.6 Where the defendant had brought up and got the plaintiff married and was loco parentis to her, it was held that he was in position to dominate her will and the impugned transaction of gift in favour of the defendant, by which she was divested of her entire inherited property, was vitiated by undue influence.7 Same was the case of a daughter, who shortly before her marriage, stood surety for her mother in an important money lending transaction.8 Adult Child and Parent There is no presumption of undue influence in the relationship of an adult child over his aged parents, or a grandson over his grandfather,9 but a case of undue influence may be established on facts.10 An aged father executed deeds of gifts and a wakfnama at a time when he was in a weak state of mind as the result of a prolonged illness. These transactions were brought about at the instance of his son and had the effect of depriving the other members of the family of their just share of the inheritance. As it was proved that the son was in a position to dominate the father's will and that he used that position to his own advantage, the deeds of gift and the wakfnama were set aside.11 But the presumption of undue influence was not applied to a gift by a mother to her daughter, where such a gift was sought to be set aside on the ground of undue influence, but domination on the part of the daughter and subjection of the mother was not established.12 Husband and Wife: Similar Relationships A husband and wife do not necessarily stand in a position of domination,13 and the relationship does not give rise to a presumption of undue influence.14 There is no presumption of undue influence in every case where a wife confers benefit on her husband without consideration.15 But the Court has recognised 'a special tenderness of treatment afforded to wives' because in many cases, sexual and emotional ties...provide a ready weapon for undue influence.'16 It has also been stated that a Court of equity 'will have more jealousy over dispositions by a wife to a husband'.17 In Yerkey v. Jones, 18 a wife gave a second mortgage of some property owned by her to help her husband to borrow money for buying a piece of land and a house thereon. The vendors--the mortgagees--issued a writ against the wife and the husband as the interest and the principle remained unpaid. The wife succeeded in her defence of undue influence and decree was passed against the husband. Dixon J. in appeal said that the relationship of husband and wife was such that presumption of undue influence does not arise in their case but 'it has never been divested completely of what may be called equitable presumption of an invalidating tendency'.19 The Privy Council upheld the plea of undue influence in a case of a husband exercising undue influence over his wife, who was illiterate, though she could sign her name, whose properties he managed, and where she passively acquiesced in what he did and signed whatever document she was asked to execute.20In such a case, it was unnecessary that there was an act ual fraud, it was sufficient if it was shown that the wife was acting under the influence of her husband and not as a free agent. It seems that the presumption may apply to engaged couples.21 The relation of paramour and mistress may be included among such cases. Where the power of influence and the influence itself are established, something more than a bare assertion of affection or a generous feeling of gratitude must be furnished to turn the scale.22 Expectant Heirs Relief is given in equity for unconscionable transactions made with heirs, reversioners and expectants
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during the lives of their parents or other ancestors on the security of their expectant or reversionary interests in property (called 'catching bargains'),23 and Court will intervene for the protection of expectant heirs.24 Expectant heirs are protected against the consequences of their not being on equal terms with the buyer, or in a position to fully understand the value of their interest, and justly to estimate the proposals made to them.25 Instances can be given of an expectant heir executing a bond agreeing to pay GBP 20,000 unless the amount of debt of GBP 10,000 was repaid by a particular date,26 or sale of reversionary interest was for a sum much below its value.27 Apart from the fraud on the ancestor, this principle is founded on pressure upon the heir, or the distress of the party disposing of his expectancy.28 If, when this is removed, he confirms the bargain, it will stand.29 Lawyer and Client The relationship of a lawyer and client is confidential and unequal and the personal ascendancy of lawyer over the client makes a client more susceptible to the undue influence from his lawyer and to the latter's dominance than any two persons who do not bear to each other a fiduciary relationship.30 The relation of solicitor and client raises so strong a presumption of undue influence that it has been said to be almost impossible 'for a gift made by a client to a solicitor to stand.31 The confidence arising from the relationship continues, even though the solicitor is not act ing for the client in the particular transaction.32 Where an illiterate old woman gifted her valuable immovable property to her advocate, the Court held that the relationship was fiduciary and that it could be presumed that the advocate was in a position to dominate the Will of the woman; and as the transaction appeared unconscionable, the Court further held that the gift deed was the result of undue influence exercised by the donee advocate.33 Where it was established that the plaintiff had dominated the Will of the defendant, being his lawyer, and had obtained unfair advantage in getting a lease deed executed in his favour by using that position, the transaction was vitiated by undue influence.34 But a gift to the advocate's wife was upheld where it was an object of bounty and as a matter of gratitude.35 The presumption stood rebutted36 in the case of a gift, by proving that the solicitor was not acting as such in the matter of the gift, and that the donor had competent, independent advice of such a nature as to show that the solicitor's influence was not operative;37 and in the case of a sale, by showing that the client was fully informed, that he had competent, independent advice, and that the price was fair.38 If an attorney advises his client to take independent advice and the client does so, it is not the business of the attorney to see that the new attorney is doing his duty diligently.39 These principles apply as much to agreements between the attorney and a client40 as to those between the managing clerk in an attorney's office and a client;41 but has been held not to arise where a pleader had no permanent professional relationship with a party having appeared only in one or two cases.42 They apply to gifts or transfers of property as well as to agreements for remuneration.43 Doctor and Patient The presumption of undue influence applies to the relationship between doctor and patient,44 and between medical attendant and patient,45 governors of private mental hospital and patient,46 and between a manager of a rest home and a patient.47 Trustee and Beneficiary In the relation of trustee and beneficiary, the rule is applied more strictly.48On grounds of public policy, the Court raises a strong presumption of undue influence, even though there is no act ual unfairness.49 The rule applies both during the actual relation, and afterwards as long as the influence resulting from the relation lasts.50 Religious Influence A devotional mind is most vulnerable to religious influence. In Allcard v. Skinner, 51 Lindley LJ stated:
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The undue influence which courts of equity endeavour to defeat is the undue influence of one person over another; not the influence of enthusiasm on the enthusiast who is carried away by it, unless indeed such enthusiasm is itself the result of external undue influence. But the influence of one mind over another is very subtle, and of all influences, religious influence is the most dangerous and the most powerful.
Where due to spiritual domination over the plaintiff, who was in frail health and had almost a blind religious devotional frame of mind, a gift was executed by him in favour of a religious organisation, it was held that a clear case of undue influence was established by the plaintiff.52 A gift of the whole of his property by a Hindu, well advanced in years, to his guru, or spiritual advisor, was set aside where the only reason for the gift, as disclosed by the deed being the donor's desire to secure benefits to his soul in the next world.53 Where a gift is made to a spiritual organisation, the courts expect a high degree of proof about the voluntary and genuine character of the transaction.54 Creditor and Debtor The fact that one party to a contract stands in the relation of a debtor to the other is not by itself sufficient to prove undue influence;55 nor is previous indebtedness;56 nor mere urgent need of money by the borrower;57 nor liability to pay heavy interest;58 even though the payment may be of compound interest59 or there was ample security for repayment;60 unless the rate of interest is exorbitantly excessive,61 or unless it is shown that the creditor is in a position to dominate the will of the borrower and has used the dominating position to his advantage. The bargain is unconscionable where the creditors are in a position to take advantage of the embarrassment of their debtors.62 While the doctrine of undue influence does not automatically attach to the relationship of banker and customer, nevertheless, relationship of reliance and confidence can be established on particular facts of the case.63 A creditor lending money to an expectant heir on the strength of expectancy,64 or to a person helpless because of his estate being under the Court of Wards,65 have been held to be in a position to dominate the Will of the debtor. Undue influence has also been held to exist where a person already indebted to a money-lender contracted a fresh debt on unconscionable terms.66 Landlord and Tenant This relationship may not necessarily raise the presumption of undue influence. An agreement between a landlord and tenant, that the landlord will get compensation money in case of acquisition, was not an unconscionable transaction where the consideration was the transfer of possession to a tenant without payment of salami; nor did it raise the presumption of undue influence,67 nor was there any undue influence when the landlord agreed to allow the tenant to stay for one more year on payment of enhanced rent;68 or where the landlord had a decree for the tenant's eviction.69 But the relations subsisting between a malik and a cultivator are such that the malik is in a position to dominate the will of the cultivator. Other Relationships The presumption of undue influence has been held to arise between the husband of the eldest of three sisters who managed the estate and the two younger sisters, whose father and mother were both dead and the younger sisters executed a promissory note in favour of the elder sister's husband when they had just attained majority a month or two before;70 and in a transaction of a mortgage by a younger brother at the instance and for the benefit of his older brothers, who till recently were his guardians, and he was under their influence.71 It has also been held that, especially among Hindus, after the death of parents, the elder brother is in a position of loco parentis, and is superior not only in matters of veneration and obedience, but also for discharging responsibilities. Therefore, an older brother not only holds an authority over the younger brothers and nephews which is both real and
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apparent, but also stands in a fiduciary relation to them.72 Undue influence of a maternal uncle over his nephew was presumed where the nephew was greatly attached to his uncle and practically lived as his ward.73 A girl was learning lessons in playing the guitar in a music school from a teacher. A question arose whether there was a fiduciary relationship between her and the accompanist, who accompanied her on the tabla while she played the guitar. It was held that there was no direct relationship of teacher and student between the accompanist and her, because accompaniment on the tabla was only incidental to the lessons in guitar and further, even if it was presumed that he assumed the role of a teacher, it was not established on evidence that the accompanist misused any fiduciary relationship and exerted any undue influence on her to get her consent to marry him.74 This presumption of undue influence has been raised in transactions also between paramour and mistress;75 an old and illiterate widow and her nephew.76 It has also been held that the relation of master and servant is not by itself enough to show a dominant position,77 nor is the circumstances that the defendant is daughter-in-law of a ruler, and the plaintiff, a subject.78 But an undertaking given by a stenographer to the Deputy Registrar of a High Court in a matter which the latter was otherwise bound to do,79 was held to be a result of undue influence. Mental Capacity is Affected Undue influence may arise where one party makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress. But a mere distressed state of mind of a party to the contract cannot raise a presumption of undue influence, unless the opposite party had taken the opportunity to use it to gain an unfair advantage to himself.80 Mere physical infirmity does not carry with it mental incapacity.81 The fact that the person transferring the property was in weak health and totally blind,82 or that the affected party was a simpleton and an opium addict, would not raise the presumption of undue influence.83 Exercise of undue influence was presumed where a young widow consented to an agreement of partition while in recent bereavement and illness, and without any independent advice.84 Mental Distress It is not enough to prove undue influence that a vendor of property was in a distressed state of mind and anxious to dispose of his property.85 A state of fear by itself does not constitute undue influence. Assuming that such a state of fear exists, amounting to mental distress enfeebling the mind, there must also be act ion of some kind, an employment of pressure or influence by or on behalf of the other party to the agreement.86 Old Age Mere loss of vigour and infirmity on account of old age is not sufficient to invalidate a contract,87 nor the fact that an old man did not make provision for his wife's settlement.88 But a presumption of undue influence arose in the case of a gift by a feeble old woman, unable to leave her house, to her nephew upon whom she relied for food and clothing and upon whom she had entrusted the management of her affairs.89 The plaintiffs, both old and infirm, with no one to look after them, were helped by a brother's grandson during illness. They agreed to make a Will in his favour, but the grandson actually got a deed of gift executed. This was held unconscionable because the donee was in a position to dominate the old couple.90 In Subhas Chandra Das Mushib v. Ganga Prasad Das Mushib, 91 presumption of undue influence arose where a gift was effected by a very old man whose vision was defective and whose sole companion in life was lying dangerously ill at the time of the transaction. But in Raghunath Rai v. Shri Ram Janki Jugal Sarkar, 92 undue influence was not inferred where a waqf deed executed by a lady, 80 years old, had herself read the deed and it was read and explained to her by the scribe. The mere fact that the donor of a gift had earlier made a will bequeathing property to some person (not the donee) is not enough to show undue influence.93
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Young Age A person who has just attained majority may be inexperienced, and the person dealing with him has to prove that the contract was made in good faith and for adequate consideration.94 Threats of Prosecution Undue influence may exist where a promise is extracted by a threat to prosecute certain person unless the promise is given. Direct threat is not necessary. It may be enough if the undertaking is given with a desire to prevent prosecution, and that desire is known to those to whom the undertaking is given. In such a case, a term may be implied into the contract that no prosecution should take place. A state of fear by itself does not constitute undue influence. Assuming a state of fear amounting to mental distress which enfeebles the mind, there must further be act ion of some kind, the employment of pressure or influence by or on behalf of the other party to the agreement. The mere fact, therefore, that a submission to arbitration was executed by the defendant during the pendency and under fear of a criminal prosecution instituted against him by the plaintiff would not render the transaction voidable on the ground of 'undue influence,1 and it could not be said that the plaintiff was in a position to dominate the Will of the defendant merely by reason of the fact that criminal proceedings had been pending against the defendant at the time when the submission was executed by him. Where the plaintiffs agreed to relinquish their right to a religious office in favour of the defendant in consideration of the latter withdrawing a charge of criminal trespass preferred against them, it was held that the agreement was voidable, the charge of trespass being false, and the sole cause for entering into the agreement being 'the well-founded terror of the influence of the prosecutor and of the civil death which would probably result from his proceeding'.2 The doctrine extends to any case where the person giving the undertaking was in substance influenced by the desire to prevent prosecution of the person implicated.3 A debtor may secure his debt, though the object may be to avoid a prosecution as in Flower v. Sadler, 4 because there is a further consideration. The question in every case of threat to prosecute is: 'what was the person giving the guarantee in substance, to the knowledge of the person to whom the guarantee was given, doing and intending to do?'5 In Mutual Finance Ltd v. John Wetton & Sons Ltd, 6 a guarantee was obtained from a family company under an implied threat to prosecute a member of the family, who forged the signature of the company on a previous guarantee. The receiver of the guarantee knew that the guarantee was only given because the father of the alleged forger was in such a state of health, that the shock of the son's prosecution would endanger his life. A plaintiff's action on the guarantee was held voidable, although, common law duress was held not proved and the company was subject to undue influence up to the issue of the writ. Undue influence in equity might exist where a promise was extracted by a threat to prosecute certain third persons unless the promise was given.7 Similarly, where criminal proceeding was threatened against a mookadam for misappropriation of his master's monies, and a bond was passed by an ignorant Hindu widow who had brought him up as her son to save him from the threatened prosecution, it was held that the agreement was not binding upon the widow, she having had no independent advice.8 A threat of prosecution may also be held in appropriate cases as contrary to public policy, if it has for its object the stifling of a prosecution for non-compoundable offence.9 Doctrine of Inequality of Bargaining Power There are cases under the English law, where equity intervened not because the terms were harsh or oppressive, but because it refused to allow one party to take advantage of the other's weakness or
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need. The pressure in these cases was not of undue influence or personal pressure, but arose because the other party took advantage of its economic power and necessity of the vendor or the borrower which has been termed as pressure resulting from an inequality of bargaining position.10 This doctrine has been applied as an independent principle. In Lloyd's Bank Ltd v. Bundy, 11 a further guarantee and a charge were given by the father to a bank on the advice of the bank manager in regard to the debt of his son. The father was held to have complete faith and did not get outside advice. The Court of Appeal held that a special relationship of confidence existed between the bank and the father, and the last guarantee and charge were liable to be set aside for undue influence. Lord Denning MR considered them voidable on the larger ground of inequality of bargaining powers. He stated:12
There are cases in our books in which the courts will set aside a contract, or a transfer of property, where the parties have not met on equal terms--when one is so strong in the bargaining power and the other so weak that, as a matter of common fairness, it is not right that the strong should be allowed to push the weak to the wall.
And later,
By virtue of it [the concept of inequality of bargaining power], the English law gives relief to one who, without independent advice, enters into a contract upon terms which are very unfair or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs or desires, or by his own ignorance or infirmity, coupled with undue influences or pressures brought to bear on him by or for the benefit of the other.
He also stated that no bargain should be upset which was 'the result of ordinary interplay of economic forces', but the Court should interfere only 'where there has been inequality of bargaining power such as to merit the intervention of the court'. Inequality of bargaining powers has not been accepted as a general principle in the English law, and its need has been doubted in later cases,13 the principle has not been accepted as a general doctrine for setting aside a contract, unless it fell within one of the recognised categories of 'victimisation' such as duress, undue influence and unconscionable advantage.14 Clause (b) of this paragraph seems to include the principle, established by a series of English decisions, that 'where a purchase is made from a poor and ignorant man at a considerable undervalue, the vendor having no independent advice, a Court of equity will set aside a transaction',15 by raising the presumption of undue influence. This section does not recognise a general principle of inequality of bargaining powers for striking down contracts. Inequality of Bargaining Power and Public Policy In Central Inland Water Transport Corporation Ltd v. Brojo Nath Ganguly, 16 a company entered into a scheme of arrangement with the corporation, a government company, with the approval of the High Court. Under the scheme, an officer of the company could accept the job of the corporation, or in the alternative, leave the job and receive a meagre amount by way of compensation. The rules of the corporation provided that the services of officers could be terminated by giving three month's notice. The petitioner's services were terminated in this manner. The petitioner challenged this rule as arbitrary under Art. 14 of the Constitution of India , and alleged that a term in a contract of employment entered into by a private employer, which was unfair, unreasonable and unconscionable was bad in law. This rule formed part of contract of employment and its validity fell to be tested, by the
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principles of the law of contracts. The petitioners did not make out a case of coercion, fraud or misrepresentation. After discussing the judgments of English courts, and the law in the UK, USA and Germany, the Supreme Court observed:17
...the courts will not enforce and will, when called upon to do so, strike down an unfair and unreasonable contract, or an unfair and unreasonable clause in a contract, entered into between parties who are not equal in bargaining power.
Observing that the different situations in which this would occur could not be visualised, it stated:
...the above principle will apply where the inequality of bargaining power is the result of the great disparity in the economic strength of the contracting parties,...where the inequality is the result of circumstances, whether of the creation of the parties or not. It will apply to situations in which the weaker party is in a position in which he can obtain goods or services or means of livelihood only upon the terms imposed by the stronger party or go without them. It will also apply where the man has no choice, or rather no meaningful choice, but to give his assent to a contract or to sign on the dotted line in a prescribed or standard form or to accept a set of rules as part of the contract, however unfair, unreasonable and unconscionable a clause in that contract or form or rules may be. This principle, however, will not apply where both parties are businessmen and the contract is a commercial transaction.
A question arose under which head an unconscionable bargain could fall. If it fell under the head of undue influence, it would be voidable, but if it fell under the head of being opposed to public policy, it would be void.18 The Court observed that such contracts would rarely be induced by undue influence, even though at times they were between parties one of whom held a real or apparent authority over the other. Very often, they were entered into under pressure of circumstances, generally economic, resulting in inequality of bargaining power. Such contracts did not fall within the four corners of the definition of 'undue influence' given in s. 16(1), and ought not to be held voidable, because 'it would compel each person with whom the party with superior bargaining power had contracted to go to the Court to have the contract adjudged voidable...Such a contract or such a clause in a contract ought, therefore to be adjudged void'. It is submitted that the true position is that a voidable contract can be rescinded by communicating in the same manner as a proposal under s. 66 of this Act, and it is not necessary to get a contract adjudged voidable. On the other hand, an agreement which has the tendency of being against public policy, may be required to be so adjudged, for the question whether a particular contract or clause in the contract fell within the doctrine of inequality of bargaining powers enunciated by the Supreme Court, and whether it was opposed to public policy could be decided only by the court. The remedies given by the court, except the remedy to strike down the contract or a clause in the contract (or to declare it rescinded), would also differ accordingly depending upon whether the contract is voidable or void. The need to strike down such contracts as void appears to have arisen because the provisions of ss. 15 and 16 as defined under the Contract Act are not flexible to deal with new emerging principles, whether of inequality of bargaining power, economic duress or unconscionability. It has been held that the doctrine of unequal bargaining powers cannot be appropriately applied in commercial contracts.19 Poverty and Ignorance Equity will set aside a transaction by way of sale or otherwise by a poor and ignorant20 vendor, where the sale is at a considerable undervalue and the vendor has not had independent advice, unless, the purchaser proves to the satisfaction of the Court that the transaction was fair, just and reasonable.21 The absence of independent advice from a solicitor is of special significance in conveyancing matters.
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22
It has been said that the generous interpretations of the expressions 'poverty' and 'ignorance' appear, on their face, to open the door to the possibility of relief in a substantial number of contracts, where the terms are exorbitant or unconscionable, and the party aggrieved did not have independent advice.23 Under this section, such cases will fall within clause (b) of sub-section 2 and the transaction is liable to be set aside if undue influence is established. It has been held that between an ignorant and illiterate villager and a shrewd businessman of town, the latter is in a position to dominate the Will of the former.24 Undue influence may be presumed where a gift of entire property was made by a person of weak intelligence,25 or by an old and illiterate woman,26 or an old and illiterate villager,27 or by a congenital cripple who was weak in intellect.28 Illiterates Mere illiteracy, without ignorance, will not be sufficient to make a person likely to be dominated by another.29 If the contents of a written document are not fully explained to or understood by a party who is an illiterate person, it may not bind him. A deed executed by an illiterate woman, purporting to authorise a nephew to manage, but act ually being a gift, was not binding on the woman when it was neither read over nor explained to her before she signed it.30 The party relying on the document executed by an illiterate person has to prove his own bona fides and good faith before seeking to enforce it, and that it was executed in the full knowledge of what it was.31 Where the document is in a foreign or alien language, the person seeking to rely on the document will have to prove that the document was read over and properly explained to the executant so as to make him understand the real import of it. The principles applicable to pardanashin women would be applied to documents made by old, invalid, infirm and illiterate persons.32 74 Subhas Chandra Das Mushib v. Ganga Prasad Das Mushib, AIR 1967 SC 878 at 880, [1967] 1 SCR 331, 334; Ladli Parshad Jaiswal v. Kamal Distillery Co. Ltd., AIR 1963 SC 1279 at 1290, [1964] 1 SCR 270 at 300; see also Thrivikraman Gomathy v. Kesavan Neelakantan, 2013 (3) KLJ 264(Ker) . 75 [1967] 1 SCR 331, AIR 1967 SC 878 at 881 per Mitter J; Ladli Parshad Jaiswal v. Karnal Distillery Co. Ltd., [1964] 1 SCR 270 at 300, AIR 1963 SC 1279 at 1290; National Westminster Bank Plc v. Morgan, [1985] AC 686, [1985] 1 All ER 821,(HL) ; Bank of Credit and Commerce International SA v. Aboody, [1990] 1 QB 923, [1992] 4 All ER 955, [1989] 2 WLR 759 at 777, (CA); Goldsworthy v. Brickell, [1987] Ch 378 at 404, [1987] 1 All ER 853,(CA), (person is in a position to exert influence where trust and confidence is reposed). 76 Sant Bux Singh v. Ali Raza Khan, (1946) 21 Luck 194, AIR 1946 Oudh 129. 77 Ram Kalap Pande v. Bansidhar, AIR 1947 Oudh 89, 227 IC 9. 78 Daya Shankar v. Bachi, AIR 1982 All 376. 79 MA Abdul Malick Saheb v. TP Muhammad Yousuf Saheb, AIR 1961 Mad 190, (1960) 2 Mad LJ 355. 80 Rajamani Ammal v. Bhoorasami Padayachi, AIR 1974 Mad 36. 81 Takri Devi v. Rama Dogra, AIR 1984 HP 11. 82 Tapan Ranjan Das v. Jolly Das, AIR 1990 Cal 353, (no such relationship between music accompanyist and student). 83 Smith v. Kay, (1859) 7 HLC 750 this was a case of general control obtained by an older man over a younger one during his minority without any spiritual influence or other defined fiduciary relation; quoted in Karnal Distillery Co. Ltd. v. Ladli Parsad Jaiswal, AIR 1958 Punj 190 at 204; reversed by the Supreme Court on another point. 84 (1886) LR 2 Ch App 55. 85 Daing Soharah Binte Daing Tadaleh v. Chabak Binte Lasaliho, AIR 1927 PC 148 at, 150. 86 Mannu Singh v. Umadat Pande, (1890) ILR 12 All 523; Manbhari v. Sri Ram, 165 IC 240, AIR 1936 All 672; but see Allcard v. Skinner, (1887) 36 Ch D 145, [1886-90] All ER Rep 90, (case of gift by a nun to the mother superior). 87 Raghunath Mulchand v. Varjivandas Madanji, (1906) ILR 30Bom 578; as to purchase by a trustee from a beneficiary, The Indian Trusts Act, 1882, s. 53.
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88 (1891) 18 IA 144, (1891) 18 Cal 545. 89 Pushong v. Mania Halwani, (1868) 1 BLR AC 95; Ram Kalap Pande v. Bansidhar, AIR 1947 Oudh 89, 227 IC 9, (an old man and his manager). 90 National Westminister Bank plc v. Morgan, [1985] AC 686, [1985] 1 All ER 821,(HL) . 91 [1975] QB 326 at 329, [1974] 3 All ER 757, [1974] 3 WLR 501,(CA) ; Tate v. Williamson, (1866) LR 2 Ch App 55 reviewed. 92 Krishna Mohan Kul v. Pratima Maity, AIR 2003 SC 4351, (2004) 9 SCC 468. 93 Hoghton v. Hoghton, (1852) 15 Beav 278; Mariam Bibi v. Cassim Ebrahim Malim, AIR 1939 Rang 278, 184 IC 171; MA Abdul Malick Saheb v. TP Muhammad Yousuf Sahib, AIR 1961 Mad 190 at 193, (1960) 2 Mad LJ 355. 94 Lingo Bhimrao Naik v. Dattatraya Shripad Jamadagni, AIR 1938 Bom 97; 39 Bom LR 1233. 95 Niko Devi v. Kirpa, AIR 1989 HP 51, (child living with cousin brother); Mariam Bibi v. Cassim Ebrahim Malim, AIR 1939 Rang 278, 184 IC 171. 96 Mariam Bibi v. Cassim Ebrahim Malim, AIR 1939 Rang 278, 184 IC 171, (guardian and ward). 97 Hylton v. Hylton, (1754) 2 Ves Sen 547, (guardian and ward). 1 Wright v. Vanderplank, (1856) 8 DM & G 133 per Turner LJ at 146, 114 RR 60, (1855) 2 K&J 1. 2 Mariam Bibi v. Cassim Ebrahim Malim, AIR 1939 Rang 278 at 283, 184 IC 171; MA Abdul Malick Saheb v. TP Muhammad Yousuf Sahib, AIR 1961 Mad 190 at 193, (1960) 2 Mad LJ 355; Archer v. Hudson, (1844) 7 Beav 551; Powell v. Powell, [1900] 1 Ch 243 at 246. 3 See illustration, (a) to the section; Narayandoss Balkrishna Doss v. Bucharaj Chordia Sowcar, 106 IC 315, AIR 1928 Mad 6 at 13, (1927) 53 Mad LJ 842; MA Abdul Malick Saheb v. TP Muhammad Yousuf Sahib, AIR 1961 Mad 190 at 193, (1960) 2 Mad LJ 355. 4 Powell v. Powell, [1900] 1 Ch 243. 5 Hoghton v. Hoghton, (1852) 15 Beav 278; Turner v. Collins, (1871) LR 7 Ch App 329. 6 Lakshmi Doss v. Roop Laul, (1906) ILR 30 Mad 169; on appeal from ILR 29 Mad 1. 7 Niko Devi v. Kirpa, AIR 1989 HP 51 at 55. 8 Lancashire Loans Ltd. v. Black, [1934] 1 KB 380, [1933] All ER Rep 201. 9 Talengala Narayana Bhatta v. Narasimha Bhatta, AIR 1965 Ker 189; Subhash Chandra v. Ganga Prasad, AIR 1967 SC 878, [1967] 1 SCR 331 at 335. 10 Avon Finance Co. Ltd. v. Bridger, [1985] 2 All ER 281. 11 Abdur Rauff v. Aymona Bibi, AIR 1937 Cal 492. 12 Ismail Mussajee Mookerdam v. Hafiz Boo, (1906) 33 Cal 773, (1906) 33 IA 86,(PC) . 13 Jean Mackenzie v. Royal Bank of Canada, AIR 1934 PC 210, (Independent advice before transaction. Advice after event is of no value. Also no presumption of undue influence on wife) Kalyan Mal v. Ahmad Uddin Khan, AIR 1934 PC 208,(PC) . 14 Howes v. Bishop, [1909] 2 KB 390, [1908-10] All ER Rep Ext 1299,(CA) ; Bank of Montreal v. Stuart, [1911] AC 120(PC) ; National Westminster Bank plc v. Morgan, [1985] AC 686, [1985] 1 All ER 821,(HL) ; Kingsnorth Trust Ltd. v. Bell, [1986] 1 WLR 119, [1986] 1 All ER 423,(CA) ; Midland Bank plc v. Shephard, [1988] 3 All ER 17,(CA) ; Bank of Credit and Commerce International SA v. Aboody, [1990] 1 QB 923, [1992] 4 All ER 955, [1989] 2 WLR 759,(CA) . 15 Tungabai v. Yeshvant Dinkar Jog, (1945) 71 IA 184, AIR 1945 PC 8, (1945), 47 Bom LR 242, 220 IC 362, (1944) 2 Mad LJ 350; Sarfaraz Ali Khan v. Ahmad Kamil Mustafa Khan, (1944) All 141, AIR 1944 All 104, 214 IC 135; Bank of Montreal v. Stuart, [1911] AC 120,(PC) . 16 Barclays Bank plc v. O'Brien, [1994] 1 AC 180, [1993] 4 All ER 417 at 424, (HL). 17 Grinby v. Cox, (1750) 1 Ves Sen 517, 27 ER 1178 per Lord Hardwicke. 18 (1939) 63 CLR 649, (High Court of Australia). 19 (1939) 63 CLR 649 per Dixon J. at 675, approved in Garcia v. National Australia Bank Ltd., (1998) 194 CLR 395,
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(1998) 155 ALR 614, (High Court of Australia). 20 Tungabai Bhratar Purushottam Shamji Kumbhojkar v. Yeshvant Dinkar Jog, (1945) 71 IA 184, AIR 1945 PC 8, (1945) Bom 189, 47 Bom LR 242, 220 IC 362, (1944) 2 Mad LJ 350; Kalyan Mal v. Ahmad Uddin Khan, AIR 1934 PC 208(PC), (a case of undue influence of husband and misrepresentation by the bank's manager). Jean Mackenzie v. Royal Bank of Canada, [1934] AC 468, AIR 1934 PC 210, (independent advice before transaction. Advice after event is of no value. Also no presumption of undue influence on wife). 21 Page v. Horne, (1848) 11 Beav 227; Lloyds Bank Re, Bomze and Lederman v. Bomze, [1931] 1 Ch 289; Zamet v. Hyman, [1961] 3 All ER 933, [1961] 1 WLR 1442,(CA) . 22 Shivgangawa Madiwalappa Vulari v. Basangouda Govindgouda Patil, AIR 1938 Bom 304 at 307-08; see also Yogendra Singh v. Prem Lata, RFA 36/2005, decided on 27 Sep 2013 (Del). 23 Earl of Chesterfield v. Janssen, (1751) 2 Ves Sen 125. 24 Eart of Aylesford v. Morris, (1873) 8 Ch App. 484, [1861-73] All ER Rep 300. 25 Permanent Trustee Company of New South Wales v. Francis Henry Bridgewater, AIR 1937 PC 14, (1937) 2 Mad LJ 87. 26 Earl of Chesterfield v. Janssen, (1751) 2 Ves Sen 125. 27 Re Fry, Fry v. Lane, Whittet v. Bush, (1888) 40 Ch D 312, [1886-90] All ER Rep 1084. 28 King v. Hamlet, (1843) 2 My & K 456 at 480 per Lord Brougham LC. While this continues, he is treated as a minor. Gwynne v. Heaton, (1778) 1 Bro CC 1 at 9. 29 Cole v. Gibbons, (1734) 3 P Wms 290; Earl of Chesterfield v. Janssen, (1751) 2 Ves Sen 125; Levin v. Roth, [1950] 1 All ER 698,(CA), (renewal of bills of exchange; no unconscionable conduct at time of renewal). 30 Amrit Lal C Shah v. Ram Kumar, AIR 1962 Punj 325; Sandersons and Morgans Solicitors v. Mohanlal Lalluchand Shah, AIR 1955 Cal 319. 31 Hatch v. Hatch, (1804) 9 Ves 292, [1803-13] All ER Rep 74; Halsbury's Laws of England, 'Vol. 66, 5th edn, 2009. 1 November 2008, Legal Professions, Para 801, (burden of proof is difficult to discharge in case of gifts). 32 McMaster v. Byrne, [1952] 1 All ER 1362,(PC) . 33 Takri Devi v. Rama Dogra, AIR 1984 HP 11, 15, 18. 34 Gauri Shankar Misra v. Fakir Mohan Dash, AIR 1989 Ori 201 at 203, 207. 35 Bireswar Sen v. Ashalata Ghose, AIR 1969 Cal 111. 36 Halsbury's Laws of England, Vol. 16(2), 4th edn. Reissue, 2003, EQUITY, para 427. 37 Wright v. Carter, [1903] 1 Ch 27, [1900-3] All ER Rep 706,(CA) . 38 Gibson v. Jeyes, (1801) 6 Ves 266 at 277, [1775-1802] All ER Rep 325; Wright v. Carter, [1903] 1 Ch 27 per Stirling LJ at 60, [1900-3] All ER Rep 706,(CA) . 39 Shamaldhone Dutt v. Lakshimani Debi (1908) 36 Cal 493, (1909-10) ILR 36-37 Cal 289. 40 Brojendra Nath Mullick v. Luckhimoni Dassee, (1902) 29 Cal 595; Shamaldhone Dutt v. Lakshimani Debi, (1908) 36 Cal 493; Sandersons and Morgans Solicitors v. Mohanlal Lalluchand Shah, AIR 1955 Cal 319; Amrit Lal C Shah v. Ram Kumar, AIR 1962 Punj 325; Subhash Chandra v. Ganga Prosad, AIR 1967 SC 878, [1967] 1 SCR 331 at 335. 41 Harivalabhdas Haridas v. Bhai Jivanji, (1902) ILR 26 Bom 689. 42 Ram Sumran v. Sarjoo Pershad, AIR 1929 Oudh 67 at 69. 43 Brojendra Nath Mullick v. Luckhimoni Dassee, (1902) 29 Cal 595, (remuneration); Shamaldhone Dutt v. Lakshimani Debi, (1908) 36 Cal 493; Sandersons & Morgans Solicitors v. Mohanlal Lalluchand Shah, AIR 1955 Cal 319, (lawyer's fees); Amrit Lal C Shah v. Ram Kumar, AIR 1962 Punj 325; Subhash Chandra v. Ganga Prosad, (1967) 1 SCR 331 at 335, AIR 1967 SC 878 at 881, (gift); Harivalabhdas Harudas v. Bhai Jivanji, (1902) 26 Bom 689, (fees). 44 Mitchell v. Homfray, [1881] 8 QBD 587,(CA) . 45 See illustration, (b) to the section. Dent v. Bennet, (1839) 4 My & Cr App R 269. 46 Re, CMG, [1970] Ch 574, [1970] 2 All ER 740.
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47 Public Trustee v. Skoretx, [1973] 2 WWR 638,(BC) . 48 Halsbury's Laws of England, Vol. 16(2), 4th edn, Reissue, 2003, EQUITY, para 426; also similarly applies between guardian and ward. 49 Hylton v. Hylton, (1754) 2 Ves Sen 547. 50 Hatch v. Hatch, (1804) 9 Ves 292, [1803-13] All ER Rep 74; Everitt v. Everitt, (1870) LR 10 Eq 405. 51 (1887) 36 Ch D 145, [1886-90] All ER Rep 90 at 99; Philip Lukka v. Franciscan Association Vashapally, AIR 1987 Ker 204 at 208. 52 Philip Lukka v. Franciscan Association Vashapally, AIR 1987 Ker 204 at 208-209. 53 Mannu Singh v. Umadat Pande, (1890) 12 All 523; Manbhari v. Sri Ram, 165 IC 240, AIR 1936 All 672; Allcard v. Skinner, (1887) 36 Ch D 145, [1886-90] All ER Rep 90, (case of gift to mother superior). 54 Philip Lukka v. Franciscan Association Vashapally, AIR 1987 Ker 204. 55 Mahadeo v. Kisan Lal, AIR 1922 Nag 219; Bibi Batual v. Debi Prasad, AIR 1925 Oudh 535; Rameshwar Marwari v. Upendranath Das, AIR 1926 Cal 455 at 457; Din Mohammad v. Badri Nath, AIR 1930 Lah 65, (1929) 120 IC 417, (small indebtedness of short duration). 56 Qamar Din v. Harbhagat, AIR 1914 Lah 63; Hussain Khan v. Ganesh Prasad, AIR 1924 Oudh 118, (2). 57 Sundar Koer v. Rai Sham Krishen, (1907) 34 IA 9, (1906) 34 Cal 150 at 154, (PC); Umesh Chandra Khasna Vis v. Golap Lal Mustafi, (1903) 31 Cal 233; Ganesh Narayan Nagarkar v. Vishnu Ramchandra Saraf, (1907) 32 Bom 37 at 43; Chatring Moolchand & Co. v. R H Whitchurch, (1907) 32 Bom 208; Debi Sahai v. Ganga Sahai, (1910) 32 All 589; Ranee Annapurni Nachiar v. Swaminatha Chettiar, (1910) 34 Mad 7; U Kesavulu Naidu v. Arithulai Ammal, (1912) 36 Mad 533, 22 IC 769; Khagaram Das v. Ram Shankar Das Pramanik, AIR 1915 Cal 796; Bejoy Singh Dudhuria v. Kumudi Kanta Talukadar, AIR 1919 Cal 414 at 416; Chota Nagpur Banking Association Ltd. v. Bhagwat Bux Rai, AIR 1922 Pat 491; Chiranji Lal v. Dost Mahomed, AIR 1923 Lah 634; Debi Bakchand v. Barakatunissa, AIR 1925 Pat 326 at 328; Barkatunnissa Begum v. Debi Bakhsh, 101 IC 29, AIR 1927 PC 84; Muhammad Said Khan v. Indarpati Singh, AIR 1927 All 315 at 316; Diala Ram v. Sardha, (1927) 102 IC 707, AIR 1927 Lah 536; Suraj Bakhsh Singh v. Ajudhiya Singh, AIR 1928 Oudh 330. 58 U Kesavulu Naidu v. Arithulai Ammal, (1912) 36 Mad 533, 22 IC 769; Ponnusami Naicken v. Nadimuthu Chetti, (1917) 33 Mad LJ 302, AIR 1918 Mad 574, 42 IC 231; Hussain Khan v. Ganesh Prasad, AIR 1924 Oudh 118, (2); Sukh Lal v. Murari Lal, AIR 1926 Oudh 273; Jewan Lal Daga v. Nilmani Chaudhuri, AIR 1928 PC 80 at 82; Mahmud-un-Nissa v. Barkatulla, (1926) 48 All 666, AIR 1927 All 44, 96 IC 684; Khallo v. Jawala Prasad, AIR 1927 All 538; Ramalingam Chettiar v. ALSPPL Subramanya Chettar, (1927) 50 Mad 614, AIR 1927 Mad 620, 103 IC 394; Waryam Singh v. Indar Singh, AIR 1929 Lah 242 at 244; Ibney Hasan v. Gulkandi Lal, AIR 1936 All 611 at 612; Gajadhar Marwari v. Baidyanath Mandal, AIR 1950 Pat 379. 59 Qamar Din v. Harbhagat, AIR 1914 Lah 63; Chiranji Lal v. Dost Mahomed, AIR 1923 Lah 634; Pandit Shyam Lal v. Badri, AIR 1925 All 31; Sukh Lal v. Murari Lal, AIR 1926 Oudh 273; Ramalingam Chettiar v. A L S P P L Subramanya Chettar, (1927) 50 Mad 614, AIR 1927 Mad 620, 103 IC 394; Boggavarappu Satyanarayanamurthi v. Gontla Venkata Pichaiah, AIR 1946 Mad 56; but see Sunder Mull v. Satya Kinkar Sahana, AIR 1928 PC 64, (conditions and terms of lending must be regarded together). 60 Raghunath Prasad Sahu v. Sarju Prasad Sahu, AIR 1924 PC 60, (1923) 51 IA 101, AIR 1924 PC 60 at 65, (1923) 3 Pat 279, (1923) 82 IC 817; Kamini Sundari Chaodhrani v. Kali Prossunno Ghose, (1885) 12 IA 215 at 225-6, (1885) 12 Cal 225; Abdul Majid v. Ksherode Chandra Pal, (1915) 42 Cal 690, AIR 1915 Cal 383, 29 IC 843; Muhammad Said Khan v. Indarpati Singh, AIR 1927 All 315; Suraj Bakhsh Singh v. Ajudhiya Singh, AIR 1928 Oudh 330. 61 Rukmina v. Mohib Ali Khan, AIR 1934 All 938, (25 percent p.a.). 62 Khagaram Das v. Ram Shankar Das Pramanik, AIR 1915 Cal 796. 63 Lloyd's Bank Ltd. v. Bundy, [1975] QB 326, [1974] 3 All ER 757, [1974] 3 WLR 501,(CA) ; National Westminster Bank plc v. Morgan, [1985] AC 686, [1985] 1 All ER 821,(HL) ; Cornish v. Midland Bank plc, [1985] 3 All ER 513,(CA) ; Goldsworthy v. Brickell, [1987] Ch 378, [1987] 1 All ER 853,(CA) ; Bank of Credit and Commerce International SA v. Aboody, [1990] 1 QB 923, [1992] 4 All ER 955, [1989] 2 WLR 759,(CA) . 64 Lala Balla Mal v. Ahad Shah, AIR 1918 PC 249 at 254. 65 Maneshar Bakhsh Singh v. Shadi Lal, (1909) 36 IA 96, (1909) 31 All 386 at 393, (PC); Dhanipal Das v. Maneshar Bakhsh Singh, (1906) 28 All 570 at 576, 33 IA 118, (PC). 66 Diala Ram v. Sardha, (1927) 102 IC 707, AIR 1927 Lah 536; Debi Bakchand v. Barakatunissa, AIR 1925 Pat 326 at 329; Rukmina v. Mohib Ali Khan, AIR 1934 All 938.
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67 Radha Gobinda Rai v. Dibakar Manto, AIR 1960 Pat 194. 68 Lakshmi Chand v. Niader Mal, AIR 1961 All 295. 69 Lala Tirath Ram v. Harbhajan Singh, AIR 1935 Lah 479, 158 IC 257. 70 AV Palanivelu Mudaliar v. Neelavathi Ammal, AIR 1937 PC 50, (1937) 39 Bom LR 720, 167 IC 5; Subbamma v. Mohd Abdul Hafiz, AIR 1950 Hyd 55. 71 Dubash D K Ahmad Ibrahim Sahib v. Meyyappa AKRMK Chettiar, AIR 1940 Mad 285; Tribhuwan Datt v. Someshwar Datt, AIR 1931 Oudh 34, 130 IC 119, (one brother over his weak-minded brother). 72 Karnal Distillery Co. Ltd. v. Ladli Parsad Jaiswal, AIR 1958 Punj 190. 73 Narayandoss Balkrishna Doss v. Bucharaj Chordia Sowcar 106 IC 315, AIR 1928 Mad 6 at 13, (1927) 53 Mad LJ 842. 74 Tapan Ranjan Das v. Jolly Das, AIR 1990 Cal 353 at 363-64. 75 Shivgangawa Madiwalappa Vulari v. Basangouda Govindgouda Patil, AIR 1938 Bom 304. 76 Sewti v. Rattan, AIR 1951 HP 54. 77 Dalpat Singh v. Ahmad Shah, AIR 1918 Oudh 313; B Rajarajeswara Sethupathi Avergal v. Kuppuswami Aiyar, AIR 1921 Mad 394 at 397; Daulat v. Gulabrao, AIR 1925 Nag 369, 88 IC 295; Reshmi v. Ghungaria, AIR 1952 HP 20 at 22, (person doing sundry jobs for an illiterate woman who was capable of managing her own business); but see Bhagwan Das v. Bitton, (1945) All 148, AIR 1945 All 227, (an old woman without relatives and his trusted servant); JK Cotton Manufactures Ltd. v. JN Tewari, AIR 1959 All 639, (employee always in a strong bargaining position is a difficult general statement). 78 Kanbi Bhagwan Pancha of Gondal v. AS Nayankunvarba, AIR 1953 Sau 53. 79 U.P. Government v. JR Bhatia, AIR 1956 All 439. 80 Inder Singh v. Dyal Singh, AIR 1924 Lah 337. 81 Mahomed Yakub v. Abdul Quddus, AIR 1923 Pat 187, (old donor losing strength but able to exercise independent and intelligent mind); Tulsiram Khirchand Parwar v. Chunnilal Panchansao Parwar, AIR 1938 Nag 391; Mohammad Husain Khan v. Mustafa Husain Khan, AIR 1946 All 85, (old and blind, but of sound disposing mind). 82 Zubeda Begum v. Syed Shah Khursheed Ahmed Hashmi, (1997) 9 SCC 324, (execution of wakf deed). 83 Jaswant Kaur v. Gajan Singh, AIR 1928 Lah 601, at 603. 84 Shah Hiralal Jadavji v. Shah Fulchand Jadavji, AIR 1956 Sau 89. 85 Inder Singh v. Dyal Singh, AIR 1924 Lah 334. 86 Gobardhan Das v. Jai Kishen Das, (1900) ILR 22 All 224. 87 Ram Sundar Saha v. Kali Narain Sen Choudhary, (1927) 55 Cal 285, AIR 1927 Cal 889, 104 IC 527. 88 Venkatrama Aiyer v. Krishnammal, 99 IC 571, AIR 1927 Mad 255, (1927) 52 Mad LJ 20. 89 Inche Noriah Binte Mohamed Tahir v. Shaik Allie Bin Omar Bin Abdullah Bahashnan, [1929] AC 127, AIR 1929 PC 3, [1928] All ER Rep 189, approving Allcard v. Skinner, (1887) 36 Ch D 145, [1886- 90] All ER Rep 90. 90 Debi Prasad v. Chhotey Lal, AIR 1966 All 438; Johnson v. Buttress, (1936) 56 CLR 113. 91 AIR 1967 SC 878, [1967] 1 SCR 331. 92 AIR 1964 Pat 284. 93 Roshan Lal v. Kartar Chand, AIR 2002 HP 131. 94 Moti Gulabchand v. Mahomed Mehdi Tharia Topan, (1895) 20 Bom 367; Official Assignee of Madras v. C Sambanda Mudaliar, AIR 1920 Mad 977, (1920) 43 Mad 739; Sheocharan v. Channulal, AIR 1931 Nag 63; Abdur Rauff v. Aymona Bibi, AIR 1937 Cal 492; Rajamani Ammal v. Bhoorasami Padayachi, AIR 1974 Mad 36. 1 Gobardhan Das v. Jai Kishen Das, (1900) ILR 22 All 224, (decided under the old section 16). 2 Pudishary Krishen v. Karampally, (1874) 7 MHC 378.
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3 Jones v. Merionethshire Permanent Benefit Building Society, [1892] 1 Ch 173; Mutual Finance Ltd. v. John Wetton & Sons Ltd., [1937] 2 KB 389 at 395, [1937] 2 All ER 657 (threat to prosecute brother and father); Kaufman v. Gerson, [1904] 1 KB 591, [1904-7] All ER Rep 896 (threat to prosecute son); Seear v. Cohen, (1881) LR 1 HL 200, [1881] 45 LT 589 (threat to prosecute son of one and nephew of the other); Brook v. Hook, (1871) 6 Ex 89, [1861-73] All ER Rep 1332 (threat to prosecute brother-in-law of the defendant). 4 (1882)10 QBD 572. 5 Mutual Finance Ltd. v. John Wetton & Sons Ltd., [1937] 2 KB 389 at 397, [1937] 2 All ER 657 at 662-63. 6 [1937] 2 KB 389 at 397, [1937] 2 All ER 657, referring to Kaufman v. Gerson, [1904] 1 KB 591, [1904-7] All ER Rep 896. 7 Williams v. Bayley, (1866) LR 1 HL 200 at 216, [1861-73] All ER Rep 227 (threat to prosecute son); Mutual Finance Ltd. v. John Wetton & Sons Ltd., [1937] 2 KB 389 at 385, [1937] 2 All ER 657. 8 Kessowji Tulsidas v. Hurjivan Mulji, (1887) 11 Bom 566; Rangnath Sakharam v. Govind Narasinv, (1904) 28 Bom 639. 9 London & Lancashire Insurance Co. Ltd. v. Binoy Krishna Mitra, AIR 1945 Cal 218. Gobardhan Das v. Jai Kishen Das, (1900) 22 All 224 per Strachey CJ at 228. 10 Lloyd's Bank Ltd. v. Bundy, [1975] QB 326, [1974] 3 All ER 757, [1974] 3 WLR 501; A Schroeder,Music Publishing Co. Ltd. v. Macaulay, [1974] 1 WLR 1308, [1974] 3 All ER 616; Clifford Davis Management Ltd. v. W E A Records Ltd., [1975] 1 All ER 237 at 240-41. 11 [1975] QB 326, [1974] 3 All ER 797 at 797, [1974] 3 WLR 501. 12 [1974] 3 All ER 757 at 763, 765. 13 National Westminster Bank plc v. Morgan, [1985] AC 686 at 708, [1985] 1 All ER 821 at 830, (HL). 14 Chitty on Contracts, 28th edn, p. 457, para 7-088. 15 Re Fry Fry v. Lane Whittet v. Bush, (1888) 40 Ch D 312 per Kay J at 322, [1886-90] All ER Rep 1084. 16 [1986] 2 SCR 278, AIR 1986 SC 1571, (1986) 3 SCC 156. 17 AIR 1986 SC 1571 at 1611. 18 Ibid. 19 S Kjain v. State of Haryana, 2009, AIR SCW 1934. 20 Cresswell v. Potter, [1978] 1 WLR 255, ('Poor' may be construed as 'being a member of the lower income group' and 'ignorant' as 'less highly educated'). Rees v. De Bernardy, [1896] 2 Ch 437, (communication of information on terms of getting a share of recoverable property). 21 Longmate v. Ledger, (1860) 2 Giff 157; Clark v. Malpas, (1862) 4 De GF & J 401; Baker v. Monk, (1864) 4 De GJ & Sm 388; Prees v. Coke, (1870) LR 6 Ch App 645; Re Fry Fry v. Lane, Whittet v. Bush, (1888) 40 Ch D 312, [1886-90] All ER Rep 1084; Cresswell v. Potter, [1978] 1 WLR 255n; Backhouse v. Backhouse, [1978] 1 All ER 1158, [1978] 1 WLR 243; Watkin v. Watson-Smith Times, 3 July 1986; cf Harrison v. Guest, (1860) 8 HL Cas 481, [1843-60] All ER Rep 797; Alec Lobb, (Garages) Ltd. v. Total Oil, (G B) Ltd., [1985] 1 All ER 303, [1985] 1 WLR 173,(CA), (mortgage). 22 Cresswell v. Potter, [1978] 1 WLR 255; Butlin-Sanders v. Butlin, [1985] FLR 204, (wife rejected advice of solicitor to take independent advice, transaction upheld). 23 Backhouse v. Backhouse, [1978] 1 All ER 1158, [1978] 1 WLR 243, (wife was an intelligent woman); Alec Lobb, (Garages) Ltd. v. Total Oil, (GB) Ltd., [1985] 1 All ER 303,(CA), [1985] 1 WLR 173 at 182, (CA); Chitty on Contracts, 28th edn, p. 451, para 7-077. 24 Nathu Kalu v. Anandilal Bhikaji, AIR 1953 MB 32. 25 Tribhuwan Datt v. Someshwar Datt, AIR 1931 Oudh 34 at 38-39, 130 IC 119. 26 Sewti v. Rattan, AIR 1951 HP 54. 27 Abhimanya Biswas v. SK Abdul, AIR 1981 Cal 444 at 447. 28 Nand Lal v. Ram Sarup, AIR 1927 Lah 546. 29 Nathu Kalu v. Anandilal Bhikaji, AIR 1953 MB 32.
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30 Patal Bala Devi v. Santimoy Majumdar, AIR 1956 Cal 575; Miti Bewa v. Daitari Nayak, AIR 1982 Ori 174, (also relationship of trust between an illiterate woman and her son-in-law who managed properties). 31 Krishna Mohan Kul v. Pratima Maity, AIR 2003 SC 4351, (2004) 9 SCC 468; A Venkappa Bhatta v. Gangamma, AIR 1988 Ker 133. 32 Krishna Mohan Kul v. Pratima Maity, AIR 2003 SC 4351, (2004) 9 SCC 468.
Sub-section 3 The third paragraph of the present section does not lay down any rule of law, but throws the burden of proving free consent on a party who, being in a dominant position, makes a bargain so much to his own advantage that it 'shocks the conscience'. The sub-section is limited in its application. It lays down the conditions for raising a rebuttable presumption that a transaction is procured by the exercise of undue influence. The reason for this rule is that a person, who had obtained an advantage over another by dominating his will, may also remain in a position to suppress the requisite evidence in support of the plea of undue influence.33 Two factors must be proved in order that this third sub-section operate, namely, that a person was in a position to dominate the will of another and the transaction appears on the face of it or on the evidence adduced to be unconscionable. If either of these two conditions is not fulfilled, the presumption of undue influence will not arise and burden will not shift;34 and proof of the act ual use of the dominating position will be required.35 In Poosathurai's case36 this case Lord Shaw observed:
...where the relation of influence, ...has been established, and the second thing is also made clear, namely, that the bargain is with the 'influencer' and in itself unconscionable, then the person in a position to use his dominating power has the burden thrown upon him, and it is a heavy burden of establishing affirmatively that no domination was practised so as to bring about the transaction, but that the grantor of the deed was scrupulously kept separately advised in the independence of a free agent.
Wherever the relation between the parties to a contract is of a confidential or fiduciary nature, the person in whom confidence is reposed and who thus possesses influence over the other, cannot hold that such other to the contract unless he satisfies the Court that it is advantageous to the other party and that he has disclosed all material facts within his knowledge.37 Where the relative position of the parties to a contract is such that it was incumbent on the creditor to establish affirmatively that the transaction was fair, just and reasonable, the transaction, in the absence of such proof, would not stand.38 When there is evidence of overpowering influence and the resulting transaction is immoderate and irrational, proof of undue influence is complete.39 The Australian High Court has put the position thus:40
The doctrine which throws upon the recipient the burden of justifying the transaction... applies whenever one party occupies or assumes towards another a position naturally involving an ascendancy or influence over that other, or a dependence or trust on his part. It is his duty to use his position of influence in the interest of no one but the man who is governed by his judgment, gives him dependence and entrusts him with his welfare. When he takes from that man a substantial gift of property it is incumbent upon him to show that it cannot be ascribed to the inequality between them which must arise from his special position. He may be taken to possess peculiar knowledge not only of the disposition itself but of the circumstances which should affect its validity; he has chosen to accept a benefit which may well proceed from an abuse of the authority conceded to him or the confidence reposed in him; and the relations between him and the donor are so close as to make it difficult to disentangle the inducements which led to the transaction.
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The burden will be heavy in the case of illiterate or weak-minded person and heavier where the donor has given all or practically all his property to the donee.41 A party pleading undue influence must show that the opposite party had influence over him because of close relationship or other circumstances, and that by exercising that influence, he took advantage at his cost. It will then be for the other side to establish the validity of the transaction. An overall view has to be taken of the matter.42 The donee must then show that the donor was emancipated or was equated to emancipation by the possession of independent advice.43 The dominating must examine witness and prove due execution of the deed.44 Illustration (c) contemplates the case of a person already indebted to a moneylender, contracting a fresh loan with him on terms which appears to be unconscionable. In such a case, a presumption is raised that the borrower's consent was not free. The presumption is rebuttable, but the burden of proof is on the party who has sought to make an exorbitant profit of the other's distress. The question is not of fraud, but of the unconscientious use of superior power, inadequacy of consideration, though it will not of itself avoid a contract,45 has great weight in this class as evidence that the contract was not freely made. Unconscionable Transaction Relief in cases of unconscionable bargains is an old head of English equity, It was formerly associated in a special manner with sales of reversionary interests, which the Court was eager to restrain; and for some time, it was the doctrine of the Court that a sale of any reversionary interest, if proved to have been made for only a little under the value, must be set aside without further inquiry. This rule was at last found so inconvenient that it was abolished by statute. But the general principles of equity in dealing with what are called 'catching bargains' remain, and the third sub-section is apparently intended to embody them. The question of unconscionableness comes for consideration only when it is determined that the relationship between the parties is such that one is in a position to dominate the will of the other and not otherwise.46 Burden of proof does not shift simply by alleging unconscionableness of the transaction.47 The fact that due to pressing necessities, a person parted with his properties for what he considered an unduly low price was not a ground for setting aside the alienation, unless it was also shown that the alienee was in a position to dominate the will of the alienor.48'If people with their eyes open willfully and knowingly enter into unconscionable bargains, the law has no right to protect them.' Hardship alone is not enough.49 Relief has, for example, been granted to a borrower in cases relating to moneylending transactions, when the lender was 'in a position to dominate the will' of the borrower, and the bargain was 'unconscionable' within the meaning of sub-section 3.50 The question whether a transaction should be set aside as being inequitable depends upon the circumstances existing at the time of the transaction, and not on subsequent events,51 nor the ultimate claim.52 In Lala Balla Mal v. Ahad Shah, 53 it was held that the Court has to look primarily at the circumstances existing at the time of the original dealings and not at the ultimate result of the dealings, unless the intermediate stages whereby that ultimate result has been arrived at have themselves been harsh or unconscionable. An unconscionable bargain is such an agreement as no sane man, not under a delusion, would make and no honest man would take advantage of.54 Another test is whether any right-minded person would have executed a document of that type.55'The classic example of an unconscionable bargain is where advantage has been taken of a young, inexperienced or ignorant person to introduce a term which no sensible, well-advised person who have accepted.'56 A high interest, or even the holding of securities for a sum greater than the actual advance, was not sufficient to make a bargain unconscionable as between parties on the equal. Where both the parties to a mortgage were money-lenders, and the mortgage purported to be a security for Rs. 5000/- as principal and Rs. 1250/sawai in lieu of interest repayment by 72 instalments, it was held that, though the interest on an installment in arrear was to run at 24 per cent per annum, and though the mortgage retained Rs. 100/an account for khichadi (bonus) out of the Rs. 5000/- purporting to have been advanced to the
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mortgagor, the transaction was not unconscionable, regard being had to the fact that it was the practice of the mortgagor himself to make advances on similar terms.57 Thus, transactions have been held unconscionable where a four storeyed building was sold for an amount of Rs.12000/- found by the Court to be unconscionably inadequate;58 where a covenant in a mortgage executed by illiterate peasants in favour of a money-lender to sell the mortgaged property to the mortgagee at a gross undervalue in default of payment of interest;59 where the lease rent for a lease of 99 years was too low compared to the rent earned from the previous lessee,60 where the interest on loan made to an illiterate peasant was exorbitant;61 where an heir to an estate borrowed Rs. 3700/- to enable him to prosecute his claim at a time when he was without the means of subsistence and gave the lender a bond for Rs 25,000/- to be paid after receiving possession of the property;62 where compound interest two percent per month with monthly rests was payable on a bond executed by a spendthrift and a drunkard 18 years old;63 where a 28 year old son of a wealthy father, having profligate habits, in great need of money, because his father did not provide him any, executed a bond to secure a sum of Rs. 500/- with interest at the rate of Rs. 37.5/- per cent per annum with six-monthly rests, with a stipulation that the borrower should not be empowered to pay the money within three years, and if he did not pay within three years, he should nevertheless be obligated to pay three years' interest at the rate above mentioned;64 where a poor Hindu widow borrowed Rs. 1500/- from a money-lender at an interest of 100 per cent per annum for the purpose of enabling her to establish her right to maintenance,65 Where an old and illiterate man residing with the nephew sold his property to the nephew for a low price to the exclusion of his three daughters, on the nephew's representation that it was a surety bond.66 Transactions, where the donor gives away almost all of his property, point towards unconscionability.67 Where an old illiterate woman suffering from cancer gifted the whole of her property to a society and had to depend on the society for maintenance and medical treatment until death, the transaction was held to be unconscionable under s. 16(2)(b) and the onus was on the society to prove want of undue influence.68 Where a talukdar declared a 'disqualified proprietor' under the provisions of the Oudh Land Revenue Act, 1876 and whose property was placed in the charge of the Court of Wards on the ground of his indebtedness and consequent inability to manage it, executed a bond for Rs. 10,000/- repayable with interest at 18 per cent per annum and compound interest in default of payment of instalments, the Privy Council disallowed compound interest on the ground that the position of the parties was such that the lender was 'in a position to dominate the will' of the borrower, and held that the charging of compound interest in the circumstances of the case was 'unconscionable'.69 The relief has not been confined to money-lending transactions. The Privy Council set aside a bond obtained by a powerful and wealthy banker from a young zamindar, who had just attained his majority, and had no independent advice, by threats of prolonging litigation commenced against him by other persons with the funds and assistance of the banker.70 An ikrarnama executed by a minor and another, who had just come of age, of half of their property in favour of the defendants was set aside, where the defendants had no title to the property, and who had taken possession thereof by show of force and with the assistance of a large body of retainers.71 Transactions have been set aside where the plaintiff, an illiterate agriculturist heavily indebted to the defendant money-lender, passed a sale deed to the defendant under pressure of payment of lands worth thrice the amount of the debt;72 and where a person entirely under the influence of his agent-manager, who managed his litigation and household expenses, executed a perpetual lease in favour of the manager for a wholly inadequate consideration and subject to terms onerous to the lessor.73 Where a collateral of the fourth degree got a deed of gift from an old widow, whose nearest heir was an indigent widowed daughter living with her but was away at the time of the gift, and the donee took a leading part in getting the gift executed, the transaction was set aside on the ground of undue influence, the gift itself being unconscionable.74 However, unless a case under this section of undue influence is made out, it is not possible to strike down the transaction merely because it appears to be hard and unconscionable.75 Hard Terms
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Simple hardship in the absence of any evidence of undue advantage of position, may not entitle to relief on the ground of undue influence, even when the transaction is undoubtedly improvident. In the absence of fraud or undue influence, a Court would not refuse to enforce the terms of an agreement on the ground that the terms are unreasonable; nor would it reduce the contractual rate of interest without proof of undue influence.76 In Dhanipal Das v. Maneshar Baksh Singh, 77 the borrower 'was under a peculiar disability and placed in a position of helplessness by the fact of his estate being under the control of the courts of wards', and 'the lender used his position to demand more onerous terms that were unreasonable'. A question arose whether relief could be given only on the ground that the transaction was a hard bargain. It was held by the Privy Council that English decisions were to be resorted to only so far as they illustrated the express terms in cases under this section. It observed:
The Subordinate Judge was wrong in deciding the case in accordance with what he supposed to be English equitable doctrine. He ought to have considered the terms of the amended s. 16 only. He also mistook the English law. Apart from the recent statute, an English Court of Equity could not give relief from a transaction or contract merely on the ground that it was a hard bargain, except perhaps where the extortion is so great as to be of itself evidence of fraud...In other cases there must be some other equity arising from the position of the parties or the particular circumstances of the case.
Protection of debtors in money-lending transactions has been effected by the Usurious Loans Act, 1918 and other legislations relating to money-lending transactions.78 Sub-section 1 and Sub-section 3 Sub-sections (1) and (3) cover two different fields, though at times, one may overlap the other. To attract sub-s. (1), two things should be established, namely, (a) one of the parties was in a position to dominate the will of the other; and (b) he used that position and obtained an unfair advantage over the other. To attract sub-s. (3) the factors that need to be proved are: (a) the person was in a position to dominate the will of the other; and (b) the transaction appeared on the face of it or evidence adduced to be unconscionable. There is another vital difference between sub-sections (1) and (3). In sub-s. (3), if the two ingredients are established, the burden of proof that contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other. This presumption is absent in sub-s. (1). Section 111 of the Indian Evidence Act, 1872 Section 111 of the Evidence Act, provides:
Proof of good faith in transactions where one party is in relation of active confidence.--Where there is a question as to the good faith of a transaction between parties, one of whom stands to the other in a position of act ive confidence, the burden of proving the good faith of the transaction is on the party who is in a position of active confidence.
The principle of this rule is that 'he who bargains in a matter of advantage with a person placing confidence in him is bound to show, that a reasonable use has been made of that confidence; a rule applying to trustees, attorneys, or anyone else'.79The plaintiff having been entirely in the hands of the defendant, would be destitute of the means of proving affirmatively the mala fides of the transaction; whilst the defendant in such a transaction may fairly be subjected to the duty not only of dealing honestly, but of preserving clear evidence that he has done so. In such cases, it is difficult to prove specific act s of deception. The risk of abuse of confidence is great. Law therefore reverses its usual
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rule of evidence; and when one party habitually looks up to the other and is guided by him, he can no longer be supposed capable, without special precautions, of exercising that independent judgment which is requisite for the consent to be free. Persons are said to be in position of 'active confidence' when their relationship is such that one is bound to protect the interests of the other. Thus, s. 111 of the Indian Evidence Act, 1872 has to be read along with the provisions of s. 16 of the Contract Act .80Both the provisions relate to transactions entered into by persons, between whom there is a fiduciary relationship, and both contain rules as to burden of proof. But there are points of distinction. Under the Indian Evidence Act, 1872 the mere fact of one party to the transaction being in a position of act ive confidence, shifts the burden of proving good faith to the party who is in that position. The presumption would arise where the question before the Court is about good faith81 of the transaction. But under the Contract Act, it is only when the transaction appears on the face of it, or on the evidence adduced, to be unconscionable, the burden of proof is thrown on the party who is in a position to dominate the will of the other. If the transaction does not, on the face of it appear to be unconscionable, the party seeking to avoid the contract has to establish that the person in the position of domination has act ually used that position to obtain an unfair advantage for himself. A partition deed in respect of joint family properties did not estop the illiterate widow, who was a member of the family, to claim partition, as proof of good faith was not forthcoming from the defendant, who was in a position to dominate the will of the plaintiff.82 An old, blind, illiterate tribal woman executed a sale deed in favour of her husband's brother on whom she was totally dependent upon and with whom she lived until her death. The initial onus, it was held, was easily discharged. Parties were also so situated that he was in a position to take undue advantage of her. Onus was on the husband's brother to prove that there was no undue influence.83 Where it is proved to the satisfaction of the Court either that the bargain on the face of it was unconscionable or the executant was the victim of physical or mental handicap or that he was subdued by the complexity of circumstances in which another person had an upper hand, the burden must be cast squarely on the person enjoying the dominating position to show that he secured the deed in good faith.84 Presumption The Court will jealously watch all transactions between parties so placed in fiduciary relationship.85 If the transaction appears to be unconscionable,86 or where the transaction is unfair on its face,87 the burden of proving that the contract was not induced by undue influence lies upon the person in a position to dominate the will of another. Nevertheless, on particular facts, a relationship not falling within one of the well-established categories, may be shown to have become such as to justify the court's applying the same presumption.88 The borderline between these cases and those of actual undue influence is a slender one.89 A deed of settlement by a widow having absolute estate in the property in favour of the defendant was set aside for undue influence in the circumstances that the defendant had taken her to Madras and a few days later got the deed executed, where she had no independent advice, and the defendant failed to prove the voluntary nature of the transaction.90 Where executant of a gift deed was an old lady of 70 years, having a paralytic stroke, and there was no evidence to show that she had executed the document knowing the contents and implications thereof, it was held that the burden of proof shifted on the donee to show absence of undue influence.91 From the mere fact that the donor is old or of weak character no presumption of imposition or fraud arises, e.g. there is no presumption of undue influence in the case of a gift to a son, grandson or son-in-law made during the donor's illness and a few days before his death.92 A high degree of proof should be expected where a gift is made in favour of a spiritual organisation.93 Rebuttable Presumption
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The word 'shall' found in s. 16(3) indicates that the presumption is mandatory...and if the burden is not discharged, the presumption shall prevail.94 But the presumption is rebuttable. The person against whom the presumption of undue influence has been raised may rebut the presumption by showing that the other party had competent, independent advice of such a nature as to show that the influence was not operative, or that the other party was fully informed, that the price was fair and that the transaction was voluntary. Where circumstances which would warrant a presumption of undue influence being made are shown to exist, the burden of proving that the contract was not induced by such influence lies, by the combined effect of sub-s. 3 of this section and s. 111 of the Indian Evidence Act, 1872 on the party against whom undue influence is alleged.95 A heavy onus lies on a person in a dominating position to prove affirmatively that no domination was practised and that the other party was separately advised in the independence of a free agent.1 The mere statement of the person in dominating position in his oral evidence is not enough.2 The free exercise of independent will can be proved by showing that the nature and effect of the transaction was explained to the donor by some independent and qualified person,3 or that the person took legal advice which is given with a knowledge of relevant circumstances and be such as a competent and honest adviser would give, if acting solely in the interests of the party who is in need of it, though proof of independent legal advice may not always suffice.4 The burden lies on the recipient to show that the donor had independent advice, or adopted the transaction after the influence was removed.5 In Johnson v. Buttress, 6 the deceased was an old, and illiterate man, unstable in his relation with other persons. He had a son who had ceased to please him. He had made a Will in favour of his son and his sister's daughter. The defendant used to look after his ailing wife, who then died. After her death, the old man would visit the defendant frequently. He then transferred substantially all his property, i.e., a cottage on rent in which he lived, a few pieces of furniture and a life policy of GBP 50. The transfer deed was prepared by the defendant's solicitor. At a suit by his son, the Australian High Court observed:
The first and most important consideration affecting the question is the standard of intelligence and character of Buttress [the deceased],
and further,
No doubt once it is established that the relation of influence exists, presumption arises independently of these matters...in this particular case it is the man's illiteracy, his ignorance of affairs and his strangeness in deposition and manner that provide the foundation of the suggested relation.
Since the presumption of undue influence was not rebutted, the transfer was set aside. One view is that undue influence is not disproved simply by showing that the complainant was paid the going rate, for there might be reasons why one may not wish to sell even though he is offered a fair price. Undue influence has a subjective basis. If he sells an article, for example, to a solicitor, at market value, 'ought we to be satisfied merely from the fact of a fair price paid, that no undue influence was involved, or should we require the solicitor to show that more clearly?'7 The other view is that a party cannot claim to have been victimised in a transaction, which provides reasonably equal benefits to both sides.8 Competent and Independent Advice
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The presumption of undue influence can be rebutted by showing that the person charging undue influence had independent advice as to the effect of the transaction. Advice relied on to support the transaction must not only be independent, but 'must be given with knowledge of all relevant circumstances and must be such as a competent and honest advisor would give if act ing solely in the interests of the donor'.9 The real issue is: was it really the result of his own free will, and the question of independent advice is subsidiary; the answer to which comes in to help to determine the ultimate issue in the case.10 It has also been held that even if no independent advice was taken by the executant, the document will not be invalid unless it was shown that independent advice would have affected the execution of the document.11 Competent and independent advice does not mean independent and competent approval. All that is necessary is that some independent person, free from the taint of the relationship or of the consideration of interest, which would affect the act, should put clearly before the person what are the nature and the consequences of the act . It is for the adult persons of competent mind to decide whether they will do the act. It applies to adults who are competent to form an opinion. In the case of those, who are not capable of managing their own affairs in the broadest sense of the word, other conditions may arise.12 There is no absolute rule as to the necessity or sufficiency of independent advice,13 and it is not the only possible proof of a donor's competence and understanding. A deed of settlement by a widow, having absolute estate in the property, in favour of the defendant, was set aside for undue influence where the defendant got the deed executed when she had no independent advice, and failed to discharge the onus of proving the voluntary nature of the transaction.14 A brother got a release deed from his unmarried sister being looked after by him, soon after she attained majority and she had no independent advice. The transaction was set aside as being one executed under undue influence.15 Similarly, where criminal proceeding were threatened against a mookadam for misappropriation of his master's moneys, and a bond was given by an ignorant Hindu widow, who had brought him up as her son to save him from the threatened prosecution, it was held that the agreement was not binding upon the widow, she having had no independent advice.16 The burden lies on the recipient to show that the donor had independent advice that is, outside advice from a disinterested person.17 Such advice to be of value must have been given before the transaction.18The plea of undue influence may be taken even by a person who act ed under legal advice.19 Persons in authority, or holding confidential employments such as that of spiritual, medical, or legal advisor, are called on to act with good faith and more than good faith in the matter of accepting any benefit (beyond ordinary professional remuneration for professional work done) from those who are under their authority or guidance. In fact, their honourable and prudent course is to insist on the other party taking independent advice. Persons standing in a confidential relation towards others cannot entitle themselves to hold the benefits which those others have conferred upon them unless they can show to the satisfaction of the Court that the person by whom the benefits have been conferred had competent and independent advice in conferring them.20 In the case of a gift from client to solicitor, it is an essential condition to the validity of the gift that the client should have competent independent advice,21 and the Court must also be satisfied that the influence has in fact ceased.22 Once the attorney advises his client to take independent advice and the client does so, it is not the business of the attorney to see that the new attorney is doing his duty diligently.23 Acquiescence and Confirmation In rebuttal of a plea of undue influence, the recipient of the transaction may show that the person complaining of undue influence adopted the transaction after the influence was removed.24 There can
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be no acquiescence in or confirmation of a transaction until the donor knows his rights and is free from the influence of the donee.25 In a Privy Council case, a Hindu widow having a widow's estate entered into a lease which was neither prudent nor beneficial to the estate; but with full knowledge of the lease, the widow, and after her, her reversioners, accepted rent under the lease. Their Lordships held that such conduct amounted to confirmation of the transaction by conduct, both by the widow and her reversioners.26 A gift by a patient in favour of a doctor was held to become unimpeachable by subsequent confirmation.27 A woman signed an agreement to sell property at the insistence of her advocate, which agreement was written in the Portuguese language and her son, who knew the language, was present at that time. She deposited the cheque for the earnest money the next day, although, one of her tenants requested her to return the cheque. It was held that the plea of undue influence could not stand.28 PardanashinWomen The term 'pardanashin' means screened from view, placed behind a screen, veiled. It refers to a woman who observes the rule of seclusion. The ground on which protection is given to a pardanashin woman is that she can be easily influenced and is very likely to be over-reached in her dealings. It is not merely by reason of the purda itself that the law throws its protection around a pardanashin woman; rather it is by reason of those disabilities which arise out of the seclusion which the pardanashin women suffer, arising from causes such as old age, infirmity, ignorance, illiteracy, mental deficiency, inexperience and dependence upon others.29 The principle upon which the law accords protection to pardanashin women is founded on equity and good conscience.30 Since long before the enactment of the Contract Act, some of the High Courts, with a certain amount of support from the Privy Council, have treated a pardanashin woman (who may or may not be a Hindu woman) as a class of persons specially exposed to undue influence, and have gone near to laying it down as a rule of law that everyone dealing with a pardanashin woman is bound to show affirmatively that she understood the nature of the transaction, and that the terms were fair. The rule was stated by the late Sir W. Rattigan, in a paper where he forcibly criticised the policy,31 to have been first announced in 1867 in a Calcutta case not regularly reported. Sir W. Rattigan observed:
It does not necessarily follow, that a native woman simply because she sits behind the parda32 is to be placed in the same category as the 'weak, ignorant, and infirm persons' whom the Court of Chancery, under a proper interpretation of the approved practice, is accustomed to protect. On the contrary, it is common experience to find in India parda ladies who are highly intelligent, strong minded, and who possess excellent business capacity, and contrive to manage large estates with great success. To adopt a sweeping generalisation, and to hold every pardanashin who enters into any commercial transactions, or who makes a disposition of her property, is presumably the victim of, 'undue influence', is to make an assumption which is contrary to actual facts, and to cause the law to be abused for the purpose of avoiding bona fide engagements.
The protection when given to such a woman is by putting the burden of proof upon the person transacting with such woman to show that the transaction was effected by the free will of such a woman, that she had taken independent advice;33 or that the said documents were executed by her after clearly understanding the nature of the transaction.34 It should be established that it was not her physical act but also her mental act.35 The burden can be established not only by proving that the document was explained to her and that she understood it but also by other evidence, direct and circumstantial.36 The law as to the burden of proof has been summarised in a decision of the Privy Council:37
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...the law throws around her a special cloak of protection. It demands that the burden of proof shall in such a case rest, not with those who attack, but with those who found upon the deed, and the proof must go so far as to show affirmatively and conclusively that the deed was not only executed by, but was explained to, and was really understood by the grantor. In such cases, it must also, of course, be established, that the deed was not signed under duress, but arose from the free and independent will of the grantor. The law as just stated is too well settled to by doubted or upset.
In an earlier case before the Privy Council, where a Mohammedan lady sued to recover from her husband the value of the company's paper of a considerable amount alleged to have been endorsed and handed over to him to receive interest thereon, and the defence was that he had purchased the paper from his wife, it was held that though the wife failed to prove affirmatively the precise case set up by her in the plaint, the burden of proof was upon the husband to show, the plaintiff being a pardanashin, that the sale was a bona fide one for value, and that upon the evidence, he had failed to satisfy the burden.38 Then it was declared that, as regards deeds taken from pardanashin women, the courts have always been careful to see 'that the party executing them has been a free agent, and duly informed of what she was about'.39 It is not sufficient to show that a document executed by a pardanashin woman was read out to her; it must further be shown that it was explained to her,40 or that she understood its conditions and effect;41 and that the explanation included all material points as well as the general nature of the transaction.42 The reason is that the ordinary presumption that a person understands to which he has affixed his name does not apply in the case of such a woman.43 In the case of a pardanashin woman, apart from other considerations applicable, if the document executed is not in the 'mother tongue' of the executant, the law requires further that she understood the document and not merely heard its contents.44 Independent legal advice is not the only way to rebut the presumption of undue influence. But the obvious way to prove that the gift was the result of the free exercise of independent will is to prove that the gift was made after the nature and effect of the transaction had been fully explained to her by some independent or qualified person.45
It is not necessary--indeed, it is undesirable--to insist in such cases upon a test which depends upon a clear understanding of each detail of a matter which may be greatly involved in legal technicalities. It is sufficient that the general result of the compromise should be understood, and that people disinterested and competent to give advice should, with a fair understanding of the whole matter, advise the lady that the deed be executed.46
Some decisions suggested that a deed of gift by a pardanashin woman is invalid in the absence of proof that she had independent advice. But in Kali Bakhsh Singh v. Ram Gopal Singh, 47 the Privy Council held that there is no rule of law of the absolute kind indicated above.
The possession of independent advice, or the absence of it, is a fact to be taken into consideration and well weighed on a review of the whole circumstances relevant to the issue of whether the grantor thoroughly comprehended, and deliberately and of her own free will carried out the transaction. If she did, the issue is solved and the transaction is upheld; but if upon a review of the facts which include the nature of the thing done and the training and the habit of mind of the grantor, as well as the approximate circumstance affecting the execution--if the conclusion is reached that the obtaining of independent advice would not really have made any difference in the result then the deed ought to stand. The present, in their Lordships' judgment, appears to be a case of that kind...In short their view is that if independent outside advice, which is an essentially different thing from independent outside control, has been obtained, the lady would have act ed just as she did. Much as their Lordships support and approve of the protection given by the laws to a pardanashin lady, they cannot transmute such a legal protection into a legal disability. She might, especially if the outside advisor had been a lawyer, have altered the shape or form of the transaction, but in substance and result she would have carried out the same purpose and will as are expressed by the deed under challenge. They refer to the judgment of Lord Macnaghten in Mahomed Buksh Khan v. Hosseini Bibi. 48
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The question whether the woman is pardanashin or not is a question of fact, and it must be pleaded, and the question put in issue.49 It is not enough to entitle a woman to the special care with which the courts regard the disposition of a pardanashin woman; that she lives in some degree of seclusion.50 Thus, a woman, goes to Court and gives evidence, who fixes rents with tenants and collects rents, who communicates, when necessary, in matters of business, with men other than members of her own family, could not be regarded as a pardanashin woman.51 In Hodges v. Delhi and London Bank, 52 a Privy Council case, it was said:
It is abundantly clear that Mrs. Hodges was not a pardanashin. The term quasi-pardanashin seems to have been invented for this occasion. Their Lordships take it to mean a woman who, not being of the pardanashin class, is yet so close to them in kinship and habits, and so secluded from ordinary social intercourse, that a like amount of incapacity for business must be ascribed to her, and the same amount of protection which the law gives to pardanashins must be extended to her. The contention is a novel one and their Lordships are not favourably impressed by it. As to a certain well-known and easily ascertained class of woman, well-known rules of law are established, with the wisdom of which we are not now concerned. Outside that class it must depend in each case on the character and position of the individual woman whether those who deal with her are or are not bound to take special precautions that her action shall be intelligent and voluntary, and to prove that it was so in case of dispute.
Thus, where the plaintiff was not a housewife confined to her house but was an artist, musician and film act ress and was perfectly able to understand what is what and had to be persuaded with adequate reasons when the property was to be purchased and was capable of understanding the nature of the transaction, it was held that this was not a case of undue influence,53 nor was the transaction vitiated where the woman had a business mind and knew the ways of the world,54 or where she was capable of carrying out monetary transactions and had no hesitation to appear before comparative strangers,55 or where she appeared before the Registrar of Documents, stood in the witness box, recovered rents from tenants and paid taxes and municipal rates,56 or when the Harijan childless widow was employed in the railways and there was nothing on record to show that she suffered from ignorance, illiteracy or mental deficiency.57 Where a mortgage was a spontaneous and well-understood act of the woman, it would not be set aside even if she had no independent advice from a lawyer.58 The rule protects pardanashin women only to the extent that it cannot be presumed that they have ascertained the meaning of any document which they have signed.59 Whilst it is the duty of the courts to see that such women are not imposed upon, they must at the same time be careful not to apply the rules intended for their protection so strictly as to deprive them of freedom of contract and reduce them to a status as that of minors, who because of their mental deficiency, are incapable of contracting.60 It should be noted that 'the undue influence which may affect a pardanashin lady's understanding of the document may proceed from a third party...' It was so held by Jenkins CJ in a case where a mortgage of her property by a pardanashin woman to a creditor of her husband was set aside, the undue influence having proceeded from the husband.61 A number of other cases relating to pardanashin women,62 do not lay down any rules differing in principle from those discussed above, but illustrate various aspects of the rules. With the gradual relaxation of the custom of the parda and the spread of education, the cases on the subject are hoped to assume less importance. Extension of the Rule Relating to aPardanashinWoman The protection afforded to pardanashin woman can be extended to women of a similar class who, though not pardanashin technically, are similarly placed because they are illiterate, sometimes old and sick, have lack of understanding and appreciation of the transaction without independent advice, are helpless, and thus exposed to the danger of entering into unfair deals. The emphasis should be on the factual understanding of the transaction entered into and not the disability presumed in the case of
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pardanashin women on the ground of mere status.63 The protection applicable to a pardanashin woman can be extended to illiterate64 and rustic village women,65 or to documents made by old, invalid, infirm and illiterate persons.66 The principles mentioned above have also been applied to males who by reasons of their apparent physical or mental incapacity or infirmity or being placed in circumstances where they are greatly amenable to the overpowering influence of another person, are induced to enter into conveyance and transactions relating to their property.67 Evidence Undue influence is not always capable of direct proof, and must depend on conclusions drawn from the nature of the transaction and the circumstances in which it had its origin,68 and it is necessary to examine very closely all the circumstances of the case. The principles are always the same, though the circumstances differ.69 No single circumstance is conclusive. The character of the transaction is an important circumstance but, unfairness of the transaction is insufficient to invalidate the transaction.70 Whether a transaction is vitiated on the ground of undue influence is primarily a question of fact.71 Undue influence may be inferred when the benefit is such as the taker had no right to demand (i.e., not natural or moral claim) and the grantor had no rational motive to give.72 Inadequacy of consideration is not per se sufficient to hold that the contract was vitiated by undue influence,73 unless it is grossly inadequate,74 when it could raise a presumption that the party either did not understand what he was doing or was the victim of some imposition.75 But coupled with other factors, it may lead to such presumption, namely, inexperience and absence of competent advice on the part of the seller,76 indebtedness and ignorance,77 illiteracy and lack of independent advice.78 The entire transaction must be taken into consideration.79 The initial burden of proving undue influence lies on the person who alleges it.80 In order to raise a presumption of undue influence, it is essential to prove: (a) that the relationship of contracting parties was such that one was in a position to dominate the will of the other; and that (b) that position was used to obtain an unfair advantage;81 and both these must be proved,82 and must be approached in that order,83 though sometimes, the questions of domination and of unconscionableness may overlap.84 On proof of these two facts, the exercise of undue influence will be presumed.85 It is insufficient to show that the relations of the parties have been such that one naturally relied upon the other for advice and the other was in a position to dominate the will of the first in giving it.86 But a mere existence of fiduciary relationship would raise a presumption of undue influence,87 which may not arise from the mere fact of near relationship.88 As discussed earlier, in particular categories of relationship, such as parent and child, solicitor and client, spiritual adviser and penitent, undue influence is more easily established.89 In dealing with cases of undue influence, there are four important questions which the Court should consider, namely:
(i) (ii) (iii) (iv)
whether the transaction is a righteous transaction, that is, whether it is a thing which a right-minded person might be expected to do; whether it was improvident, that is to say, whether it shows so much improvidence as to suggest the idea that the donor was not master of himself and nor in a state of mind to weigh what he was doing; whether it was a matter requiring a legal advisor; and whether the intention of making the gift originated with the donor.90
All these are questions of fact. Admissions made while under undue influence cannot be taken as proof that the person had full
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knowledge of the facts.91 Recitals in another deed that the executant is incapable of managing his business or is not in sound mental condition cannot be availed of to defeat his subsequent contract with other persons on the ground of undue influence.92 The charge of undue influence must be substantially proved as laid.93 The standard of proof may differ according as the person alleging undue influence is infirm and backward or capable and literate.94 A position of dominance, if proved to exist, is deemed to continue till its termination is established. When once it has been established that one party to the contract possessed a general influence and dominance over the will of another, it need not be shown how, in the particular instance it was used, and it will be presumed to have been used unless contrary is shown.95 That the consent was free may be indicated by the fact that the person alleging forced consent signed the document in the presence of a close relative in whom he or she would have confidence, viz. son;96 or father and brother,97 or that the document was duly registered.98 The section will not apply where there is no material on record nor evidence to show that the particular transaction was entered into by 'undue influence' or that the promisee was in a position to dominate the will of the promisor.99 Pleadings Although, 'undue influence', 'fraud' and 'misrepresentation' are cognate vices and may in part overlap in some cases, yet in law they are distinct categories and in view of O. 6, r. 4 read with O. 6, r. 2, CPC, they require to be pleaded separately with particularity and precision. Full particulars of the undue influence must be pleaded,1 namely of the nature of influence exercised, the manner of exercise and the unfair advantage obtained by the other party.2 A general allegation that the plaintiff was an old man of 90, who had a great deal of confidence in the defendant, was insufficient to amount to averment of undue influence.3 But where facts on record justify the plea, the omission to make an allegation is not fatal, unless the allegations are a surprise to the other party.4 The plea of undue influence may be taken in defence also without having taken steps to set aside the agreement.5 No Undue Influence No presumption of undue influence was held in a case where a sister gifted her share in the property descended from the father to her brothers. She was married a long time and was given 70 gold sovereigns as a marriage gift at the time of marriage. She resided with her husband in a separate house. The document was attested by her husband. The properties were the family property owned by the father and the plaintiff's share was only a fractional share in the total estate.6 A person, long after the death of his only son, was being ill-treated by his son's widow and her brothers. He left his own house and while residing with his nephews, executed, for consideration, a sale deed in favour of his nephew, and stated in the mutation proceeding that he had executed the sale deed of his own free will and volition. When he later sought to set aside the sale deed, it was held that in the absence of proof of lack of rational judgment or of mental incapacity, the sale-deed could not be set aside.7 No inference of undue influence was drawn in the case of a watf deed executed by a lady 80 years old, because the deed had been read and explained to her by the scribe and she herself had read it.8 A mortgage was executed by a woman looking after her affairs personally. The transaction was not unconscionable. The woman's brother was under the influence of the mortgagee's father. In such a case, the brother being under the influence of the mortgagee's father was irrelevant in deciding the question of undue influence.9 Merely because the executant of a gift deed was old, and undergoing intermittent hospitalisation was not enough to shift the burden of proof where the executant was a law graduate.10 In Jenyns v. Public Curator, 11 an old woman of 81 years had carried on business which she sold to a company in lieu of certain paid up shares in the company. She gave almost half the shares to her son who resided with her, managed the business and gave her advice. Other shares were given to the other children and employees. The public curator who took charge of her affairs sought to have the gift to son set aside. The jury found that the son stood in a confidential relation to his mother, that the
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agreement made between her and the company and transfer to the son were the result of her own will freely exercised, that she was capable of understanding these transactions, and that she did not sufficiently understand them. The trial judge gave a judgment for the public curator declaring the son to be a trustee for the shares and accountable for all profits. The son appealed. The High Court of Australia took the jury's answer to mean that she did not fail to understand the transaction but she failed to grasp the consequences that would ensue to her financially. In this case, the donor was not dependent upon the donee physically.12 The Court decided that although the donor did not sufficiently understand the transaction relating to matters of general reasoning and business wisdom and acumen as opposed to facts known to the donee in virtue of his position and not disclosed, that was not enough by itself to invalidate the gift.13 There was no undue influence merely where a person accepted the terms of a compromise as he had no option.14 A writing taken by the employer from the employee that so long the employee was in service, he would occupy for his personal residence, the premises provided by the employer for accommodation, was held not to be vitiated by undue influence merely because the employee was in service at the time when the writing was given.15 Delay and Limitation Delay and acquiescence do not bar a party's right to equitable relief on the ground of undue influence, unless he knew that he had the right, or, being a free agent at the time, deliberately determined not to inquire what his rights were or to act upon them,16 or there is confirmation or ratification of the transaction.17 In Allcard v. Skinner, 18 the gifts were held vitiated by undue influence, but the delay and conduct of the donor after leaving the influence of the sisterhood disentitled her from recovering. Where the validity of the agreement was not disputed, though the defendant had sufficient time and opportunity to question it, the Court held that the agreement was not vitiated by undue influence or coercion.19 In the case of a gift, as opposed to contract, the question of delay would only arise from the time when the plaintiff discovered the true nature of the deed.20 If there is no such conduct, it is open to the party, though he may not sue to set aside the transaction within the period of limitation, to plead undue influence as a defendant in a suit against him to enforce the transaction. A defendant in a suit is entitled to resist a claim made against him by pleading fraud (or undue influence), and he is entitled to urge that plea though he may not have himself brought a suit to set aside the transaction, and is not, in circumstances like the present, precluded from urging the plea by (the law of limitation).21 This statement was adopted in a Madras case where it was said:
We do not think it follows that because a party's remedy as plaintiff to have an instrument avoided is time-barred, his right to say by way of equitable defence, if sued, that the instrument ought not to be enforced is equally time-barred.22
Who can raise the plea of Undue Influence The plea of undue influence can be raised only by the executant of the document or his representative in estate, and not by a third party23 claiming adversely to such executant.24 A transferee of a bond has been held to have all the rights of the transferor including the right to avoid the transaction on the ground of undue influence;25 but transferees of some portions of a mortgaged property could not plead undue influence to avoid the mortgage where the mortgagor himself did not do so either before or in the suit on the mortgage.26 Legal Representatives
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A sale deed obtained by an uncle from his niece by the exercise of undue influence, the uncle standing in a fiduciary relation to the niece, may be set aside, after the death of the niece, by her legal representative.27 Undue Influence: Third Parties A contract can be set aside even where undue influence has proceeded from a third party,28 i.e., a person not party to the transaction. A party to a contract may lose its contractual rights or benefits under the contract because of the undue influence of the third party where:
(i) (ii) (iii)
(iv) (v)
(vi)
he was in conspiracy with the third party exercising undue influence;29 he was the agent of the third party exercising undue influence;30 or he was the principal of the third party exercising undue influence, or the agent, for example, where he entrusts to a third party the task of obtaining the signature of the other party to the contract knowing that the third party is related to the other party,31 but a true agency in accordance with the general law of principal and agent has to be established;32 he had actual notice of the exercise of undue influence, and even though he may have furnished consideration for the transaction;33 he had constructive notice of its exercise,34 i.e., the knowledge that there existed a fiduciary or confidential relationship35 between the other party to the contract and the third party; and even though he may have furnished consideration for the transaction; and whether he knew of the act ual exercise of undue influence or not;36 he has taken the benefit of a contract vitiated by undue influence, under a transaction without furnishing consideration, i.e., he is a volunteer,37 whether with or without knowledge of the existence of relationship or the exercise of undue influence.
A third party benefiting by a transaction and having notice of the facts which raised the presumption, is in no better position than the person who exercises influence.38 Provision to such effect is found in s. 89 of the Indian Trusts Act, 1882 which provides: Where by the exercise of undue influence any advantage is gained in derogation of another, the person gaining such advantage without consideration, or with notice that such influence has been exercised, must hold the advantage for the benefit of the person whose interests have been so prejudiced. Such party is then under the same disability as the third party who occupied the position of confidence39 and will not be entitled to retain the benefit unless he shows that the other party to the contract was a free agent and had independent and disinterested advice. The burden of proving that the transaction was made with the exercise of free will, or after independent advice, or that the person in fiduciary position did not avail of the confidence subsisting between the parties, lies as much on such party seeking to enforce the contract as would have laid upon the person in the fiduciary position.40 Where a person in a fiduciary relationship procures, by undue influence, contracts to be entered into by the companies under his control and direction, the companies will be affected by the doctrine of undue influence, even though they themselves were not in fiduciary relationships. In such a case, it is immaterial that the undue influence is exercised in order to obtain a benefit for the third parties rather than for the person himself exercising the undue influence.41 A money-lender filed a suit against a defendant on the basis of the latter's signature admitting liability on the account of the defendant's uncles. The claim against the defendant could not succeed as the creditor knew of the fiduciary position of the defendant and his uncles.42 A mortgage was declared as not binding on one of the defendants where the mortgagee failed to show that the defendant had independent advice.43 Where
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a creditor obtained a document from his debtor and another party knowing fully well that the transaction was the result of undue influence exercised by the debtor over that other party, the creditor was not allowed to enforce the transaction against such other party.44But where a couple under the undue influence of a third party, executed a legal charge in favour of a bank, but the bank had entrusted the task of getting the charge executed to the solicitors who appeared to be act ing for the couple, it was held that the bank was not infected by the undue influence, even if the solicitors were not in fact authorised to act for the couple and were act ing for the third party.45 Undue influence operating against a donee also operates against every volunteer who claims under him, and also against transferee for value from the donee with notice of the equity thereby created.46 Surety-wife and Debtor-husband The question of the disability of a party to a contract to enforce it when the other party alleges undue influence by a third party has arisen in a number of English cases in contracts involving wives, husbands and creditor banks; these involved the wife charging her property, usually the 'matrimonial home', as security for repayment of her husband's debts, but later challenging the transaction and resisting recovery by the creditors on the grounds that the transaction was effected as a result of undue influence or 'pressure' of the husband. Any decision in such cases required balancing of two policy considerations:
(i) (ii)
the need to protect a wife who may have been a victim of her husband's pressure or influence; and the need to avoid reducing the flow of loan capital to business enterprises, where security of wives' properties enabled husbands to have funds for their business.47
These English cases require that independent legal advice be taken by the wife from a solicitor in order to avoid imputation of notice upon the creditor of the exercise of undue influence. In Barclay's Bank plc v. O'Brien, 48 the wife mortgaged with a bank her share of the house and became surety for her husband's debt for the purpose of re-financing a company in which her husband had interest, but she had not. It transpired that this mortgage was procured by misrepresentation as to both the duration and the extent of the loan. The wife contested the bank's application for possession, contending that the mortgage was unenforceable against her because of her husband's wrongful act, with which the bank was tainted. While deciding in favour of the wife, the House of Lords explained why it was necessary to show tenderness to the wife: that there was a real likelihood that the wife will in fact repose trust and confidence in her husband and there was a real risk that, given the likely informality between them, a transaction would have been misrepresented or inadequately explained. Even though the relationship of husband and wife did not give rise to a presumption of undue influence, where the transaction was not on its face advantageous to the wife, together with the fact that the parties were known by the bank to be husband and wife, was sufficient to put the bank on notice of undue influence or misrepresentation and disentitled it from enforcing its claim.49 The same principles apply where the creditor knows that the parties are cohabitees,50 or other relationships where the creditor is aware that the surety reposes trust and confidence in the debtor in relation to financial affairs.51 The creditor may also be put to notice only from the terms of the transaction, namely, where the transaction is so improvident that it can be explained only in some impropriety in the debtor's behaviour towards the surety.52 The creditor need not, however, enquire into the personal relationship between those with whom it has dealings, or as to their personal motives for wanting to help one another; but he need only ensure that the surety knew what she was doing.53 The creditor will not be put to notice unless the transaction is on its face disadvantageous to the surety. In Barclay's Bank plc v. O'Briell, 54 the transaction was not on its face to the financial
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advantage of the surety, she having no interest in the business for which the debt was incurred; but in CIBC Mortgages plc v. Pitt, 55 the loan was given for the joint benefit of the husband and wife, and hence the bank was not fixed with constructive notice of undue influence. In Irish Bank plc v. Byrne, 56 the bank was put on notice when the loan for the benefit of the husband was made a joint loan to the husband and wife at the bank's suggestion. In Royal Bank of Scotland v. Etridge (No. 2), 57 the House of Lords considered the question in detail. It stated the law, and the steps the lender must take in such situations. The bank is 'put on inquiry'. It will be subject to the wife's claim unless it establishes that it has taken reasonable steps to bring home to her the practical implications of the proposed transaction and the risks she runs as surety. This would apply in all cases where the relationship between the surety and the debtor is non-commercial. A bank may satisfy the requirements set out in the previous paragraph if it insists that the wife has a private meeting with the banker bank at which she is told of the extent of her liabilities and is warned of the risks she is running. She should be urged to take independent advice. Alternatively the bank may see to it that the wife is advised independently by a solicitor who would advise her independently of her husband. The bank should communicate directly with the wife, and should inform her that she ought to take a written confirmation from a solicitor, that he has explained to her the documents and their practical implications. The bank should not proceed with the transaction until it has received an appropriate response directly from the wife. The bank must supply the solicitor with all the necessary financial information with the husband's consent to such divulgence. Having explained the position to the wife, setting out the risks involved, the solicitor should make it clear to the wife that she has a choice. The decision whether or not to proceed is hers and hers alone. If the husband does not consent to the disclosure the bank need not proceed with the transaction. In each case the bank should obtain from the wife's solicitor an appropriate written confirmation of the matters referred to above. Position of Surety-wife in Australia In Yerkey v. Jones, 58 a wife gave a second mortgage of some property owned by her to help her husband to borrow money for buying a piece of land and a house. The vendors--the mortgagees--issued a writ against the wife and the borrower husband, when the interest and the principle remained unpaid. The wife succeeded in her defence of undue influence and a decree was passed against the husband. Dixon J. in appeal said that the relationship of husband and wife was such that presumption of undue influence does not arise in their case but 'it has never been divested completely of what may be called equitable presumption of an invalidating tendency.' He stated:
The basic reason for binding the creditor with equities arising from the conduct of the husband is that in substance...the wife is a volunteer conferring an important advantage upon her husband who in virtue of his position has an opportunity of abusing the confidence she may be expected to place him in...Misrepresentation as well as undue influence is a means of abusing confidence that may be expected to arise out of the relation.
He then referred to three principles applying to the voluntary disposition by the wife in favour of the husband:
(i) (ii) (iii)
firstly, if impeached places the onus on the husband to prove that it was not improperly or unfairly procured; secondly, a third party dealing with the wife through the husband in a transaction with the wife to the husband's advantage may by that fact alone be affected by an equity between the husband and the wife; and thirdly, it still is or may be a condition of the validity of the transaction that she adequately understood the act ual nature and consequences of the transaction.
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All these three principles will apply to suretyship where the wife without recompense, except advantage to the husband saddles herself or her separate property with liability for the debt. But in this case, the wife went to the solicitors office to execute the mortgage and he fully and properly explained to her and she was under misapprehension that the solicitor was acting for her. If the transaction is understood by the wife or on reasonable grounds, the creditor believes it to have been understood, the transaction cannot be set aside.59 In England, the House of Lords had rejected the approach of Yerkey v. Jones, 60 while deciding Barclay's Bank plc v. O'Brien. 61 In Garcia v. National Australia Bank Ltd, 62 the majority of the judges of the High Court of Australia upheld the principle in Yerkey v. Jones, 63 and decided not to adopt the House of Lords' decision in Barclay's Bank plc v. O'Brien. 64 Mrs Garcia had signed a guarantee at the request of her husband, who told her that there was no risk involved. She also overlooked the fact that the guarantee also covered a liability secured on her home under a previous mortgage of her home. The earlier mortgage had been given for smaller loans, but it also contained an 'all monies' clause which extended to guarantees, and hence covered the guarantee in question. She had not taken independent advice, nor was the effect of the guarantee given to her when she visited the bank to sign it. The High Court of Australia refused to enforce the guarantee holding that the guarantee was vitiated because the wife undertook it with an incomplete understanding of what was involved, and the creditor had not taken sufficient steps to ensure that the wife's incomplete understanding was rectified. In comparison with the O'Brien case which requires that undue influence, misrepresentation, or some form of overreaching must be present, the Garcia case holds that the mere non-understanding on the part of a wife or other emotional dependence will suffice to vitiate the guarantee. Effect of Undue Influence Under s. 19A of the Contract Act, an agreement caused by undue influence is voidable at the option of the party whose consent was so caused. Such an agreement may be set aside absolutely, or upon terms and conditions.65 Unconscionability as a General Doctrine The doctrine of unconscionability differs from the doctrine of undue influence, in that the former depends on the defendant's unconscionable conduct. The former is seen as 'defendant-sided' and concerned with the defendant's exploitation of the plaintiff's vulnerability. The latter is seen as 'plaintiff-sided', being concerned with the weakness of the plaintiff's consent owing to an excessive dependence upon the defendant.66 In Morrison v. Coast Finance Ltd, 67 it was stated:
The equitable principles relating to undue influence and relief against unconscionable bargains are closely related, but the doctrines are separate and distinct. A plea of undue influence attacks the sufficiency of consent; a plea that a bargain is unconscionable invokes relief against an unfair advantage gained by an unconscientious use of power by a stronger party against a weaker.
Again in Commercial Bank of Australia Ltd v. Amadio, Deane J, stated:68
Undue influence, like common law duress, looks to the quality of the consent or assent of the weaker party. Unconscionable dealing looks to the conduct of the stronger party in attempting to enforce, or retain the benefit of, a dealing with a person under a special disability in circumstances where it is not consistent with equity or good conscience that he should do so.
In the same case, Mason J. put the difference as follows:
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Although unconscionable conduct in this narrow sense bears so me resemblance to the doctrine of undue influence, there is a difference between the two. In the latter the will of the innocent party is not independent and voluntary because i t is overborne. In the former the will of the innocent party, even if independent and voluntary, is the result of the disadvantageous position in which he is placed and of the other party unconscientiously taking advantage of that position.69
It has been suggested that the doctrines of undue influence and unconscionability are sufficiently similar in their objectives; that the two share the main features of relational inequality, transactional imbalance and unconscionable conduct of the defendant, and therefore, can profitably be merged into one.70 United Kingdom Two English cases provide support for recognition of a general principle entitling a Court to intervene on the grounds of unconscionable bargains,71 where arguments to set aside transactions on the grounds of their being unconscionable, bargains was not accepted, but both judgments support a recognition for a general principle. The elements of unconscionability were formulated in Alec Lobb (Garages) Ltd v. Total Oil (GB) Ltd., 72 as:
(i) (ii) (iii)
one party must be at a serious disadvantage vis--vis the other; this weakness must be exploited by the other party in a morally culpable manner; and the transaction must be, not merely hard or improvident, but oppressive and overreaching.
The judgment hints at requiring subjective knowledge on the part of the stronger party both of the weakness of the other party, and of the fact that a bargain was obtained. The general principle has not been accepted in the English law, because the doctrine of undue influence has been considered as a preferable technique, and it was desirable to bring about this change by legislation.73 The law in the UK about unconscionable bargains has been stated thus:74
Where by reason of the unfair manner in which it was brought into existence ('procedural unfairness') as where it was induced by undue influence, or where it came into being through an unconscientious use of the power arising out of the circumstances and conditions of the contracting parties;75 in such cases equity may give a remedy; or where by reason of the fact that the terms of the contract are more unfavourable to one party than to the other ('contractual imbalance'); contractual imbalance or inadequacy of consideration is not, however, in itself a ground for relief in equity,76 but it may be an element in establishing such fraud as will avoid the transaction77 or the transaction may be so unconscionable as to afford in itself evidence of fraud'.78 A bargain cannot be unfair and unconscionable, however, unless one of the parties to it has imposed the objectionable terms in a morally reprehensible manner, that is to say in a way which affects his conscience, as by taking advantage of the weakness or necessity of the other.79
Australia Although the concept of unconscionability is expressed in wide terms, the courts exercise an equitable jurisdiction according to recognised principles. They do not set aside bargains simply because, in the eyes of judges, they appear to be unfair, harsh or unconscionable.80 This equitable jurisdiction exists when one of the parties 'suffers from some special disability or is placed in some special situation of disadvantage'.81 In the case of Commercial Bank of Australia Ltd v. Amadio, 82 all the five judges of the High Court of
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Australia confirmed the existence in Australia, of an equitable jurisdiction to set aside contracts on the basis of unconscionable dealings, and three of them decided the case on this principle. Two elderly Italian migrants to Australia, who were not familiar with the English language, at the request of their son, executed a mortgage in favour of a bank over their land for securing an overdraft of a company which the son controlled. The son had represented to his parents that the mortgage would be limited to USD 50,000 and for six months. The bank did not disclose to the couple that the bank and the company had been selectively dishonouring the company's cheques, and that they had agreed that the overdraft was to be reduced and cleared within a short time. The couple signed the mortgage believing it to be for an amount of USD 50,000 and for six months, but the document actually signed by the couple included a guarantee containing an 'all moneys' clause, securing all amounts owing or which might be owed by the company to the bank. The bank was aware that the couple was misinformed about the instrument. The majority found that the Amadio's were under a special disability, were not given full information about the extent of the guarantee, and were ignorant about the perilous financial state of the company. Their son, who could have assisted them, had deceived them. Applying the objective test, the majority held that the bank was aware of the need of the Amadios to have independent advice, and in proceeding with the transaction in light of this knowledge, the bank had act ed unconscionably. The knowledge of the stronger party of the other party's weakness was judged in this case by the objective standard. The principle of unconscionable dealings applied was summarised as follows:
The jurisdiction is long established as extending generally to circumstances in which: (i) a party to a transaction was under a special disability in dealing with the other party with the consequence that there was an absence of any reasonable degree of equality between them; and (ii) the disability was sufficiently evident to the stronger party to make it prima facie unfair or 'unconscientious' that he procure, or accept, the weaker party's assent to the impugned transaction in the circumstances in which he procured or accepted it. Where such circumstances are shown to have existed, an onus is cast upon the stronger party to show that the transaction was fair, just and reasonable.83
Under the Amadio approach, the weaker party must show that the stronger party acted unconscionably by reference mainly to the manner in which the transaction was concluded. This is the procedural question. On the other hand, the questions of substance, namely, the nature of the terms, would be concerned at the second stage of the proceedings when the onus is cast on the stronger party to show that the transaction was 'fair, just and reasonable'. United States The general doctrine of unconscionability is also recognised in the US.84 It has been included in the Uniform Commercial Code and though the section governs transactions in goods, it has been applied by analogy or as a general doctrine to other kinds of contracts. 2-302 of the UCC provids:
If the Court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made, the Court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.
The comment to 2-302 describes the purpose of this section:
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This section is intended to enable the courts to police explicitly against the contracts or clauses which they find to be unconscionable. In the past such policing has been accomplished by adverse construction of language, by manipulation of the rules of offer and acceptance or by determinations that the clause is contrary to public policy or to the dominant purpose of the contract.
As 2-302 is addressed to the court, unconscionability must be determined by the Court as a matter of law and not by a jury. Under 2-302(2), when it is claimed or appears to the Court that the contract or any clause thereof may be unconscionable, the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the Court in making the determination. The reliefs granted by the courts have included refusal to enforce entire contracts, or only clauses found unconscionable, or also have added terms; but have declined to entertain damage suits based on unconscionability. Under the Code, as indicated in the comments to it,
A bargain is not unconscionable merely because the parties to it are unequal in bargaining position, nor even because the inequality results in an allocation of risks to the weaker party. But gross inequality of bargaining power, together with terms unreasonably favourable to the stronger party may confirm indications that the transaction involved elements of deception or compulsion, or may show that the weaker party had no meaningful choice, no real alternative, or did not in fact assent or appear to assent to the unfair terms.
Thus, mere inequality of bargaining power does not suffice, and the courts recognise that the parties are often required to make their contracts quickly, that their bargaining power may rarely be equal, and that they are not fully equipped to deal with problems of unequal distribution of wealth.85 The Code does not define unconscionability, but indicates in the comments:
...the basic test is whether, in the light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract.
In the absence of definition in the Code, its definition in Williams v. Walker-Thomas Furniture Co, 86 has been generally accepted:
Unconscionability has generally been recognised to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.
A contract or a clause in a contract will be held unconscionable, if it satisfies the test of procedural as well as substantive unconscionability, indicated respectively by the words 'absence of meaningful choice' and 'terms unreasonably favourable in the above definition; and where more of one is present, less of the other is required. Procedural unconscionability is invoked when there is an element of oppression or wrongdoing in the process of the making of the contract and would include employment of sharp bargaining practices and unfair surprise, use of fine print or language other than English or technical language, lack of understanding and inequality of bargaining power. Substantive unconscionability affects the act ual substance of the contract and its terms, and will be indicated, for example, by grossly exorbitant or excessive prices or wide exclusion clauses, etc. Unidroit Principles
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Article 3.10 permits a party to avoid a contract in cases where there is a gross disparity between the obligations of the parties, which gives one party an unjustifiably excessive advantage. Such excessive advantage must exist at the time of making of the contract, and a contract, though not grossly unfair at the time of making, becomes so later, may be adapted or terminated under other provisions on grounds of hardship. Article 3.10 provides:
A party may avoid the contract or an individual term of it if, at the time of the conclusion of the contract, the contract or term unjustifiably gave the other party an excessive advantage.
The use of the word 'excessive' excludes avoidance only on the grounds of a considerable disparity in the value and the price or some other element which upsets the equilibrium of performance and counter-performance. What is required is that the disequilibrium is in the circumstances so great as to shock the conscience of a reasonable person.87 Not only must the advantage be excessive, it must also be unjustifiable; which would depend on all the circumstances of the case. The UNIDROIT Principles list a few factors relevant to determination of whether a contract or term gives one party an excessive advantage. Article 3.10 provides that regard must be had, among other factors, to:
(i) (ii)
the fact that the other party has taken unfair advantage of the first party's dependence, economic distress or urgent needs, or of its improvidence, ignorance, inexperience or lack of bargaining skill; and the nature and purpose of the contract.
The Court may, at the request of the party entitled to avoidance, adapt the contract in order to bring it into accord with reasonable commercial standards of fair dealing. The other party may also seek such adaptation if it had informed the avoiding party of its request promptly after receiving the notice of avoidance. These rights are in addition to the rights available by general rules of avoidance.88 India The Law Commission of India in its Thirteenth report,89 considered whether relief ought to be given against hard and unconscionable bargain, even though where no question of undue influence was involved. The Law Commission preferred the view in U Kesavulu Naidu v. Arithulai Ammal, 90 that unless undue influence was proved, no relief should be granted on the ground of unconscionableness of a contract. In Central Inland Water Transport Corporation Ltd v. Brojo Nath Ganguly, 91 the Supreme Court considered the question whether relief could be granted for an unconscionable bargain, and under which head should it fall. A question arose whether a Court would have the power to strike down an unfair and unreasonable contract, or an unfair and unreasonable clause in a contract between parties, who were not equal in bargaining power. In this case, undue influence was neither alleged nor pleaded. The Court recognised that all such contracts may not fall within the definition of undue influence. After discussing the development of law in a number of countries: it held that the courts adjudged such contracts void as contrary to public policy under s. 23 of the Contract Act.92 The judgment gives stress on the procedural test of unconscionability, when it refers to the requirements of 'great disparity in the economic strength of parties', whether inequality arises as a result of circumstances or is the creation of the parties; that weaker party has no meaningful choice but to give assent to the contract, or to sign on the dotted line.93 But it also suggests that the substantive test must be satisfied; that contracts which contain 'terms which are so unfair and unreasonable that they shock the conscience of the court' are opposed to public policy.94
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Reports of the Law Commission In its Report on the Unfair Terms of Contract of 1984,95 the Law Commission of India was concerned with standard form contracts imposing unfair and unreasonable terms upon unwilling consumers or persons who had no bargaining power. It considered the inadequacy of the present statute law to give justice to the weaker party. Although, the discussion in the report focuses on standard form contracts, its recommendation is wide, and does not restrict itself to any particular type of contract. It recommended adding a new chapter and section into the Contract Act .1 The 199th report of the Law Commission of India of 2006 considered in greater detail the Unfair (Procedural and Substantive) Terms in Contracts. The report makes a unique division of unfairness into procedural and substantive unfairness. A contract or its term is procedurally unfair if it has resulted in an unjust advantage or unjust disadvantage to one party on account of the conduct of the other party or the manner in which or the circumstances under which the contract has been made, or term arrived at between the parties. The contract or its terms are substantively unfair if by themselves they are harsh, oppressive or unconscionable. Substantive unfairness shall be presumed where it excludes or restricts liability for negligence, or without adequate justification for breach of contract. The issue of unfairness can be considered by the Court without such issue being raised by parties. Remedies include non-enforcement, declaration that terms are void, varying the terms to remove unfairness, refund of consideration, compensation, damages, or injunction. Statutory Intervention in Unfair or Unconscionable Transactions The Usurious Loans Act, 1918 empowers the courts to reopen transactions of money or grant loans to revise the transaction between the parties, and if necessary, to reduce the amount payable to such sum as the court, having regard to the risk and all the circumstances of the case, may decide to be reasonable. It gives the power to the Court to go behind the particular transaction and examine antecedent agreements and attendant circumstances. The enactment was necessary because even after the amendment to s. 16 of the Contract Act, where undue influence was not established, the Court could not grant relief however exorbitant the demand, and however unconscionable the bargain. Under the Contract Act, the Court can reopen the transaction of the loan, reopen any account taken between the parties, or set aside or alter any security given for a loan if:
(1) (2)
the interest is excessive; and the transaction was substantially unfair.
33 Sher Singh v. Pirthi Singh, AIR 1975 All 259; Ladli Parshad Jaiswal v. Kamal Distillery Co. Ltd., AIR 1963 SC 1279, [1964] 1 SCR 270, AIR 1963 SC 1279. 34 Subhas Chandra Das Mushib v. Ganga Prosad Das Mushib, [1967] 1 SCR 331 at 334, AIR 1967 SC 878; Ladli Parshad Jaiswal v. Karnal Distillery Co. Ltd., [1964] 1 SCR 270 per Shah J at 300, AIR 1963 SC 1279; Poosathurai v. Kannappa Chettiar, (1919) 47 IA 1, AIR 1920 PC 65, 43 Mad 546, 55 IC 447; Gafur Mohammad v. Mohammad Sharif, AIR 1932 PC 202. 35 Poosathurai v. Kannappa Chettiar, (1919) 47 IA 1, AIR 1920 PC 65, 43 Mad 546, 55 IC 447; Mahmud-un-Nissa v. Barkatulla, (1926) 48 All 666, AIR 1927 All 44, 96 IC 684. 36 Poosathurai v. Kannappa Chettiar, (1919) 47 IA 1, AIR 1920 PC 65 at 66, 43 Mad 546, 55 IC 447; Bhola Ram Lieri v. Peari Devi, AIR 1962 Pat 168; Moody v. Cox and another, [1917] 2 Ch 71 at 88, [1916-17] All ER Rep 548, (relationship of a confidential or fiduciary nature, and confidence is reposed). 37 Moody v. Cox and another, [1917] 2 Ch 71 at 88, [1916-17] All ER Rep 548 at 556. 38 Permanent Trustee Company of New South Wales. v. Francis Henry Bridgewater, AIR 1937 PC 14, (1937) 2 Mad LJ 87, (a case of expectant heir).
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39 Bank of Montreal v. Stuart, [1911] AC 120; quoted in Dubash DK Ahmad Ibrahim Sahib v. AKRMK Meyyappa, AIR 1940 Mad 285. 40 Johnson v. Buttress, (1936) 56 CLR 113 at 135. 41 Inche Noriah Binte Mohamed Tahir v. Shaik Allie Bin Omar Bin Abdullah Bahashnan, [1929] AC 127, AIR 1929 PC 3, [1928] All ER Rep 189. 42 Elias Saleh Mohamed Sait v. Khanmull, AIR 1959 Mys 102, (case of debtor and creditor); Ballo v. Paras Ram, AIR 1972 HP 33; Guljan Bibi v. Nazir-ud-din Mia, AIR 1975 Gau 30. 43 Powell v. Powell, [1900] 1 Ch 243. 44 Krishna Mohan Kul v. Pratima Maity, AIR 2003 SC 4351, (2004) 9 SCC 468. 45 See Explanation 2 to s. 25 below. 46 Syed Noor v. Qutbuddin, AIR 1956 Hyd 114. 47 Karnal Distillery Co. Ltd. v. Ladli Parsad Jaiswal, AIR 1958 Punj 190; Talengala Narayana Bhatta v. Narasimha Bhatta, AIR 1965 Ker 189; Raghunath Altia v. Arjuno Altia, AIR 1973 Ori 76; Shrimati v. Sudhakar R Bhatkar, AIR 1998 Bom 122. 48 Sundarambal Ammal v. Yogavanagurukkal, (1915) ILR 38 Mad 850, AIR 1915 Mad 561, 23 IC 72. 49 Mackintosh v. Wingrove, (1878) 4 Cal 137; Satish Chunder Giri v. Hem Chunder Mookhopadhya, (1902) 29 Cal 823. 50 Poosathurai v. Kannappa Chettiar, (1919) 47 IA 1, AIR 1920 PC 65, 43 Mad 546, 55 IC 447; Reshmi v. Ghungaria, AIR 1952 HP 20. 51 Ganga Baksh v. Jagat Bahadur Singh, (1895) 22 IA 153, [1895] 23 Cal 15; Reshmi v. Ghungaria, AIR 1952 HP 20; Purna Chandra Choudhury v. Sarojini Choudharani, AIR 1935 Cal 234 at 238. 52 Lala Balla Mal v. Ahad Shah, AIR 1918 PC 249 at 251; Risal Singh v. Manohar Lal, AIR 1927 Lah 748 at 751; but see Hanuman Bux v. Lal Nilmoni Nath Sahi Deo, AIR 1919 Pat 566. 53 AIR 1918 PC 249 at 254, followed in Hanuman Bux v. Lal Nilmoni Nath Sahi Deo, AIR 1919 Pat 566. 54 Vinayakappa Suryabhanappa Dahenkar v. Dulichand Hariram Murarka, AIR 1986 Bom 193 at 197. 55 Talengala Narayana Bhatta v. Narasimha Bhatta, AIR 1965 Ker 189, relying on Allcard v. Skinner, (1887) 36 Ch D 145, [1886-90] All ER Rep 90, and Mahomed Buksh Khan v. Hosseini Bibi, (1888) 15 Cal 684, 15 IA 81,(PC) . 56 Multiservice Bookbinding Ltd. v. Marden, [1979] Ch 84 at 110, [1978] 2 All ER 489 at 502. 57 Hari Lahu Patil v. Ramji Valad Pandu, (1904) 28 Bom 371; Diala Ram v. Sardhal, (1929) 114 IC 693, AIR 1928 Lah 949. 58 Vinayakappa Suryabhanappa Dahenkar v. Dulichand Hariram Murarka, AIR 1986 Bom 193. 59 Kedari Bin Ranu v. Atmarambhat, (1866) 3 BHCAC 11. 60 Hamelo v. Jang Sher Singh, AIR 2002 P&H 147. 61 Lalli v. Ram Prasad, (1886) 9 All 74; the observations of the Privy Council in Kamini Sundari Chaodhrani v. Kali Prossunno Ghose, (1885) 12 IA 215 at 225-6, (1885) 12 Cal 225 at 238-39; where the loan was made to a pardanashin lady. 62 Chunni Kuar v. Rup Singh, (1888) 11 All 57, confirmed on appeal sub nom Raja Mokham Singh v. Raja Rup Singh, (1893) 20 IA 127, [1893] 15 All 352; Husain Bakhsh v. Rahmat Husain, (1888) 11 All 128. 63 Kirpa Ram v. Sami-ud-din Ahmad Khan, (1903) ILR 25 All 284. 64 Balkishan Das v. Madan Lal, (1907) ILR 29 All 303, doubted in U Kesavulu Naidu v. Arithulai Ammal, (1912) 36 Mad 533 at 537, 22 IC 769. 65 Ranee Annapurni Nachiar v. Swaminatha Chettiar, (1910) 34 Mad 7; see further as to the rest of what is excessive: Din Mohammad v. Badri Nath, AIR 1930 Lah 65, (1929) 120 IC 417; exact definition is not possible, Ramkishun Ram Marwari v. Bansi Singh, (1929) 116 IC 43, AIR 1929 Pat 340, (undue influence not found). 66 Ramu Mahabir v. Ghurhoo Samu, AIR 2006 All 273. 67 Safdarali v. Nur Mahomed Lalan, AIR 1930 Sind 25; Chinnamma v. Devanga Sangha, AIR 1973 Mys 338 at 349;
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Takri Devi v. Rama Dogra, AIR 1984 HP 11. 68 Chinnamma v. Devanga Sangha, AIR 1973 Mys 338 at 348; Ladli Parshad Jaiswal v. Karnal Distillery Co. Ltd., AIR 1963 SC 1279, [1964] 1 SCR 270, (no undue influence); Lakshmi Amma v. Talengala Narayana Bhatta, AIR 1970 SC 1367, (1970) 3 SCC 159. 69 Dhanipal Das v. Maneshar Baksh Singh, (1906) ILR 28 All 570 33 IA 118; Maneshar Bakhsh Singh v. Shadi Lal, (1909) 36 IA 96, (1909) 31 All 386; Abdul Majid v. Ksherode Chandra Pal, (1915) 42 Cal 690, AIR 1915 Cal 383, 29 IC 843 is disapproved by the Privy Council, Raghunath Prasad Sahu v. Sarju Prasad Sahu, (1923) 51 IA 101, AIR 1924 PC 60, (1923) 3 Pat 279, (1923) 82 IC 817. 70 Chedambara Chetty v. Renga Krishna Muthu Vira Puchaiya, 1 IA 241, 13 BLR 509. 71 Prem Narain Singh v. Parasram Singh, (1877) 4 IA 101. 72 Bhimbhat v. Yeshwantrao, (1901) ILR 25 Bom 126. 73 Sant Bux Singh v. AU Raza Khan, (1946) 21 Luck 194, AIR 1946 Oudh 129. 74 Kartari v. Kewal Krishan, AIR 1972 HP 117 at 119-20. 75 Abdul Majid v. Ksherode Chandra Pal, (1915) 42 Cal 690, AIR 1915 Cal 383 at 384, 29 IC 843; Aziz Khan v. Duni Chand, AIR 1918 PC 48 at 49; Kanto Mohan Mullick v. John Carapiet Galstaun, AIR 1930 Cal 547 at 552; Deota Prasad v. Tribhuwan, AIR 1983 All 139 at 144. 76 Fazal Azim v. Lala Girdhari Lal, AIR 1923 Oudh 8(1); Bibi Batul v. Debi Prasad, AIR 1925 Oudh 535; Panchi Dasi v. Kshiroda Dasi, AIR 1926 Cal 171; Khallo v. Jawala Prasad, AIR 1927 All 538; Ramkishun Ram Marwari v. Bansi Singh, (1929) 116 IC 43, AIR 1929 Pat 340; Subbamma v. Mohd Abdul Hafiz, AIR 1950 Hyd 55; but see the Usurious Loans Act, 1918 which gives the power to a Court to reduce the rate of interest. 77 (1906) ILR 28 All 570, 33 IA 118. The relief granted below was substantially confirmed on the ground that the facts brought the case within the section. 78 See also: 'Unconscionability as a General Doctrine'. 79 Gibson v. Jeyes, (1801) 6 Ves 266, [1775-1802] All ER Rep 325; followed in Babu Nisar Ahmad Khan v. Babu Raja Mohan Manucha, (1940) 67 IA 431, AIR 1940 PC 204, (1940) 43 Bom LR 465 at 469, 191 IC 94, (PC). 80 Daya Shankar v. Bachi, AIR 1982 All 376 at 379. 81 Section 3(22) of the General Clauses Act, 1897 provides that 'a thing shall be deemed to be done in &uot;good faith&uot; where it is in fact done honestly, whether it is done negligently or not.' 82 A Venkappa Bhatta v. Gangamma, AIR 1988 Ker 133. 83 Sethani v. Bhana, AIR 1993 SC 956, (1993) Supp 4 SCC 639. 84 Daya Shanker v. Bachi, AIR 1982 All 376 at 382. 85 Guljan Bibi v. Nazir-ud-din Mia, AIR 1975 Gau 30; Ballo v. Paras Ram, AIR 1972 HP 33. 86 Poosathurai v. Kannappa Chettiar, (1919) 47 IA 1, AIR 1920 PC 65, 43 Mad 546, 55 IC 447; Subhas Chandra Das Mushib v. Ganga Prosad Das Mushib, [1967] 1 SCR 331, AIR 1967 SC 878; Sethani v. Bhana, AIR 1993 SC 956, [1993] Supp, (4) SCC 639. 87 Bhola Ram Lieri v. Peari Devi, AIR 1962 Pat 168. 88 See Halsbury's Laws of England, 3rd edn., p. 673 Art. 1298, para 674 Art. 1299, quoted, by Mitter J in Subhas Chandra Das Mushib v. Ganga Prosad Das Mushib, [1967] 1 SCR 331 at 335-36, AIR 1967 SC 878 at 881; Huguenin v. Baseley, (1807) 14 Ves 273, 33 ER 526, [1803-13] All ER Rep 1; Allcard v. Skinner, (1887) 36 Ch D 145, [1886-90] All ER Rep 90; Inche Noriah Binte Mohamed Tahir v. Shaik Allie Bin Omar Bin Abdullah Bahashnan, [1929] AC 127, AIR 1929 PC 3 at 7, [1928] All ER Rep 189; Re Craig, Meneces v. Middleton, [1971] Ch 95, [1970] 2 All ER 390, (old man and lady who used to help him); National Westminster Bank plc v. Morgan, [1985] AC 686, [1985] 1 All ER 821,(HL) ; O'Sullivan v. Management Agency and Music Ltd., [1985] QB 428, [1985] 3 All ER 351,(CA) ; Avon Finance Co. Ltd. v. Bridger, [1985] 2 All ER 281,(CA) ; Bank of Credit and Commerce International SA v. Aboody, [1990] 1 QB 923, [1992] 4 All ER 955, [1980] 2 WLR 759,(CA) ; Simpson v. Simpson, [1989] Fam Law 20; cf Re Brocklehurst,Hall v. Roberts, [1978] Ch 14, [1978] 1 All ER 767,(CA), (not every fiduciary relationship gives rise to a presumption of undue influence); Re Coomber, Coomber v. Coomber, [1911] 1 Ch 723,(CA) . 89 Bank of Credit and Commerce International SA v. Aboody, [1990] 1 QB 923 at 964, [1989] 2 WLR 759 at 779, (CA) per Slade LJ.
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90 S Rathnam Naidu v. Kanni Ammal, AIR 1972 Mad 413. 91 Rugmini Amma Janaki Amma v. CV Krishnan Nair, AIR 1985 NOC 101,(Ker) . 92 Subhas Chandra Das Mushib v. Ganga Prosad Das Mushib, [1967] 1 SCR 331, AIR 1967 SC 878 per Mitter J at 881. 93 Philip Lukka v. Franciscan Association Vashapally, AIR 1987 Ker 204 at 208; Mannu Singh v. Umadat Pande, (1890) 12 All 523. 94 Andalammal v. Rajeshwari Vedachalam, AIR 1985 Mad 321 at 332, (1985) 2 Mad LJ 100. 95 Poosathurai v. Kannappa Chettiar, (1919) 47 IA 1, AIR 1920 PC 65, 43 Mad 546, 55 IC 447; Raghunath Prasad Sahu v. Sarju Prasad Sahu, (1923) 51 IA 101, AIR 1924 PC 60, (1923) 3 Pat 279, (1923) 82 IC 817; Permanent Trustee Company of New South Wales v. Francis Henry Bridgewater, AIR 1937 PC 14, (1937) 2 Mad LJ 87; A V Palanivelu Mudaliar v. Neelavathi Ammal, AIR 1937 PC 50, (1937) 39 Bom LR 720, 167 IC 5. 1 Poosathurai v. Kannappa Chettiar, (1919) 47 IA 1, AIR 1920 PC 65, 43 Mad 546, 55 IC 447; Lakshmi Doss v. Roop Laul, (1906) 30 Mad 169 at 174, (FB). 2 Ramu Mahabir v. Ghurhoo Samu, AIR 2006 All 273. 3 Moolappunathil Kochukali Amma Janaki Amma v. Moolappunath Veettil Kochukali Amma Parameshwaran Nair, AIR 1954 TC 407 at 413-14; Mahboob Khan v. Hakim Abdul Rahim, AIR 1964 Raj 250, (independent advice offered, but not taken). 4 Inche Noriah Binte Mohamed Tahir v. Shaik Allie Bin Omar Bin Abdullah Bahashnan, [1929] AC 127, AIR 1929 PC 3 at 7, [1928] All ER Rep 189. 5 Karnal Distillery Co. v. Ladli Parsad Jaiswal, AIR 1958 Punj 190. 6 (1936) 56 CLR 113 at 136-137. 7 Tiplady,(1985) 48 MLR 579, (referring to National Westminster Bank plc v. Morgan, [1983] 3 All ER 85 reversed in, [1985] 1 All ER 821, [1985] AC 686. 8 National Westminster Bank plc v. Morgan, [1985] AC 686, [1985] 1 All ER 821, per Lord Scarman at p. 827. 9 Inche Noriah Binte Mohamed Tahir v. Shaik Allie Bin Omar Bin Abdullah Bahashnan, [1929] AC 127, AIR 1929 PC 3, [1928] All ER Rep 189; Ram Sumran Prasad v. Govind Das, (1926) 5 Pat 646 at 661, AIR 1926 Pat 582, 99 IC 782; Sewti v. Rattan, AIR 1951 HP 54. 10 Haskew v. Equity Trustees, Executors and Agency Co. Ltd., (1919) 27 CLR 231 at 234-35, (High Court of Australia), following Kali Bakhsh Singh v. Ram Gopal Singh, (1913) 41 IA 23 at 28-29, [1913] 36 All 81 at 89, 21 IC 985; Mahomed Buksh Khan v. Hosseini Bibi, (1888) 15 Cal 684, 15 IA 81, and distinguishing Charles James Spong v. Charles Alfred Spong, (1914) 18 CLR 544, (High Court of Australia) and Linderstam v. Barnett, (1915) 19 CLR 528. 11 Ram Sumran Prasad v. Govind Das, (1926) 5 Pat 646, AIR 1926 Pat 582, 99 IC 782. 12 In re Coomber, Coomber v. Coomber, [1911] 1 Ch 723 at 730. 13 Lancashire Loans Ltd. v. Black, [1934] 1 KB 380 at 413, [1933] All ER Rep 201 at 213. 14 S Rathnam Naidu v. Kanni Ammal, AIR 1972 Mad 413. 15 Rajamani Ammal v. Bhoorasami Padayachi, AIR 1974 Mad 36; MA Abdul Malick Saheb v. TP Muhammad Yousuf Sahib, AIR 1961 Mad 190, (1960) 2 Mad LJ 355. 16 Kessowji Tulsidas v. Hurjivan Mulji, (1887) ILR 11 Bom 566; Rangnath Sakharam v. Govind Narasirv, (1904) ILR 28 Bom 639. 17 Karnal Distillery Co. v. Ladli Parsad Jaiswal, AIR 1958 Punj 190; Krishna Mohan Kul v. Pratima Maity, AIR 2003 SC 4351, (2004) 9 SCC 468. 18 Jean Mackenzie v. Royal Bank of Canada, AIR 1934 PC 210 (independent advice before transaction. Advice after event is of no value. Also no presumption of undue influence for wife). Kalyan Mal v. Ahmad Uddin Khan, AIR 1934 PC 208. 19 Ranee Annapumi Nachiar v. Swaminatha Chettiar, (1910) 34 Mad 7 at 10. 20 Raghunath Mulchand v. Varjivandas Madanji, (1906) ILR 30 Bom 578.
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21 Liles v. Terry, [1895] 2 QB 679, [1895-99] All ER Rep 1018(CA) ; Raja Papamma Row v. Cherukuvada Sitaramyya, (1895) 5 Mad LJ 233, and Vasireddi Bala Chendra Sekhra Vara Prasada Bahadur Garu v. Unnava Subbaya Garu, AIR 1930 Mad 317, (1929) 120 IC 882. 22 Wright v. Carter, [1903] 1 Ch 27, [1900-03] All ER Rep 706. 23 Shamaldhone Dutt v. Lakshimani Debi, (1908) 36 Cal 493. 24 Karnal Distillery Co. v. Ladli Prasad Jaiswal, AIR 1958 Punj 190. 25 Bhola Ram Lieri v. Peari Devi, AIR 1962 Pat 168. 26 Jugal Kishore Narain Singh v. Charoo Chandra Sur, AIR 1939 PC 159, 42 Bom LR 1055, 181 IC 341. 27 Mitchell v. Homfray, [1881] 8 QBD 587. 28 Maria Eduaria Apolonia Gonsalves Mesquita v. Shripad VishnuKamat Tarcar, AIR 1998 Bom 46. 29 Ashok Kumar v. Gaon Sabha, AIR 1981 All 222. 30 Tara Kumari v. Chandra Mauleshwar Prasad Singh, (1931) 58 IA 450, AIR 1931 PC 303, 34 Bom LR 222, 134 IC 1076. 31 Journal of Comparative Legislation, December 1901, p. 252, 257-58. 32 Parda means 'veil'. 33 Hussaina Bai v. Zohra Bai, AIR 1960 MP 60; Rabiya v. Ali Hussain, AIR 2009 Uttarakhand 37. 34 Sonia Parshini v. Sheikh Moula Baksha, AIR 1955 Cal 17. 35 Amir Alam v. Bibi Salma, AIR 1952 Pat 19; Kairum Bi v. Mariam Bi, AIR 1960 Mad 447. 36 Kharbuja Kuer v. Jangbahadur Rai, [1963] 1 SCR 456, AIR 1963 SC 1203 at 1206; followed in Miti Bewa v. Daitari Nayak, AIR 1982 Ori 174. 37 Kali Bakhsh Singh v. Ram Gopal Singh, (1913) 41 IA 23 at 29, [1913] 36 All 81 at 89, 21 IC 985; Farid-un-Nisa v. Munshi Mukhtar Ahmad, (1925) 52 IA 342, 89 IC 649, AIR 1925 PC 204; Mahomed Ibrahim v. Umatullah Jan 39 IC 798, AIR 1919 Lah 168, AIR 1919 Lah 168; Bibi Saleha v. Md Zakariya Khan, AIR 1950 Pat 247. 38 Moonshee Bazloor Ruheem v. Shumsoonnissa Begum, (1867) 11 MIA 551, (a mortgage of property belonging to male and female members of a Mahommedan family by the males does not operate as a transfer of the interest of the females because the management of the properties is left in the hands of the males); Azima Bibi v. Shamalanand, (1912) ILR 40 Cal 378,(PC) . 39 Geresh Chunder Lahoree v. Bhuggobutty Debia, (1870) 13 MIA 419 at 431; Sudisht Lal v. Mussamut Sheobarat Koer, (1881) IA 39, (1881) 7 Cal 245; Behari Lal v. Habiba Bibi, (1886) 8 All 267; Annoda Mohun Rai v. Bhuban Mohini Debi, (1901) 28 IA 71, (1901) 28 Cal 546; Kali Bakhsh Singh v. Ram Gopal Singh, (1913) 41 IA 23, (1931) 36 All 81, 21 IC 985; Tara Kumari v. Chandra Mauleshwar Prasad Singh, (1931) 58 IA 450, AIR 1931 PC 303, 34 Bom LR 222, 134 IC 1076; Badiatannessa Bibi v. Ambica Charan Ghose, AIR 1914 Cal 223, 23 IC 401. 40 Kuma Dei v. Md Abdul Latif, AIR 1994 Ori 111; Sonia Parshini v. Sheikh Moula Baksha, AIR 1955 Cal 17. 41 Shambati Koeri v. Jago Bibi, (1902) 29 IA 127, (1902) 29 Cal 749; Mirza Sajjad Husain v. Nawab Wazir Ali Khan, (1912) 39 IA 156; Kali Bakhsh Singh v. Ram Gopal Singh, (1913) 41 IA 23, (1913) 36 All 81, 21 IC 985; Sri Kishan Lal v. Kashmiro, AIR 1916 PC 172, (1916) 14 All LJ 1236, 34 IC 37(PC) ; Sumsuddin Goolam Husein v. Abdul Husein Kalimuddin, (1906) 31 Bom 165. 42 Farid-un-Nisa v. Munshi Mukhtar Ahmad, (1925) 52 IA 342, 89 IC 649, AIR 1925 PC 204; followed in Ram Sundar Saha v. Kali Narain Sen Choudhary, (1927) 55 Cal 285, AIR 1927 Cal 889, 104 IC 527; S K Abdul Mannan v. Mutwalli of Janebali, AIR 1956 Cal 584; Hem Chandra Roy Choudhury v. Suradhani Debya Choudharani, (1940) 2 Cal 436, AIR 1940 PC 134, 67 IA 309. 43 Ashgar Ali v. Delroos Banoo Begum, (1877) 3 Cal 324, (tauliatnama executed by a Mahomadan lady on the false representation that the effect of the document was what she desired); Mariam Bibi v. Sakina, (1892) 14 All 8; Achhan Kuar v. Thakur Das, (1895) 17 All 125; Hoti Lal v. Musammat, (1903) Punj Rec No 77. 44 Hussaina Bai v. Zohra Bai, AIR 1960 MP 60, (it appears that the executant's language was not Hindi in which the document was written). 45 Inche Noriah Binte Mohamed Tahir v. Shaik Allie Bin Omar Bin Abdullah Bahashnan, [1929] AC 127, AIR 1929 PC 3, [1928] All ER Rep 189; Mahboob Khan v. Hakim Abdul Rahim, AIR 1964 Raj 250; Lakshmi Doss v. Roop Laul,
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(1906) 30 Mad 169. 46 Sunitibala Debi v. Dhara Sundari Debi Choudhurari, (1919) 46 IA 272, AIR 1919 PC 24 per Lord Buckmaster at 278; Pattu Kumari Bibi v. Nirmal Kumar Singh Nawlakha, AIR 1939 Cal 569, 43 CWN 907, 185 IC 691. 47 (1913) 41 IA 23, 36 All 81 at 91-92, 21 IC 985;, (in this case the Privy Council upheld a gift by a pardanashin woman of about one half of her estate to her paramour's son on the ground that there was no influence). 48 (1888) 15 Cal 684, 15 IA 81, (in this case the charge of undue influence was descredited by being made as an after thought and not by the lady herself who was the original plaintiff, but by her representative after her death); Barkatun-nissa Begum v. Debi Bakhsh 101 IC 29, AIR 1927 PC 84; Lala Kundan Lal v. Musharrafi Begum, (1936) 63 IA 326, 11 Luck 346, 163 IC 156, AIR 1936 PC 207. 49 Bank of Khulna Ltd. v. Jyoti Prokash Mitra, (1940) 67 IA 377, AIR 1940 PC 147. 50 Shaik Ismail v. Amirbibi, (1902) 4 Bom LR 146 at 148. 51 Ismail Mussajee Mookerdam v. Hafiz Boo, (1906) 33 Cal 773 at 783, (1906) 33 IA 86; Shaik Ismail v. Amirbibi, (1902) 4 Bom LR 146; Mahabir Saha v. Haripada Saha, AIR 1982 Cal 353. 52 Hodges v. Delhi and London Bank, (1900) 23 All 137 at 145, (1901) 27 IA 168 at 175-6; applied in Sonia Parshini v. Sheikh Moula Baksha, AIR 1955 Cal 17. 53 Bhupendrakumar R Parikh v. MK Lahhmi, AIR 1990 Mad 46 at 55. 54 Sathi Sattema v. Sathi Subbi Reddy, AIR 1963 AP 72. 55 Sri Ram v. Nand Kishore, AIR 1925 Lah 196(2); Kairum Bi v. Mariam Bi, AIR 1960 Mad 447 at 449-50. 56 Shaik Ismail v. Amirbibi, (1902) 4 Bom LR 146. 57 Hans Raji v. Yosodanand, AIR 1996 SC 761, (1996) 7 SCC 122. 58 Life Insurance Corpn of India v. Nandarani Dassi, AIR 1970 Cal 200. 59 Suraj Prasad v. Makhna Devi, AIR 1946 All 127. 60 AIR 1946 All 127, 131. 61 Badiatannessa Bibi v. Ambica Charan Ghose, AIR 1914 Cal 223, 23 IC 401, approved and followed by the Privy Council in Tungabai Bhratar Purushottam Shamji Kumbhojkar v. Yeshvant Dinkar Jog, (1945) 71 IA 184, AIR 1945 PC 8, (1945) Bom 189, 47 Bom LR 242, 220 IC 362, (1944) 2 Mad LJ 350; The doctrine is not confined to documents executed by pardanashin women: it is based upon the principle that a third party who benefits under the deed, and entrusts it to a husband to obtain his wife's signature, cannot escape the consequences of the husband's misrepresentation or duress exercised by him in securing his wife's signature; Bank of Montreal v. Stuart, [1911] AC 120,(PC) . 62 Tara Kumari v. Chandra Mauleshwar Prasad Singh, (1931) 58 IA 450, AIR 1931 PC 303, 34 Bom LR 222, 134 IC 1076; Valluri Ramanamma v. Marina Viranna, AIR 1931 PC 100, (1931) 33 Bom LR 960, 131 IC 401, (independent advice); Nawab Sikander Begam v. Zulfikar Wali Khan, AIR 1938 PC 38, (1938) 40 Bom LR 697, 172 IC 720, (independent advice); People's Bank of Northern India Ltd. v. Main Ghulam Jan, AIR 1938 PC 276, (1938) 2 Mad LJ 902, 176 IC 773, (independent explanation); Lachhmeshwar Sahai v. Moti Rani Kunwar, AIR 1939 PC 157, 41 Bom LR 1068, 43 CWN 729, 181 IC 359, (mistaken view of deed); Hem Chandra Roy Choudhury v. Suradhani Debya Choudharani, (1940) 2 Cal 436, AIR 1940 PC 134, 67 IA 309, (effect of whole document must be understood); Bank of Khulna Ltd. v. Jyoti Prokash Mitra, (1940) 67 IA 377, AIR 1940 PC 147, (execution of deed must be result of conscious act); Karunamoyee Debi v. Maya Moyi Debi, AIR 1948 Cal 84; Maiyan Dalip Rajeshwari Debi v. Sri 5 Mohan Bikram Sah, (1945) All 315, AIR 1945 All 409; Amir Alam v. Bibi Salma, AIR 1952 Pat 19, (must understand the nature of the document and its effect on her); Ashok Kumar v. Gaon Sabha, AIR 1981 All 222. 63 Kanwarani Madna Vati v. Raghunath Singh, AIR 1976 HP 41 at 44; relying on Sonia Parshini v. Sheikh Moula Baksh, AIR 1955 Cal 17 at 19; but see Hodges v. Delhi and London Bank, (1900) 23 All 137, (1900) 27 IA 168. 64 Kartari v. Kewal Krishan, AIR 1972 HP 117. 65 Ashok Kumar v. Gaon Sabha, AIR 1981 All 222. 66 Krishna Mohan Kul v. Pratima Maity, AIR 2003 SC 4351, (2004) 9 SCC 468. 67 Daya Shankar v. Bachi, AIR 1982 All 376 at 381-82. 68 Mirza Fida Rasul v. Mirza Yakub Beg, AIR 1925 PC 101 at 102.
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69 Mahomed Buksh Khan v. Hosseini Bibi, (1888) 15 Cal 684, 15 IA 81 at 92. 70 Elias Saleh Mohaemed Sait v. Khanmull, AIR 1959 Mys 102. 71 Satgur Prashad v. Har Narain Das 59 IA 147, AIR 1932 PC 89; Ladli Parshad Jaiswal v. Karnal Distillery Co. Ltd., [1964] 1 SCR 270, AIR 1963 SC 1279; Afsar Shaikh v. Soleman Bibi, [1976] 2 SCR 327, AIR 1976 SC 163 at 168. 72 Karnal Distillery Co. Ltd. v. Ladli Parsad Jaiswal, AIR 1958 Punj 190 at 204 reversed on another point Ladli Parshad Jaiswal v. Karnal Distillery Co. Ltd., [1964] 1 SCR 270, AIR 1963 SC 1279, referring to Pollock on Contract, 12th edn, p. 494. 73 Sundarambal Ammal v. Yogavanagurukkal, AIR 1915 Mad 561; Bejoy Singh Dudhuria v. Kumudi Kanta Talukadar, AIR 1919 Cal 414 at 416; Santhappa Rai v. Santhiraja, AIR 1938 Mad 426 at 428; Ram Chandra Singh v. Basdeo Singh, AIR 1982 All 437. 74 Vinayakappa Suryabhanappa Dahenkar v. Dulichand Hariram Murarka, AIR 1986 Bom 193. 75 Permanent Trustee Company New South Wales v. Francis Henry Bridgewater, AIR 1937 PC 14 at 18, (1937) 2 Mad LJ 87; Kokil Chand Ram v. Banbahadur Singh, AIR 1926 Pat 539; Santhappa Rai v. Santhiraja, AIR 1938 Mad 426 at 428; Sonia Parshini v. Sheikh Moula Baksha, AIR 1955 Cal 17 at 21. 76 Hugh O'Rorke v. John Joseph Bolingbroke, [1878] 2 AC 814, (a case of expectant heirs against the consequences of their not being on equal terms with the buyer). 77 Bhimbhat v. Yeshwantrao, (1901) ILR 25 Bom 126 at 128. 78 Sadashiv Bhaskar Joshi v. Dhakubai, (1880) ILR 5 Bom 450 at 369. 79 P Saraswathi Ammal v. Lakshmi Ammal, AIR 1978 Mad 361 at 369. 80 Bellachi v. Pakeeran, AIR 2009 SC 3293; A V Palanivelu Mudaliar v. Neelavathi Ammal, AIR 1937 PC 50, (1937) 39 Bom LR 720, 167 IC 5; Venkatrama Aiyer v. Krishnammal 99 IC 571, AIR 1927 Mad 255, (1927) 52 Mad LJ 20; Raja Shiba Prasad Singh v. Tincouri Banerji, AIR 1939 Pat 477; Abbasunnisa v. Nisar Fatma, AIR 1946 All 121; Arnold Dominic Rodricks v. Sunder Vinayak Navalkar, AIR 1956 Bom 404; Hajra Bai v. Jadavbai, AIR 1986 MP 106. 81 Reshmi v. Ghungaria, AIR 1952 HP 20; Ram Kalap Pande v. Bansidhar, AIR 1947 Oudh 89 at 91, 227 IC 9; Karuppayee Ammal v. Karuppiah Pillai, (1987) 2 Mad LJ 138 at 148; Ladli Parshad Jaiswal v. Karnal Distillery Co. Ltd., [1964] 1 SCR 270, AIR 1963 SC 1279 at 1290. 82 Sanwal Das v. Kuremal, AIR 1928 Lah 224; Kotumal Mohandas v. Dur Mahomed, AIR 1931 Sind 78; Reshmi v. Ghungaria, AIR 1952 HP 20; Elias Saleh Mohaemed Sait v. Khanmull, AIR 1959 Mys 102 at 104; Sathi Sattema v. Sathi Subbi Reddy, AIR 1963 AP 72. 83 Raghunath Prasad Sahu v. Sarju Prasad Sahu, (1923) 51 IA 101, AIR 1924 PC 60, (1923) 3 Pat 279, (1923) 82 IC 817; Subhas Chandra Das Mushib v. Ganga Prosad Das Mushib, [1967] 1 SCR 331, AIR 1967 SC 878 at 880; Ladli Parshad Jaiswal v. Karnal Distillery Co. Ltd., [1964] 1 SCR 270, AIR 1963 SC 1279 at 1290; Sanwal Das v. Kuremal, AIR 1928 Lah 224; Tulsiram Khirchand Parwar v. Chunnilal Panchansao Parwar, AIR 1938 Nag 391; Santhappa Rai v. Santhiraja, AIR 1938 Mad 426. 84 Reshmi v. Ghungaria, AIR 1952 HP 20 at 22. 85 Poosathurai v. Kannappa Chettiar, (1919) 47 IA 1, AIR 1920 PC 65 at 66, 43 Mad 546, 55 IC 447; Ladli Parshad Jaiswal v. Karnal Distillery Co. Ltd., [1964] 1 SCR 270, AIR 1963 SC 1279; Sher Singh v. Pirthi Singh, AIR 1975 All 259, (rustic villager). 86 Habeeb Khan v. Valasula Devi, AIR 1997 AP 53. 87 M A Abdul Malick Saheb v. T P Muhammad Yousuf Sahib, AIR 1961 Mad 190, (1960) 2 Mad LJ 355. 88 Subhas Chandra Dos Mushib v. Ganga Prasad Das Mushib, [1967] 1 SCR 331, AIR 1967 SC 878 at 881. 89 Tungabai Bhratar Purushottam Shamji Kumbhojkar v. Yeshvant Dinkar Jog, (1945) 71 IA 184, AIR 1945 PC 8, (1945) Bom 189, 47 Bom LR 242, 220 IC 362, (1944) 2 Mad LJ 350. 90 Per Lord Macnaghten in Mahomed Buksh Khan v. Hosseini Bibi, (1888) 15 Cal 684 at 698-700, 15 IA 81 at 92-93; Thrasia v. Varkey Mathai, AIR 1951 TC 42; Karunamoyee Debi v. Maya Moyi Debi, AIR 1948 Cal 84; Bandarupalli Mastanamma v. Ganguri Adinarayana, AIR 1966 AP 104. 91 Tribhuvan Datt v. Someshwar Datt, AIR 1931 Oudh 34 at 38, 130 IC 119. 92 Santhappa Rai v. Santhiraja, AIR 1938 Mad 426.
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93 Suraj Bakhsh Singh v. Ajudhiya Singh, AIR 1928 Oudh 330 at 333. 94 P Saraswathi Ammal v. Lakshmi Ammal, AIR 1978 Mad 361 at 366. 95 Karnal Distillery Co. Ltd. v. Ladli Parsad Jaiswal, AIR 1958 Punj 190, (presumption may also cover other transactions). 96 Maria Eduaria Apolonia Gonsalves Mesquita v. Shripad Vishnu Kamat Tarcar, AIR 1998 Bom 46. 97 Manali Singhal v. Ravi Singhal, AIR 1999 Del 156. 98 Zubeda Begum v. Syed Shah Khursheed Ahmed Hashmi, (1997) 9 SCC 324, (the registrar was examined in the court); Bellachi v. Pakeeran, AIR 2009 SC 3293, (registration raises a presumption that the document was duly executed). 99 Gajadhar Marwari v. Baidyanath Mandal, AIR 1950 Pat 379. 1 Subas Chandra Das Mushib v. Ganga Prasad Das Mushib, [1967] 1 SCR 331, AIR 1967 SC 878 at 881; Shanti Budhiya Vesta Patel v. Nirmala Jayprakash Tiwari, AIR 2010 SC 2132, (2010) 5 SCC 104. 2 Ballo v. Paras Ram, AIR 1972 HP 33. 3 Afsar Shaikh v. Soleman Bibi, [1976] 2 SCR 327, AIR 1976 SC 163 at 167; Talengala Narayana Bhatta v. Narasimha Bhatta, AIR 1965 Ker 189; Raghunath Altia v. Arjuno Altia, AIR 1973 Ori 76; Syed Sultan Pai v. Syed Bikhu Saheb, AIR 1986 AP 342 at 344; Gauri Shankar Misra v. Fakir Mohan Dash, AIR 1989 Ori 201. 4 Gauri Shankar Misra v. Fakir Mohan Dash, AIR 1989 Ori 201; Vithoba v. Bhangi, AIR 1928 Nag 322; Sheocharan v. Channulal, AIR 1931 Nag 63; Karnal Distillery Co. Ltd. v. Ladli Parsad Jaiswal, AIR 1958 Punj 190. 5 Manbhari v. Sri Ram 165 IC 240, AIR 1936 All 672; Rash Behari Naskar v. Haripada Naskar, AIR 1934 Cal 762 at 763, 59 Cal LJ 387, 152 IC 561. 6 Thakkadi Syed Mohamed v. Ahmed Fathummal, AIR 1973 Mad 302 at 305. 7 Ram Chandra Singh v. Basdeo Singh, AIR 1982 All 437. 8 Raghunath Rai v. Ram Janki Jugal Sarkar, AIR 1964 Pat 284. 9 Kanwarani Madna Vati v. Raghunath Singh, AIR 1976 HP 41 at 49. 10 Manirajan Pillai v. K K Karunakaran Nair, AIR 2011 Ker 55. 11 (1953) 90 CLR 113 at 134-35; Moody v. Cox and another, [1917] 2 Ch 71 at 80, [1916-17] All ER Rep 548. 12 Haskew v. Equity Trustees, Executors & Agency Co. Ltd., (1918) 27 CLR 231. 13 Jenyns v. Public Curator, (1953) 90 CLR 113 at 134-135; Moody v. Cox and another, [1917] 2 Ch 71 at 80, [1916-17] All ER Rep 548. 14 Raja Shiba Prasad Singh v. Tincouri Banerji, AIR 1939 Pat 477. 15 Karam Chand Thapar & Bros Pvt Ltd. v. AB Gujaral, AIR 1986 SC 1202, (1986) 3 SCC 334 at 337. 16 Lakshmi Doss v. Roop Laul, (1906) 30 Mad 169. 17 Allcard v. Skinner, (1887) 36 Ch D 145 at 181-82, 186, [1886-90] All ER Rep 90; Wright v. Vanderplank, (1856) 8 DM & G 133, 114 RR 60, (1855) 2 K & J 1, (donor had died). 18 (1887) 36 Ch D 145, [1886-90] All ER Rep 90. 19 Joseph Zacharia v. Joseph Kuriakose, AIR 1992 Ker 103 at 105. 20 Lingo Bhimrao Naik v. Dattatraya Shripad Jamadagni, AIR 1938 Bom 97, 39 Bom LR 1233. 21 Rangnath Sakharam v. Govind Narasinv, (1904) 28 Bom 639 per Jenkins CJ. 22 Lakshmi Doss v. Roop Laul, (1906) 30 Mad 169 at 178; Manbhari v. Sri Ram 165 IC 240, AIR 1936 All 672. 23 M Venkatasubbaiah v. M Subbamma, AIR 1956 AP 195 at 197; Natha Ram v. Sohan Devi, AIR 1949 EP 277. 24 Kotumal Mohandas v. Dur Mahomed, AIR 1931 Sind 78; Thakar Singh v. Uttam Kumar, AIR 1929 Lah 295 at 304. 25 Ram Sahai v. Bhagwan Din, AIR 1936 Oudh 105, (but relief was refused on the ground of delay).
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26 Shailesh Chandra Guha v. Bechari Gope, AIR 1925 Cal 94. 27 Govind v. Savitri, (1918) 20 Bom LR 911, AIR 1918 Bom 93; the Indian Trusts Act, 1882, s. 88;Shravan Goba v. Kashiram Devji, (1926) 51 Bom 133, 29 Bom LR 115, 100 IC 932, AIR 1927 Bom 384; Rash Behari Naskar v. Haripada Naskar, AIR 1934 Cal 762, 59 Cal LJ 387, 152 IC 561; Manbhari v. Sri Ram, AIR 1936 All 672, (1936) All LJ 1215. 28 Badiatannessa Bibi v. Ambicar Charan Ghose, AIR 1914 Cal 223, 23 IC 401. 29 Poosathurai v. Kannappa Chettiar, (1919) 47 IA 1, AIR 1920 PC 65 at 66-67, 43 Mad 546 at 549, 55 IC 447, (but no proof of conspiracy or agency was given in the case). 30 Ibid. 31 Avon Finance Co. Ltd. v. Bridger, [1985] 2 All ER 281; Kingsnorth Trust Ltd. v. Bell, [1986] 1 WLR 119, [1986] 1 All ER 423; Bank of Credit & Commerce International SA v. Aboody, [1990] 1 QB 923 at 969, [1992] 4 All ER 955, [1989] 2 WLR 759 at 783, (CA); but see Barclays Bank plc v. O'Brien, [1994] 1 AC 180, [1993] 4 All ER 417,(HL), (the agency approach is often artificial on facts); Coldunell Ltd. v. Gallon, [1986] 1 QB 1184, [1986] 1 All ER 429, (enforcing party in direct communication with the other party by letter, and recommending the other party to take independent advice). 32 Bank of Credit & Commerce International SA v. Aboody, [1990] 1 QB 923, [1992] 4 All ER 955, [1989] 2 WLR 759 at 783, (CA). 33 The Indian Trusts Act, 1882, s. 89. 34 Barclays Bank plc v. O'Brien, [1994] 1 AC 180, [1993] 4 All ER 417, (constructive notice). 35 Dubash DK Ahmad Ibrahim Sahib v. A K R M K Meyyappa Chettiar, AIR 1940 Mad 285, (a case of guardian making his ward a partner in business); Narayandoss Balkrishna Doss v. Bucharaj Chordia Sowcar 106 IC 315, AIR 1928 Mad 6 at 13, (1927) 53 Mad LJ 842; Lancashire Loans Ltd. v. Black, [1934] 1 KB 380, [1933] All ER Rep 201; A L Rama Patter & Bros v. Manikkam, (1934) 58 Mad 454, AIR 1935 Mad 726, 69 Mad LJ 104; The Indian Trusts Act, s. 89;Turnbull & Co. v. Duval, [1902] AC 429, [1900-03] All ER Rep Ext 1229. 36 Narayandoss Balkrishna Doss v. Bucharaj Chordia Sowcar, AIR 1928 Mad 6, 53 Mad LJ 842, 106 IC 315. 37 See s. 89 of the Indian Trusts Act, 1882;Bridgeman v. Green, (1755) Wilmot 58; Lingo Bhimrao Naik v. Dattatraya Shripad Jamadagni, AIR 1938 Bom 97 at 106, 39 Bom LR 1233. 38 Tungabai Bhratar Purushottam Shamji Kumbhojkar v. Yeshvant Dinkar Jog, (1945) 71 IA 184, AIR 1945 PC 8, (1945) Bom 189, 47 Bom LR 242, 220 IC 362, (1944) 2 Mad LJ 350, (mortgage by wife of her stridhan as security for debts of her husband). 39 Lingo Bhimrao Naik v. Dattatraya Shripad Jamadagni, AIR 1938 Bom 97, 39 Bom LR 1233; Tungabai bhratar Purushottam Shamji Kumbhojkar v. Yeshvant Dinkar Jog, (1945) 71 IA 184, AIR 1945 PC 8 at 10, (1945) Bom 189, 47 Bom LR 242, 220 IC 362, (1944) 2 Mad LJ 350, applying Lancashire Loans Ltd. v. Black, [1934] 1 KB 380, [1933] All ER Rep 201; Dubash DK Ahmad Ibrahim Sahib v. AKRMK Meyyappa Chettiar, AIR 1940 Mad 285. 40 Narayandoss Balkrishna Doss v. Bucharaj Chordia Sowcar, AIR 1928 Mad 6, 53 Mad LJ 842, (106) IC 315; Dubash DK Ahmad Ibrahim Sahib v. AKRMK Meyyappa Chettiar, AIR 1940 Mad 285. 41 O'Sullivan v. Management Agency and Music Ltd., [1985] QB 428, [1985] 3 All ER 351,(CA) . 42 A L Rama Patter & Bros v. Manikkam, (1934) 58 Mad 454, AIR 1935 Mad 726, 69 Mad LJ 104. 43 Dubash DK Ahmad Ibrahim Sahib v. AKRMK Meyyappa Chettiar, AIR 1940 Mad 285. 44 A L Rama Patter & Bros v. Manikkam, (1934) 58 Mad 454, AIR 1935 Mad 726, 69 Mad LJ 104. 45 Bank of Baroda v. Shah, [1988] 3 All ER 24. 46 MA Abdul Malick Saheb v. TP Muhammad Yousuf Sahib, AIR 1961 Mad 190, (1960) 2 Mad LJ 355 relying on Bainbridge v. Browne, (1881) 18 Ch D 188. 47 For comments on the various surety-wife cases: SM Cretney,[1992] 108 LQR 534; Fehlberg,(1994) 57 MLR 467; Lehane,[1994] 110 LQR 167; SH Goo,(1995) 15 OJLS 119; Chandler,[1995] 111 LQR 51; Bigwood,(1996) 16 OJLS 503; Fehlberg,(1996) 59 MLR 675; Tjio,[1997] 113 LQR 10, Gardner,[1999] 115 LQR 1; Price,[1999] 115 LQR 8. 48 [1994] 1 AC 180, [1993] 4 All ER 417,(HL) . 49 [1993] 4 All ER 417 (HL) per Lord Browne-Wilkinson at 429. 50 Barclay's Bank plc v. O'Brien, [1994] 1 AC 180, [1993] 4 All ER 417,(HL) per Lord Browne-Wilkinson at 431.
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51 Avon Finance Co. Ltd. v. Bridger, [1985] 2 All ER 281, (parents providing security for the debts of their adult son); Royal Bank of Scotland v. Etridge, (No 2), [1998] 4 All ER 705 per Stuart Smith LJ at 719. 52 Credit Llyonnais Bank Nederland SA v. Burch, [1997] 1 All ER 144, (3 junior employee committed herself to a liability far beyond her means in a guarantee unlimited inpoint of time and amount and a charge over her flat to help a company in which she had no financial interest). 53 Banco Exterior Internacional SA v. Thomas, [1997] 1 All ER 46. 54 [1994] 1 AC 180, [1993] 4 All ER 417,(HL) . 55 [1994] 1 AC 200, [1993] 4 All ER 433. 56 [1995] 2 FLR 325. 57 [2001] UKHL 44, [2001] 4 All ER 449, [2001] 3 WLR 1021. 58 (1939) 63 CLR 649. 59 Yerkey v. Jones, (1939) 63 CLR 649 at 675-676 and 688-689; Howes v. Bishop, [1909] 2 KB 390, [1908-10] All ER Rep Ext 1299; Talbot v. Von Boris, 27 TLR 266, [1911-13] All ER Rep Ext 1663; Midland Bank plc v. Shephard, [1988] 3 All ER 17; cf Cresswell v. Potter, [1978] 1 WLR 255 and Backhouse v. Backhouse, [1978] 1 All ER 1158, [1978] 1 WLR 243. 60 (1939) 63 CLR 649. 61 [1994] 1 AC 180, [1993] 4 All ER 417 at 427-28. 62 [1998] 194 CLR 395, (1998) 155 ALR 614. 63 (1939) 63 CLR 649. 64 [1994] 1 AC 180, [1993] 4 All ER 417 at 427-28. 65 See s. 64 below for liability of restitution. 66 Capper,[1998] 114 LQR 479; referring to Birks and Chin, 'On the Nature of Undue Influence' in Good Faith and Fault in Contract Law, (ed Beatson and Friedmann), 1995. 67 (1965) 55 DLR, (2d) 710 at 713; referred in Commercial Bank of Australia Ltd. v. Amadio, (1983) 151 CLR 447. 68 (1983) 151 CLR 447. 69 (1983) 151 CLR 447 at 461. 70 David Capper, Undue Influence and Unconscionability: A Rationalisation,[1998] 114 LQR 479 and other writings referred in it. 71 Multiservice Bookbinding Ltd. v. Marden, [1979] Ch 84, [1978] 2 All ER 489; Alec Lobb, (Garages) Ltd. v. Total Oil, (G B) Ltd., [1983] 1 WLR 87, partly reversed in, [1985] 1 All ER 303, [1985] 1 WLR 173. 72 [1983] 1 WLR 87 per Millett QC at 94-95. 73 National Westminster Bank plc v. Morgan, [1985] AC 686, [1985] 1 All ER 821; Pao On v. Lau Yiu, [1980] AC 614, [1979] 3 All ER 65. 74 Halsbury's Laws of England, Vol. 16(2), 4th edn. Reissue, 2003, EQUITY, para 429. 75 Earl of Aylesford v. Morris, (1873) 8 Ch App 484 at 490-91, [1861-73] All ER Rep 300; Hart v. O'Connor, [1985] AC 1000, [1985] 2 All ER 880,(PC) . The view of Lord Denning in Lloyd's Bank Ltd. v. Bundy, [1975] QB 326 at 339, [1974] 3 All ER 757 at 765, [1974] 3 WLR 501,(CA) and in Arrale v. Costain Civil Engineering Ltd., [1976] 1 Lloyd's Rep 98,(CA), that there is a general principle that English courts will grant relief where there is 'inequality of bargaining power' can no longer be supported: National Westminster Bank plc v. Morgan, [1985] AC 686, [1985] 1 All ER 821,(HL) ; Alec Lobb, (Garages) Ltd. v. Total Oil, (G B) Ltd., [1985] 1 All ER 303, [1985] 1 WLR 173,(CA) . 76 Borell v. Dann, (1843) 2 Hare 440; Harrison v. Guest, (1860) 8 HL Cas 481, [1843-60] All ER Rep 797; White and Carter, (Councils) Ltd. v. McGregor, [1962] AC 413 at 445, [1961] 3 All ER 1178 at 1193, (HL) per Lord Hodson, ('it is trite that equity will not rewrite an improvident contract where there is no disability on either side'); Multiservice Bookbinding Ltd. v. Marden, [1979] Ch 84, [1978] 2 All ER 489; Hart v. O'Connor, [1985] AC 1000 at 1018, [1985] 2 All ER 880 at 887, (PC) per Lord Brightman, ('equity will not relieve a party from a contract on the ground only that there is contractual imbalance not amounting to unconscionable dealing'). As to inadequacy of consideration in bargains with expectant heirs, see para 674 post.
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77 Earl of Aylesford v. Morris, (1873) 8 Ch app 484 at 490, [1861-73] All ER Rep 300; Fry v. Lane, Re Fry, Whittet v. Bush, (1888) 40 Ch D 312 at 324, [1886-90] All ER Rep 1084. 78 Heathcote v. Paignon, (1787) 2 Bro CC 167; Gibson v. Jeyes, (1801) 6 Ves 266 per Lord Eldon at 273- 74, [1775-1802] All ER Rep 325 at 328, ('inadequacy of consideration so gross as to shock the conscience of any man who heard the terms'); Coles v. Trecothick, (1804) 9 Ves 234 at 246, [1803-13] All ER Rep 14; Underhill v. Horwood, (1804) 10 Ves 209, [1803-13] All ER Rep 122; Cockell v. Taylor, (1852) 15 Beav 103; Tennent v. Tennent, (1870) LR 2 Sc & Div 6; Hart v. O'Connor, [1985] AC 1000 at 1018, [1985] 2 All ER 880 at 887, (PC) per Lord Brightman, ('contractual imbalance may be so extreme as to raise a presumption of procedural unfairness, such as undue influence or some other form of victimisation'). 79 Multiservice Bookbinding Ltd. v. Marden, [1979] Ch 84 at 110, [1978] 2 All ER 489 at 502 per Browne-Wilkinson J; Alec Lobb, (Garages) Ltd. v. Total Oil, (GB) Ltd., [1985] 1 All ER 303, [1985] 1 WLR 173,(CA) . 80 Louth v. Diprose, (1992) 175 CLR 621 per Toohey J. in the conclusions. 81 Commercial Bank of Australia Ltd. v. Amadio, (1983) 151 CLR 447. 82 (1983) 151 CLR 447; relying upon Blomley v. Ryan, (1954) 99 CLR 362; Louth v. Diprose, (1992) 175 CLR 621. 83 (1983) 151 CLR 447 per Deane J at p. 474. 84 See generally 17 A Am Jur 2d Contracts, 295 and 509; UCC 2-302; Restatement 2d 208; Fansworth, Contracts, 3rd edn, pp 307-61, 4.28. 85 Fansworth, Contracts, 3rd edn, p. 312. 86 350 F 2rd 445, (DC Cir 1965). 87 UNIDROIT Principles: comment below Art. 3.10. 88 UNIDROIT Principles Art. 3.14-3.18. 89 The Law Commission of India, 13th report, 1958, para 41. 90 (1912) 36 Mad 533, 22 IC 769. 91 [1986] 2 SCR 278, AIR 1986 SC 1571, (1986) 3 SCC 156, see s. 23: 'Inequality of bargaining power and public policy'; the dissenting judgment of Sankaran Nair J in Shaikh Mohd Rawther v. BISN Co., (1909) 32 Mad 95 opining that s. 23 could hit exemption clauses. 92 AIR 1986 SC 1571 at 1611; See also Dai-ichi Karkaria Pvt Ltd. v. Oil & Natural Gas Commission, AIR 1992 Bom 309, (economic duress). 93 AIR 1986 SC 1571 at 1611. 94 AIR 1986 SC 1571 at 1613. 95 The 103rd Report of the Law Commission of India, 1984. 1 Chapter IV A Section 67A:, (1) Where the court, on the terms of the contract or on the evidence adduced by the parties, comes to the conclusion that the contract or any part of it is unconscionable, it may refuse to enforce the contract or the part that it holds to be unconscionable. (2) Without prejudice to the generality of the provisions of this section, a contract or part of it is deemed to be unconscionable if it exempts any party thereto from--(a) the liability for wilful breach of the contract, or, (b) the consequences of negligence.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER II Of Contracts, Voidable Contracts and Void Agreements/S. 17.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER II Of Contracts, Voidable Contracts and Void Agreements
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S. 17. 'Fraud defined'.-'Fraud' means and includes any of the following act s committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract: (1) (2) (3) (4) (5)
the suggestion, as a fact, of that which is not true, by one who does not believe it to be true; the active concealment of a fact by one having knowledge or belief of the fact; a promise made without any intention of performing it; any other act fitted to deceive; any such act or omission as the law specially declares to be fraudulent.
Explanation.--Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech. Illustrations (a) (b) (c) (d)
A sells, by auction, to B, a horse which A knows to be unsound, A says nothing to B about the horse's unsoundness. This is not fraud in A. B is A's daughter and has just come of age. Here, the relation between the parties would make it A's duty to tell B if the horse is unsound. B says to A-- &uot;If you do not deny it, I shall assume that the horse is sound&uot;. A says nothing. Here A's silence is equivalent to speech. A and B being traders, enter upon a contract. A has private information of a change in prices which would affect B's willingness to proceed with the contract. A is not bound to inform B.
Introduction This section defines fraud, and lists such act s which amount to fraud, i.e., false assertion, active concealment, promise without intention of performing it, any other deceptive act, or any act declared as fraudulent. In order to constitute fraud, such act s should have been done by the party to the contract, or by any other person with his connivance, or by his agent and with intent to deceive the other party thereto or his agent, or to induce him to enter into the contract. There is no duty upon parties to speak about facts likely to affect the other party's consent to the contract and mere silence does not amount to fraud, unless the circumstances of the case show that there is duty to speak, or silence is, in itself equivalent to speech.2 2 See also s. 19--voidability of such an agreement; s. 64--consequences of rescission; s. 65-- obligation of restitution; s. 66--communicating rescission.
Fraud in General A mere false statement is not fraud.3 Fraud is committed where one man causes another to act on a false belief by a representation which he does not himself believe to be true. He need not have definite knowledge or belief that it is not true.4 A mere nod or a wink or even an indicative smile may amount to a misrepresentation if it is intended to induce the other party to believe in a certain state of
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facts.5When fraud produces damage it is generally a wrong entitling the person defrauded to bring a civil act ion. Under the Contract Act, we are concerned with the effect of the fraud only so far as consent to a contract is procured by it. The section would not apply for fraudulent act s during the course of performance of the contract.6 The result of fraudulent practice may sometimes be complete misunderstanding on the part of the person deceived as to the nature of the transaction undertaken, or the person or identity of the other party. Such cases are exceptional. Where they occur, there is not a contract voidable on the ground of fraud, but the apparent agreement is wholly void for want of consent; and the party misled may treat it as a nullity even as against innocent third persons. However, the fraudulent party is estopped from denying that there is a contract if the party deceived finds it to be in his interest to affirm the transaction, which is a conceivable, though a not probable case. In the same way, the party deceived must be at liberty to treat the transaction as a voidable contract if he thinks fit. No doubt, many transactions have in fact been so treated, notwithstanding that under the law as settled in Cundy v. Lindsay, 7 they might have been declared wholly void. Not only fraudulent acts of a party to a contract, but also those committed with his connivance by any other person, or by his agent,8 will vitiate the contract. Under the UNIDROIT Principles, a party can avoid a contract on the ground of fraud which has caused that party to enter into the contract, if the other party has made a fraudulent representation, which may include language or practices, or fraudulent nondisclosure of circumstances which, according to reasonable commercial standards of fair dealing, the latter party should have disclosed.9 3 Kamal Kant Paliwal v. Prakash Devi Paliwal, AIR 1976 Raj 79 at 81. 4 Evans v. Edmonds, (1853) 13 CB 777, 93 RR 732; RC Thakkar v. Gujarat Hsg Board, AIR 1973 Guj 34 at 54. 5 Walters v. Morgan, (1861) 3 De G F & J 718 at 723; Avon County Council v. Howlett, [1983] 1 All ER 1073, (1981) 1 RLR 447, (payment of money); R v. Williams, (1980) Crim LR 589, (tendering obsolete foreign bank notes to a currency dealer). 6 Jamsetji Nassarwanji v. Hirjibhai Naoroji, (1913) 37 Bom 158; Fazal D Allana v. Mangaldas M Pakvasa, (1921) 46 Bom 489 at 508, 66 IC 726, AIR 1922 Bom 303. 7 [1978] 3 App Cas 459;, [1874-1880] All ER Rep 1149; see s. 13 above. 8 If the fraud is committed by the agent during the course of business and fell within his authority; see s. 238 below: Effect on agreement, misrepresentation or fraud by agent. 9 UNIDROIT Principles, Art. 3.8.
Fraud and Misrepresentation The principal difference between fraud and misrepresentation is that in the first case the person making the suggestion does not believe it to be true and in the other he believes it to be true, though in both the cases, it is a misstatement of fact which misleads the promisee.10 The language of the Contract Act throws no light on the relation of fraud to misrepresentation. Fraud, as a cause of rescission of contracts, is generally reducible to fraudulent misrepresentation. Accordingly, misrepresentation is either fraudulent or not fraudulent. If fraudulent, it is always a cause for rescinding a contract induced by it; if not, it is a cause of rescission only under certain conditions, which the definitions of s. 18 are intended to express. There are, however, forms of fraud which do not at first sight appear to include any misrepresentation of fact, and clauses 3, 4 and 5 of this section are intended to cover these.
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Under common law, fraud will not only render the contract voidable at the option of the party whose consent is so obtained, but will also give rise to an action for damages in respect of deceit. 10 Niaz Ahmed Khan v. Parsottam Chandra 53 All 374, AIR 1931 All 154; Rattan Lal Ahluwalia v. Jai Janinder Parshad, AIR 1976 P&H 200.
Clause 1 When analyzed s. 17(1) shows the following ingredients:
(i) (ii) (iii) (iv)
there should be a suggestion as to a fact; the fact suggested should not be true; the suggestion should have been made by a person who does not believe it to be true; and the suggestion should be made with intent either to deceive or to induce the other party to enter into the contract.11
11 RC Thakkar v. Gujarat Hsg Board, AIR 1973 Guj 34.
Representation A representation12 is a statement of fact, past or present; it is distinct from a statement of opinion,13 though in certain circumstances a statement of opinion may be regarded as a statement of fact.14 In order to enable the representee to avoid the contract, the fraudulent misrepresentation has to be material, i.e., such that a reasonable man would have been influenced by it in deciding whether or not to enter into the contract.15 False Assertion without Belief in its Truth To prove a case of fraud, it must be proved that representations made were false to the knowledge of the party making them.16 The statement must be false in substance and in fact.17 The meaning of fraud was stated by Lord Herschell in Derry v. Peek :18
Fraud is proved when it is shown that a false representation has been made: (1) knowingly; or (2) without belief in its truth; or (3) recklessly, careless whether it be true or false...the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states.
It was further held that there was no fraud in the making of false statement through want of care, or a false representation honestly believed, though on insufficient grounds, but, when a false statement was made, the question whether there were reasonable grounds for believing it, and what were the means of knowledge in the possession of the person making it, were important factors; however misrepresentation as to title made by vendors made recklessly, cannot escape the charge of fraudulent misrepresentation.19
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A positive knowledge of falsehood is not the criterion. In order to constitute fraud, it is necessary that the statement must have been made by the person concerned with knowledge of its falsehood, or without belief in its truth. Even mere ignorance as to the truth or falsehood of a material assertion, which however, turns out to be untrue, is deemed equivalent to the knowledge of its untruth, as also where the representor suspected that his statement might be inaccurate, or that he neglected to inquire into its accuracy. Giving a false impression and inducing a person to act upon it, is fraud, even if each fact taken by itself would be literally true;20 so is it fraud to state a thing partially which when understood, is false.21 If by a number of statements a person intentionally gives a false impression and induces another person to act upon it, it is not the less false, although if one takes each statement by itself, there may be difficulty in showing that any separate statement is untrue.22 In RC Thakkar v. Gujarat Housing Board, 23 a public authority had invited tenders and mentioned the cost estimates in the tender notices and other related papers. The work did not involve as much cost. It was held the mention of the estimates amounted to the authority's representation to the intending tenderers that the work would cost a particular amount. It related to material facts, as the intending contractors would be led to believe about the cost of the work, because the authority would have worked out the correct estimate according to the directions contained in the PWD Manual. It was held that the estimates were knowingly false.24 It was further held:
The foundation of the vice of fraud contemplated by section 17... is that a man making any representation which he intends another to act upon, must be taken to warrant his belief in its truth. He should be presumed to be aware of the fact that the person to whom it is made will at least understand that he, representor, believes it to be true. Therefore, if the representor does not in fact, entertain any such belief in the truth of his representation, he is as much guilty of fraud as if he had made any other representation which he knew to the false, or did not believe to be true....The consideration of the grounds of the belief of the person making the statement renders an important aid in ascertaining whether the belief was really entertained.
It has been held that if a person desirous of selling property causes letters to be written to him in which fictitious offers at high prices are made with the sole purpose of showing it to an intending purchaser, the making and exhibiting of such letters to the purchaser and thus, inducing him to purchase the property, amounts to fraud within the meaning of s. 17.25 Motive is irrelevant. Where a false statement is knowingly made it is unnecessary to probe into the motive.26 Therefore, it is no justification that the representation was made without a bad motive, or that there was no intention to cheat or cause loss to another by the deception.27 Reckless Statements Proof of absence of actual and honest belief is all that is necessary to satisfy the existence of fraud, whether the representation is made recklessly or deliberately; indifference or recklessness on the part of the representor as to truth or falsity of the representation affords merely an instance of absence of such belief.28 Statements made without belief in the truth would include statements made recklessly. Misrepresentation as to title made by vendors recklessly or with gross negligence cannot escape the charge of fraudulent misrepresentation.29 Representation made by one of the two defendants, by an agent of the other defendant and by another agent who was the agent of both the defendants, induced the plaintiff to enter into the purchase of a fruit business for GBP 700, the representation being that the average takings of business were GBP 100 a week. The statement was found to be false in fact, and made either knowing it to be false or recklessly. Here, the plaintiff's act ion for rescission succeeded.30 Ambiguous Statements
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Where the representor makes an ambiguous statement, the person to whom it is made must prove that he understood that statement in the sense that it was in fact false. The representor will be guilty of fraud if he intended the statement to be understood in that sense,31 and not if he honestly believes it to be true, but the person relying on it understands it in a different sense.32 A view has been expressed that where the words or conduct by which a representation is made may be understood in different sense, that is, by a reasonable person in the position of the representee in one sense, by the representee himself in another sense, and the representor in the third sense; the sense in which a representation would be understood by a reasonable person in the position of the representee is prima facie the sense relevant to the question whether the representation is false. The sense in which a representation is understood by the representee is relevant to the question whether it induced the representee to act upon it, and the sense in which the representor intended the representation to be understood, is relevant to the question whether the representation was made fraudulently.33 Once it is held that the representation was fraudulent under this clause, the exception in s. 19 is of no avail, and the question whether the person alleging fraud had or had not the means of discovering the truth with ordinary diligence, is immaterial.34 12 See s. 18 below under the headings: 'Representation' and 'Representation of Fact'. 13 Bissett v. Wilkinson, [1927] AC 177; Economides v. Commercial Union Assurance Co. plc, [1997] 3 WLR 1066, [1997] 3 All ER 636. 14 See s. 18 below: 'Fact and Opinion'. 15 Bhagwani Bai v. Life Insurance Corpn of India, AIR 1984 MP 126; see for detail discussion, s. 18 below. 16 Gauri Shankar v. Manki Kunwar, AIR 1924 All 17. 17 RC Thakkar v. Gujarat Hsg Board, AIR 1973 Guj 34 at 44. 18 (1889) 14 App Cas 337, [1886-90] All ER Rep 1 at 22. 19 Sayu Mohammed Abdulla v. Neelakantan Krishnan, AIR 1958 Ker 322. 20 Jewson & Sons Ltd. v. Arcos Ltd., (1933) 39 Com Cas 59. 21 Peek v. Gurney, (1873) LR 6(HL) 377 at 400, [1861-73] All ER Rep 116; R v. Kylsant, [1932] 1 KB 442, [1931] All ER Rep 179. 22 S Chatterjee v. Dr K Bhave, AIR 1960 MP 323,(tort) . 23 AIR 1973 Guj 34. 24 RC Thakkar v. Gujarat Hsg Board, AIR 1973 Guj 34 at 54. 25 John Minas Apcar v. Louis Caird Malchus, (1939) 1 Cal 389 at 398, 184 IC 321, AIR 1939 Cal 473. 26 RC Thakkar v. Gujarat Hsg Board supra at 52, relying on United Motor Finance Co. v. Addison & Co. Ltd., AIR 1937 PC 21, 41 Cal WN 347. 27 Polhill v. Walter, (1832) 3 B&D 114, [1824-34] All ER Rep 161; Bradford Third Equitable Benefit Building Society v. Borders, [1941] 2 All ER 205 at 211; Brown Jenkinson & Co. Ltd. v. Percy Dalton, (London) Ltd., [1957] 2 QB 621, [1957] 2 All ER 844. 28 Halsbury's Laws of England, Vol. 31, 4th edn. 2003 Reissue, November 2003, Misrepresentation and Fraud, para 1059. 29 Sayu Mohammed Abdulla v. Neelakantan Krishnan, AIR 1958 Ker 322. 30 Alati v. Kruger, (1955) 94 CLR 216, (High Court of Australia). 31 Smith v. Chadwick, [1884] 9 AC 187,(HL) . 32 Akerhielm v. De Mare, [1959] AC 749, [1959] 3 All ER 485,(PC) ; John McGrath Motors, (Canberra) Pty Ltd. v. Applebec, (1964) CLR 656.
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33 David Krakowski v. Eurolynx Properties Ltd., [1995] 130 ALR 1, (High Court of Australia). 34 See below Exception to s. 19,Mithoolal Nayak v. Life Insurance Corpn of India, AIR 1962 SC 814, [1962] 2 Supp SCR 571.
Clause 2 It is fraud where a party to the contract knows or believes a fact to be true, but conceals it act ively from the other party with a view to induce that person to enter into a contract. This clause must be read with the Explanation, under which mere silence does not amount to fraud. Active Concealment Mere non-disclosure of some immaterial facts would not per se give a right to rescission, unless it is further found that the consent has been secured by practicing some deception.35 Where the seller sold property already sold by him to a third person, his conduct amounted to active concealment and fraud, and the buyer could recover the price despite the agreement that the seller could not be responsible for defect in title.36 Where the insured, in reply to questions by the insurer during the inquiry into his proposal, withheld facts and deliberately gave false replies; or in the case of life insurance, deliberately concealed the fact of medical treatment for serious ailment, only a few months before the policy was taken,37 this amounted to fraud, entitling the insurer to avoid the contract. A leaseholder of salt works from the government was allowed to induct a financial partner on terms and conditions mentioned in the permission. The leaseholder retired from the firm and the business was continued by the financial partner. The lease was renewed in the name of the original lessee without informing the government about the retirement. It was held that by virtue of this fraud, the termination of the lease by the government was valid.38 35 Bhagwani Bai v. Life Insurance Corpn of India, AIR 1984 MP 126. 36 Akhtar Jahan Begam v. Hazari Lal, (1927) 25 All LJ 708, 103 IC 310, AIR 1927 All 693. 37 Mithoolal Nayak v. Life Insurance Corpn of India, AIR 1962 SC 814, [1962] 2 SCR Supp 571. 38 Ganpati Salt Works v. State of Gujarat, AIR 1995 Guj 61.
Clause 3 Clauses 3, 4 and 5 of this section do not appear to include any misrepresentation of fact. A promise made without any intention of performing it, though it is not merely a representation of the promisor's intention to perform it, includes a representation to that effect. Some promises are given more readily and willingly than others; but promises are accepted because they are believed to have been made in good faith; and no one would be content with a promise which he believed, the promisor had no intention of keeping. It has been observed:
The state of a man's mind is as much a tact as the state of his digestion. It is true that it is very difficult to prove what the state of a man's mind at a particular time is, but if it can be ascertained it is as much a fact as anything else.39
Promise Without Intention of Performing it
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Making a promise without the intention of performing it is fraud, though not so under the English law.40 To bring the case within this clause, it must be shown that the promisor had no intention of performing the promise at the time of making it,41 and any subsequent conduct or representation is not considered for this purpose.42 Accordingly, it is a fraud to obtain a loan of money by misrepresenting the purpose for which the money is wanted, even if there is nothing unlawful in the object for which the money is act ually wanted and used.43 Buying goods with the intention of not paying the price is a fraud which entitles the seller to rescind the contract.44 It is a fraud to obtain property, or the use of it, under a contract by professing an intention to use it for some lawful purpose, when the real intention is to use it for an unlawful purpose.45 Applying this principle to marriages, it has been held that where a man and a woman went through ceremonies of marriage without the former ever having an intention to regard it as a real marriage, the consent of the woman had been obtained by fraud.46Borrowing money with no intention of repaying it is cheating and punishable under the Indian Penal Code, 1860;47 but mere delay in payment of money due on a building contract or withholding of money is not fraud;48 nor is every breach of contract a fraud.49 39 Edgington v. Fitzmaurice, (1885) 29 Ch D 459 per Brown LJ at 483, [1881-85] All ER Rep 856. 40 Laxmibai v. Keshav Annaji Pokharkar, AIR 1916 Bom 239, (1916) 18 Bom LR 134. 41 Dagdu Valad Sadu v. Nana Valad Salu, (1910) 35 Bom 93 at 96; Maung Shwe Hea v. Maung Chet, AIR 1918 Low Bur 142; Thatha Rao Dada Rao v. Jummarlal Dhanji, AIR 1953 Hyd 179. 42 Narsinghdas Takhatmal v. Radhakisan Rambakas, AIR 1952 Bom 425 at 433-34. 43 Edgington v. Fitzmaurice, (1885) 29 Ch D 459 per Brown LJ at 480, 483. 44 Clough v. London North Western Rail Co., (1871) LR 7 Ex 26, [1861-73] All ER Rep 646; Ex p. Whittaker,(1875) LR 10 Ch 446 at 449; Allahabad Bank v. Firm of Madan Mohan Kishen Lal, AIR 1917 Lah 421 at 423. 45 Feret v. Hill, (1854) 15 CB 207, [1843-60] All ER Rep 924, 100 RR 318, (which, admitting this, decided that the defrauded party, having given possession, is not entitled to resume it by force without due process of law). 46 Shireen Mall v. John James Taylor, AIR 1952 Punj 277 at 279-80. 47 The Indian Penal Code 1860, s. 415 , Illust, (f). 48 Kapila Textiles Mills Ltd. v. Madhava & Co., AIR 1963 Mys 39; referring to Hudson, Building Contract, 8th edn, p. 312. 49 Jethmal Ganeshmal Firm v. Haridas Roy, AIR 1949 Assam 6; Maung Shwe Hla v. Maung Chet, AIR 1918 LB 142; Laxmibai v. Keshav Annaji Pokharkar, AIR 1916 Bom 239 at 244, (1916) 18 Bom LR 134.
Clause 4 The mention of 'any other act fitted to deceive' in clause. 4 appears to be inserted merely for the sake of abundant caution. A party which signs an agreement with the knowledge that the other party has recorded it erroneously, and does so fraudulently seeking to take advantage of the error, cannot subsequently take advantage of the agreement.50 It is a fraud to claim beneficial title under a deed in respect of which the vendee is only a benamidar.51 Thus, where a sale deed was executed admittedly with a fraudulent design to defeat the creditors but the vendee later started asserting the title in a suit filed by the vendor for cancellation of the sale deed, it was held that the vendor could not be permitted to take advantage of his own fraud.52
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50 William Charles Binnus v. W&T Avery Ltd. 61 Cal 548, AIR 1934 Cal 778. 51 Gundappa Chikkappa Kurbar v. Balaji Ramji Dange, AIR 1941 Bom 274; overruling Sidlingappa bin Ganeshappa v. Hirasa Bin Tukasa, (1907) 31 Bom 405. 52 Sultan Ahmad v. Rashid Ahmad, AIR 1990 All 47 at 49; Nawab Singh v. Daljit Singh, AIR 1936 All 401 at 404 holding that any who comes to seek relief from a Court of law should not be a party to a fraud, and if both parties are in pari delicto the Court should decline to help either party and let things remain as they are and let both parties reap the consequences of their own fraud and dishonesty.
Clause 5 Clause 5 applies to a case where the disclosure of certain kinds of fact s. is expressly required by law, and non-compliance with the law is expressly declared to be fraud. Thus, under s. 55 of the Transfer of Property Act, 1882 the seller of immovable property is required to disclose to the buyer 'any material defect in the property or in the seller's title thereto of which the seller is, and the buyer is not, aware, and which the buyer could not with ordinary care discover.' The buyer is required to disclose to the seller 'any fact as to the nature or extent of the seller's interest in the property of which the buyer is aware, but of which he has reason to believe that the seller is not aware, and which materially increases the value of such interest,' and 'omission to make such disclosures... is fraudulent,' and it is so even if the omission is merely due to oversight.53 Various dealings with property are made voidable by other enactments as being fraudulent, or declared to be fraudulent as against the transferor's creditors or assignees, but, as these transfers of property cannot well be employed as inducements to any other party to enter into any contract beyond such agreement as is involved in the fraudulent transfer itself, they do not come within the scope of the Contract Act, and need not be dealt with here.54 Silence as Fraud Silence as to facts, as the Explanation to the present section lays down, is not per se fraud. Mere silence is not fraud unless there is a duty to speak, or unless it is equivalent to speech.55 There are two qualifications to this rule. First, the suppression of part of the known facts may make the statement of the rest, though literally true so far as it goes, misleading as an act ual falsehood. In such a case, the statement is false in substance, and the wilful suppression which makes it so, is fraudulent.56 Secondly, a duty of disclosure of particular defects in goods sold, or the like, may be imposed by trade usage. In such a case, omission to mention a defect of that kind is equivalent to express assertion that it does not exist.57 In an American case Laidlaw v. Organ, 58 in a contract for the sale of tobacco, the buyer knew, but the seller did not, that peace had been made between Great Britain and the United States after the war of 1812; and on the seller inquiring if there was any news affecting the market price, the buyer gave no answer. The Supreme Court of the United States held that there was nothing fraudulent in his silence. Where a vendor did not disclose to the purchaser of property about a material defect in the title that the property agreed to be sold was the subject matter of a pending litigation and attachment, the non-disclosure was held to be a fraudulent act and the purchaser was entitled to rescind the contract and claim back the earnest money.59 Where the lessor, knowing that two days after executing a lease in favour of her husband, she would cease to be the lessor and the lessee also knew the same, she executed the lease for a period subsequent to her ceasing to be the lessor, the transferee is not bound by such lease which was the outcome of a fraud.60 Where the vendor made an express recital in the sale deed about non-existence of mortgage, it was an act ive misstatement; and the exception to s. 19 was not applicable.61
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When a special condition restricting inquiries into title is inserted in a contract of sale, a purchaser has the right to assume that there has been a full and fair representation as to the title on the part of the vendor.62 Duty to Speak There is no general duty to disclose facts which are or might be equally within the means of knowledge of both parties.63 In Bell v. Lever Bros Ltd., 64 the company agreed to pay large compensation to two employees, the subsidiary company directors, whose services were being dispensed with. After paying the money, the company discovered that the directors had committed breaches of duty, which would have justified their dismissal without compensation. The House of Lords held that the directors had not these breaches in mind, and were under no duty to disclose them. The principle that there is no duty to disclose in every contract appears to rest on the view that each party must obtain the necessary information for himself and cannot expect it to be, supplied by the other, even when that other is aware of his ignorance and could easily put him right. In Banque Financiere de la Cite SA v. Westgate Insurance Co. Ltd, 65 Slade J, said:
The general principle that there is no obligation to speak within the context of negotiations for. an ordinary commercial contract... is one of the foundations of our law of contract, and must have been the basis of many decisions over the years. There are countless cases in which one party to a contract has in the course of negotiations failed to disclose a fact known to him which. the other party would have regarded as highly material, if it had been revealed. However, our law leaves that other party entirely without a remedy.
This severe attitude of the common law has been criticised, because though it may be appropriate for transactions between knowledgeable businessmen, it is unsuited between private, persons; and even in commercial cases, this enables and permits sharp practices.66 Many legal systems, viz. France, impose extensive duties of disclosure in particular circumstances, on broad grounds of good faith. The American Restatement Second generally makes a party's non-disclosure of a fact equivalent to an assertion that the fact does not exist if 'he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which the party is making the contract.'67 The duty referred to in the explanation is a legal duty and not merely a moral duty to speak.68 However, there are special duties of disclosure in particular classes of contracts,69viz, in contracts between an insurer and insured,70 or where one party stands in fiduciary relationship with the other. In such types of transactions involving contracts uberrrima fides there is a legal and equitable duty on the parties, not only to state truly whatever is stated, but also divulge with candour and completeness, facts regarding which there is no obligation to disclose at all in transactions which do not fall within the recognised class.71 It was held that concealment of the true nature and effect of an arbitration agreement by a person standing in a fiduciary position to another, and obtaining consent of the latter, amounted to fraud.72 53 Akhtar Jahan Begam v. Hazari Lal, (1927) 25 All LJ 708, 103 IC 310, AIR 1927 All 693, (note that an agreement between vendor and purchaser that the vendor is not to be liable for defective title will not excuse active concealment). 54 The Transfer of Property Act, 1882, s. 53, (transfer in fraud of other transferees or of creditors); the Presidency Towns Insolvency Act, 1909, s. 56; the Provincial Insolvency Act 1920, s. 54;Manmohandas Ramji v. N C Macleod, (1902) 26 Bom 765. 55 Chartered Bank of India,Australia and China v. Imperial Bank of India 60 Cal 262, AIR 1933 Cal 366; ARSP Subramanian Chetty v. Official Assignee of Madras, AIR 1931 Mad 603, 133 IC 372; Niaz Ahmed Khan v. Parsottam Chandra 53 All 374, AIR 1931 All 154.
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56 Peek v. Gurney, (1873) LR 6 HL 377 at 403, [1861-73] All ER Rep 116; R v. Kylsant, [1932] 1 KB 442, [1931] All ER Rep 179; ARSP Subramanian Chetty v. Official Assignee of Madras, AIR 1931 Mad 603, 133 IC 372; Jewson & Sons Ltd. v. Arcos Ltd., (1933) 39 Com Cas 59,(CA) . 57 Jones v. Bowden, (1813) 4 Taunt 847, 14 RR 683. 58 15 US, (2 Wheat) 178, (1817). 59 Jaswant Rai v. Abnash Kaur, (1974) 1 Del 689 at 705. 60 Hukum Chand v. Hazra Begum, AIR 1982 All 215. 61 Ganpat Ranglal Mahajan v. Mangilal Hiralal, AIR 1962 MP 144. 62 Becker v. Patridge, [1966] 2 QB 155, [1966] 2 WLR 803 at 813. 63 Bell v. Lever Bros, [1932] AC 161, [1931] All ER Rep 1. 64 Ibid. 65 [1989] 2 All ER 952 at 1010, [1990] 2 All ER 947. 66 See Atiyah, An Introduction to the Law of Contract, 5th edn, pp 24-7. 67 Restatement 2d 161(b). 68 Sher Khan v. Akhtar Din, AIR 1937 Lah 598. 69 Imperial Pressing Co. v. British Crown Assurance Corpn. Ltd., (1914) ILR 14 Cal 581, 21 IC 836, (contract of fire insurance); see s. 143 below, (guarantee obtained by concealment of material facts). 70 The Marine Insurance Act 1963, s s. 19-20;Krishnawanti Puri v. Life Insurance Corpn of India, AIR 1975 Del 19. 71 Haji Ahmed Yar Khan v. Abdul Gani Khan, AIR 1937 Nag 270 at 272. 72 Sri Kishan Lal v. Kashmiro, AIR 1916 PC 172. See also s. 18 below under the heading: 'Fiduciary Relationship' and 'Contracts uberrimae fiedei'.
Fraud in Marriage Where consent of one party to a marriage is obtained by fraud as to the nature of the ceremony or as to any material fact or circumstance concerning the other, the marriage is voidable at the option of the first party and can be annulled by a decree of nullity.73 The concept of fraud for this purpose is not in the same sense as defined in this section.74The concept of fraud in the Contract Act is wider than fraud in relation to matrimonial causes. However, if non disclosure relates to a fact having a material impact on the very purpose of nubile alliance, it may amount to fraud vitiating the consent of the party on whom it was practised. Non-disclosure of pre-marital divorced status by one party to the other party who was unmarried, was held to be concealment of material fact amounting to fraud;75 or where the annulment of an earlier marriage on the ground of unsoundness of mind was concealed;76 it was also a fraud where vital information that the man had undergone vasectomy was not disclosed;77 or that a party to the marriage was suffering from some abhorrent disease such as leprosy or venereal disease;78 or that the husband was employed, when in fact he was only a trainee.79 Age, educational qualifications, income, caste, marital status, family status, financial status, religion or nationality have been stated to be material facts and circumstances for the purposes of marriage; as also size of the proposed matrimonial home;80 but, concealment of fact by the wife that she was suffering from a venereal disease did not amount to fraud.81 73 The Hindu Marriage Act 1955, s. 12(l)(c); the Special Marriage Act, 1954, s. 25. 74 Harbhajan Singh v. Brij Balab Kaur, AIR 1964 Pun 359; Madhusudan v. Chandrika, AIR 1975 MP 174; Nand Kishore v. Munnibai, AIR 1979 MP 45; P v. K, AIR 1982 Bom 400, (1982) 1 Bom CR 454; Rajinder Singh v. Pomilla,
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AIR 1987 Del 285; Anurag Anand v. Sunita Anand, AIR 1997 Del 94. 75 Rajinder Singh v. Pomilla, AIR 1987 Del 285 at 299. 76 Kiran Bala Asthana v. Bhaire Prasad Srivastava, AIR 1982 All 242 at 246; Madhusudan v. Chandrika, AIR 1975 MP 174; Nand Kishore v. Munnibai, AIR 1979 MP 45; Rajinder Singh v. Pomilla, AIR 1987 Del 285. 77 PJ Moore v. Valsa, AIR 1992 Ker 176; Best Moming Khongthohrem v. Nirmalendu Deb, AIR 1987 Gau 63,(FB) . 78 P v. K, AIR 1982 Bom 400 at 405, (1982) 1 Bom CR 454. 79 Bindu Sharma v. Ram Prakash Shafllla, AIR 1997 All 429. 80 Anurag Anand v. Sunita Anand, AIR 1997 Del 94. 81 Madhusudan v. Chandrika, AIR 1975 MP 174; Harbhajan Singh v. Brij Balab Kaur, AIR 1964 Punj 359; Raghunath Gopal Daftardar v. Vijaya Raghunath, AIR 1972 Bom 132; Raja Ram Vishwakarma v. Deepabai, AIR 1974 MP 52; Nand Kishore v. Munnibai, AIR 1979 MP 45 at 48; Tapan Ranjan Das v. Jolly Das, AIR 1990 Cal 353 at 364, (fraud alleged in application to dissolve marriage u/s 25(iii) of the Special Marriage Act-not proved on facts).
Fraud to defeat creditors An owner of the property cannot by contract or otherwise qualify his own interest in property by a condition determining or controlling it in the event of his insolvency to the prejudice of his creditors; and hence, a condition in the rules of provident fund of a company that on insolvency of a member, the amount standing to his credit shall be liable to forfeiture to the fund is invalid as a fraud on the law of insolvency.82 82 Muktilal Agarwala v. Trustees of the Provident Fund of The Tin Plate of India Ltd., [1956] SCR 100, AIR 1956 SC 336.
No Fraud If the party alleging fraud had the facts before it or had the means to know them, it could not be said to have been defrauded, even if a false statement has been made.83A plaintiff who was educated, had contested elections and act ed in films is not likely to have executed documents without knowing contents.84 Further, a contract cannot be avoided merely on a trivial and inconsequential mis-statement or non-disclosure.85 Where the plaintiff was aware of the contents of the Will of the father, the partition of property on the death of the father and mother was not set aside on the ground of fraud of not disclosing the contents of the Will; and no fresh partition was ordered.86 Where a party, on discovering that a document already executed by him does not take effect according to his rights, executes another document in respect of the same property, he has not acted fraudulently.87 83 Kamal Kant Paliwal v. Prakash Devi Paliwal, AIR 1976 Raj 79; but see ARSP Subramanian Chetty v. Official Assignee of Madras, AIR 1931 Mad 603, 133 IC 372. 84 Manirajan Pillai v. K K Karunakaran Nair, AIR 2011 Ker 55. 85 Bhagwani Bai v. Life Insurance Corpn of India, AIR 1984 MP 126. 86 Janaki Amma v. Raveendra Menon, AIR 1981 Ker 205. 87 Kakarla Venkatasubbayya v. Sravanam Venkatarathnamma, AIR 1954 Mad 681.
Pleadings
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A party relying on fraud must state in his plaint the particulars of the fraud with dates and items, if necessary.88 A plaintiff alleging fraud must both plead and prove it, and must give specific particulars of the alleged fraud.89 The allegations of fraud must be clear, definite and specific.90 He can succeed upon proof of the fraud as alleged and not of any other kind. The plaintiff must state specifically the particulars of the fraudulent act s, and the time when he discovered it.91 A third party to a deed of gift cannot plead that a deed of gift was obtained by fraud or misrepresentation and should, therefore, not be given effect to.92 88 See the Civil Procedure Code 1908, O. 6, r 4;Ramesh B Desai v. Bipin Vadilal Mehta, AIR 2006 SC 3672, (2006) 5 SCC 638; Sangramsinh P Gaekwad v. Shantadevi P Gaekwad, 2005, AIR SCW 790, (2005) 11 SCC 314; Chief Engineer MSEB v. Suresh Raghunath Bhokare, 2005 AIR SCW 320, (2005) 10 SCC 465. 89 Bharat Dharma Syndicate Ltd. v. Harish Chandra, AIR 1937 PC 146; Narsinghdas Takhatmal v. Radhakisan Rambakas, AIR 1952 Bom 425; Chartered Bank of India v. Imperial Bank of India 60 Cal 262, AIR 1933 Cal 366; Shanti Budhiya Vesta Patel v. Nirmala Jayprakash Tiwari, AIR 2010 SC 2132, (2010) 5 SCC 104; Ranganayakamma v. K S Prakash, AIR 2009 SC, 1218(Supp), (2008) 15 SCC 673; see also Ajjapalli Papireddy and A. Mohan Reddy v. Ajjapalli Narayana Reddy and A. Durgareddy, SA No. 795/2012, decided on 11 Oct 2013 (A.P). 90 Yog Raj v. Kuldeep Raj Gupta, AIR 1991 J&K 26 at 28. 91 AIR 1991 J&K 26 at 29. 92 M Venkatasubbaiah v. M Subbamma, AIR 1956 AP 195.
Evidence and Burden of Proof In a great majority of cases, fraud is not capable of being established by positive and tangible proof. It is by its very nature secret in its movements. It is, therefore, sufficient if the evidence given is such as may lead to an inference that fraud must have been committed. In most cases circumstantial evidence is the only resource in dealing with questions of fraud.93 If this were not allowed, the ends of justice would be constantly, if not invariably, defeated.1 At the same time the inference of fraud is to be drawn only from positive materials on record and cannot be based on speculation and surmises;2 however suspicious the circumstances, however strange the coincidences and however grave the doubts, they alone cannot take place of proof of fraud. The evidence of fraud must be sufficient to overcome the natural presumption of honesty and fair dealing; it is not to be presumed or inferred lightly.3 Evidence of unfairness in the transaction may be considered, but not when direct evidence on the question of fraud is unreliable.4 The solitary testimony of the plaintiff would not suffice.5 Pleas of fraud must be examined by the Court with utmost rigour.6 The burden of proving fraud lies on the person alleging it. However, the onus may shift on the other party where that other is in a fiduciary relationship in relation to the person alleging fraud.7 The burden of proving that silence amounts to fraud in particular circumstances, lies upon the person who alleges it.8 The charge of fraud, though in a civil proceeding, must be established beyond reasonable doubt.9 In any case, the level of proof required is extremely high and is rated on par with a criminal tria1.10 The burden of proof is not a light one. On another view, although the burden of proof is the same as in other civil proceedings,11 namely, proof on the balance of probabilities, it is not easily discharged in practice.12 To prove fraud, it must be proved that representations made were false to the knowledge of the party making them, or were such, that the party could have no reasonable belief that they were true; that they were made for the purpose of being acted upon and that they were believed and act ed upon and caused the actual damage alleged.13 He can succeed only upon proof of fraud as alleged by him.
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93 Rakhal Chandra Bardhan v. Prosad Chandra Chatterjee, AIR 1926 Cal 73 at 77; Umrao Begum v. Sheikh Rahmat Ilahi, AIR 1939 Lah 439 at 451; Bhabhutmal Nathmal v. Khan Mohammad, AIR 1946 Nag 419 at 423; Passarilal Mannoolal v. Chhuttanbai, AIR 1958 MP 417 at 422. 1 Pandit Parkash Narain v. Raja Birendra Bikram Singh, AIR 1931 Oudh 333; Thangachi Nachial v. Ahmed Hussain Malumiar, AIR 1957 Mad 194 at 197, (1957) 1 Mad LJ 300. 2 Arabinda Barma v. Chandra Kanta, AIR 1954 Assam 94; Passarilal Mannoolal v. Chhuttanbai, AIR 1958 MP 417 at 422. 3 Rakhal Chandra Bardhan v. Prosad Chandra Chatterjee, AIR 1926 Cal 73 at 77; Govinda Naik Gurunath Naik v. Gururao Puttanbhat Kadekar, AIR 1971 Mys 330 at 331. 4 Harihar Prasad Singh v. Narsingh Prasad Singh, AIR 1941 Pat 83 at 90. 5 Hajra Bai v. Jadavbai, AIR 1986 MP 106. 6 Firm of Sodawaterwala v. Volkart Brothers, AIR 1923 Sind 25 at 28. 7 Guljan Bibi v. Nazir-uddin Mia, AIR 1975 Gau 30; Ram Kalap Pande v. Bansidhar, AIR 1947 Oudh 89 at 91. 8 Niaz Ahmed Khan v. Parsottam Chandra 53 All 374, AIR 1931 All 154; Chartered Bank of India v. Imperial Bank of India 60 Cal 262, AIR 1933 Cal 366. 9 ALN Narayanan Chettyar v. Official Assignee High Court Rangoon, AIR 1941 PC 93; followed in Union of India v. Chaturbhai M Patel & Co., (1976) 1 SCC 747, AIR 1976 SC 712. 10 Savithramma v. H Gurappa Reddy, AIR 1996 Kant 99 at 104; Ranganayakamma v. K S Prakash, AIR 2009 SC, 1218(Supp), (2008) 15 SCC 673; Alva Aluminium Ltd. v. Gabriel India Ltd, (2011) 1 SCC 167, (heavy burden to show fraud). 11 Hornal v. Neuberger Products Ltd., [1957] 1 QB 247, [1956] 3 All ER 970. 12 Chitty on Contracts, 28th edn, p. 361, para 6-045. 13 Gauri Shankar v. Manki Kunwar, 45 All 624, AIR 1924 All 17 at 19; People's Insurance Co. Ltd. v. Sardar Sardul Singh Caveeshar, AIR 1962 Punj 543.
Effect of Fraud A contract, consent to which is obtained by fraud, is voidable under s. 19. The party deceived has the option to affirm the contract and insist that he be put in the position in which he would have been if the representations were true, or he may rescind the contract to the extent it is not performed. Upon rescission, he is liable to restore the benefit received by him under s. 64, and may recover damages. The measure of damages recoverable is essentially that applicable to the tort of deceit,14 i.e., all the act ual loss directly flowing from the transaction induced by the fraud, including the heads of consequential loss, and not merely the loss which was reasonably foreseeable.15 Where a document, which was intended to be in favour of a particular person but, was as a result of fraud of defendant, conveyed to someone else, the transaction would be also voidable under s. 19.16 14 Prithuram Kalita v. Mayaram Sarma, AIR 1925 Cal 555; Rajunder Narain Rae v. Bijai Govind Sing, (1841) 2 MIA 181 at 244, (PC). 15 Smith New Court Securities Ltd. v. Scrimgeour Vickers, (Asset Management) Ltd., [1997] AC 254, [1996] 4 All ER 769,(HL) . 16 Havaldar Singh v. Aditya Singh, AIR 1978 All 266; Amar Krishna Mukherjee v. Asha Rani Ghosh, AIR 1985 Cal 398.
Damages for Fraud Where a contract is induced by fraud, the representee is entitled to claim rescission, or damages or
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both. He would have a remedy by way of such suit, even if restutio in integrum is not possible.17 The damages for fraudulent misrepresentation, under the general rule, are arrived at by considering the difference in the position the plaintiff would have been in, had the representation been true and the position he is actually in, in consequence of its being untrue.18 In Doyle v. Olby (Ironmongers) Ltd, 19 an ironmonger's business was purchased by the plaintiff at an exaggerated price in consequence of false representation. The Court allowed rescission of the contract and damages for deceit based on tort and not on breach of contract, the proper measure being compensation for loss up to final disposal of the business, less any benefit received. This meant that the Court awarded not only the difference between the price paid and the value of what he received,20 but also the expenditure wasted in reliance on the contract and compensation for other opportunities passed on in reliance on it.21 A wider liability is imposed upon an intentional wrongdoer. Being a restitutionary remedy,22all act ual losses flowing from fraud are recoverable, even if they could not have been reasonably foreseen;23 subject to the rule of mitigation by the defrauded party.24 Nor would the damages be reduced on account of contributory negligence. In Dambarudhar Behera v. State of Orissa, 25 the plaintiff who had rescinded the contract for misrepresentation of facts known to the representor, claimed damages as the difference between the expenditure incurred towards the contract less earnings derived until the plaintiff knew of the misrepresentation, and these were upheld. In RC Thakkar v. Gujarat Housing Board, 26 damages were awarded to the plaintiff who had fully performed the contract, on the basis of the extra amount which would have been paid to the plaintiff had the representation of costs made by the representor been true. The damages recovered for fraudulent misrepresentation should not be greater than the loss which would have been suffered had the representation or the supposed state of affairs represented, actually existed.27 The principles applicable in assessing damages for fraudulent misrepresentation have been stated by Lord Browne-Wilkinson in Smith New Court Securities Ltd v. Scrimgeour Vickers (Asset Management) Ltd :28
(i) (ii) (iii) (iv)
(v)
(vi) (vii)
The defendant is bound to make reparation for all the damage directly flowing from the transaction; although such damage need not have been foreseeable, it must have been directly caused by the transaction; in assessing such damage, the plaintiff is entitled to recover by way of damages the full price paid by him, but he must give credit for any benefits which he has received as a result of the transaction; as a general rule, the benefits received by him include the market value of the property acquired at the date of the transaction; but such general rule is not to be inflexibly applied where to do so would prevent him obtaining full compensation for the wrong suffered; although the circumstances in which the general rule should not apply cannot be comprehensively stated, it will normally not apply where either: (a) the misrepresentation has continued to operate after the date of acquisition of the asset so as to induce the plaintiff to retain the asset; or (b) the circumstances of the case are such that the plaintiff is, by reason of the fraud, locked with the property; in addition, the plaintiff is entitled to recover consequential losses caused by the transaction; the plaintiff must take all reasonable steps to mitigate the loss once he has discovered
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the fraud.
17 Indra Nath Banerjee v. Rooke, (1909) 37 Cal 81 at 89. 18 Firbank's Executors v. Humphreys, (1886) 18 QBD 54 per Lord Fisher MR at 60. 19 [1969] 2 QB 158, [1969] 2 All ER 119. 20 Doyle v. Olby, (Ironmongers) Ltd., [1969] 2 QB 158, [1969] 2 All ER 119 at 122; Chitty on Contracts, 28th edn, p. 363, para 6-052. 21 East v. Maurer, [1991] 2 All ER 733, [1991] 1 WLR 461,(CA) . 22 South Australia Asset Management Corp. v. York Montague Ltd., [1997] AC 191, [1996] 3 All ER 365 per Lord Hoffmann at 374. 23 Doyle v. Olby, (Ironmongers) Ltd., [1969] 2 QB 158, [1969] 2 All ER 119; East v. Maurer, [1991] 2 All ER 733, [1991] 1 WLR 461,(CA) ; Smith New Court Securities Ltd. v. Scrimgeour Vickers, (Asset Management) Ltd., [1997] AC 254, [1996] 4 All ER 769,(HL) . 24 Standard Chartered Bank v. Pakistan National Shipping Corpn, [1999] 1 All ER 417(Comm) . 25 AIR 1980 Ori 188, (case does not mention fraud, nor the basis for granting damages). 26 AIR 1973 Guj 34. 27 Downs v. Chappell, [1996] 3 All ER 344,(CA) . 28 [1997] AC 254 at 263, [1996] 4 All ER 769 at 718-19 (HL); approving Doyle v. Olby, (Ironmongers) Ltd., [1969] 2 QB 158, [1969] 2 All ER 119.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER II Of Contracts, Voidable Contracts and Void Agreements/S. 18.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER II Of Contracts, Voidable Contracts and Void Agreements S. 18. 'Misrepresentation' defined.-'Misrepresentation' means and includes-(1) (2) (3)
the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true; any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or any one claiming under him; by misleading another to his prejudice or to the prejudice of any one claiming under him; causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement.
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Introduction Under this section, misrepresentation falls into three categories: (i) a statement of fact, which of false, would be misrepresentation if the maker believes it to be true, but which is not justified by the information he possesses; (ii) any breach of duty which gains an advantage to the person committing it by misleading another to his prejudice, there being no intention to deceive; and (iii) causing a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement, even though done innocently.
Language of the Section The earlier editors of this book had found the language of this section unsatisfactory, in that the use of the word 'warranted' in clause (1) in a sense was unknown to the law; and since in this subject, the words 'warranty' and 'condition' have already caused quite enough trouble, there was an elementary fault. The intention of the qualifying clause was also not clear. It was obscure and useless. Clause 3 seemed to confuse between contracts voidable because consent was obtained by misrepresentation and transactions which can have no legal effect, except possibly by way of estoppel because there was no real consent; but, in its 13th Report, the Law Commission of India did not find the need to change the language of the section.
Misrepresentation Generally A misrepresentation is a positive statement of fact, which is made or adopted by a party to a contract and is untrue. It may be made fraudulently, carelessly or innocently. It is a false representation. With regard to contracts, the general principle is that if one party has induced the other to enter into a contract by misrepresenting, though innocently, any material fact especially within his own knowledge, the party misled can avoid the contract. The law may be stated:
If made without honest belief in its truth, it amounts to fraud. The common law recognises a general duty not to make statements which are in fact untrue, with the intent that a person to whom they are made shall act upon them to the damage of a person so acting, and without any belief that they are true. The breach of this duty is the civil wrong known as fraud or deceit, but, if belief in truth exists, it is not required by any general rule of the law to be founded on any reasonable ground, though want of any reasonable ground may be evidence of want of belief.29
The Contract Act does not go beyond the common law. If fraudulent, the misrepresentation is always a cause for rescinding a contract induced by it; if not, it is a cause of rescission only under certain conditions, which the definitions of this section express. In certain classes of contracts, where the facts are especially within one party's knowledge, a positive duty of disclosure is added and the contract is made voidable by mere passive failure to communicate a material fact. The principal examples of this special duty are to be found in the several branches of the contract of insurance, and in sales of immovable property;30 but, there is no positive duty of disclosure between contracting parties where the facts are not by their nature more accessible to one than to the other, though one party may have acquired information which he knows that the other has not.31
A contract cannot be avoided where the truth has been disclosed, or is known.32 29 Derry v. Peek, (1889) 14 App Cas 337, [1886-90] All ER Rep 1.
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30 See s. 17 above, under the heading: 'Clause 5'. 31 Laidlaw v. Organ 15 US, (2 Wheat) 178, (1817); cf Turner v. Green, (1895) 2 Ch 205. 32 New India Assurance Co Ltd v. Priya Blue Industries Pvt Ltd, 2011 AIR SCW 1831.
Representation A representation is a statement made by a representor to a representee and relating by way of affirmation, denial, description or otherwise to a matter of fact. It may be a positive assertion, or may be implied or even expressed by conduct.33 Conduct may convey information as effectively as a positive assertion. 'A nod or a wink or a shake of the head or a smile,'34 may amount to a representation if made to induce the other party into believing a certain state of facts. The use of bank cheque card amounts to a representation that the user has authority, as between himself and his bank, to use his card, and the use of the card would amount to a false representation if it was not authorised by the bank.35 So also the use of a credit card for purchasing goods amounts to a representation that the user has the authority of the credit card company to use the card, even if the user of the card exceeds the limits agreed between him and the credit card company.36 Where premises let out were described as 'offices', a representation could be implied that they were covered by proper planning consent.37 The effect of representations made before making the contract may continue until the contract is actually concluded. Where a statement, which is true to the knowledge of the representor when made, no longer remains so before the contract is concluded, the representor must inform the representee of the change in circumstances.38 Representation and Term of Contract Where a statement is merely an inducement which the party making it does not undertake to make good, it is a representation; and if such a representation is false, it renders the contract voidable. If it is a term of the contract, the aggrieved party can claim damages for breach.
A representation is a statement, or assertion, made by one party to the other, before or at the time of the contract, of some matter or circumstance relating to it. Though it is sometimes contained in the written instrument, it is not an integral part of the contract; and consequently the contract is not broken though the representation proves to be untrue.39
The parties can decide at the time of making the contract which facts shall be deemed material, and to what extent. They can make the existence of any specified state of facts, or the truth of any affirmation, an essential term or condition of the contract, so that without it there is no contract at all; on the other hand, they can make any fact or affirmation the subject matter of a warranty or collateral agreement, so that failure to make it good shall not avoid the principal contract, but only give a right to damages. In every case the question is what the parties really intended. Even where the parties do not make such express provision, where the representor warrants the accuracy of the representation, i.e., promises to make it good, it would be construed a term of the contract. The primary test is of the contractual intention, an intention of both the parties that contractual liability would attach in respect of inaccuracy of the statement. The difference can be illustrated in this example. A sells a mare to B. Before the sale, A writes to B in answer to inquiries from B as follows: 'I think your queries would be satisfactorily answered by a friend
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if you have one in the station, and I shall feel more satisfied. All I can say is that the mare is thoroughly sound.' The letter is a 'positive assertion' of soundness coupled with a recommendation to B to satisfy himself before purchasing; but it does not amount to a warranty.40 The plaintiff purchased a car sold to him with the representation that it had done 20,000 miles after its reconditioning, whereas it had act ually done over 100,000 miles and was even otherwise unsatisfactory. The plaintiff succeeded in getting damages for breach of what was intended to be a warranty.41 The Esso Petroleum Company, using its expert knowledge, induced a dealer to take a petrol pump on lease. The estimate of the prospective petrol sales from the station was exaggerated and the dealer was awarded damages for breach of warranty.42 A secondhand motorcar dealer sold an old car to the plaintiff representing it to be in excellent condition; but when the plaintiff purchased and ran it for three weeks he discovered that the engine was in a very bad condition and had to be replaced. The motorcar dealer was held to be liable in damages for misrepresentation and breach of the implied warranty.43 The legal effect of a contractual term differs from that of a mere representation: in that first, the nature of rescission for breach of a term differs from that of rescission for misrepresentation, and secondly, liability in damages for breach of a contractual term will often arise without the necessity for any fault, there is no liability in damages for a purely innocent misrepresentation.44 It is, therefore, necessary to determine the category in which the statements made by the parties, during negotiations leading to a binding contract, should fall. For example, a statement in an advertisement is capable of being a term in a subsequent contract.45'An affirmation at the time of a sale is warranty, provided it appears on evidence to have been so intended.'46 The question is one of determining the intention of the parties as evidenced by their words47 and conduct,48 so that no general principle of interpretation can be universally true.49 A party's actual intention may be overridden by the objective inference drawn from his behaviour at the time, of the transaction.50 The intention of the parties seldom clearly appears, and the courts have had regard to any one or more of a number of factors for attributing an intention. These factors should be regarded as valuable, though not decisive, tests.51 The factors taken into account by the courts are as follows:52
(i) (ii)
(iii) (iv)
(v) (vi)
If only a brief period of time elapses between the making of the statement and the formation of the contract, the Court may be disposed to hold that the statement is a term of the contract.53 Where the party to whom the statement is made, makes it clear that he regards the matter as so important that he would not contract without the assurance being given, that is evidence of an intention of the parties that the statement is to be a term of the contract.54 Where the party making the statement is stating a fact which is or should be within his own knowledge and of which the other party is ignorant, that is evidence that the statement is intended to be a term of the contract.55 Where, subsequent to negotiations, the parties enter into a written contract and that contract does not contain the statement in question that may point towards the statement being a mere representation,56 though there have been cases where it has been found that such a preliminary statement constitutes a collateral contract.57 Where the party making the statement suggests an independent survey or opinion that may show that no warranty was intended.58 It has been said that the maker of a statement can rebut an inference of warranty if he can show that he was innocent of fault in making it, and that it would not be reasonable in the circumstances to hold him bound by it.59
Contractual terms must also be distinguished from words of expectation or estimate, which do not form part of the contract;60 such statements may not even give rise to liability as misrepresentations if they are honestly made.61
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The (English) Misrepresentation Act, 1967 There was authority to support that once the misrepresentation became the term of the contract, the right to rescission was lost, the situation being regarded as a breach of a contractual term;62but, under s. 1(a) of the (English) Misrepresentation Act, 1967 rescission is open even though the misrepresentation has become a term of the contract; and a person is not deprived of the right to rescind for misrepresentation merely because the representation has become a term. It is said that the effect of the (English) Misrepresentation Act, 1967 on the effect of a misrepresentation which is both a contractual statement and a contractual term, is a matter of considerable difficulty.63 Representation of Fact The traditional rule is that a representation must be a statement of fact, past or present, as distinct from a statement of opinion, or of intention, or of law. A mere statement of opinion proved to be unfounded, is not misrepresentation, nor a mere statement of intention which has not been put into effect. These are not representations of fact, except in so far as they show that the opinion or intention is held by the person expressing it.64 Fact and Opinion Statements as to opinion may range from casual remarks to considered judgments based on experience and consideration of evidence. If the person expressing the opinion did not hold it, or no reasonable man could have held it on the known facts, the statement may be regarded as a statement of fact. Particularly, if the facts are not equally known to both sides, then a statement of opinion by one who knows the facts best involves very often a statement of a material fact, for he impliedly states that he knows facts which justify his opinion.65 In the case of a sale of a hotel, where the tenant was described as 'a most desirable tenant' whereas his rent could be recovered under pressure and he was currently much in arrears, such statement was held to entitle the purchaser to rescind the contract.66 Where a vendor's solicitor honestly, but without any reasonable ground believed that estate duty would be payable on the death of an annuitant 'who is believed to have no agreeable estate', the purchaser of an absolute reversion in a trust fund was held entitled to rescind the sale because the vendor was in a stronger position to ascertain the facts, which implied a representation that he had reasonable grounds for his belief.67Where the bank made a statement that the management was 'respectable and trustworthy', which was contrary to the bank's act ual experience of the management, it was held to be a misrepresentation.68 However, in Economides v. Commercial Union Assurance Co. plc, 69 the plaintiff renewed his household contents insurance policy representing 'to the best of his knowledge and belief' that the cost of replacing the contents of the flat as new (including the valuables of his parents who had moved into his flat) was GBP 16000. The flat was burgled. Upon his claim, the insurers repudiated the policy on the ground that the contents were valued at the time of the burglary at GBP 40000, and therefore the plaintiff had misrepresented the facts. It was held that the statement being of his belief, it was true when made in good faith. Hence, while there had to be some basis for the belief which was honestly made, there was no requirement that the insured had to carry out the specific inquiries in order to establish an objectively reasonable belief. The plaintiff's representation, based on the valuation put forward by his father, had been honestly made. The distinction between statement of fact and opinion is said to have become less important;70viz., in Esso Petroleum Co. Ltd v. Mardon, 71 a petroleum company negotiating for a lease of a filling station negligently gave the prospective tenant over-optimistic estimates of the sale potential of the filling station, which was based on detailed evaluation by the petroleum company. The tenant was not in as good a position as the company to make estimates. It was held to be liable to the tenant for negligent misrepresentation.
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Statements of opinion or intention may not amount to representations where the maker of the statement had no real knowledge or was simply passing on information; but where it is reasonable for the representee to rely on the representor's statements even where those statements are matters of opinion, the statement would be regarded as a representation.72 Statements of opinion published as if they were a fact may be regarded as a statement of fact, and may be construed as misrepresentation, if false.73 Statement of Fact and Commendatory Statements Similarly, 'puffs and commendatory statements' do not amount to representation.74 Commendatory expressions such as advertisements to the effect that a soap powder 'washed whiter than white' or that certain brand of cigarettes gives 'lasting satisfaction' are not considered as serious misrepresentation of fact. In a private contract, such latitude is allowed where a person wants to seek a customer, although the borderline of permissible assertion is not always discernible. At an auction sale, land was stated to be 'fertile and improveable', when it actually was partly 'abandoned and useless.' This was held to be 'a mere flourishing description by an auctioneer'; but, statements made in good faith are not misrepresentation if they turn out to be wrong.75 In Carlill v. Carbolic Smoke Ball Co, 76 a manufacturer making a precise claim that his carbolic smoke balls gave immunity from influenza was held liable; but, in the misrepresentation as to the status of a lessee77 to a prospective purchaser, the maker was not guilty, unless he intended to give a false impression. It is a question of fact in each case whether it is a statement of mere praise or an assertion of 'verifiable facts'. Statement of Fact and Statement of Intention Statement of intention may be misrepresentation of existing fact if at the time it was made, the intention or the ability to put it into effect did not exist.78 For example, where a man orders goods which he had no intention to pay for, this was fraudulent misrepresentation.79 In M Hassanji & Sons v. State of Madhya Pradesh, 80 the Government indicated at the time of the agreement, its intention to increase the rate of royalty for mining leases, and executed a mining lease at a higher rate of royalty. This intention was evident from the draft rules published. Subsequently, the Government dropped its decision to increase the rates. It was held that the lessee could not repudiate his liability to pay higher rates on the ground of misrepresentation. Representation and Statements of Law Statements of law are statements of opinion, and may, therefore, equally be representations of fact. A wilful misstatement of law may therefore, amount to a misrepresentation.81 It is said that dichotomy between statements of law and statements of facts is too neat, and is apt to mislead.82 If a person states his opinion as, to the legal position which in fact is not his real opinion, it is a misrepresentation of fact and even an innocent statement of law may be so where it carries an implication of fact which itself is untrue.83 Therefore, a statement by a tenant to his vendee that war regulations applied to the case, although he knew they did not apply, was held to be a material misrepresentation entitling the vendee to rescind the sale.84 A representation that planning permission existed for use of premises let out as office was a representation of fact, and not law.85 Where a clause of re-entry contained in a kabuliyat (counterpart of a lease) was represented by a zamindar's agent as a mere penalty clause, the Privy Council held that the misrepresentation was such as vitiated the contract, and the zamindar's suit was dismissed.86 A statement about the existing state of law incorrectly made cannot constitute misrepresentation if it is later found that the statement was erroneous. Thus the contract could not be rescinded where the State of Rajasthan represented that the auctioned property was freehold and ceiling free and Floor Area Ration (FAR) available was 2.0, but in fact it was 1.75 and the land was not ceiling free.87
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33 Halsbury's Laws of England, Vol. 31, 4th edn, Reissue, 1 November 2003, MISREPRESENTATION AND FRAUD, para 703. 34 Walters v. Morgan, (1861) 3 De GF & J 718 at 723. 35 R v. Charles, [1977] AC 177,(HL) . 36 R v. Lambie, [1981] 1 WLR 78, [1981] 2 All ER 776,(HL) . 37 Laurence v. Lexcourt Holdings Ltd., [1973] 2 All ER 810, [1978] 1 WLR 1128. 38 Davies v. London Provindal Marine Insurance Co., (1878) 8 Ch D 469, (representation made innocently, the representor came to know later that the facts showing it were false). 39 Behn v. Burness, (1863) 3 B&S 751, (ship decribed in charter-party as 'now in the port of Amsterdam'). Bannerman v. White, (1861) 10 CBNS 844, (hop bought on terms of being free from treatment with sulphur). 40 Currie v. Rennick, (1886) Punj Rec No 41. 41 Dick Bentley Productions Ltd. v. Harold Smith, (Motors) Ltd., [1965] 2 All ER 65, [1965] 1 WLR 623. 42 Esso Petroleum Co. Ltd. v. Mardon, [1976] QB 801, [1976] 2 WLR 583, [1976] 2 All ER 5; Leaf v. International Galleries, [1950] 2 KB 86, [1950] 1 All ER 693,(CA) . 43 Crowther v. Shannon Motor Co., [1975] 1 All ER 139 at 141, (CA); distinguishing Bartlett v. Sidney Marcus Ltd., [1965] 2 All ER 753,(CA) . 44 Except in the English law in the limited circumstances provided for in the Misrepresentation Act, 1967, s. 2(2); 'Innocent misrepresentation' below. 45 Turber v. Anquetil, [1953] NZLR 952, (New Zealand SC), (advertisement of piano for private sale); and see Carlill v. Carbolic Smoke Ball Co., [1893] 1 QB 256, [1891-94] All ER Rep 127,(CA) ; but see Eaglesfield v. Marquis of Londonderry, (1875) 4 Ch D 693,(CA), (incorrect statement in share transfer certificate was a mere representation even if it was in a written document used at the time of the formation of the contract). 46 Attributed to Holt CJ. by Buller J. in Pasley v. Freeman, (1789) 3 Term Rep 51 at 57, [1775-1802] All ER Rep 31. 47 Liverpool and County Discount Co. Ltd. v. AB Motor Co., (Kilburn) Ltd., [1963] 2 All ER 396, [1963] 1 WLR 611,(CA), ('we hereby certify and warrant'). 48 Pasley v. Freeman, (1789) 3 Term Rep 51 at 57, [1775-1802] All ER Rep 31; Heilbut, Symons & Co. v. Buckleton, [1913] AC 30,(HL), [1911-13] All ER Rep 83. 49 Heilbut, Symons & Co. v. Buckleton, [1913] AC 30 at 50, (HL), [1911-13] All ER Rep 83, per Lord Moulton. 50 Pasley v. Freeman, (1789) 3 Term Rep 51 at 57, [1775-1802] All ER Rep 31; Heilbut, Symons & Co. v. Buckleton, [1913] AC 30,(HL), [1911-13] All ER Rep 83. 51 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, 'CONTRACT', para 768. 52 Ibid. 53 Routledge v. McKay, [1954] 1 All ER 855, [1954] 1 WLR 615,(CA), (seven days between statement and sale; no warranty); Couchman v. Hill, [1947] KB 554, [1947] 1 All ER 103,(CA), (statement made same day as sale was a warranty); Harling v. Eddy, [1951] 2 KB 739, [1951] 2 All ER 212,(CA), (statement immediately before sale was warranty); but cf Schawel v. Reade, [1913] 2 IR 81,(HL), (where it was held that there was a warranty though the sale was three weeks after statement and the word 'warranty' was not used); Hopkins v. Tanqueray, (1854) 15 CB 130, [1843-60] All ER Rep 96, (no warranty though sale one day after statement). 54 Bannerman v. White, (1861) 10 CBNS 844, (sale of hops, purchaser making it clear that he would not buy if they contained sulphur, and vendor assured him they did not); Thornalley v. Gostelow, (1947) 8 Ll L Rep 507, (sale of boat for fishing; purpose made known to vendor); Oscar Chess Ltd. v. Williams, [1957] 1 All ER 325, [1957] 1 WLR 370,(CA), (sale of 1939 car as 1948 model, but the purchaser would have bought had they known the truth, but at a lower price). 55 Oscar Chess Ltd. v. Williams, [1957] 1 All ER 325 at 329, 331, [1957] 1 WLR 370 at 375, 378, (CA), per Denning and Hodson LJJ respectively, (private sale of car to garage); Dick Bentley Productions Ltd. v. Harold Smith, (Motors) Ltd., [1965] 2 All ER 65 at 67, [1965] 1 WLR 623 at 628, (CA), per Lord Denning MR; Stucley v. Baily, (1862) 1 H&C 405 at 420, per Bramwell B; cf Maybury v. Wibrew, (1949) 82 Ll L Rep 481, (purchaser of horse obviously relying on his own inspection). 56 In Routledge v. McKay, [1954] 1 All ER 855, [1954] 1 WLR 615,(CA), and Gilchester Properties Ltd. v. Gorum,
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[1948] 1 All ER 493; Hill v. Harris, [1965] 2 QB 601 at 616, [1965] 2 All ER 358 at 362, (CA), obiter per Diplock LJ, (allegation of warranty collateral to lease); cf De Lassalle v. Guildford, [1901] 2 KB 215, [1900-03] All ER Rep 495,(CA) ; Miller v. Cannon Hill Estates Ltd., [1931] 2 KB 113, [1931] All ER Rep 93; Birch v. Paramount Estates Ltd., (1956) 167 EG 396, (warranties found though not incorporated into subsequent written contracts). 57 For collateral contract in general, De Lassalle v. Guildford, [1901] 2 KB 215, [1900-03] All ER Rep 1,(CA) ; City d' Westminster Properties, (1934) Ltd. v. Mudd, [1959] Ch 129, [1958] 2 All ER 733, (collateral contracts and parol evidence rule). 58 Ecay v. Godfrey, (1947) 80 L1-L Rep Rep 286, (sale of boat; vendor suggesting survey). 59 Dick Bentley Productions Ltd. v. Harold Smith, (Motors) Ltd., [1965] 2 All ER 65 at 67, [1965] 1 WLR 623 at 627-28, (CA), per Lord Denning MR; it is difficult to reconcile this view with the distinction drawn by the Misrepresentation Act, 1967, s. 2. 60 Barker v. Windle, (1856) E & B 675, 106 RR 762, (statement of tonnage in champarty); McConneli v. Murphy, (1873) LR 5 PC 203, ('about 600 red pine spars') [1861-73] All ER Rep 1075; McLay d' Co. v. Perry d' Co., (1881) 44 LT 152, ('about 150 tons'). 61 Bissett v. Wilkinson, [1927] AC 177, [1926] All ER Rep 343,(PC) . 62 Pennsylvania Shipping Co. v. Compagnie Nationale de Navigation, [1936] 2 All ER 1167. 63 Chitty on Contracts, 28th edn, p. 338, para 6-002. 64 Illustration, (d) to definition of 'fact', s. 3, Indian Evidence Act, 1872.Chitty on Contracts, 28th edn, p. 338, para 6-004. 65 Economides v. Commercial Union Assurance Co. plc, [1998] QB 587 per Simon Brown LJ at 645, [1997] 3 All ER 636 at 644, (CA). 66 Smith v. Land & House Property Corpn., (1884) 28 Ch D 7, 51 LT 718. 67 Brown v. Raphael, [1958] Ch 636;, [1958] 2 All ER 79, [1958] 2 WLR 647; but see Economides v. Commercial Union Assurance Co. plc., [1998] QB 587, [1997] 3 All ER 636,(CA) . 68 Credit Lyonnais Bank Nederland v. Export Credit Guarantee Department, [1996] 1 Lloyd's Rep 200. 69 Economides v. Commercial Union Assurance Co. plc, [1998] QB 587, [1997] 3 All ER 636,(CA) . 70 Box v. Midland Bank Ltd., [1979] 2 Lloyd's Rep 391. 71 [1975] QB 819, [1975] 1 All ER 203, reversed in part in, [1976] QB 801, [1976] 2 All ER 5, [1976] 2 WLR 583,(CA) ; Mclnerny v. Lloyd's Bank Ltd., [1974] 2 Lloyd's Rep 246 at 253-54; Cornish v. Midland Bank plc, [1985] 3 All ER 513. 72 Chitty on Contracts, 28th edn, p. 341, para 6-010. 73 Reese River Silver Mining Co. Ltd. v. Smith, (1869) LR 4 HL 64. 74 Dimmock v. Hallett, (1866) LR 2 Ch App 21 at 27; Shiromani Sugar Mills Ltd. v. Debi Prasad, AIR 1950 All 508 at 512, (statements in a company prospectus). 75 New Brunswick and Canada Ry amd Land Co. v. Conybeare, (1862) 9 HL Cas 711; Bisset v. Wilkinson, [1927] AC 177, [1926] All ER Rep 343,(PC) ; Anderson v. Pacific Fire and Marine Insurance Co., (1872) 7 CP 65. 76 [1893] 1 QB 256, [1891-94] All ER Rep 127,(CA) ; Dimmock v. Hallett, (1866) LR 2 Ch App 21. 77 Gross v. Lewis Hillman Ltd., [1970] Ch 445, [1969] 3 All ER 1476, [1969] 3 WLR 787. 78 Edgington v. Fitzmaurice, (1885) 29 Ch D 459, [1881-85] All ER Rep 856; Angus v. Clifford, (1891) 2 Ch 449 at 470, (449, 470). 79 Re Shackleton ex p. Whittaker,(1875) LR 10 Ch App 446; Ray v. Sempers, [1974] AC 370. 80 M Hassanji and Sons v. State of Madhya Pradesh, AIR 1965 SC 470 affirming State of Madhya Pradesh v. M Hassanji and Sons, AIR 1957 MP 135. 81 West London Commercial Bank v. Kitson, [1884] 13 QBD 360. 82 Brikom Investments Ltd. v. Seaford, [1981] 1 WLR 863, [1981] 2 All ER 783. 83 Chitty on Contracts, 28th edn, p. 342, para 6-011.
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84 Oudaille v. Lawson, (1922) NZLR 259; West London Commercial Bank v. Kitson, (1884) 13 QBD 360; Mackenzie v. Royal Bank of Canada, [1943] AC 468., (Representation that A's shares are pleaded to B. 85 Laurence v. Lexcourt Holdings Ltd., [1973] 2 All ER 810, [1977] 1 WLR 1128. 86 Pertap Chunder Ghose v. Mohendranath Purhait, (1889) 16 IA 233, (1889) 17 Cal 291,(PC) . 87 Ganga Retreat & Towers Ltd. v. State of Rajasthan, (2003) 12 SCC 91.
Representor A misrepresentation, in order to give relief to the other party, must have been made by the party to the contract, or his agent acting in the course of business and within the scope of authority,88 or any other person in such a manner that the other party had notice of the misrepresentation.89 Misrepresentation made by a salesman of one of the contracting parties was imputable to that party.90 88 See s. 238 below; Garnac Grain Co. Inc v. HMF Faure and Fairclough Ltd. and Bunge Corpn, [1966] 1 QB 650 reversed on facts in, [1966] 1 QB 658, [1965] 3 All ER 273,(CA) ; later affirmed in, [1968] AC 1130, [1967] 2 All ER 353,(HL) . 89 Barclay's Bank plc v. O'Brien, [1994] 1 AC 180, [1993] 4 All ER 417; there is nothing in the language of s. 18 requiring that the misrepresentation must have been made by a party to the contract, (cf s. 17). 90 Dukharam Nath Zutshi v. Commercial Credit Corpn Ltd., AIR 1940 Oudh 35.
Representee The person seeking relief in respect of misrepresentation must show that the representation was made to him, i.e., he is the representee; for it is only the representee who is entitled to remedy. Representees may be of three classes:91
(i) (ii) (iii)
persons to whom the representation is directly made and their principals; persons to whom the representor intended the representation to be passed on; members of a class at which the representation was directed.
The representee may be the general public but it does not follow that a legal remedy exists for misrepresentation in such a case. But if the representation is directed at a particular class, a representative must bring himself within this class. In Peek v. Gurney, 92 the promoters of a company issued a false prospectus and the plaintiff purchased shares of the company in the open market relying on the prospectus. The House of Lords held that the prospectus was addressed inviting the public to subscribe and plaintiff having bought the shares in the open market could not recover as he was not of the class the prospectus was meant for. In Gross v. Lewis Hillman Ltd, 93 it was held that the right of the purchaser of certain land to rescind the contract for misrepresentation did not run with the land and a purchaser from the original purchaser could not avail of it. Where the defendants-surveyors had prepared a confidential valuation report for a building society for its exclusive use and it was not intended to be made available to the plaintiff-purchaser who had paid the customary fee of the surveyor through the building society, it was nevertheless held that the defendants did owe a duty of care to the plaintiff because they ought to have foreseen that the plaintiff, as was common with most such house purchasers, would not have an independent survey, but would rely on the defendants' survey.
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Though the plaintiffs had not seen the surveyor's report sent to the building society, it was held that the plaintiffs had relied and act ed on the valuation in the sense that they believed that it confirmed the value of the house to be at least equal to the loan the building society was prepared to make on the strength of the valuation.94 Where a false statement is made in a bill of lading, any person who relies on it will be a representee, because the person making the statement knows that it would be passed on to other people and relied on by them.95 A wrong statement, to be a misrepresentation, need not be directly made to the plaintiff. It is enough if it is made to a third person in a manner that the plaintiff will become aware of it.96 91 Chitty on Contracts, 28th edn, at 354, para 6-032, Swift v. Winterbotham, (1873) 8 QB 244 at 253. 92 (1873) 6 LR 377, [1861-73] All ER Rep 116. 93 [1970] Ch 445, [1969] 3 All ER 1476. 94 Yianni v. Edwin Evans & Sons, [1982] QB 438, [1981] 3 All ER 592. 95 Brown Jenkinson & Co. Ltd. v. Percy Dalton, (London) Ltd., [1957] 2 QB 621, [1957] 2 All ER 844, [1957] 3 WLR 403. 96 Babui Panmato Kuer v. Ram Agya Singh, AIR 1968 Pat 190, (a case of consent to marriage).
Inducement A misrepresentation would entitle a person to avoid the contract only if it has operated on the mind of the representee. Section 14 provides that consent is said to have been caused by misrepresentation when it would not have been given but for the existence of such misrepresentation. The Explanation to s. 19 below provides that a fraud or misrepresentation which did not cause the consent to a contract of the party on whom such fraud was practised, or to whom such misrepresentation was made, does not render a contract voidable. The party whose consent is caused by misrepresentation may rescind the contract even though his consent may not have been caused solely by the representation. It is not necessary to show that the statement was the sole cause of his acting as he did.1 Where the representor knows or ought to know that the representee is likely to act on the misrepresentation, relief will not be denied merely because a reasonable man would not have been influenced by it;2 but, when a purchaser chose to rely upon his own judgment or upon that of his agent, he could not afterwards say that he relied upon a previous representation made by the vendor.3 1 Edgington v. Fitzmaurice, (1885) 29 Ch D 459, [1881-85] All ER Rep 856 per Cotton LJ. at 860; Arnison v. Smith, (1889) 41 Ch D 348, [1886-90] All ER Rep Ext 1332; Chitty on Contracts, 28th edn, at 358 para 6-039. 2 Chitty on Contracts, 28th edn, p. 359, para 6-041. 3 Holmes v. Jones, (1907) 4 CLR 1692, (High Court of Australia); Redgrave v. Hurd, [1881] 20 Ch D 1 at 15, [1881-85] All ER Rep 77.
Fraud and Misrepresentation The principal difference between fraud and misrepresentation is that in one case the person making the suggestion does not believe it to be true and in the other he believes it to be true, though in both cases it is a misstatement of fact which misleads.4 4 Niaz Ahmad Khan v. Parsottam Chandra, (1931) 53 All 374, AIR 1931 All 154 at 156; RC Thakkar v. Gujarat Hsg
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Board, AIR 1973 Guj 34 at 43; Rattan Lal Ahluwalia v. Jai Janinder Parshad, AIR 1976 P&H 200.
Misrepresentation under the English Law Under English law, the provisions relating to misrepresentation are contained in the common law, equity and the Misrepresentation Act, 1967. A pre-contractual misrepresentation may give rise to contractual, tortious, statutory and equitable remedies. Before the Misrepresentation Act, 1967 the party to a contract whose consent was caused by misrepresentation could rescind the contract, but could claim damages only if it was fraudulent, negligent, or a term of the contract. After the Act, the representee can claim damages for negligent representation to the same extent as for fraudulent misrepresentation. The Act also gives to the Court the power to refuse to rescind the contract, but to award damages if the misrepresentation is negligent or innocent. After the decision of the House of Lords in Hedley Byrne & Co. Ltd v. Heller and Partners Ltd, 5 and the Misrepresentation Act, 1967 there are, therefore, three categories of misrepresentation: fraudulent, negligent and innocent. 5 [1964] AC 465, [1963] 2 All ER 575.
Clause 1 The first clause refers to positive assertion, which apparently means an absolute and explicit statement of fact, not merely such language as to lead the hearer to infer it. 'Warranted' The author of the book has taken exception to the language of the clause. In the ordinary use of the English language, the assertion of that which is not true, though it may be innocent and even free from negligence, cannot be 'warranted' in any manner. The framers of the New York Civil Code (from where the language was imported) had put this clause under the head of fraud, meaning thereby that a misrepresentation made with reasonable and probable cause for believing it to be true should in no case be treated as fraud, but that a reckless or grossly negligent misrepresentation should be. Applying this meaning to the present section would lay down a more stringent rule as to fraud than that laid down in the English decisions, particularly by the House of Lords in Derry v. Peek .6 When this clause is placed under the head of misrepresentation, it seems to mean that innocent misrepresentation does not give cause for avoiding a contract unless the representation is made without any reasonable ground. It has been held that an assertion cannot be said to be 'warranted' for the purpose where it is based upon mere hearsay. Thus, if A makes a positive statement to B that C would be a director of a company about to be formed, and B applies to shares on the faith of that statement, the statement would be a misrepresentation if A did not derive the information from C directly, but from the third party, D.7 McLean CJ. said:
I need scarcely say that we must deal with this case according to the law of India and not of England, and if we find the term 'misrepresentation' defined by statute in this country, we must do our best to ascertain whether the case is brought within that statutory definition...A says that D told him that he, D had authority from C to use his name in the prospectus as a director, in other words, that he A obtained his information not from C direct, but only through D. I am not disposed to think that if A had relied on the secondhand information he
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derived from D, he was 'warranted' in making the positive assertion that C would be a director.8
Thus, it appears that the person making the representation must have not merely some reasonable ground, but a belief founded on the best information that is available, for it is often quite reasonable to act upon second-hand information, even when it is not unavoidable. It cannot be said whether the framers of the Act intended to go so far.9 Knowledge of a Corporation Where a statement is made by or on behalf of a corporate body, a question may arise as to the circumstances in which the information would be warranted by the information of the corporate body. In William Sindall plc v. Cambridgeshire County Council, 10 the plaintiffs bought a piece of land from the council for housing development. The council had stated in answers to preliminary inquiries about title, that it was 'not aware' of any easement affecting the property other than those disclosed in the contract. The plaintiffs then discovered a sewer under the site, and purported to rescind the contract. It was held that there was no misrepresentation, because the council was not aware of the sewer, and thought the sewer's existence might have been recorded by the council's predecessor, there was no implied representation that the vendor's record-keeping would reveal any encumbrance which ought to have been recorded. While so holding, Hoffman LJ. observed that the commonly employed answer 'not so far as the vendor is aware' contained an implied representation that reasonable investigations have been made and that the vendor's records were not in such a state that a reasonable conveyancer would realise that they were inadequate for the purpose of enabling him to answer the question; and Evans LJ., approved the statement of the first instance judge that when dealing with the knowledge of a corporate vendor with changing staff:
there are three possible types of information: (a) information in someone's personal memory; (b) information which is in the files and which the reasonable and proper investigations of a conveyancing solicitor when preparing his title for sale will reveal; and (c) other information which was either in an individual's memory and has been forgotten or is in the file which the ordinary and prudent conveyancer's inquiries will not reveal. Of these I consider (a) and (b) will amount to knowledge for the purpose of the answer under consideration, and that (c) [will] not.
Negligent Misrepresentation Negligent misrepresentation is one made carelessly or without reasonable grounds for believing it to be true;11 but it cannot be so regarded unless the representor owed a duty to the representee to be careful.12 There can be liability in negligence in respect of an innocent though careless misstatement which causes financial loss, but where there is specific disclaimer of responsibility there is no liability. The responsibility exists even where there is no fiduciary relationship between the parties.13 In Derry v. Peek, 14 it was held that negligent misrepresentation was one made carelessly or without reasonable grounds for believing it to be true;15 but it could not be so regarded unless the representor owed a duty to the representee to be careful. In a later case Nocton v. Lord Ashburton, 16 a solicitor was sued by his client for giving wrong advice whereby he was induced to release a part of the security and thereby the security became insufficient and it was also alleged that the advice was given to benefit himself (the solicitor) and that the solicitor knew that security will become insufficient. The House of Lords held that the mortgagee was entitled to relief for the breach of duty by the solicitor towards his clients, as the fiduciary relationship required a duty to take care. In Candler v. Crane, Christmas & Co, 17 it was held that if a company's auditors gave negligent advice to a person and the latter invited money in the company and lost it, an act ion of negligent misrepresentation would lie against the auditor if it could be shown that the auditor knew that representee would act on the advice, but, in Hedley Byrne & Co. Ltd v. Heller & Partners Ltd, 18 advice given in the course of social relationships would not be a ground of liability, they also made it clear that any special relationship will
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suffice. In case of professional relationships, even where there is no contract between the parties it would give rise to a duty of care whenever the representor knew that the representee was likely to act on the representation. Even where an advisor is not acting in his professional capacity, advice given by him 'in a business capacity' may give rise to a duty of care provided he has some financial interest in the transaction.19Mutual Life & Citizen's Assurance Co. Ltd v. Evatt, 20 limited to some extent the rule in Hedley Byrne's case, the majority of the Privy Council holding that in general there was no duty unless the maker has held himself out as having some special skill or competence in the matter; but, in Esso Petroleum Co. Ltd v. Mardon, 21 the minority view in the preceding case was adopted. In this case a petroleum company negotiating for a lease of a filling station negligently gave the prospective tenant over-optimistic estimates of the sale potential of the filling station which was based on detailed evaluation by the petroleum company and the tenant was not in as good a position as the company to make estimates. It was held to be liable to the tenant for negligent misrepresentation. The last case indicates that a duty of care may subsist between parties negotiating a contract if information was given in connection with the contract. Section 2(1) of the (English) Misrepresentation Act, 1967 which has done away with the need to establish any duty of care between the representor and the representee in the English law, provides that a person shall be liable for misrepresentation notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made, that the facts represented were true. A state financial corporation offered a deceased debtor's legal representative to retain the factory unit by clearing its dues, which offer was accepted by the representative. The corporation then sought to revise the amount of outstanding dues upwards. It was held that the initial offer amounted to misrepresentation, and the representative was allowed to avoid the deal.22 Innocent Misrepresentation The term innocent misrepresentation is used for misrepresentations in which no element of fraud or negligence is found, or one for which the representee has good grounds of belief. Under the English law, a person who is induced to enter into a contract as a result of innocent misrepresentation can rescind the contract, but is not entitled to damages.23 To succeed on the basis of innocent misrepresentation, the plaintiff would have to show that first, the language relied upon does import or contain a representation of some material facts; secondly that the representation is untrue; and thirdly that the plaintiff in entering into the contract was induced so to do in reliance upon it.24 For example, where an estate agent misrepresented, even though innocently, the effect of the printed form of contract by saying that the commission would be payable only if the sale went through, but the printed form of contract contained different terms contrary to this representation, then the contract with the estate agent was not binding and the contract would be avoided on the ground of misrepresentation.25 A contract of sale will be rescinded where the solicitor for the vendors makes an honest statement, but without reasonable ground for so believing, if the statement vitally affects the subject matter of sale. There must be imported into the representation the further representation that the vendor has reasonable ground for supporting that belief.26 In Mackenzie v. Royal Bank of Canada, 27 a married woman stood guarantee (with pledge of securities) given by her for the indebtedness of a company in which her husband was a principal shareholder. Before she stood guarantee, she was assured by her husband and the bank manager that her shares were bound to the bank and that they had gone anyhow and the only chance of getting them back was if she signed the guarantee. There were subsequent renewals of the guarantee before the plaintiff was advised of the true facts. The contract of guarantee was held liable to be avoided as induced by material misrepresentation even if innocently made. The mere fact that the party making the representation had treated the contract as binding and had acted on it did not preclude relief nor could it be said that the plaintiff received anything under the contract which she was unable to restore.28
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In Senanayake v. Cheng, 29 the Privy Council gave relief of rescission where a partner sold his portion of stockbrokers business to the plaintiff, who, after she took over as managing partner, found that she had been induced to buy the partnership business on a false though not fraudulent representation, and had brought an act ion for the return for her money. The defendant inter alia relied on Seddon v. North Eastern Salt Co. Ltd, 30 and pleaded that the plaintiff was not entitled to rescind the contract on the ground of innocent misrepresentation because it was executed, but it was held that 'the mere fact that the party making the representation has treated the contract as binding and has acted on it does not preclude relief. Nor can it be said that the plaintiff received anything which she is unable to restore', and the plaintiff's claim was decreed. An innocent misrepresentation would fall within this section only in the circumstances mentioned in clause (3), i.e., causing, the other party to the agreement to make a mistake as to the substance of the thing which is the subject of the agreement. It has been held that a misrepresentation, even though innocent and not wilful, will not avoid a contract, unless if it is made without reasonable grounds. Merely marking the trees of a forest from external appearance by a forest officer as sound and sold to a forest contractor is not misrepresentation if the trees turn out to be unsound.31 It is submitted that on the language of the section read with s. 19, a representation of a fact based on reasonable grounds for belief in its existence would not entitle the other party to rescind the contract, unless it falls within clause (3). Even under the English law, no act ion for damages lie for a mere innocent representation in this sense;32 but, a claim will lie for damages if it becomes a contractual promise and becomes a term of the contract. Thus where the parties enter into a contract and the misrepresentation becomes a term of the contract, an action will lie for damages whether the representation is innocent, negligent or fraudulent, as also where the representee enters into a contract with a third party relying on the misrepresentation.33 In the case of an innocent misrepresentation being passed on to a sub-buyer, thus bringing about a sub- contract, the sub-buyer may rescind the sub-contract.34 In that case the original contract can be rescinded by the original buyer. Innocent Misrepresentation and Executed Contracts An executed contract cannot be rescinded on the ground of innocent misrepresentation; but this rule does not apply to cases of fraud or breach of fiduciary relations.35 This rule applies to disposition of interests in land,36 e.g., vendor's title. Extension of this rule to executed conveyances was criticised by Denning LJ. Bell v. Lever Brothers Ltd. 37 and also by Scrutton LJ in Lever Bros Ltd v. Bell. 38 The rule had been applied to sale of shares in Seddon v. North Eastern Salt Co. Ltd, 39 where the absence of fraud and the absence of any allegation of fraud was held to be a bar to an act ion for rescission in the case of an executed contract for the sale of shares from the persons who really owned the shares. This decision was doubted in Lever Brothers Ltd v. Bell, 40 and the Privy Council actually set aside an executed agreement in Mackenzie v. Royal Bank of Canada .41 An executed sale was set aside on the ground of mere misrepresentation when it appeared that there is a difference in substance between the thing bargained for and that obtained.42 Instances of Misrepresentation A seller of land professing to be the owner, though merely a lease-holder, was guilty of misrepresentation.43 Where the vendor, whether on inquiry or otherwise, gave false information about the income or rental of the property being sold, he was liable for misrepresentation.44 It was misrepresentation where an endorsement contained an acknowledgment of full satisfaction of a mortgage, when it was not so satisfied;45 or where the landlord falsely informed a prospective tenant that the house had the specific number of bedrooms as required by the tenant.46 6 (1889) 14 App Cas 337, reversing judgment of CA at 37 Ch D 541. 7 Mohan Lall v. Sri Gungaji Cotron Mills Co., (1899) 4 Cal WN 369.
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8 Ibid. 9 The Law Commission of India in its 13th Report, para 43 has not found the need to change the language of the section. 10 [1994] 3 All ER 932. 11 Chitty on Contracts, 28th edn, p. 369, para 6-067. 12 Derry v. Peek, (1889) 14 App Cas 337, [1886-90] All ER Rep 1. 13 Hedley Byrne & Co. Ltd. v. Hellers & Partners Ltd., [1964] AC 465, [1963] 2 All ER 575; Stevens 27 MLR 121; cf Sayu Mohammed Abdulla v. Neelakantan Krishnan, AIR 1958 Ker 322. 14 (1889) 14 App Cas 337, [1886-90] All ER Rep 1. 15 Chitty on Contracts, 28th edn, p. 369, para 6-067. 16 [1914] AC 923, [1914-15] All ER Rep 45. 17 [1951] 2 KB 164, [1951] 1 All ER 426, majority decision disapproved in Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd., [1964] AC 465, [1963] 2 All ER 575. 18 [1964] AC 465, [1963] 2 All ER 575; Yianni v. Edwin Evans & Sons, [1982] QB 438, [1981] 3 All ER 592. 19 WB Anderson & Sons Ltd. v. Rhodes, (Liverpool) Ltd., [1967] 2 All ER 850. 20 [1971] AC 793, [1971] 1 All ER 150,(PC) ; the Australian High Court in Shaddock & Associates Pty Ltd. v. Council of the City of Paramatta, (No 1), (1981) 150 CLR 225, (1981) 55 ALJR 713 followed the majority judgments in Evatt case and held that in general there is no duty to take care in the making of statements unless the maker has held himself out as having some special skill or competence in the matter in question. 21 [1975] QB 819 reversed in part in, [1976] QB 801, [1976] 2 All ER 5,(CA), [1976] 2 WLR 583. See also Mclnerny v. Lloyd's Bank Ltd., [1974] 2 Lloyd's Rep 246 at 253-54; Cornish v. Midland Bank plc, [1985] 3 All ER 513. 22 Sita Devi v. Bihar State Financial Corpn, AIR 2003 Pat 92. 23 Anson's Law of Contract, 29th edn, 2010, p. 310. 24 Brown v. Raphael, [1958] Ch 636, [1958] 2 All ER 79, [1958] 2 WLR 647 at 650; Smith v. Land & House Property Corpn, (1884) 28 Ch D 7, 51 LT 718. 25 Jaques v. Lloyd D George & Partners Ltd., [1968] 1 WLR 625, [1968] 2 All ER 187; dictum of Scrutton LJ. in L'Estrange v. F Graucob Ltd., [1934] 2 KB 394 at 403, [1934] All ER Rep 16; applying Curtis v. Chemical Cleaning & Dyeing Co. Ltd., [1951] 1 KB 805, [1951] 1 All ER 631,(CA) . 26 Brown v. Raphael, [1958] Ch 636, [1958] 2 All ER 79, [1958] 2 WLR 647, (sale on an absolute reversion in a trust fund on the death of an annuitant); Hedley Byrne d' Co. Ltd. v. Hellers d' Partners Ltd., [1964] AC 465, [1963] 2 All ER 575, (careless misstatement); Sayu Mohammed Abdulla v. Neelakantan Krishnan, AIR 1958 Ker 322. 27 [1934] AC 468 per Lord Atkin at 475, (PC); Muskham Finance Ltd. v. Howard, [1963] 1 QB 904, [1963] 1 All ER 81, [1963] 2 WLR 87; Governor of Orissa State v. Shivaprasad Sahu, AIR 1963 Ori 217; Bireswar Sen v. Ashalata Ghose, AIR 1969 Cal 111, (a case of gift to the lawyer's wife upheld). 28 Mackenzie v. Royal Bank of Canada, [1934] AC 468 at 474-75. 29 [1966] AC 63, [1965] 3 All ER 296, [1965] 3 WLR 715; applying Mackenzie v. Royal Bank of Canada, [1934] AC 468 at 475, and Adam v. Newbigging, (1888) 13 App Cas 308,(HL), affirming sub nom Newbigging v. Adam, (1886) 34 Ch D 582, [1886-90] All ER Rep 975(CA) ; and distinguishing Seddon v. North Eastern Salt Co. Ltd., [1905] 1 Ch 326; Solle v. Butcher, [1950] 1 KB 671, [1949] 2 All ER 1107; Leaf v. International Galleries, [1950] 2 KB 86, [1950] 1 All ER 693,(CA) ; Curtis v. Chemical Cleaning d' Dyeing Co., [1951] 1 KB 805, [1951] 1 All ER 631; Long v. Lloyd, [1958] 1 WLR 753, [1958] 2 All ER 402. 30 [1905] 1 Ch 326. 31 Governor of Orissa State v. Shivaprasad Sahu, AIR 1963 Ori 217. 32 Heilbut, Symons & Co. v. Buckleton, [1913] AC 30; Gilchester Properties Ltd. v. Gomm, [1948] 1 All ER 493. 33 Dick Bentley Productions Ltd. v. Herald Smith, (Motors) Ltd., [1965] 3 All ER 65, [1965] 1 WLR 623. 34 Abram Steamship Co. Ltd. v. Westville Shipping Co. Ltd., [1923] AC 773, [1923] All ER Rep 645.
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35 Angel v. Jay, [1911] 1 KB 666, [1908-10] All ER Rep 470, (a case of lease; could not be rescinded on ground of representation of conditions of drains), criticised by Denning LJ in Solle v. Butcher, [1950] 1 KB 671 at 695, [1949] 2 All ER 1107 at 1121; Long v. Lloyd, [1958] 1 WLR 753, [1958] 2 All ER 402. 36 Wilde v. Gibson, (1848) 1 HL Cas 605, [1843-60] All ER Rep 494; Brownlie v. Campbell, (1880) 5 App Cas 925 at 937. 37 Solle v. Butcher, [1950] 1 KB 671 at 695, [1949] 2 All ER 1107,(CA) ; Leaf v. International Galleries, [1950] 2 KB 86 at 90, [1950] 1 All ER 693,(CA) ; Cf Curtis v. Chemical Cleaning and Dyeing Co., [1951] 1 KB 805 at 810, [1951] 1 All ER 631., (It cannot be said that Angel v. Jay, [1911] 1 KB 666, [1908-10] All ER Rep 470 has been overruled). 38 [1931] 1 KB 557 at 588, [1931] All ER Rep 1 HL; reversed in Bell v. Lever Bros, [1932] AC 161, [1931] All ER Rep 1. 39 [1905] 1 Ch 326; this rule has been abrogated in England by s. l, (b) of the Misrepresentation Act, and performance of the contract is no bar to an act ion thereon. 40 [1931] 1 KB 557 at per Scrutton LJ at 588, (CA);, (reversed in Bell v. Lever Bros, [1932] AC 161, [1931] All ER Rep 1). 41 [1934] AC 468. 42 Ratansing Gulabsing v. Nanikram Chatomal, AIR 1927 Sind 219. 43 JW Thomas v. Hanuman Prasad, AIR 1929 All 837. 44 Premchand v. Ram Sahai, AIR 1932 Nag 148. 45 Rangappa Gangappa Lingayat Wani v. Syed Imamuddin, AIR 1934 Nag 29. 46 Allah Bakhsh Khan v. RE Barrow, AIR 1917 Lah 173.
Clause 2 The earlier editors have criticised this sub-section as obscure. In Oriental Bank Corporation v. John Fleming, 47 Sargent J. observed:
...the second clause of s. 18 is probably intended to meet all those cases which are called in the Courts of Equity, perhaps unfortunately so, cases of 'constructive fraud',48 in which there is no intention to deceive, but where the circumstances are such as to make the party who derives a benefit from the transaction equally answerable in effect as if he had been actuated by motives of fraud or deceit.
In this case the plaintiffs, who were creditors of the defendants, sued to set aside a composition deed executed by their agents, alleging that their signature was obtained by a representation made by one of the defendants that the deed was nothing more than an assignment to trustees for the benefit of creditors, as agreed to in a previous meeting of the creditors. It was further alleged that the deed contained a release of which no mention was made at the meeting, and of which the plaintiffs' agents had no knowledge. Under those circumstances, the High Court of Bombay declared the release absolutely void, on the ground that the deed as it was signed was essentially different from that which the plaintiffs' agent intended to execute, or thought they were executing, when they affixed their signature to the deed. The Court went further, and said that there was another ground on which the plaintiffs were entitled to relief, namely, that the defendants were under a duty within the meaning of this clause to communicate to the plaintiffs' agents the fact of the existence of the release and that the breach thereof entitled the plaintiffs to avoid the transaction under s. 19 of the Contract Act but, it is submitted that the first sub-section was more applicable, as there was a 'positive assertion' by one of the defendants that the document was nothing more than a mere assignment of the creditors' property to trustees. This clause will cover concealment of material facts.49 This clause would also cover the position
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where a true statement is made, but it becomes false to the knowledge of the maker before it has been acted upon. In Incledon v. Watson, 50A, in negotiating for the sale of goodwill of a school to B, told him the truth that there were 22 boarders. But before the bargain was concluded, the number had dropped to seventeen to A's knowledge, and he said nothing. This amounted to fraud. In With v. Flanagan, 51 the plaintiff was allowed to rescind a contract to buy the defendant's medical practice. The defendant had, before the signing the contract, correctly stated that the practice was worth GBP 2000 a year, but before the plaintiff went into the possession on completion four months later, the practice had dwindled to a mere GBP 5 per week to the defendants' knowledge; yet he kept silent. The Court of Appeal based their decision on the defendant's duty to communicate the change of circumstances. This non-disclosure would appear to be a breach of duty within clause 2. Duty to Disclose The general rule therefore, is that mere non-disclosure does not constitute misrepresentation, for there is no duty on the parties to disclose material facts to each other howsoever dishonest such non-disclosure may be in the particular circumstances.52 For example, a company director who had inside information that the value of shares is likely to go up was held to be under no duty to disclose this fact to a shareholder whose shares he purchased.53 Thus, tacit acquiescence in another's self deception does not in itself amount to misrepresentation provided it is not previously caused by a positive misrepresentation.54In order to constitute misrepresentation, there must be some act ive misstatement of facts, or at all events, such a partial and fragmentary statement of facts such that the withholding of that which is not stated makes that which is stated absolutely false.55 A commercial traveller employed by the defendant had to use a car for his work. He had been convicted of a driving offence and his driving licence cancelled. He was dismissed. His suit for wrongful dismissal succeeded, as he was under no duty to disclose his previous convictions, and could engage someone else to drive his car.56 Although non-disclosure may not amount to a misrepresentation a partial non-disclosure may do so.57 Half-truth and careless advice of a solicitor may be pleaded as misrepresentation.58 Where a vendor of leasehold property, knowing the object of purchase of the property by the purchaser, remains silent about certain covenants in the lease likely to defeat that object, he is guilty of misrepresentation.59 Fiduciary Relationships In fiduciary relationships, the person in whom confidence is reposed is under a duty not only to act honestly, but also with due diligence and skill. Persons in fiduciary positions owe a duty to the other party to make a full disclosure of all material facts known to them which might affect the transaction between them. But there is no duty of disclosure in the relationship between an employer and the employee.60 Contracts Uberrimae Fidei In contracts uberrimae fidei, the knowledge of material facts lies with one party alone, and hence that party is under a duty to make a full disclosure of these facts. Apart from fiduciary relationship and contracts of partnership, contracts of insurance is one instance of contract expressed by the law to be of the utmost faith where material facts must be disclosed; if not, the contract is voidable.61 Contracts such as contracts of marine, fire and life insurance are examples where uberrima fides is to be shown by the persons obtaining them. In each of them the person desiring to be insured, must, in setting forth the risk to be insured against, not conceal any material fact affecting the risk known to him. The duty to disclose may also exist in other contracts, though these are not strictly uberrimae fidei, in contracts for purchasing shares in companies,62 family settlements,63 and partnerships. Ordinary contracts of guarantee for repayment of debts are not amongst those requiring uberrima fides on the part of the creditors towards the surety,64 but an employer is bound to disclose previous act s of dishonesty to a surety guaranteeing the 'fidelity' for his employee.65 A proposal of insurance for a woman could not be accepted if she had last delivered a child within six
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months prior to the date of proposal. The primary information of the birth was within the exclusive knowledge of the parents and when that was not correctly given there was a deliberate omission and a conscious avoidance of duty on the part of the insured.66 Contracts of Insurance The duty of utmost good faith is of universal application to all policies of insurance,67 although there are differences in the detail affecting the way in which the duty is applied.68 In its practical application it means that either party has the right to avoid the contract if either: (i) there has been a failure by the other party to disclose a material fact; or (ii) that there has been on the part of the other party a misrepresentation of a material fact.69 It is the duty of a person, wishing to take an insurance policy of any kind, marine, fire, life, guarantee, to make full disclosure to the insurer, without being asked, of all material circumstances.70 In a contract of insurance, utmost good faith is essential, i.e., the insured is expected to answer various questions and give true and faithful information. If the insured has knowledge of a fact which others cannot ordinarily have, then he should not indulge himself in suppressio veri suggestio falsi by making a suggestion which is false.71 The insurer can avoid the policy if three conditions are satisfied:72 first, there is a misstatement on a material matter, or suppression of facts which it was material to disclose; secondly, the suppression was fraudulently made by the policy-holder; and thirdly, the policy-holder must have known at the time of making the statement that it was false or that it suppressed facts which it was material to disclose. In marine insurance, the insured is under a duty to disclose every material circumstance known to him, or which, in the ordinary course of business, ought to be known by him.73 It is not the insurer's practice to ask any questions; they rely for their protection on the common law duty of disclosure. In marine insurance, an insurer can avoid the contract even if a material representation made by the assured or the agent during negotiations before the contract is concluded is untrue.74 Every material representation made during the negotiations, even if only as a matter of belief, must be true. A representation as to fact is true if it be substantially correct if the difference between what is represented and what is actually correct would not be considered material by a prudent insurer. Representation as to matter of expression or belief is true if made in good faith.75 However, in other insurance, the duty extends to facts known by the insured. The test is of honest belief in the statement. A private individual seeking to effect insurance cover other than in the ordinary course of business, has to disclose only those material facts known to him. It is sufficient that a representation given on the basis of knowledge or belief is honestly made.76 If a statement cannot be based on the proposer's own knowledge is required to be true, an express warranty is necessary.77 It is for the insurers, if they so wish, to place on the insured obligations to carry out specific inquiries or to take steps to provide objective justification for valuation, which should then be specified in the proposal form.78 Insurers may require information on topics which would not otherwise be regarded as material.79 In non-marine insurance, the insurer may require a written proposal answering specific questions, indicating that information in relation to the circumstances covered by the question is regarded by the insurers as material.80 This duty may be enlarged by contract, by an insertion of a clause called 'basis of the contract' clause in the proposal form, under which the insured warrants the accuracy of the information given by him in the proposal (of material or non-material facts), and entitling the insurer to avoid the policy and forfeit amounts paid if the information is untrue. The effect of such a stipulation is that the parties, by convention between themselves, agree that certain matters shall be considered as material and that the truth of the answers given with regard to them by the assured shall be considered as the condition essential to the validity of the contract. On true construction, the parties mutually bind themselves by convention as to what are considered such facts; but that leaves untouched the obligation to act in good faith, and not to be guilty of any conscious misrepresentation on concealment.81 The insured may also be required to take responsibility for facts which he did not know, or did not realise, to be false. Such clauses are construed strictly against the insurer.82 The incidents of such insurance
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contracts in India are 'on the same footing' as in England and the agreement is not enforceable if the basis of the agreement is broken.83 The duty may also be restricted by contract.84 Where such a provision is contained in the contract, the duty of disclosure is contractual, and as the provision becomes a part of the contract between the parties, it becomes a term of the contract that disclosure is to be made in accordance with the provision; a failure to make such disclosure is therefore, a breach of contract, making available to the insurers the remedy as stipulated in it.85 It would not be accurate to call the insurer's right as the right to avoid, because the insurer is not then relying upon something extrinsic to the contract as rendering it voidable, but is claiming the benefit of one of the terms of contract itself in order to avoid liability.86 A declaration in an application for life insurance amounts to a warranty,87 and the truth of the answers is the basis or condition precedent of liability.88 It is an implied condition of the contract that non-disclosure would entitle the insurer to avoid the contract.89 Where any statement has been made the basis of a contract of insurance, its inaccuracy or materiality is of no consequence; the falsity may be by inadvertence or without fraud;90 because the representation is a part of the contract.91 Whether there is a warranty as to the correctness of statements contained in an application for insurance and insurance policy is a question of construction;92 and an inquiry into the issue of materiality is precluded. The insured cannot turn round and say 'it would have made no difference if you had known the truth' about his state of health.1 In cases of breach of warranty of the truth of statements in an insurance proposal by one of the parties to the contract, the other party shall be discharged from the performance of his part of the contract and neither s. 64 nor s. 65 has any application, and the insurer is not liable to refund the premium.2 Even where the right of repudiation does not depend on the term of the policy, the principle of restitutio in integrum cannot be applied to render the insurer liable to return the premium;3 the insurer on repudiating the policy on the ground of fraud, misrepresentation or non-disclosure is not bound to offer return of premium, and the Court will not normally allow the proposer to set up his own fraud or misconduct in order to found a claim to such repayment.4 Insurer's Duty to Disclose The duty to disclose material facts is mutual, and the insurer is also liable to disclose all facts to the insured, e.g., those which would be taken into account by a prudent insured in deciding whether to place the risk with that insurer.5 In United India Insurance Co. Ltd v. MKJ Corporation, 6 the insurer sought to deny the claim for damage to goods relying upon a recommendation of the statutory Tariff Advisory Committee (deemed to be part of the policy) enabling the insurer to exclude cover for damage resulting from total or partial cessation of work. This was not incorporated as part of the policy. It was held that the information about the recommendations of the Committee was a material fact which the insurer ought to have disclosed to the insured at the time the contract was concluded, and the insurer could not avoid the policy. It has been held that the contract is uberrimae fidei on both sides, and it requires a prudent insurer to acquire a good knowledge of the industry in which it insures,7 and especially where the insurer has never before insured a particular type of risk (it being unique), the insured is entitled to assume that the insured is dealing with a reasonably competent, and hence knowledgeable insurer. An insurer's breach of obligation to deal with the proposer of insurance with the utmost good faith does not give rise to a remedy in damages, but only to a right of rescission of the policy and recovery of premium.8 Non-disclosure Suppression of material facts when making a proposal for insurance by one having knowledge or belief of the fact would fall under s. 17 of the Contract Act and the policy issued would be vitiated thereby;9 e.g., case of suppression of the fact that the policy holder applying for revival was treated for a serious disease; such non-disclosure will also render its reinsurance policy voidable.10
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Non-disclosure in the case of insurance does not automatically avoid the contract, but only makes it voidable, giving the insurer a right to elect, to avoid or to affirm the contract. A 'foreign jurisdiction' clause is therefore not abrogated in such a case. A dispute as to non- disclosure is 'a dispute arising under' the policy and remains within the clause.11 However, there need be no disclosure of facts which the insurer is himself aware, or which he ought to know or the knowledge of which he waives.12 Age admitted by the insurer can be questioned later if it is shown that the admission was obtained by fraud or fraudulent misrepresentation.13 There was no suppression of the fact of the insured suffering from a heart ailment where the panel of doctors of the insurer had found his heart condition good.14 Under s. 29(3) of the Marine Insurance Act, 1963 the insured need not disclose, in the absence of inquiry, the following circumstances: (i) which diminishes the risk; (ii) which is known or presumed to be known by the insurer; the insurer being presumed to know matters of common notoriety or knowledge, and matters which the insurer in the ordinary course of business as such ought to know; (iii) information of which is waived by the insurer; and (iv) which it is superfluous to disclose by reason of express or implied warranty. Any disclosure to the insurer's agent by the assured is disclosure or representation to the insurer.15 Material Fact In a contract of insurance, the non-disclosure, which may entitle the insurer to repudiate liability, must relate to material fact. Not every misrepresentation would render a contract of insurance liable to being avoided. A representation is material when a reasonable man would have been influenced by it in deciding whether or not to enter into the contract.16 The test to determine materiality is whether the fact has any bearing on the risk undertaken by the insurer; such as 'would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk'.17 Any fact which materially influences the making of a contract or determining, whether to accept or not to accept the risk at ordinary rates of premia is a material fact which has to be correctly stated.18 In Pan Atlantic Insurance Co Ltd. v. Pine Top Insurance Co. Ltd, 19 it was held that the test of materiality of fact was not whether it would have had a decisive effect on the prudent underwriter's decision whether to accept the risk and if so, at what premium, but whether the relevant circumstance would have had an effect on the mind of a prudent insurer in weighing the risk. It was later held that it was not necessary for a fact to be material that it should lead to an increased rather than a diminished risk; this factor was relevant only when considering the question of inducement; it was sufficient that the risk was different.20 A proposer is not only required to state all matters within his knowledge which he believes to be material to the question of insurance, but also all which in point of fact are so.21 It is a material fact that goods were insured upon a voyage for an amount in excess of their value,22 or that in relation to an insurance comparable to that sought, previous claims had been made. A circumstance that is material for one type of insurance is not necessarily material for another; for example that the risk has been refused by another insurer23 is material in life, fire, or accident insurance, but not marine insurance. Incidents of several fires in the past is a material fact for a fire-insurance.24 In a fire insurance, the statement about the nature of the godown in which the goods insured are proposed to be kept, is a material fact.25 Information about the age of the insured and of diseases, suffered by him are material facts.26 The fact that the assured was suffering from a serious heart ailment was a material fact for a contract of life insurance.27 A motor-vehicle insurance could be avoided on the ground that the insured had not disclosed the fact that an accident occurred on the very day the application for insurance was made.28 The primary information of the birth of a child within six months was within the exclusive knowledge of the parents and when that is not correctly given there was a deliberate omission and a conscious avoidance of duty on the part of the insured.29 In a package building insurance taken by a building society, the fact that one of the insured of a building insurance had a history of criminal convictions including one of robbery, was a material fact,
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although the insurance was taken as a package insurance by a building society. The insurer was entitled to repudiate the policy when this fact was not disclosed.30 Statement that the insured goods were consigned on CIF rather than FOB basis discharged the insurer.31 Whether a particular circumstance is material is a question of fact, and the opinion of the assured on its materiality is irrelevant.32 The insurer cannot avoid the policy if the misrepresentation does not relate to a material fact. In a proposal form for insuring tea, there was no column in the proposal form for marking the brand or quality of tea, nor for giving the value of tea. It was held that description of the tea dust was not a material fact. Therefore, description of ordinary tea dust as Pekoe tea dust, or any overvaluing of the tea would not enable the insurer to avoid a policy.33 Withdrawal of a proposal with another insurer is not such a fact,34 nor is the fact that earlier policies had lapsed.35 Where the earlier instances of burglary were not mentioned in the proposal form for burglary insurance, it was held that such non-disclosure was not material and even logically it could not be said that an incident of burglary increased the likelihood of further burglary.36 Dishonesty of underwriting agents was held not a circumstance which in the ordinary course of business be known to an assured, and the knowledge of the agent's fraud was not to be imputed to the insurers to enable the reinsurers to avoid the contract of reinsurance.37 Section 45 of the Insurance Act, 1938 Section 45 of the Insurance Act, 1938 places restrictions on the right of an insurer (of life-insurance) to repudiate its liability and eliminates the doctrine of warranty.38 In order to avoid the policy of life insurance after two years from the date it was effected, three conditions must be satisfied: (a) the statement impugned must be on a material matter or must suppress facts which it was material to disclose; (b) the suppression must be fraudulently made by the policy holder; and (c) the policy holder must have known that it was false or that it suppressed facts which it was material to disclose.39 The burden of proof is on the insurer to establish these circumstances, and unless the insurer is able to do so, the policy cannot be avoided on the ground of misstatement of facts.40 But it is not necessary for the insurer to prove these circumstances if the policy is avoided within two years.41 Disclosure and Representations in Consumer Insurance under English law Under the common law, a consumer seeking insurance was required to volunteer information which a 'prudent insurer' would consider relevant. In the UK, the Consumer Insurance (Disclosure and Representations) Act 2012 modifies principles of insurance law and abolishes the common law duty of disclosure. A consumer has no duty to volunteer or disclose information that he is not asked. The insurer must request for that information which he requires to assess the risk, and the consumer must take reasonable care not to make a misrepresentation. Where the consumer makes a misrepresentation, the insurer's remedies differ according to circumstances. An insurer has no defence if the consumer has act ed honestly and reasonably. An insurer can seek compensation if the misrepresentation is careless. The insurer can avoid the policy if the misrepresentation is deliberate or reckless. 47 (1879) ILR 3 Bom 242 at 267; see this case cited in the commentary on s. 13, under the heading: 'Mistake as to the Nature of Transaction', above. 48 This term has been obsolete for many years in English practice. 49 Martin Cashin v. Peter J Cashin, AIR 1938 PC 103 at 109. 50 (1862) 2 F & F 841. 51 [1936] Ch 575. 52 Chitty on Contracts, 28th edn, p. 343, para 6-013, relying on Ward v. Hobbs, (1878) 4 App Cas 13.
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53 Percival v. Wright, [1902] 2 Ch 421; but rules of disclosure are now more stringent under laws relating to investor protection. 54 Chitty on Contracts, 28th edn, p. 343, para 6-013. 55 Lord Cairns in Peek v. Gurney, (1873) 6 LR 377 at 403, [1861-73] All ER Rep 116. 56 Hands v. Simpson Fawcett d' Co . Ltd.,(1928) 44 TLR 295. 57 Goldsmith v. Rodger, [1962] 2 Lloyd's Rep 249; Schneider v. Heath, [1803-13] All ER Rep 472, 3 Camp 506; Ray v. Sempers, [1974] AC 370, Director of Public Prosecutions v. Ray, [1973] 3 All ER 131. 58 Nottingham Patent Brick d' Tile Co. v. Butler, (1886) 16 QBD 778, [1886-90] All ER Rep 1075,(CA), (solicitor's negligence is not noticing restrictive convenant). 59 Jogendra Nath Goswami v. Chandra Kumar Mazumdar, AIR 1914 Cal 661. 60 Bell v. Lever Bros, [1932] AC 161, [1931] All ER Rep 1. 61 Life Insurance Corpn of India v. Bhogadi Chandravathamma, AIR 1971 AP 41 at 43, 45; Bell v. Lever Bros, [1932] AC 161, [1931] All ER Rep 1 at 32. 62 Knowledge of material facts lies with promoters, directors, etc. 63 Gordon v. Gordon, [1904-7] All ER Rep 702. 64 Seaton v. Heath, (1899) I QB 782 at 782-83; Hindusthan General Insurance Society v. Punam Chand Chhajar, (1974) 2 Cal 496, AIR 1971 Cal 285; but see Levett v. Barclays Bank plc, [1995] 1 WLR 1260, (duty to disclose unusual feature of the contract which the surety may not naturally expect); but see Credit Lyonnais Bank Nederland v. Export Credit Guarantee Department, [1996] 1 Lloyd's Rep 200, affirmed Sub Nom Generale Bank Nederland CNV v. Export Credits Guarantee Department, (duty to disclose applies to unusual features of the transaction and not those of risk). 65 London General Omnibus Co. Ltd. v. Holloway, [1912] 2 KB 72, [1911-13] All ER Rep 518. 66 V Srinivasa Pillai v. Agent of Life Insurance Corpn of India, AIR 1977 Mad 381, following Mithoolal Nayak v. Life Insurance Corpn of India, [1962] Supp 2 SCR 571, AIR 1962 SC 814; Balkrishna Khirwal v. New Indian Assurance Co. Ltd., AIR 1959 Pat 102; All India General Insurance Co. Ltd. v. SP Maheshwari, AIR 1960 Mad 484 and Life Insurance Corpn of India v. Parvathavardhini Ammal, AIR 1965 Mad 357. 67 London Assurance Co. v. Mansel, (1879) 11 Ch D 363 per Jessel MR at 367. 68 Halsbury's Laws of England, Vol. 25, 4th edn., Reissue, 1 May 2003, 'INSURANCE' para 5. 69 Halsbury's Laws of England, Vol. 25, 4th edn., Reissue, 1 May 2003, 'INSURANCE' para 365 and 408. 70 Rozanes v. Bowen, (1928) 32 Ll LR 98at 102, (burglaries insurance); see s s. 19-20 of the Marine Insurance Act, 1963;Ionides v. Pender, (1874) LR 9 QB 531, [1861-73] All ER Rep 898, (marine insurance for a sum exceeding the value of goods); London Assurance Co. v. Mansell, (1879) 11 Ch D 363, (life, previous proposals rejected); Lindenau v. Desborough, (1828) 8 B&C 586, [1924-34] All ER Rep 117, (life, doubt about health); Joel v. Law Union & Crown Insurance Co., [1908] 2 KB 863, (Material facts in non-marine insurance); BAS Chopra v. New Zealand Insurance Co. Ltd., AIR 1967 Cal 35, (motor insurance). 71 V Srinivasa Pillai v. Agent of Life Insurance Corpn of India, AIR 1977 Mad 381; Mithoolal Nayak v. Life Insurance Corpn of India, [1962] Supp 2 SCR 571, AIR 1962 SC 814; Balkrishna Khirwal v. New Indian Assurance Co. Ltd., AIR 1959 Pat 102; All India General Insurance Co. Ltd. v. SP Maheshwari, AIR 1960 Mad 484 and Life Insurance Corpn of India v. Parvathavardhini Ammal, AIR 1965 Mad 357 followed. 72 Mithoolal Nayak v. Life Insurance Corpn of India, AIR 1962 SC 814, [1962] Supp 2 SCR 571. 73 See s. 20(1) of the Marine Insurance Act, 1963. 74 See the Marine Insurance Act, 1963, s. 22. 75 Ibid. 76 Wheelton v. Hardisty, (1857) 8 E&B 232; Thomson v. Weems, (1884) 9 App Cas 671 per Lord Blackburn at 684. 77 Anderson v. Fitzgerald, (1853) 4 HL Cas 484. 78 Economides v. Commercial Union Assurance Co. plc., [1998] QB 587, [1997] 3 All ER 636 per Simon Brown LJ at 646, (CA).
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79 Dawsons Ltd. v. Bonnin, [1922] 2 AC 413, [1922] All ER Rep 88,(HL) ; Australian Widows' Fund Life Assurance Society Ltd. v. National Mutual Life Association of Australasia Ltd., [1914] AC 634, AIR 1914 PC 220. 80 Newsholme Bros v. Road Transport and General Insurance Co. Ltd., (1929) 2 KB 356 per Scrutton LJ at 362, (CA), [1929] All ER Rep 442, CA. 81 Joel v. Law Union & Crown Insurance Co., [1908] 2 KB 863 at 869; Lindenau v. Desborough, (1828) 8 B & C, [1924-34] All ER Rep 117; Dalglish v. Jarvie 20 LJ Ch 475, (1850) 2 Mac & G 231; West v. National Motor and Accident Insurance Union Ltd., [1955] 1 All ER 800, [1955] 1 WLR 343,(CA) . 82 Zurich General Accident and Liability Insurance Co. Ltd. v. Morrison, [1942] 2 KB 53, [1942] 1 All ER 529,(CA) ; Hindustan General Insurance Society Ltd. v. S Subramaniam, AIR 1975 Mad 162. 83 Balkrishna Khirwal v. New India Assurance Co. Ltd., AIR 1959 Pat 102. 84 HIH Casualty and General Insurance Ltd. v. Chase Manhattan Bank, [2003] 1 All ER, 349(Comm), [2003] UKHL 6, (disclaimers excluded liability for negligent misrepresentation). 85 Halsbury's Laws of England, Vol. 25, 4th edn, Reissue, 1 May 2003, INSURANCE, para 379. Anderson v. Fitzgerald, (1853) 4 HL Cas 484; Joel v. Law Union & Crown Insurance Co., [1908] 2 KB 863 at 866, (CA); Stebbing v. Liverpool and London and Globe Insurance Co. Ltd., [1917] 2 KB 433 at 437, [1916-17] All ER Rep 248. 86 Halsbury's Laws of England, Vol. 25, 4th edn, Reissue, 1 May 2003, INSURANCE, para 383. 87 Brahm Dutt Sharma v. Life Insurance Corporation, AIR 1966 All 474; All India General Insurance Co. Ltd. v. SP Maheshwari, AIR 1960 Mad 484; Mithoolal Nayak v. Life Insurance Corpn of India, [1962] Supp 2 SCR 571, AIR 1962 SC 814; BAS Chopra v. New Zealand Insurance Co. Ltd., AIR 1967 Cal 35, (motor car insurance); State Bank of India v. Agents and Manufacturers, AIR 1998 Del 84. 88 BAS Chopra v. New Zealand Insurance Co. Ltd., AIR 1967 Cal 35; Hindustan General Insurance Society v. S Subramaniam, AIR 1975 Mad 162. 89 Blackburn Low & Co. v. Vigors, (1886) 12 App Cas 531 at 537, (1886) 17 QBD 552, (marine insurance); BAS Chopra v. New Zealand Insurance Co. Ltd., AIR 1967 Cal 35; Dawsons Ltd. v. Bonnin, [1922] 2 AC 413, [1922] All ER Rep 88,(HL) . 90 Condogianis v. Guardian Assurance Co. Ltd., AIR 1921 PC 195, (per Lord Shaw). 91 Condogianis v. Guardian Assurance Co. Ltd. supra; Anderson v. Fitzgerald, (1853) 4 HL Cas 484; Mackender v. AG Feldia, [1966] 3 All ER 847 at 853. 92 Provincial Insurance Co. Ltd. v. Morgan, [1933] AC 240 at 246, [1932] All ER Rep 899; Oriental Government Security Life Assurance Company Limited v. Narasimha Chari Ltd., [1901] 25 Mad 183; Dawsons Ltd. v. Bonnin, [1922] 2 AC 413 at 421, [1922] All ER Rep 88,(HL) ; VK Srinivasa Setty v. Premier Life and General Insurance Co., AIR 1958 Mys 53; Balkrishna Khirwal v. New Indian Assurance Co. Ltd., AIR 1959 Pat 102; Banarasi Debi v. New India Assurance Co. Ltd., AIR 1959 Pat 540. 1 Mithoolal Nayak v. Life Insurance Corpn of India, [1962] Supp 2 SCR 571, AIR 1962 SC 814, (a case of life insurance); Hindusthan General Insurance Society v. Punam Chand Chhajar, (1974) 2 Cal 496, AIR 1971 Cal 285, (facts not material do not avoid contract). 2 Mithoolal Nayak v. Life Insurance Corpn of India, [1962] Supp 2 SCR 571, AIR 1962 SC 814, (a case of life insurance); Hindusthan General Insurance Society v. Punam Chand Chhajar, (1974) 2 Cal 496, AIR 1971 Cal 285, (facts not material do not avoid contract); Oriental Government Security Life Assurance Co. Ltd. v. Narasimha Chari 25 Mad 183. 3 British Equitable Insurance Co. v. Musgrave, (1887) 2 TLR 630. 4 Halsbury's Laws of England, fourth edn, Vol. 25 para 377. Newbigging v. Adam, (1886) 34 Ch D 582, [1886-90] All ER Rep 975,(CA) affirmed sub nom Adam v. Newbigging, (1888) 13 App Cas 308,(HL) ; Houldsworth v. City of Glasgow Bank, (1880) 5 App Cas 317,(HL) . 5 Banque Financiere de la Cite SA v. Westgate Insurance Co. sub nom Banque Keyser Ullman SA v. Skandia, (UK) Insurance Co., [1991] 2 AC 249, [1990] 2 All ER 947 per Lord Templeton at 959, [1990] 3 WLR 364,(HL) ; affirming, [1990] 1 QB 665, [1989] 3 WLR 25, [1989] 2 All ER 952; Modern Insulators Ltd. v. Oriental Insurance Co. Ltd., AIR 2000 SC 1014, (exclusion clause applicable not disclosed). 6 AIR 1997 SC 408, (1996) 6 SCC 428. 7 Canadian Indemnity Co. v. Canadian Johns-Manville Co., [1990] 2 SCR 549, (Supreme Court of Canada), (this duty flowed from Art. 2486 of the Civil Code of Lower Canada).
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8 Banque Financierie de la Cite SA v. Westgate Insurance Co. sub nom Banque Financier de la cite SA v. Westgate Ltd. Insurance Co., [1991] 2 AC 249, [1990] 2 All ER 947 per Lord Templeton at 959, [1990] 3 WLR 364,(HL), (reasons discussed in detail in the judgment of Court of Appeal, [1990] 1 QB 665, [1989] 3 WLR 25, [1989] 2 All ER 952 at 991-97). 9 Mithoolal Nayak v. Life Insurance Corpn of India, [1962] Supp 2 SCR 571, AIR 1962 SC 814; Life Insurance Corpn of India v. Bhogadi Chandravathamma, AIR 1971 AP 41 at 45; Life Insurance Corpn of India v. Baidyanath Singh, AIR 1978 Pat 334 at 336; All India General Insurance Co. Ltd. v. SP Maheshwari, AIR 1960 Mad 484. 10 Hindusthan General Insurance Society v. Punam Chand Chhajar, (1974) 2 Cal 496, AIR 1971 Cal 285 at 287; Vanguard Investments Ltd. v. Indian Mutual General Insurance Society Ltd., AIR 1973 Mad 147 at 148-49, distinguishing Australian Widows' Fund Life Assurance Society Ltd. v. National Mutual Life Association of Australasia Ltd., [1914] AC 634, AIR 1914 PC 220. 11 Mackender v. AG Feldia, [1966] 3 All ER 847 at 850; Heyman v. Darwins Ltd., [1942] AC 356, [1942] 1 All ER 337. 12 BAS Chopra v. New Zealand Insurance Co. Ltd., AIR 1967 Cal 35; Stewart v. Bell, (1821) 5 B&Ald 238; Bates v. Hewitt, (1867) LR 2 QB 595; Hales v. Reliance Fire and Accident Insurance Corpn Ltd., (1960) 2 Lloyd ' s Rep 319, (insurer presumed to know); Lindenau v. Desborough, (1828) 8 B&C 586, (insurer aware); Anglo African Merchants Ltd. v. Bayley, [1970] 1 QB 311, [1969] 2 All ER 421,(waiver) ; D M, United India Insurance Co Ltd v. Amarjeet Singh, AIR 2011 J&K 148. 13 See proviso to s. 45 of the Insurance Act ;Life Insurance Corpn of India v. Baidyanath Singh, AIR 1978 Pat 334; Allianz Und Stuttgarter Life Insurance Bank Ltd. v. Hemanta Kumar Das, AIR 1938 Cal 641; refering to Maneklal Kalidas Shah v. Yorkshire Insurance Co. Ltd., AIR 1939 Bom 161. 14 Krishna Wanti v. Life Insurance Corpn of India, AIR 2000 Del 63. 15 Ayrey v. British Legal & United Provident Assurance Co. Ltd., [1918] 1 KB 136, (disclosure to the district manager of the insurance company); BAS Chopra v. New Zealand Insurance Co. Ltd., AIR 1967 Cal 35 at 38. 16 Bhagwani Bai v. Life Insurance Corpn of India, AIR 1984 MP 126 at 129. 17 The Marine Insurance Act 1963, s. 20(2); the, (English) Marine Insurance Act, 1906, s. 18(2);Locker d' Woolf Ltd. v. Western Australia Insurance Co. Ltd., [1906] 1 KB 408 at 415, (above definition held applicable to all types of insurance). 18 Locker d' Woolf Ltd. v. Western Australia Insurance Co. Ltd., [1906] 1 KB 408 at 415; Hindustan General Insurance Society v. S Subramaniam, AIR 1975 Mad 162, reversing S Subramaniam v. Hindusthan General Insurance Society Ltd., AIR 1972 Mad 196, (case of misstatement about carrying capacity); Hindustan General Insurance Society v. Punam Chand Chhajar, (1974) 2 Cal 496, AIR 1971 Cal 285; New India Assurance Co. Ltd. v. Sulochana Chowdhurani, AIR 1962 Assam 65, relying on Rohini Nandan Goswami v. Ocean Accident and Guarantee Corp Ltd., AIR 1960 Cal 696 at 700. 19 [1995] 1 AC 501, [1994] 3 All ER 581,(HL) . 20 St Paul Fire and Marine Insurance Co. (UK) Ltd. v. McConnell Dowell Constructors Ltd., [1996] 1 All ER 96,(CA) . 21 Dalglish v. Jarvie 20 LJ Ch 475, (1850) 2 Mac & G 231; BAS Chopra v. New Zealand Insurance Co. Ltd., AIR 1967 Cal 35; Brownlie v. Campbell, (1880) 5 App Cas 925 at 954; Joel v. Law Union d' Crown Insurance Co., [1908] 2 KB 863 at 883; V Srinivasa Pillai v. Agent of Life Insurance Corpn of India, AIR 1977 Mad 381 at 383, (policy of a husband and a wife who delivered a child within six months of the proposal). 22 Ionides v. Pender, (1874) LR 9 QB 531, [1861-73] All ER Rep 898. 23 Locker and Woolf Ltd. v. West Australian Insurance Co. Ltd., [1936] 1 KB 408; Glicksman v. Lancashire and General Assurance Co. Ltd., (1925) 2 KB 593 per Sargant J. at 611, (CA) affirmed, [1927] AC 139, [1926] All ER Rep 161,(HL) . 24 Marene Knitting Mills Pty Ltd. v. Greater Pacific General Insurance Ltd., [1976] 2 Lloyd's Rep 630. 25 State Bank of India v. Agents and Manufacturers, AIR 1998 Del 84. 26 Seelam Ramanamma v. Divisional Manager, LIC of India, AIR 2000 AP 350. 27 P Sarojam v. Life Insurance Corpn of India, AIR 1986 Ker 201 at 205; Kumar v. Life Insurance Corpn of India, [1974] 1 Lloyd's Rep 147, (insured stated that she had no 'operation' when she had a birth by Caesarean section-insurer could avoid). 28 George P Varghese v. G Daniel, AIR 1998 Ker 120. 29 V Srinivasa Pillai v. Agent of Life Insurance Corpn of India, AIR 1977 Mad 381.
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30 Woolcott v. Sun Alliance d' London Insurance Ltd., [1978] 1 All ER 1253; General Accident Fire and Life Assurance Corpn Ltd. v. Midland Bank Ltd., [1940] 3 All ER 252 at 258; applying Lambert v. Cooperative Insurance Society Ltd., [1975] Lloyd 's Rep at 487. 31 Contship Container Lines Ltd. v. D K Lall, AIR 2010 SC 1704, (2010) 4 SCC 256. 32 Chitty on Contracts, 28th edn, p. 404, para 6-137; Lindenau v. Desborough, (1828) 8 B&C 586, [1924- 34] All ER Rep 117; London Assurance Co. v. Mansel, (1879) 11 Ch D 363; Joel v. Law Union d' Crown Insurance Co., [1908] 2 KB 863; Lambert v. Cooperative Insurance Society Ltd., [1975] Lloyd ' s Rep at 485; Harsud Co-op Mktg Society Ltd. v. United India Fire and General Insurance Co. Ltd., AIR 1992 Bom 341 at 346, (on assessing charge of fraud). 33 Hindusthan General Insurance Society v. Punam Chand Chhajar, (1974) 2 Cal 496, AIR 1971 Cal 285 at 287; Vanguard Investments Ltd. v. Indian Mutual General Insurance Society Ltd., AIR 1973 Mad 147 at 148-49; distinguishing Australian Widows' Fund Life Assurance Society Ltd. v. National Mutual Life Association of Australasia Ltd., [1914] AC 634, AIR 1914 PC 220. 34 Benarasi Debi v. New India Assurance Co. Ltd., AIR 1959 Pat 540. 35 Bhagwani Bai v. Life Insurance Corpn of India, AIR 1984 MP 126 at 130. 36 Jayashree Roy Chowdhury v. Oriental Insurance Company Limited, AIR 1992 Cal 355 at 361; Rohini Nandan Goswami v. Ocean Accident and Guarantee Corpn Ltd., AIR 1960 Cal 696 at 700. 37 PCW Syndicates v. PCW Reinsurers, [1996] 1 All ER 774,(CA) . 38 Section 45 of the Insurance Act 1938 provides:..., No policy of life insurance ... shall, after the expiry of two years from the date on which it was effected, be called in question by an insurer on the ground that a statement made in the proposal for insurance or in any report of a medical officer, or referee, or friend of the insured, or in any other document leading to the issue of the policy, was inaccurate or false, unless the insurer shows that such statement was on a material matter or suppressed facts which it was material to disclose and that it was fraudulently made by the policy holder and that the policy holder knew at the time of making it that the statement was false or that it suppressed facts which it was material to disclose:Provided that nothing in this section shall prevent the insurer from calling for proof of age at any time if he is entitled to do so, and no policy shall be deemed to be called in question merely because the terms of the policy are adjusted on subsequent proof that the age of the life insured was incorrectly stated in the proposal. 39 Mithoolal Nayak v. Life Insurance Corpn of India, [1962] Supp 2 SCR 571, AIR 1962 SC 814 at 819-20. 40 Maneklal Kalidas Shah v. Yorkshire Insurance Co. Ltd., AIR 1939 Bom 161 at 165. 41 P J Chacko v. Chairman, Life Insurance Corporation of India, AIR 2008 SC 424, (2008) 1 SCC 321, (death within six months of taking insurance); affecting the law stated in Branch Manager Life Insurance Corporation of India v. Nilkanta Mondal, AIR 2007 Cal 74, (misstatement must be of material fact).
Clause 3 As example of the application of this clause, the following cases may be cited. In Re Nursey Spinning and Weaving Co,42two directors, the secretary, the treasurer and the agent of a company signed a bill of exchange in a form in which the company would not be liable. The bill was sold to a bank. It was held that the company would not have been liable as a drawer. The decision proceeded on the ground that the directors, while act ing within the scope of their authority, had sold the bill as one on which the company was liable, but upon which, having regard to the form in which it was drawn, the company could not be rendered liable, and the directors were, therefore, guilty of misrepresentation within the meaning of the present sub-section. But it was liable to the bank as for money received by the company to the use of the bank. The case was no doubt within the terms of this clause, but it might have been decided on the broader ground that a buyer 'is entitled to have an article answering the description of that which he bought', and that here the document which the bank had bought had not the force or value which it purported and was supposed to have. Thus, it might be regarded as a case of common mistake under s. 20 of the Contract Act, entitling the party who had paid money to recover it under s. 72. In Oceanic Steam Navigation Co. Ltd v. Soonderdas Dhurumsey, 43 the defendants in Bombay
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chartered a ship wholly unknown to them, from the plaintiffs, which was described in the charter-party, and was represented to them, as being not more than 2,800 tonnage register. It turned out that the registered tonnage was 3,045 tons. The defendants refused to accept the ship in fulfillment of the charter-party, and it was held that they were entitled to avoid the charter-party by reason of the erroneous statement as to tonnage. It is difficult to see how the Court, having regard to the terms of the Contract Act and to the usage of Bombay and the understanding of the parties in the particular case, could have decided otherwise, but, this does not necessarily lay down any rule that an error in stating the amount of tonnage will in general render a charter-party voidable. In England, such a statement does not, in the absence of special circumstances, amount even to a warranty.44 In Johnson v. Crowe, 45 in an agreement to sell and deliver a boiler by the defendant to the plaintiff, the plaintiff represented (though innocently) to the defendant that there was a practicable road all the way. As a matter of fact, there was at one point a suspension bridge not capable of bearing the weight of the boiler. The Allahabad High Court held that the agreement was voidable at the option of the defendant In fact the agreement was made several months before the Contract Act came into operation, but the case was treated at every stage as if it fell within the Contract Act . The same result might have been arrived at on the ground that the existence of a practicable road all the way was an essential term or condition of the contract. Mistake Caused by Innocent Misrepresentation In Sorabshah Pestonji v. Secretary of State, 46 a list was circulated amongst the bidders in an auction of liquor shops, which showed the places where different existing liquor shops were located. Relying upon a statement about location of a particular shop six miles away, the plaintiff purchased the licence of one shop. The statement had not mentioned that that other shop had been relocated closer to the shop of the plaintiff. It was held that the case was not one of fraud, but could fall under this clause 18(3), as there was a mistake as to the substance of the thing contracted for-the liquor shop. Where a party executes a document under a mistake as to the subject matter of the contract on an innocent representation by the other party that the document contained all the terms agreed upon when it did not contain the terms, the mistake entitled the innocent party to repudiate the contract.47 Where one party represented to the other party that the suit property belonged to a religious institution, but did not disclose the fact that an earlier judgment of the Privy Council had held that the entire suit property was not debutter property, the agreement was vitiated by misrepresentation.48 In Curtis v. Chemical Cleaning and Dyeing Co, 49 the plaintiff signed a receipt which was represented to the plaintiff as exemption of the defendants from certain risks, e.g., damage to the beads and sequins on the wedding dress; but actually it exempted defendants from 'any damage howsoever caused'. The Court of Appeal held that the exemption was not available to the defendant because of the misrepresentation. Unilateral Mistake of one Party Known to the Other Party It has been stated in Smith v. Hughes :50
One of the parties to an apparent contract may, by his own fault, be precluded from setting up that he had entered into it in a different sense to that in which it was understood by the other party. Thus in the case of a sale by sample where the vendor, by mistake, exhibited a wrong sample, it was held that the contract was not avoided by this error of the vendor: Scott v. Littledale. 51 But if in the last mentioned case the purchaser, in the course of the negotiations preliminary to the contract, has discovered that the vendor was under a misapprehension as to the sample he was offering, the vendor would have been entitled to show that he had not intended to enter into the contract by which the purchaser sought to bind him. The rule of law applicable to
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such a case is a corollary from the rule of morality which Mr Pollock cited from Paley,52 that a promise is to be performed 'in that sense in which the promisor apprehended at the time the promisee received it,' and may be thus expressed: 'The promisor is not bound to fulfil a promise in a sense in which the promisee knew at the time the promisor did not intend it.' And in considering the question in what sense the promisee is entitled to enforce a promise it matters not in what way the knowledge of the meaning in which the promisor made it is brought to the mind of the promisee, whether by express words, or by conduct, or previous dealings or other circumstances. If by any means he knows that there was no real agreement between him and the promisor, he is not entitled to insist that the promise shall be fulfilled in a sense to which the mind of the promisor did not assent.
A unilateral mistake as to terms of the contract may entitle the party mistaken to avoid the contract if the mistake is known to the other party. In Hartog v. Colin & Shields, 53 the defendants made an offer to the plaintiffs to sell hare-skins, offering to pay a price per pound instead of per piece. The usual trade practice and previous negotiations indicated that the price was payable per piece, but the plaintiffs accepted their offer. In their suit for nondelivery, it was held that the plaintiffs ought to have known that the offer did not express the true intention of the defendants, and the contract was therefore void. Where a tender submitted indicated that it was based on a serious mistake calculating the totals, its acceptance was held invalid.54 In Chwee Kin Keong v. Digilandmallcom Ptd Ltd, 55 the sellers advertised colour laser printers on the Internet at a price of 66 SGD by mistake, when the real price was 3854 SGD. The buyers placed orders for 1606 printers over the Internet, and the order was 'accepted' by the sellers' computers. This transaction was done in the early hours of the day. The sellers realised this mistake in the morning and repudiated the transaction. It was held that there was no contract. The buyers had act ual knowledge that the sellers had made a mistake in pricing commercial printers on its website. Hence the buyers could not claim that there was consensus between the parties, and could not enforce the contract. Non Est Factum: The Doctrine Ordinarily, a man is bound by the document he executes provided he is a party of full age and understanding,56 but, if he has been misled into executing the deed or signing it and the document is different from what he intended to execute or sign, it is completely void. In some cases, the mistake may have been induced by fraud, but according to some authorities the presence of fraud is not a necessary factor. In Foster v. Mackinnon, 57 it was stated:
...it is invalid not merely on the ground of the fraud where fraud exists but on the ground that the mind of the signor did not accompany the signature: in other words, that he never intended or contemplated to sign, and therefore, in contemplation of law never did sign the contract to which his name is appended.
Originally, the common law defence of non est factum to actions was available where an illiterate person, to whom the contents of a deed had been wrongly read, executed it under a mistake as to its nature and contents, he could then say that it was not his deed at all. In its modern application, the doctrine has been extended to cases other than those of illiteracy and to other contracts in writing. In most of the cases in which this defence was pleaded the mistake was induced by fraud; but that was not, perhaps, a necessary factor, as the transaction is invalid not merely due to fraud but because the 'mind of the signor did not accompany the signature' and therefore, in contemplation of law, he never did sign the contract that he did not intend to sign.58 The doctrine of non est factum does not apply unless there is a misrepresentation inducing a mistaken belief as to the class and character of the supposed document, and not a misrepresentation simply as to its contents. Thus, a guarantee of GBP 10,000 would not be enforceable if the executant believed it to be a promissory note, but a promissory note for GBP 10,000 would be binding even if the maker believed it to be for GBP 100.59 The distinction may not be easy to define because the character and
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the class of a document may be said in one sense to depend on its contents, so that misrepresentation as to its contents involves misrepresentation of the character and class, but, cases do illustrate distinctions.60Thus, where the defendant signed a document which was an indemnity but which he was told to be a release note, he was not bound by his signature, because it was wholly different in its class and character from the supposed release note, and even though the act ual and supposed document related to the same article, i.e., a car.61 Although the distinction may seem a somewhat narrow and artificial one to draw, the justification for it lies in the practical necessity to keep the plea of non est factum within manageable bounds.62 In Mercantile Credit Co. Ltd v. Hamblin, 63 there was no real misrepresentation as the party signing the document had no positive belief that the documents which she was signing were mortgage documents, and the documents were of the class and character which she had in mind being documents capable of being used for raising money on the security of the car.64 The doctrine of non est factum was therefore, not applicable. The doctrine was reviewed in Gallie v. Lee, 65 where a 78 year old widow executed a deed assigning her leasehold interest in a house to one Lee, who mortgaged the property gifted to him to a building society. The assignor did, at all times, intend to make a gift of the property to her nephew. On discovering the truth, the widow brought an action against both, Lee and the building society, that the assignment was void. The plaintiff's case was that despite her carelessness in allowing herself to be misled as to the character of the document she signed, she was not estopped from maintaining non est factum against the building society. This plea succeeded before Stamp J., but the Court of Appeal reversed the judgment and the Master of Rolls pointed out that the mistake as to contents might be just as fundamental as a mistake as to class and character. It was not really a distinction at all. He said:
a document takes its class and character from its contents and a mistake as to one is often also a mistake as to the other.
The Master of Rolls did not accept the distinction that if a man is mistaken as to the person in whose favour the deed is made, he can rely on non est factum. He said:
...but whatever may be the merits of the rule in contract, I am clear that...a man cannot plead non est factum simply because he has made a mistake as to the person in whose favour the document was made.
Therefore, the plaintiff was held not entitled to succeed on the plea of non est factum. The principle was thus stated by the Court of Appeal:
Whenever a man of full age and understanding who can read and write signs a legal document put before him for signature which on its face is intended to have legal consequences, then, if he does not take the trouble to read it, but signs it as it is, relying on the words of another as to its character or contents or effect, he cannot be heard to say that it is not his document when it goes into the hands of one who has in all innocence advanced money on the faith of it being his document.
The House of Lords upheld the judgment.66 In Saunders v. Anglia Building Society, 67 the House of Lords reviewed and restated the law on the subject, and the distinction between the character and nature of a document and the contracts of the
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document was rejected as unsatisfactory. It was stressed that the defence of non est factum was not lightly to be allowed where a person of full age and capacity had signed a written document embodying the contract, but allowable so long as the person signing the document had made a fundamental mistake as to the character or effect of the document. The House of Lords concentrated on and emphasised the disparity between the effect of the document act ually signed and the document as it was believed to be (rather than on the nature of the mistake) stressing that the disparity must be 'radical', 'serious', 'sensational', 'fundamental' or 'very substantial'. Lord Reid said,68'the plea of non est factum could not be available to anyone who signed without taking the trouble to find out at least the general effect of the document ... or to the person whose mistake was really a mistake as to the legal effect of the document ... There must be ... a radical or fundamental difference between what he signed and what he thought he was signing.' Lord Hodson said,69'the difference to support a plea of non est factum must be in particular which goes to the substance of the whole consideration or to the root of the matter'. Lord Dilhorne observed70 that it would not suffice that the signer thought that the document would have a different legal effect from what he has; nor will it suffice if in some respects it departs from what he thought it would contain. The difference must be such that the document signed is entirely or fundamentally different from what it was thought to be, it was never the signer's intention to execute the document. Lord Wilberforce observed,71'a document should be held to be void only when the element of consent to it is totally lacking i.e., when the transaction which the document purports to effect is essentially different in substance or in kind from the transaction intended. These various terms, were not defined, the question being treated as one of degree. Clause 3 andNon Est Factum Where the misrepresentation is merely about the contents of the document, the transaction becomes voidable, but where it relates also to the nature or character of the transaction, the transaction is void.72 The foreign jurisdiction clause would not apply if the issue is whether there was a contract at all (eg., on a plea of non est factum), as the contract was wholly void and unenforceable.73 Signatures on Blank Documents The plea of non est factum applies74 where a party signs a document and hands it over to the other party in order to enable him to fill in details and complete the transaction and the document is not in accordance with the instructions of the executant.75 Even in that case he will be bound if it is not essentially different, in substance or in kind from the intended transaction.76 The burden of proof is on the executant that he acted carefully,77 and he will be bound if he fails to show it. Negligence on the part of the executant will be a bar to the plea on non est factum. At one time the negligence was held to apply to negotiable instruments only,78 but after criticism,79 was overruled by House of Lords,80 and held to apply to all documents where negligence was found. W bought a car from a dealer and gave him a signed agreement with blanks for figures to be filled in by the dealer. W believed the documents to be a hire purchase agreement. The dealer instead of filling in the agreed figures filled in wrong figures. Later W received a copy of the document but did not complain, nor did he make any payment. His plea of non est factumfailed and he was held liable for the whole sum as he had act ed carelessly and failed to discharge the burden of proving due care.81 42 Re Nursey Spinning and Weaving Co. Ltd.,(1881) 5 Bom 92. 43 (1890) ILR 14 Bom 241; Maredelanto Compagnia Naviera SA v. Bergbau-Handel GmbH, (The Mihalis Angelos), [1970] 3 All ER 125, (false assurance by owners as to availability of vessel). 44 Barker v. Windle, (1856) E & B 675, 106 RR 762. 45 Johnson v. Crowe, (1874) 6 NWP 350. 46 (1927) 29 Bom LR 1535, AIR 1928 Bom 17; see also Sikka Promoters Pvt. Ltd. v. National Agricultural Cooperative
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Marketing Federation of India Ltd., 202 (2013) DLT 49. 47 Chimanram Motilal v. Divanchand Gavindram, AIR 1932 Bom 151 at 153. 48 Seth Srenikbhai Kaslllrbizai v. Seth Chandulal Kasturchand, AIR 1997 Pat 179, (but judgment categorises it as mistake under s. 20 of the Contract Act without 'going into differentiation regarding mutual mistake or unilateral mistake'...'but mistakes were there...'). 49 [1951] 1 KB 805, [1951] 1 All ER 631. 50 Smith v. Hughes, (1871) LR 6 QB 597 per Hannen J at 609, [1861-73] All ER Rep 632 at 638-39. 51 [1858] E&B 815, (note that the sale was of a specific cargo, and the seller misled the buyer, though innocently. If anyone was entitled to set aside the contract, it was the buyer). 52 Paley, Moral and Political Philosophy, Book III, Ch V. 53 [1939] 3 All ER 566. 54 Bell River Community Arena Inc v. Kaufmann Co. Ltd., (1978) 87 DLR, 761(3d) . 55 [2005] 1 SLR 502, (Singapore Court of Appeal). 56 Grasim Industries Ltd. v. Agarwal Steel, 2010, AIR SCW 232, (2010) 1 SCC 83, (more so if the signatory is a business). 57 (1869) 4 CP 704 at 711, [1861-73] All ER Rep 1913. 58 Bismillah v. Janeshwar Prasad, (1990) 1 SCC 207 at 211, AIR 1990 SC 540. 59 Treitel, The Law of Contract, 5th edn, at 240. 60 Muskham Finance Ltd. v. Howard, [1963] 1 QB 904, [1963] 1 All ER 81, [1963] 2 WLR 87 Donovan L.J; Howatson v. Webb, [1907] 1 Ch 537, affirmed in, [1908] 1 Ch 1,(CA), (the character and class of the document was that of a conveyance of property and Webb knew this. What he did not know was that the contents made it a conveyance by way of mortgage. His mistake was as to contents only); Carlisle d Cumberland Banking Co. Ltd. v. Bragg, [1911] 1 KB 489, [1908-10] All ER Rep 1977,(CA), (the character and class of the document was that of a guarantee of another's debt and Bragg did not know this. He was deceived into believing that he was dealing with some insurance matter); L'Estrange v. F Graucob Ltd., [1934] 2 KB 394, [1934] All ER Rep 16, (contract signed contained exclusion of implied warranty, held binding although the buyer did not read it); Abdul Hasan v. Wajih-un-nissa, AIR 1948 Pat 186; Appanna v. Jami Venkatappadu, AIR 1953 Mad 611. 61 Muskham Finance Ltd. v. Howard, [1963] 1 QB 904 at 912, [1963] 1 All ER 81, [1963] 2 WLR 87; but see Mackenzie v. Royal Bank of Canada, [1954] AC 468 at 475, (PC), (innocent misrepresentation.) 62 Muskham Finance Ltd. v. Howard, [1963] 1 QB 904 per Donovan LJ at 912, [1963] 1 All ER 81, [1963] 2 WLR 87 at 91, referring to Howatson v. Webb, [1970] 1 Ch 537 affirmed in, [1980] 1 Ch 1,(CA) and Carlisle d Cumberland Banking Co. Ltd. v. Bragg, [1911] 1 KB 489, [1908-10] All ER Rep 1977,(CA) . 63 [1965] 2 QB 242, [1964] 3 All ER 592, [1964] 3 WLR 798. 64 Mercantile Credit Co. Ltd. v. Hamblin, [1965] 2 QB 242, [1964] 3 All ER 592, [1964] 3 WLR 798 at 808. 65 [1969] 2 Ch 17, [1969] 1 All ER 1062, [1969] 2 WLR 902 affirmed on appeal sub nom Saunders v. Anglia Building Society, [1971] AC 1004, [1970] 3 All ER 961, [1970] 3 WLR 1078, the latter overruling Carlisle d Cumberland Banking Co. Ltd. v. Bragg, [1911] 1 KB 489, [1908-10] All ER Rep 1977,(CA) . 66 Sub nom Saunders v. Anglia Building Society, [1971] AC 1004, [1970] 3 All ER 961, [1970] 3 WLR 1078. 67 [1971] AC 1004, [1970] 3 All ER 961, [1970] 3 WLR 1078; affirming sub nom Gallie v. Lee, [1969] 2 Ch 17, [1969] 1 All ER 1062, [1969] 2 WLR 901; overruling Carlisle & Cumberland Banking Co. Ltd. v. Bragg, [1911] 1 KB 489, [1908-10] All ER Rep 1977,(CA) ; approving the essential features of the doctrine as expressed in Foster v. Mackinnon, (1869) 4 CP 704 per Byles J at 711, [1861-73] All ER Rep 1913]. 68 Saunders v. Anglia Building Society, [1971] AC 1004 at 1016-17; [1970] 3 All ER 961 at 963-64, [1970] 3 WLR 1078. 69 [1971] AC 1018-19, [1970] 3 All ER 965. 70 [1971] AC 1018-19, 1022, [1970] 3 All ER 961, 969. 71 [1971] AC 1018-19, 1022, [1970] 3 All ER 961, 969.
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72 Ningawwa v. Byrappa Shiddappa Hireknrabar, AIR 1968 SC 956; Dularia Devi v. Janardan Singh, AIR 1990 SC 1173; Partap v. Puniabai, AIR 1977 MP 108. 73 Mackender v. Feldia AG, [1966] 3 All ER 847 at 849, 851. 74 Chitty on Contracts, 28th edn, at 321, para 5-058. 75 United Dominion's Trust Ltd. v. Western, [1976] QB 513, [1975] 3 All ER 1017, [1976] 2 WLR 64. 76 United Dominion's Trust Ltd. v. Western disapproving Campbell Co. Finance Ltd. v. Gall, [1961] 1 QB 431, [1961] 2 All ER 104, [1961] 2 WLR 514. 77 British Railway Traffic d' Electric Co. Ltd. v. Roper, (1939) 162 L T 217; Eastern Distributors Ltd. v. Goldring, [1957] 2 QB 600, [1957] 2 All ER 525, [1957] 3 WLR, (23). 78 Carlisle d' Cumberland Banking Co. v. Bragg, [1911] 1 KB 489, [1908-10] All ER Rep 1977,(CA) . 79 Muskham Finance Ltd. v. Howard, [1963] 1 QB 904 at 913, [1963] 1 All ER 81, [1963] 2 WLR 87; Mercantile Credit Co. Ltd. v. Hamblin, [1965] 2 QB 242, [1964] 3 All ER 592, [1964] 3 WLR 798. 80 Saunders v. Anglia Building Society, [1971] AC 1004 at 1019, 1038, [1970] 3 All ER 961, [1970] 3 WLR 1078. 81 United Dominion's Trust Ltd. v. Western, [1976] QB 513, [1975] 3 All ER 1017, [1976] 2 WLR 64; following Saunders v. Anglia Building Society, [1971] AC 1004, [1970] 3 All ER 961, [1970] 3 WLR 1078.
Pleadings, Evidence and Burden of Proof Any pleading for misrepresentation cannot be general, specific circumstances showing that misrepresentation was practised, must be pleaded.82 The onus is on the person alleging misrepresentation to establish it.83 The burden of proof to show non-disclosure84 or misrepresentation, or that the statements in the proposal are untrue,85 lies on the insurer, and the onus is a heavy one.86 To justify the allegation of material suppression of facts by the insured in a policy of life insurance, the insurer must justify that the insured was, at every given time when insurance policies were sought and signed, conscious of the fact, and knew that he was harbouring and labouring under a disease or ailment.87 Where the insurer sought to avoid a policy taken by a 56 year old person on the ground of the insured suffering diseases that go with age, and the officer accepting the policy was not produced, and the person produced to give evidence had made no enquiries about the deceased's family, it was held that the insurer must be deemed to have accepted the deceased for insurance, and the claim was decreed against the insurer.88 Where there was no evidence to conclude that there was suppression of facts where the fact of the insured suffering from diabetes was not disclosed, the insurer could not avoid the policy.89 82 The Civil Procedure Code, 1908, O. 6, r. 4;Yog Raj v. Kuldeep Raj Gupta, AIR 1991 J&K 26, 28. 83 Kuppuswami Cbettiar v. ASPA Arumugam Cbettiar, AIR 1967 SC 1395; Satya Narain v. Nanki Devi, AIR 1968 All 224. 84 Looker v. Law Union and Rock Insurance Co., [1928] 1 KB 554. 85 Stebbing v. Liverpool and London and Globe Insurance Co. Ltd., [1917] 2 KB 433 at 437, [1916-17] All ER Rep 248. 86 Life Insurance Corpn of India v. Parvatbavardbini Ammal, AIR 1965 Mad 357. 87 Durgawati Devi v. Life Insurance Corpn, AIR 1997 All 257. 88 Kamla Wanti v. LIC of India, AIR 1981 All 366 at 372. 89 Life Insurance Corpn of India v. Narmada Agarwalla, AIR 1993 Ori 103.
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Effect of Misrepresentation The contract is voidable at the option of the party who was induced by misrepresentation to enter into a contract. He has two remedies open to him, either to elect to rescind the contract, or to seek enforcement of representation, and insist upon being placed in the same position as if the contract were performed.90 The difference between a claim for damage and suit for rescission is this. In the former case the contract is left intact, and the suit is to enforce it and substitutes money damages for performance. In the latter case, the object is to avoid performance of the contract. Hence any order made on rescission should have as its object the restoration of the parties to their original position. The idea is restitutio in integrum and the parties to be restored to status quo ante. Misrepresentation as to a part would make the whole transaction voidable.91 Damages Damages have always been recoverable under the English law for fraudulent misrepresentation, and are recoverable for negligent misrepresentation under 2(1) of the Misrepresentation Act, 1967. Under this Act, such compensation can be awarded in lieu of performance under s. 19 as would place the representee in a position as if the contract were performed.92The Court granting rescission has also the power to order compensation under s. 30 of the Specific Relief Act, 1963. The person rescinding the contract would also be entitled to restitution to the extent provided in s. 65.93 Estoppel Where a person makes a statement with the intention that it should be acted upon, and it is act ed upon, the person is estopped from contesting its truth even though it is fraudulently made.94 Misrepresentation and Third Parties Where as a result of the misrepresentation by the representor, the representee is made to enter into a contract with another person, the contract between the representee and such person is voidable in the same circumstances as if there was undue influence by the representor instead of misrepresentation.95 Where a seller of goods has obtained possession thereof under a contract voidable under s. 19 or 19A of the Contract Act, but the contract has not been rescinded at the time of the sale, the buyer acquires a good title to the goods, provided he buys them in good faith and without notice of the seller's defect in title.96 If the buyer or his agent had the knowledge or the means of knowledge about the sellers defect in title or authority to sell, the buyer would be deemed to have notice; as also where circumstances attending the transaction were such as a reasonable or prudent businessman applying his understanding to the circumstances would certainly know, as distinguished from mere suspicion, that the seller had no authority.97 Section 86 of the Indian Trust Act, 1882 provides that the transferee of property in pursuance of a contract liable to rescission, or that induced by fraud or mistake, holds the property for the benefit of the transferor, but subject to repayment by the latter of the consideration actually paid, provided he has received notice to that effect. It is not clear whether the word notice would include act ual knowledge or constructive notice; or whether the section requires notice of rescission be served on the transferee.
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90 See s. 19 below, Sorabsbab Pestonji v. Secretary of State, (1927) 29 Bom LR 1535, AIR 1928 Bom 17; see s. 30 of the Specific Relief Act. 91 Pertap Cbunder Gbose v. Mobendranatb Purlbait, (1889) 16 IA 233, (1889) 17 Cal 291,(PC) . 92 Sorabshah Pestonji v. Secretary of State, (1927) 29 Bom LR 1535, AIR 1928 Bom 17. 93 See also s. 19, under the heading: 'Damages and Rescission'. 94 Low v. Bouverie, (1891) 3 Ch 82, [1891-94] All ER Rep 348. 95 See above: 'Representor'; s. 16 above, under the heading 'Undue Influence, Third Parties.' 96 The Sale of Goods Act, 1930, s. 29. 97 Gobind Chunder Sein v. Valentine Ryan, 9 MIA 140 at (1861) 164.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER II Of Contracts, Voidable Contracts and Void Agreements/S. 19.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER II Of Contracts, Voidable Contracts and Void Agreements S. 19. Voidability of agreements without free consent.-When consent to an agreement is caused by coercion,98 fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. A party to contract, whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been if the representations made had been true. Exception.--If such consent was caused by misrepresentation or by silence, fraudulent within the meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence. Explanation.--A fraud or misrepresentation which did not cause the consent to a contract of the party on whom such fraud was practised, or to whom such misrepresentation was made, does not render a contract voidable. Illustrations (a) (b)
(c)
A, intending to deceive B, falsely represents that 500 maunds of indigo are made annually at A's factory, and thereby induces B to buy the factory. The contract is voidable at the option of B. A, by a misrepresentation leads B erroneously to believe that 500 maunds of indigo are made annually at A's factory. B examines the accounts of the factory, which show that only 400 maunds of indigo have been made. After this B buys the factory. The contract is not voidable on account of A's misrepresentation. A fraudulently informs B that A's estate is free from encumbrance. B thereupon buys the
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(d) (e)
estate. The estate is subject to a mortgage. B may either avoid the contract, or may insist on its being carried out, and the mortgage-debt redeemed.1 B, having discovered a vein of ore on the estate of A, adopts means to conceal, and does conceal, the existence of the ore from A. Through A's ignorance B is enabled to buy the estate at an undervalue. The contract is voidable at the option of A. A is entitled to succeed to an estate at the death of B, B dies; C, having received intelligence of B's death, prevents the intelligence reaching A, and thus induces A to sell him his interest in the estate. The sale is voidable at the option of A.
Introduction The section states the legal effect of coercion, fraud, and misrepresentation, in rendering contracts procured by them voidable; the earlier sections have laid down their respective definitions. If the consent is caused by fraud or misrepresentation, the party whose consent is so caused can insist on performance by the other party, and being placed in a position as if the representation were true. The important parts of the section are the Exception and the Explanation, which mark the limits within which the rule is applied.2 98 The words 'undue influence' have been omitted, by the Indian Contract Act, (Amendment Act) 1899, s. 3. 1 Under the Transfer of Property Act, 1882, s. 55(g), the seller, not having sold subject to incumbrances, is bound to discharge the incumbrance, independently of any question of fraud. 2 See s. 2(i) --What is a voidable contract; s. 64--Consequences of rescission of a voidable contract; s. 65--Obligation of a person who has received advantage under a contract which has become void; s. 66--Communication of rescission.
Consent to Making of Contract Fraud on the performance of a contract is no ground for rescission.3The principle is obvious. When a man is once bound to perform an enforceable promise, any further inducement or encouragement to do so is gratuitous and immaterial, and he cannot complain if any expectation raised in this matter is disappointed. On the other side, a promisor either performs his promise or not; if not, the breach of contract is the same whether his conduct has been honest or fraudulent (though fraud may have other consequences outside contract in the criminal or bankruptcy jurisdiction). Yet, an act done as the consideration for an offered promise is not the performance of a contract, for there is no contract until it is done, and the foregoing observation does not apply to it. 3 Jamsetji Nassarwanji Giawalal v. Hirjibhai Naoroji, (1912) 37 Bom 158 at 169; Fazal D Allana v. Mangaldas M Pakvasa, (1921) 46 Bom 489 at 508, (1921) 23 Bom LR 1144, 66 IC 726, AIR 1922 Bom 303.
'Voidable at the Option of the Party' A voidable contract is one in which by making an election, one or more parties have the power to avoid the legal relations created by the contract, or by ratification of the contract, to extinguish the power of avoidance.4 The injured party may affirm the contract, and in the case of fraud, also claim damages for deceit. The Contract Act does not make any distinction between fraud and misrepresentation in the application of provisions relating to liability for restoration under s. 64 or restitution under s. 65, or for payment of compensation in lieu of performance under the second para of s. 19.
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Since the contract is voidable, it gives the person a right of choice or election. Such a right, once exercised, is exhausted. If such a person, by express notice or by conduct, elects to affirm, he cannot later seek to avoid the contract; and if he has elected to avoid, he cannot later be allowed to affirm. There is no locus poenitentiae in either case.5 If the contract is wholly executory, the party entitled to avoid the contract need do nothing, he can wait until he is sued and then plead the voidability of the contract; but, if the contract has been partly executed, the right to avoid it must usually be exercised promptly, in the interest of the other party and of the third parties. Until this right is exercised, the contract is valid, and things done under it cannot afterwards be undone. Thus, if a contract for the sale of goods is voidable for fraud (without being void for mistake), the fraudulent party may acquire a valid title to the goods which he can transfer to an innocent purchaser for value.6 Where a document which was intended to be in favour of a particular person but as a result of fraud of the defendant was conveyed to someone else, the transaction would be voidable under s. 19.7 4 Restatement of contracts, (2d) s. 7; Chitty on Contracts, 28th edn, p. 23, para 1-039. 5 Kunja Lal Bhuiya v. Hara Lal Bhuiya, AIR 1943 Cal 162. 6 Chitty on Contracts, 29th edn, p. 23, para 1-039. 7 Havaldar Singh v. Aditya Singh, AIR 1978 All 266; Amar Krishna Mukherjee v. Asha Rani Ghosh, AIR 1985 Cal 398.
Terminable Contracts Section 19 does not apply to cases where the contract itself contains a defeasance clause; the party who is given a right to terminate the contract under it is entitled to do so unless the other party proves that the former has waived his rights.8 Whether such power could be inferred in the contract, is a question of construction of the agreement to be determined in accordance with the ordinary principles applicable to such a question.9 8 Western India Life Insurance Co. Ltd. v. Asima Sirkar, AIR 1942 Cal 412 at 417. 9 Re Spenborough Urban District Council's Agreement Spenborough Corporation v. Cooks sons & Co. Ltd, [1967] 1 All ER 959 at 962; Winter Garden Theatre, (London) Ltd. v. Millenium Productions Ltd., [1948] AC 173 at 203, [1947] 2 All ER 331 at 343.
Rescission The word 'rescind' implies an express and unequivocal cancellation of the contract by one party. The rescission must be communicated in the same manner as a proposal.10 Under this section, the right of rescission is available where consent is caused by fraud, misrepresentation or coercion; the right to rescind in the case of undue influence is dealt with under s. 19A. Modes of RescissionRescission by Notice No form is required by s. 19 for rescission. It is sufficient under s. 66 that the rescission is communicated in the same manner and subject to the same rules as if it were a proposal. Notice of rescission to an agent is notice to the principal.11 A declaration of rescission before commencing any proceedings is not necessary as matter of law,12 though, generally speaking, the prudent course is to repudiate as soon as possible after coming to
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know of the facts and of the right to rescind;13 else, the contract remains valid, and may expose such party to damages for breach of contract. Setting Aside by the Court The process of rescission is essentially the act of the party rescinding, and not of the court,14 although, it is common to speak of a Court 'setting aside' or rescinding a contract.15 The clearest form of rescission is bringing a suit to set aside the contract. A decree of rescission may become essential where property has been transferred on execution of a deed.16The Specific Relief Act, 1963 (Specific Relief Act) provides ss. 27-30 for rescission by the court. Rescission as a Defence The will to rescind may also be declared by way of defence to an act ion brought on the contract. If a suit is brought by a party to enforce a contract, the defrauded party can pray for avoiding the contract in his written statement being well within the period of limitation, and it is not necessary for him to bring a suit to avoid the contract.17 His defence cannot be defeated by lapse of time.18The innocent party may raise the defences entitling him to rescission in a suit for specific performance, which is enabled by s. 9 of the Specific Relief Act. Who can Rescind The option of avoiding a contract procured in any of the ways mentioned in s s. 19, 19A, is exercisable by the party's representatives,19 unless at the date of his death, he had lost it by acquiescence or otherwise.20 Once affirmed by the person entitled to avoid the contract, it cannot be questioned by a third party.21 Guilty Party If only one party act s fraudulently, he cannot be allowed, as plaintiff or defendant, to plead, or adduce evidence in support of his own fraud.22 Where one party records an agreement erroneously, and the other party, knowing of the error, acts fraudulently, the latter cannot be allowed to take advantage of the error and enforce it.23 Where both parties have act ed equally fraudulently, the courts will refuse to enforce the fraudulent transaction. Here, the plaintiff's suit will be dismissed; and the defendant who suppresses the fraud, cannot plead and prove it to defeat the plaintiff's claim.24 Rescission of Part of Contract A person entitled to rescind a contract cannot rescind a part only. When he decides to repudiate it, he must repudiate it altogether.25 Section 26(2)(d) of the Specific Relief Act, 1963 gives the power to the Court to refuse to rescind the contract if only a part is sought to be rescinded, and such part is not severable from the rest of the contract. This appears to suggest that rescission of part of a contract, if it can be severed from the rest of the contract, can be ordered. This would be a power with the court, and not a right of the party. The High Court of Australia has also decided that equity permits a Court to order partial rescission of a contract induced by fraudulent misrepresentation.26 In contrast, under the UNIDROIT Principles, where the ground of avoidance affects only individual terms of the contract, the effect of avoidance can be limited to individual terms of the contract, unless it would, in the circumstances, be unreasonable to uphold the remaining contract,27 The test is not just of severability (for that would in any case be necessary), but also of reasonableness.
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Contract is Valid until Avoided When a voidable contract is avoided, it does not mean that the contract never existed, but that it ceased to exist from the moment of avoidance. A voidable transfer is valid until avoided, and therefore, a third party acquires a good title in the meantime if he takes without notice. There is a clear distinction between fraudulent misrepresentation as to character of a document and as to its contents. The latter is merely voidable, but the former is void,28 and must be deemed to have never taken place. In a case under the Export & Import (Control) Act, the Supreme Court held that a licence obtained by misrepresentation did not make it non est,so as to make goods imported deemed to be without a licence in contravention of s. 3 of the Act and inviting the application of clause 8 of s. 167 of the Sea Customs Act .29Assuming that the principles of law of contract applied to licences under s. 3 of the Import and Export (Control) Act,30 a licence obtained by fraud was only voidable, and hence it was good till avoided in the manner prescribed by law.31 This judgment accepts the principle that misrepresentation does not make a contract non est but is only voidable. This pronouncement of the Supreme Court, it is submitted, is in consonance with the decision of cases decided in England that if the contract has been partly executed, it must be avoided promptly and until the right is exercised, the contract is valid and things done under it cannot afterwards be undone.32 Decisions to the contrary cited below relate to alienations of property. The judgment of the Madras High Court, to the contrary, in SNR Sundara Rao & Sons v. Commissioner of Income Tax, 33holding that the voidable contract when avoided at the instance of a party affected thereby, took effect from the date of transaction and not when it was avoided, was not on a case of contract, nor involved third party rights. The question was one under the Income Tax Act, 1961 as to whether tax was exigible from the date when the trust deeds executed by the father askarta of joint properties was declared void by a decree of court, or from the date when the transaction was effected. It was held that it was so from the latter date. An alienation which is perfect till it is set aside. It was observed:
When a person, who is entitled to dissent from an alienation, does so, his dissent is in relation to the transaction as such and not merely to the possession of the alienee on the date of such dissent. The effect of the avoidance is, therefore, to get rid of the transaction with the result that in law it is as if the transaction had never taken place.34
On the same principles, the Supreme Court in G Annamalai Pillai v. District Revenue Officer, 35held that a lease executed by a Hindu father for five years without the permission of the Court under s. 8 of the Hindu Minority and Guardianship Act, 1956 was voidable, and on the exercise of the option by the minor to avoid it, it stood avoided ab initio; the reason being that the lease was prohibited and without authority. The transaction inSatgur Prasad v. Harnarain Das, 36was not regarded merely as a contract voidable at the option of the plaintiff but it was in effect a conveyance under which title had passed to the defendant and the matter was viewed both as a contract and as one under s. 88 of The Indian Trusts Act 1882. Both the courts in India had found that the defendant stood in a fiduciary relation to the plaintiff, and finally, the doctrine ofrestitutio in integrum was applied.37 Under the UNIDROIT Principles, avoidance takes effect retroactively,38 i.e., the contract is considered never to have existed. If a part of the contract is avoided, the rule applies to the avoided part of the contract. However, individual terms of arbitration, choice of law or jurisdiction, may survive the avoidance. Effect of Rescission
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The election of a party rescinding 'relieves the other party from any further obligation under the contract and enables both the parties to make arrangements for the future on the footing that the contract has been once for all broken and is at an end'.39 Where the innocent party elects to terminate the contract and thereby puts an end to the primary obligations of the parties which were remaining unperformed: (a) there is a substitution by implication of law for the primary obligations of the party, in default, which remain unperformed, where there is a secondary obligation to pay money compensation to the other party for the loss sustained by him in consequence of their non-performance in the future; and (b) the unperformed primary obligations of that other party are discharged.40 Under the Contract Act, a voidable contract, when avoided, has been held to 'become void'.41 When a voidable contract is rescinded, the other party need not perform his outstanding obligations under the contract. The party rescinding the contract must restore the benefit received under the contract to the other party (s. 64). Any party receiving advantage under the contract is liable to restore it or make compensation for it to the person from whom it has been received (s. 65). Under the UNIDROIT Principles, upon avoidance, either party can claim restitution of what it has supplied under the contract, and is liable to make restitution of whatever it has received under the contract, and if it cannot make restitution, to make allowance for what it has received.42 If the ground of avoidance was known to the other party, he is liable for damages so as to put the other party in the same position in which it would have been if it had not concluded the contract.43 This liability arises irrespective of whether the contract was avoided or not. The UNIDROIT Principles therefore give a right to a party entitled to avoid a contract to claim damages, whether it affirms, or rescinds the contract. Since a contract caused by misrepresentation or fraud, is only voidable, a foreign jurisdiction clause is not abrogated, and a dispute as to the fact of misrepresentation is a dispute under the contract.44 Damages and Rescission Under the English law, a person induced to enter into a contract by a fraudulent misrepresentation is entitled to rescind the contract, or claim damages, or both; and the measure of damages is that applicable under the law of torts.45 Under the Misrepresentation Act, 1967 in force there, damages can also be claimed in a similar manner for negligent misrepresentation. Under this Act, the party entitled to avoid, but insisting on performance, can be awarded damages in lieu of performance or enforcement (under the second para of s. 19); and is entitled for restitution under s. 65, if he elects to rescind it. It does not expressly provide for damages on rescission, unless the provisions of s. 75 are interpreted to extend to contracts voidable under s s. 19 and 19A. In Chhanga Lal v. M C D, 46 a corporation allotted a plot for running dairy business based on the allottees representation that he carried on such business. On verification it was found that he ran a sweet shop. The corporation rescinded the contract and claimed compensation. It was held that the corporation was entitled to compensation on the basis that the contract had not been made, viz. wasted expenditure, was however liable to refund the amount received by it, but was entitled to set off the compensation against the amount refundable. In Trojan & Co. v. Nagappa Chettiar, 47 it was held that where a person is induced by the fraud of another to purchase shares the measure of damages which he is entitled to recover from the seller is the difference between the price of the shares paid by him and the real price on the date when the shares were purchased. The market rate of the shares on the date when the fraud was practised would be their real price in the absence of any other circumstance. If the market was vitiated or in the state of flux or panic in consequence of the fact which was fraudulently concealed then the real value has to be determined from the evidence adduced. Damages have been awarded under the law of torts.48
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10 See s. 66. 11 Official Receiver v. Jugal Kishore Lachhi Ram Jaina, AIR 1963 All 459. 12 Etbari v. H Bellamy, AIR 1938 Rang 207, 176 IC 526, (the plaintiff had already repudiated the contract and the defendant had accepted the repudiation). 13 UNIDROIT Principles, Art. 3.15: Notice of avoidance shall be given within a reasonable time, having regard to the circumstances, after the avoiding party knew or could not have been unaware of the relevant facts or became capable of act ing freely. 14 Alati v. Kruger, (1955) 94 CLR 216 at 224. (High Court of Australia) 15 Horsler v. Zorro, [1975] Ch 302 at 310, [1975] 1 All ER 584; Atlantic Lines & Navigation Co. Inc v. Hallam Ltd., (The Lucy), [1983] 1 Lloyd's Rep 188 at 202, (the Court may annul a rescission previously effected by self-help). 16 Appanna v. Jami Venkatappadu, AIR 1953 Mad 611. 17 Gosto Behari Roy v. Ramesh Chandra Das, AIR 1978 Cal 235 at 238. 18 Rangnath Sakharam v. Govind Narasinv, (1904) 28 Bom 639 at 642, (case of undue influence). 19 Shravan Goba Mahajan v. Kashiram Devji, (1926) 51 Bom 133, AIR 1927 Bom 384, 100 IC 932. The headnote has the effect of suggesting, quite wrongly, that the Court had some doubt on this point, it did, for abundant caution, add other reasons; and see notes to s. 16, ' Rights of Legal Representatives' above; Rash Behari Naskar v. Haripada Naskar, AIR 1934 Cal 762, 59 Cal LJ 387, 152 IC 561; Manbhari v. Sri Ram, 165 IC 240, AIR 1936 All 672. 20 Govind Ramaji Ganjale v. Savitri Rama Thosar, (1918) 43 Bom 173, 20 Bom LR 911, AIR 1918 Bom 93; Manbhari v. Sri Ram 165 IC 240, AIR 1936 All 672, (undue influence); Pardhana v. Amin Chand, AIR 1977 HP 94. 21 Rangnath Sakharam v. Govind Narasinv, (1904) 28 Bom 639; Trimbak Bhikaji v. Shankar Shamrav, (1911) 36 Bom 37; Govind Ramaji Ganjale v. Savitri Rama Thosar, (1918) 43 Bom 173, 20 Bom LR 911, AIR 1918 Bom 93. 22 (Vonnakota) Viraju v. Bangaraju, AIR 1926 Mad 631; Nambiappa Muthirian v. Chetti, AIR 1936 Mad 630; Guddappa Chikkappa Kurbar v. Balaji Ramji Dange, AIR 1941 Bom 274; Seth Narainbhai Ichharam Kurmi v. Narbada Parsad Sheosahai Pande, AIR 1941 Nag 357. 23 William Charles Binnus v. W&T Avery Ltd., AIR 1934 Cal 778. 24 Guddappa Chikkappa Kurbar v. Balaji Ramji Dange, AIR 1941 Bom 274,(FB) ; CP Automobile Engg Co. Ltd. v. Ramchandra Visnwanath, AIR 1926 Nag 259; Nawab Singh v. Daljit Singh, AIR 1935 All 799; Kisan Ram Marwari v. Godawari Debi, AIR 1940 Pat 379. 25 Ohid Bux v. Dorshul, AIR 1926 Cal 959; TSB Bank plc v. Camfield, [1995] 1 All ER 951, [1995] 1 WLR 430. 26 Vadasz v. Pioneer Concrete (SA) Pvt Ltd., (1995) 184 CLR 102, (HC of Australia). 27 The UNIDROIT Principles, Art. 3.16, (avoidance of individual terms can be sought). 28 Ningawwa v. Byrappa Shiddappa Hireknrabar, AIR 1968 SC 956; referring to Foster v. Mackinnon, (1869) LH 4 CP 704 [1861-73] All ER Rep 1913; Dularia Devi v. Janardan Singh, AIR 1990 SC 1173 at 1175; Sanni Bibi v. Siddik Hossain, AIR 1919 Cal 728; and in Brindaban Misra Adhikary v. Dhurba Charan Roy, AIR 1929 Cal 606; Pratap v. Puniya Bai, AIR 1977 MP 108; Mackender v. AG Feldia, [1966] 3 All ER 847 at 853. 29 Repealed by the Customs Act, 1962 (52 of 1962). 30 Repealed by the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992). 31 East India Commercial Co. v. Collector of Customs, AIR 1962 SC 1893; Ningawa v. Byrappa Shiddappa Hireknrabar, AIR 1968 SC 956 at 958; Pratap v. Puniya Bai, AIR 1977 MP 108 at 110. 32 Chitty on Contracts, 28th edn, para 1-039; Mackender v. AG Feldia, [1966] 3 All ER 847, 853. 33 AIR 1957 Mad 451, (1957) 31 ITR 449; referring to Maddali Visweswara Rao v. Maddalal Suryarao 59 Mad 666, AIR 1936 Mad 440, (an alienation is perfect till set aside); Official Receiver v. Jugal Kishore Lachhi Ram Jainal, AIR 1963 All 459,(FB) ; Satgur Parsad v. Har Narain Das, AIR 1932 PC 89, 59 IA 147, (Case of fraud--restoration to the former position); contra Mackender v. AG Feldia supra . 34 SNR Sundara Rao & Sons v. Commissioner of Income-tax, AIR 1957 Mad 451 at 452, (1957) 31 ITR 449 approved in G Annamalai Pillai v. District Revenue Officer, (1993) 2 SCC 402. 35 (1993) 2 SCC 402, referring to Satgur Parsad v. Har Narain Das, AIR 1932 PC 89, 59 IA 147; approving SNR
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Sundara Rao & Sons v. Commissioner of Income-tax, AIR 1957 Mad 451, (1957) 31 ITR 449. 36 AIR 1932 PC 89, 59 IA 147. 37 Satgur Parsad v. Har Narain Das, AIR 1932 PC 89, 59 IA 147. 38 The UNIDROIT Principles, Art. 3.17. 39 Johnstone v. Milling, [1886] 16 QBD 460 at 470 [1886-90] All ER Rep Ext 1701. 40 Photo Production Ltd. v. Securicor Transport Ltd., [1980] AC 827, [1980] 1 All ER 556 per Lord Diplock at 566. 41 Satgur Parsad v. Har Narain Das, AIR 1932 PC 89, 59 IA 147. 42 The UNIDROIT Principles, Art. 3.17. 43 The UNIDROIT Principles, Art. 3.18. 44 Mackender v. AG Feldia, [1966] 3 All ER 847 at 850; Heyman v. Darwins Ltd., [1942] AC 356, [1942] 1 All ER 337. 45 Archer v. Brown, [1985] 1 QB 401, [1984] 2 All ER 267. 46 AIR 2008 Del 146 47 (1953) SCR 789, AIR 1953 SC 235, (discussion based on torts). 48 S Chatterjee v. KL Bhave, (Dr), AIR 1960 MP 323, (a suit framed in tort); Dambarudhar Behera v. State of Orissa, AIR 1980 Ori 188, (basis for damages not discussed); RC Thakkar v. Gujarat Hsg Board, AIR 1973 Guj 34 at 44, (contract was performed; compensation damages granted under s. 19).
Limits on the Right of Rescission If the person entitled to rescind has put it out of his power to restore the former state of things, either by acts of ownership or the like, or by adopting and accepting dealings with the subject matter of the contract which alter its character, as the conversion of shares in a company, or if he has allowed third persons to acquire rights under the contract for value,49 it is too late to rescind, and the remedy, if any, must be of some other kind. 'You cannot both eat your cake and return your cake.'50 These limits have been recognised in the s. 26(2) of the Specific Relief Act, 1963.Affirmation If the defrauded party, by express words or unequivocal contract affirms, the contract, his election is determined forever.51 A party entitled to rescind or avoid a contract will not be held to have affirmed it unless he knows the facts, and also is aware that he has a right to rescind or avoid.52 Where a plaintiff became a partner with the defendant and soon thereafter discovered that he had been deluded, and immediately decided to exercise his right to rescind the contract, he would not be debarred from doing so and from recovering the money paid for his share of partnership. This would be so even if he had signed a false statement that he had seen the books of accounts and the balance sheet of the firm.53 A lorry purchased on the representation of being 'in first class condition' was found to have some defects when driven on business purposes. The seller agreed to pay half the price for removing those defects. It was again taken for business purposes, but it broke down again. In an action for rescission for innocent misrepresentation the Court held that even if the plaintiff had a right of rescission he lost it in the circumstances of the case.54 Where the person complaining of coercion in making consent decree adopted the transaction after alleged coercion by encashing cheques given under the consent terms, the consent decree was not vitiated.55 After receiving and accepting the benefit, the retiring partner was not entitled to avoid the deed of retirement from partnership.56 Delay
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The right of a party defrauded is not affected by the mere lapse of time so long as he remains in ignorance of the fraud.57 Lapse of time is not of itself a bar to setting aside a contract (subject to the risk of indefeasible rights having been acquired by third persons), but may be material as evidence of acquiescence, that is, of a tacit election to affirm the contract;58but, a suit for rescission of contract is liable to be dismissed if filed after the period of limitation prescribed under the Limitation Act, 1963 even though limitation is not set up as a defence, the prescribed period being when the facts entitling the plaintiff to have the contract rescinded first became known to him.59A claim for rescission can be lost by failure to act promptly.60 It has been held that where a contract to purchase shares has been induced by any misrepresentation in the prospectus, the shareholder must rescind the contract promptly, i.e., within reasonable time of his becoming aware of the fraud.61 Acquiring Rights by Third Parties Since a voidable contract is valid until rescinded, and if during the interregnum, third parties acquire rights bona fide without notice and for value, or even if the position of the wrongdoer is affected, the contract cannot be rescinded.62 If a contract entered into through fraud is not avoided before a third party intervenes and gets an interest in the subject matter of the contract, a claim to rescind will not lie.63 Where property is transferred in pursuance of a contract which is liable to rescission or induced by fraud or mistake, the transferee must, on receiving notice to that effect, hold the property for the benefit of the transferor, subject to the repayment by the latter of the consideration act ually paid.64 Restitutio in integrum It has been said that when a party 'exercises his option to rescind the contract, he must be in a state to rescind; that is, he must be in such a situation to be able to put the parties into their original state before the contract',65 implying that rescission is possible only when the parties can be restored to substantially the same position as they were in before the contract was made,66 and that where restitution is not possible there can be no rescission. In Cooper v. Phibbs, 67 it was held that on the parties being relieved of contractual obligations, each must give back what he had obtained under the contract. In Vigeors v. Pike, 68 the House of Lords refused to set aside a lease of mines on the ground of misrepresentation of the owner, as the mines had been substantially worked and it was impossible to restore the parties to their positions. The owner was entitled to receive the balance of the money due from the lease. There are obviously many cases in which such restitution is not literally possible. Thus, if the owner of an estate subject to a lease for an unexpired term contracts to sell it to a purchaser who requires immediate possession, and conceals the existence of the lease,69 the purchaser cannot be put in the same position as if the representation that there was no tenancy, or only such a tenancy as could be determined at will, had been true; but, as Lord Blackburn said in Erlanger v. New Sombrero Phosphate Co :70
... the practice has always been for a Court of Equity to give this relief by the exercise of its powers, it can do what is practically just, though it cannot restore the parties precisely to the state they were in before the contract.
Where there is improvement or deterioration, equity adjusts the rights of parties by awarding money compensation to bring about status quo, but subject to all just allowances. It means putting the parties
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back in the position they were in before the contract, not in all respects but only in respect of the rights and obligations created by the contract which is rescinded.71 A party exercising his option to rescind is entitled to be restored as far as possible to his former position.72 This doctrine would not justify 'improving the vendor out of his estate' or rendering it impossible for him to recover it. Again, allowance for improvements which were matters of taste or personal enjoyment could not be justified;73 but, limitation of restitutio in integrum must not be strictly construed, and mere deterioration would not destroy the right.74 The principle does not require that a person must be placed in the same position as before; it means he must be placed in as good a position as before. The Court is more inclined to give restitution in cases of fraud than in cases of innocent misrepresentation.75 In Adam v. Newbigging, 76N entered into a bona fide concern which he presumed to be solvent and profitable and continued labouring under such misapprehension till he found out that he was deluded. The business was not only insolvent but could no longer continue. It was held that restitutio in integrum had not become impossible, and the contract was rescinded, although the plaintiff entered the concern and continued in it till he found out the actual state of affairs. In Hulton v. Hulton, 77A promised his fiance to give her, after their marriage, an allowance of half of what his father gave him annually, i.e., half of GBP 1,000. The father died after the marriage leaving A GBP 30,000 a year but A misrepresented an income of GBP 1000 a year. A and his wife separated and wife's maintenance remained on husband's misrepresentation. By agreement, they destroyed their letters to each other. The wife on discovering the true income sought to have the agreement rescinded. The husband resisted pleading that the wife had spent the money. The Court of Appeal rescinded the agreement holding that a Court of equity will do what is practically just even though it cannot restore the parties to the position they were in. Restitution and Indemnity Even where the person seeking to rescind the contract is in a position to restore the benefits, he is entitled from the other party to indemnity against obligations created by the contract viz. liabilities to third parties. The claimant will not, however, be entitled to damages.78 Refusal by Court Under the Specific Relief Act, 1963 the Court may refuse to rescind the contract in a suit for rescission in the following circumstances:79
(i) (ii) (iii) (iv)
The plaintiff has expressly or impliedly ratified the contract; Due to change in circumstances after the making of the contract (not due to the act of the defendant himself), the parties cannot be substantially restored to the positions in which they stood when the contract was made; Third parties have during the subsistence of the contract, acquired rights in good faith without notice and for value; Only a part of the contract is sought to be rescinded and such part is not severable from the rest of the contract.
Under the s. 2(2) of the (English) Misrepresentation Act, 1967 the Court has a discretion to refuse to allow rescission for misrepresentation (except in cases of fraud) and to award damages instead 'if it is of the opinion that it would be equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as to the loss that the rescission would cause to the other party'. The Court can, therefore, take into account the importance or unimportance of the facts misrepresented, or to 'balance' the loss suffered by the representee on account of the misrepresentation, and that which would be caused to the representor due to the rescission. The measure of damages is the loss caused as a result of refusal to allow rescission of the
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contract, and not the loss caused by entering into the contract.80 Executed Contracts The principle under the English law that there can be no rescission of a contract after it has been executed by a transfer of property under it, referred to as the rule in Seddon v. North Eastern Salt Co. Ltd, 81is no longer a limitation on rescission under s. 1 (b) of the (English) Misrepresentation Act, 1967 which provides that a contract is capable of rescission notwithstanding that it has been performed. Whether the contract was executed or executory, the question is whether restitutio in integrum is substantially possible and whether rescission is just or fair.82 Incorporation as a Term There was authority to support that once the misrepresentation became the term of the contract, the right to rescission was lost, the situation being regarded as a breach of a contractual term;83 but, under s. 1(a) of the (English) Misrepresentation Act, 1967 rescission is open even though the misrepresentation has become a term of the contract. 49 Clarke v. Dickson, (1858) EB & E 148, 120 ER 463; decided on a state of company law long since obsolete and not very clear on the facts and dates, but the rule in question is correctly laid down. 50 (1858) EB&E 148 per Crompton J. 51 Ningawwa v. Byrappa Shiddappa Hireknrabar, AIR 1968 SC 956 at 958; referring to Clough v. London North Western Rail Co., (1871) 7 Ex 26 at 34, [1861-73] All ER Rep 646; Abram Steamship Co. Ltd. v. Westville Steamship Co. Ltd., [1923] AC 773, [1923] All ER Rep 645; Mackender v. AG Feldia, [1966] 3 All ER 847 at 853. 52 Peyman v. Lanjani, [1985] Ch 457, [1984] 3 All ER 703; Container Transport International Inc v. Oceanus Mutual Underwriting Association, (Bermuda) Ltd., [1984] 1 Lloyd's Rep 476. 53 Senanayake v. Cheng, [1966] AC 63, [1965] 3 All ER 296, [1965] 3 WLR 715 at 729, (PC), distinguishing Seddon v. North Eastern Salt Co. Ltd., [1905] 1 Ch 326, and applying Mackenzie v. Royal Bank of Canada, [1934] AC 468. 54 Long v. Lloyd, [1958] 1 WLR 753, [1958] 2 All ER 402; Seddon v. North Eastern Salt Co. Ltd., [1905] 1 Ch 326; Angel v. Jay, [1911] 1 KB 666, (1908-10) All ER Rep 470, (an executed contract cannot be rescinded on the ground of innocent misrepresentation); but see now the, (English) Misrepresentation Act, 1967, s. 1(b). 55 Gangadeep Pratisthan Pvt Ltd. v. Mechano, AIR 2005 SC 1958, (2005) 11 SCC 273. 56 Broadway Centre v. Gopaldas Bagri, AIR 2002 Cal 78, (coercion). 57 Armstrong v. Jackson, [1917] 2 KB 822 at 830, [1916-17] All ER Rep 1117 at 1122. 58 Clough v. London North Western Rail Co., (1871) 7 Ex 26 at 34, [1861-73] All ER Rep 646; Armstrong v. Jackson, [1917] 2 KB 822 at 830, [1916-17] All ER Rep 1117 at 1122. 59 The Limitation Act, 1963, s. 2(1), Art. 59 of the Schedule. 60 Leaf v. International Galleries, (a firm), [1950] 2 KB 86, [1950] 1 All ER 693; Hajra Bai v. Jadavbai, AIR 1986 MP 106. 61 Shiromani Sugar Mills Ltd. v. Debi Prasad, AIR 1950 All 508 at 513. 62 Babcock v. Lawson, (1880) 5 QBD 284; Seetharama Raju v. Bayanna Pantulu, 17 Mad 275 (1894). 63 White v. Garden, (1851) 10 CB 919; Babcock v. Lawson, (1880) 5 QB 284; Re LG Clarke,[1976] Ch 1121. 64 The Indian Trusts Act, 1882, s. 86. 65 Clarke v. Dickson, (1858) EB & E 148 per Crompton J at 154, 120 ER 463. 66 Solle v. Butcher, [1950] 1 KB 671, [1949] 2 All ER 1107 at 1119. 67 (1867) 2 HL 149, [1861-73] All ER Rep 2109. 68 (1842) 8 Ch & F 562; Chitty on Contracts, 28th edn, para 6-114, p. 392.
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69 Morgan v. Government of Haidarabad, (1888) ILR 11 Mad 419. 70 (1878) 3 App Cas 1218, [1874-80] All ER Rep 271; Garrard v. Frankel, (1862) 30 Beav 445; Paget v. Marshall, (1884) 28 Ch D 225. [1881-85] All ER Rep 290. 71 Erlanger v. New Sombrero Phosphate Co., (1878) 3 App Cas 1218 at 1278, [1874-80] All ER Rep 271; Brown v. Smitt, (1924) 34 CLR 160 at 164; Senanayake v. Cheng, [1966] AC 63, [1965] 3 All ER 296, [1965] 3 WLR 715 at 729, (PC). O'Sullivan v. Management Agency and Music Ltd., [1985] QB 428, [1985] 3 All ER 351,(CA) ; Atlantic Lines & Navigation Co. Inc v. Hallom Ltd., (The Lucy) [1983] 1 Lloyd's Rep 188 at 202, (it has been suggested that a contract for services, may be rescinded despite part performance of the services by the misrepresentor); Satgur Parsad v. Har Narain Das, AIR 1932 PC 89, 59 IA 147. 72 Kerr on Fraud & Mistake, 6th edn, 469, quoted with approval of Privy Council in Satgur Parsad v. Har Narain Das, AIR 1932 PC 89, 59 IA 147. 73 Brown v. Smitt, (1924) 34 CLR 160 at 165; Mill v. Hill, (1852) 3 HLC 328; Stepney v. Biddulph, (1865) 13 WR 576. 74 Armstrong v. Jackson, [1917] 2 KB 822 at 829, [1916-17] All ER Rep 1117 at 1122; Alati v. Kruger, (1955) 94 CLR 216; Brown v. Smitt, (1924) 34 CLR 160. 75 Chitty on Contracts, 24th edn, para 401: 26th edn, para 469; Spence v. Crawford, [1939] 3 All ER 271; O'sullivan v. Management Agency and Music Ltd., [1985] QB 428, [1985] 3 All ER 351,(CA) . 76 Adam v. Newbigging, (1888) 13 App Cas 308 at 317 affirming Newbigging v. Adam, [1886] 34 Ch D 582, [1886-90] All ER Rep 975. 77 [1917] 1 KB 813, [1916-17] All ER Rep 595. 78 Newbigging v. Adam, (1886) 34 Ch D 582 at 594, [1886-90] All ER Rep 975; Whittington v. Seale-Hayne, (1900) 82 LT 49. 79 See s. 27(2) of the Specific Relief Act . 80 William Sindall plc v. Cambridgeshire County Council, [1994] 3 All ER 932, [1994] 1 WLR 1016. 81 [1905] 1 Ch 326. 82 Senanayake v. Cheng, [1966] AC 63, [1965] 3 All ER 296, [1965] 3 WLR 715 at 728-29; Mangilal Sharma v. Appellate Tribunal of State Transport Authority, AIR 1957 Raj 167; Satgur Parsad v. Har Narain Das, AIR 1932 PC 89, 59 IA 147. 83 Pennsylvania Shipping Co. v. Compagnie Nationale de Navigation, [1936] 2 All ER 1167.
Affirmation The party entitled to set aside a voidable contract may affirm it if he thinks fit. That is obvious in the conception of a contract being voidable. A party entitled to rescind or avoid a contract will not be held to have affirmed it unless he knew the fact and was aware that he had a right to rescind or avoid.84 84 Peyman v. Lanjani, [1985] Ch 457, [1984] 3 All ER 703,(CA) ; Container Transport International Inc v. Oceanus Mutual Underwriting Association, (Bermuda) Ltd., [1984] 1 Lloyd's Rep 476.
Right to Insist on Performance Where the consent is caused by fraud or misrepresentation, the representee is entitled to insist that the contract be performed, and that he shall be put in the position in which he would have been if the representations made had been true, but, the section does not entitle a party to insist on the performance of a different contract from the one entered into by him.85 If the representee affirms the contract, he may require the performance of the whole and every part of it (subject to the performance in due order of whatever may have to be performed on his own part) or, in default thereof, as damages for non-performance.
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Damages can be awarded in lieu of completion or enforcement.86 In RC Thakkar v. Gujarat Housing Board, 87 where the representee had completed the performance of the contract, and claimed compensation, inter alia on the ground that the Board had misrepresented the estimate of the cost of the work in the tender, the Court awarded damages for misrepresentation under s. 19 on the basis of what would have been the position, if the representations were true. The Court held that damages could be granted under s. 19 where the plaintiff had sustained loss or damages in carrying out the execution of the work, and that these could include the profit which the party acting on such misrepresentation would have been able to obtain had there been no misrepresentation. If the default is wholly or partly due to the non-existence of facts which the defaulting party represented as existing, this party can obviously not set up the falsity of his own statement by way of defence or mitigation, and, if the case is a proper one for specific performance and if it is in his power to perform the contract fully, though with much greater cost and trouble than if his statement had been originally true, he will have to perform it accordingly.88 Is anything more than this meant by the declaration of the affirming party's right to 'be put in the position in which he would have been if the representations made had been true'?89 The earlier editors have opined that it is not certain that the present enactment can be literally relied upon. A sells a house to B, and by some blunder of A's agent, the annual value is represented as being Rs. 2000/- when it is in fact only Rs. 1000/-. According to the letter of the present paragraph, B may insist on completing the contract and the difference between the actual and the stated value being paid to him and his successors in title by A and A's successors in title for all time. Nothing short of that will put him 'in the position in which he would have been if the representations made had been true.' This, they had said, is not the intention of the enactment. In response to this view, the Law Commission of India recommended that the power of restitution must be limited to the extent considered reasonable by the court. It also recommended that it should be open to the Court to award compensation if it refuses to enforce the contract.90While the (English) Misrepresentation Act gives power to award damages in lieu of rescission, the recommendation of the Law Commission of India has been to award compensation in lieu of performance. 85 Haji Mahomed Haji Wali Mahomed v. Ramappa, (1929) 119 IC 684, AIR 1929 Nag 254, (a mortgage case--connection with general contract law remote). 86 Sorabshah Pestonji v. Secretary of State, (1927) 109 IC 141, (1927) 29 Bom LR 1535, AIR 1928 Bom 17. 87 AIR 1973 Guj 34, (it was observed that it did not make any difference even if plaintiff was compensated under the general principles of tort). 88 See the Specific Relief Act 1963, s. 13;Quaere whether this clause can usefully be applied as a measure of money compensation; Sorabshah Pestonji v. Secretary of State, (1927) 109 IC 141, (1927) 29 Bom LR 1535, AIR 1928 Bom 17, (but the party lost his claim, if any, to rescind the contract by delay). 89 The Indian Law Commissioners' draft was curiously worded, (clause 6):A person who, either knowingly, or ignorantly, makes a false representation whereby he induces another to enter into a contract with him, is bound to place the other in the same position as if the representation had been true, and in default of his doing so the contract is voidable at the option of the person who has been misled.This, literally read, says that the contract is voidable only if the representation, besides having been untrue when made cannot be subsequently made good. Such a restriction of the misled party's rights is unknown to the law. 90 The Law Commission of India, 13th report, 1958, para 19. It recommended amending s. 19 to substitute the word 'claim' for the word 'insist' in the second para, and to add after the second paragraph:Where such a claim is made, the Court shall, in deciding thereon, have due regard to the following considerations(a) whether, and if so, how far, the claim is reasonable; and(b) whether it is in the power of the party against whom the contract is voidable to perform it fully. Where such a claim is disallowed, the Court may award compensation in money for the injury caused by the fraud or misrepresentation.
Exception 1
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Under English law, the principle is that if a man makes a positive statement to another, intending it to be relied upon, he must not complain that the other need not have relied upon it. 'The purchaser is induced to make a less accurate examination by the representation, which he had a right to believe'.91 The test is not whether the party might have inquired for himself, but whether he did inquire and trust his own inquiries rather than the representation.92 Having the opportunity or investigating and ascertaining the truth of the representation does not deprive the representee of his right to rescind.93 Where a purchaser chooses to rely upon his own judgment or of his agent, he cannot afterwards say that he relied upon a previous representation made by the vendor.1 The exception of this section is wider than the corresponding English authorities.2 A question may arise whether the party alleged to have misrepresented a fact really said, 'I tell you it is so,' or only 'I think you will find it so'. This question will, according to the circumstances, be of the construction of particular words, or of the inferences to be drawn from words and conduct. Again, the possession of obvious means of knowledge, may lead, in some cases, to a fair inference that those means were used and relied upon, but, still the real point to be considered is whether the party misled did put his trust in the representation made to him of which he complains, or in other information of his own. In the latter case, the misrepresentation did not really cause his consent. A buyer, on obtaining the earning capacity of the mines to be purchased from the owners, had it checked by competent persons. On finding the figures wrong later, his act ion of rescinding the contract failed as he had not relied on the sellers' figures.3 Ordinary Diligence Exception to s. 19 applies where the innocent party might, with due diligence, have discovered,4 or had the means of so discovering the misrepresentation5 before he entered into the contract; in such a case, he cannot avoid the contract on the ground that he was deceived by the misrepresentation.6 The ordinary diligence of which the Exception speaks is such diligence as a prudent man would consider appropriate to the matter, having regard to the importance of the transaction in itself and of the representation in question as affecting its results. A possibility of discovering the truth by inquiries involving trouble or expense out of proportion to the value of the whole subject matter would not, it is conceived, be 'means of discovering the truth with ordinary diligence'. In Re Nursery Spinning and Weaving Co. Ltd,7 it was contended on behalf of the company that the bank could have discovered with ordinary diligence that the company was not liable on a bill by its secretary, treasurer, and agent. Sargent J. said:
No ordinary diligence would have enabled the bank to discover that the company was not liable on this bill. The form of the bill would naturally lead the bank, as it admittedly did lead the bank, to suppose that it was the company's bill as represented, and the discovery could only be made by persons trained in the law and after a careful examination of legal authorities.
However, where a purchaser of rice stored up at a place to which he had an easy access refused to take delivery on the ground that the rice was of an inferior quality to that contracted for, it was held that he could not rescind the contract, for he could have discovered the inferiority of the quality by using 'ordinary diligence'.8 Failure by a person to make such inquiries as an ordinary prudent person would make, may be evidence of the fact that such person was not deceived.9 Does not Apply to Fraud The Exception does not apply to the cases of active fraud as distinguished from misrepresentation,
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which is not fraudulent.10 The words 'fraudulent within the meaning of s. 17' go with the word 'silence' and not 'misrepresentation'.11 The Exception applies to act ive misrepresentation or silence amounting to fraud within s. 17, but does not cover a case of fraud under s. 17(3).12 Therefore, in such cases, the party defrauded need not establish that he had no means of discovering the truth with ordinary diligence.13 It has been held that if a person desirous of selling property causes letters to be written to him in which fictitious offers at high prices are made with the sole purpose of showing it to an intending purchaser, the making and exhibiting of such letters to the purchaser and thus, inducing him to purchase the property amounts to fraud within the meaning of s. 17, and the case does not fall within the Exception.14 A vendor of a house and land knew that the purchaser wanted immediate possession. While admitting that the property was once occupied by a tenant, he first concealed the fact that the tenant had a lease, and then pretended that the lease was forfeited; the purchaser was entitled to rescind the contract, although he might have ascertained by independent inquiry what the tenant's interest really was.15 Where the vendor not only failed to disclose his having leased the land, which was being sold, but stated that immediate possession would be delivered, the sale was voidable, and the defence of the absence of the due diligence under Exception to s. 19 by the vendee was not open to the vendor.16 A person purchased from the official assignee a decree obtained in favour of an insolvent for 20 per cent of its face value by representing that the decree was practically unrealisable, although he knew that satisfactory security had been given for the full amount of the decree. The official assignee was held entitled to rescind the contract.17 A false statement that the property to be sold was free from mortgage did not fall under the Exception and the contract was voidable at the instance of the vendee for fraud.18 One agent cannot be said to have knowledge of fraud because the principal has vicarious knowledge of fraud on account of the knowledge of another agent.19 Therefore, a tahsildar conducting a Court sale cannot be said to have knowledge of fraud because of the knowledge of the Government pleader.20 Explanation: 'Causing Consent' A false representation, whether fraudulent or innocent, is irrelevant if it did not induce the party to whom it was made to act upon it by entering into a contract or otherwise.21 He cannot complain to having been misled by the statement which did not lead him at all. If the misrepresentation does not effect the representee because he would have entered into the contract even had he known the true facts, he had no remedy.22 Whether a particular misrepresentation was of such a nature, that it did cause the consent of the person to whom it was made, or whether it was of such a nature that his consent was, in no way, affected by the misrepresentation, is a question of fact, and illustration (b) to the section cannot be considered exhaustive of the class of cases which could come under the Explanation.23 The representation must be definable as dans locum contractui, bringing about the contract. Hence, an attempt to deceive, which has not in fact deceived the party, can have no legal effect on the contract, not because it is not wrong in the eye of the law, but because there is no damage. This rule is applicable where a seller of specific goods purposely conceals a fault by some contrivance, in order that the buyer may not discover it if he inspects the goods, but the buyer does not in fact make any inspection.24 It may be hard to determine whether a certain representation was in fact relied upon so that it can be said to have caused consent to the contract. P was induced to take debentures in a company partly because of the misstatement in a prospectus issued by D and partly because of his own mistaken belief that debenture holders would have a charge upon the property of the company. D pleaded that one of the inducements operating on P's mind was his own mistake, but P was allowed to rescind;25 as in English law if the representation was one of the inducing causes, it is immaterial that it was not the sole inducing cause. This question, where its arises, is a question not of law, but of fact,26 on which the character of the statement made and the probability that it would influence a reasonable man's determination may be
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taken into account. Per Lord Blackburn:
If it is proved that the defendants, with a view to induce the plaintiff to enter into a contract, made a statement to the plaintiff of such a nature as would be likely to induce a person to enter into a contract, and it is proved that the plaintiff did enter in to the contract, it is a fair inference of fact that he was induced to do so by the statement...its weight as evidence must greatly depend upon the degree to which the act ion of the plaintiff was likely, and on the absence of all other grounds on which the plaintiff might act.27
There is no rule of law that any particular kind of statement is necessarily material in some cases and immaterial in others. In general, one man's money is as good as another's, and in a contract of loan, the lender's personality is different from the borrower; but where a money-lender who has acquired an evil repute for hard dealing in his own name advertises and lends money in assumed names, it is a permissible inference of fact that the concealment of his identity was a fraud inducing the borrower to contract with him.28 The fact that a person had taken pains to falsify or conceal a fact is cogent evidence that to him, at any rate, that fact appeared material, and the falsification or concealment was an important condition for obtaining the other party's consent. A man who has so act ed cannot afterwards turn around and say, 'it could have made no difference if you had known the truth.' It has also been held that a good defence is made if the truth was known to the agent of the plaintiff, at least where the facts were already communicated to the agent.29 Moreover, the argument that the misrepresentation or fraud have in fact materially induced the contract must be specifically pleaded in the plaint.30 91 Dyer v. Hargrave, (1805) 10 Ves 505 at 510, 8 RR 35 at 39, [1803-13] All ER Rep 348. 92 Redgrave v. Hurd, (1881) 20 Ch D 1, [1881-85] All ER Rep 77. 93 Redgrave v. Hurd, supra ; Central Railway Co. of Venezuela v. Kisch, (1867) LR 2 HL 99; Laurence v. Lexcourt Holdings Ltd., [1978] 1 WLR 1128, [1978] 2 All ER 810. 1 Holmes v. Jones, (1907) 4 CLR 1692 at 1702, 1709, 1711; Lysney v. Selby, (1705) 2 Ld Raym 1118; Redgrave v. Hurd, (1881) 20 Ch D 1 at 15. [1881-85] All ER Rep 77. 2 John Minas Apcar v. Louis Caird Malchus, (1939) 1 Cal 389 at 398, 184 IC 321, AIR 1939 Cal 473 per Lord Williams J at 477. 3 Attwood v. Small, (1838) 6 CL & Fin 232, [1835-42] All ER Rep 258, 49 RR 115. 4 Allah Bakhsh Khan v. RE Barrow, AIR 1917 Lah 173. 5 Dhulipudi Namayya v. Union of India, AIR 1958 AP 533. 6 Hakim Rai & Sons v. Kharak Singh, AIR 1918 Lah 94 at 95; Premchand v. Ram Sahai, AIR 1932 Nag 148 at 151; Dhulipudi Namayya v. Union of India, AIR 1958 AP 533 at 539; Governor of Orissa State v. Shivaprasad Sahu, AIR 1963 Ori 217. 7 (1881) ILR 5 Bom 92; see s. 18. 8 Shoshi Mohan Pal Chowdhry v. Nobo Krishta Poddar, (1878) 4 Cal 801. 9 Huri alias Alim Khatun v. Roshan Khudabux, AIR 1923 Sind 5 at 14, (FB). 10 Abdulla Khan v. Girdhari Lal, (1904) Punj Rec No 49. 11 Niaz Ahmad Khan v. Parsottam Chandra, (1930) 53 All 374, 129 IC 545, AIR 1931 All 154; John Minas Apcar v. Louis Caird Malchus, (1939) 1 Cal 389 at 398, 184 IC 321, AIR 1939 Cal 473; Kopparthi Venkataratnam v. Palleti Sivaramudu, AIR 1940 Mad 560; Mithoolal Nayak v. Life Insurance Corporation India, AIR 1962 SC 814, 1962 Supp, (2) SCR 571; Life Insurance Corporation India v. Baidyanath Singh, AIR 1978 Pat 334 at 337; P Sarojam v. LIC of India, AIR 1986 Ker 201 at 205. 12 Niaz Ahmad Khan v. Parsottam Chandra, (1930) 53 All 374, 129 IC 545, AIR 1931 All 154; JM Apcar v. LC
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Malchus, (1939) 1 Cal 389, AIR 1939 Cal 473; Venkataratnam v. Sivaramudu, AIR 1940 Mad 560; Niranjan Samal v. Tirilochan Kuar, AIR 1956 Ori 81; Life Insurance Corpn of India v. Baidyanath Singh, AIR 1978 Pat 334. 13 Niaz Ahmad Khan v. Parsottam Chandra, (1930) 53 All 374, 129 IC 545, AIR 1931 All 154; John Minas Apcar v. Louis Caird Malchus, (1939) 1 Cal 389 at 398, 184 IC 321, AIR 1939 Cal 473; Venkataratnam v. Sivaramudu, AIR 1940 Mad 560; Governor of Orissa State v. Shivaprasad Sahu, AIR 1963 Ori 217. 14 John Minas Apcar v. Louis Caird Malchus, (1939) 1 Cal 389 at 398, 184 IC 321, AIR 1939 Cal 473. 15 Morgan v. Government of Haidarabad, (1888) ILR 11 Mad 419 at 439; Jogendra Nath Goswami Mazumdar v. Chandra Kumar, (1914) ILR 42 Cal 28 at 34, AIR 1914 Car 661, 24 IC 193. 16 Venkataratnam v. Sivaramudu, AIR 1940 Mad 560; contra Harilal Dalsukhram Sahiba v. Mulchand Asharam 52 Bom 883, AIR 1928 Bom 427; Governor of Orissa State v. Shivaprasad Sahu, AIR 1963 Ori 217, (a case of innocent representation). 17 ARSP Subramanian Chetti v. Official Assignee of Madras, AIR 1931 Mad 603, 133 IC 372. 18 Ganpat Ranglal Mahajan v. Mangilal Hiralal, AIR 1962 MP 144. 19 Bappu Rawther Abdul Kassim Rawther v. State of Kerala, AIR 1964 Ker 109; Gordon Hill Trust Ltd. v. Segall, [1941] 2 All ER 379; Armstrong v. Strain, [1952] 1 KB 232, [1952] 1 All ER 139. 20 Bappu Rawther Abdul Kassim Rawther, v. State of Kerala, AIR 1964 Ker 109. 21 Mithoolal Nayak v. Life Insurance Corpn of India, AIR 1962 SC 814, [1962] Supp 2 SCR 571; Hindusthan General Insurance Society Ltd. v. Punam Chand Chhajar, (1974) 2 Cal 496, AIR 1971 Cal 285 at 289; Chitturi Surayya v. Boddu Ramayya, AIR 1915 Mad 1152; GM Birla & Co. v. Johurmull Premsukh, AIR 1920 Cal 908; Premchand v. Ram Sahai, AIR 1932 Nag 148. 22 Industrial Properties (Barton Hill) Ltd. v. Associated Electrical Industries Ltd., [1977] QB 580, [1977] 2 All ER 293; JEB Fasteners Ltd. v. Marks, Bloom & Co., [1981] 3 All ER 289. 23 Raghava Mannadiar v. Parakkal Pathayapura Veetil Sivasankara Menon, AIR 1921 Mad 198. 24 Horslfall v. Thomas, (1862) 1 H & C 90, (an action for breach of the implied terms as to quality and fitness would lie in similar circumstances). 25 Edgington v. Fitzmaurice, (1885) 29 Ch D 459, [1881-85] All ER Rep 856. 26 Currie v. Rennick, (1886) Punj Rec No 41. 27 Smith v. Chadwick, (1884) 9 App Cas 187, 196. 28 Gordon v. Street, [1899] 2 QB 641,(CA) . 29 Strover v. Harrington, [1988] 1 All ER 769, [1988] 2 WLR 572; cf Markappa Inc v. NW Spratt & Sons Ltd., [1985] 1 Lloyd's Rep 534. Reversing [1983] 2 Lloyd's Rep 405. 30 GM Birla & Co. v. Johurmull Premsukh, AIR 1920 Cal 908,(FB) ; Premchand v. Ram Sahai, AIR 1932 Nag 148; Chitturi Surayya v. Boddu Ramayya, AIR 1915 Mad 1152.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER II Of Contracts, Voidable Contracts and Void Agreements/S. 19A.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER II Of Contracts, Voidable Contracts and Void Agreements S. 19A.
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Power to set aside contract induced by undue influence.-When consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused. Any such contract may be set aside either absolutely or, if the party who was entitled to avoid it has received any benefit thereunder, upon such terms and conditions as to the Court may seem just. Illustrations (a) (b)
A's son has forged B's name to a promissory note. B under threat of prosecuting A's son, obtains a bond from A for the amount of the forged note. If B sues on this bond, the Court may set the bond aside. A, a money-lender advances Rs. 100/- to B, an agriculturist, and by undue influence, induces B to execute a bond for R s. 200/- with interest at 6 per cent per month. The Court may set the bond aside, ordering B to repay the Rs. 100/- with such interest as may seem just.
Introduction A contract induced by undue influence is voidable at the option of the party whose consent is so caused. This is the same provision as in the case of other factors vitiating consent. The second paragraph is an additional provision giving powers to a Court to impose conditions while adjudging setting aside the contract.
Amendment This section was inserted by the Indian Contract Act Amendment Act, 1899 and was intended to give express sanction to the practice of Indian and English courts in cases of unconscionable money lending, of relieving the borrower against the oppressive terms of his contract, but subject to the repayment to the lender of the money act ually advanced with reasonable interest.31 The Select Committee gave the following reason for adding this section to the Contract Act:
We have recast the language of the new s. 19A of the Act, 1872 proposed by clause 3 of the Bill, so as to bring it more closely into accord with the language of s. 19. A contract obtained by undue influence is on a different footing from a contract obtained by fraud. In the case of the latter a party who, with knowledge of the fraud, has taken any benefit under the contract, is held to have elected to affirm it; but where a contract has been obtained through the exercise of undue influence it is necessary that the Court should have power to relieve the party who acted under the undue influence, even although he may have received some benefit under the contract. On the other hand where such benefit has been received the Court ought to have full power to impose such conditions as may be just [to] the, party seeking relief.
31 Poma Dongra v. William Gillespie, (1907) ILR 31 Bom 348 at 352.
'Voidable'
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Where consent to an agreement has been caused by undue influence, the contract is voidable at the option of the party whose consent is so caused. Since the contract is voidable, it gives the person under undue influence, a right of choice or election. Such a right, once exercised, is exhausted. If such a person, by express notice or by conduct, elects to affirm, he cannot later seek to avoid the contract; and if he has elected to avoid, he cannot later be allowed to affirm. There is no locus penitentiae in either case.32 Where a contract is voidable, it can be rescinded by communicating rescission under s. 66 of the Contract Act, or by filing a suit for setting aside the contract. The plea of undue influence can also be raised as a defence in a suit filed by the other party for enforcing the contract; but, a document vitiated by undue influence is voidable and not void ab initio and will have to be set aside; a mere suit for declaration that the instrument is void and ineffective, will not lie.33 A lessor desirous of avoiding a lease on the ground of undue influence cannot do so in proceedings under the Land Acquisition Act, 1894 for apportionment of compensation; but he can do so by filing separate proceedings.34 Similarly, where a compromise recorded by a Court is sought to be avoided on the ground of undue influence, the aggrieved party has to file a regular suit to avoid the compromise. It cannot be set aside in the same proceeding as the compromise.35After amendment of the Code of Civil Procedure in 1976, the only remedy for avoiding a compromise is to approach the same Court and establish that there was no compromise. It cannot be challenged in a suit or appeal or otherwise.36 32 Kunja Lal Bhuiya v. Hara Lal Bhuiya, AIR 1943 Cal 162; see also s. 19 above. 33 Rajamani Ammal v. Bhaarasami Padayachi, AIR 1974 Mad 36, (1973) 1 Mad LJ 400. 34 Santash Kumar Dhar v. Nanda Kishore Mallick, AIR 1958 Cal 56 at 64. 35 Ahamad Mohiuddin v. Abdurrahman, AIR 1953 Hyd 62 at 63, (after the amendment in 1976 of the Civil Procedure Code, 1908, no suit can lie under O.23, r. 3A to set aside a decree on the ground that the compromise on which the decree is based is not lawful); see s. 64 for the consequences of rescission of a voidable contract and s. 65 for restitution; see also the Specific Relief Act, 1963, s s. 27-30, (rescission), and ss. 31-33, (cancellation of instruments). 36 Pushpa Devi Bhagat v. Rajinder Singh, AIR 2006 SC 2628, (2006) 5 SCC 566.
'Party whose Consent is so Caused' Where the party whose consent was caused by undue influence had no opportunity to rescind the contract after removal of the undue influence, his representatives can, after his death, raise the defence of undue influence in an act ion to enforce the contract,37 unless the party at the date of his death, has lost such right by acquiescence or otherwise.38 The section is applicable to Mohammedans, and the heirs of a Mohammedan donor have the right to avoid a gift under it.39 The plea of undue influence cannot be raised by a third party40 claiming adversely to such executant.41The right to avoid a bond under s. 19A also gets transferred under s. 130 of the Transfer of Property Act, 1882 and can be exercised by the transferee of the bond;42 but, where the right has been lost by the party under undue influence on account of acquiescence, the transferee cannot exercise that right. Transferees of some portions of a mortgaged property could not plead undue influence to avoid the mortgage where the mortgagor himself did not do so either before or in the suit on the mortgage.43 37 Rash Behari Naskar v. Haripada Naskar, AIR 1934 Cal 762. 38 Manbhari v. Sri Ram, AIR 1936 All 672. 39 Mahboob Khan v. Hakim Abdul Rahim, AIR 1964 Raj 250, (It was urged that under Mohammedan law, a gift could be revoked by the donor, and not his heirs after his death).
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40 M Venkatasubbaiah v. M Subbamma, AIR 1956 AP 195 at 197; Natha Ram v. Sohan Devi, AIR 1949 EP 277. 41 Kotumal Mohandas v. Dur Mahomed, AIR 1931 Sind 78; Thakar Singh v. Uttam Kaur, AIR 1929 Lah 295 at 304. 42 Ram Sohai v. Bhagwan Din, AIR 1936 Oudh 105, (but relief was refused on the ground of delay). 43 Shailesh Chandra Guha v. Bechari Gope, AIR 1925 Cal 94.
May be Set Aside Subject to Terms and Conditions Where the contract is voidable on the ground of undue influence, the Court has a discretion to set aside the transaction absolutely, or subject to terms and conditions. The Court can pass such a decree in favour of the plaintiff as may be consistent with the equities of the case, and it is not necessary to the passing of such a decree that the plaintiff should agree to the contract being modified.44 For example, in Sundar Rai v. Suraj Bali Rai, 45 in consideration of A agreeing to stand all expense of litigation, B agreed that if B was successful in the suit for obtaining a certain property, he would give A one-half share in the property. A's suit for recovery of the share was dismissed on the ground that A was in a position to dominate the will of B. In appeal, it was found that the property being worth Rs. 600/-, and the expenses of litigation R s. 200/-, the transaction was unfair. In an appeal before the High Court, it was held first, that the plea for relief under the second clause of the section could also be raised in second appeal, enabling the second appellate Court to impose such terms and conditions as may seem just; and secondly, that A was entitled to Rs. 400/- in consideration of the amount spent and the risk taken by him. The power of the Court to set aside gifts exists both in cases where undue influence has act ually been exercised and in cases where a presumption of such influence arises from the relations of the parties; but on the ground of different principles,46 not just on the ground that any wrongful act has in fact, been committed by the donee, but on the ground of public policy, and to prevent the relations which existed between the parties and the influence arising there from being abused. The liability of the terms and conditions imposed by the Court for setting aside a contract induced by undue influence would be in addition to the liability under s. 64 of the Contract Act to restore the benefit received under the contract. Terms and Conditions Instead of setting aside a transaction of debt, relief has been granted under this section to a debtor, in the rate of interest. The rate of interest allowed by the High Court as reasonable has varied, according to circumstances, from 6-12 per cent in Bengal to 24 per cent in Bombay and the United Provinces.47 The Court has also disallowed compound interest under the powers under this section,48 or awarded simple interest.49 This branch of the law is now mainly governed by legislation relating to money lending in various states in India.50 Relief has not been confined to money-lending transactions, and the Court has reduced the amount payable under a bond,51 set aside an Ikrarnama52 and a lease,53 set aside a sale under the influence of heavy indebtedness, on return by the seller of the amount of debt.54 Compensation Section 30 of the Specific Relief Act, 1963 expressly provides for an order of payment of compensation by a person in whose favour rescission is granted, in addition to restoring the benefit received. The Court may order directing accounts and making allowances wherever it is practically just.55 Where taking of account would not do practical justice between the parties, compensation could be awarded, in the form of the difference between the value which the plaintiff surrendered
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under the transaction affected by undue influence, and any value which he has received.56 Where the asset has been purchased by financial contribution of both parties and the contribution having been made under undue influence; and the value of the asset had fallen; the Court ordered that the loss arising out of sale shall also be borne by the party seeking to avoid the transaction, in proportion of his share in the purchase price.57 In O'Sullivan v. Management Agency and Music Ltd, 58 a contract between a young inexperienced singer and a reputed firm of managers was set aside on the ground of undue influence. By that time, the singer had achieved considerable fame and success because of the promotion work done by the managers under the arrangement; and the parties could not be restored to status quo. When the Court ordered the defendant to account for profit it had made from the contract, it also held that the defendant was entitled to reasonable remuneration for work under the contract. 44 Sundar Rai v. Suraj Bali Rai, (1925) 47 All 932, AIR 1925 All 783, 88 IC 1013. 45 (1925) 47 All 932, AIR 1925 All 783, 88 IC 1013. 46 Moolappunathil Kochukali Amma Janaki Amma v. Moolapunathu Veettil Kochukali Amma Parameswaran Nair, AIR 1954 TC 407. 47 Raja Mohkam Singh v. Raja Rup Singh, (1893) 20 IA 127, (1893) 15 All 352, (where 20 per cent was allowed); Dhanipal Das v. Maneshar Bakhsh Singh, (1906) 28 All 570, 33 IA 118; Maneshar Bakhsh Singh v. Shadi Lal, (1909) 36 IA 96, (1909) 31 All 386; Balkishan Das v. Madan Lal, (1907) 29 All 303, (24 per cent interest allowed); Poma Dongra v. William Gillespie, (1907) 31 Bom 348, (24 per cent interest allowed) Ranee Annapurni Nachiar v. Swaminatha Chettiar, (1910) 34 Mad 7, (24 per cent interest allowed). 48 Kirpa Ram v. Sami-ud-din Ahmad Khan, (1903) 25 All 284; Dhanipal Das v. Maneshar Bakhsh Singh, (1906) 28 All 570, 33 IA 118; Maneshar Bakhsh Singh v. Shadi Lal, (1909) 36 IA 96, (1909) 31 All 386; Abdul Majid v. Ksherode Chandra Pal, (1914) 42 Cal 690, AIR 1915 Cal 383, 29 IC 843 is disapproved by the Privy Council, Raghunath Parsad Sahu v. Sarju Parsad Sahu, (1924) 51 IA 101 at 108, 82 IC 817, AIR 1924 PC 60. 49 Balkishan Das v. Madan Lal, (1907) ILR 29 All 303, doubted in U Kesavulu Naidu v. Arithulai Ammal, (1912) 36 Mad 533 at 537, 22 IC 769. 50 Legislation relating to money-lending falls within the powers of states in India under Item 30 of List II of Schedule VII of the Constitution of India; the Usurious Loans Act, 1918, which enables the Court to reopen transactions of loan inter alia where interest is excessive and the transaction is substantially unfair. 51 Chunni Kaur v. Rup Singh, (1888) 11 All 57, confirmed on appeal sub nom Raja Mokham Singh v. Raja Rup Singh, (1893) 20 IA 127, 15 All 352; Husain Bakhsh v. Rahmat Hussain, (1888) 11 All 128, (cases decided before the amendment of s. 16). 52 Prem Narain Singh v. Parasram Singh, (1877) 4 IA 101. 53 Sant Bux Singh v. Ali Raza Khan, (1946) 21 Luck 194, AIR 1946 Oudh 129. 54 Bhimbhat v. Yeshwantrao, (1901) 25 Bom 126. 55 Cheese v. Thomas, [1994] 1 WLR 129, [1994] 1 All ER 35 at 41; Erlanger v. New Sombrero Phosphate Co., (1878) 3 App Cas 1218 per Lord Blackburn at 1278-79, [1874-80] All ER Rep 271 at 286. 56 Mahoney v. Purnell, [1996] 3 All ER 61, following O'sullivan v. Management Agency and Music Ltd., [1985] 1 QB 428, [1985] 3 All ER 351. 57 Cheese v. Thomas, [1994] 1 WLR 129, [1994] 1 All ER 35; Chen-Wishart,[1994] 110 LQR 173. 58 [1985] 1 QB 428.
Section 27-30 of the Specific Relief Act, 1963 Sections 27-30 of the Specific Relief Act, 1963 make similar provisions. The combined effect of these sections is that a contract in writing may be rescinded at the suit of a party when (amongst other causes) it is voidable, but that the Court may require the party rescinding to make any compensation to the other which justice may require.
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STATE AMENDMENT Madhya Pradesh59 S. 19B. Definitions of maintainer and champertous agreement.--
(a) (b)
'Maintainer' is a person who gives assistance or encouragement to one of the parties to a suit or proceeding and who has neither an interest in such suit or proceeding nor any other motive recognised by law as justifying his interference. 'Champertous agreement' means an agreement whereby the nominal plaintiff agrees with the maintainer to share with or give to him a part of whatever is gained as a result of the suit maintained.
S. 19C. Power to set aside champertous agreement.-A champertous agreement may be set aside upon such terms and conditions as the Court may deem fit to impose. 59 Added by CP and Berar Indian Contract, (Amendment) Act, (15 of 1938), s. 2; extended to the whole of the state of Madhya Pradesh by the MP Act 23 of 1958; repealed in its application to the Vidarbha region of the Maharashtra State by the Maharashtra Repealing and Amending Act, (26 of 1963), s. 2 and Schedule 1 with effect from 4 June 1983.
Introduction Sections 19B and 19C as amended in the State of Madhya Pradesh, enable the Court to set aside a champertous agreement, and to impose terms and conditions while doing so.
Power of the Court A champertous agreement is not void under the laws in India, unless avoided on the ground of public policy if extortionate, unconscionable or inequitable.60 Section 19C neither renders such agreements void, nor voidable, but merely gives to the courts the power to set aside a champertous agreement on such terms and conditions as it may deem fit to impose.61 The question whether it will be set aside will depend on the facts and circumstances of each case; but, it has also been held that the words 'may be set aside' are not used to give a discretion but to confer a power, and the exercise of such power depends not upon the discretion of the Court of the judge, but upon proof of a particular case out of which such power arises. Once an agreement comes within the definition of a 'champertous agreement', the courts will be at liberty to set it aside. The discretion of the Court will be exercised only in imposing the terms and conditions while setting aside the agreement.62 60 See s. 23 below, under the heading: 'Maintenance and Champerty'. 61 Pannalal Gendalal v. Thansing Appaji, (1949) Nag 663, AIR 1952 Nag 195; but see Passarilal Mannoolal v. Chhuttanbai, AIR 1958 MP 417, (such agreement is voidable). 62 Passarilal Mannoolal v. Chhuttanbai, AIR 1958 MP 417.
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Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER II Of Contracts, Voidable Contracts and Void Agreements/S. 20.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER II Of Contracts, Voidable Contracts and Void Agreements S. 20. Agreement void where both parties are under mistake as to matter of fact.-Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void. Explanation.--An erroneous opinion as to the value of the thing which forms the subject matter of the agreement, is not to be deemed a mistake as to a matter of fact. Illustrations (a)
(b) (c)
A agrees to sell to B a specific cargo of goods supposed to be on its way from England to Bombay. It turns out that, before the day of the bargain, the ship conveying the cargo had been cast away, and the goods lost. Neither party was aware of these facts. The agreement is void. A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void. A, being entitled to an estate for the life of B, agrees to sell it to C, B was dead at the time of the agreement, but both parties were ignorant of the fact. The agreement is void.
Introduction An agreement is void if it is caused by a mistake, and the mistake is bilateral, as to a fact which is essential to the agreement. The Explanation states that an erroneous opinion as to value of the subject matter of the agreement cannot be called a mistake as to a matter of fact.
Principle A mistake described in this section operates to invalidate a contract, because the true intention of the parties to make their agreement conditional on the existence of some state of facts turns out not to have existed at the date of the agreement. Where the contract is for the sale of an object not existing, or which has ceased to exist according to the description by which it was contracted for, the result is still more easily seen, because there is nothing to buy and sell. The author of the book is of the view that the wording of the section tends to obscure this principle. One view is that it is a dangerous way to state the law, that an agreement is void if the mistake is sufficient fundamental or basic; this is because many fundamental mistakes are at the risk of one or
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other of the parties. The risk that the facts may turn out differently, may be allocated by express or implied terms of the contract, or by other clear rules of contract law; and once it has been decided that certain risks lie on a party, there is no room for him to argue that the contract should be rescinded for mistake.63 In practice, courts would be reluctant to intervene in a contract on the ground of mistake for the following reasons:64
(i)
(ii) (iii)
(iv) (v)
the need to protect the rights of third parties to a contract who have acquired interest in the subject matter in good faith and for value; where the contract is partly performed, serious practical difficulties may arise in adjusting the rights of the parties if the contract is to be held void; the parties must be held to their bargains, once they have agreed on the same terms and in the same sense, and made to rely on the stipulation made by them in the contract for protection of facts not known to them at the time of making the contract; it would not be unreasonable to hold that a person should not enter into a contract unless he is able to perform it, because when he so contracts, he takes the risk that performance may prove difficult or even impossible in the circumstances existing at the date of the contract; there should not be a temptation for any party to get out of a bad bargain; rendering the whole contract void or inoperative, is a drastic proceeding, which would threaten the sanctity of contracts if it could be invoked whenever a party claims that he or both parties had made a serious mistake.
In Bell v. Lever Bros Ltd, 65 having held that the contract was not vitiated by mistake, Lord Atkin observed:
The result is that in the present case servants unfaithful in some of their work retain large compensation which some will think they do not deserve. Nevertheless, it is of greater importance that well established principles of contract should be maintained than that particular hardship should be redressed; and I see no way of giving relief to the plaintiffs in the present circumstances except by confiding to the courts loose powers of introducing into contracts terms which would serve only to introduce doubt and confusion where certainty is essential.
The rule of mistake, as invalidating a contract, is therefore confined within very narrow limits, where the extreme injustice of holding one party to the contract, outweighs the general principle that apparent contracts should be enforced.66 63 PS Atiyah, An Introduction to the Law of Contract, 5th edn, 219. 64 Anson's Law of Contract, 29th edn, 2010, pp. 249-251; GH Treitel, The Law of Contract, 5th edn, pp. 223-24. 65 [1932] AC 161, [1931] All ER Rep 1, 33. 66 GH Treitel, The Law of Contract, tenth edn, 262.
Mistake Nullifying and Negativing Consent 'If mistake operates at all, it operates so as to negative, or in some cases to nullify consent.'67 When a mistake prevents parties from reaching an agreement, because one party intends to contract about one thing, and the other about another, mistake negatives consent. When the parties are agreed about the same thing, but their agreement is based on a fundamental mistaken assumption, mistake nullifies consent. This section deals with mistake nullifying consent, where the parties are agreed in
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the same thing in the same sense, but on the basis of an assumption which is false, and hence, both are mistaken about a matter of fact essential to the agreement.68 Mistake negativing consent is considered under s. 13 above. 67 Bell v. Lever Bros Ltd., [1932] AC 161, [1931] All ER Rep 1 at 27. 68 ITC Ltd. v. George Joseph Fernandes, AIR 1989 SC 839.
Types of Mistakes Mistake may be unilateral, i.e., that of one party only to the contract; or it may be bilateral, where both parties are under a mistake. A bilateral mistake may be a mutual or common mistake.69 Unilateral Mistake A mistake would be unilateral where one party is mistaken. It will make the contract void, if the other party knows or must be taken to know of the mistake of the first party. The buyer believes it to be so and the seller knows of it. It will be mutual if the seller is ignorant of the buyer's belief. Thus it was no excuse for a contractor undertaking construction of a road that he entertained a wrong belief about the distance of the place from where raw material was available.70 Bilateral Mistake Mutual Mistake Mutual mistake occurs where the parties misunderstand each other and are at cross-purposes with each other. There is no real corresponding offer and acceptance. The parties are not really consensus ad idem. There is thus no agreement at all; and this contract is also void. For example, A intends to offer his 8 hp car, but B believes it to be 10 hp. Here, there is a misunderstanding in the communication between the parties, which prevents there being an effective agreement. Common Mistake Common mistake arises where both parties are ad idem, but for eg, the subject matter of the contract has already perished. This is also void. Section 20 is concerned with common mistake of fact and not mutual mistake.71 It is a mistake 'possessed or shared alike by both or all the persons or things in question' and mutual means 'possessed or entertained by each of two persons towards or with regard to each other'.72 But it is common to use the term 'mutual mistake' for this type of mistake,73 and has been so used below. There is yet a fourth kind of mistake--non est factum; but it really falls under ss. 13 or 18 and has been dealt with there. 69 AIR 1989 SC 839 at 852. 70 State of Karnataka v. Stellar Construction Co., AIR 2003 Kant 6. 71 Uttar Pradesh Government v. Lala Nanhoo Mal Gupta, AIR 1960 All 420; ITC Ltd. v. George Joseph Fernandes, AIR 1989 SC 839. 72 Cheshire & Fifoot's Law of Contract, 10th edn, p. 200; Oxford English Dictionary. 73 Anson's Law of Contract, 29th edn, p. 2010, 251.
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Mistake Nullifying Consent Distinguished from other Situations A mistake must be distinguished from two other situations. Where the offer and the acceptance of the parties have not coincided, there is no agreement at all; this issue is not connected with mistake rendering an agreement void. Nor can such mistake be invoked, where a party realises that he has committed a mistake in making the contract at all, because the obligations of the contract have turned out more onerous than intended, or because he is disappointed with the performance of the other party. A party is not entitled to be relieved from his contract when his mistake relates to its commercial consequence and effect, when he has failed to appreciate the commercial effect of the agreement.74 74 Clarion Ltd. v. National Provident Institution, [2000] 2 All ER 265.
Fundamental Mistake: A Mistake going to the Root of the Contract In Bell v. Lever Bros Ltd, 75an agreement of service between a company and two directors of its subsidiary was terminated on payment of compensation. The parties proceeded on the assumption that the service agreements were not liable to immediate termination by reason of misconduct of the directors, which assumption proved to be mistaken because the directors had, without the knowledge of the company, engaged in private transactions resulting in secret profits to themselves. In an act ion by company for rescission of contract and repayment of moneys paid, the agreement was set aside by Wright J and the Court of Appeal on the ground of mutual mistake. But the House of Lords, by a majority, reversed the judgment on the ground that the mutual mistake related not to the subject matter but to the quality of the service contract, and was not of such a fundamental character as to constitute an underlying assumption without which the parties would not have entered into the agreement. As to the nature of mistake being of fundamental character, Lord Atkin observed: 'Does the state of new facts destroy the identity of the subject matter as it was in the original state of facts?'76 and, Lord Thankerton stated that the error must be such that:
...it either appeared on the face of the contract that the matter as to which the mistake existed was an essential and integral element of the subject matter of the contract or was an inevitable inference from the nature of the contract that all parties so regarded it.77
The speeches support a number of interpretations about the doctrine of mutual mistake. On one interpretation, there is no independent doctrine of mistake. As Lord Denning said in Solle v. Butcher :78
The correct interpretation of [Bell v. Lever Bros Ltd ], to my mind, is that, once a contract has been made, that is to say, once the parties, whatever their inmost states of mind, have to all outward appearances agreed with sufficient certainty in the same terms on the same subject matter, then the contract is good unless and until it is set aside for failure of some condition on which the existence of the contract depends, or for fraud, or on some equitable ground. Neither party can rely upon his own mistake to say that it was a nullity from the beginning, no matter that it was a mistake which to his mind was fundamental, and no matter that the other party knew that he was under a mistake. A fortiori, if the other party did not know of the mistake but shared it.
Yet, the decision in Bell v. Lever Bros Ltd assumes that certain types of mistakes will avoid the
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contract, and seeks to confine the operation of mistake within narrow limits. On a second interpretation, it has been stated that Bell v. Lever Bros Ltd establishes that a mistake would nullify the contract only if some term can be implied in the offer and the acceptance which prevents the contract from coming into operation. Sir John Simon in his arguments, formulated for the assistance of the House, the following proposition:79
Whenever it is to be inferred from the terms of the contract or its surrounding circumstances that the consensus has been reached upon the basis of a particular contractual assumption, and that assumption is not true, the contract is avoided; i.e. it is void ab initio if the assumption is of present fact and it ceases to bind if the assumption is of future fact.
This was accepted by the House, with the additional rider that the assumption must have been fundamental to the continued validity of the contract or a foundation essential to its existence. 'If the contract expressly or impliedly contains a term that a particular assumption is a condition of the contract, the contract is avoided if the assumption is true.'80 The House was divided as to the assumption being sufficiently fundamental, but not as to the principle. When such condition is implied, a very important and serious mutual mistake may not affect a contract, because one party should have known the facts; or where a party had no reasonable grounds of believing that about which he alleges to have been mistaken. The third interpretation is that the doctrine of mutual mistake depends upon the true construction of the contract. The question of the effect of mutual mistake in the law of contract is one of allocation of risk as to the facts being assumed.81 Normally, either of the parties would have assumed the risk of ordinary uncertainties which exist when they make the contract. It is only where the terms of the contract show that the terms never intended to apply to a situation which existed at that time, and that the risk of the mistake has not been allocated to any of the parties, the contract will be void. It has been suggested that there is no independent doctrine of mistake apart from the principle of implied terms,82 but it has been observed: &uot;Just as the doctrine of frustration only applies if the contract contains no provision that covers the situation, the same should be true of common mistake&uot;.83 It has been stated that whether there is a mistake, can be ascertained by asking the following questions.84 First, whether, under the express or implied terms of the contract, the risk of the relevant mistake is allocated to any of the parties. If not, the second question is whether the contract is subject to an express condition precedent that the facts should be as the parties believe them to be. If not so, then the third question is whether the matter relating to the mistake is sufficiently fundamental that the contract should be treated as subject to an implied condition precedent, or whether it should be treated as void for mistake. For a common mistake of fact to vitiate a contract, it must render the performance of the contract impossible.85 In Great Peace Shipping Ltd v. Tsavliris, International Ltd., 86 the defendant agreed to provide salvage services to a stricken vessel and sought services of the claimant for their vessel closest to the stricken vessel about 35 miles (12 hours) away. Unknown to both parties the vessel was 410 miles away. The defendant realised that it would take the claimant's vessel 39 hours to reach. Two hours after the contract, the defendant found another closer vessel and cancelled the contract. The claimant sued, and the defendant pleaded common mistake as to the location of the stricken vessel. It was held that the mistake was not sufficiently fundamental to the contract: &uot;the fact that the vessels were considerably further apart than the defendants had believed did not mean that the services that the Great Peace was in a position to provide were essentially different from those which the parties had envisaged when the contract was concluded.&uot; 75 Bell v. Lever Bros Ltd., [1932] AC 161, [1931] All ER Rep 1. 76 [1931] All ER Rep 1 at 32.
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77 [1931] All ER Rep 1 at 37. 78 [1950] 1 KB 671 at 691, [1949] 2 All ER 1107 at 1119, (CA). 79 Bell v. Lever Bros Ltd., [1932] AC 161, [1931] All ER Rep 1 at 31; Associated Japanese Bank, (International) Ltd. v. Credit du Nord SA, [1988] 3 All ER 902, [1989] 1 WLR 225 in which Steyn J rested his decision on this ground. 80 Bell v. Lever Bros Ltd., [1931] All ER Rep 1; Purangir v. Bhawanigir, AIR 1957 HP 11, 14, (recognises the concept of a condition precedent). 81 Amalgamated Investment and Property Co. Ltd. v. John Walker & Sons Ltd., [1976] 3 All ER 509, [1977] 1 WLR 164. 82 Re Smith,[1994] 110 LQR 400. 83 Great Peace Shipping Ltd. v. Tsavliris, International Ltd., [2002] EWCA Civ 1407 per Phillips MR para 75, [2002] 4 All ER 689,(CA) . 84 Chitty on Contracts, 28th edn, p. 301, para 5-014; PS Atiyah, An Introduction to the Law of Contract, 5th edn, p. 221. 85 Brennan v. Bold Burden, [2005] 1 QB 303, [2004] EWCA Civ 1017. 86 [2002] EWCA Civ 1407, [2002] 4 All ER 689,(CA) .
Mistake under Section 20 Mistake The doctrine of mutual mistake cannot be invoked by a party who has no reasonable grounds for his belief,87 or where it was the duty of the party to know or the party had the means of knowledge about the fact essential to the agreement. Where the position was notorious and well-known in the locality that tenants were entitled as a matter of law, to pluck, gather and sell kendu leaves to any person, it could not be said that either party to a lease of forest produce was under a misconception as to the rights of tenants.88 The plaintiff cannot complain of mistake, when the state of facts was easily verifiable by him.1 An error due to one's own stupidity, ignorance or carelessness, would not affect the contract. Mistake of Fact For a mutual mistake to be operative in invalidating consent to a contract, it must be a mistake as to fact, and not one of law. A mistake, which is a mutual mistake of general law, will not entitle a party to have a contract rescinded.2 Where neither party is in error as regards the essential facts upon which the contract proceeded and the mistake, if any, was about the effect of registration on the deed of assignment, the mistake was one of law and the contract was not void under s. 21.3 A mistaken view of the title of a contracting party,4 or the extent of one's rights,5 is a mistake of law and not of facts, so is a mistake arising upon the construction and meaning of a contract.6 Nor is relief granted for mistaken expectations which are not realised.7 But the grounds on which a payment made under mistake can be recovered under s. 72 of the Contract Act are much wider than mistakes invalidating consent and nullifying contract.8 Mistake of Existing Fact Where a party, while understanding the surrounding circumstances, makes an error of judgment about the prospects under the contract, and refuses to perform, he will be guilty of breach. On the other hand, where a contract, valid in its inception, becomes impossible to perform by subsequent events not contemplated by the parties, the contract 'is frustrated', which dissolves the contract but not retrospectively.
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As observed by the Privy Council in Periasami v. Perisami, 9'the grant, whatever its effect, was not necessarily avoided because subsequent events disappointed the expectation in which it was made'. Section 20 does not apply to a case where the contracting parties have made no mistake as to any existing fact, but one of the parties finds itself unable to carry out the terms of its contract on account of the act of a third party to carry out its obligation under another agreement with that second party.10 Where the parties entered into a contract on the assumption that the Jute Control Order, which was about to expire and was not continued, would be continued, it was held that there was no mistake as to an existing fact and the contract was not void.11 A vendor is bound to deliver goods at the price set out in the contract of sale, although, the cost is increased by the subsequent imposition of an excise duty.12 In Amalgamated Investment and Property Co. Ltd v. John Walker & Sons Ltd, 13 on the date of contract of sale of a building for development, both parties believed that the building was not listed under planning legislation as being of special architectural interest, although, it was in the provisional list. But the list was given legal effect soon after the contract, and the purchaser claimed rescission of contract. It was held that the doctrine of common mistake required that the plaintiff must show that the mistake existed at the date of the contract. As the property had not been included in the accepted list of the special architectural building, but this was only an administrative step towards listing and it become a listed building subsequent to the date of the contract, the parties had not been under any common mistake, and the plaintiff's action failed. A mistake as to an existing fact will not render void an agreement concluded with a retrospective effect, where the circumstances have changed between the date from which the agreement is to begin, and the date the bargain is concluded. In Indian Trade and General Insurance Co. Ltd. v. Bhailal Maneklal Desai, 14 the company issued a cover note, insuring goods against fire with effect from a date three days before. Unknown to either party, the goods had been destroyed by fire, two days before the issue of the cover note. The company was held liable. 87 Associated Japanese Bank, (International) Ltd. v. Credit du Nord SA, [1988] 3 All ER 902, [1989] 1 WLR 255; McRae v. Commonwealth Disposals Commission, (1950) 84 CLR 377 per Dixon and Fullagar JJ at 408 . 88 State of Orissa v. Khan Saheb Md Khan, AIR 1961 Ori 75. 1 AP Kochudevassy v. State of Kerala, AIR 1982 Ker 90; see also Gujarat State Finance Corporation v. Vraj Food Private Ltd., First Appeal No. 2230/2006, decided on 20 Nov 2013 (Guj). 2 Beesly v. Hallwood Estates Ltd., [1960] 2 All ER 314, [1960] 1 WLR 549 at 563; affirmed on other grounds, [1961] Ch 105, [1961] 1 All ER 90. 3 Kalyanpur Lime Works Ltd. v. State of Bihar, AIR 1954 SC 165, [1954] SCR 956. 4 Dalmia Jain and Co. Ltd. v. Kalyanpore Lime Works Ltd., AIR 1952 Pat 393; reversed on another point in Kalyanpur Lime Works Ltd. v. State of Bihar, AIR 1954 SC 165. 5 Habib Miyan v. Mahemud Mir, AIR 1959 MP 221. 6 Shiva Parsad Singh v. Maharaja Sris Chandra Nandi, AIR 1943 Pat 327. 7 Ismail Allarakhia v. Dattatraya R Gandhi, (1916) 40 Bom 638, AIR 1916 Bom 209, 34 IC 515; Ranga v. Suba Hegde, (1880) 4 Bom 473; Babshetti v. Venkataramana, (1879) 3 Bom 154; Amalgamated Investment and Property Co. Ltd. v. John Walker & Sons Ltd., [1976] 3 All ER 509, [1977] 1 WLR 164. 8 See s. 72 below. 9 (1878) LR 5 IA 61 at 73. 10 Uttar Pradesh Government v. Lala Nanhoo Mal Gupta, AIR 1960 All 420. 11 Chandanmull Jhaleria v. Clive Mills Co. Ltd., (1948) 2 Cal 297, AIR 1948 Cal 257. 12 Chin Gwan & Co. v. Adamjee Hajee Dawood & Co., (1933) 11 Rang 201, 146 IC, AIR 1933 Rang 79. 13 [1976] 3 All ER 509 at 516, [1977] 1 WLR 164; cf Laurence v. Lexcourt Holdings Ltd., [1978] 2 All ER 810, [1978] 1
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WLR 1128; Davis Contractors Ltd. v. Fareham Urban District Council, [1956] 2 All ER 145 applied. 14 AIR 1954 Bom 148.
Section 20 and Section 56 The range of authorities relating to some alteration in circumstances subsequent to the date of the contract do not raise a question of mutual error or mistake in them. Here, the formation of the contract is complete and binding; but not subsequent events arising which critically affect the contract but whose occurrence has not been provided for in the contract.15 The difference between the legal effect where there is a mistake of existing fact, and on the other hand, where there is an unexpected turn of the subsequent events, is well brought out by contrasting two types of cases arising from the cancellation due to illness of the coronation procession of King Edward VII. In Griffith v. Brymer, 16 the plaintiff agreed to hire rooms from the defendant to watch the procession. Unknown to either party, the king's doctors had already decided, prior to the agreement between the parties, to perform an operation, which would involve the abandonment of the procession; but in Krell v. Henry, 17 the facts were the same except that the agreement preceded the decision of the doctors by four days. It was held that the agreement was discharged by frustration. In India, the appropriate section in the latter case would be s. 56 not s. 20. In Sheikh Brothers Ltd v. Ochsner, 18 the Privy Council stated the distinction between s s. 20 and 56. It held that s. 56 applied only where an agreement otherwise valid and enforceable, was rendered void by impossibility of performance. It had no application to agreements which were void under s. 20, by reason of a mutual mistake as to an essential fact. It was further held that there is no repugnancy between s s. 20 and 56, of the Contract Act . Section 56 applied to enforceable agreements apart from any question of performance. Another reason for that view, was that the words 'or with reasonable diligence might have known' in s. 56 imply a set of circumstances in which the promisor is in a different position from the promisee. In other words, the case is to be treated as one of unilateral and not of 'mutual' mistake. 15 Bell v. Lever Bros Ltd., [1932] AC 161 per Lord Thankerton at 237, [1931] All ER Rep 1 at 37. 16 (1903) 19 TLR 434; following Couturier v. Hastie, (1856) 5 HL Cas 673, [1843-60] All ER Rep 280. 17 [1903] 2 KB 740. [1900-03] All ER Rep 20, CA. 18 [1957] AC 136, [1957] 2 WLR 254,(PC) .
Fact Essential to the Agreement The mistake must be 'as to a matter of fact essential to the agreement'. It is not enough that there was an error 'as to some point, even though a material point, an error as to which does not affect the substance of the whole consideration'.19 A mistake is material to the formation of the agreement, if it is such that had the party mistaken had realised his mistake, he would not have entered that agreement.20 The circumstance, therefore, that at the date of a lease, neither the lessor nor the lessee supposed that the government assessment would ever be increased, will not avail the lessor to avoid the lease, if the assessment is subsequently enhanced. Mere erroneous expectations, which subsequent events entirely falsify have no such effect.21 It was stated:
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The circumstance that both the parties to the lease supposed (if they did suppose) that the assessment would never be increased, did not prevent their united will from forming a contract, any more than from making the terms of the contract, when thus concluded, from being binding, in spite of any future change of circumstances.22
The error, to be relevant to vitiate a contract, should be essential and inexcusable; and in a contract of marriage, should be, in addition, of such an objective nature that in the general conscience, people feel that if such an error was known, the will would not have formed in the manner it did.23 The subject matter of a separate warranty in a contract is not an essential part of the contract.24 Nor do mistakes as to collateral circumstances avoid a contract.25 Parties to a compromise could not be said to be under a mistake of fact essential to the agreement, where muafi26 had been forfeited by the government before the compromise had been arrived at, and of which the parties were unaware, because the muafi was not a condition precedent to the execution of the compromise, or otherwise essential to it.27 19 Kennedy v. Panama Mail Co., (1867) LR 2 QB 580 per Blackburn J at 588; OAPRMAR Adaikappa Chettiar v. Thomas Cook & Sons, (Bankers) Ltd., AIR 1933 PC 78, 64 Mad LJ 184, 142 IC 660. 20 See s. 14, para 2 above. 21 Babshetti v. Venkataramana, (1879) ILR 3 Bom 154; Ranga v. Suba Hegde, (1880) 4 Bom 473. 22 (1879) 3 Bom 154 at 158. 23 Mandakini Pundalik Salkar v. Chandrasen Raikar, AIR 1986 Bom 172 at 181. 24 Sada Kavaur v. Tadepally Basaviah, (1906) ILR 30 Mad 284. 25 Sada Kavaur v. Tadepally Basaviah supra; Debendra Nath Dutt v. Administrator-General of Bengal, (1908) 35 Cal 955, (1908) 35 IA 109; Debendra Nath Dutt v. Administrator-General of Bengal, (1906) 33 Cal 713. 26 Means remission of land revenue to the owner. 27 Purangir v. Bhawanigir, AIR 1951 HP 11.
Mistake of Both the Parties about the Fact In order to render an agreement void under s. 20, both the parties must be labouring under the same mistake of fact. Where one party knows the facts, but refrains from communicating the same to the other party, s. 20 is not attracted.28 A unilateral mistake also does not enable a party to avoid the contract.29 In Tarsem Singh v. Sukhminder Singh, 30 the price for the land agreed to be sold was to be calculated at a specified rate per unit of area (which unit was in dispute). On the seller's refusal to convey, the plaintiff filed a suit for specific performance, and in the alternative, for refund of earnest money; in which specific performance was decreed in the trial court. The first Appellate Court found that the parties were mistaken as to the area of land to be sold, one intending it in terms of a bigha and the other in terms of kamal, and that the plaintiff was not willing to pay the full consideration amount, and therefore, modified the decree allowing only refund of earnest money. The High Court upheld the decision. In the Supreme Court, appeal was heard only on the question of refund of earnest money, and the defendant contended first, that any mistake about price or area would not be a matter essential to the agreement, and secondly, that he was entitled to forfeit the earnest money under a clause in the agreement. It was held that the parties suffered from a mutual mistake as to area of land, which was essential to the agreement; as the price was to be calculated on the basis of the area, and that therefore, earnest money ought to be refunded under s. 65, of the Contract Act.
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It is submitted that the refund of earnest money could be justified on grounds other than a mistake under s. 20, namely, the relief could be granted in the exercise of the power of the Court under s. 21, Specific Relief Act to order refund of earnest money on the refusal of specific performance. Else, assuming that the defence of mistake of the type alleged (mistake negativing agreement) relief could be available to the plaintiff under s. 65 of the Contract Act. It is submitted that the parties could not be said to have been under such a mistake as is provided in s. 20 on the following grounds:
(i) (ii) (iii) (iv)
(v) (vi)
both the parties having claimed in the suit on the basis of a valid enforceable agreement, the one claiming specific performance; and the other, the right to forfeit the earnest money under the terms of the contract, the defence of mistake could not lie; a plaintiff seeking specific performance of a contract could not be heard to allege mistake at the same time, or when specific performance could not be had; the area of a piece of land proposed to be purchased was verifiable; knowledge of the price, the rates and the area of the land could be easily imputed upon a prospective purchaser on the basis of his duty to know, or having the means to know with due diligence, or which any reasonable buyer could have known; the mistake could, at the most, be said to be unilateral; section 20 could not be applied where the mistake was not that of both parties who had agreed, but were mistaken about the same thing, but that of both parties who did not understand the same thing in the same sense, i.e., when the parties were not ad idem.31
28 Ganga Retreat & Towers Ltd. v. State of Rajasthan, (2003) 12 SCC 91. 29 See s. 22 below; Dagdu v. Bhana, (1904) 28 Bom 420; Dhulipudi Namayya v. Union of India, AIR 1958 AP 533; State of Jammu and Kashmir v. Sanna Ullah Mir, AIR 1966 J&K 45. 30 AIR 1998 SC 1400, (1998) 3 SCC 471, (the case was heard in the absence of the respondent buyer). 31 AIR 1998 SC 1400 at 1405, (1998) 3 SCC 471 at 1478, where the Court observes that the parties were not ad idem.
Mistake Nullifying Consent Cases where such mistake has been held to nullify consent can be classified in groups as under: Mistake about Existence of the Subject Matter An agreement would be void if both the parties are mistaken about the existence of the subject matter of the agreement, for example, where property had ceased to exist at the date of the contract.32 Illustration (a) to the section deals with such a situation.33 Partial destruction or loss of goods contracted for would have the same effect.34 Thus, the view of the Australian High Court in the case of completed sale of property, where the subject matter of the contract was not in existence at the time of the contract was that the contract was:
...not partially void but unenforceable. The one party is unable to supply the very thing that the other party contracts to take and therefore the contract is unenforceable by the one if executory, while if executed, the other can recover back money paid on the ground of total failure of consideration.35
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One view is that the doctrine of mistake is confined to cases of res suae or res extinctae, i.e., a contract will be void only if there is nothing to contract about...and the ground of such a nullity is not the mistake but the absence of res.36 The reason advanced for restricting, the scope of operative common mistake, is that to hold an agreement void tends to prejudice the rights of innocent third parties. But a wider view is now accepted, and it has been held that a mistake might render an agreement void, provided it rendered the subject matter essentially and radically different from what the parties believed to exist.37 In ITC Ltd v. George Joseph Femandes, 38 the Supreme Court has also observed that a mistake as to substance of the thing contracted for, may render a contract void, when the difference between what has been contracted and what has been offered is so complete that, if the contract were enforced in the act ual circumstances which have unexpectedly emerged, this would involve an obligation fundamentally different from that which the parties believed they were undertaking. Mistake as to Quality of the Subject Matter For no contract to come into existence through a fundamental error, the mistake must be as to the identity of the other party--as opposed to his attributes, as to the substance of the subject matter--as opposed to its qualities; or as to the nature of the transaction--as opposed to its terms.39 Lord Atkin suggested in Bell v. Lever Bros Ltd, 40 that a distinction should be drawn between a mistake as to substance (or essence) and mistake as to quality (or attributes); a mistake of the former type will avoid the contract and of the latter type will not.41 Some support for his distinction may be gained from the case of Kennedy v. Panama Mail Co. Ltd, 42 where the prospectus of the company mentioned a contract, which though made with the Post Master General of New Zealand, was not ratified by the government, and as a consequence, the value of the shares fell. The plaintiff had relied on the prospectus, and claimed for the return of the shares he had purchased or the price paid. The action failed because the shares, which were bought by the plaintiff under the alleged misapprehension as to the existence of the contract, were not substantially different from the shares described in the prospectus and applied for on the faith of that description. In Smith v. Hughes, 43 the plaintiff offered to sell and exhibited a sample of oats which the defendant took to be old oats. They were act ually new oats, and unsuitable for the purpose of the defendant. The question left to the jury was whether the plaintiff believed the defendant to believe that he was contracting for old oats. This direction was held not to be sufficient to distinguish between a mistake on the part of the defendant that the oats were old oats and a mistake that they were being offered to him as old oats. In the former case, the contract would be valid and in the latter the contract would be void. A new trial was ordered. This case is similar to buying a horse believed to be sound and buying one with the warranty of being sound. Cockburn CJ stated the rule that if a specific article is offered without an express warranty and the buyer has full opportunity of inspecting it, and if he acts on his own judgment, the rule of caveat emptor applies. If A buys a horse believing it to be sound, and it turns out to be unsound, and the seller has made no misrepresentation as to its soundness, A cannot recover back the price and is bound by the contract. It is not open to him to say that the seller must have known from the price paid that the buyer must have thought the horse to be sound.44 This case illustrates the principle that a mistake as to quality is insufficient to set aside a contract. The principle stated in Salle v. Butcher, 45 that in the absence of fraud or of definite warranty, there is no remedy if the mistake was about quality, was applied in later cases.46 In Leaf v. International Galleries, 47 a painting of Salisbury Cathedral by Constable, which was a term of contract of sale, was found not to be a Constable. The contract was upheld as the mistake was not about the subject matter but as to quality.48 In Harrison & Jones Ltd v. Bunten & Lancaster Ltd, 49 the goods were sold under the trade description 'Sree Brand Kopak'--which was delivered to be pure kopak, though in truth, it was an admixture of tree and bush cotton. The contract was upheld as the mistake was as to quality. In Fredrick E Rose (London) Ltd v. Won H Pim Junr & Co. Ltd, 50 there was a contract between the parties for the sale of 'horsebeans' which were quite different from 'feveroles', which both parties believed the to be. This contract it was held, could not be rectified as notwithstanding the mutual mistake as to the meaning of the 'feveroles' and 'horsebeans', the contract correctly expressed the
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agreement. There was no mistake where a hire-purchase transaction was entered into in 1955 and in exchange; the sellers of a new car took an old Morris car purporting to be 1948 model, which was later found to be a 1939 model.51 In ITC Ltd v. George Joseph Fernandes, 52 the Supreme Court has also observed that a distinction has to be made between the mistake as to substance or essence on one hand, and a mistake as to quality or attributes on the other. A mistake of the former type will avoid the contract, whereas a mistake of the latter type will not. However, according to circumstances, even a mistake as to substance of the thing contracted for may not necessarily render a contract void, unless the difference was so complete that, if the contract were enforced in the act ual circumstances which have unexpectedly emerged, this would involve an obligation fundamentally different from that which the parties believed they were undertaking. Thus, where a question arose whether the deficiency in refrigeration system to the extent of -10F made the trawlers essentially different from trawlers with a refrigeration system of -20F necessary for deep sea fishing, and whether this standard of the refrigeration system was in the minds of the parties so that there was a mutual mistake regarding it, the Supreme Court took into account the series of steps taken for repairs and the stipulation in the charter party, and held that it was not a case of mutual mistake as to quality which made the trawlers different from the trawlers that the parties in their minds agreed to transfer.53 In many cases of mistake as to quality in a contract of sale, either the buyer or the seller will be held to have assumed the risk; in any case, the buyer will be protected by implied terms in a contract of sale. But where premises were leased for office use when the landlord only had a limited permission for using a part of the premises for such purpose, the contract was held to have been caused by mutual mistake.54 Where neither the vendor nor the purchaser knew of a notification under the Calcutta Improvement Act for acquisition of the very property which was the subject matter of the agreement, the mistake was vital and essential and the agreement void, although, only half the property was notified for acquisition.55 Mistake as to Existence of State of Things or False and Fundamental Assumption Illustration (c) to the section would fall under this category.56 A contract of insurance is void if the insured was already dead. The transaction of assignment was avoided and the vendor recovered the policy and the money paid thereunder.57 In Magee v. Pennine Insurance Co. Ltd, 58 a number of misstatements were carelessly, but not fraudulently made in a policy for insurance. The policy was accepted and renewed several times. When the car covered by the policy was damaged and the plaintiff claimed the value of the car, a compromise was settled at GBP 385. The untrue statements in the policy were discovered before the payment was made. The Court of appeal held that though the acceptance by the plaintiff of the insurance company's offer constituted a contract of compromise, the parties were under a common and fundamental mistake, when they thought that the original policy was good and binding. The contract was, therefore, voidable in circumstances on equitable grounds. A separation deed between a husband and wife entered into under the mistaken belief of their being married was pronounced void in Galloway v. Galloway .59 In Sheikh Bros Ltd v. Ochsner, 60a case from Kenya decided in respect of the sections of the Contract Act, the appellant granted a licence to the respondent to cut sisal growing on appellant's land in return of his delivering sisal fibre in minimum quantities of 50 tons per month to the appellant. Unknown to both parties, the estate was incapable of producing the necessary amount of sisal. It was held that the contract was void because the land was incapable of producing the quantity, and that was the basis of the contract, and the mistake was as to a matter of fact essential to the agreement. Under a marine insurance policy of a cargo of lemons, money was paid for lemons under the mistaken belief that they had perished, but they had been sold en route. The money was recovered.61 A guarantee of a lease of a machine was void when it transpired that the machine, which was the prime security for the guarantors, did not exist and the lease was invalid.62 Where a property agreed to be sold had been notified for acquisition under the Calcutta Improvement
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Act, and neither the vendor nor the purchaser was aware of the notification at the date of their agreement, the notification was held to constitute a matter of fact essential to the agreement within the meaning of this section and the agreement was declared void.63 So was an agreement void where the land being sold in liquidation proceedings was, unknown to the liquidator and the purchaser who had deposited the price in the court, subject to litigation, and possession of the entire land could not be given, being prevented by an injunction against the liquidator at a suit of a third party.64 The municipal byelaws enjoined that a building site could not be less than five bighas. A sale of a building site less than that area was effected, and where both the parties were under a mistaken impression that the land was five bighas, the agreement was void.65 Where a purchaser agreed to receive a certain amount from the seller in full satisfaction of his claim against the seller for non-delivery of goods, and both the parties were under a mistake of essential fact in calculating the said amount, the agreement was void, and the purchaser was entitled to receive the balance under s. 65.66 A compromise effect without knowing that the suit had already been decided in favour of one of the parties is void.67 32 Svanosio v. McNamara, (1956) 96 CLR 186 at 209; Bell v. Lever Bros Ltd., [1932] AC 161 at 236, [1931] All ER Rep 1; Scott v. Coulson, [1903] 2 Ch 249, where the supposed assured was dead at the time of insurance; Couturier v. Hastie, (1856) 5 HL Cas 673, [1843-60] All ER Rep 280, (sale of a cargo of corn already sold by the master of the ship). 33 Couturier v. Hastie, (1856) 5 HL Cas 673, [1843-60] All ER Rep 280. 34 Barrow Lane & Ballard Ltd. v. Phillip Phillips & Co. Ltd., [1929] 1 KB 574, [1928] All ER Rep 74. 35 McRae v. Commonwealth Disposals Commission, (1950) 84 CLR 377 at 403-4; Svanosio v. McNamara, (1956) 96 CLR 186 at 209; Bell v. Lever Bros Ltd., [1932] AC 161 at 218, 222, [1931] All ER Rep 1. 36 Cheshire and Fifoot's Law of Contract, 10th edn, p. 211. 37 Associated Japanese Bank, (International) Ltd. v. Cr edit du Nord SA,[1988] 3 All ER 902 at 912, [1989] 1 WLR 255 at 266-68. 38 AIR 1989 SC 839. 39 Psaltis v. Schutlz, (1948) 76 CLR 547 per Dixon J at 561; Bell v. Lever Bros Ltd., [1932] AC 161 at 217, [1931] All ER Rep 1 at 27-28. 40 [1932] AC 161 at 218, [1931] All ER Rep 1 at 27; Psaltis v. Schutlz, (1948) 76 CLR 547 at 561. 41 Re Taylor,(1948) 11 MLR 257. 42 [1867] LR 2 QB 580 approved in Bell v. Lever Bros Ltd., [1932] AC 161, [1931] All ER Rep 1. 43 (1871) LR 6 QB 597 at 606, [1861-73] All ER Rep 632. 44 Smith v. Hughes, (1871) LR 6 QB 597 at 606, [1861-73] All ER Rep 632; Bell v. Lever Bros Ltd., [1932] AC 161 at 224, [1931] All ER Rep 1 at 31. 45 [1950] 1 KB 671, [1949] 2 All ER 1107 at 1119, (CA). 46 Leaf v. International Galleries, [1950] 2 KB 86 at 91, [1950] 1 All ER 693, (a case of a painting found not to be genuine); Fredrick E Rose, (London) Ltd. v. Won H Pim Jnr & Co., [1953] 2 QB 450, [1953] 2 All ER 739, (sale of horse beans believed to be feverolles); Oscar Chess Ltd. v. Williams, [1957] 1 All ER 325, [1957] 1 WLR 370 at 373, (mistake as to the age of a car); Per Goff J in Grist v. Bailey, [1967] Ch 532, [1966] 2 All ER 875, [1966] 3 WLR 618; but see Svanosio v. McNamara, (1956) 96 CLR 186 at 210. 47 [1950] 2 KB 86, [1950] 1 All ER 693. 48 Leaf v. International Galleries, [1950] 2 KB 86, [1950] 1 All ER 693; Solle v. Butcher, [1950] 1 KB 671, [1949] 2 All ER 1107,(CA) . 49 [1953] 1 QB 646, [1953] 1 All ER 903. 50 [1953] 2 QB 450 at 460, [1953] 2 All ER 739 at 747. 51 Oscar Chess Ltd. v. Williams, [1957] 1 All ER 325 per Denning LJ at 333, [1957] 1 WLR 370 at 377; cf Nicholson
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and Venn v. Smith-Marriott, (1947) 177 LT 189, which was held to be wrongly decided on this point by Denning LJ in Solle v. Butcher, [1950] 1 KB 671 at 692, [1949] 2 All ER 1107 at 1119, (CA). 52 AIR 1989 SC 839. 53 ITC Ltd. v. George Joseph Fernandes, AIR 1989 SC 839 at 854. 54 Laurence v. Lexcourt Holdings Ltd., [1978] 2 All ER 810 at 819, [1978] 1 WLR 1128; applying Solle v. Butcher, [1950] 1 KB 671, [1949] 2 All ER 1107,(CA) ; Grist v. Bailey, [1967] Ch 532, [1966] 2 All ER 875, [1966] 3 WLR 618. 55 Nursingh Doss Kothari v. Chutto Lal Misser, (1923) ILR 50 Cal 615. 56 Strickland v. Turner, (1852) 7 Ex 208; Cochrane v. Willis, (1865) LR 1 Ch 58. 57 Scott v. Coulson, [1903] 2 Ch 249. 58 [1969] 2 QB 507, [1969] 2 All ER 891, [1969] 2 WLR 1278,(CA) . 59 (1914) 30 TLR 531; followed in Law v. Harragin, (1917) 33 TLR 381; distinguished in Bell v. Lever Bros Ltd., [1932] AC 161, [1931] All ER Rep 1. 60 Sheikh Brothers Ltd. v. Ochsner, [1957] AC 136, [1957] 2 WLR 254 at 260, (PC); Bell v. Lever Bros Ltd., [1932] AC 161, [1931] All ER Rep 1. 61 Norwich Union Fire Insurance Society Ltd. v. Won H Price Ltd., [1934] AC 455,(PC) . 62 Associated Japanese Bank, (International) Ltd. v. Credit du Nord SA, [1988] 3 All ER 902, [1989] 1 WLR 225 at 269. 63 Nursing Dass Kothari v. Chutto Lall Misser, (1923) 50 Cal 615, AIR 1923 Cal 641, 74 IC 996; Jodha Mal Kuthalia v. Associated Hotels of India Ltd., AIR 1950 Lah 106, (but if the notification was issued after the contract, the contract would not be void). 64 Mahendra Kumar Roongta v. Official Liquidator, AIR 1996 Cal 146. 65 Henry Earnest Meaney v. EC Eyre Walker, AIR 1947 All 332. 66 Bharat Electronics Ltd. v. American Export Isbrandsen Lines Inco, AIR 1979 Mad 267, (1979) 2 Mad LJ 304. 67 Ananda Chandra Das v. Kali Das Bepari, AIR 1919 Cal 330, (1).
Mistake as to Title or Rights In Cooper v. Phibbs, 68A agreed to take a lease of a fishery from B, though contrary to the belief of both parties at the time, A was tenant for life of the fishery and B had no title at all. Lord Westbury applied the principle that:
... if parties contract under a mutual mistake and misapprehension as to their relative and respective rights, the result is that the agreement is liable to be set aside as having proceeded upon a common mistake.
The transfer of ownership being impossible, the stipulation was naturali ratione inunitilis. Lord Atkin, in Bell v. Lever Bros Ltd, 69 described the statement of Lord Westbury as too wide, and said that the correct view was that there was a contract which the vendor was either incapable of performing or had committed a breach of a stipulation as to title; the contract was unenforceable but not void. Where in a settlement between government and certain inamdars in respect of the village, whereby the latter agreed to pay a certain yearly quit-rent, the parties believed that the inamdars were the superior holders of all the lands in the village, it was held that the settlement was void as regards a portion of the lands which subsequently turned out to be watan lands held by certain girassias as owners in possession.70 Where the heirs of a deceased compromised a suit unaware of the fact that the estate of the deceased could pay all the legacies, the agreement could be set aside under this
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section.71 A decree-holder agreed to give up costs if the judgment-debtor did not file an appeal. It was found that there was no right of appeal at all. The agreement was void, only if both parties believed there was no right of appeal, but the contract would be voidable, where the judgment-debtor made a dishonest misrepresentation knowing he had no right of appeal.72 The agreement for sale of leased land was not enforceable where both parties believed that the seller had authority to sell the land, but did not have such authority in fact.73 68 (1867) LR 2 HL 149 at 170, [1861-73] All ER Rep 2109; see Bell v. Lever Bros Ltd., [1932] AC 161 at 218, [1931] All ER Rep 1 at 27 per Lord Atkin. 69 [1932] AC 161 at 218, [1931] All ER Rep 1 at 27; Kennedy v. Panama Royal Mail Co., (1867) LR 2 QB 580 and applying Smith v. Hughes, (1871) LR 6 QB 597, [1861-73] All ER Rep 632. 70 Secretary of State for India v. Sheth Jeshingbhai Hathisang, (1892) 17 Bom 407; Kuchwar Lime & Stone Co. Ltd. v. Secy of State, (1936) 16 Pat 159, 166 IC 966, AIR 1937 Pat 65; Magee v. Pennine Insurance Co. Ltd., [1969] 2 QB 507, [1969] 2 All ER 891, [1969] 2 WLR 1278,(CA) . 71 Bibee Solomon v. Abdool Azeez, (1881) ILR 6 Cal 687; Secretary of State for India v. Sheth Jeshingbhai Hathisang, (1893) 17 Bom 407. 72 Ram Rattan v. Municipal Committee, AIR 1939 Lah 511. 73 M Rathnam v. Susheelamma, AIR 2009 Kant 79.
Mistake as to the Quantity of the Subject Matter In a Canadian case, Hyrsky v. Smith, 74 the parties entered into a contract for the sale and purchase of certain land for USD 4700. The northernmost boundary was to be 1000 ft, although, survey of the land procured before the sale showed 877.2 ft; and the latter was indicative of the intention of the parties. About four years after the sale, it was discovered that the vendor had no title to 76 ft x 1000 ft, the result being that the vendor's title was only to about half of the land sold. The purchaser, who had purchased the land for investment purposes and had apprised the vendor of this fact, claimed rescission of the contract and return of the purchase price plus interest. The Court held that in order to rescind for mutual (common) mistake, the mistake should go to the root of the contract. And in order to constitute an error in substantialibus, there must be a mutual fundamental mistake as to the quality of the subject matter. There often can be a fine line between the quantity and quality. If the mistake as to quantity is substantial it changes the quality of the subject matter, then in a proper case, rescission 'may exist'. In the instant case, the deficiency was that one-half of the land purchased was quite unsuitable for the purpose for which it was purchased. Therefore, there was a common fundamental mistake as to the quality of the subject matter, and the contract was rescinded. 74 (1969) 5 DLR, (3rd) 355.
Mistake as to Price A car was sold and purchased at a certain price, both the seller and the purchaser bona fide believing it to be the proper controlled price fixed under the Government Control Order then in force. It was held that the contract was entered into on a mistaken assumption as to the price and the purchaser could have returned the car and got back the price on the ground of mistake.75 75 Lakshmanprasad & Sons v. A Achutan Nair, AIR 1955 Mad 662, (but could not claim back the difference in the price); reversing Lakshmana Prasada & Sons v. A Achutan Nair, AIR 1952 Mad 779 on another point; a purchaser in such a case may now claim the difference under the Consumer Protection Act 1986, on the ground that the trader has charged a price higher than that fixed by law.
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Mistake and Equity under the English Law At common law, a mistake renders a contract void ab initio, and it refuses remedy for contract induced by mistake, but equity may grant relief. A contract is liable to be set aside in equity, if the parties were under a common misapprehension either as to facts, or as to their relative and respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault.76 A mere unilateral mistake on the part of the plaintiff, unknown to the defendant, does not, however, entitle the plaintiff to rescission, with or without the option of rectification.77 Equitable relief may be granted where, as a result of common mistake; substantial injustice has been done, particularly when interests of third parties are adversely affected. In any such case, the Court may on such terms as it thinks just, intervene to set aside the contract and render justice. The Court may intervene to set right a common mistake by rectifying a written contract or deed, which has not accurately recorded the agreement between the parties. In all other cases, equity follows the law and the parties must accept the position, which they brought about by their agreement, albeit by a common mistake. In Salle v. Butcher, 78 the parties entered into the lease under the mutual mistake that the alteration made had so altered the identity of the leased premises as to make it a new dwelling house outside the Rent Act s. The tenant sued for the return of the rent overpaid and the landlord applied for rescission of the lease. The Court of Appeal held that the landlord was entitled to have the lease set aside in equity on such terms as the Court thought fit. In Laurence v. Lexcourt Holdings Ltd, 79 the defendants took the premises of the plaintiffs on lease for 15 years for the purpose of offices, when the planning permission was only for a limited period of two to three years. This was held to be common mistake of the parties because: (a) the belief of the parties that planning permission was available without restriction for use of the premises of offices was a fundamental mistake; and (b) the defendants were not at fault in entering into possession without making the usual searches, as they were under no duty of care to the plaintiffs to make the searches and they did not bring about the plaintiffs' forgetfulness. According to Denning LJ, the correct interpretation of Bell v. Lever Bros Ltd, 80 is that once a contract has been made, it is good, unless and until it is set aside for breach of some condition expressed or implied in it, or for fraud, or on some equitable ground. Neither party can rely on his own mistake, which to say that it was a nullity from the very beginning, no matter that it was a mistake which to his mind was fundamental and no mater that the other party knew he was under a mistake; a fortiori if the other party did not know of the mistake but shared it.81 A distinction was drawn by Denning LJ between, (a) the effect of the mistake at law; and (b) its effect in equity. At law, mistake, if effective at all, makes the contract void. In equity, mistake is a common ground for rescission or for refusing specific performance and is wider than the jurisdiction at law. According to Denning LJ, if Bell v. Lever Bros case had been considered on equitable grounds, the result might have been different.82 76 Solle v. Butcher, [1950] 1 KB 671, [1949] 2 All ER 1107,(CA) ; Leaf v. International Galleries, [1950] 2 KB 86, [1950] 1 All ER 693,(CA) ; Oscar Chess Ltd. v. Williams, [1957] 1 All ER 325, [1957] 1 WLR 370,(CA) ; Grist v. Bailey, [1967] Ch 532, [1966] 2 All ER 875, [1966] 3 WLR 618; Magee v. Pennine Insurance Co. Ltd., [1969] 2 QB 507, [1969] 2 All ER 891, [1969] 2 WLR 1278,(CA) ; Laurence v. Lexcourt Holdings Ltd., [1978] 2 All ER 810, [1978] 1 WLR 1128; Associated Japanese Bank, (International) Ltd. v. Crdit du Nord SA, [1988] 3 All ER 902 at 911, [1989] 1 WLR 255. 77 Riverlate Properties Ltd. v. Paul, [1975] Ch 133, [1974] 2 All ER 656,(CA) . 78 [1974] 2 All ER 656, (CA) at 1121; referring to Cooper v. Phibbs, (1867) LR 2 HL 149, [1861-73] All ER Rep 2109. 79 [1978] 2 All ER 810 at 819, [1978] 1 WLR 1128; Solle v. Butcher, [1950] 1 KB 671, [1949] 2 All ER 1107,(CA) ; applying Grist v. Bailey, [1967] Ch 532, [1966] 2 All ER 875, [1966] 3 WLR 618. 80 [1932] AC 161, [1931] All ER Rep 1. 81 Solle v. Butcher, [1950] 1 KB 671, [1949] 2 All ER 1l07 (CA). 82 [1949] 2 All ER 1107 (CA); Grist v. Bailey, [1967] Ch 532, [1966] 2 All ER 875 per Goff J at 878, [1966] 3 WLR 618.
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Mistake will not Nullify Consent Explanation: Opinion as to Value The explanation to the section states that an erroneous opinion as to the value of the subject matter would not be considered a mistake of fact. A property subject to a subsisting lease was sold. The agreement did not mention that the lessee had the right to receive the value of the improvements. The buyer sought to set aside the agreement on the ground of mistake as to this right. It was held that there was no mistake. It could only be an erroneous opinion which the parties had formed as to the real value of the subject matter and did not vitiate the agreement.83 83 T.V Kochuvareed v. Mariappa Gaunder, AIR 1954 Tr & Coch 10 at 24.
Express Terms in Contract The existence of the separate warranty in a contract of sale is evidence that the matter of the warranty is not an 'essential' part of the contract. In such a case, if there is a breach of the warranty, the purchaser is only entitled to compensation for the breach, and the sale is not even voidable. It is a still stronger case where not only no warranty is given by the vendor, but the purchaser buys 'subject to all defects.' Thus, where a mortgagee sold his claim under the mortgage, subject in effect to all defects, and it was subsequently discovered that the mortgage was inoperative, as it was attested by only one witness, it was held that, though both parties were ignorant of that fact at the time of assignment, the purchaser was not entitled to rescind the contract and claim back the purchase money, the purchase having been made subject to all defects.84 84 Sada Kavaur v. Tadepally Basaviah, (1906) ILR 30 Mad 284.
Construction of Contract The application of the doctrine of mutual mistake depends upon the true construction of the contract. A mutual misunderstanding will not nullify a contract but only if the terms of the contract construed in light of the nature of the contract, and of the circumstances believed to exist at the time it was done; show that it was never intended to apply to the situation which in reality existed at that time, will the contract be held void.85 Both parties may have entered into a contract on an understanding that it would operate if certain assumptions are correct, and the assumptions turn out to be false, it is a matter of true construction of the contract whether neither party shall then be bound by the contract, or one shall be bound, or the other shall be bound, or that both shall be bound. In Amalgamated Investment and Property Co. Ltd v. John Walker & Sons Ltd, 86 both the parties believed that the building was not listed under planning legislation as being of special architectural interest, although it was in the provisional list. But the list was given legal effect soon after the contract. It was held that as the defendant had not warranted that planning permission could be obtained for development, there was an inherent risk which every purchaser should be regarded as being aware of. In another case, a loan was taken on security of a ship after it had sailed out on a voyage. Its repayment was fixed on a date after the expiry of certain months from the date of its setting sail. The ship was lost after a few days of its sailing, but some time prior to the date of the contract. It was held that s. 20 was not attracted.87
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The Australian High Court held the doctrine of mistake inapplicable to the sale of a tanker in McRae v. Commonwealth Disposals Commission, 88 where the plaintiff purchased an abandoned tanker stated to be lying on Jourmound Reef and the tanker was found to be non-existent in spite of the assertion of the seller, the Commonwealth Disposals Commissioner. The trial judge held the contract void on the basis of Couturier v. Hastie. 89 The High Court of Australia held that the Commission could not rely on its own mistake to avoid the contract, because the mistake was induced by the series of faults of its own servants, who asserted the existence of the tanker recklessly and without any reasonable grounds. There was a valid contract and the Commission had contracted that a tanker existed at a position specified. Since there was no tanker there, there was a breach of the contract and the Commission was liable for damages for that breach.90 85 ITC Ltd. v. George Joseph Fernandes, AIR 1989 SC 839 at 853. 86 [1976] 3 All ER 509 at 516, [1977] 1 WLR 164; applying Davis Contractors Ltd. v. Fareham Urban District Council, [1956] 2 All ER 145; cf Laurence v. Lexcourt Holdings Ltd., [1978] 2 All ER 810, [1978] 1 WLR 1128. 87 Vappakandu Marakayar v. Annamalai Chett, (1901) ILR 25 Mad 561 at 566. 88 (1950) 84 CLR 377. 89 (1856) 5 HL Cas 673, [1843-60] All ER Rep 280. 90 McRae v. Commonwealth Disposals Commission, (1950) 84 CLR 377, 406-7, 410; distinguishing Couturier v. Hastie, (1856) 5 HL Cas 673, [1843-60] All ER Rep 280; Strickland v. Turner, (1852) 7 Ex 208.
Completed Contracts and Conveyances It is possible to get relief on the ground of common mistake after a contract for sale of land has been completed, but cases are rare and those are peculiar cases, eg, where the property sold already belonged to the vendee,91 when there has been a total failure of consideration. There are dicta that relief can be given after a contract is completed where there is a common mistake upon a material point, although, there is a partial failure of consideration. But the proper principle appears to be that in the case of a completed contract of sale, rescission is only possible on the ground of common mistake, where contrary to the belief of parties, there is nothing to contract about.92 In Svanosio v. Mcnamara, 93 there was a contract of sale of general law land together with the victuallers licence in respect of the hotel erected thereon. The conveyance was executed and the licence transferred. It was subsequently discovered that the hotel was partially constructed on land conveyed and a substantial part stood on unalienated Crown land. Both parties had assumed the hotel to be constructed in the conveyed land. The vendee claimed a declaration that the contract was void for a mistake and for setting aside the conveyance. The action failed and the full Court upheld that decision. Dixon CJ. and Fullagar J. held that equity will not undo a sale of the land after conveyance, unless there is fraud or total failure of consideration or what amounts to that. They also referred to cases where equity gave relief when the vendor had no title to the land at all. 'There may be cases of mistake in which it would be so inequitable that a party should be held to his contract; that equity would set it aside.'1 McTiernan, Williams and Webb JJ. after referring to several English cases,2 where the subject matter was not in existence, said:
It would be hard to find an analogous example in the case of land, because land does not cease to exist, unless one can take the somewhat fanciful example. But even in these cases the contract is probably not void but merely unenforceable. The one party is unable to supply the very things that the other party contracted to take and therefore the contract is unenforceable by the one if executory, while if executed the other can recover back money paid on the ground of total failure of consideration.3
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91 Svanosio v. McNamara, (1956) 96 CLR 186 at 207; Elder v. Auerbach, [1950] 1 KB 359, [1949] 2 All ER 692 per Devlin J, (a case of innocent misrepresentation as to an executed lease); Solle v. Butcher, [1950] 1 KB 671, [1949] 2 All ER 1107,(CA), (a case of a lease; mistake as to applicability of Rent Acts). 92 Svanosio v. McNamara, (1956) 96 CLR 186 at 209; Jones v. Clifford, (1876) 3 Ch D 779; Debenham v. Sawbridge, [1901] 2 Ch 98 at 109. 93 (1956) 96 CLR 186. 1 (1956) 96 CLR 186 at 198-200, 207. 2 Svanosio v. McNamara, (1956) 96 CLR 186 at 209; Bingham v. Bingham 27 ER 934, (1748); Cooper v. Phibbs, (1867) LR 2 HL 149, [1861-73] All ER Rep 2109; Bell v. Lever Bros Ltd., [1932] AC 161 at 236, [1931] All ER Rep 1; Scott v. Coulson, [1903] 2 Ch 249; Couturier v. Hastie, (1856) 5 HL Cas 673, [1843-60] All ER Rep 280; Strickland v. Turner, (1852) 7 Ex 208. 3 Svanosio v. McNamara, (1956) 96 CLR 186 at 209; McRae v. Commonwealth Disposals Commission, (1950) 84 CLR 377 at 403; referring to Lord Atkin in Bell v. Lever Bros Ltd., [1932] AC 161 at 218, 222, [1931] All ER Rep 1.
Auction Sale in Execution Section 20 does not apply to an auction sale in execution, and therefore mutual mistake of fact does not make a contract void,4 because the purchaser at an auction knows that no one guarantees to him that the judgment-debtor has a good title and he purchases the property with his eyes open. 4 Thakarlal v. Rama, AIR 1961 Raj 193; but see Mehar Chand v. Milkhi Ram 13 Lah 618, AIR 1932 Lah 401(FB), (where an auction purchaser was held entitled to recover purchase price on equitable grounds in cases where judgment-debtor had no saleable interest).
Surety Bonds under Statute An administration bond given under s. 256 of the Indian Succession Act, 18655 is not void under this section, though the party to whom the grant of letters of administration is made may have obtained the grant by fraud upon the court, and though neither the sureties nor the Court to which the bond is passed were aware of the fraud when the grant was made. In Debendra Nath Dutt v. Administrator General of Bengal, 6 the administration of the estate of a deceased person was granted to A on execution of a bond by him and two sureties engaging for the due administration of the estate. It was subsequently discovered that A was not entitled to the grant, and that he had obtained it by false and fraudulent representations made in his petition of letters of administration. The grant to A was thereupon revoked, and a suit was brought against the sureties to recover from them the amount misappropriated by A and forming part of the estate. One of the defences raised on behalf of the sureties was that the bond was void under the present section, and that they were not therefore liable upon the bond. It was contended that both the Court and the sureties were under a mistake as to a matter of fact 'essential' to the agreement, namely, that A was entitled to letters of administration, and that' the sureties would not have executed the bond but for that mistake. But a majority of the Judges of the High Court of Calcutta held that the mistake of the Court and of the sureties did not relate to the essential subject of the contract. The decision was also based on the ground that the liability of sureties under an administration bond did not depend on the validity or invalidity of the grant. This decision was upheld on appeal to the Privy Council.7 The same principles applied to surety bonds under the Guardians and Wards Act, 1890 whereA was appointed guardian of the property of a minor. He executed a bond to the district Court and B was the surety for the due management and realisation of the minor's property. A failed to account for the
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income of certain property, which actually belonged to the minor, but was not included in the list of the properties belonging to the minor annexed to the petition for his appointment. It was held that B was liable to make good the amount, though it might be said that both the Court and B were led to believe by A that the property did not belong to the minor.8 5 Now s. 291, Indian Succession Act, 1925. 6 (1906) ILR 33 Cal 713 at 739-40, 746-47, 751, 755, (1908) 35 IA 109. 7 Debendra Nath Dutt v. Administrator-General of Bengal, (1908) ILR 35 Cal 955, (1908) LR 35 IA 109. 8 Sarat Chandra Roy v. Rajoni Mohan Roy, (1908) 12 Cal WN 481.
Compromises Special considerations apply to a compromise of family rights entered into under a mistake of fact of law. A compromise assumes that the rights of the parties are doubtful, and the compromise is effected for the purpose of settling their interests in property, or their claims against each other, without resorting to or without continuing litigation. It would therefore defeat the object of the compromise, if, it could be set aside on the ground of mistake. If the rights depend on matters of fact, it is the duty of each party to disclose to the other all relevant facts known to himself; and, if, owing to a failure in this respect, either party enters into the compromise under a mistake of fact, it may be set aside,9 unless the doubtfulness of the fact was the ground of compromise. If rights depend on questions of law, a distinction may be drawn between cases where the law is clear and cases where it is doubtful. If the law is regarded as clear and the facts are admitted, the rights are not in doubt; the basis for a compromise does not exist, and a compromise entered into in such circumstances will be set aside. If the rights depend upon doubtful law, however, or upon the doubtful construction of a document, mistake as to these rights is no ground for setting the compromise aside.10 A compromise of a suit will be set aside if it was brought about under a mistake as to the subject matter of the agreement.11 But it has also been held by the English courts that not only a compromise,12 but also an order of the Court made by consent,13 may be set aside for any reason which would afford a ground for setting aside the agreement on which the order was based, including a mistake regarding a material fact. A settlement made in a proceeding is binding, and one party cannot unilaterally withdraw, except in case of fraud or undue influcence.14 9 See s. 18 cl., (3). 10 Halsbury's Laws of England, Vol. 16(2), 4th edn. Reissue, 2003, Equity, para 442. 11 Bibee Solomon v. Abdool Azeez, (1881) ILR 6 Cal 687 at 706; but see Secretary of State v. Nabi Bakhsh, (1927) 100 IC 730, AIR 1927 Oudh 198;, (a compromise on a disputed title is not affected by a later decision upon that title); Baba Tikam Das v. Nawab Abbas Mirza, AIR 1934 Oudh 442, (2); Uttar Pradesh Govt in Nazul Department v. Church Missionary Trust Association Ltd., AIR 1948 Oudh 54; but see O. 22, r. 3A, of the Civil Procedure Code, 1908, (added by amendment in 1976), under which a suit cannot be filed for challenging a decree based on a compromise alleged to be not lawful. 12 Hickman v. Berens, [1895] 2 Ch 638. 13 Wilding v. Sanderson, [1897] 2 Ch 534; Hudderfield Banking Co. Ltd. v. Henry Lister & Sons Ltd., [1895] 2 Ch 273, [1895-99] All ER Rep 868. 14 Ghulam Nabi Dar v. State ofj&K, (2013) 3 SCC 353; Sunita v. Bharat Bhushan, AIR 2012 Del 104.
No Mistake under Section 20
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It has been held that s. 20 did not apply where the mistake related to the area of land leased for a colliery;15 where the mistake was as to whether goods were actually in transit;16 where the mistake related to whether interest could be claimed in execution;17 where the mistake related to whether a particular ship was bringing a specific quantity of goods;18 or where the nature of property was such that it was only fit for one of the two purposes set out in the contract,19 or the floor-area-ratio (FAR) applicable to a particular land being auctioned.20 15 Soorath Nath Banerjee v. Bhabasankar Goswami 119 IC 205, AIR 1929 Cal 547. 16 Shriram Vithuram v. Trimbak Amolakchand, AIR 1927 Bom 514, 29 Bom LR 1036. 17 Seth Gokul Dass Gopal Dass v. Murli and Zalim, (1878) 5 IA 78, (1878) ILR 3 Cal 602. 18 Bhailal Chaturbhai Patel v. Kalyanrai Varajrai Desai 45 Bom 1222, AIR 1921 Bom 49. 19 Om Prakash v. Daulat Ram, AIR 1930 Lah 772. 20 Ganga Retreat & Towers Ltd. v. State of Rajasthan, (2003) 12 SCC 91.
Effect of Mistake An agreement vitiated by mutual mistake of fact essential to the agreement is void. Where mistake is not mutual, or not of fact, or is not essential to the agreement, the agreement is a contract binding on the parties. When mistake vitiates the agreement, the obligation of restitution arises under s. 65. In addition, other equitable remedies are available in the form of defence to a suit or specific performance, and rectification, where the entire agreement is not vitiated by the mistake, but there is a mistake as to some terms, or where the intention of the parties is not reflected in the document incorporating the contract. Restitution: Section 65 Section 65 provides that when an agreement is discovered to be void, any person who has received any advantage under the agreement is bound to restore it, or to make compensation for it, to the person from whom he received it. Specific Performance A defendant may set up a variation in a suit of specific performance, whereby a mistake of fact, the written contract of which performance is sought by the plaintiff, is in terms or effect different from the parties had agreed to, or does not contain all the terms agreed to between the parties on the basis of which the defendant entered into the contract.21 Rectification There may be cases where the parties are genuinely agreed, but the language or the terms used by them in the written document do not convey the true meaning or reflect their true intention. This is not a mistake rendering the agreement void, but a mistake in expression capable of being rectified, if not mutually, with the assistance of the court. Section 26 of the Specific Relief Act, 1963 enables such rectification. This relief is available for correcting the language of an instrument for making it in accord with the true intention of the parties by reason of mutual mistake of the parties.22 The Court will not rectify an instrument on the ground of mistake, unless it is shown that there was an actual concluded contract antecedent to the instrument sought to be rectified, and that the contract is inaccurately represented in the instrument.
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In Haji Abdul Rahman Allarakia v. Bombay and Persia Steam Navigation Co, 23 the plaintiffs chartered a steamer from the defendants to sail from Jedda on 'the 10 August 1892' 15 days after the Haj, in order to convey pilgrims returning to Bombay. The plaintiffs believed that 'the 10 August 1892,' corresponded with the 15 day after the Haj, but the defendants had no belief on the subject, and contracted only with respect to the English date. The fifteenth day after the Haj actually fell on 19 July 1892. On learning of its mistake, the plaintiffs sought for rectification of the charter-party. It was held that the agreement was one for the 10 August 1892; that the mistake was not mutual, but on the plaintiffs' part only; and, therefore, that there could be no rectification. The Court further expressed its opinion, that even if both the parties were under the mistake, the Court would not rectify, but only cancel the instrument, as the agreement was one for that 10 August 1892, and that date was a matter materially inducing the agreement. 21 See the Specific Relief Act, 1963, s. 18. 22 The Specific Relief Act, 1963, s. 26. 23 (1892) 16 Bom 561, followed in U Shwe Thaung v. U Kyaw Dun 125 IC 259, AIR 1930 Rang 12; Madhavji Bhanji v. Ramnath Dadoba, (1906) 30 Bom 457.
Pleadings and Proof Mistake of fact must be pleaded in the written statement, else the question cannot be allowed to be raised.24 It cannot be raised for the first time in appeal.25 The burden of proving mistake is on the party alleging it.26 24 Shiva Parsad Singh v. Maharaja Dris Chandra Nandi, AIR 1943 Pat 327. 25 Raja Sri Sri Jyoti Parsad Singh Deo Bahadur v. Samuel Henry Seddon, AIR 1940 Pat 516; Governor of Orissa State v. Shivaprasad Sahu, AIR 1963 Ori 217. 26 William Charles Binns v. W&T Avery Ltd. 61 Cal 548, AIR 1934 Cal 778.
UNIDROIT Principles The Principles enable avoidance of contract for mistake on the following conditions.27First, the mistake must be serious, i.e., of such importance that a reasonable person in the same situation as the party in error would only have concluded the contract on materially different terms, or would not have concluded the contract at all if it had known the true state of affairs. Secondly, both parties laboured under the same mistake, or the error was caused by the other party, or the other party knew or ought to have known of the error of the mistaken party and that it was contrary to reasonable commercial standards of fair dealing to leave the mistaken party in error, or the other party has not, up to the time of avoidance, act ed in reliance of the contract. But the party in error cannot avoid the contract, if the error is due to his gross negligence, or where he has either assumed the risk of mistake or where this risk should in the circumstances be borne by it. 27 See LTNIDROIT Principles, Art. 3.5.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER II Of Contracts, Voidable Contracts and Void Agreements/S. 21.
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The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER II Of Contracts, Voidable Contracts and Void Agreements S. 21. Effect of mistakes as to law.-A contract is not voidable because it was caused by a mistake as to any law in force in India; but a mistake as to a law not in force in India has the same effect as a mistake of fact. 28
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Illustration A and B make a contract grounded on the erroneous belief that a particular debt is barred by the Indian Law of Limitation; the contract is not voidable.29 30
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Introduction The section provides that a mistake of law in force in India does not make a contract voidable, but a mistake of foreign law is to be treated as a mistake of fact. 28 Second paragraph omitted by Adaptation of Laws Order 1950. 29 In this Illustration, voidable was an obvious slip for void, which is required both by legal principle and by the express terms of s. 20. If there is really a common mistake on an essential matter of fact, there is no contract at all, and the illustration was out of place. 30 A second illustration of this section omitted by the Repealing and Amending Act, 1917 (24 of 1917). It provided:&uot;A and B make a contract grounded on an erroneous belief as to the law regulating bills of exchange in France. The contract is voidable&uot;.
Principle The general language of this section represents the current doctrine at the time when the Contract Act was made, namely, that relief is not given against mistake of law. A person cannot go back upon what he has deliberately done or excuse himself from liability of wrongful act or offence, merely because he alleges that he acted under a misapprehension of law. It is his business to know, by taking professional advice or otherwise, so much law as concerns him for the matter he is transacting. No other general rule is possible, without offering enormous temptations to fraud. But this doctrine in question is not without rather large qualifications. A mistake of law does not universally or generally invalidate transactions in which it occurs. The UNIDROIT Principles, on the other hand, equate a mistake of fact with that of law.31 This is justified on the ground of the increasing complexity of modern legal systems, especially when in cross-border trade, a number of legal systems may be involved. Under the Principles, mistake is an erroneous assumption relating to facts or to law existing when the contract was concluded. 31 The UNIDROIT Principles, Art. 3.4.
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Mistake as to Law While mistake as to general law is no ground for relief:
... if the mistake of law is of such a kind that it is mixed up with certain specific facts relating to a particular individual...that...as a combined effect of a party's view of the law and facts, he made a mistake at the time of entering the transaction as to the nature of his pre-existing private right, it may be said that such a mistake is not a pure mistake of law.32
The existence of particular private rights is a matter of fact, though depending on rules of law, and for most civil purposes, ignorance of civil rights--a man's ignorance that he is heir to such and such property, for instance--is ignorance of fact. A man's promise to buy that which, unknown to him, already belongs to him is not to be made binding by calling his error as to the ownership, a mistake of law.33 In Ram Chandra v. Ganesh Chandra, 34A agreed to take a lease from B of certain lands, including mineral rights for coal mining operations; it was provided that B should make out a good title to the property. The lease was held by B on a tenure, which was believed by both A and B at the date of agreement to carry with it mineral rights. A made several payments in advance to B, but later when a decision of the Privy Council and a decision of the Calcutta High Court threw very grave doubts upon this understanding of the law, A refused to carry out the agreement, and sued B for refund of advances. It was held, following the principle of Cooper v. Phibbs, 35 that the case was one of a common mistake as to a matter of fact, and that the agreement was void under s. 20 and A was entitled to a refund of the advances made by him. Applying the principle of this section, where a mortgage bond provided that if the mortgagor failed to redeem the mortgaged property within eight years, the mortgagee should be the owner of the property, and the mortgagor being unable to redeem, executed an absolute transfer of the property to the mortgagee, and put him in possession, it was held that the purchaser from the mortgagor of the equity of redemption subsequent to the date of the transfer was not entitled to redeem, even though the mortgagor might have been ignorant of his right to redeem the mortgage, notwithstanding the clause in the mortgage precluding him from doing so.36 Here, there was a complete conveyance and transfer of the possession from the mortgagor to the mortgagee. But if the matter had rested in contract only, and there was no transfer of the mortgaged property, the mortgagor would have been entitled to redeem the mortgage, on the principle 'Once a mortgage, always a mortgage.' There would have been no consideration for a promise to transfer the property to the mortgagee, and the question whether there was any mistake, and if so, whether of fact or law, would really have been superfluous. An erroneous belief that the widow forfeits upon remarriage the rights of an occupancy tenant under the NWP Tenancy Act,37 to which she has succeeded on the death of her first husband as his heir, is a mistake of law, and a contract grounded on such belief is not voidable, though the mistake may be common to both parties to the contract.38The erroneous belief that the tribunal under a Debt Conciliation Act had jurisdiction over a non-agriculturist was a mistake of law.39 The SIIC, agent of the government for implementation of a subsidy scheme of the government, was not entitled to receive back from a hotel, the subsidy paid under an agreement with it on the ground that it was paid under a mistake that hotels were covered under the scheme, when they were not so covered. This was held to be a mistake of law.40 The Privy Council held in Seth Gokul Dass Gopal Dass v. Murli and Zalim, 41 that an erroneous belief that a judgment-debtor was bound by law to pay interest on the decretal amount,' though no interest has been awarded by the decree, was a mistake of law; it was not a belief as to a matter of fact
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essential to the agreement within the meaning of s. 20. That such a mistake is not a mistake of fact, but one of law, is abundantly clear from Seth Gokul Dass case, where their Lordships said:
There was, no doubt, a mistake of law on the part of the defendants in supposing that execution could be issued for interest upon the amount decreed from the date of the decree to the date of realisation, no such interest having been awarded by the decree. But that mistake appears to have been common not only to the plaintiff and the defendant, but also to the Court which made the order of attachment.
If the law does not permit the alienation of sirdari interest, the same cannot be permitted merely because the alienation was under a mistake of law and the purchaser had paid full value for such interest under that mistake.42 Misrepresentation, especially willful misrepresentation, of a matter of law, may be a ground for avoiding a contract under s. 17 or s. 18. 32 AM Appavoo Chettiar v. SI Rly Co., AIR 1929 Mad 177, 56 Mad LJ 269. 33 Cooper v. Phibbs, (1867) LR 2 HL 149 at 170, [1861-73] All ER Rep 2109; Kuchwar Lime & Stone Co. Ltd. v. Secy of State, (1936) 16 Pat 159, 166 IC 966, AIR 1937 Pat 65; Ramanujulu Naidu v. Gajaraja Ammal, AIR 1950 Mad 146. 34 Ram Chandra Misra v. Ganesh Chandra Gangopadhya, [1917] 21 CWN 404, AIR 1917 Cal 786; see also AM Appavoo Chettiar v. SI Rly Co., AIR 1929 Mad 177, 114 IC 358, (principle fully acknowledged, but the mistake of paying a surcharge for railway carriage not really authorised by the regulations was held to be a pure mistake of general law); Balaji Ganoba v. Annapurnabai wlo Tatyaji, AIR 1952 Nag 2. 35 (1867) LR 2 HL 149, [1861-73] All ER Rep 2109. 36 Vishnu Sakharam Phatak v. Kashinath Bapu Shankar, (1886) 11 Bom 174. 37 See now the Uttar Pradesh Tenancy Act, 1939. 38 Sabihan Bibi v. Madho Lal, (1907) All WN 197. 39 Ghansiam Bholaram Tamoli v. Girijashankar, (1944) ILR Nag 244, AIR 1944 Nag 247. 40 State Industrial and Investment Corpn of Maharashtra Ltd. v. Narang Hotels Pvt Ltd., AIR 1995 Bom 275. 41 (1878) 5 IA 78, (1878) 3 Cal 602. 42 Ram Patti Devi v. Board of Revenue, AIR 1973 All 288 at 290.
Mistake as to Foreign Law As regards the second clause of the section, Indian jurisprudence has adopted the rule of the common law that foreign law is a matter of fact, and must be proved or admitted as such, though the strictness of the rule about proof has been somewhat relaxed by The Indian Evidence Act 1872.43 Accordingly, the statement of finding of any foreign law on which the Court proceeds in a given case is no more binding on the Court in any future case, even apart from the possibility of alteration in the law in question, than any other determination or assumption as to matters of fact. 43 The Indian Evidence Act, 1872, s. 38.
Relationship of Contract
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In Pravin s/o Jethalal Kamdar v. State of Maharashtra, 44the plaintiff sold the property to the government after permission was denied to him under s. 27(1), of the Urban Land (Ceiling and Regulation) Act, 1976 to sell the same to a prospective purchaser. The Supreme Court later struck down this section in another case.45The plaintiff thereafter sought repossession of the said property. The government alleged inter alia that the sale being effected under a mistake of law, was not affected. It was held that s. 21 would not apply, because, although the sale was effected, it was done under compulsion, and in pursuance of the pre-emptive right enjoyed by the government under that Act . 44 AIR 1996 Bom 280. 45 Bhim Singhji v. Union of India, AIR 1981 SC 234.
Sections 21 and 72 Section 72 enables refund of monies paid under a mistake, including a mistake of the law.46 But where a contract is the result of mistake of law of both parties, any sum of money paid under the contract falls under s. 21 and not s. 72.47 In Dhanyalakshmi Rice Mills v. Commissioner of Civil Supplies, 48 the petitioner had paid monies to the government as administrative charges for obtaining permits, of which it claimed refund under s. 72 of the Contract Act, pleading mistake of law. While refusing relief, the Supreme Court observed:
If a party under a mistake of law pays to another money which is not due under a contract or otherwise, that is to be repaid. When there is a clear and unambiguous rule of law which entitles a party to the relief claimed by him, equitable considerations cannot be imported. A contract entered into under a mistake of law of both parties falls under s. 21 and not s. 72. If a mistake of law had led to the formation of a contract, s. 21 enacts that the contract is not for that reason, voidable. If money is paid under that contract it cannot be said that the money was paid under a mistake of law, it was paid because it was due under a valid contract, and if it had not been paid, payment could have been enforced.
Thus, there is no conflict between s. 72 on the one hand and s s. 21 and 22 on the other. A contract made under a mistake of law of parties falls under s. 21 and not under s. 72 of the Contract Act and s. 72 deals with cases where money is paid by a mistake or under coercion.49 A contract giving a person the right to pluck and gather kendu leaves was not void on the ground that there was a mutual mistake as to the law by which the tenants have the right to gather the leaves and sell to whomsoever they pleased, and this law was known to both sides. This was governed by s. 21 and not by s. 72.50 46 See s. 72 below. 47 State of Orissa v. Khan Saheb Md Khan, AIR 1961 Ori 75; Skiba Parsad Singh v. Maharaja Srish Chandra Nandi, AIR 1949 PC 297, ILR 28 Pat 913. 48 [1976] 3 SCR 386, AIR 1976 SC 2243; followed in State Industrial and Investment Corpn of Maharashtra Ltd. v. Narang Hotels Pvt Ltd., AIR 1995 Bom 275; Somnath Mahaswara v. Orissa State Road Transport Corpn, AIR 1995 Ori 186. 49 Corpn of Calcutta v. Hindusthan Construction Co. Ltd., AIR 1972 Cal 420 at 427; Dhanyalakshmi Rice Mills v. Commr of Civil Supplies, AIR 1976 SC 2243, [1976] 3 SCR 386 at 2250. 50 State of Orissa v. Khan Saheb Md Khan, AIR 1961 Ori 75.
Sections 21 and 13
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Where mistake negatives consent, it is dealt with under s. 13. Section 21 cannot give validity to agreements which do not satisfy the conditions of consent under s. 13.51 51 Ramanujulu Naidu v. Gajaraja Ammal, AIR 1950 Mad 146.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER II Of Contracts, Voidable Contracts and Void Agreements/S. 22.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER II Of Contracts, Voidable Contracts and Void Agreements S. 22. Contract caused by mistake of one party as to matter of fact.-A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact.
Introduction This section emphasises what s. 20 has provided, that if one party alone is under a mistake of fact, the contract is not rendered voidable merely on that ground.
Unilateral Mistake While bilateral mistake renders an agreement void, unilateral mistake is not of any effect. Each party will look as though he is intending to contract in respect of a certain subject matter; and the objective test will therefore preclude any party from denying the formation of an agreement on the grounds that he is mistaken as to that subject matter. Although, one party is mistaken and there is no consensus of mind, yet, what is expressed by a party sticks to him and he is estopped from pleading his own unilateral mistake. By his words, he has induced another to enter into the contract, and so he cannot be permitted to say, even if it is true, that he never intended to say or write what he did. Where one party was mistaken about a date specified in the agreement, the agreement was not void.52 A plea, that the contractor tendering did not understand the nature of the work to be done and that he was labouring under a mistake, would not entitle him to avoid contract. More so, if he had the means to know everything about the work by exercise of ordinary diligence.53 Mere unilateral mistake of the lessor, where the lessee had in no way contributed to the mistake, was no ground for rescission of the lease either with or without the option to the lessee to accept rectification to cure the mistake.54 Where one party is aware that the other has committed a mistake, there is no contract.55 Where the mistake of one party is caused, however innocently, as to the substance of the thing which is the subject of the agreement, the contract would be voidable at the instance of the mistaken party. The language of s. 22 does not preclude the operation of s. 18 to render such contract voidable.
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52 Haji Abdul Rahman Allarakhia v. Bombay and Persia Steam Navigation Co., (1892) 16 Bom 561. 53 Dhulipudi Namayya v. Union of India, AIR 1958 AP 533. 54 Riverlate Properties Ltd. v. Paul, [1975] Ch 133, [1974] 2 All ER 656 at 661, (CA). 55 Chwee Kin Keong v. Digilandmallcom Ptd Ltd, [2005] 1 SLR 502, (Singapore Court of Appeal); see also section 18 above: &uot;Unilateral Mistake of One Party Known to the Other Party'.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER II Of Contracts, Voidable Contracts and Void Agreements/S. 23.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER II Of Contracts, Voidable Contracts and Void Agreements S. 23. What considerations and objects are lawful, and what not.-The consideration or object of an agreement is lawful, unless-It is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law, or is fraudulent; or involves or implies injury to the person or property of another; or the court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void. Illustrations (a)
(b)
(c)
(d) (e)
A agrees to sell his house to B for 10,000 rupees. Here, B's promise to pay the sum of 10,000 rupees is the consideration for A's promise to sell the house, and A's promise to sell the house is the consideration for B's promise to pay the 10,000 rupees. These are lawful considerations. A promises to pay B 1,000 rupees at the end of six months, if C, who owes that sum to B, fails to pay it. B promises to grant time to C accordingly. Here, the promise of each party is the consideration for the promise of the other party, and they are lawful considerations. A promises, for a certain sum paid to him by B, to make good to B the value of his ship if it is wrecked on a certain voyage. Here, A's promise is the consideration for B's payment, and B's payment is the consideration for A's promise, and these are lawful considerations. A promises to maintain B's child, and B promises to pay A 1,000 rupees yearly for the purpose. Here, the promise of each party is the consideration for the promise of the other party. They are lawful considerations. A, B and C enter into an agreement for the division among them of gains acquired, or to be acquired, by them by fraud. The agreement is void, as its unlawful.
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(f) (g) (h) (i)
(j) (k)
A promises to obtain for B an employment in the public service and B promises to pay 1,000 rupees to A. The agreement is void, as the consideration for it is unlawful. A, being agent for a landed proprietor, agrees for money, without the knowledge of his principal, to obtain for B a lease of land belonging to his principal. The agreement between A and B is void, as it implies a fraud by concealment, by A, on his principal. A promises B to drop a prosecution which he has instituted against B for robbery, and B promises to restore the value of the things taken. The agreement is void, as its object is unlawful. A'sestate is sold for arrears of revenue under the provisions of an Act of the Legislature, by which the defaulter is prohibited from purchasing the estate. B, upon an understanding with A, becomes the purchaser, and agrees to convey the estate to A upon receiving from him the price which B has paid. The agreement is void, as it renders the transaction, in effect, a purchase by the defaulter, and would so defeat the object of the law. A, who is B's mukhtar, promises to exercise his influence, as such, with B in favour of C, and C promises to pay 1,000 rupees to A. The agreement is void, because it is immoral. A agrees to let her daughter on hire to Bfor concubinage. The agreement is void, because it is immoral, though the letting may not be punishable under the Indian Penal Code (45 of 1860).
Introduction This section lays down that the consideration or object of an agreement is unlawful if it is forbidden by law, or would defeat the provisions of law, or would involve injury to the person or property of another, or the court considers it immoral or opposed to public policy. When the consideration or object is unlawful, the agreement is void. Section 23 of the Contract Act was inspired by the Common Law of England and should be construed in that light.1 1 Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406, AIR 1959 SC 781 at 797.
Principle The law may refuse to give effect to a contract on the ground of illegality; this is a limitation upon the freedom of contract. Illegality may arise by statute, or statutory rules, or in cases where the courts consider the enforcement of contract immoral or against public policy. Illegality may arise either because the agreement is itself prohibited by law, or because the consideration or object is unlawful. This section provides the cases in which the agreement would be unlawful. The presumption of law is in favour of legality of contracts. If a contract reasonably admits of two meanings or two modes of performance, one legal and the other not, the court would prefer the one which supports it and makes it operate; and the burden lies on the person who impeaches its validity to establish its legality. There is a public policy in the upholding of contracts, which the doctrine of illegality undermines; the public policy lies in that the courts do not lightly interfere with freedom of contracts;2 however some contracts have been held unlawful without due consideration to this very important principle.3 As stated by Jessel MR in Printing and Numerical Registering Co v. Sampson :4
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...if there is one thing which more than another public policy requires, it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts, when entered into freely and voluntarily, shall be held sacred and shall be enforced by courts of justice. Therefore, you have this paramount public policy to consider--that you are not likely to interfere with freedom of contract.
This section imposes a restriction on the absolute freedom of a person to contract and subjects his rights to the overriding considerations of public policy and others enunciated under s. 23 of this Act .5 It applies to all contracts, even to those entered into by a person and governed by special statute affecting his profession. But it does not apply to claims founded on tort.6 A contract entered into in defiance of a legal provision continues to be illegal even after the legal provision ceases to be effective and a plea that the contract, when it was to be enforced, was not hit by any subsisting law is not open to the party seeking to enforce it.7 2 Bansi Dhar v. Ajudhia Prasad, AIR 1925 Oudh 120, 82 IC 333. 3 Prashant B Narnaware v. Vijaya Bank, AIR 2012 Kant 191(SB) (it was possible to decide with reference to section 74); Amrita Pathania v. Sunita Jamwal, AIR 2012 J&K 100 (the first right of purchase is void under this provision). 4 (1875) LR 19 Eq 462 at 465. 5 Re KL Gauba,AIR 1954 Bom 478. 6 Bhola Nath-Shankar Das v. Lachmi Narain, AIR 1931 All 83. 7 Sita Ram v. Kunj Lal, AIR 1963 All.
Effects Vary The seriousness and turpitude of the illegality varies considerably. First, the illegality may arise out of statute, personal laws, or other rules, especially the issues of public policy requiring that an otherwise valid contract not be enforced. Secondly, the gravity of the unlawfulness varies. It may range from gross moral turpitude to such acts which only cause small harm. Accordingly, the effect of illegality on the contract would also vary; sometimes, the courts may refuse enforcement altogether, at other times, enforce the separable legal part of the contract, or give assistance to the party which is not guilty of the illegality. The court may also set aside the illegal transaction and provide relief for giving effect to the purpose of the statute.8 It is for these reasons that the branch of law relating to illegality has been described as complex, and its growth unsystematic. 8 R Chandevarappa v. State of Karnataka, (1995) 6 SCC 309; Papaiah v. State of Karnataka, AIR 1997 SC 2676.
Public Conscience Test: The Discretionary Approach The 'public conscience' test suggested as one alternative, involves the court looking at the quality of the illegality relied on by the defendant and all the surrounding circumstances without fine distinctions, and seeking to answer two questions; first, whether there has been an illegality of which the court should take notice, and secondly, whether in all the circumstances, it would be an affront to the public conscience, if by affording him the relief sought, the court was seen to be indirectly assisting or encouraging the plaintiff in the criminal act . The 'public conscience' test so set out by Hutchison J.,9 was approved later,10 but Dillon LJ.11 did not find the 'public conscience' test satisfactory, for the reason that appeal to public conscience would be likely to lead to a graph of illegalities according to moral turpitude. It has been suggested that this test would reduce the complexity. 'Does public policy require that this claimant, in the circumstances which have occurred, should be refused relief to which he would
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otherwise have been entitled with respect to all or part of his claim?' In addition, the court could ask a second question: 'whether facts justify the granting of some consequential relief (other than enforcement of contract) to either of the parties'.12 The 'public conscience test' furnishes a flexible approach, under which the court must weigh, or balance the adverse consequences of granting relief against the adverse consequences of refusing relief. The ultimate decision calls for a value judgment.13 This 'discretionary' approach was rejected by the House of Lords in Tinsley v. Milligan 14 on the ground that:
(i) (ii) (iii)
Its adoption would constitute revolution in this branch of law, which could not be reconciled with the strict rules established by a long line of authority for 200 years; The basis of the defence of ex turpi causa lay in public policy and directed at deterrence. The force of the deterrent effect lay in the existence of the known rule and its stern application; and Any new system of discretionary relief must be instituted by the legislature.
The (English) Law Commission has posed in its Consultation Paper,15a provisional proposal that the technical rules relating to effect of illegality on contracts should be replaced by a structured discretion; enabling a court to decide whether illegality should act as a defence to normal rights and remedies. The court could take into account relevant factors like:
(i) (ii) (iii) (iv) (v)
The seriousness of the illegality involved; The knowledge and intention of the party claiming relief; Whether denying the claim would deter the illegality; Whether denying the claim would further the purpose of the rule which rendered the transaction illegal; and Whether denying the claim would be proportionate to the illegality involved; which factors would reflect the policies lying behind the illegality defence.
9 Thackwell v. Barclays Bank plc, [1986] 1 All ER 676. 10 Saunders v. Edwards, [1987] 2 All ER 651, [1987] 1 WLR 1116. 11 Pitts v. Hunt, [1990] 3 All ER 344. 12 Chitty on Contracts, 28th edn, p. 836, para 17-001. 13 Tinsley v. Milligan, [1992] 2 All ER 391, per Nicholls LJ. at 398 (CA); affirmed in [1994] 1 AC 340, [1993] 3 All ER 65(HL) . 14 [1994] 1 AC 340, [1993] 3 All ER 65(HL) ; cf Bettie June Nelson v. Elizabeth Anne Nelson, (1995) 184 CLR 538 per Toohey J. at 596, and McHugh J. at 612. 15 Illegal Transactions: The Effect of Illegality on Contracts and Trusts, Law Commission Consultation Paper No 15.4 published on 21 January 1999.
Section 23: Unlawful Consideration and Unlawful Object By section 10, an agreement is enforceable only if it is made for a lawful consideration and with a lawful object. The present section declares what kinds of consideration and object are not lawful. Its phraseology has been criticised.16 We speak of the consideration for a promise, not that of an agreement. If A agrees to sell B a piece of land for R s. 20,000/-, A's promise to convey the land is the
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consideration for B's promise to pay the price, and B's promise to pay the price is the consideration for A's promise to convey the land. There is no consideration of the agreement between them as a whole. The text becomes clearer, if the word 'agreement' is read as 'promise'; and s. 2(e) above, appears to warrant this interpretation, as also illustration (a). There is another possible reason, however, for the use of the word 'consideration'. A person may enter into a contract, lawful in itself, and perform it in such a manner or by such means as to violate some distinct requirement or prohibition of the law. By so doing, he may deprive himself of any claim to recover on the other party's promise to pay for his work, whether the other party knew anything beforehand of his unlawful act ion or not. In an agreement by mutual promises, each of the promises is the consideration, and the only consideration, for the other; but in discussing the subsequent duties of the parties as to performance, the word 'consideration' is sometimes applied, in a loose and extended sense, to those cases where the duty of performance on the one part is, according to the original intent of the agreement, conditional on the previous or simultaneous performance on the other. In this inaccurate but not uncommon sense, it may be said that when a promisor who might have performed his promise lawfully performs it unlawfully, the consideration for the reciprocal promise becomes unlawful; and the language of the Act may have been designed to cover such cases. A typical English example is Bensley v. Bignold, 17 where a printer, having put a false imprint on a pamphlet, instead of his true name and address, as required by statute, was not allowed to recover the price of his work. It does not appear, whether the defendant was a party to the falsification or not, or for what purpose it was done. Here, a personal and quasi-penal disability is imposed on the plaintiff for reasons of the general policy without regard to the original character of the agreement, and with the result of conferring corresponding gain on the defendant, whose desserts may be no better in themselves.18 Practically, it is convenient to treat these cases under the head of unlawful agreements, as the broad principles and the results are same. This section thus speaks of consideration, object and the agreement itself.19 The word 'object' in this section is not used in the same sense as 'consideration,' but as distinguished from 'consideration' to mean 'purpose' or 'design',20 nor does it mean the act ion actually taken under the agreement.21 In Jaffer Meher Ali v. Budge Budge Jute Mills Co, 22A had agreed to sell goods to B, and B while in insolvent circumstances assigned the benefit of the contract to his brother-in-law C for a consideration of Rs. 100/-, the object both of B and C being to defraud B's creditors. It was said that the consideration for the assignment, namely, the sum of Rs. 100/-, was lawful, but the object was unlawful, as it was to defeat the provisions of the Insolvency Act. But where A had advanced amounts to B, which had not been disclosed for payment of income tax, and had therefore escaped income tax, and B knew of this fact, it was held in a suit by A to recover the amount that the object of the agreement as pleaded in the plaint was not to evade payment of the income tax, and the agreement was not against public policy.23 Further, it is the object of the agreement which has to be seen, and not the object of one or the other parties to it.24 When the consideration is a promise, it may be forbidden in one of the two distinct senses. The promise may be of something which it would be unlawful to perform; here, the object of the agreement, namely, the unlawful performance, is forbidden. On the other hand, although, there is nothing unlawful in performing the promise, a positive rule of law, founded on reasons of general expediency, will not suffer any legal obligation to arise from the promise of that kind, eg., in the case of wagers, agreements in restraint of trade etc. In such cases, the object of the agreement is not unlawful, if, by 'object' is meant the act ual performance; but it is unlawful if by 'object' is meant the creation of an obligation to perform the things promised. This ambiguity is not addressed by the language of the Act. A distinction is made in the English law between contracts enforceable at common law because they were entered into with the object of committing an act prohibited or penalised by statute, and those contracts which are themselves rendered illegal by statute;25 in the latter case, illegality does not depend on the intention of the parties or their ignorance of the illegality.
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Motive Section 23 is confined to the object of transaction and not to the reasons or motive which prompted it.26B borrowed a certain amount of money from A in order to bribe a certain officer. After this work was done, B obtained a loan from C in order to pay off A and executed a mortgage in favour of C. It was held that the object of the mortgage was not to effect an illegal purpose, as such illegal purposes had already been affected, and, therefore, the mortgage transaction was not contrary to public policy.27 A gift to a woman, the object of which was past cohabitation, was valid as a gift, being a transfer without consideration; and past cohabitation could not be the purpose or the design of the transfer, though, it may be the motive for the transaction.28 In Ouseph Poulo v. Catholic Union Bank Ltd, 29 the plaintiff had pledged certain goods to the defendant bank as security for the bank. The goods were found to be of a much lesser value. The bank thereupon filed information resulting in police investigation. The plaintiff and his relations then executed mortgages and hypothecation bonds and the pledged goods were 'surrendered' to the bank. Thereafter, the proceedings in the police department were dropped. The Supreme Court observed that the sequence of events tended to obliterate the real difference between the motive for the agreement and the consideration for it and held that it was not proved that the party had executed the document in consideration of the withdrawal. 16 Nathusa Pasusa Lad v. Munir Khan, (1943) Nag 42, AIR 1943 Nag 129. 17 (1822) 5 B & A1d 355, 24 RR 401. 18 Anderson Ltd v. Daniel, [1924] 1 KB 138; B&B Viennese Fashions v. Losane, [1952] 1 All ER 909; Maries v. Philip Trant & Sons Ltd (No 2), [1954] 1 QB 29, [1953] 1 All ER 651. 19 Neminath Appayya Hanamannanavar v. Jamboorao Satappa Kocheri, AIR 1966 Mys 154 at 162. 20 Cited and followed in Chandra Sreenivasa Rao v. Korrapati Raja Rana Mohana Rao, AIR 1952 Mad 579; Jaffer Meher Ali v. Budge Budge Jute Mills Co, (1906) 34 Cal 702; Sabava Yellappa v. Yamanappa Sabu, AIR 1933 Bom 209, 35 Bom LR 345; Gulabchand Gambhirmal v. Kudilal Govindram Ratilal Bhagwandas and Co, AIR 1959 MP 151 at 165 (FB), on appeal Gulabchand v. Kudilal, AIR 1966 SC 1735; Jai Ram and son v. Kahna Ram Hans Raj, AIR 1963 HP 3. 21 Matta Jaggilodu v. Matta Byramma, AIR 1941 Pat 349. 22 (1906) 34 Cal 702 at 710; on appeal (1907) 34 Cal 289. 23 Shanta Agarwal v. Baldota Bros, (1974) 76 Bom LR 156. 24 Nathusa Pasusa Lad v. Munir Khan, (1943) Nag 42, AIR 1943 Nag 129; Gulabchand Gambhirmal v. Kudilal Govindram Ratilal Bhagwandas & Co, AIR 1959 MP 151 at 165 (FB), on appeal Gulabchand v. Kudilal, AIR 1966 SC 1735. 25 Chitty on Contracts, 28th edn, p. 911 at 17-140; Dungate v. Lee, [1969] 1 Ch 545, [1967] 1 All ER 241. 26 Gulabchand v. Kudilal, AIR 1966 SC 1735; Gurmukh Singh v. Amar Singh, (1991) 3 SCC 79. 27 Kashinath v. Bapurao, AIR 1940 Nag 305 at 311, 312 (FB); distinguishing Kali Kumari Baisnabi v. Mono Mohini Baisnabi, AIR 1935 Cal 748, 160 IC 212, referring to Fender v. Mildmay, [1938] AC 1, [1937] 3 All ER 402. See also Dehra Dun Mussoorie Electric Tramway Co Ltd v. Official Liquidators, AIR 1930 All 357; Gulabchand Gambhirmal v. Kudilal Govindram Ratilal Bhagwandas and Co, AIR 1959 MP 151 at 165 (FB), on appeal Gulabchand v. Kudilal, AIR 1966 SC 1735; Gurmukh Singh v. Amar Singh, (1991) 3 SCC 79. 28 Pyare Mohan v. Narayani, AIR 1982 Raj 43 at 47. 29 [1964] 7 SCR 745, AIR 1965 SC 166.
'Forbidden by Law' An act or undertaking may be forbidden by law if it violates a prohibitory enactment of the legislature or a principle of unwritten law. In India, where criminal law is codified, act s forbidden by law seem
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practically to consist of acts punishable under the Indian Penal Code, 1860 (IPC), and of act s prohibited by special legislation, or by regulations or orders made under the authority derived from the legislature.30 The term 'law' in this expression would include any enactment or rule of law for the time being in force in India, i.e., under three heads:
(i) (ii) (iii)
The provisions of any legislative enactment; or The rules of Hindu or Mahomedan law; or Other rules for the time being in force in India.31
An agreement is also unlawful, if forbidden by an order of a competent authority, which has the force of law.32 Parties may not ordinarily commit themselves to agreements to do anything obviously illegal, or at any rate to bring them into court. Hence, the kind of question which arises in practice under this head is whether an act, or some part of a series of act s agreed upon between parties, does or does not contravene some legislative enactment or regulation made by lawful authority. The decision may turn on the construction of the agreement itself, or of the terms of the Act or other authoritative document in question, or on both. In particular, it may have to be considered whether the intention of the legislator was to prevent certain things from being done, or only to lay down terms and conditions on which they might be done.33 Having regard to the wide wording of s. 23, which declares every agreement of which the object or consideration is unlawful as void, there is no warrant for confining its operation only to agreements in breach of conditions which are made offences; and it is submitted, that for this reason, a finding is not warranted that in absence of a non obstante clause,34 or a penalty, a sub-letting by a tenant could not be held unlawful despite express provision in the statute expressly prohibiting a tenant from sub-letting the premises without the consent of the landlord.35 It is also possible for the statute to attach a penalty to making a particular kind of agreement, and at the same time to provide that such an agreement, if made, shall not therefore, be void.36 Although, properly drawn Act s or Regulations ought to leave no doubt on that point, such doubts are possible and have not been uncommon. That which has been forbidden in the public interest cannot be made lawful by paying the penalty for it; but an act which is in itself harmless, does not become unlawful merely because some collateral requirement imposed for reasons of administrative convenience has been omitted. Where the contract is such that it affects not only the parties to it, but if permitted or recognised, would have such wider repercussions affecting adversely the public at large, it would be unlawful under s. 23.37 There is nothing illegal about trying to avoid having one's property taken under the superintendence of the Court of Wards, as long as the device adopted was not illegal in itself. The purpose of preventing the estate from being taken over by the Court of Wards is not an unlawful purpose.38 'Forbidden by Law' and 'Void' A statute may provide that an agreement shall be only void, or may provide that it shall also be unlawful or illegal. It is not necessary that whatever is declared void is forbidden by law.39 A contract, which is merely void and unenforceable, is not 'forbidden by law' within s. 23. What is void cannot be equated with what is 'forbidden by law'.40 In the latter case, the Legislature prohibits it or penalises it, in the former, it merely refuses to give effect to it. If a void contract has been carried out and consideration has passed, the promisor may not be allowed to go back upon it without restoring the benefit, but the promisee would get no help from the court if he comes to court.41The word 'lawful' applied to compromises under O. 23, r. 1, Civil Procedure Code, 1908, must be read in terms of s. 23 of the Contract Act .42The fact that a contract is not enforced by a court of equity on equitable ground, does not make the contract illegal within s. 23 of the Contract Act. The contract may be perfectly good and yet not enforceable in a court of equity.43 For instance, a contract ultra vires the powers of a company under its memorandum of association is not necessarily illegal.44
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Nature and Effect of Statutory Prohibition There are four main ways in which the enforceability of a contract may be affected by a statutory provision which renders particular conduct unlawful.
(i) (ii) (iii) (iv)
The contract may be to do something which the statute forbids; The contract may be one which the statute expressly or impliedly prohibits; The contract although lawful on its face, may be made in order to effect a purpose which the statute renders unlawful; and The contract, although lawful according to its own terms, may be performed in a manner which the statute prohibits.45
The nature and effect of statutory prohibition may vary. A statute may expressly prohibit an agreement, when it would not be enforced. What is done in contravention of the provisions of an Act of Parliament cannot be made the subject matter of an action.46 At other times, the statute may permit enforcement by one of the parties, especially belonging to the class for whose protection the statute has been enacted, and not at the instance of the party whose duty it is to observe the statute; or the statute may also provide for setting aside the very transaction prohibited by it, thereby giving effect to the purpose of the statute. Though, a statute does not expressly prohibit an agreement, it may provide penalty for entering into the agreement, or its performance; in the latter case, the innocent party may be able to sue. Where an offence has been committed, it may not necessarily have the effect of making the contract enforceable, but may entitle even the guilty party to sue on the contract. The effect necessarily depends upon the gravity of the offence or illegality, and the purpose of the statute.47 It has been stated that the courts should not refuse to enforce legal rights simply because they arose out of or were associated with an unlawful purpose unless:
(a)
The statute discloses an intention that those rights should be unenforceable in all circumstances; or
(b)
30 This definition was accepted and quoted with approval by the Supreme Court in Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406 at 417, AIR 1959 SC 781 at 786. 31 A.R.L.P. Firm v. U Po Kyaing, (1939) Rang 311, 183 IC 673, AIR 1939 Rang 305(FB) ; Vassandmal Davaldas v. Hiromal Mohanmal 227 IC 633, AIR 1947 Sind 94; Neminath Appayya Hanamannanavar v. Jamboorao Satappa Kocheri, AIR 1966 Mys 154. 32 Abdul Hameed v. Mohd Ishaq, AIR 1975 All 166(FB), overruling Udhoo Das v. Prem Prakash, AIR 1964 All 1(FB) . 33 Cited and applied in Chacko Mathai v. Aippu Yojakku, AIR 1953 Tr & Coch 44. 34 Like the clause 'Notwithstanding anything contained in any law it shall not be lawful...' in s. 15, the Bombay Rent etc. Act, 1947. 35 Banarsi Dass v. Shakuntala, AIR 1989 Del 184 (it was held that as the contract of sub-letting was not void, the sub-tenant could not deny that the plaintiff had title to the property at the commencement of the tenancy). 36 MaungYe v. MAS Finn, (1928) ILR 6 Rang 423, AIR 1928 Ran 136, 111 IC 105 (failure to observe special registry rules by the parties to a transfer of property does not make unlawful); the Child Marriage Restraint Act, 1929, which imposes penalties of the solemnisation of certain marriages, but does not in terms declare the marriages void; the Foreign Exchange Regulation Act, 1973, s. 47. 37 Naveen Chandra Sharma v. Sixth Additional District and Sessions Judge, Meerut, AIR 1983 All 116 at 122.
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38 Rani Huzur Ara Begam v. Deputy Commr, Gonda, AIR 1941 Oudh 529. 39 Mahadeodas v. Gherulal Parakh, AIR 1958 Cal 703. 40 Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406, p. 415, AIR 1959 SC 781 at 792; see judgment of the High Court in Mahadeodas v. Gherulal Parakh, AIR 1958 Cal 703 at 707 holding that a wagering contract was not opposed to public policy or immoral or unlawful; Dip Narain Singh v. Nageshwar Prasad, (1929) 52 All 338, 122 IC 872, AIR 1930 All 1 at 3 (FB). 41 Dip Narain Singh v. Nageshwar Prasad 52 All 338, AIR 1930 All 1 at 3 (FB). 42 Putto Lal v. His Highness Maharaja Dhiraj Sumersinghji of Kishangarh, AIR 1963 Raj 63; Mulkh Raj v. Sushil Kumar, AIR 2005 J&K 58. 43 Albert Judah Judah v. Ramapada Gupta, AIR 1959 Cal 715 at 728. 44 Ahmed Sait v. Bank of Mysore Ltd, AIR 1930 Mad 512. 45 Yango Pastoral Company Pty Ltd v. First Chicago Australia Ltd, (1978) 139 CLR 410 per Gibbs ACJ. at 413. 46 Langton v. Hughes, (1813) 1 M & S 593 per Lord Ellenborough CJ. at 596. 47 Master Education Services Pty Limited v. Jean Florence Ketchell, [2008] HCA 38 (High Court of Australia).
Express Prohibition If expressly prohibited by law, the contract is void ab initio,49 and cannot be enforced at all.50'[There] is a clear and unequivocal declaration by the Legislature in the public interest that this particular kind of contract shall not be entered into.51 When the statute expressly prohibits a contract, it is irrelevant whether the parties meant to break the law or not. Purpose of the Prohibition If the purpose of the prohibition is merely protection or revenue, and not that of the general public, the transaction may not be void as unlawful. A contract to do that which is in contravention of law to safeguard revenue, may or may not be void according to the object, is to make a contravention expressive or to prohibit it. In the latter case, it would be void.52
When conditions are prescribed by statute for the conduct of any particular business or profession, and such conditions are not observed, agreements made in the course of such business or profession are void if it appears by the context that the object of the Legislature in imposing the condition was the maintenance of public order or, safety or the protection of the persons dealing with those on whom the condition is imposed; (but they) are valid if no specific penalty is attached to the specific transaction, and if it appears that the condition was imposed for merely administrative purposes, eg, the convenient collection of the revenue.53
Statutes relating to excise, the Opium Act and Food Control Orders are examples of statutes which prohibit transactions not only for the purposes of gaining revenue, but in the interest of the public health, morality or welfare, and the infringement of their provisions will make an agreement unlawful. Express Prohibition in the Statute Necessary In Bhikanbhai v. Hiralal Ramdinshet Marwadi, 54s. 10 of the Bombay Tolls Act, 1875 empowered the government to lease the levy of tolls on such terms and conditions as the government deemed desirable. One condition of the lease prohibited the lessee from subletting the tolls without previously obtaining the permission of the collector. Another condition empowered the collector to impose a fine of R s. 200/- for a breach of the condition. The lessee sub-let the tolls to the defendant without the permission of the collector, and sued the defendant to recover the amount receivable under the
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sub-lease. The defendant contended that the sub-lease, without the permission of the collector, was unlawful. A question arose whether such an agreement by a lessee of tolls from the government for subletting the tolls was valid and binding between the lessee and sub-lessee. While allowing the plaintiff to recover, Parsons J. stated:
In our opinion this case falls within the latter class [of the observation of Pollock above], because the statute itself does not forbid or attach a penalty to the transaction of subletting,but merely gives power to impose a condition under which it can be forbidden should the collector see fit to do so what can be only purely for administration purposes. The Act imposing tolls is an Act passed for the benefit of the revenue and not an act for the protection of public morals.
Ranade J. stated:
As a general rule, the law does not forbid things in express terms, but imposes penalties for doing them, and the imposition of such penalties implies prohibition, and an agreement to do a thing so prohibited is unlawful under the s. 23 of the Contract Act . As no penalties are prescribed under the (Tolls) Act, the agreement does not prima facie fall under the 1st clause of s. 23.
In Nutan Kumar v. Second Addl District Judge, 55 a landlord let out premises violating a state law governing letting of premises, that required him to inform of the vacant premises to the authority under the law. Such violation was punishable under the Act, and gave to the authority powers to evict the lessee. A question arose whether the letting was void, and hence a decree of eviction could not be passed. It was held that the law did not prohibit such letting, nor did it declare that it would be void. The agreement was enforceable between the parties. Hence the landlord could evict the tenant. Nor was the letting against public policy. A transfer, which is not forbidden by law and which is not opposed to public policy, is not void merely because it is prohibited by a term of the contract by which the right transferred has been conferred upon the transferor.56Therefore, where the transfer of a licence, permission, lease, etc. granted under the provisions of a statute, and the transfer or other dealings of such licence, permission, lease, etc. is prohibited by the terms of such licence, permission, lease, etc. unless made without the permission of the collector or prescribed authority, but the transfer is not expressly prohibited by the Act or the Rules, such transfer may be invalid against the government, but is valid as between the transferor and the transferee. For this reason, the following transfers or dealings have been held valid between the transferor and the transferee: the transfer of the ferry by a lessee of a ferry under the Madras Ferries Act, 1890 without the permission of the collector as required by the terms of the lease;57an assignment of license to cut grass given by the Forest Department under The Forest Act, 1878 (now the Indian Forest Act, 16 of 1927);58 the transfer of a forest lease without government sanction.59 An agreement to sell a share in the partnership firm which had entered into a contract with the railway administration, may enable the railway administration to cancel the contract on the ground that its consent was not obtained as stipulated, but the agreement for sale was not opposed to any public policy nor any statute and was not void under s. 23.60 But where there was prohibition in law upon the transfer of steel under allotment to any other party and the agreement contemplated such prohibited transfer, it was held that the court would not assist in such illegal agreement.61 Contracts for Transfer or of Partnership in Relation to Licences, Permits Contracts of partnership or agreements involving transfer of a licence in contravention of the provisions of statute for the sale of liquor or excisable articles or other articles, or which are contrary to other laws, are void and moneys paid thereunder cannot be recovered.
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Transfer of Licence, Lease etc. Statutes intended solely for the protection of revenue must be distinguished from the Abkari and Opium Acts, which have for their object, the protection of the public as well as the revenue,62 and infringement of the latter will make an agreement unlawful. Thus, an agreement to sub-let a license to sell arrack issued under the Madras Abkari Act, 188663 or a license to manufacture and sell country liquor granted under the prevalent Excise Act, 188164or a license to sell opium issued under the Opium Act, 187865or a license to manufacture salt under the Bombay Salt Act, 189066 or a transfer of right to collect fees on the sale of cattle under a municipal statute,67 without the permission of the collector, were in all cases illegal and void, the sublease in each case without such permission being prohibited by statute; and no suit could lie to recover any money due or any sum deposited under such an agreement. The result is the same whether the holder of such a license did not act ually sublet or transfer the license, but did an act which amounted to a sub-lease or a transfer, as where he sold his business in an excisable article in consideration of a money payment with leave to the purchaser to carry on the business in his name, or obtained an indemnity from the purchaser against the losses, claims and demands in respect of the business. In such cases, neither the consideration money nor payments made by the holder of the licence for debts contracted by the purchaser in the business or covered by the indemnity, are recoverable.68 Similarly, a right to collect a tax not leviable under the law cannot be transferred. It can be challenged, even though the transferee has collected the tax during the portion of the period of the contract.69A suit cannot lie for enforcing a contract for the transfer of a route permit, since it is prohibited by the Motor Vehicles Act, 1988, s. 59 and the prohibition relates to matters of public interest, and its enforcement would defeat the provisions of that law.70 A condition prohibiting the licensee from 'selling, transferring and sub-letting' has been held not to prohibit the licensee from admitting partners in the business to which the license relates;71 as also a condition prohibiting the licensee from 'sub-letting, selling, mortgaging or otherwise alienating whole or in part, the privilege granted by this licence of manufacturing salt'.72It has been held that where a licensee enters into partnership with a non-licensee, the mere formation of partnership does not amount to transfer of the licence and the registration of the firm under the Income Tax Act, 1961 cannot be refused.73 Partnerships In absence of any restriction in the licence, a licensee is not precluded from doing business in partnership with others. He can enter into a partnership business without transferring his licence, and this will not amount to assignment or sub-letting or otherwise transferring of the licence by the licensee. Thus, where the licence for exhibiting films in the cinema hall was obtained in the name of the plaintiff and the same was being renewed every year; while the cinema business was carried on in partnership, it was held that a suit for dissolution of partnership and accounts would lie, since the partnership was neither illegal nor opposed to s. 23 of the Contract Act .74 But where the statute expressly prohibits the licensee or permit-holder from admitting any partner in the business, the violation being punishable under the statute, any partnership agreement in violation of such law is void as forbidden by law;75 and, if a person being aware of this prohibition, does join as a partner, and the advance capital for that purpose, he cannot recover back the amount advanced;76 nor can a suit lie for settlement of accounts or other relief on the basis of the partnership agreement.77 The fact that the partnership may be permitted by the collector does not detract from the mandatory character of the clause in the licence requiring permission.78 Since licence is a personal privilege,79 a partnership was unlawful under this section where the partners carried on the trade of tobacco on a licence in favour of one of them,80 or if, as a consequence of entering into a partnership, the licensee passed an interest to another and thereby contravened what the law sought to forbid.81 Agreement of partnership with the financier in a licenced ganja and opium business without the permission of the collector being expressly prohibited, a financier could not be admitted into partnership in such business, and therefore, the income-tax authorities would be justified in not registering the partnership.82 Where, a rule framed under the Madras Abkari Act, 1886 prohibited, on payment of a fine, the holder
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of the licence for the sale of toddy from being interested in the sale of arrack, it was held that an agreement of partnership in the business of selling arrack and toddy entered into between a holder of a license for the sale of toddy and the holder of the license for the sale of arrack was void, and that neither party could sue the other for the recovery of the money due to him in respect of the partnership.83 But where the Silk Control Order of Bengal of 1945 did not contain a provision prohibiting the transfer or sub-letting of an excise shop or prohibiting the use of the permission to purchase or sell silk, and such a partnership, continued after the repeal of the Control Order, a partner was entitled to sue for accounts even for the period the order was in force.84 A distinction is, however, made between a case in which the partner merely shared in the profits and takes no act ive part in the sale of liquor, and a case in which the partnership deed entitles the other partners to take part in the business of the licensee.85 In Gordhandas Kessowji v. Champsey Dossa, 86 it was held that an agreement to shares of the profits of the licensee's business did not amount to sub-letting or alienation of the license. Therefore, where a license has been granted to partners, and one of the partners enters into a sub-partnership, such a sub-partnership does not amount to a sub-letting or transfer of the license, as the sub-partner cannot interfere in the business of the licensees.87 Further, where the liquor licence stood in the names of some of the partners, it necessarily implied that the contract would be carried on by those partners who had the licence or whose names were incorporated in the licence, and therefore, the partnership was not illegal merely because it contravened some executive instructions which had no force of law, and could not be refused registration by the income-tax authorities.88 Where, three brothers forming a joint Hindu family, carried on the business of sale of foreign liquor at three shops with separate licences in their individual names, separated and formed a partnership, and their application for registration was rejected by the income tax officer inter aliaon the ground that the provisions of The Bengal Excise Act provided for cancellation of the licence if transferred or sub-let without the permission of the licensing authority, the Supreme Court found that there was no sub-letting or transfer of the licence, and that the partnership was not illegal.89 Where the licence did not prohibit the holder from entering into partnership and merely provided that the licence shall not be sub-let or transferred, the question whether partnership was illegal, did not arise.90 Partnerships did not involve transfer of licence or contravention of law, where the rules merely required an intimation of the partnership to the excise authorities, though breach of the rule was punishable with fine.91 Similarly, if one partner had licence for carrying on tobacco trade at a place A, and another partner at a place B and either of them purchased or sold tobacco in an area outside their respective licences and had a joint business for sharing profits, such a partnership was not illegal, and a promissory note by one partner in settlement of accounts with the other was not void.92 Although an unregistered firm could not take a contract under the PWD rules, yet, there was no bar to an individual partner taking such a contract in his own name for and on behalf of himself and another for financing the work, both forming an unregistered partnership; and a suit inter se for rendition of accounts would not be barred under s. 23.93 As regards partnership in transport with vehicles belonging to one partner having permit in his name, or with vehicles of the partnership in the name of one partner, the opinion of the High Courts is divided, some holding that such partnerships were legal since the Motor Vehicles Act, 1988 did not require vehicles belonging to the partnership with permits also in the name of the partnership,94yet others holding that such partnerships were illegal and opposed to public policy being in contravention of the Motor Vehicles Act, 1988.95 Assignment and Subletting of Public Contracts Agreements to assign or sublet licences granted under the excise laws must be distinguished from the agreements to sublet a contract with a public department.96 In Gangadhar Raghunath Joshi v. Damodar Mohanlal Guzarathi, 97 the defendant had a contract with the Public Works Department to supply materials for the construction of a public road, in which one condition provided that the work could not be underlet by the contractor without the express permission in writing of the Executive Engineer. The defendant had an agreement with the plaintiff, without such permission, under which the plaintiff agreed to do the contract work, and the defendant agreed to pay him all the moneys received by him from the Executive Engineer under the contract, after deducting 10 per cent as the
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defendant's profit. The plaintiff did not know of the condition against under-letting. In a suit by the plaintiff, for the amount due to him under the agreement, it was held that, as the plaintiff did not appear to have any knowledge of the restrictive condition in the contract, he was entitled to enforce his own contract against the defendant. The Court held that the subcontract was to be distinguished from the subletting of the licence granted under the excise laws and intended by the legislature for the use of the licensee only.1 Not Unlawful A contract to obtain a license and do a thing in accordance with law is not illegal, but initially valid,2 and even though the agreement subsequently becomes illegal because no license is obtained, s. 65 will apply and any advantage received under the contract must be restored.3 If one party promises to obtain the license, he may even be liable in damages to the other party for breach of warranty in failing to obtain a license, unless the latter has been guilty of culpable negligence.4 In this case, A, carrying on the business of manufacture and sale of safety matches, agreed to take B as a partner for a period of six years, B agreeing to pay Rs. 10,000/- towards capital, and A was to get B's name added in the licence. However, B's name was not added in the licence, and the business was carried on. B was later expelled and sued for the monies paid by him. It was held that the partnership was not per se illegal, because the joint licence was not obtained and B was entitled to the monies paid by him.5A promise to pay commission to a person soliciting insurance business before his obtaining a license under the Life Insurance Act is contrary to law and therefore, not payable.6 Prohibition under Rent Legislations Many rent control or tenancy legislations prohibit charging of premium or like amounts by the landlord while letting out premises or allowing assignment of premises. Likewise, tenants may be prohibited from charging an amount for agreeing to leave or surrender the premises rented to them. Such laws may also prohibit sub-letting of premises or transfer of tenancy or occupancy rights by the tenants, or may place restriction on landlords or the tenants from charging more than a fixed or standard rent from tenants or sub-tenants respectively. An agreement to pay such premium, when prohibited, is unenforceable under this section.7 The agreement was void, where an ex-proprietary tenant to pay rent for his ex-proprietary holding at a rate higher than that prescribed by the statute;8 or where a tenant contracted to sub-let premises at a rent higher than that fixed by statute.9 Where a lessee of a village from a zamindar agreed to collect from the ryots, and pay over to the zamindar, an annual festival cess up to that time recovered by the zamindar, it was held that the zamindarcould not recover from the lessee the amount of the cess collected by him, the cess being of a nature prohibited by s. 10 of The Bengal Rent Recovery Act .10 Where a tenant agreed by the registered kabuliatto deliver to his landlord in addition to rent certain agricultural produce, and further, to supply the landlord with a cart and bullock when necessary, and to pay cash value in default, along with the rent, it was held that the agreement was one to pay cess, and was therefore void as being barred by s. 56, United Provinces Land Revenue Act, 1901.11 An agreement in a contract allowing a tenant to assign or sublet the premises was held to be void, being in breach of a provision of law in Bombay at that time prohibiting subletting or assignment of leases; and plea of waiver was not available to the tenant.12 But since the amendment in 1959 to s. 15 Bombay Rent etc. Act, 1947 a tenant would be able to sub-let, assign etc with the consent of the landlord. Even where a tenant cannot sub-let except with the permission of the landlord, such sub-letting being prohibited, and punishable under the relevant statute, the sub-letting is void.13 An agreement by the defendant for relinquishment of all their sir and khudkashtlands and ex-proprietary rights therein to the plaintiffs, none of whom were at the date of the agreement, proprietors, landholders or co-sharers of that land, and for payment of damages for any breach of the agreement by them, was illegal and void as being in contravention of the policy of the said Act.14 It has been held that a sale by occupancy tenants of occupancy rights was void, it being of such a nature that it would defeat the provisions of rent legislation;15 so was an agreement to transfer rights
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of an ex-proprietary tenant in a mahal;16 or an agreement letting out premises against the provisions of the Uttar Pradesh Control of Rents and Eviction Act by resorting to a sham transaction of partnership;17or the creation of a tenancy without informing the District Magistrate, as required by the Uttar Pradesh Rent Control Act, that the house had fallen vacant;18 or a usufructuary mortgage of an occupancy holding by an occupancy tenant,19 and a covenant empowering the mortgagee to recover money, if possession was not delivered;20 or a mortgage of the rights of an ex-proprietary tenant mortgages in contravention of rent control legislation, under which it was held, the mortgagee could not recover;21 but if such a mortgage debt was redeemed by executing a bond or giving a promissory note, the bond or the promissory note would be enforceable.22It is now held that a tenancy created without an allotment order by the District Magistrate under the Uttar Pradesh Urban Buildings (Regulation of Letting, Rent and Eviction) Act, 1972 contravenes the provisions of that Act, but it is not void as between parties because the statute does not specifically provide that it shall be void. A suit for eviction of tenant will lie because the tenant was an unauthorised occupant, and not under the provisions of the tenancy agreement.23 Similarly, a lease made in violation of the Central Provinces and Berar Letting of Houses and Rent Control Order requiring the landlord to give intimation to the Deputy Commissioner of vacancy, is not void, and the landlord cannot seek to avoid it on this ground.24 Agreements Relating to Transfer or Alienation of Land Where a specific kind of land or specific rights in land have been declared by the legislature to be not transferable, a transfer of such land or rights in land is void, as to permit it would be to defeat the provisions of law within the meaning of the section. An agreement to sell agricultural land without the permission of the collector as required under s. 4 of The Hyderabad Prevention of Agricultural Land Alienation Act is not enforceable, being prohibited by law;25 so is an alienation by a person who had been granted land as member of 'depressed classes' under a land revenue law.26 A lease in favour of a bank for running its branch was void where the development statute prohibited use of the premises for non-residential purposes.27 Benami Transactions Benami transactions were valid before the enactment of the Benami Transactions (Prohibition) Act, 1988 which now expressly prohibits them (subject to few exceptions). On coming into force of the Benami Transactions (Prohibition) Act, 1988 no suit, claim or action to enforce any right in respect of any property held benami against the person in whose name the property is held or against any other person, shall lie by or on behalf of a person claiming to be the real owner of such property, nor can defence be based on any right in respect of any property held benami, as provided in sub-sections 1 and 2 of s. 4, subject to the exceptions mentioned in sub-section 3 thereof. Money Lending Transactions Where a money-lender doing business without a licence under the laws relating to money lending, procures the licence during the pendency of the suit for recovery, it has been held that the loan is not recoverable, as the purpose of the Act is not merely to supervise and regularise money lending, but to protect borrowers by making such loans void;28 but production of the registration certificate prior to the delivery of the judgment suffices;29 since the object of the statute is the protection of revenue and not the general public, the money lending transaction was not void and the debt could be recovered if the provision of registration--the breach of which was punishable with fine--was complied with even after the suit was filed.30A lent a sum of money to B. B refused to repay on the ground that A was not registered as a money lender. A filed a suit against B, who took legal advice and compromised with A and agreed to repay. B then repudiated the compromise. It was held that B could not reopen the issue of illegality, once he had voluntarily compromised after taking competent legal advice.31 Forward and Similar Contracts The State Government has the powers under the Forward Contracts (Regulation) Act, 1952 to apply
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the provisions of s. 15 of that Act to any goods or class of goods, after which every forward contract for sale or purchase of goods other than between members of recognised association or through or with such members shall be illegal. A contract in contravention of s. 17, Forward Contracts (Regulation) Act of 1952 is void, under which the State Government may prohibit certain forward contracts for specified goods except with its permission, failing which the transaction shall be illegal. If under a contract, the right of the seller to obtain payment of the price of the goods be transferred, the contract is not non-transferable and is therefore void under the Act of 1952.32A forward contract in jute or jute goods in contravention of s. 15(4) of the Forward Contracts (Regulation) Act, 1952 which prohibited such contracts except under certain specified circumstances, and which was punishable under another provision of the Act, was invalid.33 Thus, a forward contract with a buyer in Italy to supply oil, the contract being prohibited by the law in India, could not be enforced in India, and the award given by arbitrators in pursuance of arbitration clause in the contract could not be enforced under general principles of law applicable to the enforceability of the contracts themselves or of foreign awards, made as a consequence of any terms in such contracts.34A transaction of buyback of shares by a bank was illegal when the Government had issued a notification under s. 16(1) of the Securities Contracts (Regulation) Act, 1956 prohibiting except with the permission of the Central Government, any contract for sale or purchase of securities other than spot delivery contract, or a contract for cash or hand delivery or special delivery.35 But a forward contract which was not void ab initio, but became void and unenforceable due to prohibition of law (Cotton Control Order), could become enforceable when the inhibition was lifted.36 Agreements Involving Land Ceiling Legislation A transfer of land made without permission of Collector as required under s. 5 of the Madhya Pradesh Ceiling on Agricultural Holdings Act, 1960 was void as there was a public policy behind s. 5 and the provision was mandatory, and the transfer would defeat the provisions of the Act and the public policy underlying it.37It has also been held that s. 27 of the Urban Ceiling Act imposed total prohibition against transfer, except by previous permission in writing of the competent authority and hence, the agreement to sell such land without obtaining permission under the Act was opposed to the statute and public policy and hit by s. 23 of the Contract Act .38 Although agreement to sell land without such permission may be unlawful, an agreement to transfer land after seeking permission is not unlawful.39 Hence a conditional decree for specific performance subject to exemption being made under s. 20, Urban Land (Ceiling and Regulation) Act was permissible, despite a provision in s. 5(3), Urban Land (Ceiling and Regulation) Act 1972, declaring transfers void, because such transfer could be effected after obtaining exemption, and the power of the owner of the vacant land in excess of the ceiling limit to 'alienate' such land could be exercised by him on seeking exemption.40 But in Jambu Rao Satappa Kocheri v. Neminath Appayya Hanamannayar, 41the plaintiff, who owned certain area of land, agreed to purchase another area of land, when the two lands together would have exceeded the ceiling prescribed under the Bombay Tenancy and Agricultural Lands Act, 1948. The seller refused to complete the transaction, and the plaintiff sued for specific performance. The question for decision was whether the enforcement of the contract would result in transgression of The Bombay Act . The Supreme Court held it would not do so, as the object of the agreement was not to defeat the provisions of any law. The parties were agriculturists and the transfer itself was not prohibited and invalid. There was no restriction against transfers, but only a provision that the acquisition of an area in excess of the ceiling was invalid, resulting in its vesting in the State Government. The contract of purchase with the knowledge that the purchaser would hold land in excess of ceiling was not void and a suit for enforcement of the contract could not be resisted on the ground that if permitted, would result in transgression of the law. A transfer of landbona fide effected in anticipation of land ceiling legislation, but at a time when there was no prohibition of transfer, was not hit by s. 23.42 Agreement to Give and Take Dowry An agreement for the giving or taking of dowry is void under s. 5 of the Dowry Prohibition Act, 1961. This Act, however, expressly lays down in s. 6, that the dowry amount shall be recoverable by the woman, where it has been received by some other person in connection with her marriage. Before this enactment, some State legislations prohibited the giving and taking of dowry. Where the payment or
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taking oftilak money was made punishable under the Bihar Dowry Restraint Act, 1950 money paid as such could not be recovered, even if the bridegroom's relatives refused to proceed with the marriage.43 Other Agreements A sale of the woman being 'traffic in human beings' prohibited by Art. 23 of the Constitution of India , no action can be based on such a contract, and hence, a party could not claim refund of the amount obtained by him from the plaintiff on the condition of supplying a dangi woman for her son.44 The sale of fermented liquor without a license, such a sale being prohibited and punishable under an excise statute, is unlawful, and the vendor is not entitled to recover the price thereof from the buyer.45 Where the transfer of spindles without the permission of the textile commissioner was totally prohibited under the Control Order, the agreement to sell them was illegal and hit by this section.46Admission of liability in a suit against the firm by a partner, who was not empowered to do so under any usage or custom of trade as envisaged by s. 19(2)(e) of the Indian Partnership Act, 1932 was held to be illegal, being prohibited by that section, and hit by s. 23.47 Other Statutes Prohibiting Certain Contracts An agreement to pledge the labour of a child is void under s. 3 of the Children (Pledging of Labour) Act, 1933. Any contract by which any person or any member of the family or dependent of such person, is required to do any work or render any service as a bonded labour is void under s. 5 of the Bonded Labour System (Abolition) Act, 1976. Any borrowing of money upon or charge of funds by a local authority made otherwise that for the purposes given under s. 7 of the Local Authorities Loans Act, 1914 is void. Section 8 of the Personal Injuries (Emergency Provisions) Act, 1962 renders void any assignment of or charge on, or any agreement to assign or charge, any payment awarded or to be awarded under the scheme made under the Act. A number of statutes provide that any term in a contract giving up, limiting or restricting the rights in the respective statutes would be void,48 but this does not prevent the party for whose benefit the provisions are made, to agree for more beneficial terms than those provided in the statute.49Restrictive conditions stated in s. 140 of the Patents Act, 1970 in certain contracts relating to patents are void. Section 47 of the Foreign Exchange Regulation Act, 197350provides that no person shall enter into a contract or agreement which would directly or indirectly evade or avoid in any way the operation of any provision of the Act . A reference to an arbitrator for construction of an unprobated will for establishing the rights of the legatees was held prohibited under s. 213 of the Indian Succession Act, 1923 even with the consent of all the parties.51 The Central Government may, notify, under s. 13 of the Securities Contracts (Regulation) Act, 1956 that contracts in a state or area notified shall be illegal, unless made between members of a recognised stock exchange, and then any contract contravening s. 13 shall be void, if it violates the bye-laws as respects rights of members or any other person with knowledge of such violation. When the Central Government prohibits by notification under s. 16 of that Act that no person shall enter into any contract for sale or purchase of security except to the extent and manner specified; then any such contract entered shall be illegal. Transfers of property declared as untransferable by s. 6 of The Transfer of Property Act, 1882 are void under this section; so are transfers of actionable claims in contravention of s. 136 of that Act . Transfers of property declared as untransferable by s. 6,Transfer of Property Act, 1882 are void under this section;52so are transfers of actionable claims in contravention of s. 136 of that Act .53 Agreements Violating other Rules in Force Where an agent purchased chillies for his principal, knowing that they were to be sent to the principal outside the district, which was prohibited by an order of the Collector under the Defence of India Rules, the contract was unlawful under s. 23 and the agent could not recover any money under the contract.54 Contracts forbidden by regulations under the Defence of India Act, 1915 are illegal;55 so
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are agreements in contravention of the Jute Control Order and the Oil Seeds Order.56 However, directions given by the Reserve Bank of India under s. 36 of the Reserve Bank of India Act, 1949 prohibiting banks from entering into buy-back transactions, though binding on the banks, do not affect the legality of such transactions between the banks and third parties. The non-compliance of the directions issued by the Reserve Bank may result in prosecution or levy of penalty against the banks, but do not invalidate the contracts made by the bank, because neither the Reserve Bank of India Act, nor the circulars themselves, provided that the contract between the banks and third parties would be invalidated or void.57 In Sunil Pannalal Banthia v. City and Industrial Development Corpn of Maharashtra Ltd, 58 CIDCO allotted and leased a plot to the petitioner without calling for tenders, a requirement prescribed in judgments of the Supreme Court. It sought to cancel the allotment on the ground that it violated the public policy. It was held that it could not do so. Agreements Prohibited, but Enforceable at the Instance of one Party A statute may, instead of completely prohibiting the contract, either in express terms or in its true construction, enable the enforcement of the contract by one of the parties; making it unenforceable on the part of the party whose duty it is to observe the statutory requirement. The statute may also lay down provisions as to the manner and the extent of the enforcement. Although the giving and taking dowry is prohibited under the Dowry Prohibition Act, 1961 where any dowry is received by any person other than the woman in connection with whose marriage it is given, that person shall transfer it to the woman, and pending such transfer, hold it in trust for her benefit. Failure to transfer is itself punishable. Tenancy or rent legislations prohibit the landlord to take premiums for granting of lease, or amounts in addition to rent from the tenants, and the tenant has the right to recover these amounts paid, either by way of separate proceedings, or by way of deduction from rent, as provided by the statutes. Penalty Imposed by Statute A statute may make the making of the agreement itself punishable, or certain acts in its performance or its manner of performance. The mere imposition of penalty by itself in the statute, without declaring a contract in contravention of it to be illegal or void or making a breach of the condition of a licence punishable, did not necessarily imply a prohibition of the contract.59Whether it renders the contract unlawful depends upon the purpose of the statute; upon whether on its true construction, it is intended to prohibit the class of contracts, or whether it intends merely to prohibit the doing of the act made punishable, or to impose a charge on the doing of the prohibited act. If all contracts so penalised were held unenforceable in the same manner, the punishment for a minor breach of the law might be out of proportion with the loss ensuing from non-enforcement; and would render the infringer to double punishment under the statute for the breach; and under the contract non-enforcement may also result in unjust enrichment to the party who has received the promise under it, but has not performed his part. In Yango Pastoral Company Pty Ltd v. First Chicago Australia Ltd, 60a question arose whether the provision of the (Australian) Banking Act, 1959 prohibiting a body corporate from carrying on any banking business in Australia unless it had an authority to do so and providing a penalty for each day of contravention, had the effect of rendering void and unenforceable a mortgage or guarantee given to a body corporate carrying on an unauthorised banking business for a loan made by it in the course of its business. While holding that the mortgage and guarantee were not unlawful and were therefore enforceable, the Court considered various relevant circumstances. The statute did not expressly prohibit the making or performance of such contracts. If the provision be held to prohibit any business of banking, thereby avoiding all contracts entered into for the purposes of banking business, 'the avoidance of the contract could cause grave inconvenience and injury to innocent members of the public without furthering the object of the statute'.61 The penalty was imposed in the form of a pecuniary sum for each day, during which the contravention continued, irrespective of the number of
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transactions done during the day, and not for each contract made in the course of business, which indicated that the Parliament did not intend to prohibit each and every contract. The language of the provision was directed against the carrying on of business and not performance or making of particular contracts. Unlike other statutes, this statute did not forbid or render punishable, the doing of any particular act. The purpose of the particular contract before the Court was not illegal. The purpose of the prohibition was not only to protect depositors, but to equip the Government with current and detailed information as to banking operations, and to arm the Government with supervisory powers. The Parliament could not intend to inflict dire consequences of unenforceability upon innocent depositors. A statute requiring that persons dealing as principals or agents in securities be duly licensed, and providing for penalties for act ing without such licences, was held not directed against the deals or the contracting parties, but against the servant or agents making the deals; nor did public policy require an interpretation which would strike down the transactions. The transactions effected by an agent without a licence were therefore enforceable and valid.62 It has been held that under the Central Excise and Salt Act, 1944 trading in any excisable goods without a licence, or aiding another to do, is an offence. Therefore, where a licensed trader advances to another unlicensed trader, an amount to buy tobacco for the former, it violates the law and is illegal under s. 23; and the money so advanced is not recoverable.63Where the Maximum Price Control Order prescribed the maximum price at which paddy might be sold and any contravention thereof was punishable under s. 7 of the Essential Commodities Act, 1955 an agreement to sell at a price higher than the maximum would be void under this section.64 Lending of foodgrains,65 or contract to deliver grain in discharge of money advanced,66 have been held to be in contravention of Food Grains Orders in force. But a contract is not opposed to law merely because in the notice inviting tenders, the measurement of stresses was given in inches and not in metric measures in contravention of the Standards of Weights and Measures Act, 1959 although, not so mentioning the measurements is made punishable by that Act .67Therefore, a debt incurred for the marriage of a Hindu minor girl by the major members of a joint Hindu family is binding on the joint family property, because marriage of a minor girl is neither invalidated nor rendered illegal by the Child Marriage Restraint Act, 1929 though those who arrange it or participate in it are liable to be prosecuted;68 and sale of property for the marriage of minor children was not invalid, where the purchaser was not aware of their ages;69 but an alienation has been held void, even if part of the consideration was for the marriage.70 An agreement between A and B for sub-letting the telephone by installing it in the nonsubscriber's premises was forbidden by law and hit by s. 23 of the Contract Act, as the object of the Legislature in imposing conditions about telephones under The Indian Telegraph Act, 1885 was to effectively provide a modern public amenity and utility service, and the maintenance of public administration, order and safety. More so, when s. 20A of that Act provided for imposing not a single but continuing penalties for a continuing breach of the conditions.71 Formation Legal but Performance Illegal A contract, although according to its own terms, may be unlawful, because it is performed in a manner which the statute prohibits. In such cases, the performance of the contract may be illegal, if it is clear that the law in question prescribes that the contract must be performed in one way and that way only, and that requirement is breached. For such a breach to have occurred, the illegality must affect the very core or essence of the contract. The fact that the statute was passed for the protection of the public is one, but not the only test of whether it was intended to avoid the contract being formed or performed. It is essentially a question of construction of the statute. If the purpose of the statute is only to impose a penalty, even the guilty party may be able to enforce the contract.72 Whether the contract performed in an unlawful manner shall deprive the both the parties or any one of them from enforcing it, would depend on whether the statute, having regard to its language, scope and purpose, intended to render it unenforceable at the suit of the party so performing it, or to merely punish the wrongdoer.
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The rule of enforcement in such cases is flexible, because it would be absurd if a trivial breach of a statutory provision constituting illegality, connected in some way with the contract or contracting parties, could be held to justify the total withdrawal of the remedies by the courts. 'It may be questionable...whether public policy is well served by driving from the seat of judgment everyone who has been guilty of a minor transgression.'74 It would also be absurd, if the courts closed their doors to a party seeking to enforce its contractual rights without having regard to the degree of that party's transgression, the deliberateness or otherwise of its breach of law, and its state of mind generally relevant to the illegality. Different considerations may exist where the contractual rights that are being enforced, arise directly from the illegality, as distinct from those that arise only incidentally or peripherally.75 The rights under the contract would be enforced, if the effect of refusing to enforce them would be disproportionate to the seriousness of the unlawful conduct in question. Where a contract, which was valid at inception, was performed by one party violating some statutory prohibition, the party violating the law will not be able to enforce the claim based on his own illegal performance. The other party can enforce the contract if innocent,76 but not if he participates in, or assents to, the illegal performance.77 A contract of employment performed in such a way as to defraud the revenue, renders it unenforceable by the employers. Whether it is also unenforceable by the employee, depends on his knowledge of the illegality.78 The fact that a party has, in the course of performing a contract, committed an unlawful or immoral act, will not by itself prevent him from further enforcing that contract, unless the contract was entered into with the purpose of doing that unlawful or immoral act, or the contract itself is prohibited by law.79The question of illegality of a partnership must be distinguished from illegality of any act s done in the course of its business by the firm or some or all of its members. The fact that one partner has been guilty of certain illegal acts in the conduct of the partnership business is no defence to an act ion for accounts by the other partner, where the object of partnership was not illegal and the innocent partner, at the time of entering into the partnership, intended that it should be carried on lawfully.80 The defendants agreed to carry for the plaintiffs to the seaport a tube weighing 25 tonnes manufactured by the plaintiffs. The defendant's vehicle was not meant for such a heavy load and the loading was therefore against regulations. The tube was loaded in the presence of the plaintiffs' representative. The vehicle overturned en route and the tube was damaged. In the plaintiffs' suit for damages, it was held that even if the contract when made was legal, its performance, also participated in by the plaintiffs, was illegal, the load being a breach of regulations. The plaintiffs could not claim damages.81 The sale of the motor vehicle without a current certificate of fitness is breach of a regulation, and disentitled the party at fault to sue on it because the contract was performed in a prohibited manner, although it was not illegal ab initio.82 49 Archbolds (Freightage) Ltd v. S Spanglett Ltd, [1961] 1 QB 374, [1961] 1 All ER 417, [1961] 2 WLR 170 at 177, 180 (CA); distinguishing In Re an arbitration between Mahmoud and Ispahani, [1921] 2 KB 716, [1921] All ER Rep 217, CA ('...no person shall buy or sell...except in accordance with...a licence') and Dennis d' Co Ltd v. Munn, [1949] 2 KB 327, [1949] 1 All ER 616 ('...the execution...of any operation specified...shall be unlawful except so far as authorised'); SM Kanniappa Nadar v. K K Karuppiah Nadar, (1962) Mad 441, AIR 1962 Mad 240(FB) ; Gulabchand Gambhirmal v. Kudilal Govindram, AIR 1959 MP 151 at 165 (FB), on appeal Gulabchand v. Kudilal, AIR 1966 SC 1734; Reggazzoni v. KC Sethia, (1944) Ltd,[1956] 2 All ER 487; Waugh v. Morris, [1873] 8 QB 202 at 208, [1861-73] All ER Rep 941 at 943; Foster v. Driscoll, [1929] 1 KB 470 at 510, 521, [1928] All ER Rep 130; Firm Durga Prasad Magniram v. Ganesh Prasad, AIR 1982 MP 219 at 224. 50 In Re an arbitration between Mahmoud and Ispahani, [1921] 2 KB 716, [1921] All ER Rep 217 CA, Bostel Brothers Ltd v. Hurlock [1949] 1 KB 74, [1948] 2 All ER 312; Wilson Smithett d' Cope Ltd v. Terruzzi, [1976] QB 683, [1975] 2 All ER 649. 51 In Re an arbitration between Mahmoud and Ispahani,[1921] 2 KB 716 per Bankes LJ. at 724, [1921] All ER Rep 217, CA. 52 Commissioner of Income Tax: Mysore v. Union Tobacco Co, AIR 1960 Ker 276; Pamulapati Bhushayya v. Kommareddy Chinnapareddi, AIR 1960 AP 39; Janki Bai Chunnilal v. Ratan Melu, AIR 1962 MP 117(FB) ; V Basavayya v. N Kottayya, AIR 1964 AP 145. 53 Pollock, Principles of Contract, 13th edn, p. 276, cited and applied in Teegula Babiah v. Mohammad Abuds Siobhan
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Khan, AIR 1954 Hyd 156(FB) ; and Fakirchand v. Bansilal, AIR 1955 Hyd 28(FB) ; Abdullah v. Allah Diya, (1927) 8 Lah 310, 100 LC 846, AIR 1927 Lah 333; Pamulapati Bhushayya v. Kommareddy Chinnapareddi, AIR 1960 AP 39, contract contra to Central Excise Act. Janki Bai Chunnilal v. Ratan Melu, AIR 1962 MP 117(FB) (breach punishable with fine, object protection of revenue). 54 (1900) ILR 24 Bom 622; ; followed in Abdullah v. Allah Diya, (1927) 8 Lah 310, 100 LC 846, AIR 1927 Lah 333; Bhagwant Genuji Girme v. Gangabisan Ramgopal, (1941) Bom 71, AIR 1940 Bom 369, 42 Bom LR 750, 191 IC 806 where the authorities are reviewed; Mohamad Syed Baba v. Universal Timbers Traders, AIR 1976 J&K 9 at 11 (transfer of forest lease); but see PC Kapoor v. Commr of Income-tax, (1973) 1 All 293 at 313, 90 ITR 172 (FB) (All) (mere imposition of penalty without declaring the contract illegal does not necessarily imply prohibition of contract). 55 AIR 2002 SC 3456, (2002) 8 SCC 31, reversing Nutan Kumar v. Second Additional District Judge, AIR 1994 All 298, and following Nanakram v. Kundalrai, AIR 1986 SC 1194. 56 Gauri Shanker v. Mumtaz Ali Khan, (1879) ILR 2 All 411 at 415 (FB); Ram Chandar v. Jagan Nath, AIR 1957 HP 70. 57 Abdulla v. Mammod, (1902) 26 Mad 156; Gauri Shanker v. Mumtaz Ali Khan, (1879) 2 All 411(FB) . 58 Nazaralli Sayad Imam v. Babamiya Dureyatimsha, (1915) 40 Bom 64, AIR 1915 Bom 244, 30 IC 913; Harkaran Ghasiram Agarwal v. Champalal Chhotelal Mahajan, AIR 1962 MP 22. 59 Mohamad Syed Baba v. Universal Timbers Traders, AIR 1976 J&K 9 at 11. 60 Shyam Sunder Shaw v. Netai Chand Shaw, AIR 1986 Cal 230 at 235. 61 Bharat Barrel & Drum Mfg Co Pvt Ltd v. Hindustan Petroleum Corpn Ltd, AIR 1989 Bom 170 at 177. 62 Behari Lall Shaha v. Jagodish Chunder Shaha, (1904) ILR 31 Cal 798. 63 Thithi Pakurudasu v. Bheemudu, (1902) 26 Mad 430; Krishna Menon v. Narayana Ayyar, AIR 1962 Ker 21(FB) ; Sundara Gownder v. Balachandran, AIR 1990 Ker 324 at 326. 64 Debi Prasad v. Rup Ram, (1888) ILR 10 All 577 (Act repealed later); Radhey Shiyam v. Mewa Lal, (1928) 116 IC 89, AIR 1929 All 210 (what amounts to a sub-lease). 65 Raghunath Lalman v. Nathu Hirji Bhate, (1894) ILR 19 Bom 626 (Act repealed later by the Narcotic Drugs and Psychotropic Substances Act, 1985 (61 of 1985)); Rabiabibi v. Gangadhar Vishnu Puranik, AIR 1922 Bom 78, (1922) 24 Bom LR 111, 66 IC 393. 66 Ismalji Yusufalli v. Raghunath Lachiram Marwadi, (1909) ILR 33 Bom 636. 67 RamKripal Sheoprasad v. Municipal Committee Bilaspur, AIR 1963 MP 240. 68 Behari Lall Shaha v. Jagodish Chunder Shaha, (1904) ILR 31 Cal 798. 69 RamKripal Sheoprasad v. Municipal Committee Bilaspur, AIR 1963 MP 240. 70 Tekumalla Rama Rao v. Durga Suryanarayana, AIR 1964 AP 256; CP Automobile Engineering co Ltd v. Ramchandra Vishwanath, AIR 1926 Nag 259; Maniam Hiria Gowder v. Naga Maistry, AIR 1957 Mad 620; Inderjit Singh v. Sunder Singh, AIR 1969 Raj 155; KM Vlswanatha Pillai v. KM Shanmugham Pillai, AIR 1969 SC 493. 71 Gauri Shanker v. Mumtaz Ali Khan, (1879) ILR 2 All 411 at 413; Karsan Valal Sadashiv Patil v. Gatlu Shivaji Patil, (1912) ILR 37 Bom 320, 19 IC 442. 72 Champsey Dossa v. Gordhandas Kessowji, (1917) 19 Bom LR 381, 40 IC 805, AIR 1917 Bom 250; Chennuru Ramarao v. Gowri Sankar Talkies Tekkali, AIR 1986 AP 84; but see Nalain Padmanabham v. Sait Badrinadh Sarda, (1911) 35 Mad 582, 10 IC 126; Chava Ramanayudu v. Suryadevara Seetharamayya, (1934) 58 Mad 727, 155 IC 544, AIR 1935 Mad 440(FB) ; Satyala Sanyasi v. Bhogavalli Sanyasi, AIR 1935 Mad 895, 158 IC 1055; R Chennayya v. T Janikamma, AIR 1944 Mad 415; J.D. Italia v. D. Cowasjee, (1944) Mad 697, AIR 1944 Mad 295, (1944) 1 Mad LJ 97; Velu Padayachi v. Sivasooriam Pillai, (1950) Mad 987, AIR 1950 Mad 444(FB) . 73 PC Kapoor (M/s) v. Commr of Income Tax, (1973) 1 All 293 at 306, 90 ITR 172 (FB) (All); relying on Commissioner of Income Tax v. Prakash Ram Gupta 72 ITR 366(Pat) and Mohd Wasarat Hussain v. CIT, [1971] 82 ITR 718(Pat) . 74 Chennuru Ramarao v. Gowri Sankar Talkies Tekkali, AIR 1986 AP 84; Kommineni Krishna Rao v. Kommineni Babjee Rao, AIR 1991 AP 232; at 238-40 holding that the decision of the Madras High Court in K Viswanathan v. Namakchand Gupta, AIR 1955 Mad 536 is deemed to have been overruled along with the decision in A V Varadarajulu Naidu v. K V Thavasi Nadar, (1963) Mad 942, AIR 1963 Mad 413 by the ruling of the Supreme Court in K M Viswanatha Pillai v. K M Shanmugham Pillai, AIR 1969 SC 493 and that the judgment of the Full Bench of the Madras High Court in Velu Padayachi v. Sivasooriam Pillai, (1950) Mad 987, AIR 1950 Mad 444(FB) is deemed to have been impliedly overruled by the judgment of the Supreme Court in Jer and Co v. Commissioner of Income Tax U.P., (1972) 4 SCC 77.
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75 Hormasji Motabhai Pestonji v. Tanji Dhanjibhai, (1887) 12 Bom 422; Pisupati Rama Rao v. Tadepalli Papayya, AIR 1954 AP 51; V Basavayya v. N Kottayya, AIR 1964 AP 145; Velu Padayachi v. Sivasooriam Pillai, (1950) Mad 987, AIR 1950 Mad 444(FB) ; Commissioner of Income Tax v. Union Tobacco Co, AIR 1960 Ker 276; Maniam Hiria Gowder v. Naga Maistry, AIR 1957 Mad 620; but see S Meikole Udayar v. SP Periasami Konar, AIR 1967 Mad 449 (prohibition contained in a government contract); Govindaraj v. Kandaswami Goundar, AIR 1957 Mad 186; Teegula Babiah v. Mohammad Abdus Subhan Khan, AIR 1954 Hyd 156(FB) (master-servant relationship). 76 Gopalrav Hanmant v. Kallappa Bin Dharmappa, (1901) 3 Bom LR 164. 77 Gobardhan Chakraborty v. Abani Mohan, AIR 1991 Cal 195 at 203 (prohibition under the West Bengal Cinema (Regulations of Public Exhibitions) Rules); but see Kommineni Krishna Rao v. Kommineni Babjee Rao, AIR 1991 AP 232 at 238-40. 78 Biharilal Jaiswal v. Commr of Income Tax, (1996) 1 SCC 443, distinguishing Jer and Co v. Commissioner of Income Tax U.P., (1972) 4 SCC 77 (relevant statute did not prohibit partnership). 79 Budh Ram Balak Ram v. Dhuri Co-op-cum-Marketing-cum-Processing Society, (1973) 2 Punj 677, AIR 1972 Punj 185 at 188. 80 Govindaraj v. Kandaswami Goundar, AIR 1957 Mad 186. 81 Commissioner of Income Tax v. Union Tobacco Co, AIR 1960 Ker 276; Velu Padayachi v. Sivasooriam Pillai, (1950) Mad 987, AIR 1950 Mad 444(FB) ; Budh Ram Balak Ram v. Dhuri Co-op-cum-Marketing-cum-Processing Society, (1973) 2 Punj 677, AIR 1972 Punj 185 (a licence under Cotton Control Order); Satchidananda Samanta v. Rajan Kumar Basu, AIR 1992 Cal 222 at 238 (transfer of licence prohibited under West Bengal Cinema Regulations Act). 82 Mahapatra Bhandar v. Commissioner of Income Tax, [1965] 58 ITR 67, AIR 1965 Ori 160; Moti Lal Chunni Lal v. CIT, (1998) 9 SCC 401; Biharilal Jaiswal v. Commr of Income Tax, (1996) 1 SCC 443. 83 Marudamuthu Pillai v. Rangasami Mooppan, (1901-02) ILR 24-25 Mad 279; Velu Padayachi v. Sivasooriam Pillai, (1950) Mad 987, AIR 1950 Mad 444(FB) ; but the illegality of a partnership affords no reason why a third party who has lent money to the partnership and is not particeps, should not recover a proportion of his loan, the partner who originally held the license; Ganapathi Brahmayya v. Kurella Ramiah, (1920) 43 Mad 141, 54 IC 45, AIR 1920 Mad 270. 84 Mafizuddin Khan Choudhury v. Habibuddin Sheikh, AIR 1957 Cal 336. 85 Velu Padayachi v. Sivasooriam Pillai, (1950) Mad 987, AIR 1950 Mad 444. 86 AIR 1921 PC 137. 87 S Venkataratnam v. Y Venkataratnam, AIR 1944 Mad 394; L Shiv Dayal L Mela Mal v. Firm Bishan Dass Shankar Dass, AIR 1961 Punj 405. 88 PC Kapoor v. Commr of Income Tax, (1973) 1 All 293 at 306, 90 ITR 172 (FB) (All); Jer and Co v. Commissioner of Income Tax U.P., (1972) 4 SCC 77. 89 Umacharan Shaw & Bros v. CIT, [1959] 37 ITR 271 at 276, SC. 90 Jer and Co U.P. v. CIT, (1972) 4 SCC 77 at 78. 91 Pamulapati Bhushayya v. Kommareddy Chinnapareddi, AIR 1960 AP 39; following V Kalyansundaram Pillai v. R M L S Chockalingam Chettiar, AIR 1952 Mad 293; Chandaji Sukhraj and Company v. Lal and Co, AIR 1960 AP 444. 92 Pamulapati Bhushayya v. Kommareddy Chinnapareddi, AIR 1960 AP 39 at 40; Dhuri Coop-cum-Marketing-cum-Processing Society v. Budh Ram, AIR 1971 Punj 134 (partnership with a person with licence under Cotton Order not illegal). 93 Budheswar Barua v. Jatindra Nath Barua, AIR 1976 Gau 12. 94 Dayabhai and Co v. CIT, [1966] 59 ITR 364, AIR 1966 MP 13; Magnilal v. Gheesukhan, AIR 1980 Raj 14 at 19 (case of truck permit). 95 AV Varadarajulu Naidu v. KV Thavasi Nadar, (1963) Mad 942, AIR 1963 Mad 413; Velu Padayachi v. Sivasooriam Pillai, (1950) Mad 987, AIR 1950 Mad 444(FB) ; Maniam Hiria Gowder v. Naga Maistry, AIR 1957 Mad 620. 96 The formation of a partnership by a contractor with the Forest Department for executing the work under his direction is in itself only a matter of agency and not a subletting of his rights contrary to the Forest Act ; Mukala Venkatanandam v. Immidisetty Dhanaraju, (1928) 117 IC 298, AIR 1929 Mad 689. 97 (1896) 21 Bom 522 (in any case, the plaintiff could have recovered for the work and labour of which the defendant had received the benefit).
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1 S Meikole Udayar v. SP Periasami Konar, AIR 1967 Mad 449. 2 J.D. Italia v. D. Cowasjee, (1944) Mad 697, AIR 1944 Mad 295; Velu Padayachi v. Sivasooriam Pillai, (1950) Mad 987, AIR 1950 Mad 444 at 447 (FB). 3 Babulal Agarwala v. Vijaya Stores, AIR 1955 Ori 49. 4 Strongman (1945) Ltd v. Sincock, [1955] 2 QB 525, [1 9551 3 All ER 90 (CA). 5 SM Kanniappa Nadar v. KK Karuppiah Nadar, (1962) Mad 441, AIR 1962 Mad 240(FB) ; AV Varadarajulu Naidu v. KV Thavasi Nadar, (1963) Mad 942, AIR 1963 Mad 413 (a case of motor transport). 6 Life Insurance Corpn of India v. KA Madhava Rao, AIR 1972 Mad 112. 7 Gobind Ram v. Rajphul Singh, AIR 1973 Punj 94 at 99. 8 Pirag v. Sital Pershad, (1914) ILR 36 All 155, AIR 1914 All 374, 22 IC 965. Similarly of a contract for the sale of land contravening the rule against perpetuities; Dinkrrao Ganpatrao v. Narayan v. Vishoanath Mandalik, (1922) ILR 47 Bom 191, (1922) 24 Bom LR 449, AIR 1922 Bom 84. 9 Bansidhar Dobey v. Budangal Dar, AIR 1928 Cal 763. 10 Kamala Kant Ghosse v. Kalu Mahomed, (1869) 3 BLR 44(AC) ; Mohan Chand v. Manindra Nath, AIR 1955 Cal 442; But see Radhu Hari v. Narendra Nath Chatterjee, (1929) 115 IC 34, 49 Cal LJ 189, AIR 1929 Cal 224 (agreement to perform defined services in lieu of rent is not an illegal 'imposition' on the tenant within the Bengal Tenancy Act). 11 Sis Ram v. Asghar Ali, (1912) 35 All 19. 12 Waman Shrinivas Kini v. Ratilal Bhagwandas and Co, [1959] Supp 2 SCR 217, AIR 1959 SC 689; Lachoo Mal v. Radhye Shyam, [1971] 3 SCR 698, AIR 1971 SC 2213. 13 Liiadhar Dariyana v. Chimman Ram Curwa Ram, AIR 1955 VB 31; Firm Durga Prasad Maniram v. Ganesh Prasad, AIR 1982 MP 219; But see Banarsi Das v. Shakuntala,AIR 1989 Del 184. 14 Moti Chand v. lkram-Ullah Khan, (1917) 39 All 173, 39 IC 454, 44 IA 54, AIR 1916 PC 59. 15 Jhinguri Tewari v. Durga, (1885) ILR 7 All 878. 16 Kashi Prasad v. Kedar Nath Sahu, (1897) 20 All 219. 17 Haji Abdul Shakoor v. Rent Control and Eviction Officer, AIR 1959 All 440. 18 Lakshmi Chand v. Niader Mal, AIR 1961 All 295; Shamsfer Bahadur v. State of Uttar Pradesh, AIR 1964 All 395. 19 Mukund Lal v. Sunita, AIR 1931 All 461, 132 IC 422. 20 Daya Ram v. Thakuri, AIR 1924 All 668 (1); Mukund Lal v. Sunita, AIR 1931 All 461, 132 IC 422; Mohammad Muzaffar Husain v. Madad Ali, AIR 1931 Oudh 309, 132 IC 543; Usman Khan v. Sitarakhan, AIR 1935 All 256; Jagannath v. Baijnath 165 IC 587, AIR 1937 Oudh 150. 21 Mohammad Muzaffar Husain v. Madad Ali, AIR 1931 Oudh 309, 132 IC 543, s. 7A; regarding Oudh Rent Act, 1886. 22 Jagannath v. Baijnath 165 IC 587, AIR 1937 Oudh 150. 23 Nutan Kumar vs Second Addl District Judge,AIR 2002 SC 3456, (2002) 8 SCC 31, reversing Nutan Kumar v. Second Additional District Judge, AIR 1994 All 298; for earlier decisions see: Naveen Chandra Sharma v. Sixth Additional District and Sessions Judge, Meerut, AIR 1983 All 116 at 119-120; Mani Kant Tiwari v. Babu Ram Dixit, AIR 1978 All 144; Murlidhar Agarwal v. State of Uttar Pradesh, [1975] 1 SCR 575, AIR 1974 SC 1924; approving Udhoo Das v. Prem Prakash, AIR 1964 All 1(FB) . 24 Nanakram v. Kundalrai, AIR 1986 SC 1194 reversing Kakubhai & Co v. Nathmal Kisanlal, AIR 1980 Bom 25. 25 Pujari Narasappa v. Shaikh Hazarat, AIR 1960 Mys 59; Ashwinkumar Manilal Shah v. Chhotabhai Jethabhai Patel, AIR 2001 Guj 90; see also Jayamma v. Maria Bai, AIR 2004 SC 3957 (case involved a will). 26 Papaiah v. State of Karnataka, AIR 1997 SC 2676; MurLtdhar Dayandeo Kesekar v. Vishwanath Pandu Barde, (1995) Supp (2) SCC 549. 27 Khaja Moinuddin Khan v. SP Ranga Rao, AIR 2000 AP 344. 28 Mohd Bin Salem v. Umaji, AIR 1955 Hyd 113(FB) ; overruling Shamshir Ali v. Ratnaji, AIR 1952 Hyd 58(FB) ; Jugal Prasad Misser v. Bhadai Das, (1952) Pat 963, AIR 1953 Pat 259 (the moneylender had no license, but subsequently
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assigned the debt to another licensed moneylender); Rukmandhwaj Patel v. Chandrashekhar Sharma, AIR 2011 Chhat 35. 29 Patiram Tukaram v. Baliram Parashram, AIR 1954 Nag 44; following Shamshir Ali v. Ratnaji, AIR 1952 Hyd 58, before it was overruled in 1955; Janki Bai Chunnilal v. Ratan Melu, AIR 1962 MP 117(FB) . 30 Janki Bai Chunnilal v. Ratan Melu, AIR 1962 MP 117(FB) . 31 Binder v. Alachouzos, [1972] 2 QB 151, [1972] 2 All ER 189(CA) ; But see Kamta Prasad v. IInd Addl District Judge, AIR 1997 All 201 (Uttar Pradesh Regulation of Money Lending Act, 1976. prohibited recovery notwithstanding any contract, decree or order). 32 Suwalal Jain v. Clive Mills Co Ltd, AIR 1960 Cal 90; Raymon & Co (India) Pvt Ltd v. Khardah Co Ltd, AIR 1960 Cal 86 on appeal Khardah Company Ltd v. Raymon & Co (India) Private Ltd, [1963] 3 SCR 183, AIR 1962 SC 1810. 33 Sundar Lal and Son v. Bharat Handicraft Pvt Ltd, [1968] 1 SCR 608, AIR 1968 SC 406; Ratanlal v. Firm Mangilal Mathuralal, AIR 1963 MP 323 (contract with entries relating to forward contracts of linseed in Indore state as consideration is illegal; as such is prohibited). 34 Societa Anonmina Lucchesse Olii E vini Lucca v. Gorakharam Gokalchand, (1964) 2 Mad 90, AIR 1964 Mad 532. 35 BOI Finance Ltd v. Custodian, AIR 1997 SC 1952, (1997) 10 SCC 488. 36 Hagami Lal Ram Prasad v. Bhuralal Ram Narain, AIR 1961 Raj 52. 37 State of Madhya Pradesh v. Board of Revenue Gwalior, AIR 1983 MP 111 at 120; Balbir Singh v. Arjun Singh, AIR 2000 All 37 (transaction made expressly void). 38 Denzyl Winston Ferries v. Abdul laleel, AIR 1992 AP 246 at 253-54. 39 Purvankara Projects Ltd v. Hotel Venus International, (2007) 10 SCC 33. 40 Shah Jitendra Nanalal v. Patel Lallubhai lshverbhai, AIR 1984 Guj 145(FB) ; Rajesh Aggarwal v. Balbir Singh, AIR 1994 Del 345 (specific performance with direction to obtain clearance under s. 269 DC, Income Tax Act, 1961); Manzoor Ahmed Magray v. Gulam Hassan Aram, AIR 2000 SC 191. 41 AIR 1968 SC 1358; Pahunchi Lal v. Man Singh, AIR 1971 All 444, 446; Kuppannagri Sreeramamrthy v. Pydi Anda Rao, AIR 1985 AP 336. 42 S. Naganatha Ayyar v. Authorised Officer Thanjavur, (1971) 1 Mad LJ 274 at 283 (the Tamil Nadu Land Reforms (Fixation of Ceiling of Land) Act 1961 did not prohibit transfer after the notified date). 43 Ramekbal Singh v. Harihar Singh, AIR 1962 Pat 343. 44 Nihal Singh v. Ram Bai, AIR 1987 MP 126 at 132. 45 Boistub Churn Naun v. Wooma Churn Sen, (1889) ILR 16 Cal 436. 46 Universal Plast Ltd v. Santosh Kumar Gupta, AIR 1985 Del 383 at 388. 47 Tilokram Ghosh v. Gita Rani Sadhukhan, AIR 1989 Cal 254 at 259. 48 See for example, the Employers' Liability Act, 1938, s. 3A; the Minimum Wages Act, 1948, s. 25; the Payment of Wages Act, 1936, s. 23; the Workmens' Compensation Act, 1923, s. 17. 49 FW Heilgers & Co v. Nagesh Chandra Chakravarty, AIR 1949 FC 142. 50 The Act is now replaced by the Foreign Exchange Management Act, 1999. 51 Vishanji Dungannal Futnani v. Mohanlal Dungarmal Futnani, AIR 1988 Cal 402. 52 Kakaralapudi Lakshmi Naryana Jaganadha Raju Garu v. Kandukuri Veera, AIR 1916 Mad 579; Durga v. Jamna Prasad, AIR 1924 Oudh 234 at 236; Dwarka Prasad v. Nasir Ahmad, AIR 1925 Oudh 16 at 18; Mahadeo Prasad Singh v. Mathura Chaudhari, AIR 1931 All 589 (2) at 591; but see AP Joseph v. EH Joseph, AIR 1927 Rang 157. 53 Sitla Bux Singh v. Mahabir Parsad, AIR 1936 Oudh 275. 54 Appana Radha Sri Krishna Rao v. VKM Kodandarama Chetti, AIR 1960 AP 190. 55 Abdula Saheb v. Guruvappa & Co, AIR 1944 Mad 387. 56 Birla Jute Mfg Co Ltd v. Dulichand Pratapmull, AIR 1953 Cal 450; Hussain Kasam Dada v. Vijayanagram Commercial Assocn, AIR 1954 Mad 528; David Taylor & Son Ltd v. Barnett, [1953] 1 All ER 843, [1953] 1 WLR 562.
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57 BOI Finance Ltd v. Custodian, AIR 1997 SC 1952, (1997) 10 SCC 488. 58 Sunil Pannalal Banthia v. City and Industrial Development Corpn of Maharashtra Ltd, AIR 2007 SC 1529, (2007) 10 SCC 674. 59 PC Kapoor v. Commr of Income Tax, 90 ITR 172, (1973) 1 All 293 at 313, 315 (FB) (All); Janki Bai Chunnilal v. Ratan Melu, AIR 1962 MP 117(FB) . 60 (1978) 139 CLR 410; distinguishing Cornelius v. Phillips, [1918] AC 199, [1916-17] All ER Rep 685 HL. 61 Archbolds (Freightage) Ltd v. S Spanglett Ltd, [1961] 1 QB 374 at 390, [1961] 1 All ER 417, [1961] 2 WLR 170(CA) . 62 Hughes v. Asset Managers Plc, [1995] 3 All ER 669. 63 Peddi Virayya v. Doppalapudi Subba Rao, AIR 1959 AP 647; Subodh Kumar Shaw v. Bijoy Krishna Mallick, AIR 1984 NOC 128(Cal) . 64 Rakurti Manikyam v. Medidi Satyanarayana, AIR 1972 AP 367 at 368. 65 Bhaskarrao Jageshwarrao Buty v. Saru Jadhaorao Tumble, AIR 1978 Bom 322. 66 Yeleswarapu Lakshmi Suryanarayana v. Kudara Valli Venkataratnam, AIR 1945 Mad 512. 67 Yogendra Kumar Jalan v. Union of India, AIR 1972 Del 234 at 236. 68 Parasram v. Naraini Devi, AIR 1972 All 357 at 359; Tattya Mohyaji Dhomse v. Rabha Dadaji Dhomse, AIR 1953 Bom 273; Rambhau Ganjaram v. Rajaram Laxman, AIR 1956 Bom 250; not following Hansraj Bhuteria v. Askaram Bhuteria, AIR 1941 Cal 244. 69 Tribeni Pd Rastogi v. Basudeo Pd Rastogi, AIR 1980 Pat 220. 70 Maheswar Das v. Sakhi Dei, AIR 1978 Del 84 at 86; Ram Jash Agarwala v. Chand Mandal, (1937) 2 Cal 764; Birupakshya Das v. Kunja Behari, AIR 1961 Del 104. 71 Malladi Seetharama Sastry v. Naganath Kawlwar, AIR 1968 AP 315. 72 St John Shipping Corpn v. Joseph Rank Ltd, [1957] 1 QB 267, [1956] 3 All ER 683; Archbolds (Freightage) Ltd v. S Spanglett Ltd [1961] 1 QB 374, [1961] 1 All ER 417, [1961] 2 WLR 170(CA) ; Dungate v. Lee, [1969] 1 Ch 545, [1967] 1 All ER 214. 73 Fuji Finance Inc v. Aetna Life Insurance Co Ltd, [1994] 4 All ER 1025. 74 St John Shipping Corpn v. Joseph Rank Ltd, [1957] 1 QB 267 per Devlin J. at 288-289, [1956] 3 All ER 683 at 691. 75 See above at 284, 289-90, 292-93. 76 Maries v. Philip Trant & Sons Ltd (No 2), [1954] 1 QB 29, [1953] 1 All ER 651 [failure to deliver particulars in writing at the time of delivery of seeds as required under the (English) Seeds Act 1920]. 77 Ashmore, Benson, Pease & Co Ltd v. AV Dawson Ltd, [1973] 2 All ER 856, [1953] 1 All ER 651 (overloading the vehicle). 78 Newland v. Simons & Willer (Hairdressers) Ltd, [1981] ICR 521. 79 Coral Leisure Group Ltd v. Barnett, [1981] ICR 503 at 509; Newland v. Simons and Willer (Hairdressers) Ltd, [1981] ICR 521 at 530. 80 Janardhanan v. Sreedharan, AIR 1985 Ker 199 at 202. 81 Ashmore, Benson, Pease & Co Ltd v. AV Dawson Ltd, [1973] 2 All ER 856 at 862, [1973] 1 WLR 828; Anderson Ltd v. Daniel [1924] 1 KB 138 at 149, B&B Viennese Fashions v. Losane, [1952] 1 All ER 909 at 913, (1952) 1 TLR 750; J M Allan (Merchandising) Ltd v. Cloke, [1963] 2 All ER 258 at 261, [1963] 2 WLR 899. 82 Berrett v. Smith, (1965) NZLR 460 at 463, 465; Anderson Ltd v. Daniel, [1924] 1 KB 138; B&B Viennese Fashions v. Losane, [1952] 1 All ER 909, (1952) 1 TLR 750; Marles v. Philip Trant & Sons Ltd (No 2), [1954] 1 QB 29, [1953] 1 All ER 651; St John Shipping Corpn v. Joseph Rank Ltd, [1957] 1 QB 267, [1956] 3 All ER 683.
Defeat the Provisions of Law
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The words 'defeat the provisions of any law' must be taken as limited to defeating the intention which the legislature has expressed, or which is necessarily implied from the express terms of an Act . It is unlawful to contract to do that which it is unlawful to do; but an agreement will not be void, merely because it tends to defeat some purpose ascribed to the Legislature by conjecture, or even appearing, as a matter of history, from extraneous evidence, such as legislative debates or preliminary memoranda, not forming part of the enactment. It is not defeating the provisions of a law to take advantage of the lack of any provision for some particular case. If the enactment as it stands, is intelligible, the court cannot assume that the omission was not intended. The court looks at the real intention of the parties to an agreement and not merely at the description of it by the parties. If the intention of the parties is to defeat the provisions of law, the court will not enforce it. Where, by merely styling a document as a mortgage, the landlord was really collecting one year's rent in advance, which was prohibited by law, the agreement was held to be illegal and not enforceable.83 Defeating Legislative EnactmentsAgreements Affecting Payment of Rent A statute, relating to rent control, prohibited the payment of premium, and if paid it was recoverable. The word 'premium' included '...any other pecuniary consideration in addition to rent', and was held to include any consideration whereby there is benefit to the landlord or detriment to the tenant. The mere fact that the premium was required to be paid not to the landlord, nor to any person on his behalf; but to a third party, could not remove the transaction from the operation of the Act, since the Legislature could not be supposed to have intended that a landlord might lawfully require the payment of premium for the benefit of a third party.84 Where the mortgagee, on redemption, was entitled to retain possession as a tenant and the mortgagor's debt was reduced to a certain extent, the amount by which the debt was reduced was held to be a 'premium' prohibited under a rent restriction statute, and could not be enforced.85 Creation and Transfers of Tenancy or Occupancy or Other Similar Rights The surrender of a raiyati holding by a raiyat in favour of his landlord and transfer by the landlord to the plaintiff of the same holding making a permanent chapparbandi lease, was held to be a device to circumvent the provisions of the Chota Nagpur Tenancy Act, 1908 which prohibited the transfer of raiyati rights by a raiyat, and hence, was void under this section.86 In Krishna Khanna v. Addl District Magistrate, Kanpur, 87a landlord and tenant agreed on the following by a compromise: (a) that on the expiry of 30 days from the date of intimation, the shop in dispute would automatically stand released to the landlord; (b) the landlord at any time could discontinue to utilise the accommodation for his own business or the business of his son; (c) if the landlord at any time discontinued the use of the premises for his own business, he would let it out to the tenant on reasonable terms and not to anyone else; (d) that the shop is already in possession of the landlord, and the tenant will not be entitled to take any steps till the landlord himself desires to let out the shop to the tenant. This compromise was challenged, and it was held by the majority that so long as the Act88 and the Rules continued in force, the control of letting vested in the District Magistrate and not in the parties, and that this power could not be curtailed by compromise, it being for the benefit of the general public. Therefore, the compromise was void under s. 23 of this Act and the tenant committed no fraud in applying for eviction of the landlord under s. 7 A of the Act and for delivery of act ual physical possession to him. The minority view was that even if the compromise was unlawful and the decree passed on that account void, the mere fact of the tenant having submitted to the consent decree declaring the order of allotment to be invalid and recognising the right of the landlord to occupy the shop was a highly relevant circumstance bearing on the exercise of discretion of the District Magistrate, and the nondisclosure of the fact of the consent by the tenant in his application under s. 7 A vitiated the order of the District Magistrate. However, s. 23 did not apply where a contract of sale of occupancy tenancy by an occupancy tenant
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without the consent of the landlord was not ab initio void under the statute;89 or where there was a partial restriction (for a period of years) on alienation of unoccupied lands given on registry, and the impugned agreement was an agreement for sale of the land assigned to the defendant by the Government under the Food Production Scheme, 15 years before the registry;90 or where the provisions of the statute rendered void acquisition of land under the land reforms law by a person having an income above a certain limit, when such acquisition had to be declared null and void after an enquiry and declaration made under the statute.91 Where, after a decree for ejectment and arrears of rent was passed, the parties agreed in execution proceedings that the judgment-debtor would not appeal against the decree and will pay the decretal amount and vacate the premises in a month, the agreement was held valid,92 so was an agreement allowing the landlord to reconstruct the leased shop without dispossessing the tenant, and letting the same to the tenant at higher rent.1 Licences and Permissions under Statutes A license under the Abkari Act cannot be obtained benami, as that would defeat the purpose of the Act, and therefore, no suit can be filed against the benamidar to recover any sum of money from him.2 As a licensee must be known to and approved by the authorities, purchase of toddy shops by a benamidar is illegal.3 Paying a sum of money for the purchase of a license is illegal under the relevant Export Control Order because: (a) it would amount to the transfer of the privilege under the export licence; and (b) it would be export of goods by a person, the exporter, although, the goods are not his property. Any agreement for the payment of price for the license would amount to abetment of an offence, and hence void under this section.4 A partnership, where a licensee of a municipal stall admitted a partner enabling him to carry on business in that stall, would be of a nature, which if permitted, would defeat the provision of the law prohibiting the carrying on of business in a municipal stall without a licence and would, therefore, be void under s. 23.5 Contracting out of the Provisions of a Statute Where the object of the statute is the protection of a class of persons, an agreement reducing or restricting this protection would be unlawful as defeating the purpose of the statute. A contract, which seeks to exclude the application of a statutory provision to the parties, is not valid.6Section 60 (1A) of the Code of Civil Procedure, 1908, declares that any agreement by which a person agrees to waive the benefit of any exemption from attachment, is void. Hence, the protection afforded by proviso (c) to s. 60, being based upon high public policy of State, cannot be waived.7 The most obvious and direct form of contracting out of a statute is where a party agrees not to make a claim for a benefit for which a statute provides. But it may take many other forms, varying with the nature, subject matter and the object or purpose of the statute, and the means selected to escape from its provisions or its operation. An express statutory prohibition against contracting out renders void an agreement or clause that is inconsistent with it. But when there is no express prohibition in the statute, an agreement, the operation of which defeats or circumvents the purpose or policy of the statute, would also be barred. The Supreme Court has held that the protection given by the rent restriction laws was a matter of public policy and for the protection of the tenants in general, and could not be waived,8but benefits given under these laws to landlords can be waived by them, as the public policy demands protection of tenants. An agreement by a tenant contracting out of the provisions of a Rent Act is illegal, since the law has been enacted for the protection of tenants;9 but an agreement is not unlawful if an agreement enhances the rights granted under the statute. Parties can contract for greater benefits than those conferred under the statute. An agreement for termination of a lease, if two month's rent remained unpaid, would be binding on the parties even though inconsistent with the Rent Act, the reason being that it was not against public policy to abridge the rights of the landlord who, under the applicable Act, could re-enter on non-payment of one month's rent.10 In a suit for ejectment of a tenant, a valid decree for ejectment could be passed by compromise, and there was no prohibition in
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passing such decree, even if none of the grounds mentioned in the law for eviction were mentioned in the compromise. The protection being for the benefit of the tenant, he could waive that right;11 but it has also been held that such a compromise cannot be enforced, when none of the grounds for eviction available under the applicable Rent Act was set out in the compromise.12 An agreement between a landlord and his tenant during the pendency of eviction proceedings that the tenant will not be evicted even after a decree of eviction is passed is not void.13A contract between the landlord and a statutorily protected tenant to give up possession for the landlord's promise to pay a sum of money to him (the tenant) was not illegal, as an attempt to get out of Rent Acts, although, the landlord could not obtain possession except under the Rent Act, yet, if the tenant performed his part, he could recover the sum of money promised.14 But this principle would not apply where the rent statute expressly prohibits receiving of such payments by the landlord from the tenant for granting the lease, or by the tenant from the landlord for surrendering the premises. Insolvency Laws An agreement the consideration of which is to defeat the provisions of the statutes relating to insolvency, is void.15 An agreement, by which an insolvent who had obtained his personal, but not his final discharge, settled the claim of one creditor without notice to the official assignee or his other creditors, and by which that creditor agreed not to oppose his final discharge, was void as in fraud of the creditors and as inconsistent with the policy of the statute then in force.16 Similarly, a promissory note, by which a creditor secures for himself a payment from an insolvent larger than he is entitled to under a composition deed, is void, where the other creditors are not aware of the arrangement, despite the note being passed to the creditor by a third party with the insolvent's knowledge.17 A composition deed, by which a debtor assigned the whole of his property to trustees for the benefit of such of his creditors as should sign the deed within a certain period, was void as against the official assignee.18 On like grounds, a collusive assignment for a contract by a party thereto, on the eve of his insolvency to his brother-in-law with the object of defrauding his creditors was void under this section and s. 6, clause (h) of the Transfer of Property Act, 188219as the effect of such an assignment was to defeat the provisions of the Indian Insolvency Act then in force, by preventing the benefit of the contract from vesting in the official assignee.20 An official assignee could not raise money for pursuing a suit for the benefit of the estate under an agreement with creditors, who advanced it and gave preference to it over their debts,21 but where a discharged insolvent agreed to pay his old debt in consideration of the creditor entering into a fresh transaction, the agreement was valid.22 Procedural Laws Where, under the Code of Criminal Procedure, 1973, (Cr PC),23A was required to furnish a surety for his good behaviour, and B agreed to become a surety on condition that A would deposit with him the sum in which he was required to get bail, and the deposit was made, the deposit was not recoverable after the expiry of the period of suretyship, as the effect of the agreement was to defeat the provisions of the Code by rendering B a surety only in name.24 But where P, had deposited money with D to stand surety for an accused charged under s. 323 of the IPC , he was held entitled to recover from D, on the ground that the surety was not for good behaviour,25 but it was a case where the court could have been satisfied under s. 513, Cr PC (as it stood then), if the accused himself deposited the money.26 A contract to indemnify a surety against loss in the event of the surety bond being forfeited, is illegal and cannot be enforced.27 Hence, a surety, who has given a bail for an accused person, cannot recover from the accused the bail that has been forfeited in consequence of the accused failing to appear when required by the court which released him on bail.28 The salary of a railway servant to the extent of Rs. 100/- being exempt from attachment under s. 60(I) (i) of the CPC , 1908 (as it then stood), a compromise decree making moneys from the salary of the railway servant earning less than Rs. 100/- payable by instalments was void and unenforceable.29 Since a receiver is an officer of the court, the court alone can determine his remuneration, and the parties cannot, by any act of theirs, add to, or derogate from, the functions of the court without its
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authority,30 and therefore, a promise to pay the salary of a receiver without leave from the court, even if unconditional, is not binding on the promisor;31but an agreement for remuneration to an executor, not out of the assets of the testator, but from the pocket of a third person, is neither forbidden by s. 56 of the Administrator-General's Act, 187432 nor it is one, which, if permitted, would defeat the provisions of that Act.33 An alienation made, pending a temporary injunction under the CPC was not unlawful under this section.34 An agreement to give time to the judgment-debtor without the sanction of the court could be enforced by either party on performing its part of the contract.35 But, although, interest cannot be recovered by proceedings in execution of the decree when a decree is silent as to subsequent interest,36 an agreement in the nature of a compromise between a decree-holder and a judgment-debtor, which proceeds upon ignorance common to both parties thereto, as to the above principle, is not illegal as defeating the provisions of that law.37 Parties, by contract, can neither alter the statutory period of limitation nor the statutory starting point of limitation, and any such contract is void.38 An agreement by a debtor not to raise the plea of limitation is void under this section, as it would defeat the provisions of the Limitation Act,39 though not voided by s. 28. Agreements by Persons Incompetent under Statute Where a person has been declared, under an Act, to be incompetent to transfer land belonging to him, a transfer of land by such person is void under this section, and such transfer cannot be enforced even after removal of the disability.40 A mortgage of immovable property belonging to a minor, by a person holding a certificate of administration in respect of the estate of the minor under the Minors (Bengal) Act, 185841 was void, where it was made without the sanction of the court, even though the mortgage money was advanced to liquidate ancestral debts and to save an ancestral property from sale in the execution of a decree.42 A sale deed executed by a de factoguardian of a lunatic without the permission of the court, under the proviso to s. 75(1) of the Lunacy Act, 191243 was void under s. 23 of this Act, because of the statutory embargo against the alienation of the property belonging to a lunatic without the permission of the court.44 But where a landholder, who was re-entrusted with his land by the Court of Wards, but remained under a statutory disability that prevented him from transferring any interest beyond his life without the previous sanction of the collector, purported to transfer such an interest without such sanction, the transferee could sue the latter's legal representatives on dispossession after the death of the transferor, for breach of the covenants for title and quiet enjoyment.45 Similarly, a bond passed by a ward of the Court of Wards is void. But, if after the death of the ward, and after the estate was released from the Courts of Wards, the son of the deceased ward obtained a fresh advance from the lender and passed a bond for a sum, including the loan to the deceased, the bond was valid even as regards that loan, provided, it was proved that the lender refused to make a fresh advance, unless the son agreed to pay also the loan made to the father.46 Speculative Transactions Where the plaintiff and defendants entered into a contract to do business in oil seeds in the Bombay market, and the plaintiff was authorised to do business through sub-agents and also authorised to do business in accordance with the custom of badla in the Bombay markets, the contract between the parties was held not to be a wagering contract. But the contract was otherwise void, as having been entered into for an object which was prohibited by law, namely the law forbidding forward contracts (Bombay Forward Contracts Control Act) and the Oil Seeds Forward Prohibition Order and Essential Supplies Act with the Central Order of 1943.47 Transactions in derivatives, being expressly permitted by master circulars issued by the Reserve Bank of India are not opposed to public policy.48 Where A entered into a contract with B to engage on A's behalf in speculative business, and B entered into contracts with third parties for the purpose of carrying out A's contract, it was immaterial whether B
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dealt with third parties as a principal or as being sub-agent; and if the contract between A and B was illegal under s. 23 of this Act, B's suit against A must fail.49 Foreign Exchange Regulation Laws In Dhanrajamal Govindram v. Shamji Kalidas & Co, 50 a contract for the purchase and sale of East African cotton, provided in its clause 6, that the buyers were to obtain import licence from the Government of India, failing which, the sellers would, 'at their discretion', be entitled either to carryover the goods at the cost of the buyers, or call upon them to take immediate delivery on payment in British East Africa, and in default, to sell the goods in British East Africa and claim the deficit, if any, between the contractual price, and the price obtained on re-sale. By a subsequent letter, the sellers confined that 'if necessary' they would carryover the goods for two months. The contract further provided that notwithstanding the import policy followed by the Government of India in respect of the import of contracted goods, the buyers would be bound to obtain the necessary import licences and communicate the numbers thereof to the sellers on the specified dates, failing which clause 6 above would operate. The buyers did not perform the contract and the sellers, after notice to them, resold the goods and thereafter claimed the deficit which the buyers refused to pay. It was urged that the above clauses contemplated acquisition of property or exchange in Africa, and thus, were in breach of s. 5 of the Foreign Exchange Regulation Act, since no general or special exemption had been granted thereunder by the Reserve Bank. The Supreme Court held:51 The contention that the contract involved an actual or, at least, a contingent right to exchange or acquisition of property aboard is not correct. Even if it were so, the contract is saved by s. 21, as already explained. In our opinion, the contract was not void for illegality. Other Enactments An agreement, under which a corporation authorised a person to operate as its nominee, his motor vehicle as a stage carriage under the permit issued to the corporation, being contrary to the provisions of ss. 42 and 59 of the Motor Vehicles Act, 1939 could not be enforced.52It would have been different if there had been a law corresponding to the Uttar Pradesh Motor Vehicles Special Provisions Act, 1976 under which the competent authority could authorise such operation subject to conditions specified therein.53 An agreement, by which a permit as well as vehicle covered by it was transferred without requisite permission under s. 59 of the Motor Vehicles Act, was void under this section as defeating s. 59 of that Act.54 A Way Bill issued by a carrier provided that no suit would lie against the carrier in respect of any consignment without a claim made in writing in that behalf and preferred within 30 days from the date of booking or from the date of arrival at the destination. It was held that the object of such provision was to defeat the provisions of s. 10 of the Carriers Act, and therefore, such provision was void under this section.55 A contract of sale of land without complying with the provisions of the relevant Town Planning and Development Act was illegal and invalid for contravention of the Act . Neither the Act nor the Regulations thereunder expressly prohibited selling before the issue of the certificate thereunder, but the prohibition was implied from the steps to be taken by any person desiring to sell land.56 And where the manager of the temple at Broach sued the defendant to establish the right of the temple to levy a cess on cotton purchased in Broach and exported from it, it was held that, assuming that the defendant impliedly assented to pay the cess, the agreement was unlawful as being against the provisions of the Bombay Town-Duties Abolition Act, 1844 which abolished cesses of every kind not forming part of the land revenue.57 An agreement under a registered sale deed, imposing an absolute restraint on the right of the vendee to alienate the property being violative of s. 10 of the Transfer of Property Act, 1882 was held to be hit by s. 23.58 Since a will must be proved in some form, no grant of probate can be made merely on the consent of the parties, and an agreement or compromise about the genuineness and due execution of a will, if its
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effect is to exclude evidence in proof of the will, is not lawful so as to be enforceable59 under the provisions of s. 375 of the CPC.60 An agreement to refer to arbitration the construction of an unprobated will, was held to be illegal, being forbidden by s. 123 of the Indian Succession Act, 192561 so was an agreement to share commission between an insurance agent and an insurer.62 An agreement to let to hirers a roulette table with the necessary accessories for playing a game known as 'roulette royale' is unlawful and therefore void and unenforceable, rendering irrecoverable any sum due under an agreement of hiring.63 An agreement to pay fees to a chartered accountant, on the basis of percentage of the relief obtained in an income tax case, is opposed to the provisions of the Chartered Accountants Act, 1949 even though it includes fees to be paid to counsel.64 A claim in the case of an insurance against loss, including theft of various articles, was held unsustainable as the articles included various articles smuggled by the plaintiff without paying duty. It was held that the insurance was not tainted with illegality, but would be contrary to public policy to help the plaintiff to make good the loss, because to do so would allow him to benefit from this infringement of the law.65 A loan made to a parent or guardian for the marriage of his minor child is for a purpose, which if permitted, would defeat the provisions of the Child Marriage Restraint Act, 1929.66 Opposed to Personal Law of Parties The rules must of course be such as are recognised and enforceable by courts of law; they do not include rules of an exclusively religious character which operate in foro conscientiae only. An agreement that would defeat the provisions of Hindu law, would be unlawful within the meaning of the present clause. Where the contract provided for giving a son in adoption in consideration of an annual allowance to the natural parents, a suit would not lie to recover any allowance on such a contract, though the adoption may have been performed.67 Hindu law does not recognise in this kali yug, any adoption but that of a dattak son, and such a son is defined in Dattaka Chandrika (s. 1, para 12) as a son 'affectionately given by his father or mother'. Besides defeating the provisions of Hindu law, such an agreement would involve an injury to the person and property of the adopted son:
...inasmuch as, if it could be proved that the boy was purchased and not given, it is very probable that the adoption would be set aside, and if such adoption were set aside he would not only lose his status in the family of his adopting father, but also lose his right of inheritance to his natural parents.68
An agreement between a widow and her deceased husband's coparceners seeking to restrain the power of the widow to adopt was void, whether the restraint was absolute or partial. It was also repugnant to Hindu law, and an adoption in breach of such agreement was nevertheless valid.69 A father agreed not to take any share in the movable or immovables of his father's estate in order to prevent the prosecution of his son for theft of ornaments from the father's house. Such an agreement purporting to forfeit his share in father's estate, besides requiring registration, is void under s. 23.70 A karnavan of a tarwad cannot part by contract, so as to be unable to resume them, with the privileges and duties which attach to his position as karnavan.71 Such an agreement is invalid on the principle that 'there can be no renunciation of rights and consequent destruction of relative duties prescribed by an absolute law'.72 A contract between Hindus of Assam, by which it was agreed that, if the husband left the village in which the wife and her friends resided, the marriage would become null and void, was contrary to the policy of Hindu law.73 Similarly, an agreement, where a Hindu husband agreed that he will not be at liberty to remove his wife from her parents' abode to his own abode, was illegal, as tending to defeat
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the rule of Hindu law, and also opposed to public policy; and such an agreement was no defence to a suit by the husband for the restitution of conjugal rights.74 So was an agreement void, which enabled the wife to avoid the marriage, if the husband took another wife, or did not treat her kindly, or asked her to live at place D instead of place B, being repugnant to the spirit of Hindu law.75 An agreement between a Mahomedan wife and husband made before marriage, providing that the wife shall be at liberty to live with her parents after marriage was void, and did not afford an answer to a suit for restitution of conjugal rights;76 so was an agreement between husband and wife living separately made after marriage, where it provided that they should resume cohabitation, but if the wife is unable to agree with the husband, she should be free to leave him;77 or an agreement between a Mahomedan husband and wife for a future separation, where the wife could not on separation, recover the maintenance allowance provided by the agreement.78 But an agreement made between a Mahomedan wife and husband, entered into before marriage, by which it was provided that the wife shall be at liberty to divorce herself from her husband under certain specified conditions was valid, if the conditions were of reasonable and not opposed to the policy of Mahomedan law. When such an agreement is made, the wife may, at any time after the happening of the contingencies, repudiate the marriage herself, in the exercise of the power; and such a divorce will take effect as if the talaq (divorce by the husband) was by tafwiz (delegation), the wife being as it were, the delegate of the husband to pronounce the talaq.79 So also, an agreement made at the time of marriage, where the husband undertook not to ill-treat his wife, and agreed that the wife would be entitled to claim the customary maintenance allowance if relations between husband and wife became strained, was not void.80 83 Tip Top v. Indramani Devi, AIR 1982 Pat 190 at 197. 84 Elmdene Estates Ltd v. White, [1960] 1 All ER 306[1960] 2 WLR 35 at 365, 366, 368 and 373 (HL); distinguishing Rex v. Birmingham (West) Rent Tribunal, [1951] 2 KB 54, [1951] 1 All ER 198, (1951) 1 TLR 77. 85 Gobind Ram v. Rajphul Singh, AIR 1973 Punj 94. 86 Garaj Narain Singh v. Babulal Khemka, AIR 1975 Pat 58 at 60. 87 AIR 1975 SC 1525 at 1529, 1533, [1975] 3 SCR 709. 88 The Uttar Pradesh (Temporary) Control of Rent and Eviction Act. 89 Bipin Behari Deb v. Masrab Ali, AIR 1961 Assam 173 [under Assam (Temporarily Settled District) Tenancy Act]. 90 Krishnna Kesavan v. Kochukkunju Karunakaran, AIR 1988 Ker 107 at 109. 91 KMjose v. D Anantha Bhat, AIR 1987 Kant 173 at 176 [case under s. 79A (1) and (3) of the Karnataka Land Reforms Act]. 92 Gousmohoddin Gajabur Saheb Bhagwan v. Appasaheb, AIR 1976 Kant 90; Gajendra Singh v. Durga Kumari, AIR 1925 All 503(FB), 23 All LJ 561; Shiwaji v. Ratiram, AIR 1931 Nag 126. 1 Deo Narayan Jaiswal v. Special Judge, AIR 2008 All 163. 2 Puvvada Venkata Subbayya v. Attar Sheik Mastan, AIR 1949 Mad 252. 3 Fakirchand v. Bansilal, AIR 1955 Hyd 28(FB) . 4 Nathmal Bhaironbux and Co v. Kashi Ram, AIR 1973 Raj 271 at 277. 5 Rasamoy Chowdhury v. Anil Krishna Dawn, AIR 1988 Cal 55 at 57. 6 King v. Paulson, AIR 1920 PC 190 at 195; Madan Mohan v. Ram Chander Rao, AIR 1935 All 619; Mukul Dutta Gupta v. Indian Airlines Corpn, AIR 1962 Cal 311. 7 Duggirala Balarama Krishnayya v. Arokapudi Jagannadha Rao, AIR 1983 AP 136 at 139. 8 Murlidhar Agarwal v. State of Uttar Pradesh, [1975] 1 SCR 575, AIR 1974 SC 1924 at 1928. 9 Lachoo Mal v. Radhye Shyam, [1971] 3 SCR 693, AIR 1971 SC 2213; Varada Bongar Raju v. Kirthali Avatharam, AIR 1965 AP 86.
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10 S Raja Chetty v. Jagannathadas Govindas, AIR 1950 Mad 284; see also Ramswarup Prasad v. Budhdeo Sao, AIR 1983 Pat 266. 11 Tej Chaddha v. Sideshwari, AIR 1973 All 324 at 328 [the Uttar Pradesh (Temporary) Control of Rents and Eviction Act, 1943], distinguishing Lachoo Mal v. Radhye Shyam, [1971] 3 SCR 693, AIR 1971 SC 2213. 12 Hubbilal Sadashiv v. Mohammed Makbool Ahmed Khan, AIR 1977 MP 65; relying on Nagindas Ramdas v. Dalparram Iccharam, [1974] 2 SCR 544, AIR 1974 SC 471; not following Chandan Bai v. Surjan, AIR 1972 MP 106. 13 M K Usman Koya v. C S Santha, AIR 2003 Ker 191. 14 Rajbenbach v. Mamon, [1955] 1 QB 283, [1955] 1 All ER 12. 15 Muktilal Agarwala v. Trustees of the Provident Fund of the Tin Plate Co of India Ltd, AIR 1956 SC 336 at 339; Krishnappa Chetti v. Adimula Mudali, (1896) 20 Mad 84; In Re V PurushothamDoss and Brothers,(1927) 116 IC 125, 55 Mad LJ 657, AIR 1929 Mad 385; Narinjan Singh v. Damodar Singh, AIR 1936 Lah 831. 16 Naoroji Nusserwanji Thoonthi v. Kazi Sidick Mirza, (1896) ILR 20 Bom 636 (a case under the Insolvent Debtors Act, later replaced by the Presidency-towns Insolvency Act, 1909 and the Provincial Insolvency Act 1920). 17 Krishnappa Chetti v. Adimula Mudali, (1896) ILR 20 Mad 84; Mahomad Pulavar v. Parameshwara Patter, (1906) 16 Mad LJ 418; Atumal Ramoomal v. Dipchand Kessumal, 179 IC 901, AIR 1939 Sind 33. 18 Manmohandas Ramji v. NC Macleod, (1902) ILR 26 Bom 765. 19 The Transfer of Property Act, 1882, clause (h), s. 6, provides that no transfer can be made for an unlawful object or consideration within the meaning of s. 23 of the Contract Act. 20 Jaffer Meher Ali v. Budge Budge Jute Mills Co, (1907) ILR 34 Cal 289; on appeal from (1906) 34 Cal 702. 21 In Re V PurushothamDoss & Brothers,(1927) 116 IC 125, 55 Mad LJ 657, AIR 1929 Mad 385. 22 Hashim Ismail Dooply v. Chotalal, (1938) Rang 19, 174 IC 863, AIR 1938 Rang 11. 23 Then s. 505, Act 10 of 1872; later s. 107, Act 5 of 1898, Act 2 of 1974. 24 Fateh Singh v. Sanwal Singh, (1875-80) ILR 1-2 All 751. 25 Ibid. 26 Dula Ram v. Akhey Raj, AIR 1952 Ajmer 28 distinguishing Fateh Singh v. Sanwal Singh, (1878) 1 All 751; but see Laxmanlal Kanakkirti Pandit v. Mulshankar Pitambardas Vyas, (1908) 32 Bom 449 at 453, where a similar argument was rejected because the deposit permitted by s. 513 is allowed only in substitution of the bond, the principal himself would otherwise execute, not in substitution of any bond which his surety executes. 27 Bhupati Charon Nandi v. Golam Ehihar Choudhury, AIR 1920 Cal 498, 56 IC 539. 28 Sunder Singh v. Kishen Chand, (1899) Punj Rec No 1; Bur Singh v. Kehru, AIR 1938 Lah 732. 29 M&SM Rly v. Rupchand Jitaji, (1950) Bom 185, AIR 1950 Bom 155, (1949) 51 Bom LR 1024; Prem Prakash v. Mohan Lal, (1944) Lah 379. 30 O. 40, r. 1, Civil Procedure Code . 31 Prokash Chandra Sarkar v. EE Adlam, (1903) ILR 30 Cal 696. 32 Later repealed; now the Administrators-General Act, 1963. 33 Narayan Coomari Debi v. Shajani Kanta Chatterji, (1895) ILR 22 Cal 14. 34 Monohar Das v. Ram Autar Parde, (1903) 25 All 431, (1901-03) ILR 23-25 All 1025. 35 Bank of Bengal v. Yabhoy Gangji, (1891-92) ID 15-16 Bom 618; Abaji Sitaram Modak v. Trimbak Municipality, (1903) 28 Bom 66 at 73; (1903-04) IHCR 21-28 Bom 472; such an agreement was declared void under s. 257A , Code of Civil Procedure , 1882, which section is not re-enacted in the Code of Civil Procedure, 1908. 36 Sadasiva Pillai v. Ramalinga Pillai, (1875) 2 IA 219, 15 BLR 383. 37 Seth Gokul Dass Gopal Dass v. Murli and Zalim, (1878) ILR 3 Cal 602. 38 Ballapragada Ramamurthy v. Thammanna Gopayya, (1917) 40 Mad 701, AIR 1917 Mad 892; Jawahar Lal v. Mathura Prasad, AIR 1934 All 661(FB) .
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39 Ballapragada Ramamurthy v. Thammanna Gopayya, (1917) 40 Mad 701, AIR 1917 Mad 892, 35 IC 575; Bhagwati Prasad v. Chatrapal, (1946) All 711, 225 IC 122, AIR 1947 All 38. 40 Radha Bai v. Kamod Singh, (1908) ILR 30 All 38 (a case under s. 8, Jhansi Encumbered Estates Act, 1882, s. 8 then in force relating to disqualified zamindars). 41 Repealed by the Guardian and Wards Act, 1890. 42 Chimman Singh v. Subran Kuar, (1880) ILR 2 All 902. 43 See the Mental Health Act 1987, which does not contain any express prohibition. 44 Johri v. Mahila Draupati, AIR 1991 MP 340 at 344. 45 Gulabchand Daulatram v. Suryajirao Ganpatrao, AIR 1950 Bom 401, following Babu Nisar Ahmad Khan v. Babu Raja Mohan Manucha, AIR 1940 PC 204, where the PC held a mortgage to be void for want of the collector's sanction, but the covenant to pay nevertheless enforceable. 46 Babu Bindeshri Prasad v. Kuar Sarju Singh, AIR 1923 All 590, (1923) 21 All LJ 446, 73 IC 458. 47 Firm of Pratapchand Nopaji v. Firm of Kotrike Venkata Setty & Sons, [1975] 3 SCR I, AIR 1975 SC 1223 at 1233; Shivnarayanan Kahra v. State of Madras, [1967] 1 SCR 138, AIR 1967 SC 986 at 989. 48 Rajshree Sugars and Chemicals Ltd v. Axis Bank Ltd, AIR 2011 Mad 144. 49 Firm of Pratapchand Nopaji v. Firm of Kotrike Venkata Setty & Sons, [1975] 3 SCR 1, AIR 1975 SC 1223 at 1233 (suit for recovery of losses incurred in speculative oilseed transactions), relying upon Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406, AIR 1959 SC 781. 50 Dhanrajamal Govindram v. Shamji Kalidas & Co, [1961] 3 SCR 1020, AIR 1961 SC 1285; Abdul Jabbar v. Abdul Muthaliff, AIR 1982 Mad 12. 51 Dhanrajamal Govindram v. Shamji Kalidas & Co supra at 1291. 52 Brij Mohan Parihar v. Madhya Pradesh Road Transport Corpn, AIR 1987 SC 29 at 32. 53 Sumer Chand Sharma v. State of Uttar Pradesh, AIR 1986 SC 1112. 54 Khawaz Bux v. Mirza Mohammad Ismail, AIR 1984 All 83 at 86. 55 MG Brothers Lorry Service v. Prasad Textiles, AIR 1984 SC 15 at 18. 56 George v. Greater Adelaide Land Development Co Ltd, (1929) 43 CLR 91 at 101; applying Harse v. Pearl Life Assurance Co, [1904-07] All ER Rep 630, CA; [1904] 1 KB 558. 57 Gosvami Purushotamji Maharaj v. B Robb, (1884) ILR 8 Bom 398. 58 Brahama Nand v. Roshani Devi, AIR 1989 HP 11 at 13. 59 Monmohini Guha v. Banga Chandra Das, AIR 1989 HP 11 at 13, (1903-04) ILR 30-31 Cal 925. 60 Now O. 23, r. 3, CPC, 1908. 61 Vishanji Dungarmal Futnani v. Mohanlal Dungarmal Futnani, AIR 1988 Cal 402 at 408. 62 Administrator, Hindustan Cables Employees Co-op Multipurpose Society Ltd v. Jatindra Kumar Das Choudhury, AIR 1968 Cal 146; Heyman v. Darwins Ltd, [1942] AC 356, [1942] 1 All ER 337; referring to Anderson Ltd v. Daniel, [1924] 1 KB 138. 63 JM Allan (Merchandising) Ltd v. Cloke, [1963] 2 All ER 258, [1963] 2 WLR 899. 64 RB Basu v. PK Mukherjee, AIR 1957 Cal 449. 65 Geismar v. Sun Alliance & London Insurance Ltd, [1978] QB 383, [1977] 3 All ER 570. 66 Chandra Sreenivasa Rao v. Korrapati Raja Rana Mohana Rao, AIR 1952 Mad 579 at 582; Duggirala Sadasiva Vittal v. Bolla Rattain, AIR 1958 AP 145. 67 Under s. 17 of the Hindu Adoptions and Maintenance Act, 1956, an agreement to receive or the receipt of any payment or other reward in consideration of the adoption of any person is punishable. 68 Eshan Kishore v. Haris Chandra, (1874) 13 BLR App 42; Sitaram Pandit v. Harihar Pandit, (1910) 35 Bom 169 at 179, 180, 8 IC 625; Narayan Laxman Chandwadkar v. Gopalrao Trimbak Chandavarkara, (1922) 24 Bom LR 414, 67
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IC 850; but see Subbaraju v. lndukuri Narayanaraju, AIR 1926 Mad 1093, (1926) 51 Mad LJ 366, 97 IC 232 (a family agreement merely collateral to an adoption does not avoid it). 69 Punjabrao Deorao v. Sheshrao s/o Baburao, AIR 1962 Bom 175. 70 Haliman v. Md Manir, AIR 1971 Pat 385 at 388. 71 Cherukomen v. lsmala, (1871) 6 MHC 145. 72 See above, per Holloway J at p. 150. 73 Sitaram v. Mussamut Aheeree Heerahnee, (1873) 11 BLR 129 at 134, 135. 74 Tekait Mon Mohini Jemadai v. Basanta Kumar Singh, (1901) ILR 28 Cal 751. 75 Chait Ram v. Mussammat, (1900) Punj Rec No 15; Rambhabai Bhavan v. Kanji Ravji, AIR 1953 Sau 88; but see Purshottamdas Harjivandas Patel v. Rukmini, AIR 1937 Bom 358. 76 Abdul Pirojkhan Nabab v. Hussenbi, (1904) 6 Bom LR 728. 77 Meherally Mooraj v. Sakerrhanoobai, (1905) 7 Bom LR 602. 78 Bai Fatma v. Alimahomed Aiyeb, (1912) 37 Bom 280, 17 IC 946, (1911-13) ILR 35-37 Bom 923; Contra Muhammad Muinud-din v. Jamal Fatima, (1921) 43 All 650, AIR 1921 All 152, 63 IC 883; Muhammad Ali Akbar v. Fatima Begam, AIR 1929 Lah 660, 119 IC 486. 79 Hamidolia v. Faizunnissa, (1882) ILR 8 Cal 327; Ayatunnessa Beebee v. Karam Ali, (1908) 36 Cal 23; Maharam Ali v. Ayesa Khatun, (1915) 19 CWN 1226, 31 IC 562, AIR 1916 Cal 761 (the condition in this case was divorce, if husband married a second wife); Mirjan Ali v. Maimuna Bibi, AIR 1949 Assam 14 (the wife must establish clearly that the conditions entitling her to exercise the delegated power have been full filed); Buffatan Bibi v. Sheikh Abdul Salim, AIR 1950 Cal 304; Saifuddin Sekh v. Soneka Bibi, AIR 1955 Assam 153. 80 Jamila Khatoon v. Abdul Rashid, AIR 1939 Lah 165, 184 IC 105; Buffatan Bibi v. Sheikh Abdul Salim, AIR 1950 Cal 304.
Agreements Held not Void Ultra Vires Agreements An agreement by a Madras district municipality, by which it farmed out its rights to collect fees on the slaughter of animals was held void as being ultra vires, so that the municipality could not sue on it. The court said, 'the powers of a Corporation must be strictly constructed and it is hardly too much to say that what is not permitted to such a body is forbidden'.81 But this is not accurately expressed. A contract which is ultra vires the powers of a company under its memorandum of association, is not necessarily illegal.82 There is no such rule of construction as supposed, and acts ultra viresare not forbidden; the attempt to do such an act is a nullity.83 Money lent on a mortgage was recoverable by the sale of the mortgaged property, even if a society had no power to lend money on a mortgage. Such a transaction was not illegal within s. 23 of the Contract Act merely because it was in excess of authority.84 Cases on the doctrine of ultra vires are not really relevant to s. 23. Agreements Requiring Permissions as Condition Precedent The letting of premises for a club, which required planning permission on the understanding that permission will be applied for, was a letting for a legal purpose and the contract was not illegal, even though after taking possession, the lessee applied for permission, but it was refused.85 Others Permitting parole evidence to establish the real and larger consideration than the one recited in the deed of sale would not make the deed of the sale invalid, for the consideration recited, though not
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real, is still valid and is not hit by s. 23 of the Contract Act .86 Although deduction from the provident fund amount payable to an employee is prohibited, such deduction was allowed where the deduction was made on the basis of an undertaking given by the servant in the court.87 A loan by a military officer to a man under his command was not unlawful as being against the law, though such a loan may be against the rules of discipline.88 An agreement to sell is not a transfer of any rights in immovable property; and therefore, could not be held bad in law, despite the restrictions on the powers of the landlord under cll. 2 and 3 of s. 7, the Uttar Pradesh Encumbered Estates Act, 1934 prohibiting transfer of rights in immovable property by way of exchange, gift, sale, mortgage and lease.89There was nothing in the Bengal Drainage Act s,90 to render invalid a contract by which a tenant agreed to pay the landlord for the land on which rent has for the first time been imposed, the drainage cost in consequence of a scheme of works carried out under the Acts benefiting it.91 The Jute Export Control Order, 1949, did not prohibit or make unlawful, a contract for sale of jute goods at a price exceeding the ceiling price, since neither the consideration nor the object of such contract was unlawful or was of such a nature as to defeat the provisions of the control order.92 A raffle itself is not illegal nor is it opposed to public policy. A collateral contract of agency for the purpose of sale of raffle tickets is therefore perfectly valid and enforceable in law.93 81 Municipal Council Kumbakonam v. Abbahs Sahib, (1911) ILR 36 Mad 113, 11 IC 669. 82 Ahmed Sait v. Bank of Mysore Ltd, AIR 1930 Mad 512. 83 Pollock, Principles Contract, 12th edn p. 101; Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, CONTRACT, para 837. 84 Radhasoami Satsang Sabha v. Hanskumar Kisanchand, AIR 1959 MP 172; Re Coltman,Coltman v. Coltman, (1881) 19 Ch D 64. 85 Best v. Glenville, [1960] 3 All ER 478, [1960] 1 WLR 1198; considering the dictum of Lord Goodhard CJ in Attorney-General v. Smith, [1958] 2 QB 173 at 180, [1958] 2 All ER 557 at 558. 86 A Dhoddiah Chettiar v. Madukkarai (Nilgiris) Estates Tea Factory, (1974) 1 Mad LJ 146, at 151. 87 Shyam Lal v. State of Uttar Pradesh, AIR 1968 All 139 at 146. 88 Asa Singh v. Sadda Singh, (1873) Punj Rec No 16. 89 Gaya Prasad v. Surendra Bahadur Singh, AIR 1987 SC 925 at 930. 90 Bengal Act 6 of 1880 and Bengal Act 2 of 1902. 91 Jyoti Kumar Mukherjee v. Hari Das Maiti, (1905) ILR 32 Cal 1019. 92 Guljarilal Kanoria v. Busi and Stephenson Ltd, AIR 1960 Cal 590. 93 TT Augustine v. Changanacherry Municipality, AIR 1982 Ker 307 at 309.
Agreements Involving Injury to Person or Property The consideration or object of an agreement is unlawful, when it involves or implies injury to the person or property of another. An agreement entered into with a fraudulent object is a particular species of the genus of agreements contemplating or involving injury to the person or property of another. The general term 'injury' means criminal or wrongful harm. Hence, there is nothing unlawful in agreeing to carry on a business lawful in itself, though the property of rivals in that business may, in a wider sense, be injured by the consequent and intended competition.94 Where all competing bidders at an auction sale agreed to form a ring and peg down the price and purchase the property at the knock out price and share the property, the agreement was unlawful, as it implied injury to the debtor.95
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Agreement to Commit Torts No one can stipulate for inequity. This is based on the broad rule of public policy that no one can claim indemnity or reparation for his wilful and culpable crime. He is under a disability precluding him from imposing a claim. But this disability will not affect an injured third party.96 Therefore, a security officer trying to stop a stolen van can claim damages, if injured during the process. If the object of a contract is the commission of a deliberate act of tort, the contract is illegal, even though no criminality of fraud is involved. Hence, a printer cannot recover the cost of printing a matter, if he knew it to be libellous.97 Even though giving clean bills of indemnity was a common practice, an agreement to indemnify a master of a ship against losses arising from the issuing of a clean bill of lading in respect of leaking and defective old barrels was unenforceable, because the consideration was a tort, and thus illegal.98 Fraudulent Agreements Section 53 of the Transfer of Property Act, 1882 provides inter alia that:
'...every transfer of immovable property made with intent to defeat or delay the creditors of the transferor is voidable at the option of any person so defeated or delayed,' but that 'nothing in this section contained shall impair the rights of any transferee in good faith and for consideration.'
Such a transfer is not illegal, for the section merely declares that it shall be voidable at the option of the party affected by the transfer. Where a fictitious property was deliberately inserted in the document for enabling registration at a far away place, when no part of the property act ually transferred existed there, the document was liable to be set aside as a fraud on the law relating to registration.1 Although a person is entitled to purchase shares of a company in the open market, if the transaction is done surreptitiously with a mala fide intention by making use of some public financial institutions as a conduit, such transaction or deal would be illegal;2 so also an agreement to prefer some creditors in order to obtain their consent to a composition between the debtor and the creditors.3 A transfer of shares made out of fear that the shares might be sold to meet potential liabilities of creditors was illegal, its purpose being to defraud the creditors, although, no creditors were deceived on account of alternative arrangements to prevent their liabilities from arising.4 An agreement to defraud revenue is illegal;5 namely, an agreement to conceal the actual income so as to reduce the assessment of land revenue is fraudulent.6 In Alexander v. Rayson, 7 a landlord let out a flat on a lease at 450 per annum, and had a separate contract for services at 750 per annum. With a slight exception, the services provided under the latter agreement were provided for under the lease. The purpose of the agreement was to defraud the rating authority, by deceiving them about the true rateable value of the flat, for which purpose, he produced only the lease before the assessment authorities. In the landlord's suit for recovery of service charges not paid by the tenant, it was held that he could not enforce the lease or the agreement; and despite the fact that he could no longer use the documents for an illegal purpose any more. In Tinsley v. Milligan, 8T and M purchased a house in joint names with joint contributions, but it was purchased in the name of T, so that M could fraudulently claim welfare payments by misrepresenting to the welfare authorities that she did not own her own home. This purpose was known to T. The welfare payments received were used to meet the joint expenses. After disputes arose, T left the
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house and started action for possession also asserting her ownership. M counter claimed that the house was held by T for both in equal shares, hence, the house be sold and she be given equal shares in the sale proceeds. T raised a defence that M's claim was tainted with illegality, in that the purchase was made in T's name to facilitate fraud on the Department of Social Security. The transaction was held illegal.9 A sale of immovable property pending a suit against the vendors to recover a debt is not invalid merely because the motive of the vendors might have been to prevent the land from attachment and sale in execution. The only question is whether the sale was a real transfer of the title to the land for a fair money consideration. The motive of the vendors to defeat the execution of any decree that may be passed against them is immaterial.10 Where both parties do not show any conspiracy to defraud a third person or to commit any illegal act, the maxim in pari delicto can 'hardly be applicable'.11 Where a sale is made by a person with the object of defeating a probable execution of a decree, it is not necessarily made with a fraudulent or unlawful object.12 Injury to the Property of Another A contract, which involves injury to the property of other persons, is void and cannot be enforced. A claim of damages based on the breach of such unlawful contract is not sustainable.13 But a compromise between parties to a dispute as to management of endowed property by a shebait,which provides for future succession without consultation of the family of the founder as provided in the deed of endowment, is not illegal under s. 23 of the Contract Act, as it does not cause injury to the property of another.14 If the agreement was to execute the work of a railway line on the properties after they are acquired and handed over to the contractor, it would not be open to the contractor to wriggle out of the contract, on the ground that the contract involved injury to the properties of other persons and was therefore void under s. 23.15 Where a compromise between a plaintiff and some defendants in a suit for dissolution of partnership affected the rights of a third party, the compromise was hit by this section;16 so was an agreement between all the competing bidders at an auction sale to form a ring and peg down the price and purchase the property at a knock out price, as it was injurious to the debtor.17 94 Jai Ram and son v. Kahna Ram Hans Raj, AIR 1963 HP 3 (opposed to public policy). 95 Gurmukh Singh v. Amar Singh, (1991) 3 SCC 79 (on facts, no such intention proved). 96 Hardy v. Motor Insurer's Bureau, [1964] 2 All ER 742, [1964] 3 WLR 433 at 441. 97 Chitty on Contracts, 28th edn, p. 846, para 17-018. 98 Brown Jenkinson & Co Ltd v. Percy Dalton (London) Ltd, [1957] 2 All ER 844, [1957] 3 WLR 403 at 414; Silver v. Ocean Steamship Co Ltd, [1930] 1 KB 416, [1929] All ER Rep 611, CA. 1 Philip Lukka v. Fransiscan Association Vazhappally, AIR 1987 Ker 204 at 210. 2 SR Nayak v. Union of India, AIR 1991 SC 1420 at 1443. 3 Atumal Ramoomal v. Dipchand Kessumal 179 IC 901, AIR 1939 Sind 33. 4 Tribe v. Tribe, [1996] Ch 107, [1995] 4 All ER 236, [1995] 3 WLR 913(CA) . 5 Miller v. Karlinski, (1945) 62 TLR 85; Alexander v. Rayson, [1936] 1 KB 169, [1935] All ER Rep 185; Anand Prakash Om Prakash v. Oswal Trading Agency, AIR 1976 Del 24 at 27. 6 Chagan Lal v. Kashiram, AIR 1923 Nag 76. 7 [1936] 1 KB 169. 8 [1994] 1 AC 340, [1993] 3 All ER 65(HL) . 9 But relief was granted on the ground that M could establish her title independent of illegality. 10 Pullen Chetty v. Ramalinga Chetty, (1870) 5 MHC 368 referring to Sankarappa v. Kamayya, (1866) 3 MHC 231 and Gnanabhai v. Sriniva Pillai, (1868) 4 MHC 84; Rajan Harji v. Ardeshir Hormusji Wadia, (1879) 4 Bom 70.
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11 Kedar Nath Motani v. Prahlad Rai, [1960] 1 SCR 861 at 868, AIR 1960 SC 213. 12 Rajan Harji v. Ardeshir Hormusji Wadia, (1879) ILR 4 Bom 70. 13 K Abdulkhadar v. Plantation Corporation of Kerala Ltd, AIR 1983 Ker 1. 14 Harishankar Prasad v. Bishwanath Prasad, AIR 1965 Pat 33. 15 Union of India v. Phillip Construction, AIR 1989 Ker 152 at 155; K Abdulkhadar v. Plantation Corpn of Kerala, AIR 1983 Ker 1 (an agreement for construction of roads through properties of strangers was void). 16 Kiran Arora v. Ram Prakash Arora, AIR 1980 Del 99. 17 Gurmukh Singh v. Amar Singh, (1991) 3 SCC 79 at 84 (held on facts that the agreement did not involve such injury).
Court Regards it as Immoral or Opposed to Public Policy The courts exercise wide powers of restraining individual freedom on grounds of general utility, and it is impossible to provide in terms for this discretion without laying down that all objects are unlawful which the court regards as immoral or opposed to public policy. The word 'immoral' points, in legal usage, to conduct or purposes which the state, though disapproving them, is unable, or not advised, to visit with direct punishment.18 The term 'public policy' points to political, economical, or social grounds of objection, outside the common topics of morality, either to an act being done or to a promise to do it being enforced. Agreements or other acts may be contrary to the policy of the law without being morally disgraceful or exposed to any obvious moral censure. Immoral Agreements The word 'immoral' is very comprehensive and it may be said that what is repugnant to good conscience is immoral.
Its varying content depends upon time, place and the stage of civilization of a particular society. In short, no universal standard can be laid down and any law based in such fluid concept defeats its own purpose.19
The limitation on the word 'immorality' imposed by the statute, namely, 'the court regards it as immoral' shows that immorality is also a branch of the common law like the doctrine of public policy, and, therefore, should be confined to the principles recognised and settled by courts, which have confined the concept to sexual immorality.20 It has been stated:
Its (of immoral) juxtaposition with an equally illusive concept, public policy, indicates that it is used in a restricted sense; otherwise, there would be overlapping of the two concepts. In its wide sense, that, what is immoral may be against public policy, for public policy covers political, social and economic grounds of objection.21
and
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Although it has sometimes been said that contract contra bonos moresare void, the only aspect of immorality with which courts of Law have act ually dealt is sexual immorality.22
Since English as well as Indian precedents confine it only to sexual immorality, a new head could not be evolved to bring wagering within its fold.23 The contention that wagering contracts were illegal under the Hindu law, or that they were immoral according to the Hindu law doctrine of pious obligation of sons to discharge the father's debts, was held unsustainable in law and negatived by the Supreme Court. For example, settlements in consideration of concubinage, contracts for sale or hire of things to be used in a brothel or by a prostitute for purposes incidental to her profession, agreements to pay money for future illicit cohabitation, promises in regard to marriage for consideration, or contracts facilitating divorce24 are all held to be void on the ground that the object is immoral.25'Immorality' is decided according to the standards of morality approved by the courts. An agreement to pay a commission or a consideration to a person to induce another to pay a substantially higher price for property worth much less, was held by the Andhra Pradesh High Court to be immoral, within s. 23 of the Contract Act. The Court relied on Illustration (j).26 In Gulabchand v. Kudilal, 27 the Supreme Court has not referred to this Illustration, and whether bribery could be included under this head was not decided, since such agreements were otherwise covered by s. 23. It is also significant that Illustration (k) deals with sexual immorality--an agreement to let a daughter for concubinage.28 A settlement in consideration of concubinage was held to be void, notwithstanding that it was made by a member of a community among whom concubinage carried no stigma.29 However, a contract for which the consideration is past cohabitation, which was not adulterous, was not void.30 A gift to a permanent concubine motivated by a desire to compensate for past services is invalid31qua coparcenery property. A contract of employment requiring the employee to procure prostitutes was for an immoral purpose, and hence illegal and unenforceable.32 A landlord cannot recover the rent of lodging knowingly let to a prostitute, who carries on her vocation there.33 Money lent to a prostitute expressly to enable her to carry on her trade could not be recovered,34 nor money advanced by the plaintiff to the defendant to enable the defendant to continue cohabitation with a dancing girl.35 Ornaments lent by a brothel-keeper to a prostitute for attracting men and encouraging prostitution could not be recovered.36 An assignment of a mortgage to a woman for future cohabitation was void, and could be set aside at the instance of the assignor, though partial effect had been given to the illegal consideration.37 English courts adopt a different approach, holding that property loaned, hired or pleaded for an immoral purpose can be recovered by the owner, provided that he can establish his title otherwise than through the medium of the illegal transaction. In Taylor v. Chester, 38P pledged half a banknote with D as security for money advanced to be spent immorally in D's brothel. If P pleaded his ownership, D could reply that the note was pledged with her. P could not plead payment, so that he had to rely on the illegality of the transaction, and could not recover. The court indicated that if P could have made out his case without pleading the illegality, he would have been entitled to judgment.39 It is submitted that the decision would have been different had D never advanced the money. A gift was made by the defendant to his concubine for natural love and affection and she resided in the gifted property for 10 years. Later, the defendant executed a release called rectification deed for a consideration of Rs. 50/- acknowledging the title of the plaintiff. The previous deed also recited that the plaintiff should continue to live with the defendant. This was held to be a gift and not an agreement for any immoral consideration. The motive was the past cohabitation, and future cohabitation was not intended to be a condition precedent.40 Arrears of allowance agreed to be paid to a woman for past cohabitation can be enforced,41 because:
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Such a consideration, if it can properly be called, which seems to us more than doubtful, would not be immoral so as to render the contract de factovoid, but we think the more correct view is to regard the promise to pay the allowance as an undertaking on the part of Bikramjit Singh to compensate the woman for past services voluntarily rendered to him for which no consideration as defined in the Contract Act would be necessary.
This case was decided on the principles mentioned in s. 25(2) of the Act, though the section is not specially referred to. It is submitted that a consideration which is immoral at the time, and, therefore, would not support an immediate promise to pay for it, does not become innocent by being past.42 Similarly, in Kisandas Laxmandas Bairagi v. Dhondu Tukaran Narwade, 43 it was held that past cohabitation was not good consideration for a transfer of property. But in a later case, where a person had agreed to pay a maintenance allowance to his discarded mistress, it was observed that a contract to enter into the relationship of protector and mistress was undoubtedly immoral and unenforceable in law; but the case of a contract to compensate a woman for what she had lost on account of past association with the promisor was not immoral.44 This distinction may be difficult to draw. The English view of such cases is that the alleged consideration is bad, simply as being a past consideration, and not falling within any of the exceptions.45 In a later case, the same High Court held that adultery in India being an offence under criminal law, cohabitation past or future, if adulterous, is not merely an immoral but an illegal consideration.46 A loan made for the purpose of teaching singing to naikins (dancing girls) has nothing immoral in its subject, for although it might be true that most of the naikins who sing led a loose life, singing was a distinct mode of obtaining a livelihood, not necessarily connected with prostitution.47 An agreement to pay maintenance for an illegitimate child was not illegal, even though under Muslim law, there was no liability to maintain such children.48 The concept of immorality changes as values change with the times. In Tanner v. Tanner, 49 a married man provided his mistress and the twins born of their relationship with a house, and then tried to evict her. The court implied a contract between them that he would provide her with a house, which was supported by a consideration when she agreed to leave her rented accommodation. The trend would be to allow enforcement of enforceable contractual arrangements involving unmarried parties to a relatively domestic arrangement. The courts have, for example, where a man and a woman cohabit and have children, given to the woman cohabiting with a man, the rights to a 'matrimonial home' equivalent to that of a wife.50 The English Court of Appeal has also held that an agreement to advertise telephone sex lines was not unenforceable on the grounds of immorality.51 The principles of the older authorities will only apply to relationships which are wholly related to the provision of sexual services.52 Agreements Opposed to Public Policy Public policy is the principle which declares that no man can lawfully do that which has a tendency to be injurious to the public welfare. Ex dolo malo non oritur actio.53 Public policy comprehends the protection and promotion of public welfare. It is a principle of law, under which freedom for contract of private dealings is restricted by the law for the good of the community. Reference to public policy requires taking into account the interest of persons other than the parties. The Supreme Court has stated:54
Public policy or the policy of the law is an illusive concept; it has been described as 'untrustworthy guide', 'variable quality', 'uncertain one', 'unruly horse', etc.; the primary duty of a court of law is to enforce a promise which the parties have made and to uphold the sanctity of contracts which form the basis of society, but in certain cases, the court may relieve them of their duty on a rule founded on what is called the public policy. The doctrine of public policy is extended not only to harmful cases but also to harmful tendencies; ...the principles have been crystallised under different heads and though it is permissible for courts to expound and apply them to different situations, it should only be invoked in clear and incontestable cases of harm to the public; though heads [of public policy] are not closed and though theoretically it may be permissible to evolve a
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new head under exceptional circumstances of a changing world, it is advisable in the interest of stability of society not to make any attempt to discover new heads in these days.
But a statutory provision cannot be struck down on the ground of being opposed to public policy.55 Transactions permitted by law cannot be opposed to public policy.56 Public Policy The Contract Act does not define the expression 'public policy' or 'opposed to public policy'. From the very nature of things, these expressions are incapable of precise definition. The Supreme Court has held that public policy is not the policy of a particular Government. It connotes some matter which concerns public good and public interest.57 A contract which has the tendency to injure public interest or public welfare is one against public policy. What constitutes an injury to public interest or welfare would depend upon the times and the climes. The social milieu in which the contract is sought to be enforced would decide the factum, the nature and the degree of the injury. The concept of public policy is not immutable, since it must vary with the changing needs of the society.58 These values may sometimes get incorporated in the legislation, but sometimes they may not. The Legislature often fails to keep pace with the changing needs and values nor is it realistic to expect that it will have provided for all contingencies and eventualities. It is, therefore, not only necessary, but obligatory on the courts to step in to fill the lacuna.59 But the courts should use extreme reserve in holding a contract as void against public policy, and should do so only when the contract is incontestable and on any view inimical to public interest. The doctrine should be invoked only in clear cases in which harm to the public in substantially incontestable and does not depend upon the idiosyncratic inferences of a few judicial minds.60 Public Policy and Enforcement in Contracts Involving a Foreign Element A distinction is drawn while applying a rule of public policy between matters governed by domestic law and those involving conflict of laws. The application of doctrine of public policy in the field of conflict of laws is more limited. Courts are slower to invoke public policy in cases involving a foreign element on the ground that 'transactions containing a foreign element may constitute a less serious threat to municipal institutions than would purely local transactions.61 In Lemenda Trading Co Ltd v. African Middle East Petroleum Co Ltd, 62 the defendant company registered in London, had a contract with the National Oil Company of Qatar for supply of crude oil. By a later agreement between the defendant and the plaintiff-company, registered in Nassau, the plaintiff agreed to assist the defendant in procuring the renewal of the supply contract by exerting influence on the chairman or managing director of the Qatar National Oil Company in return for a commission payable on any oil shipped under the renewed contract. The supply contract was renewed and the plaintiff sought payment under the commission agreement. The defendant refused to pay and the plaintiff brought an action in England to recover the amount contending that the agreement was not illegal under the Law of Qatar, but merely contrary to public policy. The defendant conceded that the agreement was governed by English law, and contended that it was unenforceable in England, because it had been performed in a friendly foreign state, where its performance was illegal. It was held that the public policy of a friendly foreign state could not of itself prevent the enforcement of a contract in England. However, an English court would not enforce a contract which was governed by English law, if the contract related to a transaction which was contrary to English public policy founded on general principles of morality and the same public policy applied in the friendly foreign country, where the contract was to be performed so that the contract would not be enforceable under the law of that country, because in such circumstances, international comity combined with English domestic policy would militate against enforcement. The practice of exacting payment for the use of personal influence, particularly when the person to be influenced is likely to be unaware of the pecuniary motive
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involved is unattractive, whatever the context. The court would refuse to enforce any contract which tended to promote corruption in the public affairs of a foreign country. Since Qatar, the country in which the agreement was to be performed and with which the agreement had the closest connection, had the same public policy as that which prevailed in England, the courts of Qatar would not enforce the agreement. The act ion was therefore dismissed. The principle was stated thus:
... the English court should not enforce an English law of contract which fails to be performed abroad where: (i) it relates to an adventure which is contrary to a head of English public policy which is founded on general principles of morality; and (ii) the same public policy applies to the country of performance so that the agreement would not be enforceable under the law of that country. In such a situation, international comity combines with English domestic policy to militate against enforcement.63
But a contract may still be enforced if it is based on considerations 'which are purely domestic', wherein it may not bar enforcement of the contract that has to be performed abroad.64 The words 'public policy' occurring in s. 7 (1) (b) (ii) of the Foreign Awards (Recognition and Enforcement) Act, 196165 enabling the court not to enforce a foreign award, if the Court is satisfied that the enforcement of the award will be contrary to public policy, refers to the public policy of India, and not that of a foreign country.66 A contract, valid by the foreign law governing it, may be refused performance if it is illegal or contrary to the public policy of the country where it is sought to be enforced. This approach is valid when the contract involves criminality under the law of the country of enforcement; but it has been stated that great care should be exercised by the courts in determining whether the domestic policy demands such refusal of enforcement when the contract is valid under the foreign law applicable.67 But where export price was fixed by another country (Pakistan), a breach of which condition was contrary to public policy under the Pakistani law, it was not binding in India.68 Heads of Public Policy The doctrine of public policy is only a branch of common law and, just like any other branch of common law, it is governed by the precedents. The principles have been crystallised under different heads, and though it is permissible for courts to apply them to different situations, the doctrine should only be invoked in clear and incontestable cases of harm to the public. Though the heads are not closed, and though theoretically it may be permissible to evoke a new head under exceptional circumstances of a changing world, it is advisable in the interest of stability of society not to make any attempt to discover new heads in these days.69 The court is not the legislator; it cannot initiate the principle; it can only state or formulate it if it already exists.70 In Nagle v. Feilden, 71 it was said, 'the law relating to public policy cannot remain immutable. It must change with passage of time. The wind of change blows upon it'. Commenting on this, the Andhra Pradesh High Court in Rattan Chand Hira Chand v. Askar Nawab Jung 72 has said:
...in a modern progressive Society with fast changing social values and concepts it becomes more and more imperative to evolve new heads of public policy...law cannot afford to remain static.
Public policy is also stated as 'a principle of judicial legislation or interpretation founded on the current needs of the community'. Hence, it is necessarily variable.73 But the duty of the court is to expound and not expand the doctrine of public policy, and the doctrine should be invoked only in clear cases where the harm to the public is substantially incontestable and does not depend upon the idiosyncratic inferences of a few judicial minds.74 In Gherulal Parakh v. Mahadeodas Maiya, 75 one of the
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questions raised was whether the contracts in dispute were illegal under Hindu law and immoral because of the doctrine of pious obligation of the sons to discharge the father's debts. It was held that tenets of Hindu law could not be imported to give a novel content to the doctrine of public policy in respect of contracts of gaming and wagering. In Chandra Sreenivasa Rao v. Korrapati Raja Rana Mohana Rao, 76 Subba Rao J. (as he then was) quoted with approval the following from the 7th edition of this book:
It is now understood that the doctrine of public policy will not be extended beyond the classes of cases already covered by it. No court can invent a new head of the public policy;77 it has even been said in the House of Lords that 'public policy is always an unsafe and treacherous ground for legal decision'.78 This does not affect the application of the doctrine of public policy to new cases within its recognised bounds;79 but the test is always whether the enforcement of the impugned contract leads, or is likely to lead, to injurious act ion.
In State of Rajasthan v. Basant Nahata, 80 the State Government, purporting to exercise powers under the provisions of s. 22 of the Registration Act, issued a notification declaring certain specified powers-of-attorney against public policy in the State of Rajasthan. As its effect, registration of such powers-of-attorney was liable to be refused. While striking down this notification primarily on the grounds the power of declaring a document against public policy could not be relegated to the executive through subordinate legislation. A party against whom illegality is pleaded gets in a suit an opportunity to defend the illegality. Hence such declaration could be done only by legislation. In Zoroastrian Cooperative Housing Society Ltd v. District Registrar, Cooperative Societies (Urban), 81 a byelaw of a cooperative society restricted its membership to Parsis. Such a byelaw did not contravene any provision of the Maharashtra Cooperative Societies Act or Rules, and thus could not be regarded as opposed to public policy. It was observed that a court could not consider a particular byelaw undesirable and opposed to public policy. Restriction imposed by contract cannot be unsettled under the doctrine of public policy on the ground that it might affect fundamental rights, in this case guaranteed by Arts. 19(1)(d) or (g) or the right under Art. 300A of the Constitution of India. The principles governing public policy are thus capable on proper occasion, of expansion or modification.82 If there is no head of public policy which covers a case, then the court must, in consonance with public conscience and in keeping with public good and public interest, declare practices which were considered normal at one time, but have become obnoxious and oppressive to public conscience, to be opposed to public policy. It is to be judged by dominant opinion or what is termed customary morality.83 Whether a contract is opposed to public policy or not, must be decided on general principles only, and not by any consideration of the terms of a particular contract.84 The general head of public policy include a wide range of topics categorised under certain heads. Agreements may offend against public policy by tending to the prejudice of the state in time of war (trading and enemies, etc.), by tending to the perversion or abuse of municipal justice (stifling prosecutions, champerty and maintenance) or, in private life, by attempting to impose inconvenient and unreasonable restrictions on the free choice of individuals in marriage, or their liberty to exercise any lawful trade or calling. Some of these matters considered as against public policy under the English law are separately and expressly dealt with in this Act, namely, ss. 26-28. Agreements Injurious to the State in its Relations with Other States Trading with an Alien Enemy.--Detrimental contracts are those which tend either to benefit an enemy country or to disturb the good relations of a country with a friendly country.85 Agreements alleged to amount to trading with an enemy or otherwise to operate in the enemy's favour in time of war do not appear to have come before the courts of British India before the war of 1914. It is long settled law that all trade with public enemies without licence of the Crown is unlawful. 'The King's subjects cannot trade with an alien enemy, i.e., a person owing allegiance to a Government at war with the King, without the King's licence'.86 This includes shipping a cargo from an enemy's port even in a neutral vessel. As a consequence of this, 'no action can be maintained against an insurer of an enemy's
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goods or ships against capture by the British Government'. If the performance of a contract made in time of peace is rendered unlawful by the outbreak of war, the obligation of the contract is suspended or dissolved; according to the intention of the parties it can or cannot be substantially carried out by postponing the performance till the end of the hostilities.87 In such a case, a contracting party is not bound to perform a part of his undertaking which remains possible and lawful in itself, but would be useless without the rest.88 The rules under this head become applicable only when an act ual state of war exists. They cannot be made to relate back to a time before the war, though war may have been apprehended. A contract of insurance made before the war cannot be vitiated, as regards a loss by seizure also before any act of public hostility, by the fact that war did break out shortly afterwards.89 One question, which needs further definition, is--who is an enemy for the purpose of the rule, and especially, how the friendly or hostile character of an incorporated company is to be tested. The seat of a man's business is of more importance than domicile in the technical sense, or even nationality (for an enemy subject allowed to remain here under the protection of the state is not a commercial enemy, and enemy subjects residing in friendly countries need not be); and in the case of a corporation, the jurisdiction in which it is registered does not conclusively determine its character, nor yet the nationality of its individual shareholders, and it must be considered by whom and in what interest its affairs are in fact controlled.90 The matter has also been the subject of special legislation.91 Trading with the enemy is regulated and prohibited by the Trading with the Enemy (Continuance of Emergency Provisions) Act, 1947 which incorporates the relevant provisions of the Defence of India Rules in the first column of the Schedule to this Act. Accordingly, a person shall be deemed to have traded with the enemy, if he has had any commercial, financial or other intercourse or dealings with, or for the benefits of, an enemy, and, in particular, if he has:
(i) (ii) (iii)
supplied any goods to or for the benefit of an enemy, or obtained any goods from an enemy, or traded in, or carried, any goods consigned to or from an enemy or destined for or coming from enemy territory; or paid or transmitted any money, negotiable instrument or security for money to or for the benefit of an enemy or to a place in enemy territory; or performed any obligation to, or discharged any obligation of, an enemy, whether the obligation was undertaken before or after the commencement of the provisions.
A person shall not be deemed to have traded with the enemy by reason only that he has done anything under an authority of the Central Government or he has received any payment from an enemy of a sum of money due in respect of a transaction under which all obligations on the part of the person receiving payment had already been performed when payment was received and had been performed at a time when the person from whom the payment was received was not a enemy. By r. 98(3) of The Defence of India Rules, any person who trades with the enemy is liable to imprisonment for a term which may extend to seven years or fine, or both.1 Breaking Laws of a Friendly Country.--An agreement, which contemplates act ion hostile to a friendly foreign Government, is unlawful and cannot be enforced.2 An agreement may be refused enforcement, where its performance in a foreign country is in breach of the laws of that country,3 especially when the parties to the contract knowingly break such law.4 Further, the English courts have, for instance, refused enforcement where that foreign law was repugnant to the English concepts of liberty or freedom of action,5 or where it imposed an incapacity alien to English principles of law.6 Agreements which Tend to Injure Good Government Sale of Public Offices.--Traffic by way of sale in public offices and appointments obviously tends to the
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prejudice of the public service by interfering with the selection of the best qualified persons. In Parkinson v. College of Ambulance Ltd, 7 the secretary of the defendant company fraudulently represented to P that the company could procure a knighthood for him, if he made an adequate gift to the company. P paid 3,000 to the company, but could not enforce the recovery of this money when no title was forthcoming, Cases in India have arisen principally in connection with religious offices. A religious office is so intimately connected with, and is essential to, religious worship, that it cannot legally be the subject of sale. The sale of the office of a shebait has been held invalid.8 The High Court of Bombay, while affirming the invalidity of an alienation of the office to a stranger, upheld an alienation made in favour of a member of the founder's family standing in the line of succession.9 Similarly, the office of mutwali of a wakf is not transferable,10 nor land which is the emolument of a religious office.11 A custom allowing the sale of the office of uralar (trustee) of a Hindu temple for the pecuniary advantage of the trustee, even if it was established, would be bad in law.12 These decisions are based upon the principle that the interest of the public might suffer if bargains relating to public offices are upheld, as their effect is to prevent such offices being filled by the best available persons. Where, however, the claimants to the office of ojha (high priest) of the temple of Baidyanath were members of a family group, and one claimed the office on the ground that it was elective, and the other that it was hereditary, the High Court of Calcutta held that a compromise by which one of the claimants relinquished his claim in favour of the other in consideration of an annual payment out of the charao (offerings) to the idol was not against public policy.13 The transfer of a village barber's inam by some of the office holders, not being a transfer within s. 5 of the Madras Hereditary Offices Act, is not prohibited.14 But the office of vettis is not transferable, as unlike the office of barbers, it is not heritable but is an appointment by the collector.15 An agreement to pay money to a public servant to induce him to retire and thus make way for the appointment of the promisor is virtually trafficking with reference to an office, and is void under this section.16 In the language of the English law, such an agreement (an office brokerage agreement) is invalid as opposed to public policy17 [see Illustration (f) to the section]; so is a promise to make an annual payment to the person on condition that he withdraws his candidature for a public office in favour of the promisor unenforceable.18 Where money is paid under such an agreement, it cannot be recovered back from the defendant, though he has failed to carry out his promise to procure employment for the plaintiff in public service.19 Contracts Injurious to Public Service.--Agreements tending to injure public service are illegal and void as being opposed to public policy.20 An agreement, the object of which is to use the influence with the ministers of Government to obtain a favourable decision, is destructive of sound and good administration. It showed a tendency to corrupt or influence public servants to give favourable decisions otherwise than on their own merits. Such an agreement is contrary to public policy. It is immaterial, if the persons intended to be influenced are not amenable to such recommendations.21 So is an agreement to pay money in consideration of a recommendation to an appointing authority.22 An agreement, that a person would not claim higher salary or other attendant benefits if he is promoted to a higher post or put to officiate on that post, as in the case of a stop-gap arrangement, is opposed to public policy.23 In Pichakutty Mudali v. Narayanappa, 24 the tenants of certain villages collected subscriptions and engaged the services of the defendant for advocating their cause in the matters of assessments made upon the villages, and agreed to pay him a sum of money, if he succeeded in obtaining a more favourable assessment, a part of which was paid in advance. It was agreed that if he failed in his work, he should repay the amount. In the suit to recover the amount paid to the defendant on the ground that he had failed to perform his part of the contract, it was held that the plaintiffs were entitled to succeed, and the agreement was not vitiated illegality. The court applied the principle that where it was possible to perform an agreement by lawful means according to its terms, an unlawful intention would not be presumed, and any party alleging such an intention must prove it. It observed:
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The point, then, for consideration is, did the defendant for that purpose undertake, in consideration of the stipulated sum, to induce by corrupt or illegal means, or by the exercise or personal, influence, any public servant to do an official act or show favour? If he did not, the contract cannot be treated as illegal; and we are of opinion that the written agreement does not properly admit of such a construction.
In Rattan Chand Hira Chand v. Askar Nawab Jung, 25 the plaintiff advanced an amount of Rs. 75,000/- to the defendant for prosecuting his claim as a sharer in the estate of late Nawab Salar Jung of the State of Hyderabad. The agreement itself stipulated that on the successful establishment of the claim, the defendant would not only return the said advance, but would also pay to the plaintiff consideration of the said advance at the rate of one anna a rupee. In a suit for recovery of the amount by the plaintiff, it was held that the agreement in question was opposed to public policy as the object of the agreement was that the plaintiff should wield his influence with the Central and State Ministers to have the defendant recognised as the heir to the estate in return for his being given one anna share in the amount to be received by the defendant. The Supreme Court upheld the decision of the Andhra Pradesh High Court, that the agreement was to be treated as a whole and the two parts, namely, the advance and the consideration for the same could not be separated. Therefore, even the amount actually advanced by the plaintiff and received by the defendant could not be recovered by the plaintiff under s. 70. The practice of exacting payment for the use of personal influence, particularly when the person to be influenced is likely to be unaware of the pecuniary motive involved, is unattractive whatever the context. The court would refuse to enforce any contract which tended to promote corruption in the public affairs of a foreign country.26 A deal or transaction done surreptitiously with mala fide intention by making use of some public financial institutions as a conduit in a clandestine manner, would be contrary to public policy and illegal.27 Bribery.--An agreement inducing public officer for money or other valuable consideration to use his position and influence to procure a benefit is void as against public policy.28 Money paid by a wife to a third person to be given as a bribe to a gaoler for procuring the release of her husband from gaol could not be recovered back on failure of the gaoler to procure the release.29 An agent could not claim commission for contracts procured for the principal, where both parties signed the commission agreement knowing that the agent was likely to use bribery to win the contracts.30 Whether bribery is included in the word 'immoral' was not decided by the Supreme Court in Gulabchand v. Kudilal, 31 but it was decided that it was otherwise covered by s. 23. Therefore, an agreement to sell two and a half anna share of managing agency by way of bribe to the plaintiff, a member of committee appointed to enquire into the affairs of a company, is illegal and not enforceable. Money promised to two members of the Legislative Assembly, who were also carrying on the business of law agents, to urge the Government to close a deal of purchase of land as early as possible, is an illegal promise and such a bargain cannot stand because 'it would encourage those who are appointed to be sentinels of the public welfare to become sappers and miners of the Constitution,' which the court would not hesitate to denounce in the most positive terms.32 Interference in the Course of Justice Any agreement for the purpose of, or to the effect of, using improper influence of any kind with judges or officers of justice is void.33 Various agreements, not open to objection on the ground of champerty, nor always obviously wrong in themselves, have been held void as attempting to interfere with the powers and discretion of the regular courts in administering justice. Thus, an agreement, whereby one person agreed to assist another in carrying out litigation for the purpose of delaying execution of a decree was held to be unenforceable.34 A deed of exchange made for compromising criminal proceedings was to be obtained from registration office only after criminal cases were compromised was void under s. 23.35 Agreements to Conceal Crime.--An agreement not to disclose misconduct would be void as opposed to public policy, if the misconduct is of such a nature that it ought to be disclosed in public interest to those who have a proper interest to receive it.36 But where a person against whom frauds have been
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or were likely to be committed, gave a promise of secrecy with a view to obtain information about the frauds and to take steps for their prevention, the promise was enforceable, but not where the promise extended to frauds committed or contemplated against others.37 Agreements to Stifle Prosecution.--An agreement, the object of which is to stifle a prosecution, is against public policy. The principle is 'you shall not make a trade of a felony';38 or, as it was expressed in a Calcutta case, 'no court of law can countenance or give effect to an agreement which attempts to take the administration of law out of the hands of the judges and put it in the hands of private individuals'.39 In England, the compromise of any public offence was illegal. If the accused person is 'innocent, the law (is) abused for the purpose of extortion; if guilty, the law (is) eluded by a corrupt compromise screening the criminal for a bribe'.40 But after the passing of the Criminal Law Act, 1967 in England, a crime of concealing an arrestable offence is committed only if a person accepts as the price of not disclosing such an offence, any consideration other than the making good of loss or injury occasioned by the offence, or the making of any reasonable compensation for that loss or injury. But this is stated not to affect the rules of public policy administered by the English Courts.41 It is a settled proposition, and of general application, that where criminal charges are matters of public concern, there can be no diversion of the course of public justice and cannot be the subject matters of private bargain or compromise. The essence of the doctrine of stifling of prosecution is that no private person should be allowed to take the administration of criminal justice out of the hands of the judges and place it in his own hands. In the Bhopal Gas Leak Disaster case,42 the memorandum of settlement contemplated that with a view to effectuating the stipulation, there be a termination of pending criminal prosecution with a further settlement for abstention from future criminal proceedings. It was urged that since a part of the consideration for the payment of $470 million was the stifling of the prosecution, the settlement was void being unlawful and opposed to public policy under s s. 23 and 24 of the Contract Act. The Supreme Court held that the settlement did not suffer from this vice, since it was the Union of India, as dominus litis, that had consented to the quashing of the proceeding and no private party had taken administration of law in its own hands. The arrangement, which purported to terminate the criminal cases, was one of purported withdrawal not forbidden by any law, but one which was clearly enabled. Where dropping of the criminal proceedings is a motive for entering into the agreement and not its consideration, the doctrine of stifling of prosecution is not attracted. A compromise of proceedings, which are criminal only in form, and involve only private rights, may be lawful.43 This test may not be as necessary in Indian practice, where the Criminal Procedure Code, 1973 gives a list of compoundable offences.44
The criminal law of this country makes a difference between various classes of offences. With regard to some, it allows the parties to come to an agreement and either not to start proceedings or to drop the proceedings after institution in a few instances even without the leave of the court, and, in other instances, with the leave of the court. But there are other instances which cannot be compounded or arranged between the parties. If the offence (is) compoundable and (can) be settled in or out of court without the leave of the court, there seems no reason why (a compromise) should be regarded as, forbidden by law or as against public policy, the policy of the criminal procedure being to allow such a compromise in such cases.45
Where the law permits the compounding of an offence, it encourages compromise, which is but an agreement between the parties to abandon prosecution. A contract arising out of a composition of a compoundable offence is not against public policy.46 But even as to a non-compoundable offence, the withdrawal of a petty charge, as an incident in a fair compromise, does not avoid the compromise.47Section 23 is also not attracted, when the agreement to terminate criminal proceedings was made after securing permission from the court.48 But where the offence is non-compoundable, an agreement made for the purpose of compounding it or stifling a prosecution in respect of it, is unenforceable and cannot be sued on.49 This would be so,
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even if part of the consideration of the agreement is shown to be stifling of a non-compoundable offence.50 If the agreement to abandon a prosecution is part of the consideration for the payment of the debt, the reality of the debt is irrelevant.51 If it is an implied term of a deed that a criminal complaint would not be further proceeded with, then the consideration for the deed is unlawful, quite irrespective of the fact whether any prosecution in law has been started or there is something for which it is to be dropped.52 An agreement to stifle a prosecution is invalid, where it is supported by prohibited consideration, eg., reparation made as a consideration to give up criminal prosecution which would be an abuse of the right of private prosecution.53 A mortgage executed for a sum of money embezzled by the mortgagor's son and as a compromise for withdrawing a prosecution is void under s. 24.54 The same is true of an agreement for withdrawal of a complaint for a non-compoundable offence,55 unless it had been withdrawn, because the complainant had very little chance to succeed in establishing the case.56 Even if the prosecution is proceeded with by the authorities, in spite of the agreement to withdraw it, the agreement is void.57 And, further, if the accused was induced to pay money to the complainant in order that a criminal prosecution for an offence which was not compoundable, should not be proceeded with, the accused is entitled to recover back the money as paid under 'coercion' within the meaning of s. 72 below. In such a case, the parties cannot be said to be in pari delicto.58 But if there is no evidence of pressure or coercion, the money cannot be recovered back, because in such a case, the parties will be deemed to be in pari delicto.59 Thus, where A agreed to execute a kabala of certain lands in favour of B in consideration of B's abstaining from taking criminal proceedings against A with respect to an offence of simple assault, which is compoundable, it was held that the contract was not against public policy and that the same could be enforced.60 So a promise to pay a sum of money as compensation for the abduction of a woman is enforceable, provided the abduction does not constitute a non-compoundable offence.61 Likewise, money paid to compromise a charge of adultery may be recovered back, if the party to whom the money is paid proceeds with the prosecution of the charges, adultery being a compoundable offence.62 Where the offence is compoundable with leave of the court, and such leave is obtained, the composition cannot fall within the mischief of the section.63 In a case before the Supreme Court, in a pending criminal proceeding against the accused under ss. 420, 465, 468, 477 read with ss. 107 and 120 B of the Indian Penal Code, 1860 some of which offences were non-compoundable, the parties entered into an agreement on the date of hearing of the criminal case to refer dispute to arbitration in consideration of the complainant withdrawing the criminal case and the dispute was act ually referred. The arbitration agreement was held to be invalid as being opposed to public policy, on the ground that if a person sets the machinery of the criminal law into motion on the allegation of the commission of a non-compoundable offence and by the use of its coercive machinery, he compels the opponent to enter into an agreement, the agreement will be invalid as being opposed to public policy.64 It is not enough that the motive compelling the party, who undertook the liability under the agreement, was that the pending criminal case should be withdrawn. The test to be applied is whether it was an express or implied term of the bargain between the parties that a non-compoundable case should not be proceeded with.65 In Ouseph Paulo v. Catholic Union Bank Ltd, 66 the plaintiff had pledged certain goods to the defendant bank as security for the bank, which were found to be of a much smaller value. After the bank had approached the police, and investigation begun, the plaintiff and his relations executed mortgages and hypothecation bonds, and surrendered the pledged goods to the bank, after which the police proceedings were dropped. It was held that it was not proved that the party had executed the document in consideration of the withdrawal. An employee of a company pilfered goods from his employer's premises and sold them to defendants 1 and 2. When the company wanted to take legal action, defendant 1 and 2 voluntarily executed a pronote for the value of the goods and as a mode of payment, gave four cheques in the name of the defendant 3, who undertook to encash the cheques and pay the money to the company. Only one cheque was encashed, and the rest were dishonoured. The company brought a suit. The defence was
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that the transaction was void under this section being caused by coercion and intimidation by threatening criminal proceedings. The High Court, on appeal, decreed the suit holding that the property in the goods had not passed to the two executants and they had to return the goods; and as they could not do so, they chose the impugned method of payment in discharge of their liability at a time when the company had not decided what act ion to take; so there was no illegality in accepting the mode of payment adopted. It also held that the consideration for the pronote was not to stifle prosecution. There was a difference between a motive for the agreement and consideration for it. There being nothing illegal or opposed to public policy within s. 23 of the Contract Act, the pronote was legal and the motive for the pronote was to avoid a legal proceeding, and the consideration was valid, being the price of the goods.67 It is not necessary to prove any express threat of prosecution, if the transaction in fact amounted to a bargain not to prosecute, and if the court thinks the defence of illegality a disreputable one to be raised in the circumstances, the only way in which it can give effect to its opinion is in dealing with costs.68 In Pudishary Krishen v. Karampally Kunhunni, 69 where the plaintiffs agreed to relinquish their right to a religious office in favour of the defendant, in consideration of the latter withdrawing a charge of criminal trespass preferred against them, it was stated by Innes J., that the agreement was illegal, as it 'would amount to the stifling of a criminal prosecution for an offence which the law does not permit to be compounded'. The case was, however, treated as one of 'coercion', the charge of trespass being false, and the sole cause for entering into the agreement being 'the well-founded terror of the influence of the prosecutor and of the civil debt which would probably result from this proceedings'. In Kessowji Tulsidas v. Hurjivan Mulji, 70 it was held that a guarantee for the payment to creditors of debts due to them in consideration of the creditors abstaining from taking criminal proceedings against the debtor is void, as being against public policy. But it must be noted, as observed in that case, that:
...a man to whom a civil debt is due may take securities for that debt from his debtor, even though the debt arises out of a criminal offence, and he threatens to prosecute for that offence, provided he does not, in consideration of such security agree not to prosecute, and such an agreement will not be inferred from the creditor's using strong language. He must not, however, by stifling a prosecution obtain a guarantee for his debt from third parties.71
Therefore, a contract for payment of money in respect of which a criminal proceeding is pending, is not itself opposed to public policy, where there is a civil liability.72 Following this principle, it has been held that where a bona fidedebt exists and where the transactions between the parties involve a civil liability as well as possibly a criminal act, a promissory note given by the debtor and a third party as security for the debt is not void under this section.73 However, on reparation being made or promised by the offender, it would be a public mischief if, no mercy being shown, reparation is sought to be avoided. It is the duty of an offender to make reparation and he should be encouraged to do so.74 On the other hand, to insist on reparation as a consideration for a promise to abandon criminal proceedings is a serious abuse of the right of private prosecution.75 If a third party alone provides the security, an agreement not to prosecute is more likely to be inferred from the circumstances.76 So also, where the nature of previous dealing is substantially altered with a view to terminate the criminal proceedings.77 But in weighing the different considerations, the Court must enquire 'did one party to the transaction make his promise in exchange or part exchange or promise not to prosecute'.78 The agreement usually has to be inferred; as such bargains are seldom set out on paper.79 In Bhowanipur Banking Corporation Ltd v. Durgesh Nandini Dassi, 80 the husband and some of his relations were prosecuted for conspiracy to cheat. The question of liability of the accused was referred to arbitration and an award against the accused was made. In order to pay off that sum, certain arrangements were arrived at, and one of the terms was the mortgage by the wife of her property, and
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in consideration thereof, the prosecution was withdrawn. This mortgage was held illegal by the Privy Council. In Dhanwantia v. Deonandan Mahto, 81 as a result of a prosecution, a compromise was entered into, whereby two widows, who were, under the Hindu Widows Right to Property Act, entitled to a widow's estate, accepted an area of land to be enjoyed by them during life without a right of alienation, and the prosecution was withdrawn. This was held to be illegal under s. 23 of the Contract Act . As a suit will not lie for an agreement to stifle a prosecution, so an agreement of this class will not avail as a defence to a suit.82 Thus, where in a suit for damages for wrongful arrest and confinement, the defendant pleaded an agreement, under which the plaintiff was to give up all claims against the defendant for his arrest and confinement in consideration of the defendant withdrawing charges of criminal trespass and being a member of an unlawful assembly preferred against the plaintiff, it was held that the latter offence being non-compoundable, the agreement could not be set up as an answer to the suit.83 But the mere fact that A makes an agreement with B, who intends, by means of something to be obtained or done under it, to effect an unlawful or immoral purpose, will not render the agreement illegal, unless A knows of that purpose. Thus, if B sells his house to A for the purpose of raising money to be given to certain persons as a bribe to induce them to withdraw a charge or criminal beach of trust, which they had preferred against B, the sale is not illegal, unless it be proved that A was aware of the unlawful object.84 Where A promises to remunerate B in consideration of B undertaking to use his influence over C, so as to effect a compromise of a civil dispute between A and C, the consideration or object of the agreement is not unlawful.85 A criminal complaint cannot be referred to arbitration; and an agreement to so refer would be void.86 But the English common law rule, that contracts for the compounding or suppression of criminal charges for offences of a public nature are illegal and void, has no application to a contract for compounding the prosecution of criminal proceedings for an offence against the municipal law of a foreign country and committed there, if such a contract is permitted by the law of that country, and this, whether the contract is entered into there or in British territory. A suit would, therefore, lie in British India on a bond passed to the plaintiff in consideration of his withdrawing a prosecution for theft instituted in the French court at Pondicherry, the agreement being permissible by French law.87 It would have been difficult, indeed, to hold that the compromise of a French law suit in a manner allowed by French law could have been injurious to the administration of justice in British India. Agreements Which Tend to Abuse the Legal Process.--An agreement to pay money to the plaintiff for giving evidence in a civil suit on behalf of the defendant cannot be enforced. Such an agreement may be for giving true evidence, and then there is no consideration, for 'the performance of a legal duty is no consideration for a promise'; or it may be giving favourable evidence either true or false, and then the consideration is vicious.88 But there is nothing in this decision, or in the reasons for it, to invalidate an expert's claim for services rendered in the way of professional investigation, though he may afterwards become a witness for his employer in a litigation arising out of the same facts. Agreements Ousting or Conferring Jurisdiction.--The jurisdiction of any court is conferred by statute, and can be taken away only by the statute. The parties cannot, by agreement, divest the court of its jurisdiction to try disputes arising out of an agreement.89 Any agreement restricting any party absolutely from enforcing his rights under a contract by usual proceedings in this country, which right the party otherwise has under s. 20 of the CPC , cannot be sustained being opposed to public policy and void under s. 23; it can be no answer that the aggrieved party could file proceedings in England or in any other foreign country.90 If the parties should seek, by agreement, to take the law out of the hands of the courts and put it into the hands of a private tribunal, without any recourse at all to the courts in cases of error of law, then the agreement is to that extent contrary to public policy and void.91 In Hyman v. Hyman, 92 a covenant in the separation deed providing that the wife would not apply to the divorce court for maintenance, was held as void being contrary to public policy; so was a wife's covenant not to invoke the jurisdiction of the divorce court in respect of maintenance for the
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child and herself, but the remaining agreement was enforceable.1 A wife who has agreed not to claim alimony or maintenance as a term of divorce of mutual consent, is nevertheless entitled to invoke the jurisdiction of courts to grant maintenance.2 But where jurisdiction can lie in more than one court, and the parties agree that the dispute shall be tried only in one of them, the agreement would not be against public policy.3 However, if the parties agree to get their disputes resolved through a court at a particular place, otherwise having no jurisdiction to try the suit, it amounts to absolute ouster of the jurisdiction of a competent court, and is void. There can be no doubt that an agreement to oust absolutely the jurisdiction of the court will be unlawful and void being against public policy.4 Parties cannot confer jurisdiction or authority upon a Collector to collect contractual dues as arrears of land revenue, when the statute does not do so.5 A clause in the insurance policy making provision for filing an appeal against an award of the Motor Accidents Claims Tribunal regarding quantum of compensation could not enable the insurer to file appeal without seeking leave of the court under s. 170 of The Motor Vehicles Act, 1988.6 Parties cannot by agreement select a forum which could prevail over the provisions of s. 31(4) of The Arbitration Act, 19407 which prescribes jurisdiction of a Court in arbitration matters.8 In Centrotrade Minerals and Metal Inc v. Hindustan Copper Ltd, 9 the arbitration agreement provided that the Indian law would be applicable in relation to the first part of the arbitration, namely, the Indian Council of Arbitration, whereas second part thereof would be governed by International Chamber of Commerce, Paris Rules. One judge opined that both legs fell under different chapters and different schemes, this statutory scheme could not be violated, and hence the scheme violated public policy. The other judge opined that such agreement was valid, since there was no prohibition in the Arbitration and Conciliation Act. The matter has been referred to a larger bench. Agreements to Indemnify a Surety.--An agreement by the accused with the surety who gives bail to him, to indemnify the surety, if the bail is forfeited on account of the nonappearance of the accused, is void being opposed to public policy;10 so is an agreement by a third person to do so.11 But s. 23 did not apply when the accused voluntarily executed, three years after the forfeiture of the bond, a mortgage in favour of the surety for payment of the amount forfeited;12 or where A deposited a certain sum of money with B, who stood surety for an accused in a case but not for his good behaviour, and B agreed to refund the money to A after the case was over.13 Maintenance and Champerty Champerty is something against good policy and justice, because it tends to promote unnecessary litigation.14'Someone who does this might be tempted, for personal gain, to inflame damages, to suppress evidence, or even to suborn witnesses'.15 Champerty and Maintenance.--Maintenance was thus defined by Lord Haldane in Neville v. London Express Newspapers Ltd 16 --
...it is unlawful for a stranger to render officious assistance by money or otherwise to another person in a suit in which that third person has himself no legal interest, for its prosecution or defence.
Where a person, without any just cause, supports litigation in which he has no legitimate interest, he would be guilty of maintenance. Agreements to finance litigation in consideration of having share in property are not per se opposed to public policy, unless the object of the agreement is an improper one, such as abetting unrighteous suits or gambling in litigation.17 'Champerty' is an aggravated form of maintenance, where the maintainer stipulates for a share of the
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proceeds of the act ion or suit or other proceedings where property is in dispute.18 Various Types of Agreements.--The practices forbidden under the English law at the time (partly by old statutes which affirmed the common law) may be described as the promotion of litigation, in which one has no interest of one's own. Maintenance is the more general term; champerty, which in fact is the subject of almost all the modern cases, is in its essence, 'a bargain whereby the one party is to assist the other in recovering property, and is to share in the proceeds of the action'.19 Agreements of this kind are equally illegal and void whether the assistance20 to be furnished consists of money, or, it seems, of professional assistance, or both. They are, in practice, often found to be also disputable on ground of fraud or undue influence as between the parties.21 The law of champerty and maintenance extends to the proceedings for establishing proof in liquidation of a company and to any contentious proceedings, where property which is in dispute, becomes the subject of an agreement to share the proceeds.22 Departure from English Law.--The specific rule of English law against maintenance and champerty at the time of enactment of this Act was statutory,23 and held not applicable to India,24 and a champertous agreement has never been per se void in India,25 yet on other grounds what is substantially the same law is in force,26 the principle, so far as it rests on general grounds of policy, is regarded as part of the law of 'justice, equity, and good conscience', to which the decisions of the court should conform. In GF Fischer v. Kamala Naicker, 27 the Privy Council observed:
The court seems very properly to have considered that the champerty, or, more properly, the maintenance into which they were inquiring, was something which must have the qualities attributed to champerty or maintenance by the English law; it must be something against good policy and justice, something tending to promote unnecessary litigation, something that in a legal sense is immoral, and to the constitution of which a bad motive in the same sense is necessary.28
Adverting to these observations in a later case,29 the Privy Council said:
It is unnecessary now to say whether the above considerations are essential ingredients to constitute the statutable offence of champerty in England; but they have been properly regarded in India as an authoritative guide to direct the judgment of the court in determining the binding nature of such agreements there.
Champertous Agreements in India.--In Raja Rai Dayal Singh v. Debi Dayal Sahu, 30 the Privy Council clearly laid down that an agreement champertous according to English law, was not necessarily void in India; it must be against public policy to render it void here. A present transfer of property for consideration by a person who claims it as against another in possession thereof, but who has not yet established his title thereto, is not for that reason opposed to public policy.31 Nor is it opposed to public policy, merely because the payment of the major part of the consideration is made to depend on the transferee's success in the suit to be brought by him to recover the property.32 Similarly, agreements to share the subject of litigation, if recovered, in consideration of supplying funds to carry it on, are not in themselves opposed to public policy;33 nor is an advance made for litigation with a claim for refund of only what has been advanced and not for property recovered in litigation.34 There is no rule of law to forbid the purchase of property of which the title is or may be disputed, but the law does not, therefore, sanction mere speculative traffic in rights of action.35 An agreement would be unenforceable, if it is inequitable and extortionate.36 To which class, a given transaction belongs in a case where doubt is at first sight possible, seems to be a question of fact rather than of law. A fair agreement to supply funds to carry on a suit in consideration of having a share of the property if recovered, ought not to be regarded as being per se opposed to public policy. Indeed, cases may be
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easily supposed in which it would be in furtherance of right and justice and necessary to resist oppression that a suitor who had a just title to property and no means except the property itself should be assisted in this manner. But agreements of this kind ought to be carefully watched and when found to be extortionate and unconscionable so as to be inequitable against the party, or to be made, not with the bona fide objects of assisting a claim believed to be just and obtaining a reasonable recompense therefore, but for improper objects, as for the purpose of gambling in litigation or of injuring or oppressing others by abetting and encouraging unrighteous suits so as to be contrary to public policy, effect ought not to be given to them.37 Thus, in Ram Coomar Coondoo v. Chunder Canto Mookerjee, 38a suit could not lie at the instance of a successful defendant in a former suit to recover the costs of that suit from a party who advanced funds for the prosecution of the suit to the plaintiff therein, even though the advances may have been made under an agreement that was champertous and unconscionable in its nature, and though that party was the real act or and had an interest in that suit. In deciding whether a particular transaction is vitiated under this section:
... the courts will consider whether the transaction is merely the acquisition of an interest in the subject of the litigation bona fide entered into or whether it is an unfair or illegitimate transaction, got up for the purpose merely of spoils of litigation or disturbing the peace of families and carried on from a corrupt or other improper motive.39
Champertous transactions are in their essence speculative, and the fairness or otherwise of a particular bargain is almost always open to some debate.... It is essential to have regard not merely to the value of the property claimed but to the commercial value of the claim. This has to be estimated by the parties in advance of the result... . Though it is clearly not conclusive, the proportion to be retained by the claimant is an important matter to be considered when judging the fairness of a bargain made at a time when the result of the litigation is problematic. The uncertainties of litigation are proverbial, and if the financier must risk losing his money, he may be allowed some chance of exceptional advantage.40
The fairness of the transaction must be weighed as a whole. Disparity in consideration is not the sole criterion. It is not the market value of the property, but its commercial value which must be taken into account.41 If the reward from the transaction is out of all proportion to the actual expenses incurred, the agreement would be unconscionable, and against public policy.42 An agreement to finance litigation in consideration of the claimant getting a share of property, if successful, but containing no provision for refund in case of failure, is champertous;43 so is an agreement pursuant to which finance is provided for litigation under which the financier would get the entire property won in hard fought litigation, the person fighting getting only the money financed.44 Champertous Agreements in the English Law.--Before 1968, maintenance and champerty were crimes under the English law, both under the common law and statute. The Criminal Law Act, 1967 abolished criminal as well as tortious liability for maintenance and champerty, without affecting the rule under which a contract was to be treated as contrary to public policy or illegal. The law relating to maintenance and champerty as affecting contracts is also undergoing a change with the times under the English law, by statute namely for ensuring access to civil justice. 'The law on maintenance and champerty has not stood still, but has accommodated with the changing times.'45 Even the courts have found the need that the doctrine of maintenance be reconsidered.
...concepts having their origins in the ancient fear entertained by English lawyers of the abuse of legal process,
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which was endemic in mediaeval times, should once again be reappraised in the light of current notions of public policy and of international trading practices.46
The scope of justification or excuse for supporting an agreement of maintenance has widened. If there is a sufficient community of interest between the parties, an agreement will be valid even though it would otherwise be champertous as, for example, an agreement to divide the proceeds of a claim otherwise than in accordance with strict legal rights.47 An agreement would not be in the nature of maintenance, where the interest of the person supporting the action is distinct from the benefit which the person seeks to derive from the agreement to support it.48 For example, where a litigation is supported by an association or trade union;49or where an employer supports an act ion against his employee for protection of his own reputation;50 or the person providing funds has a 'genuine pre-existing financial interest in maintaining the solvency of the person whose action he maintains'.51 Indemnity for costs in defending criminal proceedings.--A newspaper promised indemnity to its editor covering reasonable professional costs and expenses properly incurred that would arise from his having to defend or appear in any judicial proceedings by reason of his having been an Editor. It was held that given the nature of employment, such a clause would cover expenses incurred for defending cases of libel, contempt of court or criminal proceedings, and that it was not contrary to public policy to provide funds to another for defending criminal charges.52 Order for Payment of Legitimate Expenses.--Though the courts will not give effect to agreements 'got up for the purpose merely of spoil or of litigation' they may, in a proper case, award compensation for legitimate expenses incurred by the lender to enable the borrower to carry on the law suit;53 or for recovery of money advanced.54 Thus, where in consideration of the plaintiff agreeing to defray the expenses of prosecuting the defendant's suit to recover a certain property, the defendant agreed to transfer to the plaintiff, in one case nine annas55 share of the property;56 in another, half the land and half the mesne profits,57 and in another two annas share,58 it was held that the agreement was extortionate and inequitable, and the plaintiff was awarded the expenses legitimately incurred by him with interest. The quantum of the share, which the financier would get under the agreement, is an important matter to be taken into consideration in judging the fairness or otherwise of the agreement. A three-fourth share to the financier is not a fair gain.59 Where the claim was of a simple nature and in fact no suit was necessary to settle it, an agreement to pay R s. 30,000/- to the plaintiff for assisting in recovering the claim was held to be extortionate and inequitable.60 An agreement in a pre-emption case, that the respondent would file the appeal in the name of the appellant and in case of success, the appellant would pay half the costs to the respondent and half the purchase price, and share the property half and half, was champertous and opposed to public policy, and therefore void.61 However, mere inadequacy of consideration is not of itself sufficient to render a transaction champertous.62 An agreement for the purchase of a property pendente lite, which entitled the purchaser to cancel the agreement in the event of the suit being decided against the vendor so as to leave the vendor no interest in the property, was not champertous;63 nor was an assignment for a second time by the mortgagor of his equity of redemption previously assigned to another by an unregistered document, though the transaction might be one not commendable in conscience;64 or a sale for Rs. 50/- of property worth Rs. 150/-, which the vendor had previously transferred by way of gift to another person.65 And where a patnidar, having a claim against the defendant for R s. 13,099/-, sold 14 annas share for his claim to another for R s. 4,000/-, it was held in a suit by the patnidar and his assignee to recover R s. 13,099/- from the defendant, that the sale was not champertous.66 But where the liquidator of a company compromised a claim of the company amounting to Rs. 1,61,500/- for a tenth part of its value, on the representation of the debtor's friends that he could not pay more, and after about 10 years, assigned the same claim to a third person, who was neither a creditor nor a shareholder of the company, but a complete outsider as regards all matters connected with the company, it was held in a suit brought by the assignee to have the compromise declared void on the ground of fraud that the suit was not maintainable, as the assignment was effected with a view to litigation, and was, therefore, champertous in its nature.67 Sargent J. said:
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The case is, therefore, the simple one of a stranger officiously interfering for reasons of his own, and in no way at the request or even suggestion of the company or liquidator, in a matter in which he had no connection whatever, with the sole object of enabling himself to dispute transactions which occurred ten years ago, and in which, independently of the assignment of those claims, he has no interest whatever, so far as least as appears on the plaint.
In a Privy Council case, A claimed to be entitled to a taluq by suggestion, of which B had entered into possession. Not having money to establish his title to the taluq by suit, A sold a moiety of the taluq to R for Rs. 1,50,000/-. In the sale deed, it was stated that a lakh of rupees had been paid down by R, and that the balance of Rs. 50,000/- was to remain on deposit with R, to be expended in prosecuting the proposed suit and in paying Rs. 50/- every month to A and Rs. 20/- to his mukhtear. A suit was then brought by A and R as co-plaintiffs against B; A afterwards compromised with B, and withdrew from the suit. Then arose the question whether R could sue alone, and it was held that he could. It was contended on behalf of B that the settlement in the sale deed that one lakh has been paid to A was not true, and that the sale to R was void as being champertous. After observing that the statement as to the payment of one lakh was not in accordance with the fact, it was said:
Of course, at the first blush, the untrue statement throws suspicion upon the whole transaction. But after all, so long as the deed stands, it is no concern of B that A may have a grievance on the score of a misstatement in an instrument to which B is no party. A himself has taken no steps to impeach the deed. On the contrary, in the course of the two years that elapsed between the date of the deed and the institution of the suit, A more than once affirmed the transaction... Apart from the untrue recital in the sale deed there seems to be no flaw in the transaction. Without assistance A could not have prosecuted his claim. There was nothing extortionate or unreasonable in the terms of the bargain. There was no gambling in litigation. There was nothing contrary to the public policy. Their Lordships agree with the judgment of the court of the Judicial Commissioner that the transaction was a present transfer by A of one moiety of his interest in the estate, giving a good title to R on which was competent for him to sue.68
In Raja Rai Dayal Singh v. Debi Dayal Sahu, 69 the grandmother to the last full owner succeeded to the property after his death. The grandmother sold the property to X. On her death, the reversioners, who were refused possession by X, executed a sale deed in favour of one R, by which they purported to sell their rights in the properties, which were worth Rs. 3,00,000/- to R for Rs. 52,600/- of which, however, only Rs. 600/- was paid down, the balance being left on deposit with R 'on this condition, that the vendors should get the whole of the consideration in case the whole of the property should be recovered, and in the event of recovery of a portion of the property sold, a portion of the consideration money in proportion thereto.' In a suit by R against X for possession of the property, it was held by the High Court of Calcutta that the sale was void as being champertous, that no title passed to R, and that he was not therefore entitled to maintain the suit.70 On appeal, it was held by the Privy Council that though the agreement was of a generally champertous character, it was not void on the account, nor was it opposed to public policy and void by reason of the stipulation relating to the payment of the consideration. As to X's contention that the assignment by the reversioners to R was unfair and unconscionable, it was held that, X not being a party to the assignment, it was not open to him to question the transaction on that ground. In the course of the judgment, their Lordship said:
It was...argued that the transaction in question was contrary to public policy and void on that ground, by reason of the provision as to payment of the purchase-money by the first appellant to the second and third. The purchase-money was fixed at Rs. 52,600/-, of which Rs. 600/- was to be paid down, and the balance when the property should be recovered. Their Lordships are unable to agree to this argument. In their opinion the condition so introduced does not carry the case any further than does the champertous character of the transaction generally. It was further said, and this was relied upon by the court of India, that the transaction was an unfair and unconscionable bargain for an inadequate price. But that is a question between assignor
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and assignee. It is unnecessary to consider what the decision ought to have been if this had been a litigation between the assignors and the assignee in which the former sought to repudiate the assignment. In the present case the assignors do nothing of the kind. They maintain the transaction and ask that effect be given to it, and for that purpose they join as plaintiffs in the present section. Their Lordships are therefore of opinion that the attack upon the title of the first appellant upon any such grounds as those indicated must fail.
It has also been held that restoration is possible under s. 65, and if restoration is not possible, compensation is payable in the alternative.71 Agreements Enforced.--A speculative sale is not bad on the ground of public policy.72 Therefore, a transferee's claim to recover property, which he has bought by paying costs of the suit, may be a speculation in litigation, but it is not invalid.73 An agreement to finance litigation up to the High Court could be enforced, even though no appeal was filed.74 Similarly, an agreement to pay a certain sum on the success of the suit, to one who has been engaged to act on behalf of the promisor and represent the promisor wherever necessary, was enforceable;75 so was an agreement to pay to an agent appearing in a case before the Supreme Court his out-of-pocket expenses, a fixed amount in any event, and the taxed costs if the case proved to be successful.76 Assignment of Right to Sue.--Assignment of a right to litigate savours of champerty. A right to sue is personal to the party aggrieved and there can be no assignment of a right to sue for damages for tort or for breach of contract.77Section 6(e), Transfer of Property Act, 1882 also provides that 'a mere right to sue cannot be transferred'. The use of the word 'mere' limits the transfers purporting to transfer nothing but the right to sue, and the transferee acquires no interest in the subject of transfer than the right to sue.78The right to litigate can be assigned, if the assignment is subsidiary to a transfer of property; the question then is whether the subject matter of the assignment is, in the view of the court, property with incidental remedy for its recovery or is there a mere right to bring an act ion either at law or in equity. The benefit of a contract can be transferred before breach as an actionable claim.79 But a mere right to sue for damages surviving after breach cannot be transferred.80 Such an assignment is good if it is incidental to a transfer of property. An assignment of a right to sue is therefore valid, if made incidental to a transfer of property, or even a debt,81 even though, it is made after the transfer, or by a person other than the vendor.82 An assignment of an insured's right of act ion to an insurer, who has indemnified the insured under the policy of insurance is valid, because an insurer has a genuine interest recovering the loss sustained by the payment on the policy.83 A bona fide assignment of a debt by its owner is not invalid, even if the necessity of litigation to recover it had been contemplated before the assignment; the debt does not become unassignable merely because the debtor chooses not to dispute it.84 The House of Lords in Trendtex Trading Corporation v. Credit Suisse, 85re-examined the law of maintenance and champerty, in so far as it applied to the assignment of the right to litigate, and held that if the assignee has a genuine commercial interest in taking the assignment and in enforcing it for his own benefit, there was no reason why the assignment should be struck down as an assignment of a bare cause of action or as savouring of maintenance. The House of Lords held that the assignee needed to demonstrate a commercial interest in the enforcement of the claim, in order that such assignment be valid, but held that the assignment in the particular case was void, because it was a first step in a transaction, whereby the cause of act ion was to be assigned to a third party, who had no legitimate interest in the transaction. In Brownton Ltd v. Edward Moore Inbucon Ltd., 86 the principles were summarised:
(i) (ii)
maintenance is justified, inter alia, if the maintainer has a genuine commercial interest in the result of the litigation; there is no difference between the interest required to justify maintenance of an action and the interest required to justify the taking of a share in the proceeds, or the interest
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(iii) (iv) (v) (vi)
required to support an out-and-out assignment; a bare right to litigate, the assignment of which is still prohibited, is a cause of act ion, whether in tort or contract, in the outcome of which the assignee has no genuine commercial interest; in judging whether the assignee has a genuine commercial interest for the purposes (i)-(ii) above, you must look to the transaction as a whole; if the assignee has a genuine commercial interest in enforcing the cause of action, it is not fatal that the assignee may make a profit out of the assignment; it is an open question, whether, if the assignee does make such a profit, he is answerable to the assignor for the difference.87
The Madhya Pradesh Amendment.--Sections 19B and 19C, as added to this Act in the State of Madhya Pradesh, define 'maintainer' and 'champertous agreements', and enable the court to set aside a champertous agreement, and to impose tends and conditions while doing so (see ss. 19B and 19C above). Agreements between Lawyers and Clients.--A solicitor is not debarred from acting and recovering his costs merely because of his knowledge of the client's champertous agreement. But if he act ively participates by stipulating for a percentage or by doing a positive act to assist in the implementation of the unlawful agreement, he will be debarred. By rendering positive assistance, he becomes guilty of aiding and abetting--by drawing up the champertous agreement or by helping to secure the sharing of the proceeds in accordance therewith.88 According to the current state of English law, it is not improper for a solicitor to agree to act on the basis that he is to be paid his ordinary costs if he wins, but not if he loses. But where he contracts for a reward over and above his proper fees if he wins, the whole retainer would be unlawful, and the solicitor can recover nothing.89
Agreements between legal practitioners subject to The Legal Practitioners Act, 1879 and their clients, making the remuneration of the legal practitioner dependent to any extent on the result of the case in which he is retained, are illegal as being opposed to public policy;90 so is an agreement that a pleader shall be given part of the property in dispute in the suit for which he has been engaged;91 so is an agreement between a chartered accountant to accept engagement on percentage of profits.92
However, where the agreement provided that the agent appearing in the case in the Supreme Court would be paid the taxed costs, if the case was successful, it was held that the obligation which was contingent, would ripen into an absolute obligation in the event of the success of the case. Such an agreement would not be champertous, where the client is bound in the alternative to pay out-of-pocket expenses of the agent and a fixed remuneration in any case.1
The English law relating to champerty and maintenance has been altered considerably by the courts and Legal Services Act, 1990 and regulations made under it. This Act allows lawyers to agree for their fees on a 'no win, no fees' basis, and also to increase the fees in the event of success up to a maximum of 100 per cent. The Act and the regulations prescribe that such agreements must be in writing and comply with other formalities. Clients who do not have legal aid, can agree for payment of conditional fees in proceedings of personal injuries, as also in action by insolvent companies. Such a provision is said to confer a benefit to the public by making justice more accessible. Heir-locator Agreements.--An 'heir-locator' agreement is an agreement where the 'heir-locator' undertakes to render assistance in recovering the inheritance by gathering evidence and financing the litigation. Such agreements have been held to be champertous and void.2 While such agreements may help persons to obtain a rightful inheritance, they might otherwise lack the means or knowledge to acquire, such an agreement may expose the next of kin to overreaching and fraud; other persons
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having claim to the same estate may be deprived of the estate, and the heir-locator might be tempted to behave unethically to secure the remuneration. It has been suggested that such agreements serve a useful purpose.3 Agreements Tending to Create Interest Against Duty There are conflicting opinions as to the legality of an agreement by a patwari or kanungo in the Government service, for the purchase of land situated within his circle or for the acquisition of any other interest therein. The Allahabad High Court's decisions, that such an agreement created an interest which would conflict with his duty,4 have been overruled by the Bench of the same Court;5 but the Lahore High Court does not follow this, at any rate as to agricultural land.6 The Bombay and the Madras High Courts7 agree with the Full Bench decision of the Allahabad High Court. If a person enters into an agreement with a public servant, which to his knowledge, might cast upon the public servant obligations inconsistent with public duty, the agreement is void.8 A person entrusted with the sale of land and occupying a fiduciary position, cannot use that position for the interest of the prospective purchaser, and the purchaser's promise to pay him the commission is not enforceable.9 That an agent must not deal in the matter of agency on his own account without his principal's knowledge, has been specifically dealt with in the Act .10 An agreement between an electricity board and its consumer that the latter would bear the cost of a transformer, if it was stolen, is void as being contrary to public policy, because under The Electricity Supply Act, 1948 it was the duty of the electricity board to maintain the service line of which the transformer was a part.11 An agreement, by which a litigant binds himself to pay a sum of money to his pleader's clerk for giving special attention to his legal business, which the pleader is bound to see to in consideration of his fee, is opposed to public policy, and consequently cannot be enforced.12 An agreement by a defendant to sell a share in a managing agency to the plaintiff, who was a member of an enquiry committee appointed to enquire into a dispute regarding the managing agency between the defendant and another, was void being against public policy, because its object involved in its fulfillment, a tendency to create a conflict between the plaintiff's duty as a member of the enquiry committee and interest. It was sufficient for this purpose to show that the personal interest created by the contract had a tendency to prevent the plaintiff from discharging his duties as a member of the enquiry committee faithfully and honestly; although, the plaintiff may not have been act ually influenced by personal considerations while reporting about the allegations against the defendant.13 There is no law prohibiting contracts between two companies--one private and the other public--merely because there are common shareholders and common directors. A contract entered into by a managing director of a public company with a private company, in which he holds an interest, is not illegal, even though in some cases, a court of equity may not enforce the contract.14 An arrangement between a bank and a person that the person will ensure a return of 15% on investment, and that sale and purchase of securities would happen under his instructions so that this return would be assured, is not against public policy.15 Benami and like Transactions A benami transaction is one where a purchase or transfer is made by a person in the name of another person with his own funds and for his own benefit, with no intent to make that other person the beneficiary thereof. Transfers of a benami nature were recognised statutorily by s. 82 of the Indian Trust Act, 1882. The section was repealed by the Benami Transactions (Prohibition) Act, 1988 which now prohibits benami transactions,16 subject to a few exceptions. In cases decided before this enactment, it has been held that a transaction is not necessarily fraudulent though benami, and if there is no intention to defraud any particular person, the real owner will be allowed to recover the land from the benamidar. This is so even despite an intention to practise a fraud upon a court, eg., by creating a false impression that the benamidar has a real interest in the land, in order to facilitate recovery from a third party in wrongful possession.17 Relief to the plaintiff could be granted in a suit by the owner of vehicles against the benamidar thereof, directing the defendant to execute necessary documents required to effectuate transfer of the permit standing in his name to the plaintiff.18 A license under the Abkari Act could not be obtained benami,as that would defeat the purpose of the
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Act, and therefore no suit could lie against the benamidar to recover any sum of money from him.19 So was purchase of toddy shops by a benamidar illegal, because a licensee must be known to and approved by the authorities.20 Benami transactions have been held not to violate public policy,21 even where public servants purchased properties in the name of another without permission from the government;22 for a 'contract is not opposed to public policy because it was entered into by particular individual, subject to particular restrictions'. A money lending transaction by a pleader in the name of his wife was not invalid, but really matter of professional ethics;23 nor was the conduct of business by an employee of a Court of Wards in the name of another person rendered invalid, because it was against the Service Rules of Court of Wards which were not statutory in nature.24 Agreements Affecting Personal Liberty A bond, which compels the executant to daily attendance and manual labour until a certain sum is repaid in a certain month and penalises default with overwhelming interest, is unlawful and void, 'such a condition,' the court said, 'is indistinguishable from slavery, and such a contract is, in our opinion, opposed to public policy and not enforceable'.25 A mortgage bond, whereby a person, who is entitled to a moiety only of certain property, mortgages the whole of that property, is not void under this section as to the moiety belonging to him, merely because he purports to mortgage the other moiety also not belonging to him.26 An agreement imposing restrictions on a borrower, which reduces him to the position of a slave, is against public policy.27 An agreement calculated to prevent a person from enjoying a fundamental right and which compels him not to seek redress in a court of law is bad and unlawful.28 Agreements Affecting Freedom or Security of Marriage Money advanced to the defendant, a married woman, to enable her to obtain a divorce from her husband, the defendant agreeing to marry the lender as soon as she could obtain a divorce, could not be recovered, as the agreement had for its subject, the divorce of the defendant from her husband, and the promise of marriage given under such circumstances was contra bonos mores.29 Where promises of marriage are actionable, an agreement between a married man and a woman, who knows him to be married, to marry one another after the wife's death, is void as being contrary to morality and public policy.30 But a promise to marry made after a decree nisi had been pronounced in divorce proceedings, but before decree absolute, was held by the House of Lords, after a review of all the authorities on the subject of public policy, not to be void on the ground that after the decree nisi, nothing but the shell of the marriage was left, and the further period of waiting until the decree is made absolute, was imposed in the public interest in order to secure full disclosure before the court.31 Agreement providing for separation of husband and wife would be valid, if it provides for immediate separation; an agreement for possible separation in the future may not be valid, because such an agreement is likely to give inducement to the parties not to perform their marital obligations, in the fulfilment of which the public has an interest. An agreement by a wife agreeing in consideration of a lump sum payment not to claim any maintenance from the husband, is not opposed to public policy;32 nor is a contract by a wife to suspend the operation of her maintenance decree for some time to give opportunity to her husband to prove his willingness to maintain her properly.33 Nor is a post-nuptial agreement of separation between the husband and wife, providing for maintenance of wife opposed to public policy or the principles of Hindu law;34 or an agreement made on their reconciliation after separation, if it contemplates a future separation and a promise for maintenance in that event.35 In the absence of proof of custom, a contract to compensate the husband for expenses of his marriage upon his consenting to divorce the wife is not void.36 Marriage Brokerage Agreements.--Agreements to procure marriages for rewards37 are undoubtedly void under the common law, on the ground that marriage ought to be procured, if not from mutual
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affection, at least from the free and deliberate decision of the parties with an unbiased view to their welfare. They are against the law, 'not for the sake of the particular instance or the person, but of the public, and that marriages may be on a proper foundation'.38 It has been observed that 'it is hard to see what is wrong with these (contracts) in modern times' as many are made by quite respectable marriage bureaux.39 The views of the High Courts in India on this issue differ. One view is that every agreement to pay money to the father or guardian of a girl in consideration of his consent to her marriage is not necessarily unlawful, and each case must be judged by its own circumstances. Such an agreement would be opposed to public policy only if the parents or the guardians are not seeking the welfare of the girl, but are giving her an ineligible husband.40 The other view is that such an agreement is per se opposed to public policy.41 The Law Commission of India, in its 13th Report, recommended that such an agreement must be expressly declared unlawful and void.42 The proposition, that it is settled law that a marriage brokerage contract where a third person intervenes and wants to make money out of the marital relationship between the two partners, is against public policy and not enforceable by a court of law, is perhaps too broadly stated, considering the practice of priests arranging and performing marriages.43 Receiving consideration by those who arrange marriages, when the money received is intended to benefit those persons and not for the expenses of the ceremony or for the benefit of the bridegroom or the bride is against public policy.44 Such questions have come before Indian courts in several cases, where the parties to the suit have been Hindus, amongst whom marriages had been generally arranged by the parents or friends of the parties, before they themselves were of an age to give a free and intelligent consent.45 One of the reasons suggested for not enforcing agreements to reward parents for giving their children in marriage, is that such agreements tend to a conflict of interest with duty. The same principle was applied by the common law to dealings of agents and other persons in similar fiduciary positions with third persons.46 It had been held that the consent of parties not being an essential condition in a Hindu marriage,47 an agreement to pay money to the father or guardian of a girl in consideration of his consent to the marriage of the girl was not unlawful,48 and that each case must be judged by its own circumstances. Where the parents of the girl are not seeking her welfare but give her to a husband, otherwise ineligible, in consideration of a benefit to be secured to themselves, an agreement by which such benefit is secured is, in our opinion, opposed to public policy and ought not be enforced.49 On the other hand, it has also been held that an agreement to pay money to the parent or guardian of a minor, in consideration of his consenting to give the minor in marriage, was void as being opposed to the public policy,50 and therefore, the plaintiff could not recover the stipulated sum from the defendant as damages for breach of the contract, even if the amount has been described in the agreement as peherammi to be given to the bridegroom's father;51 nor could the amount unpaid be recovered if the marriage was performed,52 even though the defendant has executed a promissory note in favour of the plaintiff.53 But where the agreed sum, or a portion thereof has been paid by the plaintiff in advance and the suit is brought to recover back the amount on failure of the defendant to give the bride in marriage, the plaintiff was held entitled to a decree for the same;54 though he himself may have broken the contract by refusing to give the bride in marriage,55 even though the plaintiff has assigned no reason for refusal.56 If any present of ornaments has been made by the father or the guardian of the bridegroom to the bride, the same could be recovered by the former, if the father of the bride, in breach of the contract, gave away the girl in marriage to another,57 or if the bride or bridegroom died before the marriage.58 Transfer of land in the name of the father as consideration for giving his daughter in marriage would be void being for immoral purpose, and against public policy.59 An agreement by a person to pay money to a stranger hired to procure a wife for him, is opposed to public policy and will not be enforced by any of the Indian courts.60
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Agreement to pay Dowry.--An agreement to pay dowry is void and punishable under the Dowry Prohibition Act, 1961. Most of the cases discussed below deal with the law before the Act. A contract for receiving pecuniary gain either by the father of the groom or of the bride in consideration for giving his son or daughter in marriage is opposed to public policy and repugnant to morals.61 Such a contract is hit by this section, and is not enforceable in a civil court. Hence, it cannot form the basis of a charge of cheating in a criminal court. It is submitted that the proposition is too broadly stated about criminal liability.62 The Madras High Court holds that there is no distinction in principle between an agreement between A and B that B's daughter shall marry A's son on payment of a sum of money by A to B, and an agreement between A and B that B's daughter shall marry A's son and that, if she fails to do so, B shall pay a sum of money to A. In such a case, B has a pecuniary interest in bringing about the marriage. In the one case, if the event takes place, he receives money. In the other, if the event does not take place, he has to pay money. If the former agreement is void as being contrary to public policy as held in the Full Bench case cited above, the latter agreement, it was held, is equally so.63 It had, however, been held that a promise to pay a sum of money to a bride or bridegroom in consideration of the marriage is valid and not opposed to public policy.64 Contracts Relating to Marriage.--A contract in general restraint of marriage is unenforceable on the ground of public policy, whether it contains an express undertaking that the subject will not marry, or whether it is merely a contract, which on financial or other grounds, tends to discourage a subject from marrying.65 A deed of settlement by a married Hindu in favour of a lady consenting to be his second wife executed prior to the marriage, gifting certain properties to her for life with 'vested remainder' to the children of marriage is void, as being an illegal or unlawful consideration.66 The gift over to the children of marriage suffers from the same defect and is also void.67 An agreement to marry is illegal as against public policy, if at the time it is made, one of the parties, to the knowledge of the other, is married. This is so even though the agreement is to marry when the existing marriage ends by death or a decree of court; and it makes no difference that the existing marriage may be an empty shell and there are grounds for immediate divorce. But an enforceable agreement can be made after the decree nisi.68 However, the contract is enforceable, if at the time the contract was made, one of the parties was unaware of the fact69 or if a decree nisi obtained was capable of being made absolute in a short time (two or three weeks).70 A divorce deed between a husband and wife with a provision of maintenance till remarriage, irrespective of whether the husband succeeded in proving a plea of the wife living in adultery is void under s. 23, as being opposed to public policy.71 A petition for divorce under s. 8 of the Bombay Hindu Divorce Act, 1947 was withdrawn, and divorce under custom with a provision for maintenance for life or till marriage was made by the husband. This agreement was held to be subject to the provision of the Act that the wife shall remain chaste.72 A marriage custom, which allows dissolution of marriage at the will of either spouse, is not against public policy.73 Money paid by a person to obtain a divorce to another is money paid for an illegal or immoral purpose.74 Agreements Affecting Parental Authority There is no difference between Hindu law and English law in regard to guardianship. The parent being the natural guardian of his minor children75 and the guardianship being in the nature of sacred trust, he cannot, during his lifetime, substitute another to be the guardian. He may, in his discretion as a guardian, entrust the custody and education of his children to another. But the authority is essentially a revocable one and if the welfare of the children requires it, he can take such custody and education in his own hands notwithstanding any contract to the contrary.76 An agreement by the father to give up entirely the custody and control of his child to the mother has been held void.77If, however, the authority has been act ed upon in such a way as, in the opinion of the court, to create associations or give rise to expectations on the part of the infants, which it would be undesirable in their interests to disturb or disappoint, such courts will interfere to prevent in revocation.78 In Annie Besant v. G
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Narayaniah, 79 the question of validity of the contract was not specifically decided, but the decision shows how far the agreement acted upon will be enforced. Parents cannot by agreement between themselves take away rights of minor children to maintenance.80 In English law, a contract by a parent to transfer parental rights and religious education is void as against public policy. Thus, a father cannot, by contract, bind himself to give up the control of the religious education of his children81 or their custody.82 But it may be a valid condition in a deed of separation, unless the court is of opinion that it is not in the interest of the children. If so, the contract will not be enforceable.83 Similarly, the mother of an illegitimate child cannot, by contract, transfer the obligation imposed on her by law to another person. But there may be circumstances in which such a contract may, for good consideration, be enforced.84 An ante-nuptial agreement between husband and wife of different religious persuasions that boys should be brought up in the religion of the father and girls in the religion of the mother, is not binding as a legal contract. No damages can be recovered and it cannot be enforced by a suit for specific performance. The decision of the question would depend upon what is beneficial for the child.85 Surrogacy as a method of reproduction is legal in India.86 Surrogacy agreements are not unlawful in India. In 2005, the Indian Council for Medical Research has given guidelines for regulating assisted reproductive technology procedures.87 The 228th Report of the Law Commission of India (2009) discusses Assisted Reproductive Technology procedures and procedural aspects affecting surrogacy arrangements. Surrogacy agreements are not unlawful in the UK; they are unenforceable by or against the person making them. Neither the intended parents nor the surrogate commits an offence. It is illegal to arrange surrogacy commercially or to advertise for surrogacy.88 Altruistic surrogacy is recognised, and commercial surrogacy is unlawful in many countries. Agreements Relating to Adoption An agreement by A to pay money to B, if B induced his daughter to take A in adoption, was against public policy, and B was not entitled to recover on the agreement;89 so was an agreement prohibiting a widow from adopting without the consent of the coparceners.90 But a compromise in a suit providing that the plaintiff should adopt the son of one of the defendants, and giving the plaintiff certain rights on condition of his so adopting, was a bona fide family settlement, and valid.91 Section 17 of The Hindu Adoptions and Maintenance Act, 1956 now prohibits receiving or agreeing to receive any payment or other reward in consideration of the adoption of any person, and no person shall make or give or agree to make or give to any other person, any payment or reward the receipt of which is so prohibited. This is also punishable. Religious Agreements
Agreements to pay money to another for offering prayers to God for the success of the promisor in a suit is not opposed to public policy,92 nor is a payment offered for performing religious rites to secure confirmation in a post.93 An agreement by the pandas of a temple to share offerings to deities is not necessarily against public policy,94 if it does not control the discretion of those, by whom offerings or gifts are made;95 or if it is not made to a stranger, but to one who is a participant in the offerings.96 Waiver of Illegality Agreements which seek to waive an illegality are void on grounds of public policy.97 Whenever an illegality appears, whether from the evidence given by one side or the other, the disclosure is fatal to the case. A stipulation of the strongest form to waive the objection would be tainted with the vice of the original contract and void for the same reasons. Wherever the contamination reaches, it destroys.98
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Agreements Tending to Create Monopolies Agreements having for their object, the creation of monopolies, are void as opposed to public policy.1 It has been held against public policy to attempt to monopolise the right to ply or hire motor lorries in order to fix hire at an artificial figure;2 or to agree not to set up a business in consideration of a promise to pay off certain sums for life.3 But an arrangement, which is designed to keep up prices (as in minimum price arrangement), is not necessarily disadvantageous to the public. It may operate to the public benefit.4 A provision, reasonable as between parties, which restricts the trade of a British company, is not prima facie against public policy, merely because it is imposed at the instance of a foreign business concern.5 After the commencement of the Constitution of India, the State cannot create monopoly in favour of any person, except in the circumstances given in Art. 19(6) of the Constitution; else it is violative of the fundamental right to carry on any trade or business granted by Art. 19(1)(g). Trade Combines Forming of trade combines for the promotion of business is not against public policy; namely, an agreement to form a combination to fix rates and divide profits in a certain manner;6 an agreement to carry on business among the members of the traders' private association only, and penalise breach of any condition;7 or an agreement providing that the manufacture and sale of certain produce shall be distributed in a certain proportion as not to affect the manufacturing capacities of the parties to it, and the produce, when manufactured, shall be sold at a particular rate.8The Monopolistic and Restrictive Trade Practices Act, 1969 provides for investigation into monopolistic trade practices (s. 31), and also that certain agreements relating to restrictive trade practices shall be registered (s. 33) and avoidance of conditions for maintaining re-sale prices (s. 39). Agreements to Prevent Bidding Where A and B agreed not to outbid each other with the understanding that A would convey half of the property in favour of B in case A's bid was accepted, and sale deed was duly executed in his favour, it could not be said to be against any public policy.9 An agreement between persons not to bid against one another at an auction sale is not necessarily unlawful,10 as being in restraint of trade,11 but it may be so if the purpose is to defraud a third party,12 or to prevent the realisation of fair price or to damp the sale.13 In Gurmukh Singh v. Amar Singh, 14 six bidders participated in the auction and the highest bid reached Rs. 5000/- as against the upset price fixed at Rs. 1000/-. The facts demonstrated that the appellant and the respondent had contracted that the appellant would participate on their behalf in a public auction to purchase the evacuee property and the appellant would convey half the property, purchased at the auction, to the respondent. The Supreme Court observed that an agreement between all competing bidders at an auction sale to form a ring and peg down the price and purchase the property at a knock-out price, would be injurious to the debtor and against public policy, but in the instant case, there was only a combination to participate at the auction and there was no intention either to peg down the price or to defraud the Government to knock-out the sale at a lower price. The object of such agreement was therefore not opposed to public policy, and could be especially enforced. Contracts of Agency Where money is given to an agent for an illegal contract, it cannot be recovered by the principal, because what the party himself cannot do, cannot be done through the agent;15 but betting losses paid by him can be recovered (see s. 30 below).16 Contract not to Revoke a Will A man may validly bind himself or his estate to make certain dispositions by will.17 Its breach cannot be prevented by injunction, but a suit for damages will lie, if broken otherwise than by marriage. Such an agreement would not necessarily be void as being in restraint of marriage, although, marriage
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would revoke the will.18 A covenant not to revoke a will or alter it does not amount to a covenant not to marry. The covenant should be confined to act s of revocation performed as such and does not extend to revocation following as a matter of law.19 Agreements Violating Directive Principles of State Policy under the Constitution of India An agreement with the State Government, by which it was to keep certain area of the company excluded from municipal bounds or limits, was held unenforceable as being opposed to public policy, and was inconsistent with the Constitutional provision in Art. 40 read with Item 5 of List II in Schedule VII.20 Agreements Violating the Policy of Statutes Beneficial to Oppressed Classes Freedom of contract is not permissible when it leads to taking disadvantage of oppressed or depressed people.21 The Government granted certain land to defendant under the HP Nantor Rules, which had the force of law. The grant was for cultivation of land and to provide 'subsistence' to a grantee, who was obliged to render the land fit for cultivation within a certain period and use it for cultivation. On his failure to do so, the land could be taken back by the Government and handed over to a landless person. The defendant agreed to hand over a substantial portion thereof to the plaintiff and handed over possession to the plaintiffs. The plaintiffs brought a suit sought to restrain the defendant from disturbing their possession. The defendant contended that the said agreement was void as being forbidden by law. It was held that the agreement was void as being against the public policy of helping the poor and landless persons by giving them land for their subsistence.22 In the contract of a cooking gas agency given to a person belonging to a Scheduled Caste, a term which entitled the corporation to terminate the agreement on giving 30 days' notice without assigning any reason for such termination, was held to be unconscionable and void being against public policy, since the contract was given from the Scheduled Caste quota for providing a source of livelihood to a person belonging to the economically backward class and not between two equals, where rights and obligations are negotiable.23 Suicide In England, suicide by a sane person is felo de se, and it has accordingly been held that the heirs or assignees of an assured who has committed suicide, cannot enforce the insurance policy, even though on its true construction, the insurers had agreed to pay in such an event.24 This was on the ground that suicide was a crime, and it would be against public policy to enforce such a contract of insurance. But in India, it is not against public policy to enforce a contract of insurance, where the assured has committed suicide; and a term in an insurance policy covering risk of death by suicide was not opposed to public policy.25 Agreement to Refund Taxes Exemption from tax to encourage industrialisation may be permissible, but not its refund. A promise or agreement to refund tax, which is due under a statute and has been realised in accordance with law would be a fraud on the Constitution and breach of faith of the people. Utilisation of tax by way of refund not to the payer but to a private person, a manufacturer, as an inducement to set up its unit in the state, would be breach of trust of the people and to deception. No law can be made to refund tax to a manufacturer realised under a statute. An agreement, notification or order permitting refund of sale tax, which was due, will be contrary to the statute and the Constitution. Constitutional requirements of levy of tax being for welfare of the society and not for a specific individual, the agreement by the Government to refund the sales tax in such manner was held by the Supreme Court to be violative of public policy and void under s. 23 of the Contract Act.26 Unconscionable Agreements Without a statutory provision enabling interference by the court in transactions unfair or unconscionable, or transactions caused by economic duress, but falling short of undue influence or
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coercion, the courts have struck down such terms on the ground of public policy. In Central Inland Water Transport Corporation Ltd v. Brojo Nath Ganguly, 27 a company carrying on the business of maintenance and running of river services entered into a scheme of arrangement with the CIWTC Ltd, a Government company; which scheme was approved by the High Court. Under the scheme, the officer of the company had an alternative to either accept the job of the corporation, or in the alternative, to leave and receive a meagre sum by way of compensation. The rules of the corporation provided for termination of the services of the officers by giving three months' notice. The services of the petitioners were terminated by giving three months' notice. The petitioners challenged this rule as arbitrary under s. 14 and alleged that a term in a contract of employment entered into by a private employer, which was unfair, unreasonable and unconscionable, was bad in law. The Court observed that the rule formed part of a contract of employment, and therefore, its validity fell to be tested by the principle of the law of contracts. The petitioners had not made out a case of coercion, fraud or misrepresentation. If it was caused by undue influence, it would be voidable, but if it was opposed to public policy, it would be void. Such contract will not fall within the four corners of 'undue influence'. The Court stated:
Such contract ought to be adjudged void. In order to adjudge it void it must fall under one of the sections of the Contract Act . Only relevant provision is s. 23.28
This principle was to be applied, as stated by the Court, to contracts which contained 'terms which are so unfair and unreasonable that they shock the conscience of the court'.29 And the Court observed:
The principle is that the courts will not enforce and will, when called upon to do so, strike down an unfair and unreasonable contract, or an unfair and unreasonable clause in a contract, entered into between parties who are not equal in bargaining power. It is difficult to give an exhaustive list of all bargains of this type...One can only attempt to give some illustrations. For instance, the above principle will apply where the inequality of bargaining power is the result of the great disparity in the economic strength of the contracting parties. It will apply where the inequality is the result of circumstances, whether of the creation of the parties or not. It will apply to situations in which the weaker party is in a position in which he can obtain goods or services or means of livelihood only upon the terms imposed by the stronger party or go without them. It will also apply where a man has no choice, or rather no meaningful choice, but to give his assent to a contract or to sign on the dotted line in a prescribed or standard form or to accept a set of rules as part of the contract, however unfair, unreasonable and unconscionable a clause in that contract or form or rules may be...there can be myriad situations which result in unfair and unreasonable bargains between parties possessing wholly disproportionate and unequal bargaining power. These cases can neither be enumerated nor fully illustrated. The court must judge each case on its own facts and circumstances'.30
The Court then excluded the application of the principle: (i) where the bargaining power of the contracting parties is equal or almost equal; (ii) where both parties are businessmen and the contract is a commercial transaction.31 Transfer of employees of a public service undertaking to a private company without their consent was held violating s. 23.32 In Sushil Kumar Yadunath Jha v. Union of India, 33 pursuant to his representation against termination of service, the appellant was appointed afresh as a teacher with an intimation that no benefit of the previous service rendered by him would be admissible, the Court held that he was in no position to bargain for a better deal and in the straitened circumstances in which he found himself, he was compelled to accept whatever was dictated to him, and the subsequent conduct and the quality of his performance which was highly appreciated, indicated that he should be relieved of the disadvantages suffered by him pursuant to that term in his contract of fresh appointment. The same principle was applied to strike down Regulation 9(b) of the Delhi Road Transport Authority (Conditions of Appointment and Service) Regulations, 1952, which empowered the authority to terminate the services of a permanent and confirmed employee by issuing a notice without assigning any reasons in the order and without giving
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any opportunity of hearing to the employee.34 Much earlier, a condition in a laundry receipt that only half the price will be paid in case of loss of garments given to it for washing, is opposed to public policy and therefore void;35 so is a term in an insurance policy insisting that the assured should be defended by a solicitor appointed by the insurer.36 But a stipulation entitling the demand of higher charges/tariff for electricity consumed beyond legally fixed limit, was a reasonable deterrent measure providing appropriate sanction, and was not opposed to public policy;37 nor was the provision in an agreement of two clauses, one vesting in the sellers the rights to accept or reject orders booked by their representatives, and the other, authorising that a higher price could be demanded by them under certain conditions.38 A clause in an exemption agreement excluding liability of an airline carrier is not opposed to public policy and to s. 23.39 A Government order providing for deduction of 5 per cent from advertisement bills of newspapers to become part of the pension fund of working journalists was struck down, inter alia, on the ground that it was unjust and violated s. 23.40 Contracts Made under Economic Duress In Dai-ichi Karkaria Pvt Ltd v. Oil and Natural Gas Commission, 41 the Bombay High Court has alluded to the application of this section to contracts (or its terms), consent to which has been caused by 'economic duress'. Although, the basis of relief is not clear from the judgment, it does rely upon the judgment of the Supreme Court in Central Inland Water Transport Corporation Ltd v. Brojo Nath Ganguly, 42 and indicates that such terms may be considered as opposed to public policy. Agreements held not Against Public Policy The Common Law of England and that of India have never struck down contracts of wager on the ground of public policy; indeed, they have always been held to be not illegal, notwithstanding the fact that the statute declared them void.43 A compromise of a suit, in which the defendant agreed to a mortgage decree being passed against him even in respect of a claim not secured by a mortgage, was not unlawful or opposed to public policy.44 A clause in the contract prohibiting assignment is not contrary to public policy.45 A clause in a contract with the Government prohibiting its assignment or sub-letting, did not make illegal on the ground of public policy, the taking of partners;46 nor a term in a loan advanced by the government, that the amount shall be recoverable as arrears of land revenue;47 or a clause in a contract entitling a party (the Government in the case) to terminate the contract without assigning any reasons.48 An agreement to pay interest on interest is not contrary to public policy.49 A clause entitling a hypothecatee to take possession and proceed to sell the hypothecated property without intervention of the court in the event or default of payment or breach of conditions, does not violate public policy.50 Where jute bags were to be delivered at Genoa (Italy) at a price mentioned, and the sellers could not, under the law of India, export without a licence although there was no condition precedent in the contract of seller's obtaining a quota or a licence for export, there was no agreement express or implied that the sellers should export the contravention of the law of India relating to quota and licence. Therefore, neither the agreement nor the award could be said to be against public policy.51 In agreements relating to allotment of residential plots at concessional rates to certain categories of persons required by the Rules to pay the cost price of the land and not the market price, a clause provided for enhancement of price due to award of higher compensation under The Land Acquisition Act, 1894. This clause was held was not against public policy, since the concessional rates under the Rules embodying the public policy were not to be below the cost price.52 An agreement by a surety waiving his rights under s s. 133-35, 139 and 141 of this Act does not violate public policy; public policy lay in not allowing the debtor to defeat the debt of the creditor.53 To abridge the rights of a landlord as given in the Rent Acts is not opposed to public policy;54 nor is an agreement by a widow not to claim enhancement of maintenance;55 or by a wife not to claim any maintenance in consideration of a lump sum;56 nor is an agreement by the parties vesting jurisdiction
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in one of the courts within whose jurisdiction the cause of act ion arose;57 or a contract by a carrier exempting himself from liability from negligence.58 A condition in a contract requiring payment to be made in foreign currency was not opposed to public policy;59 nor was an insurance policy covering risk of death by suicide;60 or an insurance policy in covering award of exemplary damages.61 An agreement for sale of goods in the 'black market' out of unaccounted money was for good consideration and not opposed to public policy.62 18 This definition in the earlier edition was approved in Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406, AIR 1959 SC 781 at 797. 19 Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406, AIR 1959 SC 781 at 797. 20 Ibid. 21 Ibid. 22 Anson's Law of Contracts, 29th edn, 2010, p. 393. 23 Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406. AIR 1959 SC 781 at 797. 24 For agreements interfering with marriage; see below--'Agreements Affecting Freedom or Security of Marriage'. 25 Examples cited in Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406 at 415, AIR 1959 SC 781 at 797. 26 Narayana Rao v. Ramchandra Rao, AIR 1959 AP 370 at 377, dissenting from Shiv Saran Lal v. Kesho Prasad Singh, AIR 1917 Pat 92. 27 AIR 1966 SC 1734 at 1738. 28 Gulabchand v. Kudilal, AIR 1966 SC 1734; Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406 at 446, AIR 1959 SC 781 AT 797. 29 Subava Yellappa v. Yamanappa Sahu, AIR 1933 Bom 209, 35 Bom LR 345. 30 Subhaschandra v. Narbadabai, AIR 1982 MP 236 at 238. 31 Dwarampudi Nagaratanamba v. Kunuku Ramayya, AIR 1968 SC 253; Manicka Gaunder v. Muniammal, AIR 1968 Mad 392 (a promissory note in favour of a married woman with whom the promissor had an adulterous connection). 32 Coral Leisure Group v. Barnet, [1981] ICR 503. 33 Gaurinath Mookerjee v. Madhumani Peshakar, (1872) 9 BLR App 37; Pirthi Mal v. Mst Bhagan, (1898) Punj Rec No 2; Brinkman v. Abdul Ghafur, (1904) Punj Rec No 65; Bani Muncharam v. Regina Stanger, (1907) 32 Bom 581 at 586 et seq; Choga Lal v. Piyari, (1908) 31 All 58; Pranballav Saha v. Tulsibala Dassi, AIR 1958 Cal 713; Kali Dassi v. Kanai Lal De, AIR 1921 Cal 486; Upfill v. Wright, [1911] 1 KB 506; Mariam Begum v. Mungi, (1928) 113 IC 366, AIR 1928 Sind 173 (award of mesne profits in ejectment). 34 Bholi Baksh v. Gulia, (1876) Punj Rec No 64; Kali Kumari Baisnabi v. Mono Mahini Baisnabi, AIR 1935 Cal 748, 160 IC 212. 35 Pannichand v. T Nanoo Sanker Tawker, (1908) 18 Mad LJ 456; Rajendra Nath Dass v. Abdul Hakim Khan, AIR 1918 Cal 399. 36 Alla Bakshv Chunia,(1877) Punj Rec No 26. 37 Thasi Muthukannu v. V Shunmugavelu Pillai, (1905) ILR 28 Mad 413; Kandaswami Goundan v. Narayanswami Goundan, (1923) 45 Mad LJ 551, AIR 1924 Mad 159, 76 IC 306; Alice Mary Hill v. William Clarke, (1905) 27 All 266 and Roshun v. Muhammad, (1887) Punj Rec No 46; Ghumna v. Ram Chandra Raa, AIR 1925 All 437, 88 IC 411. 38 (1869) LR 4 QB 309, 38 LJ QB 225, [1861-73] All ER 154; Bowmakers Ltd v. Barnet Instruments Ltd, [1945] KB 65 at 71, [1944] 2 All ER 579. 39 But see Vilayat Husain v. Misran, (1923) ILR 45 All 396, p. 399, in which Taylor v. Chester is apparently misunderstood, where the court remarks that where the plaintiff has to produce a document, the defendant may cross-examine him or issue interrogatories, and shown that he is in pari delicto; but the whole point of Taylor v. Chester is that despite the illegality, the plaintiff can recover, and will not be deemed to be in pari delicto, unless he has to rely upon the illegality of the transaction as an integral part of his case.
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40 Saradambal Ammal v. AM Natesa Mudaliar, (1972) 1 Mad LJ 244 at 253, following Ram Sarup v. Bela 11 IA 44, (1883) 6 All 313(PC), and distinguishing TayaRamma v. Sitaramasami Naidu, (1900) 23 Mad 613; Pyare Mohan v. Narayani, AIR 1982 Raj 43. 41 Dhiraj Kaur v. Bikramjit Singh, (1881) ILR 3 All 787; Man Kaur v. Jasodha Kaur, (1877) 1 All 478; Lakshminarayana Reddiyar v. Subhadri Ammal, (1902) 13 Mad LJ 7; M Kothandapani Mudaliar v. Dhanammal, AIR 1943 Mad 253, (1943) 1 Mad LJ 56. 42 This was also the view lately taken in Husseinali Casam Mahomed v. Dinbai, (1923) 25 Bom LR 252, 86 IC 240, AIR 1924 Bom 135. 43 (1920) ILR 44 Bom 542, AIR 1920 Bom 142, 57 IC 472; Sabava Yellappa v. Yemanappa Sabu, AIR 1933 Bom 209, 35 Bom LR 345; but see Istak Kamu Musalman v. Ranchod Zipru Bhate, (1947) Bom 206, AIR 1947 Bom 198, 48 Bom LR 775 (gift made for compensating past consideration not void, but will be void if made in discharge of agreement which has past cohabitation as its consideration); Lilu Ram v. Ram Piyari, AIR 1952 Punj 293. 44 LE Godfrey v. Parbati Paluni, (1938) 17 Pat 308, 178 IC 574, AIR 1938 Pat 502 per Courtney Terrell CJ at 504. 45 Ayerst v. Jenkins, (1873) LR 16 Eq 275; Gray v. Mathias, (1800) 5 Ves 286, [1775-1802] All ER Rep 534; Beaumont v. Reeve, [1865] 8 QB 483. 46 Alice Mary Hill v. William Clarke, (1905) ILR 27 All 266; distinguished in BV Rama Rao v. Jayamma, AIR 1953 Mys 33, on the ground that in the Alice Mary Hill case, future cohabitation was part of the agreement. 47 Khubchand v. Beram, (1888) 13 Bom 150, (1889-90) ILR 13-14 Bom 100. 48 Sukha v. Ninni, AIR 1966 Raj 163; Khwaja Muhammad Khan v. Husaini Begum, 37 IA 152, (1910) 32 All 410 refd to. 49 [1975] 3 All ER 776, [1975] 1 WLR 1346 (question of illegality was not raised); Barton,(1976) 92 LQR 168; Paul v. Constance, [1977] 1 All ER 195, [1977] 1 WLR 527(CA) . 50 Eves v. Eves, [1975] 3 All ER 768, [1975] 1 WLR 1338(CA) ; Tanner v. Tanner, [1975] 3 All ER 776, [1975] 1 WLR 1346(CA) ; Paul v. Constance, [1977] 1 All ER 195, [1977] 1 WLR 527(CA) (declaration of trust). 51 Armhouse Lee Ltd v. Chappell The Times, 7 August 1996; referred in Anson's Law of Contract, 29th edn, 2010, p. 393. 52 Chitty on Contracts, 28th edn, p. 871, para 17-068. 53 A right of action cannot arise out of fraud; Per Lord Mansfield in Holman v. Johnson, (1775) Cowp 341, p. 343, 98 ER 1120, [1775-1802] All ER Rep 98. 54 Gherulal Parakh v. Mahadeodas Maiya, 1959 Supp (2) SCR 406 at 439, AIR 1959 SC 781 at 795; Chitty on Contracts, 28th edn, p. 836-37, para 17-003; Wilkinson v. Osborne, (1915) 21 CLR 89 at 97; Multiservice Bookbinding Ltd v. Marden, (1979) Ch D 84, [1978] 2 All ER 489; Newland v. Simons & Wilter (Hairdressers) Ltd, (1981) ICR 521; Enderby Town Football Club Ltd v. The Football Association Ltd, [1971] Ch 591 at 606, [1971] 1 All ER 215(CA) . 55 Sudha v. Sankappa Rai, AIR 1963 Mys 245. 56 Rajshree Sugars and Chemicals Ltd v. Axis Bank Ltd, AIR 2011 Mad 144 (transactions in derivative and financial instruments used for transferring or hedging risks permitted by RBI Master Circulars). 57 Central Inland Water Transport Corpn Ltd v. Brojo Nath Ganguly, [1986] 2 SCR 278, AIR 1986 SC 1571 at 1612, (1986) 3 SCC 156. 58 Bhagwant Genuji Girme v. Gangabisan Ramgopal, (1941) Bom 71, AIR 1940 Bom 369 at 372, 42 Bom LR 750, 191 IC 806. 59 Rattan Chand Hirachand v. Askar Nawaz lung, (1991) 3 SCC 67 per Sawant J. at 77; Gurmukh Singh v. Amar Singh, (1991) 3 SCC 79 at 86. 60 Gulabchand Gambhirmal v. Kudilal Govindram, AIR 1959 MP 151(FB) . 61 Rattan Chand Hira Chand v. Askar Nawab Jung, (1991) 3 SCC 67 at 76-77, quoting Graveson, Conflict of Laws, 7th edn, 2010, p. 165; approved in Renusagar Power Co Ltd v. General Electric Co Ltd, AIR 1994 SC 860 at 886, (1994) 1 SCC 644. 62 [1988] QB 448, [1988] 1 All ER 513, [1988] 2 WLR 735, QBD; Parkinson v. College of Ambulance Ltd, [1925] 2 KB 1, [1924] All ER Rep 325 at 327 (procurement of title by improper means contrary to English public policy); Montefiore v. Menday Motor Components Co Ltd, [1918] 2 KB 241 at 244-45, [1918-19] All ER Rep 1188 (procuring a benefit from the government by the use of influence against public policy).
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63 Lemenda Trading Co Ltd v. African Middle East Petroleum Co Ltd, [1988] QB 448 per Phillips J. at 461, [1988] 1 All ER 513 at 523, [1988] 2 WLR 735. 64 [1988) QB 448 at 459, [1988] 1 All ER 513 at 521. 65 Repealed by the Arbitration and Conciliation Act, 1996 (26 of 1996). 66 Renusagar Power Co Ltd v. General Electric Co Ltd, AIR 1994 SC 860, (1994) 1 SCC 644. 67 See Chitty on Contracts, 28th edn, p. 850, para 17-029. 68 Naihati Jute Mills Ltd v. Khyaliram Jagannath, AIR 1968 SC 522 at 529; but see Tool Metal Co Ltd v. Tungsten Electric Co Ltd, [1955] 2 All ER 657 at 688 (reasonable price fixed at the instance of foreign concern not against public policy). 69 See above. 70 Wilkinson v. Osborne, (1915) 21 CLR 89 at 97; Janson v. Driefontein Consolidated Mines Ltd, [1902] AC 484, [1900-03] All ER 426(HL) . 71 [1966] 1 All ER 689 per Danckwerts at 650, [1966] 2 WLR 1027 LJ at 1037 (discrimination against women); Kamala Sugar Mills Ltd v. Ganga Bishen Bhajan Singh, AIR 1978 Mad 178 at 183; Anand Prakash Om Prakash v. Oswal Trading Agency, AIR 1976 Del 24 at 27; Martell v. Consett Iron Co Ltd, [1954] 3 All ER 339, on appeal [1955] Ch 363, [1955] 1 All ER 481(CA) (law of maintenance), applied in Hill v. Archbold, [1968] 1 QB 686, [1967] 3 All ER 110, [1967] 2 WLR 1218 at 1255, 1227. 72 AIR 1976 AP 112. 73 See Winfield,(1928) 42 HLR 76. 74 Fender v. Mildmay, [1938] AC 1, [1937] 3 All ER 402; Janson v. Driefontein Consolidated Mines Ltd, [1902] AC 484, [1900-3] All ER Rep 426(HL),[1900-3] All ER Rep 426(HL) . 75 Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406; AIR 1959 SC 781 AT 797. 76 AIR 1952 Mad 579 at 582. 77 Janson v. Driefontein Consolidated Mines Ltd, [1902] AC 484 per Lord Halsbury at 491, [1900-03] All ER Rep 426 at 429 (HL); Shrinivasdas Lakshminarayan v. Ramchandra Ramrattandas, (1919) 44 Bom 6, AIR 1920 Bom 251, 52 IC 546; Vassandmal Davaldas v. Hiromal Mohanmal 227 IC 633, AIR 1947 Sind 94; Fender v. Mildmay, [1938] AC 1, [1937] 3 All ER 402 at 407; Bhagwant Genuji Girme v. Gangabisan Ramgopal, (1941) Bom 71, AIR 1940 Bom 369, 42 Bom LR 750, 191 IC 806. 78 Janson v. Driefontein Consolidated Mines Ltd, [1902] AC 484 per Lord Davey at 500, [1900-03] All ER Rep 426(HL), per Lord Lindley at 507, cited in Govind Subrao v. FS Pacheco, (1902) 4 Bom LR 948. 79 Wilson v. Carnley, [1908] 1 KB 729, [1908-10] All ER Rep 120(CA) ; Pardumanchand v. Bawa Kashmira Singh, AIR 1943 Lah 100; Ranjeetsingh Murlisingh v. Ramlal Shivlal, AIR 1951 MB 113(1). 80 AIR 2005 SC 3401, (2005) 12 SCC 77. 81 AIR 2005 SC 2306, (2005) 5 SCC 632. 82 Mafizuddin Khan Choudhury v. Habibuddin Sheikh, AIR 1957 Cal 336. 83 Associated Cement Companies Ltd v. State of Rajasthan, AIR 1981 Raj 133 at 137. 84 Kalavagunta Venkata Kristnayya v. Kalavangunta Venkatachalam, (1908) ILR 32 Mad 185 at 190 (FB). 85 Furtado v. Rogers, (1802) 3 Bob & P 191 at 198. 86 Janson v. Driefontein Consolidated Mines Ltd, [1902] AC 484 per Lord Macnaghten at 499, [1900-03] All ER Rep 426(HL) . 87 Potts v. Bell, (1800) 8 TR 548, 5 RR 452; Esposito v. Bowden, (1857) 7 E&B 763, [1843-60] All ER Rep 39, 110 RR 822. 88 Geipel v. Smith, (1872) LR 7 QB 404, [1861-73] All ER Rep 861; See also s. 56 below. 89 Janson v. Driefontein Consolidated Mines Ltd, [1902] AC 484 per Lord Macnaghten at 499, [1900-03] All ER Rep 426(HL) ; Wolf & Sons v. Dadiba Khimji & Co, (1919) 44 Bom 631, AIR 1920 Bom 192, 58 IC 465.
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90 Porter v. Freudenberg, [1915] 1 KB 857, [1914-15] All ER Rep 918; Daimler Co Ltd v. Continental Tyre and Rubber Co Ltd, [1916] 2 AC 307, [1916-17] All ER Rep 191; Re Badische Co Ltd,[1921] 2 Ch 331. 91 See Trading with the Enemy (Continuance of Emergency Provisions) Act, 1947; The (English) Trading with the Enemy Act, 1939. 1 See s. 2(1)(a) and r. 98 of the Schedule to the Trading with the Enemy (Continuance of Emergency Provisions) Act, 1947. 2 See Anson's Law of Contract, 29th edn, 2010, p. 387. 3 Ralli Brothers v. Compania Naviera Sota y Aznar, [1920] 2 KB 287 per Scrutton LJ. at 304, [1920] All ER Rep 1427; Foster v. Driscoll, [1929] 1 KB 470, [1928] All ER Rep 130; Libyan Arab Foreign Bank v. Bankers Trust Co, [1989] 1 QB 728 per Staughton J. at 743-46, [1989] 3 All ER 252. 4 Regazzoni v. K C Sethia (1944) Ltd, [1958] AC 301, [1957] 3 All ER 286, [1957] 3 WLR 752(HL), affirming [1956] 2 All ER 487. 5 Regazzoni v. K C Sethia (1944) Ltd, [1958] AC 301 at 325, [1957] 3 All ER 286(HL), affirming [1956] 2 All ER 487; Lemenda Trading Co Ltd v. African Middle East Petroleum Co Ltd, [1988] QB 448, [1988] 1 All ER 513, [1988] 2 WLR 735. 6 Re Selot's Trusts,[1902] 1 Ch 488. See also 'Public Policy and Enforcement in Contracts Involving a Foreign Element' above. 7 [1925] 2 KB 1, [1924] All ER Rep 325. 8 Narasimma Thata Acharya v. Anantha Bhatta, (1881) 4 Mad 391(1878-82) ILR 1-4 1107 (office of archaka); Kuppa Gurukal v. Dorasami Gurukal, (1882) 6 Mad 76, (1882-84) ILR 5-7 Mad 331 (sale of religious office to a person not in the line of heirs); Rajah Vurmah Valia v. Ravi Vurmah Kunhi Kutty 4 IA 76, (1876) 1 Mad 235; Ghanasambanda Pandara Sannadhi v. Velu Pandaram, (1899) 27 IA 69 (hereditary right of management of a religious endowment). 9 Mancharam v. Pranshankar, (1882) ILR 6 Bom 298. 10 Wahid Ali v. Ashruff Hossain, (1882) ILR 8 Cal 732. 11 Neti Anjaneyalu v. Sri Venugopal Rice Mills Ltd, (1922) ILR 45 Mad 620, AIR 1922 Mad 197, 70 IC 466. 12 Rajah Vurmah Valia v. Ravi Vurmah Kunhi Kutty, 4 IA 76, (1876) 1 Mad 235. 13 Girijanund Datta Jha v. Sailajanund Dutta Jha, (1896) ILR 23 Cal 645. 14 Kolaparti Venkatareddi v. Kolaparti Peda Venkatachalam, AIR 1964 AP 465. 15 Kolaparti Venkatareddi v. Kolaparti Peda Venkatachalam, AIR 1964 AP 465. 16 Hoode Venkataramanayya v. JM Lobo, AIR 1953 Mad 506; Swaminatha Aiyar v. Muthusami Pillai, (1907) 30 Mad 530. 17 Swaminatha Aiyar v. Muthusami Pillai, (1907) 30 Mad 530; Karuppiah Pillai v. Ponnychami Pillai, AIR 1933 Mad 768, 65 Mad LJ 532, 45 IC 972. 18 Puttulal v. Raj Narain, (1931) 53 All 609, 132 IC 419, AIR 1931 All 428; Swaminatha Aiyar v. Muthusami Pillai, (1907) 30 Mad 530; Syed Shah Nasihuddin v. Syed Shah Salihuddin, AIR 1957 Pat 659. 19 Ledu v. Hira Lal Bose, (1915) ILR 43 Cal 115, AIR 1916 Cal 266, 29 IC 625, dissented in PR Srinivasa Ayyar v. A Sesha Ayyar, (1918) ILR 41 Mad 197 at 200, 202, 41 IC 783; Parkinson v. College of Ambulance Ltd, [1925] 2 KB 1, [1924] All ER Rep 325; Ranjeetsingh Murlisingh v. Ramlal Shivlal, AIR 1951 MB 113(1) (offering money to a jobber in a mill for giving employment against public policy). 20 Kolaparti Venkatareddi v. Kolaparti Peda Venkatachalam, AIR 1964 AP 465. 21 Rattan Chand Hira Chand v. Askar Nawab Jung, AIR 1976 AP 112 at 120, affirmed in (1991) 3 SCC 67, applying Montefiore v. Menday Motor Components Co Ltd, [1918] 2 KB 241, [1918-19] All ER Rep 1188; Hopkins v. Prescott, (1847) 4 CB 573 at 576; NVP Pandian v. MM Roy, AIR 1979 Mad 42 at 46 (amount paid for securing seat in a medical college). 22 Ranjeetsingh Murlisingh v. Ramlal Shivlal, AIR 1951 MB 113(1). 23 Secretary-cum-Chief Engineer v. Hari Om Sharma, AIR 1998 SC 2909, (1998) 5 SCC 87. 24 Pichakutty Mudali v. Narayanappa Aiyam, (1864-65) 2 MHCR 243.
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25 (1991) 3 SCC 67. 26 Lemenda Trading Co Ltd v. African Middle East Petroleum Co Ltd, [1988] QB 448, [1988] 1 All ER 513, [1988] 2 WLR 735; Parkinson v. College of Ambulance Ltd, [1925] 2 KB 1, [1924] All ER Rep 325 at 327; Montefiore v. Menday Motor Components Co Ltd, [1918] 2 KB 241 at 244-45, [1918-19] All ER Rep 1188. 27 SR Nayak v. Union of India, AIR 1991 SC 1420 at 1443, overruling Babulal Choukhani v. Western India Theatres Ltd, AIR 1957 Cal 709. 28 Ledu v. Hira Lal Bose, AIR 1916 Cal 266; Manindra Chandra Nandi v. Aswini Kumar Acharjya, AIR 1921 Cal 185; the Prevention of Corruption Act, 1988. 29 Protima Aurat v. Dukhia Sirkar, (1872) 9 Beng LR App 38. 30 ANC Holdings Pte Ltd v. Bina Puri Holdings Bhd, [2013] SGHC 97 (Singapore High Court). 31 AIR 1966 SC 1734 at 1738. 32 Wilkinson v. Osborne, (1915) 21 CLR 89; Gulabchand v. Kudilal, AIR 1966 SC 1734 (bribing a committee of investigation was held illegal, but question of immorality not decided); Kotharaju Narayana Rao v. Tekumalla Ramchandra Rao, AIR 1959 AP 370 at 377 (immoral); Amresh Chandra Pandey v. Firm Kalyan Mal Dharam Narain Saral, AIR 1972 All 130 (a case of bribe to an MLA for getting a government agency); Debenham v. Ox, (1749) 1 Ves Sen 276; Higgins v. Hills, (1887) 56 LT 426 (use of undue influences to get a legacy); Rattan Chand Hira Chand v. Askar Nawab Jung, AIR 1976 AP 112 at 120; (use of influence with minister of government); NVP Padiou v. MM Roy, AIR 1979 Mad 42 at 46 (money paid to get a seat in a medical college, suit for refund not maintainable). 33 EV Balasundara Mudaliar v. K Mahomed Oosman Sahib, (1929) 118 IC 65, AIR 1929 Mad 812, 57 Mad LJ 154 (a promise of reward by a Muslim litigant to a Hindu devotee in consideration of offering prayers for the success of his suit is not against public policy); Bhagwan Dat Shastri v. Raja Ram, (1927) 25 All LJ 518, AIR 1927 All 406 (reward was to be a commission on the money recovered in the suit against public policy); Pashupati Mukherjee v. Shitalkumar Sarkar, (1930) 58 Cal 699, 133 IC 327, AIR 1931 Cal 587 (a promise to withdraw a caveat and to get certain costs from the executor it the will is proved, is not contrary to public policy, if fairly made). 34 Lala Nand Kishore v. Kunj Behari Lal 145 IC 756, AIR 1933 All 303; See also s. 28 below. 35 Srihari Jena v. Khetramohan Jena, AIR 2002 Ori 195. 36 Initial Services Ltd v. Pulterill, [1968] 1 QB 396, [1967] 3 All ER 145(CA) ; Lion Laboratories Ltd v. Evans, [1985] 1 QB 526, [1984] 2 All ER 417; Attorney-General v. Guardian Newspapers Ltd, [1990] 1 AC 109 at 268-69, [1988] 3 All ER 545. 37 Howard v. Odhams Press Ltd, [1938] 1 KB 1 at 41-42, [1936] 2 All ER 40, KBD, affirmed [1937] 2 All ER 509(CA) . 38 Williams v. Bayley, (1866) LR 1 HL 200 per Lord Westbury at 220, [1861-73] All ER Rep 227. 39 Sudhindra Kumar Rai Chaudhuri v. Ganesh Chandra Ganguli, (1939) 1 Cal 241 per Mukherjee J. at 250, AIR 1938 Cal 840, 179 IC 210; Mohanlal Jagannath v. Kashiram Gokul, (1950) Nag 105, AIR 1950 Nag 71; V Narasimharaju v. V Gurumurthy Raju, [1963] 3 SCR 687, AIR 1963 SC 107 at 110 (arbitration of a criminal complaint); Malka v. Sardar, AIR 1929 Lah 394; Ahmad Ullah v. Hafizullah, AIR 1961 All 173. 40 Keir v. Leeman, (1846) 9 QB 371 at 392, 66 RR 392, 9 QB 371, 72 RR 298; Windhill Local Board of Health v. Vint, (1890) 45 Ch D 351; R v. Panayiotou, [1973] 3 All ER 112, [1973] 1 WLR 1032(CA) . 41 Anson's Law of Contract, 29th edn, 2010, p. 389. 42 Union Carbide Corpn v. Union of India, AIR 1992 SC 248 at 286-87. 43 Fisher & Co v. Appollinaris Co, (1875) LR 10 Ch App 297 as qualified by Windhill Local Board of Health v. Vint, (1890) 45 Ch D 351; Tek Chand v. Harjas Rai-Arjan Das, AIR 1929 Lah 564, 117 IC 74; but see Kamini Kumar Basu Thakur v. Birendra Nath Basu Thakur, (1930) 57 IA 117, 57 Cal 1302, 123 IC 187, AIR 1930 PC 100, reversing Birendra Nath Basu Thakur v. Basanta Kumar Basu Thakur, AIR 1926 Cal 519, 91 IC 624 agreement of withdrawing criminal complaint of forgery, though one incident in a dispute about property, was unlawful. 44 See s. 320, Cr PC, 1973; Onkar Mal v. Ashiq Ali, (1927) 49 All 540, 100 IC 499, AIR 1927 All 318 (there must be better evidence of compounding than the mere withdrawal of a complaint); Sadho Kandu v. Jhinka Kuer, AIR 1929 All 456, 116 IC 749; Firm Harjas Rai-Arjan Das v. Tek Chand, AIR 1927 Lah 465, 101 IC 786; Shanti Sarup v. Lal Chand, AIR 1927 Lah 530, 103 IC 444. 45 Per cur Amir Khan v. Amir Jan, (1898) 3 CWN 5; followed in Ahmed Hassan v. Hassan Mahomed Malik, (1928) 52 Bom 693, 112 IC 459, AIR 1928 Bom 305. 46 Kalianna Goundan v. Settia Goundan, AIR 1946 Mad 80, (1945) 2 Mad LJ 468; Saktay Sah v. Mahadin, AIR 1930
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Oudh 196; Ram Jash Goshain v. Markande Pathak, AIR 1934 All 1068; Lewai Khan v. Goolreze Khan, AIR 1941 Rang 231; Chandanmal v. Rupakula Ramakrishnayya, (1941) 2 Mad LJ 827, AIR 1942 Mad 173. 47 Onkar Mal v. Ashiq Ali, (1927) 49 All 540, 100 IC 499, AIR 1927 All 318. 48 Raja Ram v. Charanji Lal, AIR 1939 Lah 98; Lewai Khan v. Goolreze Khan, AIR 1941 Rang 231 at 233; Kalianna Goundan v. Settia Goundan, AIR 1946 Mad 80, (1945) 2 Mad LJ 468; Chandanmal v. Rupakula Ramakrishnayya, (1941) 2 Mad LJ 827, AIR 1942 Mad 173; Ramchandra v. Bhanwari Bai, AIR 1973 Raj 260; Marla Packiam v. Vallaimmal, (1989) 2 Mad LJ 461. 49 Majibar Rahman v. Muktashed Hossain, (1912) 40 Cal 113; Mottai Reddy v. Thanappa Reddy, (1914) 37 Mad 385, AIR 1915 Mad 635; Ahmed Hassan v. Hassan Mahomed Malik, (1928) 52 Bom 693, 112 IC 459, AIR 1928 Bom 305; Gopal Chandra Poddar v. Lakshmi Kanta Saha, AIR 1933 Cal 817, 37 CWN 749, 147 IC 492; Pakalapati Veerayya v. Devulapalli Sobhandri, AIR 1936 Mad 656; Banu Mal v. Ratan Deo, AIR 1937 All 370, 169 IC 533; Raja Ram v. Charanji Lal, AIR 1939 Lah 98; Brahmdeo Narayan v. Brajballabh Prasad, (1940) Pat 424, 188 IC 859, AIR 1940 Pat 573 (proceedings withdrawn on plaintiff agreeing to convey lands to defendant for a certain sum); Karnidan Sarda v. Sailaja Kanta Mitra, (1940) 19 Pat 715, 192 IC 187, AIR 1940 Pat 683; Bhowanipur Banking Corpn Ltd v. Shrimati Durgesh Nandini Dassi, (1941) 1 Cal 1, AIR 1941 PC 95, 44 Bom LR 1 (noted as 1941 PC); Matta Jaggilodu v. Matta Byramma, AIR 1941 Pat 349; Motumal Issardas Firm v. Haji Ibrahim Khan Raisimkhan, (1943) Kant 390, 212 IC 287, AIR 1944 Sind 80; Shripad v. Sanikatta Co-operative Salt Sale Society, (1945) Bom 208, 46 Bom LR 745, AIR 1945 Bom 82; Mohanlal Jagannath v. Kashiram Gokul, (1950) Nag 105, AIR 1950 Nag 71; Ouseph Poulo v. Catholic Union Bank Ltd, [1964] 7 SCR 745, AIR 1965 SC 166; V Narasimharaju v. V Gurumurthy Raju, [1963] 3 SCR 687, AIR 1963 SC 107; Radhakishan Chintaman v. Chapa Bhima, AIR 1963 MP 139 (promissory note executed). 50 Chandanmal v. Rupakula Ramakrishnayya, (1941) 2 Mad LJ 827, AIR 1942 Mad 173; Premji Damodar v. Firm LV Govindji & Co, AIR 1943 Sind 197; Nand Kishore v. International Mercantile Corpn (India) Ltd, AIR 1953 Cal 415. 51 Bhowanipur Banking Corpn Ltd v. Shrimati Durgesh Nandini Dassi, (1941) 1 Cal 1, AIR 1941 PC 95, 44 Bom LR 1 (noted as 1941 PC); Jones v. Merionethshire Permanent Benefit Building Society, [1892] 1 Ch 173, [1891-94] All ER Rep 2010(CA) . 52 Kamini Kumar Basu Thakur v. Birendra Nath Basu Thakur, (1930) 57 IA 117, 57 Cal 1302, 123 IC 187, AIR 1930 PC 100 (withdrawal of proceedings-an implied term of reference to arbitration); Brahmdeo Narayan v. Brajballabh Prasad, (1940) Pat 424, 188 IC 859, AIR 1940 Pat 573 at 575; Narayana Pillai Parameswaran Pillai v. Kudamaloor Regional Service Co-op Society Ltd, AIR 1967 Ker 51 at 53; Loganathan Minor v. Ponnuswami Naicker, AIR 1969 Mad 15 at 17. 53 Ouseph Paulo v. Catholic Union Bank Ltd, [1964] 7 SCR 745, AIR 1965 SC 166; V Narasimharaju v. Gurumurthy Raju, [1963] 3 SCR 687, AIR 1963 SC 107 (a case of arbitration agreement); Kamini Kumar Basu Thakur v. Birendra Nath Basu Thakur, (1930) 57 IA 117, 57 Cal 1302, 123 IC 187, AIR 1930 PC 100; Bhowanipur Banking Corpn Ltd v. Shrimati Durgesh Nandini Dassi, AIR 1941 PC 95 (wife mortgaged property for the debt of husband). But mortgage was held illegal as executed in consideration of withdrawal of a criminal case, which was opposed to public policy). 54 Eastern Mercantile Bank Ltd v. VNT Philip, AIR 1960 Ker 194. 55 Majibar Rahman v. Muktashed Hossain, (1912) 40 Cal 113 at 117-18; RS Bion v. Sheogulam Lal, AIR 1924 Pat 305; Nabidad Khan v. Abdul Rahman, AIR 1931 All 128; RamJash Goshain v. Markande Pathak, AIR 1934 All 1068; Sudhindra Kumar Rai Chaudhuri v. Ganesh Chandra Ganguli, (1939) 1 Cal 241, AIR 1938 Cal 840, 179 IC 210. 56 Sadho Kandu v. Jhinka Kuer, AIR 1929 All 456 at 457, 116 IC 749. 57 Shripad v. Sanikatta Co-op Salt Sale Society, (1945) Bom 208, 46 Bom LR 745, AIR 1945 Bom 82. 58 Muthuveerappa Chetti v. Ramaswami Chetti, (1917) 40 Mad 285, 34 IC 401 at 1017, AIR 1917 Mad 607; Trikamdas Udeshi v. Bombay Municipal Corpn, AIR 1954 Bom 427; Dy Commr Rae Bareli v. Har Narain Lal, AIR 1956 All 205. 59 Amjadennessa Bibi v. Rahim Buksh Shikdar, (1915) 42 Cal 286, 28 IC 713, AIR 1916 Cal 74; Bindeshari Prasad v. Lekhraj Sahu, AIR 1916 Pat 284, 33 IC 711. 60 Per Cur Amir Khan v. Amir Jan, (1898) 3 Cal WN 5, followed in Ahmed Hassan v. Hasan Mahomed Malik, (1928) 52 Bom 693, 112 IC 459, AIR 1928 Bom 305. 61 Shah Rahman v. Ismail Khan, (1904) Punj Rec No 82. 62 Hosein Shah v. Nur Ahmed, (1875) Punj Rec No 81. 63 TA Meenakshi Sundarammal v. K Subramania Ayyar, AIR 1955 Mad 369; Ramchandra v. Bhanwari Bai, AIR 1973 Raj 260. 64 V Narasimharaju v. V Gurumurthy Raju, [1963] 3 SCR 687, AIR 1963 SC 107 at 109; Sumitra Devi Agarwalla v. Sulekha Kundu, AIR 1976 Cal 196 at 205; distinguishing Deb Kumar Ray Choudhury v. Anath Bandhu Sen, AIR 1931
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Cal 421, 35 CWN 26, 131 IC 133. 65 Adhikanda Sahu v. Jogi Sahu, AIR 1922 Pat 502; Onkar Mal v. Ashiq Ali, (1927) 49 All 540, 100 IC 499, AIR 1927 All 318; Shripad v. Sanikatta Co-op Salt Sale Society, (1945) Bom 208, 46 Bom LR 745, AIR 1945 Bom 82. 66 [1964] 7 SCR 745, AIR 1965 SC 166. 67 R Sivaram v. TA John, AIR 1975 Ker 101. 68 Jones v. Merionethshire Permanent Benefit Building Society, [1892] 1 Ch 173, [1891-94] All ER Rep 2010(CA) ; Bhowanipur Banking Corpn v. Durgesh Nandini Dassi, AIR 1941 PC 95, 44 Bom LR 1; Mohanlal Jagannath v. Kashiram Gokul, (1950) Nag 105, AIR 1950 Nag 71; s. 19, Central Provinces and Berar Act, 15 of 1938. 69 (1874) 7 MHC 378; Sanaullah v. Kalimullah, AIR 1932 Lah 446, 137 IC 790; Karnidan Sarda v. Sailaja Kanta Mitra, (1940) 19 Pat 715, 192 IC 187, AIR 1940 Pat 683. 70 (1887) ILR 11 Bom 566; Shih Charon Lal v. Lachmi Narain, AIR 1951 All 613 (on facts, bond executed for discharging civil liability and not dropping prosecution); Dwijendra Nath Mullick v. Gopiram Gobindaram, (1925) 29 CWN 855, AIR 1926 Cal 59, 89 IC 200 (application for leave to withdraw a prosecution already commenced, does not of itself amount to stifling the prosecution) Rameshwar Marwari v. Upendranath Das 29 CWN 1029, 90 IC 463 at 1026, AIR 1926 Cal 455 (no credible evidence of any prosecution); Sudhindra Kumar Rai Chaudhuri v. Ganesh Chandra Ganguli, (1939) 1 Cal 241, AIR 1938 Cal 840, 179 IC 210; Haliman v. Md Manir, AIR 1971 Pat 385 (agreement to give up share of inheritance to save one's son from prosecution). 71 Flower v. Sadler, [1882] 10 QBD 572, cited with approval Bhowanipur Banking Corpn Ltd v. Durgesh Nandini Dassi, (1941) 1 Cal 1, AIR 1941 PC 95; Abdul Qadir v. Imam Din, AIR 1927 Lah 231; Sayamma Dattatraya Narsingrao v. Punamchand Raichand Marwadi, AIR 1933 Bom 413; Pakalapati Veerayya v. Devulapalli Sobhandri, AIR 1936 Mad 656; London and Lancashire Insurance Co Ltd v. Binoy Krishna Mitra, AIR 1945 Cal 218, 220 IC 379 . 72 Deb Kumar Ray Choudhury v. Anath Bandhu Sen, AIR 1931 Cal 421, 35 CWN 26, 131 IC 133; Widya Wanti v. Jai Dayal, (1931) 13 Lah 156, 140 IC 220, AIR 1932 Lah 541; Mohd Azim v. Adil Shah, AIR 1934 Pesh 105; Jagdish v. Kausilla Devi, AIR 1947 All 317; Babu Har Narain Kapur v. Bapu Ram Swarup Nigam, AIR 1941 Oudh 593. 73 Jai Kumar v. Gauri Nath, (1906) 28 All 718; Narasimhalu Naidu v. Naina Pillai, (1929) 115 IC 156, AIR 1929 Mad 7; Widya Wanti v. Jai Dayal, (1931) 13 Lah 156, 140 IC 220, AIR 1932 Lah 541; Deb Kumar Ray Choudhury v. Anath Bandhu Sen, AIR 1931 Cal 421, 35 CWN 26, 131 IC 133; Shaikh Gafoor v. Hemanta Shashi Debya, AIR 1931 Cal 416, 35 CWN 28, 131 IC 574; Chandanmal v. Rupakula Ramakrishnayya, (1941) 2 Mad LJ 827, AIR 1942 Mad 173; London and Lancashire Insurance Co Ltd v. Binoy Krishna Mitra, AIR 1945 Cal 218, 220 IC 379 (threat of prosecution does not avoid the contract); Ramchandra Laxman v. Bank of Kolhapur, (1952) Bom 715, AIR 1952 Bom 315. 74 Bhowanipur Banking Corpn Ltd v. Durgesh Nandini Dassi, (1941) 1 Cal 1, AIR 1941 PC 95; Ouseph Poulo v. Catholic Union Bank Ltd, [1964] 7 SCR 745, AIR 1965 SC 166. 75 Ibid. 76 Bhowanipur Banking Corpn Ltd v. Durgesh Nandini Dassi, (1941) 1 Cal 1, AIR 1941 PC 95; Ouseph Poulo v. Catholic Union Bank Ltd, [1964] 7 SCR 745, AIR 1965 SC 166. 77 Ouseph Poulo v. Catholic Union Bank Ltd, [1964] 7 SCR 745, AIR 1965 SC 166. 78 See above. 79 Bhowanipur Banking Corpn Ltd v. Durgesh Nandini Dassi, (1941) 1 Cal 1 at 4, AIR 1941 PC 95; Mohanlal Jagannath v. Kashiram Gokul, (1950) Nag 105, AIR 1950 Nag 71. 80 (1941) 1 Cal 1, AIR 1941 PC 95. 81 AIR 1957 Pat 477; Bhowanipur Banking Corpn Ltd v. Durgesh Nandini Dassi, (1941) 1 Cal 1, AIR 1941 PC 95. 82 Maharaja Srish Chandra Nandy v. Supravat Chandra, (1940) 1 Cal 372, 190 IC 295, AIR 1940 Cal 337. 83 Dalsukhram Hargovandas v. Charles De Bretton, (1904) ILR 28 Bom 326. 84 Rajkristo Moitro v. Koylash Chunder Bhuttacharjee, (1882-83) 8-9 ILR Cal 16; Iqbal Ahmed v. Mohammad Hanif, AIR 1952 Bhopal 32. 85 Syed Mahomed v. Shah Vazirul Haq, (1911) 16 Cal WN 480. 86 Malka v. Sardar, AIR 1929 Lah 394; Ahmad Ullah v. Hafizullah, AIR 1961 All 173; V Narasimharaju v. Gurumurthy Raju, [1963] 3 SCR 687, AIR 1963 SC 107 at 110 (arbitration); Kamini Kumar Basu Thakur v. Birendra Nath Basu Thakur, (1930) 57 IA 117, 57 Cal 1302, 123 IC 187, AIR 1930 PC 100(arbitration) .
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87 Subraya Pillai v. Subraya Mudali, (1867) 4 MHC 14; Hamlyn & Co v. Talisker Distillery, [1894] AC 202, [1891-94] All ER Rep 849; Kaufman v. Gerson, [1904] 1 KB 591, [1907] All ER Rep 896(CA) . 88 Shahabuddin Sahib v. Tota Venkatachalam Chettiar, AIR 1938 Mad 911 at 913-14, (1938) 2 Mad LJ 523; Sashannah Chetti v. Ramasamy Chetty, (1868) 4 MHC 7; Collins v. Godefroy, (1831) 1 B & Ad 950. 89 National Petroleum Co v. FX Rebello, AIR 1935 Nag 48. 90 Rajendra Setha v. Punjab National Bank, AIR 1991 Del 285 at 290. 91 Lee v. Showmen's Guild of Great Britain, [1952] 2 QB 329, [1952] 1 All ER 1175 per Lord Denning at 1181 (CA); Sutton v. Sutton, [1984] Ch 184 at 195-98, [1984] 1 All ER 168. 92 [1929] AC 601, [1929] All ER Rep 245; Bennett v. Bennett, [1952] 1 KB 249, [1952] 1 All ER 413. 1 Bennett v. Bennett, [1952] 1 KB 249, [1952] 1 All ER 413. 2 Geeta Satish Gokarna v. Satish Shankar Rao Gokarna, AIR 2004 Bom 345; P Archana v. Varada Siva Rama Krishna, AIR 2008 AP 216 (claim for enhanced maintenance). 3 ABC Laminart Pvt Ltd v. AP Agencies, AIR 1989 SC 1239, (1989) 2 SCC 163; Angile Insulations v. Davy Ashmore India Ltd, AIR 1995 SC 1766, (1995) 4 SCC 153; National Petroleum Co Ltd v. Meghraj Ramkaranji Golcha, AIR 1937 Nag 334; Hoosen Kasam Dada (India) Ltd v. Motilal Padampat Sugar Mills Co Ltd, AIR 1954 Mad 845. 4 ABC Laminart Pvt Ltd v. AP Agencies, AIR 1989 SC 1239 at 1242, (1989) 2 SCC 163; (see also s. 28 below). 5 Mahesh Chandra v. Zilla Panchayat, AIR 1997 All 248; Surendra Kumar Rai v. Zilla Parishad, Jhansi, AIR 1997 All 387. 6 New India Assurance Co Ltd v. Tara Sundari Phauzdar, AIR 2004 Cal 1. 7 Now see the Arbitration and Conciliation Act, 1996. 8 Universal Petrochemicals Ltd v. Rajasthan State Electricity Board, AIR 2001 Cal 102. 9 AIR 2007 (Supp) 1770, (2006) 11 SCC 245. 10 Bhupati Charan Nandi v. Golam Ehihar Choudhury, AIR 1920 Cal 498, 56 IC 539; Meherulla v. Sariatulla, AIR 1930 Cal 596. 11 Prosonno Kumar Chakravarti v. Prokash Chandra Dutra, AIR 1915 Cal 695. 12 Bur Singh v. Kehru, AIR 1938 Lah 732; relying on Bisheswar v. Rachcha Ram, AIR 1921 Oudh 132. 13 Dula Ram v. Akhey Raj, AIR 1952 Ajmer 28. 14 GF Fischer v. Kamala Naicker, (1860) 8 MIA 170 at 187 (PC). 15 Re Trepca Mines Ltd,[1963] Ch 199 per Lord Denning MR at 219, [1962] 3 All ER 351 at 355. 16 [1919] AC 368 at 390, [1918-19] All ER Rep 61 at 71; Bradlaugh v. Newdegate, (1883) LJ 52 QB 454, (1883) 11 QBD 1. 17 Rajah Vatsavaya Venkata Subhadrayyamma Jagapati Bahadur Garu v. Sri Poosapati Venkatapati Raju Garu 52 IA 1, AIR 1924 PC 162; Ram Coomar Coondoo v. Chunder Canto Mookerjee, (1876) 4 IA 23, (1876) 2 Cal 233; Raghunath v. Nilkanth, PC Sub nom; Kunwar Ram Lal v. Nil Kanth, (1893) 20 IA 112 sub nom Raghunath v. Nil Kanth (PC); Achal Ram v. Kazim Hussain Khan, (1905) 32 IA 113, (1905) 27 All 271 at 290 (PC); Valluri Ramanamma v. Marina Viranna, AIR 1931 PC 100 at 104, 131 IC 401; Alopi Parshad v. Court of Wards, AIR 1938 Lah 23; Suganchand v. Balchand, AIR 1957 Raj 89; Pandrangi Gopalam v. Chidamana Chinnayya, AIR 1958 AP 630; Zainab Begum alias Varalakshmi v. Khursheed Begum, AIR 1963 AP 370. 18 Ellis v. Torrington, [1920] 1 KB 399, [1916-18] All ER Rep 1132; Giles v. Thompson, [1994] 1 AC 142, [1993] 3 All ER 321 at 328; Trendtex Trading Corporation v. Credit Suisse, [1982] AC 679, [1980] 1 QB 629 at 663, 697, [1981] 3 All ER 520; Martell v. Consett Iron Co Ltd, [1955] Ch 363 at 387, 389, 420, 430, [1955] 1 All ER 481(CA) . 19 Hutley v. Hutley, [1873] LR 8 QB 112 per Blackburn J. at 115. 20 There must be something more than simply communicating information; Rees v. De Bernardy, [1896] 2 Ch 437 at 446. 21 Rees v. De Bernardy, [1896] 2 Ch 437; U Pe Gyi v. Mg Thein Shin, (1923) 1 Rang 565, 77 IC 372, AIR 1924 Rang 48.
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22 Re Trepca Mines Ltd, [1963] Ch 199, [1962] 3 All ER 351. 23 Maintenance and champerty are now no longer an offence nor torts under the English law. See below, under the heading--'Champertous Agreements in the English Law'. 24 Chedambara Chetty v. Renga Krishna Muthu Vira Puchaiya Naickar, (1874) 1 IA 241; Ram Coomar Coondoo v. Chunder Canto Mookerjee, (1876) 4 IA 23, (1876) 2 Cal 233; Banarasi Das v. Sital Singh 121 IC 295, AIR 1930 Lah 392. 25 Nuthaki Venkataswami v. Katta Negi Reddy, AIR 1962 AP 457 (case of champerty); Lala Ram Sarup v. Court of Wards, (1939) 67 IA 50, AIR 1940 PC 19, (1940) Lah 1,185 IC 590; Ram Coomar Coondoo v. Chunder Canto Mookerjee, (1876) 4 IA 23 at 47, (1876) 2 Cal 233; Raghunath v. Nilkanth, PC, Sub nom; Kunwar Ram Lal v. Nil Kanth, (1893) 20 IA 112 sub nom Raghunath v. Nil Kanth (PC); Sri Rajah Vatsavaya Venkata Subhadrayyamma Jagapati Bahadur Garu v. Sri Poosapati Venkatapati Raju Garu 52 IA 1, AIR 1924 PC 162 at 173; Alopi Parshad v. Court of Wards, AIR 1938 Lah 23; Suganchand v. Balchand, AIR 1957 Raj 89; Zainab Begum alias Varalakshmi v. Khursheed Begum, AIR 1963 AP 370; Ratanchand Hirachand v. Askar Nawaz Jung, AIR 1976 AP 112 at 121. 26 Bhagwat Dayal Singh v. Debi Dayal Sahu, 35 IA 48 at 56, (1908) 35 Cal 420. 27 (1860) 8 MIA 170, where it was stated that an assignment by an agent to his principal of his interest is an agreement entered into in his name, but on behalf of the principal, was not champertous. 28 (1860) 8 MIA 170 at 187. 29 Ram Coomar Coondoo v. Chunder Canto Mookerjee, (1876) 4 IA 23, (1876) 2 Cal 233 . 30 (1908) 35 IA 48, 35 Cal 420; Rajah Vatsavaya Venkata Subhadrayyamma Jagapati Bahadur Garu v. Sri Poosapati Venkatapati Raju Garu 52 IA 1, AIR 1924 PC 162; Ram Coomar Coondoo v. Chunder Canto Mookerjee, (1876) 4 IA 23, (1876) 2 Cal 233. 31 Achal Ram v. Karim Hussain Khan, (1905) 32 IA 113, (1906) 27 All 271; as explained in Bhagwat Dayal Singh v. Debi Dayal Sahu, (1908) 35 IA 48 at 56, (1908) 35 Cal 420. 32 Bhagwat Dayal Singh v. Debi Dayal Sahu, (1908) 35 IA 48. 33 Raghunath v. Nilkanth, PC, Sub nom; Kunwar Ram Lal v. Nil Kanth, (1893) 20 IA 112; sub nom Raghunath v. Nil Kanth (PC); Inder Singh v. Munshi, (1920) 1 Lah 124, 56 IC 272, AIR 1920 Lah 123(2). 34 Dara Shapurji v. Askarai Begum, AIR 1954 Hyd 98. 35 See the Transfer of Property Act, 1882, s. 6(e). 36 Raghunath v. Nilkanth, PC, Sub nom; Kunwar Ram Lal v. Nil Kanth, (1893) 20 IA 112; sub nom Raghunath v. Nil Kanth (PC); Kesho Das v. Tulsi Dass, AIR 1926 Lah 43; Ram Coomar Coondoo v. Chunder Canto Mookerjee, (1876) 4 IA 23, (1876) 2 Cal 233; Lucy Moss v. Mah Nyein May, AIR 1933 Rang 418; Fateh Jang v. Bute Khan, AIR 1934 Lah 1017; Alopi Parshad v. Court of Wards, AIR 1938 Lah 23; Kalimuthu v. Maung Tha Din, AIR 1936 Rang 491; Suganchand v. Balchand, AIR 1957 Raj 89. 37 Ram Coomar Coondoo v. Chunder Canto Mookerjee, (1876) 4 IA 23, (1876) 2 Cal 233; Raghunath v. Nilkanth, PC, Subnom; Kunwar Ram Lal v. Nil Kanth, (1893) 20 IA 112 sub nom Raghunath v. Nil Kanth (PC); Baldeo Sahai v. Jugal Kishore, (1911) 33 All 626, 2 IC 932; Valluri Ramanamma v. Marina Viranna, AIR 1931 PC 100, 131 IC 401; Pannalal Gendalal v. Thansing Appaji, AIR 1952 Nag 195; Pandrangi Gopalam v. Chidamana Chinnayya, AIR 1958 AP 630. 38 (1876) 4 IA 23, (1876) 2 Cal 233. 39 Chedambara Chetty v. Renga Krishna Muthu Vira Puchaiya Naickar, (1874) 1 IA 241 at 265 (PC); Tarachand v. Suklal, (1888) 12 Bom 559; Amrita Lal Baisya v. Pratap Chand Chakrabarty, AIR 1931 Cal 144; Lucy Moss v. Mah Nyein May, AIR 1933 Rang 418; Kalimuthu v. Maung Tha Din, AIR 1936 Rang 491; Alopi Parshad v. Court of Wards, AIR 1938 Lah 23 at 28. 40 Lala Ram Sarup v. Court of Wards, (1939) 67 IA 50 per Sir George Rankin at p. 62, AIR 1940 PC 19 AIR 1940 PC 19 at 23, (1940) Lah 1,185 IC 590; Khaja Moinuddin Khan v. SP Ranga Rao, AIR 2000 AP 344. 41 Unnao Commercial Bank Ltd v. Kailash Nath, AIR 1955 All 393. 42 Husain Bakhsh v. Rahmat Hussain, (1888) 11 All 128 at 135; Loke Indar Singh v. Rup Singh, (1889) 11 All 118 at 125; Raja Mohkam Singh v. Raja Rup Singh, (1893) 20 IA 127, (1893) 15 All 352; U Pe Gyi v. Mg Thein Shin, (1923) 1 Rang 565, 77 IC 372, AIR 1924 Rang 48 at 51; Kesho Das v. Tulsi Dass, AIR 1926 Lah 43 at 45; Alopi Parshad v. Court of Wards, AIR 1938 Lah 23 at 27-8; but see Marina Viranna v. Valluri Ramanamma, AIR 1928 Mad 437 (a bargain in which the reward is largely in excess of the expenses is not necessarily an unfair bargain).
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43 Pusapati Venkatapathiraju Garu v. Vatsavaya Venkata Subhadrayyamma Jagapati, AIR 1919 Mad 718. 44 Kamrunnisa v. Pramod Kumar Gupta, AIR 1997 MP 106. 45 Giles v. Thompson, [1994] 1 AC 142, [1993] 3 All ER 321 per Bingham MR at 348. 46 Trendtex Trading Corporation v. Credit Suisse, [1980] 1 QB 629 per Oliver LJ at 7, [1980] 3 All ER 721 at 748, affirmed in [1982] AC 679 at 702, [1980] 1 QB 629, [1981] 3 All ER 520; Walters,(1996) 112 LQR 560. 47 Guy v. Churchill, (1888) 40 Ch D 481; Performing Rights Society Ltd v. Thompson, (1918) 34 TLR 351. 48 Giles v. Thompson, [1994] 1 AC 142, [1993] 3 All ER 321. 49 Martell v. Conselt Iron Co Ltd, [1955] Ch 363, [1955] 1 All ER 481(CA) . 50 Hill v. Archbold, [1968] 1 QB 686, [1967] 3 All ER 110, [1967] 2 WLR 1218. 51 British Cash and Parcels Conveyors Ltd v. Lamson Stores Service Co Ltd, [1908] 1 KB 1006, [1908-10] All ER Rep 146; Trendtex Trading Corporation v. Credit Suisse, [1980] 1 QB 629, [1982] AC 679, [1981] 3 All ER 520; Giles v. Thompson, [1994] 1 AC 142, [1993] 3 All ER 321; Camdex International Ltd v. Bank of Zambia, [1998] QB 22, [1996] 3 All ER 431. 52 Coulson v. News Group Newspapers Ltd, [2012] EWCA Civ 1547. 53 Raghunath v. Nilkanth, PC, Subnom; Kunwar Ram Lal v. Nil Kanth, (1893) 20 IA 112 sub nom Raghunath v. Nil Kanth (PC); Dhallu v. Jiwan Singh, (1894) Punj Rec No 79; Stewart v. Ram Chand, (1906) Punj Rec No 26; Alopi Parshad v. Court of Wards, AIR 1938 Lah 23; Pandrangi Gopalam v. Chidamana Chinnayya, AIR 1958 AP 630. 54 Ratanchand Hirachand v. Askar Nawaz Jung, AIR 1976 AP 112 at 121; Kamrunnisa v. Pramod Kumar Gupta, AIR 1997 MP 106. 55 'x' annas share would be x/16th share. 56 Raghunath v. Nilkanth, PC, Subnom; Kunwar Ram Lal v. Nil Kanth, (1893) 20 IA 112 sub nom Raghunath v. Nil Kanth (PC). 57 Husain Bakhsh v. Rahmat Hussain, (1888) 11 All 128; Harivalabhdas Haridas v. Bhai Jivanji, (1902) 26 Bom 689. 58 Raja Mohkam Singh v. Raja Rup Singh, (1893) 20 IA 127, (1893) 15 All 352, in appeal from Chunni Kaur v. Rup Singh, (1888) 11 All 57. 59 Nuthaki Venkataswami v. Katta Negi Reddy, AIR 1962 AP 457 at 458-59, following Lala Ram Sarup v. Court of Wards, (1939) 67 IA 50, AIR 1940 PC 19, (1940) Lah 1,185 IC 590; Ram Coomar Coondoo v. Chunder Canto Mookerjee, (1876) 4 IA 23 at 47, (1876) 2 Cal 233; Zainab Begum alias Varalakshmi v. Khursheed Begum, AIR 1963 AP 370; Kamrunnisa v. Pramod Kumar Gupta, AIR 1997 MP 106. 60 Harilal Nathalal Talati v. Bhailal Pranlal Shah, AIR 1940 Bom 143,188 IC 217, 42 Bom LR 165 (defendant of vacillating mind, unable to look after his affairs). 61 Suganchand v. Balchand, AIR 1957 Raj 89. 62 Gurusami v. Subbaraya, (1888) 12 Mad 118; Siva Ramayya v. Ellamma, (1898) 22 Mad 310. 63 Ahmedbhoy Hubibhoy v. Vulleebhoy Cassumbhoy, (1884) 8 Bom 323 at 333, 334. 64 Gopal Ramchandra v. Gangaram Anandishet, (1889) 14 Bom 72; followed in Ramanuja Ayyangar v. Narayana Ayyangar, (1895) 18 Mad 374. 65 Siva Ramayya v. Ellamma, (1898) ILR 22 Mad 310. 66 Abdool Hakim v. Doorga Prashad Rannerjee, (1879) 5 Cal 4, (1879-80) ILR 4-5 Cal 615; Tarachand v. Suklal, (1888) 12 Bom 559; Unnao Commercial Bank Ltd v. Kailash Nath, AIR 1955 All 393 at 396. 67 Goculdas Jagmohandas v. Lakhmidas Khimji, (1879) 3 Bom 402 at 415. 68 Achal Ram v. Karim Hussain Khan, (1905) 32 IA 113, 27 All 271 at 289-90. 69 (1908) 35 IA 48, 35 Cal 420. 70 Debi Dayal Sahoo v. Thakurai Bhau Pertap 1903 8 CWN 408. 71 Suganchand v. Balchand, AIR 1957 Raj 89.
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72 Ramanuja Ayyangar v. Narayana Ayyangar, (1895) ILR 18 Mad 374 at 378. 73 lndarpal Singh v. Rameshwar Baksh Singh, AIR 1925 Oudh 71. 74 Fateh Jang v. Bute Khan, AIR 1934 Lah 1017. 75 Kalimuthu v. Maung Tha Din, AIR 1936 Rang 491. 76 Firm of N Peddanna Ogeti Balayya v. Katta V Srinivasayya Setti Sons, AIR 1954 SC 26. 77 Abu Mahomed v. SC Chunder, (1909) 36 Cal 345, I IC 827; Hirachand Amichand Gujar v. Nemchand Fulchand Marwadi, (1923) 47 Bom 719, AIR 1923 Bom 403, 73 IC 465; Pansulari Vencatasawmi v. Mentana Ramchandra Raju, (1915) 38 Mad 138, AIR 1916 Mod 595, 18 IC 520; Jewan Ram v. Ratan Chand-Kishen Chand, AIR 1921 Cal 795, 70 IC 498; Punjaram Mali v. Harisao Rangari, AIR 1934 Nag 268, (1934) 153 IC 447 (executory contract for future sale of property is not a mere right to sue); Mohanlal Lad v. Motilal Marwadi, AIR 1935 Nag 135, (1935) 157 IC 587; Mon Mohan Bhattacharjee v. Bidhu Bhusan Dutta, AIR 1939 Cal 460, 185 IC 6; M T Rajamanickam Chetty v. T R Abdul Halim Sahcb, AIR 1941 Mad 389, (1941) 1 Mad LJ 22 (benefit obtainable under a decree can be transferred). 78 Jagannath Marwari v. Kalidas Raha, (1924) 3 Pat 575, AIR 1929 Pat 245. 79 Section 3, Transfer of Property Act, 1882, for definition of and actionable claim; Manmatha Nath Mullick v. Sheikh Hedait Ali 59 IA 41, AIR 1932 PC 32, for the distinction between a mere right to sue and transfer of actionable claim. 80 Pansulari Vencatasawmi v. Mentana Ramchandra Raju, (1915) 38 Mad 138, AIR 1916 Mad 595, 18 IC 520; Abu Mahomed v. SC Chunder, (1909) 36 Cal 345, 11 IC 827; Nakhela v. Kokaya, AIR 1923 Nag 67; Yadavendra Bhatta v. Shrinivasa Babu, (1924) 47 Mad 698, AIR 1925 Mad 62; Moti Lal v. Radhey Lal 55 All 814, AIR 1933 All 642; Powri v. Shiwa Paiku Mahar, AIR 1935 Nag 2. 81 AB Miller v. Budh Singh Dudhuria, (1890) 18 Cal 43; Chandmull v. Ranee Soondery Dos see, (1894) 22 Cal 259; Liladhar Uttamchand Marwadi v. Nago, AIR 1933 Nag 6, (1933) 141 IC 479; Powri v. Shiwa Paiku Mahar, AIR 1935 Nag 2; Camdex International Ltd v. Bank of Zambia, [1998] QB 22, [1996] 3 All ER 431. 82 Ellis v. Torrington, [1920] 1 KB 399, [1916-18] All ER Rep 1132. 83 King v. Victoria Insurance Co Ltd, [1896] AC 250; Compania Colombiana de Seguros v. Pacific Steam Navigation Co, [1965] 1 QB 101, [1964] 1 All ER 216; Hindustan Corpn (Hyderabad) Pvt Ltd v. United India Fire and General Insurance Co Ltd, AIR 1997 AP 347 (a letter of subrogation was an assignment or transfer of the rights and remedies of the insured); United India Fire and General Insurance Co Ltd v. Pelaniappa Transport Carriers, AIR 1986 AP 32; but see New India Assurance Co Ltd v. BN Sainani, AIR 1997 SC 2938, (1997) 6 SCC 383 (cannot seek remedy as a 'consumer' under the Consumer Protection Act 1986). 84 Camdex International Ltd v. Bank of Zambia, [1998] QB 22, [1996] 3 All ER 431. 85 [1982] AC 679 at 703, [1980] 1 QB 629, [1981] 3 All ER 520 at 531-32. 86 [1985] 3 All ER 499. 87 See above per Lloyd LJ. at 509. 88 Re Trepca Mines Ltd, [1963] Ch 199, [1962] 3 All ER 351 at 356, reversing [1962] 2 WLR 800 (mere awareness of the terms of such agreement was held to make the contract void). 89 Thai Trading Co v. Taylor, [1998] 3 All ER 65(CA), overruling Aratra v. Taylor, [1995] 4 All ER 695. 90 Ganga Ram v. Devi Das, (1907) Punj Rec No 61; Re Mr G, a Senior Advocate of the Supreme Court,AIR 1954 SC 557; Re KL Gauba,AIR 1954 Bom 478. 91 Kathu Jairam Gujur v. Vishvanath Ganesh Javadekar, (1925) 49 Bom 619, AIR 1925 Bom 470, 89 IC 199. 92 RB Basu v. PK Mukherji, AIR 1957 Cal 449 at 458. 1 Firm of N Peddanna Ogeti Balayya v. Katta V Srinivasayya Setti Sons, AIR 1954 SC 26 at 28. 2 Rees v. De Bernardy, [1896] 2 Ch 437; Wedgerfield v. De Bernardy, [1908] 25 TLR 21; Fraser v. Buckle, [1996] 2 IRLM 34 (Supreme Court of Ireland) noted in Capper,(1997) 113 LQR 49. 3 Capper,[1997] 113 LQR 49. 4 Shiam Lal v. Chhaki Lal, (1900) 22 All 220; Sheo Narain v. Mata Prasad, (1904) 27 All 73. 5 Bhagwan Dei v. Murari Lal, (1917) 39 All 51, AIR 1917 All 462, 36 IC 259(FB) (an assignment of mortgage by a patwari is not opposed to public policy); Kamala Devi v. Gur Dial, (1917) 39 All 58, AIR 1917 All 447, 36 IC 319; Sharan
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Behari Lal v. Kanhaya Lal, AIR 1953 All 276 (a mortgage to an advocate by his client was not void). 6 Abdul Rahman v. Ghulam Muhammad, (1926) 7 Lah 463, 98 IC 673, AIR 1927 Lah 18 (transfer of land to a patwari against public policy). 7 Dharwar Bank Ltd v. Mahomed Nayal, AIR 1931 Bom 269, 133 IC 241, 33 Bom LR 250 (acquiring of property by government servant in name of another in contravention of departmental rules not invalid); Manuel S Lobo v. Nicholos Britto, (1897) 7 Mad LJ 268 (similar case). 8 Sitarampur Coal Co Ltd v. Colley, (1908) 13 Cal WN 59. It is not easy to see what the party's knowledge has to do with it. The rule is for the protection of public interest. 9 Manikka Mooppanar v. Peria Muniyandi Pandithan, AIR 1936 Mad 541, 164 IC 31. 10 See ss. 215, 216 of this Act below. 11 Uttar Pradesh State Electricity Board v. Lakshmi Devi Sehgal, AIR 1977 All 499 at 503; distinguishing Lachoo Mal v. Radhye Shyam, [1971] 3 SCR 698, AIR 1971 SC 2213. 12 Tenjerla Suryanarayana v. Prabhala Subbayya, (1917) 41 Mad 471, 42 IC 911, AIR 1918 Mad 504. 13 Gulabchand v. Kudilal, AIR 1966 SC 1734, affirming Gulabchand Gambhirmal v. Kudilal Govindram, AIR 1959 MP 151(FB) . 14 Albert Judah Judah v. Ramapada Gupta, AIR 1959 Cal 715 at 728. 15 Canara Bank v. Standard Chartered Bank, AIR 2002 SC 132, (2002) 10 SCC 697. 16 The Benami Transactions (Prohibition) Act, 1988 defines a benami transaction as meaning 'any transaction in which property is transferred to one person for a consideration paid or promised by another person.' 17 Kalipada Mondal v. Kali Charan Mondal, AIR 1949 Cal 204. 18 KM Viswanatha Pillai v. K M Shanmugham Pillai, AIR 1969 SC 493 at 496, reversing KM Viswanathan Pillai v. K M Shanmugam Pillai, AIR 1967 Mad 100, and overruling AV Varadarajulu Naidu v. K V Thavasi Nadar, (1963) Mad 942, AIR 1963 Mad 413 and Chavali Venkataswami v. Chavali Kotayya, AIR 1962 AP 14; see the provisions of ss. 3 and 4, Benami Transactions (Prohibition) Act, 1988. 19 Puvvada Venkata Subbayya v. Attar Sheik Mastan, AIR 1949 Mad 252. 20 Ibid; Fakirchand v. Bansila4 AIR 1955 Hyd 28(FB) . 21 Kedar Nath Motani v. Prahlad Rai, [1960] 1 SCR 861, AIR 1960 SC 213 at 219. 22 See Bhagwan Dei v. Murari La4 (1917) 39 All 51, AIR 1917 All 462, 36 IC 259(FB) ; Balkissen v. Debi Singh, AIR 1919 Nag 50; Dhirendra Kumar Bose v. Chandra Kanta Roy, AIR 1923 Cal 154; Dharwar Bank Ltd v. Mahomed Hayat, AIR 1931 Bom 269, 133 IC 241, 33 Bom LR 250; Indarsingh Gopalsingh Rajput v. Ramnarayan Mathurala4 AIR 1944 Nag 325; but see Sajjad Mirza v. Nanhi Khanam, AIR 1918 Oudh 457; Sundrabai Sitaram v. Manohar Dhondu, AIR 1933 Bom 262. 23 Ram Singh v. Raghubansa, AIR 1923 Oudh 3. 24 Surasaibalini Debi v. Phanindra Mohan Majumdar, [1965] 1 SCR 861, AIR 1965 SC 1364. 25 Ram Sarup Bhagat v. Bansi Mandar, (1915) 42 Cal 742, AIR 1916 Cal 718, 30 IC 955; Satish Chandra Ghosh v. Kashi Sahu, (1918) 3 Pat LJ 412, AIR 1918 Pat 249, 46 IC 418. In an English case Horwood v. Millar's Timber and Trading Co Ltd, [1917] 1 KB 305, [1916-17] All ER Rep 847 (a borrower never bound himself without the consent of the lender to change his employment or his residence, or to part with any of his property, or to incur an obligation legal or moral); but see Anandiram v. Goza Kachori, (1918) 27 Cal LJ 459, 45 IC 965, AIR 1918 Cal 409; Karuppanna v. Pambayan, AIR 1927 Mad 531, 101 IC 39 (no penal interest); Sitaram Deokaran v. Baldeo Jairam, AIR 1958 MP 367. 26 Jogu Mohen Deb v. Davdoong Burman, (1908) 12 Cal WN 94. 27 Horwood v. Millar's Timber and Trading Co Ltd, [1917] 1 KB 305, [1916-17] All ER Rep 847; A Schroeder Music Publishing Co Ltd v. Macaulay, [1974] 3 All ER 616, [1974] 1 WLR 1308. 28 Sundar Sahu Gountia v. Chamra Sahu Gountia, AIR 1954 Ori 80. 29 Bai Vijli v. Nansa Nagar, (1885) 10 Bom 152; Roshun v. Muhammad, (1887) Punj Rec No 46. 30 Wilson v. Carnley, [1908] 1 KB 729, [1908-10] All ER Rep 120(CA) ; Spiers v. Hunt, [1908] 1 KB 720; Millward v. Littlewood, (1850) 5 Ex 775, 82 RR 871, 155 ER 339, applied in Shaw v. Shaw, [1954] 2 All ER 638, [1954] 3 WLR
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265. 31 Fender v. Mildmay, [1938] AC 1, [1937] 3 All ER 402(HL) ; Psaltis v. Schultz, (1948) 76 CLR 547 at 561 (High Court of Australia). 32 Muniammal v. Raja, AIR 1978 Mad 103 at 108, relying on Muhammad Muin-ud-din v. Jamal Fatima, (1921) 43 All 650, AIR 1921 All 152, 63 IC 883. 33 Vemuru Venkata Krishnayya v. Vemuru Lakshmamma, AIR 1944 Mad 17. 34 Indira Bai v. Makarand, AIR 1931 Nag 197; Purshottamdas Harjivandas Patel v. Rukmini, AIR 1937 Bom 358; Audumbar Gangaram v. Sonubai Audumbar, AIR 1962 Bom 35; AE Thirumal Naidu v. Rajammal, AIR 1968 Mad 201. 35 Gogineni Subbayya v. Goggineni Govindamma, AIR 1945 Mad 36. 36 Narayan v. Laxman, AIR 1925 Nag 111. 37 Hermann v. Charlesworth, [1905] 2 KB 123(CA) (whether generally or with specific persons, reversing the judgment of a divisional court, which had held that only agreements to procure marriages with specified persons were illegal). 38 Cole v. Gibson, (1750) 1 Ves Sen 503 per Lord Eldon at 506. 39 Atiyah, An Introduction to the Law of Contract, 5th edn, p. 323. 40 Baldeo Sakai v. Jumna Kunwar, (1901) ILR 23 All 495. 41 Kalavagunta Venkata Kristnayya v. Kalavangunta Venkatachalam, (1908) ILR 32 Mad 185(FB) . 42 The Law Commission of India in its 13th Report, 1958 recommended adding s. 23A to the Act : 3A. Agreements to procure marriage or pay money in consideration thereof.The following agreements are unlawful within the meaning of section 23--(a) an agreement to procure the marriage of any person for reward;(b) an agreement to pay money or deliver anything whose value can be expressed in terms of money to a parent or other guardian-in-marriage of any person in consideration of his consenting to the marriage of that person. 43 A Suryanarayan Murthy v. P Krishna Murthy, AIR 1957 Ori 124. 44 Alsidas s/o Pannalal Nawta v. Punamchand s/o Hukumchand Oswal, AIR 1944 Nag 159 (but money recoverable under s. 65, if marriage not taken place). 45 Purshotamdas Tribhovandas v. Purshotamdas Mangaldas Nathubhoy, (1897-98) ILR 21-22 Bom 16 (specific performance of a Hindu parent's or guardian's contract to give him a child in marriage will not be granted; the remedy being in damages); Khimji Kuverji Shah v. Lalji Karamsi Raghavji, (1941) Bom 211, 196 IC 858, AIR 1941 Bom 129. 46 Manikka Mooppanar v. Peria Muniyandi Pandithan, AIR 1936 Mad 541, 164 IC 31. 47 Visvanathan v. Saminathan, (1889) 13 Mad 83; Baldeo Sahai v. Jumna Kunwar, (1901) 23 All 495; Gopi Tihadi v. Gokhei Panda, AIR 1954 Ori 17 (payment of bride price being a well established custom). 48 The Dowry Prohibition Act, 1961 now prohibits such payments. 49 Baldeo Sohal v. Jumna Kunwar, (1901) ILR 23 All 495 at 496-97. 50 Dholidas Ishwar v. Fulchand Chhagan, (1897) 22 Bom 658; Dulari v. Vallabdas Pragji, (1888) Bom 126; Baldeo Das v. Mohamaya, (1911) 15 CWN 447; Kalavagunta Venkata Kristnayya v. Kalavangunta Venkatachalam, (1908) 32 Mad 185(FB) ; Wazarimal v. Ballia, (1889) Punj Rec No 128; Hira v. Bhandari, (1892) Punj Rec No 112; Kundan Lal v. Nathu, (1880) Punj Rec No 116; Abbas Khan v. Nur Khan, (1920) 1 Lah 574, AIR 1920 Lah 357, 58 IC 167. 51 Dholidas Ishwar v. Fulchand Chhagan, (1897) 22 Bom 658; Dulari v. Vallabdas Pragji, (1888) 13 Bom 126; Kalavagunta Venkata Kristnayya v. Kalavangunta Venkatachalam, (1908) 32 Mad 185(FB) ; Ramekbal Singh v. Harihar Singh, AIR 1962 Pat 343 (payment of tilak money punishable under Bihar Dowry Restraint Act, 1950). 52 Baldeo Das v. Mohamaya, (1911) 15 Cal WN 447; Baldeo Sohal v. Jamna Kunwar, (1901) ILR 23 All 495. 53 Salliyal Kottakkat Mannakkal Narayanan Nambudiri v. Patticharavoor, AIR 1945 Mad 165, 221 IC 584; but see Kulatooraiyan Chidambara Iyer v. Ananthakrishna Iyer Janardhana Iyer, AIR 1954 Tr & Coch 231 (a decision not sustainable, as there must be consideration for a promissory note, and the consideration must not be illegal). 54 Juggessur Chuckerbutty v. Panch Cowree Chuckerbutty, (1870) 14 WR 154, approved in Ram Chand Sen v. Audaito Sen and Srinath Sen, (1884) 10 Cal 1054; Gulabchand Paramchand v. Fulbai Rom Harichand Ramchand, (1909) 33 Bom 411 (the marriage could not take place because of the death of the plaintiff's son); Jiwana v. Malak Chand, (1919) 54 PR 113; Ganpat v. Lahana, (1927) 106 IC 803, AIR 1928 Nag 89; Alsidas s/o Pannalal Nawta v. Punamchand s/o Hukumchand Oswal, (1944) Nag 535, AIR 1944 Nag 159, 214 IC 168; Bhan Singh v. Kaka Singh,
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AIR 1933 Lah 849; Sadhusingh Fatehsing v. Jhamandas Valiram, AIR 1937 Sind 211, 171 IC 1005; contra Girdhari Singh v. Neeladhar Singh, (1912) 10 All LJ 159, 16 IC 1004. 55 PR Srinivasa Aiyar v. A Sesha Ayyar, (1918) ILR 41 Mad 197, AIR 1918 Mad 444, 41 IC 783; Gopi Krishna Prasad v. Janak Prasad, AIR 1951 Pat 519. 56 Dhamidhar v. Kanhji Sahay, AIR 1949 Pat 250. 57 Rambhat v. Timmayya, (1892) 16 Bom 673; Girdhari Singh v. Neeladhar Singh, (1912) 10 All LJ 159, 16 IC 1004; Cohen v. Sellar, [1926] 1 KB 536, [1926] All ER Rep 312; but see Ram Sumran Prasad v. Govind Das, (1926) 5 Pat 646, 99 IC 782, AIR 1926 Pat 582 (if the proposed marriage is in fact solemnised, and gifts of this kind made over, they cannot be recovered back). 58 Rajendra Bahadur Singh v. Roshan Siligh, AIR 1951 All 592. 59 Kamla Bai v. Arjan Singh, AIR 1991 MP 275 at 279. 60 Vaithyanatham v. Gungarazu, (1893) 17 Mad 9; Pitamber Ratansi v. Jagjivan Hansraj, (1889-90) ILR 13-14 Bom 88. 61 A Suryanarayan Murthy v. P Krishna Murthy, AIR 1957 Ori 124. 62 Emperor v. Jani Hira, (1912) 13 Cr LJ 521; relying on Jamadar Rai v. Emperor, AIR 1930 Pat 504. 63 Devarayan Chetty v. VKM Muthuramman Chetty, (1914) 37 Mad 393, AIR 1914 Mad 551, 18 IC 515, followed in Fazal Rahim v. Nur Mohammad, AIR 1935 Pesh 121, 157 IC 736. 64 Salliyal Kotakkat Mannakkal Narayanan Nambudiri v. Patticharavoor, AIR 1945 Mad 165, 221 IC 584. 65 Re Michelhams Will Trusts,[1963] 2 All ER 188 at 192, [1963] 2 WLR 1238 at 1244. 66 Marayee Ammal v. Nalluswamy, (1965) 2 Mad LJ 329; distinguishing Maneshaw v. Motishaw, (1956) SCJ 701, (1956) 2 MLJ SC 67. 67 Marayee Ammal v. Nalluswamy, (1965) 2 Mad LJ 329. 68 Fender v. Mildmay, [1938] AC 1, [1937] 3 All ER 402; Spiers v. Hunt, [1908] 1 KB 720; Wilson v. Carnley, [1908] 1 KB 729, [1908-10] All ER Rep 120(CA) ; Skipp v. Kelly, (1926) 42 TLR 258; Siveyer v. Allison, [1935] 2 KB 403, [1935] All ER Rep 965. 69 Wild v. Harris, (1849) 7 CB 999, 137 ER 395, [1843-60] All ER Rep 413; Millward v. Littlewood, (1850) 5 Ex 775, 82 RR 871, 155 ER 339. 70 Psaltis v. Schultz, (1948) 76 CLR 547 at 563-4 (two or three weeks' time); Fender v. Mildmay, [1938] AC 1, [1937] 3 All ER 402. 71 Audumbar Gangaram v. Sonubai Audumbar, AIR 1962 Bom 35. 72 Ibid. 73 Sudha v. Sankappa Rai, AIR 1963 Mys 245, distinguishing Keshav Hargovan v. Bal Gandi 39 Bom 538, AIR 1915 Bom 107 (custom by which a marriage tie can be dissolved on payment of money is opposed to public policy). 74 Thunki v. Bajirao Sitaram Dhoke, AIR 1956 Nag 160, distinguishing Narayan v. Laxman, AIR 1925 Nag 111. 75 Githa Hariharan v. Reserve Bank of India, AIR 1999 SC 1149, (1999) 2 SCC 228. 76 Annie Besant v. G Narayaniah 41 IA 314, AIR 1914 PC 41. 77 Victor Justin Walter v. Marie Josephine Walter, AIR 1928 Cal 600. 78 Annie Besant v. G Narayaniah 41 IA 314, AIR 1914 PC 41; Lyons v. Blenkin, (1821) Jacob 245 per Lord Eldon quoted in Andrews v. Sail, (1873) 8 Ch App 622 at 640. 79 Annie Besant v. G Narayaniah 41 IA 314, AIR 1914 PC 41. 80 Mohinder Singh v. Ravneet Kaur, AIR 2007 P&H 49. 81 Andrews v. Sail, (1873) 8 Ch App 622 at 636. 82 Re Andrews,[1873] 8 QB 153; See now The (English) Adoption Act, 1958. 83 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, CONTRACT, para 865.
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84 Humphrys v. Polak, [1901] 2 KB 385 at 388. 85 Andrews v. Salt, (1873) 8 Ch App 622 at 636; Re Meades Ir LR 5 Eq 98; Hill v. Hill 10 WR 400. 86 Baby Manji Yamada v. Union of India, AIR 2009 SC 84. 87 National Guidelines for Accreditation, Supervision & Regulation of Art Clinics in India, 2005. 88 The (UK) Surrogacy Arrangements Act, 1985, ss. 1A, 2 and 3. 89 Thuri Kothandarama Reddiar v. Thesu Reddiar, (1914) 27 Mad LJ 416, AIR 1915 Mad 130. 90 Punjabrao Deorao v. Sheshrao s/o Baburao, AIR 1962 Bom 175. 91 Renumasta Subbaraju v. Indukuri Narayanaraju, AIR 1926 Mad 1093, (1926) 51 Mad LJ 366, 97 IC 232. 92 EV Balasundara Mudaliar v. K Mahomed Oosman Sahib, (1929) 118 IC 65, AIR 1929 Mad 812, 57 Mad LJ 154; but see Bhagwan Dat Shastri v. Raja Ram, (1927) 25 All LJ 518, 100 IC 1040, AIR 1927 All 406. 93 Bapu Lal Barik Gayawal v. Harihar Pandit, AIR 1916 Pat 218. 94 Kallu Tewari v. Rajinder Prasad, AIR 1923 All 56. 95 Raghubar v. Rukmin, AIR 1918 Oudh 462. 96 Maula Bakhsh v. Sajawal Shah, AIR 1933 Lah 223. 97 Dhanukdhari v. Nathima, (1907) Cal WN 848; La Banque v. La Banque, (1899) AC 431. 98 Oscanyan v. Arms Co 103 US 261 per Fielf J (Supreme Court of US); Hall v. Capell 7 Wallace 542. 1 Somu Pillai v. Municipal Council Mayavaram, (1905) 28 Mad 520, distinguished in K L Mackenzie v. Rameshwar Singh Bahadur 34 IC 754, AIR 1916 Pat 304; Devi Dayal v. Narain Singh, AIR 1928 Lah 33, (1927) 100 IC 859; Maharajadhiraja Sir Kameshwar Singh Bahadur v. Yasin Khan, (1937) 17 Pat 255, 179 IC 431, AIR 1938 Pat 473; District Board, Jhelum v. Hari Chand, AIR 1934 Lah 474, 153 IC 39. 2 Amba Prasad Maheshwari v. Jugal Kishore, AIR 1936 All 112. 3 G Hari Krishna Pillai v. M Authilachmy Ammal, AIR 1916 MB 51(FB) . 4 North Western Salt Co v. Electrolytic Alkali Co Ltd, [1914] AC 461 at 473, [1914-15] All ER Rep 752 (per Lord Haldane LC). 5 Tool Metal Co Manufacturing v. Tungsten Electric Co Ltd, [1955] 2 All ER 657 at 68; But see Naihati Jute Mills Ltd v. Khyaliram Jagannath, AIR 1968 SC 522 at 529 (export price fixed by another country is contrary to public policy). 6 Kuber Nath v. Mahali Ram, (1912) ILR 34 All 587; SB Fraser & Co v. Bombay Ice Manufacturing Co Ltd, (1904) ILR 29 Bom 107 at 119. 7 Bhola Nath-Shankar Das v. Lachmi Narain, AIR 1931 All 83. 8 SB Fraser & Co v. Bombay Ice Manufacturing Co Ltd, (1904) 29 Bom 107. 9 Sujan Singh Sadhana v. Mohkam Chand Jain, AIR 1983 P&H 180 at 185; KSR Chakrapani Chettiar v. S Guruswarni Reddiar, AIR 1984 Mad 194 at 198. 10 Mahommad Mira Rovuther v. Savvasi Vijaya Raghunadha Gopalar, (1900) 23 Mad 227, 27 IA 17; Hari Balkrishna Joglekar v. Naro Moreshwar Joglekar, (1893) 18 Bom 342; Doorga Singh v. Sheo Pershad Singh, (1889) 16 Cal 194 at 199; Maung Sein Htin v. Chee Pan Ngaw, (1925) 3 Rang 275, 92 IC 270, AIR 1925 Rang 275; Nand v. Bhagat Singh, AIR 1932 Lah 32, 134 IC 101; Mohafazul Rahim v. Babulal 1948 Nag 431, AIR 1949 Nag 113; Pattipati Ramalingaiah v. Nagulagunta Subbarami Reddi, AIR 1951 Mad 390; Mahommad Isack v. Doddapaneni Sreeramalu, AIR 1946 Mad 289, 226 IC 37; M Mohammed v. A Narayana Rao, AIR 1973 Ker 266 at 267; Lachhman Das v. Hakim Sita Ram, AIR 1975 Del 159 at 164; Gurmukh Singh v. Amar Singh, (1991) 3 SCC 79. 11 Harrop v. Thompson, [1975] 2 All ER 94 at 96. 12 Ram Lal Misra v. Rajendra Nath Sanyal, (1932) 8 Luck 233, 142 IC 595, AIR 1933 Oudh 124, where the authorities are reviewed; followed in Hutchegowda v. HM Basaviah, AIR 1954 Mys 29 at 31; Gurmukh Singh v. Amar Singh, (1991) 3 SCC 79. 13 Lachhman Das v. Hakim Sita Ram, AIR 1975 Del 159 at 164. 14 (1991) 3 SCC 79 at 86.
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15 Babulal Swarupchand Shah v. South Satara (Fixed Delivery) Merchants' Assn Ltd, AIR 1960 Bom 548; Harry Parker Ltd v. Mason, [1940] 4 All ER 199; Appana Radha Sri Krishna Rao v. VKM Kodandarama Chetti, AIR 1960 AP 190 (supply of chillies). 16 Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406, AIR 1959 SC 781 at 791, approving Pringle v. Jafar Khan, (1883) 5 All 443. 17 Chitty on Contracts, 28th edn, pp 873-74, paras 17-073; Re Brookmans Trust, [1869-70] 5 Ch A 182 at 192; Hammersley v. Baron De Biel 8 ER 1312(HL) ; Synge v. Synge, [1894] 1 QB 466, [1881-84] All ER Rep 1164 (in both these cases, the consideration was marriage, which took place after such agreement); Robinson v. Ommanney, (1883) 23 Ch D 285, [1881-85] All ER Rep 265. 18 Robinson v. Ommanney, (1883) 23 Ch D 285, [1881-85] All ER Rep 265. 19 Re Marsland, Lloyd's Bank Ltd v. Marsland, [1939] Ch 820, [1939] 3 All ER 148. 20 Associated Cement Companies Ltd v. State of Rajasthan, AIR 1981 Raj 133 at 137; Equitable Life Assurance Society of United States v. Reed, [1914] AC 587; Maharaja Shree Umaid Mills Ltd Union of India,AIR 1960 Raj 92; Rederiaktiebolaget Amphitrite v. R, [1921] 3 KB 500, [1921] All ER Rep 542 (government cannot fetter its future executive of action); but see Motilal Padampat Sugar Mills Co Ltd v. State of Uttar Pradesh, AIR 1979 SC 621, and s. 10 above 'Doctrine of Promissory Estoppel'. 21 Pomal Kanji Govindji v. Vrajlal Karsandas Purohit, AIR 1989 SC 436. 22 Chet Ram v. Sawanu Ram, AIR 1985 HP 97. 23 Shyam Gas Company v. State of Uttar Pradesh, AIR 1991 All 129 at 142. 24 Beresford v. Royal Insurance Co Ltd, [1938] AC 586, [1938] 2 All ER 602(HL) . 25 Scottish Union & National Insurance Co v. VN Roushan Jahan Begam, (1945) 20 Luck 194, AIR 1945 Oudh 152. 26 Amrit Banaspati Co Ltd v. State of Punjab, AIR 1992 SC 1075 at 1083. 27 [1986] 2 SCR 278, AIR 1986 SC 1571, (1986) 3 SCC 156, see s. 16 above--'Unconscionability as a General Doctrine'--'India'; the dissenting judgment of Sankaran Nair J. in Sheikh Mahamad Rovuther v. British India Steam Navigation Co Ltd, (1909) 32 Mad 95 opining that s. 23 could hit exemption clauses. 28 Amrit Banaspati Co Ltd v. State of Punjab, AIR 1992 SC 1075 at 1611. 29 AIR 1992 SC 1075 at 1613. 30 AIR 1992 SC 1075 at 1611. 31 See also S K Jain v. State of Haryana, 2009 AIR SCW 1934; Shin-Etsu Chemical Co Ltd v. Vindhya Telelinks Ltd, AIR 2012 MP 122. 32 BCPP Mazdoor Sangh v. NTPC, AIR 2008 SC 336, (2007) 14 SCC 234. 33 AIR 1986 SC 1636, (1986) 3 SCC 325 at 328. 34 Delhi Transport Corpn v. DTC Mazdoor Congress, AIR 1991 SC 101 at 167, 206--majority affirming the view in Central Inland Water Transport Corpn Ltd v. Brojo Nath Ganguly, AIR 1986 SC 1571, (1986) 3 SCC 156; West Bengal State Electricity Board v. Desh Bandhu Ghosh, AIR 1985 SC 722 at 723; OP Bhandari v. Indian Tourism Development Corpn Ltd, AIR 1987 SC 111 at 113; Om Prakash Pariwal v. Union of India, AIR 1988 Cal 143 at 146 (an unreasonable and unconscionable termination clause of agency was illegal); Shyam Gas Co v. State of Uttar Pradesh, AIR 1991 All 129. 35 Lily White v. R Munuswami, AIR 1966 Mad 13; R S Deboo v. M V Hindlekar, AIR 1995 Bom 68. 36 RS Deboo v. MV Hindlekar, AIR 1995 Bom 68. 37 Jiyajeerao Cotton Mills Ltd v. Madhya Pradesh Electricity Board, AIR 1989 SC 788 at 807; Bihar State Electricity Board Patna v. Green Rubber Industries, (1990) 1 SCC 731, AIR 1990 SC 699. 38 Kamala Sugar Mills Ltd v. Ganga Bishen Bhajan Singh, AIR 1978 Mad 178 at 184. 39 Indian Airlines Corpn v. Madhuri Chowdhri, AIR 1965 Cal 252; Rukmanand Ajitsaria v. Airways (India) Ltd, AIR 1960 Assam 71. 40 Hindustan Times v. State of UP, AIR 2003 SC 250, (2003) 1 SCC 591 (order struck down being arbitrary).
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41 AIR 1992 Bom 309. 42 [1986] 2 SCR 278, AIR 1986 SC 1571, (1986) 3 SCC 156. 43 Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406 at 440, AIR 1959 SC 781 at 795, 797; Thacker v. Hardy, [1878] 4 QB 685; Hyams v. Stuart King, [1908] 2 KB 696, overruled on another point in Hill v. (William) Hill (Park Lane) Ltd, [1949] AC 530, [1949] 2 All ER 452(HL) . 44 Bhuvanagiri Subbarayudu v. Maradugula Venkataratnam, (1907) 17 Mad LJ 200. 45 Linden Gardens Trust Ltd v. Lenesta Sludge Disposals Ltd, [1993] 3 All ER 417(HL) . 46 S Meikole Udayar v. SP Periasami Konar, AIR 1967 Mad 449. 47 Bank of India v. John Bowman, AIR 1955 Bom 305 at 311. 48 Jagat Bahadur v. District Supply Officer, AIR 1990 All 113. 49 Renusagar Power Co Ltd v. General Electric Co, AIR 1994 SC 860, (1994) 1 SCC 644. 50 State Bank of India v. SB Shah Ali, AIR 1995 AP 134; In view of the the decisions in Charnjit Singh Chadha v. Sudhir Mehta, AIR 2001 SC 3721, (2001) 7 SCC 417; Orix Auto Finance (India) Ltd v. Jagmander Singh, (2006) 2 SCC 598; Shibi Francis v. State of Kerala, AIR 2007 Ker 296; Bhavani Amma Kanakadevi v. C S I Dekshina Kerala Maha Idavaka, AIR 2008 Ker 38 and Tarun Bhargava v. State of Haryana, AIR 2003 P&H 98 are not good law. 51 Pratabmull Rameshwar v. KC Sethia, (1944) Ltd, AIR 1960 Cal 702; Pratabmull Rameshwar v. KC Sethia Ltd, [1950] 1 All ER 51(CA), and [1951] 2 All ER 352(HL) ; Peter Cassidy Seed Co Ltd v. Osuustukkukauppa, [1957] 1 All ER 484, [1957] 1 WLR 273; Brauer & Co (Great-Britain) Ltd v. James Clark (British Materials) Ltd, [1952] 2 All ER 497. 52 Vipul Rai Sharma v. Ludhiana Improvement Trust, AIR 1992 P&H 42 at 46. 53 Central Bank of India v. Multi Block Pvt Ltd, AIR 1997 Bom 109; approving T Raju Setty v. Bank of Baroda, AIR 1992 Kant 108 at 113; Anil Kumar v. Central Bank of India, AIR 1997 HP 5; State Bank of India v. Vivek Garg, AIR 2011 Sikkim 7. 54 S Raja Chetty v. Jagannathadas Govindas, AIR 1950 Mad 284. 55 A Suryachandra Mouleswar Rao v. VA Durgamba 47 Mad 308, AIR 1924 Mad 687. 56 Muniammal v. Raja, AIR 1978 Mad 13. 57 ABC Laminart Pvt Ltd v. AP Agencies, AIR 1989 SC 1239, (1989) 2 SCC 163; Musa Ji Lukman Ji v. Durga Dass, AIR 1946 Lah 57(FB) . 58 Sheikh Mahamad Rouvther v. British India Steam Navigation Co Ltd (1909) ILR 32 Mad 95; Indian Airlines Corpn v. Madhuri Chowdhuri, AIR 1965 Cal 252; Madhuri Chaudhuri v. Indian Airlines Corpn, AIR 1962 Cal 544. 59 Damania Industries Ltd v. State of Orissa, AIR 1998 Ori 2. 60 Scottish Union and National Insurance Co v. VN Roushan Jahan Begam, (1945) 20 Luck 194, AIR 1945 Oudh 152. 61 Lancashire County Council v. Municipal Mutual Insurance Ltd, [1996] 3 All ER 545. 62 Anand Prakash Om Prakash v. Oswal Trading Agency, AIR 1976 Del 24.
Pleadings, Evidence and Procedure The fact showing illegality must be pleaded; but when the illegality appears from the plaintiff's own evidence, or is otherwise duly brought to the notice of the court, it is the duty of the court to give effect to the fact thus brought to its notice, and to give judgment for the defendant, although, the illegality is not raised by the pleadings.63 The question of public policy has been held to be a question of law, and the court could determine it from evidence, even if the facts had not been fully pleaded by the parties;64 but the question whether there was or not an agreement to stifle prosecution is one of fact.65 A party relying on the illegality in the object of the gift was not precluded from challenging the gift deed, even though there was no pleading on the point of illegality, but when the facts on record clearly disclosed it.66
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If the agreement is on the face of it legal, but unpleaded facts showing illegality have gotten into evidence, the court should not declare the agreement illegal, unless it is satisfied that the whole of the relevant circumstances are before it.67 The court should be slow to draw inferences of illegality.68 Illegality should be sufficiently proved and the facts constituting illegality must be established.69 The objection that a contract is illegal may be considered, even though it is taken late;70 it can be raised at the High Court even though not raised at the trial,71 and it may be raised in appeal for the first time in arguments, even though not pleaded.72 The question whether agreement was champertous has been allowed even at the stage of second appeal without specific pleadings.73 Where a contract or transaction is illegal, there need be no pleading of the parties raising the issue of illegality, and the court of the first instance or in appeal, is bound to take judicial notice of it in its own motion;74 even if a contract is not ex facie illegal, and illegality is not pleaded but is disclosed in evidence.75 In such a case, it must apply the overriding basic principle of public policy that the courts will not assist a plaintiff by enforcing an illegal contract.76 A contract, whose object is opposed to public policy, is invalid, even though its unlawful terms are embodied in a consensual decree.77 The onus to prove a transaction to be benami,78 or that a deed is opposed to public policy,79 or that an agreement for terminating criminal proceedings was hit by this section,80 lay on the party which alleged so. In a suit to recover money for financing litigation, the burden was on the plaintiff to prove that the litigation was just and the agreement to finance it was just and equitable.81 Where a promissory note, under which money was borrowed, contained no recital of the purpose, proof of knowledge of the creditor about the immorality of the purpose was necessary to hold that the note was invalid.82 An agreement, which has the object of stifling prosecution, is seldom set out on paper, and hence is required to be inferred from the conduct of the parties,83 and the court cannot be confined to the terms of the agreement;84 reference may be made to other attending circumstances.85 For proving the allegations of bribery in a civil suit, the standard of proof is not the same as that in a criminal case.86 63 Surasaibalini Debi v. Phanindra Mohan Majumdar, [1965] 1 SCR 861, AIR 1965 SC 1364; Nair Service Society Ltd v. K C Alexander, AIR 1968 SC 1165; Immani Appa Rao v. Gollapalli Ramalingamurthi, [1962] 3 SCR 739; Asaram v. Ludheshwar, AIR 1938 Nag 335(FB) ; Alice Mary Hill v. William Clarke, (1904) 27 All 266; Manna Vazhmuni Mudali v. Nathumuni Mudali, AIR 1930 Mad 361; Ko Pa Tu v. Azimulla, AIR 1940 Rang 73, 187 IC 269; Abdula Saheb v. Guruvappa & Co, AIR 1944 Mad 387; Mohanlal Jagannath v. Kashiram Gokul, (1950) Nag 105, AIR 1950 Nag 71; Iqbal Ahmed v. Mohammad Hanif, AIR 1952 Bhopal 32; Liladhar Dariyana v. Chimman Ram Curwa Ram, AIR 1955 VP 31; Sewsagar Avasty v. Satyanarain Sah, AIR 1960 Pat 145; Naraini v. Pyare Mohan, AIR 1972 Raj 25; Kamla Bai v. Arjan Singh, AIR 1991 MP 275 at 280; North Western Salt Co v. Electrolytic Alkali Co, [1914] AC 461. 64 Ouseph Poulo v. Catholic Union Bank Ltd, [1964] 7 SCR 745, AIR 1965 SC 166 at 169-71; M Kesava Gounder v. DC Rajan, AIR 1976 Mad 102; Anand Prakash Om Prakash v. Oswal Trading Agency, AIR 1976 Del 24. 65 London and Lancashire Insurance Co Ltd v. Binoy Krishna Mitra, AIR 1945 Cal 218, 220 IC 379; Ahmad Ullah v. Hafizullah, AIR 1961 All 173; Narayana Pillai Parameswaran Pillai v. Kudamaloor Regional Service Co-op Society Ltd, AIR 1967 Ker 51. 66 Naraini v. Pyare Mohan, AIR 1972 Raj 25 at 28-29. 67 Discussed in Edler v. Auerbach, [1949] 2 All ER 692. 68 Asaram v. Ludheshwar, AIR 1938 Nag 335 at 341 (FB); but see Prashant B Narnaware v. Vijaya Bank, AIR 2012 Kant 191(SB) (it was possible to decide with reference to section 74). 69 Surasaibalini Debi v. Phanindra Mohan Majumdar, [1965] 1 SCR 861, AIR 1965 SC 1364 at 1368; Nair Service Society Ltd v. KC Alexander, AIR 1968 SC 1165 at 1176; Maung Sein Htin v. Chee Pan Ngaw, (1925) 3 Rang 275, 92 IC 270, AIR 1925 Rang 275; Manna Vazhmuni Mudali v. Nathumuni Mudali, AIR 1930 Mad 361; Ko Pa Tu v. Azimulla, AIR 1940 Rang 73, 187 IC 269; Kotharaju Narayana Rao v. Tekumalla Ramchandra Rao, AIR 1959 AP 370; Scott v. Brown, Doering, Mcnab & Co, [1892] 2 QB 724, [1891-94] All ER Rep 654. 70 Abdulla Saheb v. Guruvappa & Co, AIR 1944 Mad 387. 71 Iqbal Ahmed v. Mohammad Hanif, AIR 1952 Bhopal 32.
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72 Janu Sait v. Ramaswami Naidu, AIR 1923 Mad 626 (plea that agreement opposed to public policy); Central Bank of India v. Multi Block Pvt Ltd, AIR 1997 Bom 109 (plea that agreement opposed to public policy); but see Subbayyan Chettiar v. TR Ponnuchami Chettiar, AIR 1941 Mad 727 (cannot be raised in the second appeal). 73 Kamrunnisa v. Pramod Kumar Gupta, AIR 1997 MP 106. 74 Surasaibalini Debi v. Phanindra Mohan Majumdar, [1965] 1 SCR 861. AIR 1965 SC 1364 at 1370. 75 Surasaibalini Debi v. Phanindra Mohan Majumdar, [1965] 1 SCR 861, AIR 1965 SC 1364; Montefiore v. Menday Motor Components Co Ltd, [1918] 2 KB 241 at 244, [1918-19] All ER Rep 1188; Kotharaju Narayana Rao v. Tekumalla Ramchandra Rao, AIR 1959 AP 370 at 376; Scott v. Brown, Doering, Mcnab & Co, [1892] 2 QB 724, [1891-94] All ER Rep 654; Nixon v. Albion Marine Insurance Co, (1867) 2 Ex 338; Surajmull Nagoremull v. Triton Insurance Co Ltd, AIR 1925 PC 83, 52 IA 126; Waman Shrinivas Kini v. Ratilal Bhagwandas and Co, [1959] Supp 2 SCR 217 at 224-25, AIR 1959 SC 689; Sewsagar Avasty v. Satyanarain Sah, AIR 1960 Pat 145. 76 Snell v. Unity Finance Ltd, [1963] 3 WLR 559 at 569, [1963] 3 All ER 50; see North Western Salt Co v. Electrolytic Alkali Co Ltd, [1914] AC 461 at 477, [1914-15] All ER Rep 752; Montefiore v. Menday Motor Components Co Ltd, [1918] 2 KB 241 at 244, [1918-19] All ER Rep 1188; Ratanchand Hirachand v. Askar Nawaz Jung, AIR 1976 AP 112; Anand Prakash Om Prakash v. Oswal Trading Agency, AIR 1976 Del 24 at 27; Connolly v. Consumer's Cordage Co, (1903) 89 LT 347(PC) ; Taylor v. Chester, (1869) LR 4 QB 309, 38 LJ QB 225, [1861-73] All ER Rep 154. 77 Union Carbide Corpn v. Union of India, AIR 1992 SC 248 at 284; State of Punjab v. Amar Singh, AIR 1974 SC 994 at 1007, (1974) 2 SCC 70 at 90. 78 Surasaibalini Debi v. Phanindra Mohan Majumdar, [1965] 1 SCR 861, AIR 1965 SC 1364 at 1372; Janardhanan v. Sreedharan, AIR 1985 Ker 199 at 201. 79 Ouseph Poulo v. Catholic Union Bank Ltd, [1964] 7 SCR 745, AIR 1965 SC 166; Subbayyan Chettiar v. T R Ponnuchami Chettiar, AIR 1941 Mad 727. 80 Marla Packiam v. Vallaimmal, (1989) 2 Mad LJ 461. 81 Babu Ram v. Ram Charan Lal, AIR 1934 All 1023, 151 IC 969; Unnao Commercial Bank Ltd v. Kailash Nath, AIR 1955 All 393. 82 Natarajulu Naicker v. Subramanian Chettiar, AIR 1922 Mad 181 at 182-83. 83 Mohanlal Jagannath v. Kashiram Gokul, (1950) Nag 105, AIR 1950 Nag 71 at 76; Narayana Pillai Parameswaran Pillai v. Kudamaloor Regional Service Co-op Society Ltd, AIR 1967 Ker 51 at 54. 84 Maharaja Srish Chandra Nandy v. Supravat Chandra, (1940) 1 Cal 372, 190 IC 295, AIR 1940 Cal 337. 85 Ahmad Ullah v. Hafizullah, AIR 1961 All 173. 86 Gulabchand v. Kudilal, AIR 1966 SC 1734.
Effect of Illegality No court will lend its aid to a man, who founds his cause of act ion upon an immoral or an illegal act. If the cause of act ion appears to arise ex turpi causa or the transgression of a positive law of this country, there the court says he has no right to be assisted.87 The ex turpi causa defence rests on a principle of public policy that the courts will not assist a plaintiff, who has been guilty of illegal or immoral conduct, of which the court should take notice. It applies, if in all the circumstances, it would be an affront to public conscience to grant the plaintiff the relief which he seeks, because the court would thereby appear to assist or encourage the plaintiff in his illegal conduct or to encourage others in similar acts.88 The transferor is not entitled to get back the property not on the ground of the legality of the transfer, but on the ground that the court will not help a particeps criminis but would say 'let the estate lie where it lies'. As Lord Mansfield stated in Holman v. Johnson :89
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The objection, that a contract is immoral or illegal as between the plaintiff and defendant sounds at all times very ill in the mouth of the defendant. It is not for his sake, however, that the objection is ever allowed; but is founded on general principles of policy, which the defendant has the advantage of, contrary to the real justice, as between him and the plaintiff, by accident, if I may so say. The principle of public policy is this: ex dolo malo non oritur actio. No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act . If from the plaintiff's own stating or otherwise, the cause of action appears to arise ex turpi causaor the transgression of a positive law of this country, there the court says he has no right to be assisted. It is upon this ground the court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff. So if the plaintiff and defendant were to change sides, and the defendant was to bring his act ion against the plaintiff, the latter would then have the advantage of it; for where both are equally at fault, potior est conditio defendentis.
The effect of illegality under a contract in the English domestic law was dealt with in three propositions by Kerr LJ.,90 which is summarised as under:
(1)
(2)
The ex turpi causa defence rests on a principle of public policy. It applies where the plaintiff has been guilty of illegal or immoral conduct, if in all the circumstances; it would be an affront to the public conscience to grant the plaintiff relief, because the court would thereby appear to assist or encourage the plaintiff in his illegal conduct or to encourage others in similar acts; The main situations where the defence will prima facie succeed are:
87 Holman v. Johnson, (1775) 1 Cowp 341 per Lord Mansfield CJ. at 343, 98 ER 1120, [1775-1802] All ER Rep 98, quoted in Brown Jenkinson & Co Ltd v. Percy Dalton (London) Ltd, [1957] 2 All ER 844, [1957] 3 WLR 403 at 415-16, and in Harry Parker Ltd v. Mason, [1940] 4 All ER 199 at 202; refd to in Nair Service Society Ltd v. K C Alexander, AIR 1968 SC 1165 at 1176; Kedar Nath Motani v. Prahlad Rai, [1960] 1 SCR 861, AIR 1960 SC 213 at 217; Waman Shrinivas Kini v. Ratilal Bhagwandas & Co, [1959] Supp 2 SCR 217 at 226, AIR 1959 SC 689; Umar v. Shivdan Singh, AIR 1958 MP 88; Kamala Sugar Mills Ltd v. Ganga Bishen Bhajan Singh, AIR 1978 Mad 178 at 184; Sewsagar Avasty v. Satyanarain Sah, AIR 1960 Pat 145. 88 Euro-Diam Ltd v. Bathurst, [1990] QB 1, [1988] 2 All ER 23 per Ker. LJ. at 28, [1988] 2 WLR 517 at 526. 89 (1775) 1 Cowp 341, p. 343, 98 ER 1120, [1775-1802] All ER Rep 98; Pranballav Saha v. Tulsibai Dassi, AIR 1958 Cal 713 (this rule forms an integral part of our law). 90 Euro- Diam Ltd v. Bathurst, [1988] 2 All ER 23(CA) affirmed in [1990] QB 1, [1988] 2 All ER 23 at 28-29, [1988] 2 WLR 517.
(3)
However, the ex turpi causa defence must be approached pragmatically and with caution depending on the circumstances.
The maxim 'ex turpi causa' as applied in India, was stated thus by the Supreme Court in Kedar Nath Motani v. Prahlad Rai: 91
The correct position in law, in our opinion, is that what one has to see is whether the illegality goes so much to the root of the matter that plaintiff cannot bring his act ion without relying upon the illegal transaction into which he had entered. If the illegality be trivial or venial, as stated by Williston and the plaintiff is not required to rest his case upon that illegality, then public policy demands that the defendant should not be allowed to take advantage of the position. A strict view, of course, must be taken of the plaintiff's conduct, and he should not be allowed to circumvent the illegality by restoring to some subterfuge or by mis-stating the facts. If, however, the matter is clear and illegality is not required to be pleaded or proved as part of the cause of action and the plaintiff recanted before the illegal purpose was achieved, then, unless it be of such a gross nature as to
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outrage the conscience of the court, the plea of the defendant should not prevail.
An agreement hit by s. 23 is void ab initio.92There is divergence of opinion among the courts as to whether s. 65 is attracted to a contract void for illegality. It has been held that neither does such contract 'become void', nor is it 'discovered to be void', and hence s. 65 of this Act is not attracted;1 but it has also been held that s. 65 may apply.2 An agreement if prohibited is void, and it does not get legalised if the law prohibiting it is repealed.3 91 Kedar Nath Motani v. Prahlad Rai, [1960] 1 SCR 861 at 873, AIR 1960 SC 213 at 218-19; Kamala Sugar Mills Ltd v. Ganga Bishen Bhajan Singh, AIR 1978 Mad 178. 92 Parasharam Ragho Kunbi v. Sadasheo Namdeo Shimpi, AIR 1936 Nag 268. 1 Ledu v. Hira Lal Bose 43 Cal 115, AIR 1916 Cal 266; Ranjeetsingh Murlisingh v. Ramlal Shivlal, AIR 1951 MB 113(1); Hussain Kasam Dada v. Vijayanagram Commercial Association, AIR 1954 Mad 528; Nihal Singh v. Ram Bai, AIR 1987 MP 126. 2 Asaram v. Ludheshwar, AIR 1938 Nag 335; Rudragowda Yeshvantgowda v. Gangowda Basagawda Patil, AIR 1938 Bom 54; Suganchand v. Balchand, AIR 1957 Raj 89 (champertous agreement); SR Umar v. Shivdansingh, AIR 1958 MP 88. See also s. 65 below, under the heading: 'void for illegality'. 3 Raptakos Brett And Co Pvt Ltd v. Modi Business Centre (Pvt) Ltd, AIR 2006 Mad 236 (repeal of the Urban Land Ceiling Act); Gh Mahd Matoo v. Gh Rasool Sofi, AIR 2005 J&K 48 (alienation prohibited under the state's Agrarian Reforms Act).
Enforcement of Agreement The severity of illegality is not the same in all cases, and the extent to which the law gives assistance for enforcement of unlawful agreements differs. This effect and enforceability of the agreement will depend upon the intention of the parties, and whether they knew of or participated in the illegal intention. There are two general principles. First, a contract that is entered into with the object of committing an illegal act is unenforceable. If the intent is mutual, it is not enforceable at all; and if it is on the part of one party, he cannot enforce the contract. Secondly, the court will not enforce a contract, which is expressly or impliedly prohibited by statute--it does not matter what the intent of the parties was; the agreement is unenforceable.4 The same principle applies to contracts legal in form but performed illegally.5 Unless the intention of the legislature is clear or public policy demands that the contract be prohibited altogether, the innocent party can sue on the contract. When a contract is void because it is prohibited by statute, the court has the power to work out the equities and place the parties upon terms.6 A strict application of the principle of illegality may cause injustice because of unjust enrichment, particularly in cases where the illegality is not severe, or where the plaintiff has not participated in the illegality. The 'public conscience' approach (see above &uot;Public Conscience Test: The Discretionary Approach&uot;), where the court would help the plaintiff unless to do so 'would be an affront to public conscience',7 alleviates the rigour of this harsh rule. But this approach was rejected by the House of Lords in Tinsley v. Milligan, 8 where it was stated:
...the principle of ex turpi causa potior est conditio defendentis is not a principle of justice: it is a principle of policy, whose application is indiscriminate and so can lead to unfair consequences as between the parties to litigation. Moreover, the principle allows no room for the exercise of any discretion by the court in favour of one party or the other.
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Intention of Parties The effect of illegality depends upon the intention of the parties at the time of making the contract, to do an act forbidden by law. The rights and remedies will depend upon whether they knew of, or participated in, the illegal intention. While a party who enters into the contract with an unlawful purpose or with an intention to perform the contract unlawfully may not be entitled to remedy, remedies may be granted to a party who is innocent of the illegality. And if he becomes aware of the illegality before performance, he may refuse to perform the contract.9The question of illegality of a partnership must be distinguished from illegality of any of the acts done in the course of its business by the firm or some or all of its members. The fact that one partner has been guilty of certain illegal act s in the conduct of the partnership business, is no defence to an action for accounts by the other partner, where the object of partnership was not illegal and the innocent partner at the time of entering into the partnership intended that it should be carried on lawfully.10 Unlawful intention, like negligence, is not presumed by the law, nor is any person expected to presume it without evidence. Therefore, if a contract can, on the face of it, be lawfully performed, the existence of an undisclosed intention by one party to perform it unlawfully, or use it as part of an unlawful scheme, will not disable the other party from enforcing it, at any rate by way of damages; and if the construction is doubtful, then the construction which admits of a lawful performance will have to be preferred. If there exists or arises a legal impediment, unknown to the parties at the time of contracting, to the performance of a contract in the manner which otherwise would have been the most obvious, this will not, of itself, avoid the contract, if it can still be substantially performed without breaking the law.11 If a contract is expressly or by necessary implication forbidden by statute, or if it is ex facie illegal or both parties know that though ex facie legal, it cannot be performed illegally or be intended to be performed illegally, the law will not help the plaintiffs in any way, i.e., by direct or indirect enforcement of the rights under the contract. And for this purpose, both the parties are presumed to know the law. If both parties have knowledge that a contract could not be carried out without the violation of the law, the contract would be unenforceable.12 But if only one party has such knowledge, the innocent party is not precluded because otherwise it would injure the innocent, benefit the guilty and put a premium on deceit.13 But if both parties, in fact, contemplate an unlawful manner of performance, the case falls within the rule 'that a contract lawful in itself is illegal if it be entered into with the object that the law should be violated'.14 A contemplated unlawful or immoral use of property (including money) to be obtained under a contract is an unlawful object within the meaning of this rule, and this, whether such use is part of the bargain or not, and whether the party supplying the property is to be paid out of the profits of its unlawful use or not. If both parties know of the wrongful or immoral intention, the agreement is void; if the party who is to furnish the property does not know of it, the contract is voidable at his option when he discovers the other party's intent. This is well settled both by English15 and Indian16 decisions. Where both parties do not show any conspiracy to defraud a third person or to commit any illegal act, the maxim in pari delicto can 'hardly be applicable'.17 Formation Legal but Performance Illegal Ordinarily, a party who has performed in an illegal manner is precluded from seeking enforcement of the contract;18but that may not necessarily be so, namely, where the intention of the statute does not prohibit the performance, but merely makes it punishable (see above), or where public policy does not require that such an act during the course of performance should deprive the guilty party from enforcing the contract. The party, who has in the course of performing a contract, committed an unlawful or immoral act, it will not, by itself, prevent him from further enforcing that contract unless the contract was entered into with the purpose of doing that unlawful or immoral act, or the contract itself is prohibited by law.19
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The defendants agreed to carry for the plaintiffs to the seaport, a tube weighing 25 tonnes manufactured by the plaintiffs. The defendant's vehicle was not meant for such a heavy load and the loading was therefore against regulations. The tube was loaded in the presence of the plaintiffs' representative. The vehicle overturned en route and the tube was damaged. In the plaintiffs' suit for damages, it was held that even if the contract when made was legal, its performance, also participated in by the plaintiffs, was illegal, the load being a breach of regulations. The plaintiffs could not claim damages.20 The sale of a motor vehicle without a current certificate of fitness in breach of a regulation, disentitles the party at fault to sue on it, because the contract is performed in a prohibited manner, although it was not illegal ab initio.21 Ignorance of Law It is not correct to say that everyone is presumed to know the law. The true proposition is that no man can excuse himself from doing his duty by saying that he did not know the law on the matter--Ignorantia juris neminem excusat.22 Where two persons together have a common design to use a subject-matter for an unlawful purpose, so that each participates in the unlawful purpose, then that contract is illegal in its formation and it is no answer for them to say that they did not know the law on the matter.23 If both sides have knowledge of the illegality, the contract is unenforceable.24 If only one party has such knowledge, the innocent party can enforce the contract.25 A creditor lending money for the marriage of a debtor's daughter's marriage without knowledge of its contravention of the Child Marriage Restraint Act, 1929 (Now see Prohibition of Child Marriage Act, 2006.) can recover his loan.26 It is not illegal to deal with an irregular unregistered association in ignorance of its character.27 A contract to do something, which cannot be performed without violation of law, is void, whether the parties knew the law or not.28 But if a contract can be performed in one of the two ways, i.e., legally or illegally, it is not an illegal contract, though it is unenforceable at the suit of a party who chooses to perform it illegally.29 The plaintiff hired a van, which, unknown to him, had a licence only to carry the owner's goods and not the goods of the others; and the plaintiff's goods were stolen through the negligence of the driver of the van. The transaction was ex facie neither illegal nor contrary to public policy. The Court was thus not constrained to refuse aid to the plaintiffs, who did not know that the contract would be performed illegally.30 Although, the ex turpi causaprinciple would preclude the plaintiff from directly enforcing an illegal contract, he is not precluded from enforcing causes of act ion which are collateral to the contract. In Saunders v. Edwards, 31 the plaintiff had purchased a flat from the defendant. The purchase price contained an inflated figure for fixtures and fittings, which reduced the stamp duty payable by the plaintiff. Though the plaintiff's conduct was tainted with illegality in connection with the evasion of stamp duty, the plaintiff was allowed to recover damages on the ground of fraud of the defendant in misrepresenting the extent of the property being sold. The Court held that the 'relative moral culpability' of the parties could be taken into consideration in deciding whether the plaintiff should be given a remedy which did not involve the enforcement of the contract. The Saunders case is an example of a pragmatic approach to the in pari delicto, where redress is sought in connection with an illegal contract other than its enforcement. But an arbitration clause in a contract, which is illegal and void and which forms part of the contract, is itself void;32 so are any references to arbitration contained in such agreements.33 In Pari Delicto The true meaning of the maxim 'in pari delicto potior est conditio posidentis' is that where the circumstances are such that the court will refuse to assist either party, the consequence must, in fact follow that the party in possession should not be disturbed. It must not be understood as meaning that where a transaction is vitiated by illegality, the person left in possession of goods after its completion is always and of necessity entitled to keep them.34 Despite there being failure of consideration, no claim can lie on restitutionary principles. Where the tenant had paid a mutually agreed, illegally enhanced rent, there was no right to automatic
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adjustment against subsequent defaults in the payment of monthly rent.35 No person can found a cause of action upon his illegal or immoral act .36 Thus, where a sale deed was executed admittedly with a fraudulent design to defeat the creditors, but the vendee later started asserting the title in a suit filed by the vendor for cancellation of the sale deed, it was held that the vendor could not be permitted to take advantage of his own fraud.37 The courts will refuse to enforce an illegal agreement at the instance of a person, who is himself a party to the agreement or fraud--'in pari delicto potier est conditio defedentis',38 eg., money paid to a charitable institution on a promise that the secretary will secure the plaintiff a knighthood which never materialised.39 Money paid to a person to get a boy admitted into a medical college cannot be recovered when both parties are equally guilty and the maxim in pari delicto potior est conditio possedentis applies. Therefore, money paid by a person to another person to get his son admitted into a medical college, when the boy does not get admitted, cannot be covered by suit.40 Enforcement Possible However, there are exceptional cases, where a man will be relieved of the consequences of an illegal contract.41 They are:
(i) (ii) (iii)
where the illegal purpose has not yet been substantially carried out before it is sought to recover the money paid or goods delivered in furtherance of it; where the plaintiff is not in pari delicto with the defendant; where the plaintiff does not have to rely upon the illegality to make out his claim.
Illegal Purpose not Carried Out When a transaction is entered into for an unlawful or immoral purpose and that purpose has been achieved, the court would not interfere at the instance of the particeps criminis to relieve him from the legal effects of the transaction;42 and no relief will be granted, whether of enforcing the obligation, or of restoring the property, neither the relief of declaration,43 nor annulment of transfer.44 But where a transaction is illegal, it is better to allow the plaintiff to resile from it before it is completed and to award restitution to him rather than to allow the defendant to remain in possession of his illegal gains.45 Before the time of performance of an illegal contract, one of the guilty parties is allowed a locus penitentiae, an opportunity for repentance or change of mind; but after the time of performance has passed, the repentance of one is of no avail.46 Therefore, money may be recovered before the fraud or illegal purpose is carried out, from a person to whom it has been advanced.47 To be able to recover, the plaintiff must have withdrawn from the transaction before the illegal purpose was executed, in whole or in part. As suggested by English authorities, the withdrawal must be voluntary, and not by frustration of circumstances over which he had no control, or because the other party failed to perform the contract,48 but it has been held by the Madras High Court that:
...so long as the contemplated fraud is not carried out or at least there has been no substantial part performance of it, the grantor, although in pari delicto, is entitled to invoke the assistance of a court for the recovery of properties he has parted with irrespective of the fact whether the frustration of the fraud was the result of the 'locus poenitentiae' of the transferor or due to other causes.49
In cases where the illegal purpose has not been accomplished, English law examines the reason which led to the failure of the unlawful project. There must be repentance by the plaintiff,50 and where the scheme has been frustrated by the vigilance of third parties,51 or a change of mind on the part of the defendant,52 the plaintiff cannot recover. But a later case suggests that genuine repentance is not necessary, it is sufficient that there is a genuine withdrawal from the transaction.53 In Alexander v.
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Rayson, 54 in order to defraud the rating authority, the landlord split up the rent of the flat in two parts, for providing certain services and amount payable as rent of the flat, thus showing the rent to be lower than it actually was. The tenant failed to pay in accordance with the terms of the documents. The court of appeal held them unenforceable as they were to be used for a fraudulent purpose. In Bigos v. Bousted, 55 A had agreed to provide foreign money to B, in contravention of the Exchange Contract Act and B had deposited as security a share certificate of 140 shares with the plaintiff. A failed to provide the foreign money. B claimed the return of the share certificate, but failed, as the parties were in pari delicto at the time of making the contract. In India, it suffices for the plaintiff to establish that the illegal purpose has not been achieved for whatever cause.56 The same principle applies to cases where a person transfers his property benami to another in order to defraud his creditor.57 In such cases, where the fraudulent purpose is not carried into execution, the transferee will be deemed to hold the property for the benefit of the transferor, as provided in s. 84 of the Indian Trusts Act, 1882.58 Where, however, the fraudulent object is accomplished,59 or substantially accomplished,60 the transferee will not be disturbed in his possession. If the transferee is not in possession, there is a conflict of judicial opinion whether the transferee can obtain possession from the transferor where the unlawful purpose has been accomplished, or whether a plea of par delictum will defeat his claim.
A mere intention not carried into effect ought not to be sufficient to deprive the party of the assistance of the court in enforcing his rights, and if he either abandons his fraudulent purpose before it is accomplished or pays his debts to the full value of the property conveyed, the fraud should be regarded as purged.61
In Kedar Nath Motani v. Prahlad Rai, 62 a benami settlement by the manager of a Court of Wards without the consent of the Court of Wards as required by the terms of the lease, was made known to the Court of Wards, but it did not resume the lands. It was also found that fraud, though intended, was not perpetrated, and the locus poenitentiae was duly used before the expiry of the lease, the illegality was of a trivial character and the plaintiff was not required to prove the illegality as a part of the cause of action, and the benami nature of the transaction had been proved. In such circumstances the plaintiff could not be deprived of a judgment against the benamidars.'The authorities do not go to that length because public policy demands that where fraud might have been contemplated but was not be perpetrated, the defendant should not allowed to perpetrate a new fraud.'63 Where a party seeks to enforce his rights under a statute, the opposite party cannot be permitted to assert in a court of justice, any right founded upon or growing out of an illegal transaction.64 The Privy Council, in Petherpermal Chetty v. Muniandy Servai, 65drew a distinction between a claim to property by assertion of title, where only an attempt to evade a statute or to commit fraud has taken place, and cases where evasion or the fraud has succeeded and the impermissible object has been achieved. It is in the latter case that the fraudulent grantor loses the right to claim the aid to law. The Supreme Court, in a later case, drew the same distinction in a similar case. In that case, the object of the transaction was the circumvention of service rules and not the evasion of the Income Tax Act, although it resulted in the payment at a lower rate.66 If two parties enter into an illegal contract and money is paid upon it by one to the other, it may be recovered back before the execution of the contract but not afterwards; but recovery cannot be had in such a case, if the contract is tainted with criminality or immorality.67 This is on the principle that so long as the transaction has not been fully executed and carried out, the courts would allow suits for recovery of money or property transferred.68 But as soon as the illegal transaction has been fully executed and carried out, the court will not entertain a suit for recovery,69 even if only a part of the contract has been performed,70 unless it appears that the parties were not in pari delicto.71 Where a contract is in contravention of a provision of law, eg the iron and steel control Order, but is not executed, then a party who is not in pari delicto, or is more innocent, or is not suing to enforce the contract but is repudiating, it is entitled to recover back the money paid by him.72 The same principles
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have been held to apply to payments made under agreements which are void under s. 30 as being by way of wager.73 But the claim of the vendor for the balance of the purchase money remaining unpaid was dismissed and so was the claim for the return of installments of purchase price paid by the purchaser, on the ground that for money to be recoverable there must be an element of duress or oppression or fraud, so that parties are considered not to be in pari delicto.74 The contract was illegal for contravention of statute (see below 'Transfer of Property Tainted with Illegality'). Parties not in Pari Delicto The very words of the maxim in pari delicto indicate one of the limitations to its operation: 'it will not apply where the transferor is not as guilty as the transferee'.75 Where parties are not in pari delicto, the less guilty party may be able to recover money paid or property transferred under the contract. This possibility may arise in three situations76 --first, the contract may be of a kind made illegal by a statute in the interests of a particular class of persons of whom the plaintiff is one;77 secondly, the plaintiff has been induced to enter into the contract by fraud or strong pressure;78 thirdly, a person, who is under a fiduciary duty to the plaintiff, will not be allowed to retain property or to refuse the account for moneys received, on the ground that the property or the monies have come into his hands as the proceeds of an illegal transaction.79 Illegal under a Statute Beneficial to the Class to which the Plaintiff belongs
Where contracts or transactions are prohibited by positive statutes, for the sake of protecting one set of men from another set of men; the one, from their situation and condition, being liable to be oppressed or imposed upon by the other; there, the parties are not in pari delicto; and in furtherance of these statutes, the person injured, after the transaction is finished and completed, may bring an action and defeat the contract.80
'Such are transactions where', in the words of Lord Ellenborough,81'one holds the rod and the other bows to it.' In Kiriri Cotton Co Ltd v. Dewani, 82 the Uganda Rent Restriction Ordinance imposed penalty on the landlord, if he received any amount by way of premium. The tenant, being not in pari delicto, was not precluded from suing for recovery of premium paid in contravention of the Ordinance. A premium paid by the tenant to a landlord in breach of the Ordinance was an illegal payment, but could be recovered by the tenant, because the ordinance was for the protection of the tenant from exploitation; the law imposed penalty on the landlord and not the tenant; the prohibition was addressed against the landlord, and the duty of observing the law was that of the landlord. The tenant could recover, despite the absence of remedy under the Ordinance. The statutes relating to rent control provide for recovery of payments made in violation of the provisions of such statutes. But recovery may be allowed to a tenant, who has been required to pay premium even without any statutory provision in the statute enabling recovery. Where the contract is rendered illegal by a statute, the object of which is to afford protection to a class of persons from machinations of another class, who are in a position to oppress or impose themselves on the protected class, the parties would not be regarded as equally delictual. Where one party can dominate over the will of the other, it would not be a case of collusion, but one of compulsion. Thus, where a tenant did not question the truth of the statements made by the landlady and supported them while obtaining permission under s. 21 of The Delhi Rent Control Act, 1958 enabling her to summarily evict the tenant on the expiry of the period for which permission was granted to let out the premises to the tenant, it was held that in a case of this nature, it is always open to the weaker of the two parties to establish that the transaction was only a camouflage used to cover its true nature and the ground that the tenant cannot be allowed to resile from the stand taken by him and challenge the permission initially granted under s. 21 of the Delhi Rent Control Act, 1958 was not available to the landlord.83
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A tenant under a tenancy governed by the Bombay Hotel and Lodging Houses Rates Control Act, 1947 was allowed by the landlord 'to keep sub-tenants', although sub-letting was prohibited by s. 15 of that Act. Another provision gave a landlord the right to evict his tenant for sub-letting. In a suit for ejectment, the tenant pleaded that the parties were in pari delicto and that the landlord had waived his right of ejectment. Non obstanteclause in s. 15 of the Act provided that 'notwithstanding anything contained in any law it shall not be lawful...for any tenant to sub-let the whole or any part of the premises...'. It was held that there was a difference between a case where the plaintiff seeks the assistance of the court to evict a tenant guilty for a breach of a provision of law, and a case where the plaintiff seeks to enforce an agreement, the object of which is to do an illegal act. The former is enforceable and the latter is not. The defendant cannot be permitted to plead an agreement to sub-let, which is contrary to the provisions of a statute, as this would be opposed to public policy; and if public policy demands it, even an equal participant in an illegality may be allowed relief by way of restitution84 or rescission, though not on the contract.85 Plaintiff Induced to Contract by Fraud, Misrepresentation or Compulsion If the party seeking to enforce the contract is innocent and his consent to the contract has been induced by misrepresentation,86 fraud,87 oppression,88 or assurance by the other party, he can recover damages, or seek rescission.89 He would be entitled to remedies only if he is innocent,90 or his conduct is not culpable to disentitle him to it.91 In Shelley v. Paddock, 92 the plaintiff was entitled to recover damages for fraud, when she was induced to agree for the purchase of property in Spain, but was ignorant that the purchase was in breach of the Exchange Control Act . In Hughes v. Liverpool Victoria Legal Friendly Society, 93 the insured effected an insurance policy on the life of a person in which he had no insurable interest. He was induced to do so on the fraudulent representation of the insurance agent that the policy was valid. He was entitled, though not to the policy amount, to the refund of premiums paid. The doctrine is attracted only when none of the parties is a victim of such exploitation, and both parties have voluntarily and by their full will joined hands to flout the law for their mutual gain. Thus, where a tenant advances a loan to the landlord in order to secure the lease of a premises and the agreement between the parties specifically provided that the loan amount was to be adjusted against the rent, which accrued, but the landlord, setting up a plea of in pari delicto against the tenant, sought his eviction on the ground of arrears of rent, the Supreme Court held that the doctrine of in pari delicto cannot be applied, since the tenant was perforce compelled to advance a loan to secure the leave, even though such advancement of loan was against the terms of the relevant rent Act.94 But the Full Bench of the Patna High Court has held that the rule of in pari delictowould squarely apply to tenants, who pay enhanced rents in contravention of the terms of the rent restriction Act s and hence, the appellants were guilty of in pari delicto and could not, therefore, seek adjustment of the excess payments made by them and seek avoidance of their eviction for default in paying rent.95 Payment made under Mistake Where illegality arises out of statute, payment may be recovered either on the view that the plaintiff should recover when the payee was primarily responsible for the payment,96 or applying a test by weighing the comparative merits of the parties in the light of statutory purposes and policies, and to allow recovery, and doing so would not undermine them.97 The dictum of Lord Ellenborough in Langton v. Hughes that 'what is done in contravention of an Act of Parliament cannot be made the subject-matter of an act ion,'98 has no application to cases where a party is seeking to recover money paid under an illegal transaction, since the party is not seeking positive enforcement of an illegal contract as in Langton's case, but seeking to recover money paid or property transferred under the illegal transaction.1 Fiduciary Capacity Public policy requires that the rule of ex turpi causa shall be excluded by the more important and imperative rule that agents and trustees must faithfully perform the duties of their office. Therefore, if
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B, as agent or trustee of A, is paid money by C, which is pursuant to an illegal contract between A and C, A can recover that money from B, even though he could not have recovered from C,2 and the agent cannot set up the illegality of the contract as a justification for withholding payment. For the same reason, a defendant association acting as a clearing house will be liable to pay to the plaintiff (its member), the amount received by it, on behalf of the plaintiff as an agent on account of turmeric transactions with another co-member, although such transactions were prohibited by law and were illegal.3 Where the plaintiff society was only a financier, the management being in the hands of the defendant firm through one Budh Ram, it was entitled to ask for accounts, the relationship between the parties being that the defendant firm stood in fiduciary relationship to the plaintiff society.4 But recovery may be denied where the agency itself is illegal.5 Relief of Rescission under the Specific Relief Act, 1963 Section 27 of the Specific Relief Act gives power to the court to adjudge rescission of a contract where a contract is unlawful: (i) for causes not apparent on its face; and (ii) the defendant is more to blame than the plaintiff. Rescission may be refused, if the plaintiff has ratified the contract, or where the parties cannot be restored to the position before they entered into the contract, or where third parties have acquired rights in good faith without notice and for value; or where part of the contract is sought to be rescinded, which is not severable from the rest of the contract. Plaintiff does not Rely on the Illegality No claim founded on illegal contract will be enforced by the court, but as a general rule, a man's right to possession of his own property will be enforced against one who, without any claim, is in possession thereof, provided the plaintiff does not found his claim on an illegal contract or has to plead its illegality in order to support his claim.6 If a plaintiff does not have to rely upon his own illegality, then although the possession had begun in trespass, a suit can be maintained for restitution of possession. Otherwise, the opposition party can make unjust enrichment, although his own possession is wrongful against the claimant.7 Property loaned, hired or pleaded for an immoral purpose can be recovered by the owner, provided that he can establish his title otherwise than through the medium of the illegal transaction. In Bowmakers Ltd v. Barnet Instruments Ltd, 8 Du Parcq LJ., delivering the judgment of the Court of Appeal, having emphasised that prima facie a man is entitled to his own property, stated the law as follows:
In our opinion a man's right to posses his own chattels will as a general rule be enforced as against one who, without any claim of right, is detaining them or has converted them to his own use, even though it may appear either from the pleadings, or in the course of the trial, that the chattels in question came into the defendant's possession by reason of an illegal contract between himself and the plaintiff, provided that the plaintiff does not seek, or is not forced, either to found his claim on the illegal contract or to plead its illegality in order to support his claim.
In Taylor v. Chester, 9P pledged half a banknote with D as security for money advances in D's brothel. If P pleaded his ownership, D could reply that the note was pledged with her. P could not plead payment, and he had to rely on the illegality of the transaction, and could not recover. The Court indicated that if P could have made out his case without pleading the illegality, he would have been entitled to judgment.10 It is submitted that the decision would have been different had D never advanced the money. In Bigos v. Bousted, 11 it seems that Bousted might have succeeded had he relied on his ownership of the share certificate, which he had deposited with Bigos in return for a promise to provide Bousted with Italian money in Italy, in contravention of the currency control regulations. Bigos furnished no such money, but Bousted, in suing to recover the share certificate, merely pleaded the rule that property handed over in consideration of an agreement, which though illegal had remained executory, may be recovered back upon repudiation of the transaction.12 The
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Court held against Bousted, as there was no repentance by him to bring him within the ambit of this rule, but he merely repudiated because Bigos would not do this part.13 Had Bousted relied, however, on his title, it seems that he might have recovered, for if Bigos pleaded the pledge, Bousted's reply would have been that no money was advanced, and Bigos would be left to raise the illegality of the transaction. Under the National Security (Exchange Control) Regulation, every person in possession of gold was to deliver it to the Commonwealth Bank. A bailment of gold in contravention of that regulation was illegal. The bailor could not sue for return of gold from the bailee, because he would be obliged to prove the contract of bailment.14 But in Abdul Jabbar v. Abdul Muthaliff, 15 the plaintiff sent money from Malaysia to the defendant, through non-official channels in contravention of the foreign exchange regulation Act then in force. The defendant used the money to purchase a plot of land and to erect a rice mill on it for the plaintiff. The plaintiff returned to India, got a licence for the mill and entered possession, but the defendant had taken possession of the mill and the account books in the absence of the plaintiff. A suit by the plaintiff for declaration of ownership and permanent injunction was held maintainable, as the plaintiff did not have to rely on the illegality of the channel of sending of the money, but was merely claiming his own property to which the maxim in pari delicto potior est canditio defendetis did not apply. In Surasaibalini Debi v. Phanindra Mohan Majumdar, 16 one P, a servant of the Court of Wards, carried on business in the name of one G, to whom he entrusted the management during his absence for illness. In a suit for the possession of his business, P did not allege invalidity of the transaction, but on his title to the business, its entrustment to G and G's refusal to deliver possession when demanded. On proof of his ownership of the business, P was held entitled to enforce his title, there being no taint attached to entrustment. The court also found that the object of the parties at the time the transaction was entered into, was not to defeat the provisions of the Income Tax Act, but to circumvent service rules and as a consequence of it, P obtained the benefit of paying a lower rate, his personal income not being subject to income tax. In Mistry Amar Singh v. Kulubya, 17 the Privy Council applied the rule in Bowmakers Ltd v. Barnet Instruments Ltd .18The plaintiff, an African, was allowed to successfully sue a non-African for possession of his property leased out to the non-African without the approval of the Governor, required under the law. The plaintiff was, therefore act ing in contravention of the law and had committed an offence. But, so was the defendant who could not show any right to the property in view of the terms of the legislative provisions, nor could he assert any right to occupation. As a non-African, he had no right without the consent in writing of the Governor, to occupy or enter into possession of the land or to make any contract to take the land on lease. The defendant therefore was not, and never had been in lawful occupation. The defendant could not rely on an illegal agreement as justifying any right or claim to remain in possession and without doing so, he could not defeat the plaintiff's case. The plaintiff, on the other hand, required no aid from the illegal transaction to establish his case. It was sufficient for him to show that he was the registered proprietor of the land, and the defendant was a non-African in occupation, without the formalities under the statute, and accordingly, had no right to occupy. In such circumstances, the plaintiff was not in pari delicto with the defendant. It may be pointed out that in that case, the relevant legislation was intended for the projection of the Africans as a class.19 It was held by the Privy Council that it would be contrary to public policy to refuse to assist an African to eject a non-African in illegal occupation of the land, even though the African might have committed an illegal act in permitting the non-African to enter on the land.20 There is a distinction between a claim to the property transferred to or held out in the other party's name, in which a party has to rely upon a conspiracy to effectuate an illegal or fraudulent purpose in support of his claim, and claims in which the unlawful or unworthy object was fulfilled. The property was owned by the claimant and the claimant sought the assistance of the Court not to effectuate his unlawful purpose, but to enforce it by a plea of the detenue under a transaction, which was not tainted by illegality.21Chettiar v. Chettiar 22 illustrates the former and Sajan Singh v. Sardara Ali, 23 the latter. In the former case, the Court refused to assist the claimant, who had of necessity to rely on his disclosure of deceit on the public administration by transferring his property to his son in order to avoid
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a regulation on the size of rubber estate holdings.24'No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act .'25 In Sajan Singh v. Sardara Ali, 26 as a result of an unlawful contract, a lorry was sold to the plaintiff and was in his possession and was used by him, although the permit was in the name of the defendant, because the former could not, and the latter could, get a licence for the lorry. The defendant removed the lorry and the plaintiff sued to recover possession. The plaintiff succeeded in recovering property of which he was wrongfully dispossessed, even though the title of the property was acquired by the plaintiff by an unlawful transaction between the plaintiff and the defendant. This was because he could sue without relying on the unlawful contract between the parties.27 Where the plaintiff does not have to rely for his claim on the illegality, order can be passed for recovery of amount deposited in connection with the contract.28 Where a promissory note made payable to bearer on demand was void being prohibited, the creditor could sue on the obligation independent of the note.29 In BOI Finance Ltd v. Custodian, 30 certain banks entered into ready-forward or buy-back share transactions with some brokers, the forward leg being prohibited by the Securities Contracts (Regulation) Act, 1956. The ready leg of the transaction was completed, the banks having paid the agreed price and received delivery of the shares. It was held that assuming that the agreements were not severable (having held that the agreements were severable), the ready leg having been performed, the illegality could not affect the transfers, which had already taken place. Applying the Bowmaker test, it was held that the bank based its claim not on the terms of the ready-forward contract, but on the payment of market price against delivery of securities, and hence, could establish their title independent of the ready-forward transaction. Application to Equitable Interests The principle in the Bowmaker case was applied by the House of Lords to equitable interests also in Tinsley v. Milligan, 31 where T and M had purchased with joint funds, a house in the name of T so that M could claim social security benefits on the basis that she had no home of her own. When they fell out, T commenced action, claiming ownership, and M counter-claimed that T had held the house in equal shares on trust for both the parties. The House of Lords, by majority held that since both the parties had provided the purchase money, T held the property by way of resulting trust for both the parties in shares proportionate to their contribution towards the price, and therefore, M could counter-claim on the basis of her equitable interest, and did not have to rely on the illegality. In Tribe v. Tribe, 32 the father had voluntarily transferred the shares to his son under fear that he may have to sell them later to meet the creditors' claims. When the risk had passed, the father sought return of the shares from the son, which he refused. In this case, the equitable presumption of advancement applied, whereby the father was presumed to have given the shares to his son, and the rule of 'no reliance on illegality' appeared to prevent the father from adducing evidence of his dishonest intention to rebut the presumption. It was held that the father could adduce evidence of his dishonest intention to rebut this presumption, and allowed the recovery on the basis that the illegal purpose had not yet been carried out. This approach has been criticised on the ground that the father did not withdraw because of change of mind or repentance, but on the ground that the transaction had become unnecessary, the risk in the business having passed.33 Rather than discouraging illegal products, this approach produces the opposite effect, since the transferor of the property has nothing to lose and everything to gain by entering into the illegal transaction.34 Criticism of theBowmakerRule The Bowmaker rule35 has been criticised on various grounds, discussed by McHugh J. in Nelson v. Nelson .36 The rule:
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...has no regard to the legal and equitable rights of the parties, the merits of the case, the effect of the transaction in undermining the policy of the relevant legislation or the question whether the sanctions imposed by the legislation sufficiently protect the purpose of the legislation. Regard is had only to the procedural issue; and it is that issue and not the policy of the legislation or the merits of the parties which determines the outcome. Basing the grant of legal remedies on an essentially procedural criterion which has nothing to do with the equitable positions of the parties or the policy of the legislation is unsatisfactory, particularly when implementing a doctrine that is founded on public policy.
The policy justification for the rule...is that the harsh and indiscriminate nature of the rule will deter people from entering into unlawful agreements and trusts because they know that the courts will not provide them with equitable relief.37 Whether the rule adopted by the minority would be an effective deterrent is debatable. However, the notion of deterrence seems a weak argument to justify the Bowmaker rule...while the Bowmaker rule may impose severe losses on those who are forced to rely on the illegality, it also gives windfall gains to those who rely on the defence of illegality. In so far as the Bowmaker rule is a deterrent, it is also an incentive to illegality, because it encourages those to whom property is conveyed to encourage transferors to carry out their unlawful purpose...even if this random process of assigning losses and gains without regard to the substantive equities of a dispute is a disincentive to those who might enter illegal transactions, it does not follow that the Bowmaker rule is the most efficient rule to protect the community against the making of trusts and agreements for unlawful purposes. There are other rules that could achieve the same goals of legal policy through a less extreme and a more just process.
A final criticism of the Bowmaker rule...is that it may often defeat the intention of the Legislature. Parliament almost invariably provides mechanisms for dealing with breaches of its laws. Those mechanisms sometimes include a provision that makes unlawful and unenforceable an agreement that defeats or evades the operation of the relevant law. If a particular enactment does not contain such a provision, the prima facie conclusion to be drawn is that Parliament regarded the sanctions and remedies contained in the enactment as sufficient to deter illegal conduct and saw no need to take the drastic step of making unenforceable an agreement or trust that defeats the purpose of the enactment.
Approach of the High Court of Australia In Nelson v. Nelson, 38 the plaintiff had provided money for purchase of a house in the names of her adult son and daughter, without intending to gift the house to them, but to be able to obtain later, a housing loan at subsidised rates under the Defence Service Homes Act . She obtained some subsidy for purchase of a second house, for obtaining which she had stated that she had no equitable interest in any other house. When the first house was sold at a profit, she claimed the amount realised on sale, which claim was resisted on the ground that it was made on a dishonest purpose. Thus, the illegal purpose had been achieved in the case. Dawson J. distinguished between the intention of the transfer, and the reason or motive for the transfer, and held that the mother's intention not to make a gift rebutted the presumption of advancement. The majority, however, followed neither the strict application laid down in Holman v. Johnson, 39 nor the proprietary-based approach in Tinsley v. Milligan, 40 stating:
...a doctrine of illegality that depends upon the state of pleadings or the need to rely on a transaction that has an unlawful purpose is neither satisfactory nor soundly based on legal policy. The results produced by such a doctrine are essentially random and produce windfall gains as well as losses, even when the parties are in pari delicto.
The majority of the Court awarded the mother the relief sought, on a condition that she made compensation to the authority which had given her the subsidy. In doing so, the Court adopted an approach, which would deny recovery to the plaintiff only where the result was required by the policy
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of statute which had been violated. The Court observed that:
...the doctrine of illegality expounded in Holman was formulated in a society that was vastly different from that which exists today. It was a society that was much less regulated. With the rapid expansion of regulation, it is undeniable that the legal environment in which the doctrine of illegality operates has changed. The underlying policy of Holman is still valid today--the courts must not condone or assist a breach of statute, nor must they help to frustrate the operation of a statute.41
and stated:
One of the most significant reasons for adopting a less rigid approach to illegality than the bald dictum in Holman or, for that matter, the Bowmaker rule adopted in Tinsley is that statutory illegality can arise in a number of different ways. First, the statute may directly prohibit the contract or trust. Second, while the statute may not prohibit making the contract or trust, it may prohibit the doing of some particular act that is essential for carrying it out. Third, the statute may not expressly prohibit the contract or trust but the contract or trust may be associated with or made in furtherance of a purpose of frustrating the operation of the statute. Fourth, the statute may make unlawful, the manner in which an otherwise lawful contract or trust is carried out. It would be surprising, if sound legal policy required each of these forms of illegality to be treated in the same way.42
and applied a test in the context of enforcement of the contract in the light of policy of the statute, holding:
First, the sanction imposed should be proportionate to the seriousness of the illegality involved. It is not in accord with contemporaneous notions of justice that the penalty for breaching a law or frustrating its policy should be disproportionate to the seriousness of the breach. The seriousness of the illegality must be judged by reference to the statute whose terms or policy is contravened. It cannot be assessed in a vacuum. The statute must always be the reference point for determining the seriousness of the illegality; otherwise the courts would embark on an assessment of moral turpitude independently of and potentially in conflict with the assessment made by the Legislature.
Second, the imposition of the civil sanction must further the purpose of the statute and must not impose a further sanction for the unlawful conduct if Parliament has indicated that the sanctions imposed by the statute are sufficient to deal with conduct that breaches or evades the operation of the statute and its policies. In most cases, the statute will provide some guidance, express or inferred, as to the policy of the Legislature in respect of a transaction that contravenes the statute or its purpose. It is this policy that must guide the courts in determining, consistent with their duty not to condone or encourage breaches of the statute, what the consequences of the illegality will be. Thus, the statute may disclose an intention, explicitly or implicitly, that a transaction contrary to its terms or its policy should be unenforceable. On the other hand, the statute may inferentially disclose an intention that the only sanctions for breach of the statute or its policy are to be those specifically provided for in the legislation.
Accordingly, in my opinion, even if a case does not come within one of the four exceptions to the Holman dictum...courts should not refuse to enforce legal or equitable rights simply because they arose out of or were associated with an unlawful purpose unless:
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(a)
the statute discloses an intention that those rights should be unenforceable in all circumstances; or
(b)
4 In Re an arbitration between Mahmoud and Ispahani, [1921] 2 KB 716, [1921] All ER Rep 217; Chai Sau Yin v. Liew Kwee Sam, [1962] AC 304; Harse v. Pearl Life Insurance Co, [1904] 1 KB 558, [1904-07] All ER Rep 630, CA. 5 St John Shipping Corpn v. Joseph Rank Ltd, [1957] 1 QB 267, [1956] 3 All ER 683; B&B Viennese Fashions v. Losane, [1952] 1 All ER 909, (1952) 1 TLR 750. 6 Asaram v. Ludheshwar, AIR 1938 Nag 335(FB) ; but see Laxmidas v. Jyotsnaben Chhaganlal, AIR 1954 Kutch 7. 7 Euro Diam Ltd v. Bathurst, [1990] QB 1 at 35, [1988] 2 All ER 23, [1988] 2 WLR 517. 8 [1994] 1 AC 340 per Lord Goff at 355, [1993] 3 All ER 65 at 72 (HL). 9 Cowan v. Milbourn, (1867) LR 2 Ex 230. 10 Janardhanan v. Sreedharan, AIR 1985 Ker 199 at 202. 11 Waugh v. Morris, (1873) LR 8 QB 202 at 208, [1861-73] All ER Rep 941; see especially at 207 at 208; Hindley & Co Ltd v. General Fibre Co Ltd [1940] 2 KB 517; Gursaran Lal v. Seral Kumar, AIR 1956 All 136. 12 Waugh v. Morris 1873 LR 8 QB 202 per Lord Blackburn at 208, [1861-73] All ER Rep 941; Archbolds (Freightage) Ltd v. S Spanglett Ltd, [1961] 1 QB 374, [1961] 1 All ER 417, [1961] 2 WLR 170 at 171, 179 (CA). 13 Archbolds (Freightage) Ltd v. S Spanglett Ltd, [1961] 1 QB 374, [1961] 1 All ER 417 at 424, [1961] 2 WLR 170 at 179, (CA). 14 Waugh v. Morris, (1873) LR 8 QB 202 at 207-08; [1861-73] All ER Rep 941; Hindley & Co Ltd v. General Fibre Co Ltd, [1940] 2 KB 517; Gursaran Lal v. Seral Kumar, AIR 1956 All 136. 15 See for example, Pearce v. Brooks, (1866) LR 1 Ex 213; Smith v. White, (1866) LR 1 Eq 626, [1861-73] All ER Rep 599; but a transfer of property once executed in possession cannot be set aside on this ground. Ayerst v. Jenkins, (1874) LR 16 Eq 275; Alexander v. Rayson, [1936] 1 KB 169, [1935] All ER Rep 185; Fielding & Platt Ltd v. Najjar, [1969] 2 All ER 150 (plaintiff aware of and actively participating in illegal purpose). 16 Pragilal Kanhaiya Lal v. Ratan Lal Mathra Prasad, AIR 1931 All 458, 131 IC 546 (money borrowed from plaintiff for gambling); Shahabuddin Sahib v. Tota Venkatachalam Chettiar, AIR 1938 Mad 911, (1938) 2 Mad LJ 523. 17 Kedar Nath Motani v. Prahlad Rai, [1960] 1 SCR 861 at 868, AIR 1960 SC 213 at 216. 18 Anderson Ltd v. Daniel, [1924] 1 KB 138, [1923] All ER Rep 783, CA; B&B Viennese Fashions v. Losanne, [1952] 1 All ER 909, (1952) 1 TLR 750. 19 Coral Leisure Group Ltd v. Barnett, (1981) ICR 503 at 509; Newland v. Simons & Willer (Hairdressers) Ltd, (1981) ICR 521 at 530; Archbolds (Freightage) Ltd v. S Spanglett Ltd, [1961] 1 QB 374 at 390, [1961] 1 All ER 417, [1961] 2 WLR 170(CA) . 20 Ashmore, Benson Pease & Co Ltd v. AV Dawson Ltd, [1973] 2 All ER 856 at 862; Anderson Ltd v. Daniel, [1924] 1 KB 138 at 149, and B&B Viennese Fashions v. Losane, [1952] 1 All ER 909 at 913, (1952) 1 TLR 750; J M Allan (Merchandising) Ltd v. Cloke, [1963] 2 All ER 258 at 261, [1963] 2 WLR 899. 21 Berrett v. Smith, (1965) NZLR 460; Anderson Ltd v. Daniel, [1924] 1 KB 138; B & B Viennese Fashions v. Losane, [1952] 1 All ER 909, (1952) 1 TLR 750; and Marles v. Philips Trant & Sons Ltd (No. 1), [1954] 1 QB 29, [1953] 1 All ER 645; St John Shipping Corpn v. Joseph Rank Ltd, [1956] 3 All ER 683. 22 Kiriri Cotton Co Ltd v. Dewani, [1960] AC 192, [1960] 1 All ER 177 at 181, [1960] 2 WLR 127(PC) ; Archbolds (Freightage) Ltd v. S Spanglett Ltd, [1961] 1 QB 374, [1961] 1 All ER 417, [1961] 2 WLR 170 at 177, 180 (both parties presumed to know the law). 23 JM Allan (Merchandising) Ltd v. Cloke, [1963] 2 All ER 258, [1963] 2 WLR 899 at 909, distinguishing Waugh v. Morris, (1873) LR 8 QB 202, [1861-73] All ER Rep 941. 24 Waugh v. Morris, (1873) LR 8 QB 202 at 108, [1861-73] All ER Rep 941; Archbolds (Freightage) Ltd v. S Spanglett Ltd, [1961] 1 QB 374, [1961] 1 All ER 417, [1961] 2 WLR 170(CA) .
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25 Archbolds (Freightage) Ltd v. S Spanglett Ltd, [1961] 1 QB 374, [1961] 1 All ER 417 at 424, [1961] 2 WLR 170 at 179. 26 Pisipati Punnakotiah v. Kallapalli Kolikamba, AIR 1967 AP 83. 27 Appa Dada Patil v. Ramkrishna Vasudeo Joshi, (1930) 53 Bom 652, 121 IC 581, AIR 1930 Bom 5. 28 Gulabchand Gambhirmal v. Kudilal Govindram Ratilal Bhagwandas and Co, AIR 1959 MP 151 at 165 (FB), on appeal Gulabchand v. Kudilal, AIR 1966 SC 1735; CP Automobile Engineering Co Ltd v. Ramchandra Vishwanath, AIR 1926 Nag 259, 91 IC 1029; Regazzoni v. K C Sethia, (1944) Ltd, [1956] 2 All ER 487 affirmed in [1958] AC 301, [1957] 3 All ER 286, [1957] 3 WLR 752; Waugh v. Morris, (1873) LR 8 QB 202 at 208, [1861-73] All ER Rep 941. 29 Archbolds (Freightage) Ltd v. S Spanglett Ltd, [1961] 1 QB 374, [1961] 1 All ER 417 at 426, [1961] 2 WLR 170 at 182 (CA); Strongman (1945) Ltd v. Sincock, [1955] 2 QB 525, [1955] 3 All ER 90(CA) (a builder building without a licence where a licence was required). 30 Archbolds (Freightage) Ltd v. S Spanglett Ltd, [1961] 1 QB 374; [1961] 1 All ER 417, [1961] 2 WLR 170 at 179 (CA). 31 [1987] 2 All ER 651, [1987] 1 WLR 1116; Mitsubishi Corp v. Alafouzos, [1988] 1 Lloyd ' s Rep 191 (1988) 1 FTLR 47; Shelley v. Paddock, [1980] QB 348 at 357, [1980] 1 All ER 1009. 32 Suwalal Jain v. Clive Mills Co Ltd, AIR 1960 Cal 90; Raymon and Co (India) Private Ltd v. Khardah Co Ltd, AIR 1960 Cal 86, on appeal Khardah Company Ltd v. Raymon & Co (India) Private Ltd, [1963] 3 SCR 183, AIR 1962 SC 1810. 33 Birla Jute Mfg Co Ltd v. Dulichand Pratapmull, AIR 1953 Cal 450; Hussain Kasam Dada v. Vijayanagram Commercial Association, AIR 1954 Mad 528; David Taylor & Sons Ltd v. Barnett, [1953] 1 All ER 843, [1953] 1 WLR 562. 34 Waman Shrinivas Kini v. Ratilal Bhagwandas and Co, [1959] Supp 2 SCR 217 at 223, AIR 1959 SC 689. 35 Gulab Chand Prasad v. Budhwanti, AIR 1985 Pat 327 at 336-337. 36 Shaw v. Shaw, [1965] 1 All ER 638, [1965] 1 WLR 537 at 539; Berg v. Sadler & Moore [1937] 2 KB 158, [1937] 1 All ER 637,(CA) ; Chettiar v. Chettiar, [1962] AC 294, [1962] 1 All ER 494, [1962] 2 WLR 548(PC) . 37 Sultan Ahmad v. Rashid Ahmad, AIR 1990 All 47 at 49; Nawab Singh v. Daljit Singh, AIR 1936 All 401 at 404. 38 Sita Ram v. Radha Bai, [1968] 1 SCR 805, AIR 1968 SC 534; Kuju Collieries Ltd v. Jharkhand Mines Ltd, AIR 1974 SC 1892 at 1895 (a suit for refund of money paid for a mining lease illegally given to plaintiff); NVP Pandian v. MM Roy, AIR 1979 Mad 42 (money paid to get admission into a medical college (both parties equally guilty); Bindeshari Prasad v. Lekhraj Sahu, AIR 1916 Pat 284, 33 IC 711 (withdrawal of criminal charges for an agreement to compromise non-compoundable offence); Janu Sait v. Ramaswami Naidu, AIR 1923 Mad 626. 39 Parkinson v. College of Ambulance Ltd, [1925] 2 KB 1, [1924] All ER Rep 325; Grodecki[1955] 71 LQR 254. 40 NVP Pandian v. MM Roy, AIR 1979 Mad 42 at 46; Sita Ram v. Radha Bai, [1968] 1 SCR 805, AIR 1968 SC 534 at 537; Kuju Collieries Ltd v. Jharkhand Mines Ltd, AIR 1974 SC 1892. 41 Sita Ram v. Radha Bai, [1968] 1 SCR 805, AIR 1968 SC 534 per Shah J. at 537; Kedar Nath Motani v. Prahlad Rai, [1960] 1 SCR 861, AIR 1960 SC 213; Amresh Chandra Pandey v. Firm Kalyan Mal Dharam Narain Saraf, AIR 1972 All 130; Abdul Jabbar v. Abdul Muthaliff, AIR 1982 Mad 12; Saudagar Choudhary v. Bipati, AIR 1986 Pat 211 at 215. 42 Hormasji Motabhai v. Pestonji Dhanjibhai, (1888) 12 Bom 422; Petherpermal Chetty v. Muniandy Servai, (1907) 35 Cal 551, (1908) 35 IA 98; Deivanayaga Padayachi v. Muthu Reddi, AIR 1921 Mad 326; Janu Sait v. Ramaswami Naidu, AIR 1923 Mad 626; Nawab Singh v. Daljit Singh, AIR 1936 All 401; Pranballav Saha v. Tulsibala Dassi, AIR 1958 Cal 713 (discussion); Peddi Virayya v. Doppalapudi Subba Rao, AIR 1959 AP 647; Dasari Satyanarayana v. Kanchupata Appa Rao, AIR 1966 AP 209; Ismail v. Wasudeo, AIR 1919 Nag 43 (purpose frustrated). 43 Bindeshari Prasad v. Lekhraj Sahu, AIR 1916 Pat 284, 33 IC 711; Amresh Chandra Pandey v. Firm Kalyan Mal Dharam Narain Saral, AIR 1972 All 130 at 133. 44 I Brahmayya Lingam v. Kamisetti Mallamma, AIR 1924 Mad 849; Bur Singh v. Kehru, AIR 1938 Lah 732. 45 Taylor v. Bowers, [1876] 1 QBD 291, applied in Petherpermal Chetty v. Muniandy Servai, (1907) 35 Cal 551, (1908) 35 IA 98 at 103; Kiriri Cotton Ltd v. Dewani, [1960] AC 192, [1960] 1 All ER 177, [1960] 2 WLR 127(PC) . 46 Harry Parker Ltd v. Mason, [1940] 4 All ER 199 at 202; Kedar Nath Motani v. Prahlad Rai, [1960] 1 SCR 861 at 873, AIR 1960 SC 213; Peddi Virayya v. Doppalapudi Subba Rao, AIR 1959 AP 647. 47 Peddi Virayya v. Doppalapudi Subba Rao, AIR 1959 AP 647.
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48 Bigos v. Bousted, [1951] 1 All ER 92. 49 K Tirupathi Mudali v. T Lakshmana Mudali, AIR 1953 Mad 545 (in India, the cause of the failure is immaterial); doubting Bigos v. Bousted, [1951] 1 All ER 92. 50 Chettiar v. Chettiar, [1962] AC 294, [1962] 1 All ER 494, [1962] 2 WLR 548(PC) . 51 Alexander v. Rayson, [1936] 1 KB 169(CA), [1935] All ER Rep 185(CA) . 52 Bigos v. Bousted, [1951] 1 All ER 92; contra Alexander v. Rayson, [1936] 1 KB 169(CA), [1935] All ER Rep 185, distinguishing Taylor v. Bowers, [1876] 1 QBD 291; K Tirupathi Mudali v. T Lakshmana Mudali, AIR 1953 Mad 545; Grodecki,[1955] 71 LQR 254 at 263 at 263. 53 Tribe v. Tribe, [1996] Ch 107, [1995] 4 All ER 236, [1995] 3 WLR 913. 54 [1936] 1 KB 169 (CA), [1935] All ER Rep 185. 55 [1951] 1 All ER 92. 56 Petherpermal Chetty v. Muniandy Servai, (1907) 35 Cal 551, (1908) 35 IA 98 at 559 (PC); K Tirupathi Mudali v. T Lakshmana Mudali, AIR 1953 Mad 545 at 547 rejecting Bigos v. Bousted, [1951] 1 All ER 92; s. 84, Indian Trusts Act 1882. 57 Kalipada Mondal v. Kali Charon Mondal AIR 1949 Cal 204. 58 Kammula Venkataramayya v. Yilapani Pullayya, (1936) 59 Mad 998, AIR 1936 Mad 717(FB) ; Sham Lall Mitra v. Amarendro Nath Bose, (1895) 23 Cal 460. 59 Petherpermal Chetty v. Muniandy Servai, (1907) 35 Cal 551, (1908) 35 IA 98; Chenvirappa bin Virbhadrappa v. Puttappa bin Shivbasappa, (1887) 11 Bom 708; Honapa v. Narsapa, (1898) 23 Bom 406; Rangammal v. Venkatachari, (1895) 18 Mad 378, affirmed (1896) 20 Mad 323; Yaramati Krishnayya v. Chundru Papayya, (1897) 20 Mad 326; Kondeti Kama Row v. Nukamma, (1908) 31 Mad 485; Goberdhan Singh v. Ritu Roy, (1894) 23 Cal 962 (1); Kali Charan Pal v. Rasik Lal Pal, (1894) 23 Cal 962 (2); Banka Behary Dass v. Raj Kumar Dass, (1899) 27 Cal 231; Govinda Kuar v. Lala Kishun Prosad, (1900) 28 Cal 370; Jadu Nath Poddar v. Rup Lal Poddar, (1906) 33 Cal 967; (the portion of the headnote stating that Chenvirappa bin Virbhadrappa v. Puttappa bin Shivbasappa, (1887) 11 Bom 708 and Yaramati Krishnayya v. Chundru Papayya, (1897) 20 Mad 326 have been dissented from is misleading: see per Rampini J on p. 969 and per Mookerjee J on p. 983); Girdharilal Prayagdat v. Manikamma Narayansami, (1913) 38 Bom 10, AIR 1914 Bom 283, 21 IC 50. 60 Muthuraman Chetty v. Krishna Pillai, (1905) 29 Mad 72 (interpreting the words 'not carried into execution' in s. 84,Indian Trusts Act 1882). 61 Jadu Nath Poddar v. Rup Lal Poddar, (1906) ILR 33 Cal 592. 62 [1960] 1 SCR 861 at 873, AIR 1960 SC 213 at 218. 63 Kedar Nath Motani v. Prahlad Rai, [1960] 1 SCR 861 at 869, AIR 1960 SC 213. 64 Waman Shrinivas Kini v. Ratilal Bhagwandas and Co, [1959] Supp 2 SCR 217 at 223, AIR 1959 SC 689; Gibbs & Street Manufacturing Co v. Brucker 111 US 597, 28 L edn 534, 535. 65 (1908) 35 Cal 551, (1908) 35 IA 98, p. 103. 66 Surasaibalini Debi v. Phanindra Mohan Majumdar, [1965] I SCR 861, AIR 1965 SC 1364. 67 Ledu v. Hira Lal Bose 43 Cal 115, AIR 1916 Cal 266 (bribes involving sale of public office) distinguishing Pichakutty Mudali v. Narayanappa Aiyam, (1864-65) 2 MHCR 243, where money was paid for a more favourable assessment of cultivable lands; Raghuber Das Mahant v. Nataber Singh, AIR 1919 Pat 316 (use of pressure); Kali Kumari Baisnabi v. Mono Mohini Baisnabi, AIR 1935 Cal 748, 160 IC 212; Rudragowda Yeshvantgowda v. Gangowda Basagawda Patil, AIR 1938 Bom 54. 68 Kiriri Cotton Ltd v. Dewani, [1960] AC 192, [1960] 1 All ER 177, [1960] 2 WLR 127 at 132 (PC); Hastelow v. Jackson, (1828) 8 B & C 221 at 226, [1824-34] All ER Rep 529; Taylor v. Bowers [1876] 1 QBD 291; applied in Petherpermal Chetty v. Muniandy Servai, (1907) 35 Cal 551, (1908) 35 IA 98. 69 Herman v. Jeuchner, [1885] 15 QBD 561; Kiriri Cotton Ltd v. Dewani, [1960] AC 192 at 203, [1960] 1 All ER 177, [1960] 2 WLR 127 at 131 (PC); Amresh Chandra Pandey v. Firm Kalyan Mal Dharam Narain Saraf, AIR 1972 All 130. 70 Peddi Virayya v. Doppalapudi Subba Rao,AIR 1959 AP 647; Amresh Chandra Pandey v. Firm Kalyan Mal Dharam Narain Saraf, AIR 1972 All 130. 71 Lowry v. Bourdieu, (1780) 2 Doughl 468 at 472; Kiriri Cotton Ltd v. Dewani, [1960] AC 192 at 203, [1960] 1 All ER
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177, [1960] 2 WLR 127(PC) . 72 Jahed Shaikh v. Kamlesh Chandra Das, AIR 1959 Cal 165; Ram Singh v. Jethanand Wadhumal, AIR 1964 Raj 232; but see Bigos v. Bousted, [1951] 1 All ER 92 (Exchange Control Act contravened). 73 Dayabhai Tribhovandas v. Lakhmichand Panachand, (1885) 9 Bom 358 at 362; Srikakolapur Venkataraju v. Gudivada Ramanujam, (1918) 34 Mad LJ 561, AIR 1918 Mad 163, 44 IC 319; Naguppa Pillai v. Arunachalam Chetty, (1924) 85 IC 1016, AIR 1925 Mad 281 (court divided). 74 George v. Greater Adelaide Land Development Co Ltd, (1929) 43 CLR 91 at 99, 101; Petherpermal Chetty v. Muniandy Servai, (1907) 35 Cal 551, (1908) 35 IA 98 at 103; Harse v. Pearl Life Assurance Co, [1904] 75 See The Indian Trusts Act, 1882, s. 84. 76 Sita Ram v. Radha Bai, [1968] 1 SCR 805, AIR 1968 SC 534 per Shah J. at 537; Abdul Jabbar v. Abdul Muthaliff, AIR 1982 Mad 12; Janardhanan v. Sreedharan, AIR 1985 Ker 199; Saudagar Chaudhary v. Bipati, AIR 1986 Pat 211 at 215. 77 Gray v. Southouse, [1949] 2 All ER 1019 (recovery of illegal premium); Kiriri Cotton Ltd v. Dewani, [1960] AC 192 at 204, [1960] 1 All ER 177, [1960] 2 WLR 127(PC) (recovery of premium paid to secure a tenancy). 78 Reynell v. Sprye, (1852) 1 De GM & G 660; Hughes v. Liverpool Victoria Legal Friendly Society, [1916] 2 KB 482, [1916-17] All ER Rep 918. 79 Chettiar v. Chettiar, [1962] 1 All ER 494(PC) ; Budh Ram Balak Ram v. Dhuri Co-op-cum-Processing Society, AIR 1972 Punj 185. 80 Browning v. Morris, (1778) 2 Cowp 790, p. 792. 81 In Smith v. Cuff, (1817) 6 M & S 160, p. 165; cited and followed by Chagla CJ in Trikamdas Udeshi v. Bombay Municipal Corpn, AIR 1954 Bom 427; The Specific Relief Act 1963, s. 27(1)(b). 82 [1960] AC 192, [1960] 1 All ER 177, [1960] 1 WLR 127(PC) ; Gobind Ram v. Rajphul Singh, AIR 1973 Punj 94 at 99 (rent restriction law). 83 VS Rahi v. Ram Chambeli, AIR 1984 SC 595, (1964) 1 SCC 612 at 618. 84 Mohamed v. Alaga & Co, [1999] 3 All ER 699(CA) (claim allowed in quantum meruit). 85 Waman Shrinivas Kini v. Ratilal Bhagwandas & Co, [1959] Supp 2 SCR 217, AIR 1959 SC 689 at 693. 86 Strongman, (1945) Ltd v. Sincock, [1955] 2 QB 525, [1955] 3 All ER 90(CA) ; Khaja Moinuddin Khan v. SP Ranga Rao, AIR 2000 AP 344. 87 Burrows v. Rhodes, [1899] 1 QB 816, [1895-99] All ER Rep 117 (no recovery on facts); Shelley v. Paddock, [1980] QB 348, [1980] 1 All ER 1009; Hughes v. Liverpool Victoria Legal Friendly Society, [1916] 2 KB 482, [1916-17] All ER Rep 918. 88 Atkinson v. Denby, (1863) 7 H&N 934; affirmed in (1862) 1 De GM & G 660, [1861-73] All ER Rep 2294. 89 Hughes v. Clewley (The Siben) (No 2), [1996] 1 Lloyd's Rep 35 (on facts, held not available). 90 Parkinson v. College of Ambulance Ltd [1925] 2 KB 1, [1924] All ER Rep 325. 91 Askey v. Golden Wine Co Ltd, [1948] 2 All ER 35. 92 [1980] QB 348, [1980] 1 All ER 1009. 93 [1916] 2 KB 482, [1916-17] All ER Rep 918. 94 Mohd Salimuddin v. Misri Lal, AIR 1986 SC 1019, (1986) 2 SCC 378, holding that it will be a judicial sin to treat the landlord and tenant on par and apply the doctrine of pari delicto because the parties were placed in the position of 'oppressor and oppressed'; Budhwanti v. Gulab Chand Prasad, AIR 1987 SC 1484 at 1487. 95 Gulab Chand Prasad v. Budhwanti, AIR 1985 Pat 327 at 336-7; the appeal before the Supreme Court in Budhwanti v. Gulab Chand Prasad, AIR 1987 SC 1484 was dismissed without going into the question whether the tenant was entitled to adjust the excess rent; the decree of eviction being sustained on the ground of bona fide requirement. 96 Kiriri Cotton Ltd v. Dewani, [1960] AC 192, [1960] 1 All ER 177 at 181, [1960] 2 WLR 127 at 131 (PC). 97 St John Shipping Corpn v. Joseph Rank Ltd, [1957] 1 QB 267, [1956] 3 All ER 683.
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98 Langton v. Hughes, (1813) 1 M & S 593 at 596. 1 Kiriri Cotton Ltd v. Dewani, [1960] AC 192, [1960] 1 All ER 177 per Lord Denning at 180, [1960] 2 WLR 127 at 131 (PC); Dicta of Lord Mansfield on Lowry v. Bourdieu, (1780) 2 Doughl 468 at 472; Browning v. Morris, (1778) 2 Cowp 790 at 792 applied. 2 Kedar Nath Motani v. Prahlad Rai, [1960] 1 SCR 861, AIR 1960 SC 213; Haji Habib Haji Pir Mohamad v. Bikamchand Jankilal Shop, AIR 1954 Nag 306; Babulal Swarupchand Shah v. South Satara (Fixed Delivery) Merchants' Association Ltd, AIR 1960 Bom 548; Tenant v. Elliott, (1797) 1 B&P 3, [1775-1802] All ER Rep 179; Farmer v. Russell, (1798) 1 B&P 296, [1775-1802] All ER Rep. 234; Bridger v. Savage, (1885) 15 QBD 363, [1881-85] All ER Rep 1065. 3 Babulal Swarupchand Shah v. South Satara (Fixed Delivery) Merchants' Association Ltd, AIR 1960 Bom 548. 4 Budh Ram Balak Ram v. Dhuri Co-op-cum-Marketing-cum-Processing Society, (1973) 2 Punj 677, AIR 1972 Punj 185 at 188. 5 Harry Parker Ltd v. Mason, [1940] 2 KB 590, [1940] 4 All ER 199, CA. 6 Bowmakers Ltd v. Barnet Instruments Ltd, [1945] KB 65, [1944] 2 All ER 579, distinguished in Thomas Brown & Sons Ltd v. Fazal Deen, (1962) 108 CLR 391, p. 41I, (1962) 36 ALJR 229; considered in Kedar Nath Motani v. Prahlad Rai, [1960] 1 SCR 861 at 863, AIR 1960 SC 213 at 218; Waman Shrinivas Kini v. Ratilal Bhagwandas and Co, [1959] Supp 2 SCR 217 at 223, AIR 1959 SC 689; Abdul Jabbar v. Abdul Muthaliff, AIR 1982 Mad 12. See Gascoigne v. Gascoigne, [1916-17] All ER Rep 1143 (plaintiff cannot maintain action by setting up his own fraudulent design); but see Moody v. Cox and another, [1917] 2 Ch 71, [1916-17] All ER Rep 548(CA) . 7 Nair Service Society Ltd v. KC Alexander, AIR 1968 SC 1165 at 1176; referring to Holman v. Johnson, (1775) 1 Cowp 341, 98 ER 1120, [1775-1802] All ER Rep 98. 8 [1945] KB 65 at 71, [1944] 2 All ER 579 at 582; approved obiter by a Bench of the Nagpur High Court in Haji Habib Haji Pir Mohamad v. Bikamchand Jankilal Shop, AIR 1954 Nag 306 at 314, 316, 318. 9 (1869) LR 4 QB 309, 38 LJ QB 225, [1861-73] All ER Rep 154. 10 See also [1945] KB 65 at 71, [1944] 2 All ER 579; note the misunderstanding of Taylor v. Chester in Sheikh Vilayat Hussain v. Misran, AIR 1923 All 504, where the court remarks that where the plaintiff has to produce a document, the defendant may cross-examine him or issue interrogatories, and show that he is in pari delicto. But the whole point of Taylor v. Chester is that despite the illegality, the plaintiff can recover, and will not be deemed to be in pari delicto, unless he has to rely upon the illegality of the transaction as an integral part of his case. 11 [1951] 1 All ER 92. 12 See also s. 65 below. 13 In India, Bousted might recover under this head, as the illegal purpose had failed. In India, the cause of the failure is irrelevant, as held in K Tirupathi Mudali v. T Lakshmana Mudali, AIR 1953 Mad 545 at 547 (doubting Bigos v. Bousted on this point); Petherpermal Chetty v. Muniandy Servai, (1907) 35 Cal 551 at 559, (1908) 35 IA 98(PC) ; below 's. 84, Indian Trust Act, 1882.' 14 Thomas Brown & Sons Ltd v. Fazal Deen, (1962) 108 CLR 391, (1962) 36 ALJR 229 at 236 distinguishing Bowmakers Ltd v. Barnet Instruments Ltd, [1945] KB 65 at 71, [1944] 2 All ER 579. 15 AIR 1982 Mad 12; relying on Situ Ram v. Radha Sai, [1968] 1 SCR 805, AIR 1968 SC 534; Woman Shrinivas Kini v. Ratilal Bhagwandas and Co, [1959] Supp 2 SCR 211, AIR 1959 SC 689; Sajan Singh v. Sardara Ali, [1960] AC 167, [1960] 1 All ER 269(PC) ; Chettiar v. Chettiar, [1962] AC 294, [1962] 1 All ER 494, [1962] 2 WLR 548(PC) . 16 [1965] 1 SCR 861, AIR 1965 SC 1364; Petherpermal Chetty v. Muniandy Servai, (1907) 35 Cal 551, (1908) 35 IA 98. 17 [1963] 3 All ER 499, [1963] 3 WLR 513(PC) . 18 Bowmakers Ltd v. Barnet Instruments Ltd, [1945] KB 65, [1944] 2 All ER 579; Mistry Amar Singh v. Serwano Wofunira Kulubya, [1963] 3 All ER 499, [1963] 3 WLR 513(PC) . 19 Mistry Amar Singh v. Serwano Wofunira Kulubya, [1963] 3 All ER 499, [1963] 3 WLR 513(PC) . 20 Mistry Amar Singh v. Serwano Wofunira Kulubya, [1963] 3 All ER 499, [1963] 3 WLR 513(PC) . 21 Surasaibalini Debi v. Phanindra Mohan Majumdar, [1965] 1 SCR 861, AIR 1965 SC 1364 at 1368; Chettiar v. Chettiar, [1962] AC 294, [1962] 1 All ER 494, [1962] 2 WLR 548(PC) ; Sajan Singh v. Sardara Ali, [1960] AC 167, [1960] 1 All ER 269. 22 [1962] AC 294, [1962] 1 All ER 494, [1962] 2 WLR 548(PC) .
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23 [1960] AC 167, [1960] 1 All ER 269; Surasaibalini Debi v. Phanindra Mohan Majumdar, [1965] 1 SCR 861, AIR 1965 SC 1364. 24 Chettiar v. Chettiar, [1962] AC 294, [1962] 1 All ER 494, [1962] 2 WLR 548(PC) ; Thomas Brown & Sons Ltd v. Fazal Deen, (1962) 108 CLR 391 at 412, (1962) 36 ALJR 229; See Holman v. Johnson (1775) 1 Cowp 341 at 343, 98 ER 1120, [1775-1802] All ER Rep 98. 25 Holman v. Johnson, (1775) 1 Cowp 341 per Lord Mansfield at 343, 98 ER 120. 26 [1960] AC 167, [1960] 1 All ER 269. 27 Ibid. 28 Liladhar v. R S Sunderlal, AIR 1932 Nag 32, 136 IC 875; Shanta Agarwal v. Baldota Bros, (1974) 76 Bom LR 156. 29 S. 25, Paper Currency Act (10 of 1923),AIR 1928 All 371. 30 AIR 1997 SC 1952, (1997) 10 SCC 488. 31 [1994] 1 AC 340, [1993] 3 All ER 65(HL) . 32 [1996] Ch 107, [1995] 4 All ER 236, [1995] 3 WLR 913; see Virgo,(1996) Camb LJ 23. 33 See Virgo,(1996) Camb LJ 23; Creighton,(1997) 60 MLR 102. 34 Chitty on Contracts, 28th edn, p. 931, para 17-174. 35 Bowmakers Ltd v. Barnet Instrument Ltd, [1945] KB 65, [1944] 2 All ER 579. 36 (1995) 184 CLR 538 per McHugh J. at 609-10 (High Court of Australia); Stowe,(1994) 57 MLR 441; Enonchong,(1994) 14 OJLS 295; Creighton,(1997) 60 MLR 102. 37 The rule adopted by the minority in Tinsley v. Milligan, [1994] 1 AC 340, [1993] 3 All ER 65 per Lord Goff at 75 (HL). 38 (1995) 184 CLR 538 (High Court of Australia). 39 (1775) 1 Cowp 341, 98 ER 1120, [1775-1802] All ER Rep 98. 40 [1994] 1 AC 340, [1993] 3 All ER 65(HL) . 41 Bettie June Nelson v. Elizabeth Anne Nelson, (1995) 184 CLR 538 per McHugh J. at 611 (High Court of Australia). 42 Ibid.
Transfer of Property Tainted with Illegality Under the English law, if the transfer is ex facie a legal one, the transferee will recover possession under the maxim that no one can plead his own wrongdoing; and this the transferor will be forced to do. One party cannot recover what he had given to the other party, if in order to substantiate his claim, he is driven to disclose the illegality. The courts will not assist either party to a contract that is forbidden by law.44 Any rights which he may have, irrespective of illegal contract, will of course be recognised and enforced.45 In Mistry Amar Singh v. Kulubya, 46 the respondent's claim was based on his being a 'registered owner' and the agreement under which the appellant took possession was illegal, as a non-African was in possession without the Governor's permission. The respondent admitted the illegality, but he sued for possession of the land as a protected African, nevertheless. He succeeded because 'in spite of and not because of those illegal agreements that he was entitled to possession'. Similarly, in Sajan Singh v. Sardara Ali, 47 a lorry was registered in the name of the defendant because he could and did obtain a permit. The plaintiff, who had contributed towards its cost, removed it from the defendant's possession, and used it. Subsequently, the defendant took it away from the plaintiff. The plaintiff succeeded, because the defendant would have to disclose the illegal transaction to which he was a party. But in Chettiar v. Chettiar, 48 in order to defeat the Regulation regarding holdings of rubber growing
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lands, a father got an area which exceeded the allowable maximum, and registered the lands in the name of his son, but the certificate and possession remained with the father, although the two holdings were treated as separate. The father brought proceedings for declaration that the son held the land in trust for him and for an order that the son re-transfer it to him. The son did not plead illegality affecting the transfer. The suit failed. The Privy Council held that where the fraudulent purpose had not been carried out and there was room for repentance, the father might have been allowed to have the land re-transferred to him.49But where the fraudulent purpose has been act ually effected by means of the colourable transfer, there is no room for repentance. The process of the courts cannot be used by a person to achieve his fraudulent purpose and also get back his property. The courts will say: Let the estate lie where it falls.50Sajan Singh's case was distinguished on the ground that there, the plaintiff's claim to the lorry was founded on his right to and possession of the lorry and no immoral or illegal act was alleged. In Roberts v. Roberts, 51X conveyed land by deed to D, his brother, to achieve two secret unlawful purposes, first to give D a qualification to kill game, and secondly to get rid of a criminal information pending against D. X remained in possession, and died. The court held that D could recover possession from X's widow. This authority has been followed by some High Courts,52 but rejected by others.53 In Qadir Bukhsh v. Hakam, 54a piece of agricultural land belonging to a statutory agriculturist, in contravention of the provisions of the Alienation of Lands Act, was mortgaged to the defendant, a non-agriculturist, but ostensibly, the mortgage was in the name of the plaintiff, a statutory agriculturist, the defendant remaining in possession. The plaintiff sued for possession on his title and the defendant pleaded the real nature of the transaction, which the court allowed him to do. The respective spheres of the maxim 'nemo allegans turpitudinem suam audiendus est' and 'in pari delicto potior est conditio possidentis' were delineated.55 The former is the general rule and the latter is an exception to that rule and there is no real conflict between the two; a rigid application of the former might give effect to the fraudulent design of the authors and defeat the very object for which the maxim was framed. As was observed in Maung Tin v. Ma Mai Myint :56
It is one thing to forbid the pleading of a fraud to obtain an advantage and quite another to refuse a party to the fraud to plead the true nature of the transaction. In the one case, the courts would be lending themselves to helping a party to a fraud to obtain the benefit of his fraud, while in the other case, it would be preventing a party to the fraud from pleading and thereby permitting a further fraud to be committed.
The Indian law applying to transfers of property has been summarised in Pranballav Saha v. Tulsibala Dassi by Bachawat J.:57
In Indian law a transfer for an unlawful object or consideration within the meaning of s. 23 of the Contract Act is prohibited by s. 6 (h) clause 2 of the Transfer of Property Act . Such a transfer is void and need not be set aside...the transferee cannot recover property on the strength of such a transfer...the transferor claiming that the transfer is void may sue to recover the property on the strength of his original title and in general, he may be given relief, though he is particeps criminis in the following cases:
(a)
where his case falls within one of the three exceptions recognised by s. 84 of the Indian Trusts Act; or
(b)
44 Chettiar v. Chettiar, [1962] AC 294, [1962] 1 All ER 494, [1962] 2 WLR 548(PC) ; referring on Holman v. Johnson, (1775) 1 Cowp 341, 98 ER 1120, [1775-1802] All ER Rep 98.
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45 Per Lindley LJ. in Scott v. Brown. Doering, McNab & Co, [1891-94] All ER Rep 654. 46 [1963] 3 All ER 499[1963] 3 WLR 513(PC) ; Bowmakers Ltd v. Barnet Instruments Ltd, [1945] KB 65, [1944] 2 All ER 579(CA) and other authorities referred to. (in Bowmakers case, the illegal bailments of machinery under hire-purchase agreements were assumed terminated by sale of the machinery to the plaintiffs on demand). 47 [1960] AC 167, [1960] 1 All ER 269. 48 Chettiar v. Chettiar, [1962] AC 294, [1962] 1 All ER 494, [1962] 2 WLR 548(PC) . 49 [1962] AC 294, [1962] 1 All ER 494, [1962] 2 WLR 548(PC) ; Petherpermal Chetty v. Muniandy Servai, (1907) 35 Cal 551, (1908) 35 IA 98. 50 Chettiar v. Chettiar, [1962] AC 294, [1962] 1 All ER 494 at 497, [1962] 2 WLR 548(PC) ; Sajan Singh v. Sardara Ali, [1960] AC 167 at 177, [1960] 1 All ER 269 at 273; Kiriri Cotton Ltd v. Dewani, [1960] AC 192 at 202-3, [1960] 1 All ER 177 at 180, [1960] 2 WLR 127(PC) . 51 (1819) 2 B & Ald 367, 106 ER 401, 20 RR 477. 52 See eg. Koppula Kotayya Naidu v. Chitrapu Mahalakshmamma, (1933) 56 Mad 646, AIR 1933 Mad 457; Sidlingappa bin Ganeshappa v. Hirasa bin Tukasa, (1907) 31 Bom 405. 53 Sheikh Vilayat Hussain v. Misran, (1923) 45 All 396, AIR 1923 All 504; Luckmidas Khimji v. Mulji Canji, (1881) 5 Bom 295; followed in Chenvirappa bin Virbhadrappa v. Puttappa bin Shivbasappa, (1887) 11 Bom 708; Babaji v. Krishna, (1893) 18 Bom 372; Honapa v. Narsapa, (1898) 23 Bom 406; Raghupati Chatterjee v. Nrishingha Hori Das, AIR 1923 Cal 90, 71 IC 1; Qadir Bukhsh v. Hakam, (1932) 13 Lah 713, AIR 1932 Lah 503(FB) (full discussion of authorities); Maung Tin v. Ma Mai Myint, AIR 1921 LB 63, 65 IC 459, affirmed in Ma Man Chaw v. Ma E, (1926) 4 Rang 429, AIR 1927 Rang 86. 54 (1932) 13 Lah 713, AIR 1932 Lah 503(FB) . 55 AIR 1932 Lah 503 (FB) at 506. 56 AIR 1921 LB 63, 65 IC 459 per Robinson CJ, affirmed in Ma Man Chaw v. Ma E, (1926) 4 Rang 429, AIR 1927 Rang 86, referred to in Qadir Bukhsh v. Hakam, (1932) 13 Lah 713, AIR 1932 Lah 503(FB) . 57 AIR 1958 Cal 713 at 729-30.
...Relief may be given upon such terms as the justice of the case may require. Section 84 of The Indian Trusts Act, 1882 Section 84 of the Indian Trusts Act, 1882 also provides:
Transfer for illegal purpose.--Where the owner of property transfers it to another for an illegal purpose and such purpose is not carried into execution, or the transferor is not as guilty as the transferee, or the effect of permitting the transferee to retain the property might be to defeat the provisions of any law, the transferee must hold the property for the benefit of the transferor.
Collateral Transactions If an agreement is merely collateral to another or constitutes an aid facilitating the carrying out of the object of the other agreement which, though void, is not in itself prohibited, within the meaning of this section, it may be enforced as a collateral agreement.58 A party to the contract, if innocent, may be able to enforce a collateral warranty and recover damages.59 If, on the other hand, it is part of a mechanism meant to carry out what the law has actually prohibited, courts will not allow a claim based upon the agreement, because it will be tainted with illegality of the object sought to be achieved, which is hit by s. 23.60 Where a contract is void as being forbidden by law, every ancillary agreement connected with the contract would also be invalidated.61 An agreement
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may be rendered unlawful by its connection with a past as well as with a future unlawful transaction. Thus, the giving of security for money purporting to be payable under an agreement, whose purpose was unlawful, is itself an unlawful object, even though, it was not stipulated for by the original agreement.62 A property was leased for the purpose of carrying on organised prostitution. The lessee deposited a sum of money with the lessor for which the lessor subsequently passed a promissory note. The suit on the promissory note was dismissed on the ground that a bond or other instrument connected with an illegal agreement could not be enforced.63 Loan knowingly lent to discharge obligation under an illegal contract is not recoverable.64 However, a bank was held not entitled to recover a loan given to a partnership for abkari business without a licence, although no evidence was led of the purpose for which the money was used, nor was it any party's case that there was no licence.65 Severability A contract will rarely be totally illegal or void, and certain parts of it may be entirely lawful in themselves. The question therefore arises whether the illegal or void parts may be separated or 'severed' from the contract and the rest of the contract enforced without them.66 Sometimes, although parts of the contract are unenforceable being illegal or against public policy, other parts, were they to stand alone, would be unobjectionable. The question then arises whether the objectionable part may be severed and the valid one enforced. The general rule is that:
...where you cannot sever the illegal from the legal part of a covenant, the contract is altogether void; but where you can sever them, whether the illegality be created by statute or by the common law, you may reject the bad part and retain the good.67
Section 23 of the Contract Act does not prohibit enforcement of the valid portion of transfer of property or debt, if it is severable from the invalid portion. Where a portion of debt was invalid because it was held by s. 54A(2) of the (then prevailing) Companies Act, 1913 read with s. 23 of the Contract Act, it was held that the invalid portion of the debt was severable from the valid portion already paid.68 Where a contract of bailment is with regard to gold and gems, the former being illegal and the latter legal, and the two are severable, the latter will be enforced.69 A transaction for sale of goods supplied in the 'black market' payable by black money (unaccounted money), payment for the goods supplied could be enforced, and the transaction was not hit by this section, because the transaction involved purchase of goods against price payable, which was not in itself unlawful or opposed to public policy. The tainted part, the manner in which the contract was to be carried out by the parties, was severable.70 Where certain banks entered into ready-forward transactions in unlisted securities with share brokers, the forward leg of the transaction being prohibited under a notification issued under the Securities Contracts (Regulation) Act, and the ready-leg of the transaction was completed, it was held that the forward leg was independent and severable, and its illegality did not affect the vesting in the banks of property in the shares.71 The earlier cases of the nineteenth century required that an illegal promise could be severed only if it was supported by separate consideration.72 Emphasis has now shifted to the nature of illegality, and whether it accords with public policy that severance should be allowed. Two underlying principles73 appear to have guided the courts on the application of the doctrine of severance:
(i) (ii)
The courts will not make a new contract for the parties by re-writing the existing contract or by basically altering its nature; The courts will not sever the unenforceable parts of a contract unless it accords with
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policy to do so. The 'Blue Pencil' Rule 'Severance can be effected when the part severed can be removed by running a blue pencil through it.'74 Where severance is allowed, it must be possible simply to strike out the offending parts, but the court will not rewrite or rearrange the contract.75 The illegal portion of the contract must be capable of being separated from the remainder of the agreement without affecting the meaning of the remainder. Even if the promises can be struck out as aforementioned, the court will not do this if the deletion of the illegal part affects the whole of the contract; if it is so inextricably interwoven with the other promises in the agreement that to do so would alter entirely the scope and intention of the agreement,76 there will be no severance.77 Illegal Promise not the Main Consideration The contract, shorn of the offending parts, must retain the characteristics of a valid contract so that if severance will remove the whole or main consideration given by one party, the contract becomes unenforceable.78 The illegal part must not form the whole or the substantial part of the consideration for the contract, though it may affect a subsidiary part of the contract.79 Public Policy Would Allow Severance Even where the legal and illegal terms can be separated, the court will effect the severance only if it is in accordance with public policy. Severance will not be allowed where the illegal portion is such as to taint the rest of the contract; or where it would be inconsistent with the policy of the statute;80 or where the whole transaction is prohibited by statute or it involves serious moral turpitude.81 In Napier v. National Business Agency Ltd, 82A was employed by B for an amount of GBP 13 per week as salary and GBP 6 for 'expenses', when A's expenses were much less than that figure. A claim for salary was also disallowed on the ground that the provision of expenses was contrary to public policy, and it vitiated the whole agreement. Effect of Severance If the legal and illegal promises are distinct and separate, and each is supported by a distinct consideration, the court may strike out the illegal promise with the consideration. Otherwise, the offending promise simply drops out and the other parts of the contract are enforceable, and the court may strike out only one or more promises on one side without touching the consideration.83Section 24 below provides that if any part of a single consideration for one or more objects, or anyone or any part of anyone of several considerations for a single object, is unlawful, the agreement is void. Restitution has also been awarded where the parties are not willing to accept the contract in a severed form.84 Waiver If, by enforcing a contract contrary to an enactment, the consequence will be the enforcement of an illegality and infraction of a statutory provision, which cannot be condoned by any conduct or agreement of the parties, the contract will not be enforced by a court, as 'waiver in derogation of a statutory right is not favoured and the waiver will be inoperative and void...if it could be against public policy or morals...'.85 In Lachoo Mal v. Radhey Shyam, 86 the Supreme Court had held that where the provisions of a statute were for the benefit of an individual and the prohibition under it is not as a matter of public policy, the benefit can be waived on the principle quilibet potest renunciare juri pro se introducto. But in a later case,87where the tenant objected to the jurisdiction of a civil court in matters of eviction without the permission of the District Magistrate under the Uttar Pradesh (Temporary) Control of Rents and Eviction Act, the lease deed it was held to be illegal and hit by s. 23 of this Act, as the provision was for the benefit of the public and could not be waived. In a suit for eviction on a ground not being default in payment of rent, a compromise provided that if the tenant committed a default in paying rent for three months, he was liable to be evicted. It was held that such a provision
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clearly contravened the statutory enactment conferring protection to the tenant in the matter of default, and thus the same was void.88 Illegality and Conflict of Laws The material or essential validity of a contract is governed by the proper law of contract, i.e., the law governing it. These would include questions about the validity or the effect of agreements in the nature of champerty, wagering, prohibition of statutes, etc. But this is subject to exceptions enumerated below, in which cases, the contract will be unenforceable by the courts of the place of the forum, even though the governing law is not the law of the forum; and the Indian cases have followed the principles followed by the English courts.
(i) (ii)
(iii)
(iv)
If any party in making it or performing it, commits or assists another to commit an offence, or an act prohibited under the English law, in England, or by virtue of a provision having extra-territorial operation.89 If the performance of the contract (even though lawful by its proper law) is unlawful by the law of the country where the contract is to be performed (lex loci solutionis).90 It has been held that if an Indian contract, lawful in its inception, is to be rendered unenforceable in the courts of India by a supervening foreign law, two elements must co-exist: Where the contract is governed by a foreign law, the contract will not be enforced in England, if it is unenforceable under the proper law, unless the vitiating illegality under the proper law is one which the courts in England decline to recognise because it imposes an unfair discrimination upon one or both of the contracting parties. An English court will ignore foreign legislation which deprives a contract of effectiveness, if that legislation is regarded by the English law as so discriminatory or oppressive as to offend against public policy.1 Where, however, a contract is valid by a foreign law and is opposed to public policy in England, then its nature has to be seen. If it involves criminality or prohibition by statute or at common law, it will not be enforced in England;2 and where though not criminal, it offends one of the recognised heads of public policy, the courts in England have not enforced it. The basis of this principle lies in that the courts of a country will not apply any foreign law, if its application would lead to results contrary to the fundamental principles of public policy of the lex fori.3
58 Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406. AIR 1959 SC 781. 59 Burrows v. Rhodes, [1899] 1 QB 816, [1895-99] All ER Rep 117 (no recovery on facts); Shelley v. Paddock, [1980] QB 348, [1980] 1 All ER 1009; Hughes v. Liverpool Victoria Legal Friendly Society, [1916] 2 KB 482, [1916-17] All ER Rep 918. 60 Firm of Pratapchand Nopaji v. Firm of Kotrike Venkata Setty & Sons, [1975] 3 SCR 1, AIR 1975 SC 1223 at 1228. 61 Khardah Company Ltd v. Raymon & Co (India) Private Ltd, [1963] 3 SCR 183, AIR 1962 SC 1810 at 1814; Birla Jute Manufacturing Co Ltd v. Dulichand Pratapmull, AIR 1953 Cal 450 at 453; Suwalal Jain v. Clive Mills Co Ltd, AIR 1960 Cal 90 at 91; Se Se Oil v. Gorakhram Gokalchand, (1962) 64 Bom LR 113 at 117. 62 Fisher v. Bridges, (1854) 3 E & B 642, 97 RR 701, 2 CLR 939, Ex Ch; Geere v. Mare, (1863) 2 H & C 339, 133 RR 707. 63 Kali Kumari Baisnabi v. Mono Mohini Baisnabi, AIR 1935 Cal 748, 160 IC 212. The decision, in Liladhar v. R S Sunderlal, AIR 1932 Nag 32, 136 IC 875 seems to be of doubtful validity. 64 Spector v. Ageda, [1971] 3 All ER 417. 65 Andhra Bank v. Vattikuti Sreemannarayana, AIR 2005 AP 108. 66 See also s. 24--'Unlawful'; s. 57--'Reciprocal Promises to Do Things Legal and Illegal'; s. 58--Alternative Promise.
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67 Pickering v. Ilfracombe Rly Co, (1868) LR 3 CP 235; per Willes J at 250; See Chemidus Wavin Ltd v. Societe Pour La Transformation Et L Exploitation Des Resines Industrielles SA, (1978) 3 CMLR 514; Royal Exchange Assurance Corpn v. Sjorforsakrings Aktiebolaget Vega, [1902] 2 KB 384; cf Electrical Trades Union v. Tarlo, [1964] Ch 720 at 731, [1964] 2 All ER 1. 68 Life Insurance Corpn of India v. Devendrappa Bujjappa Kadabi, AIR 1987 Kant 129 at 136. 69 Thomas Brown & Sons Ltd v. Fazal Deen, (1962) 108 CLR 391. 70 Anand Prakash Om Prakash v. Oswal Trading Agency, AIR 1976 Del 24 at 29. 71 BOI Finance Ltd v. Custodian, AIR 1997 SC 1952, (1997) 10 SCC 488. 72 Waites v. Jones, (1835) 1 Bing NC 646; Hopkins v. Prescott, (1847) 4 CB 578; Kearney v. Whitehaven Colliery Co, [1893] 1 QB 700, [1891-94] All ER Rep 556; Kuenigl v. Donnersmarck, [1955] 1 QB 515, [1955] 1 All ER 46. 73 Carney v. Herbert, [1985] AC 301 at 317, [1985] 1 All ER 438(PC) ; Goldsoll v. Goldman, [1915] 1 Ch 292, [1914-15] All ER Rep 257, followed in Ronbar Enterprises Ltd v. Green, [1954] 2 All ER 266, [1954] 1 WLR 815; Scorer v. Seymour-Jones, [1966] 3 All ER 347, [1966] 1 WLR 1419; Attwood v. Lamont, [1920] 3 KB 571 at 578, 580, 593, [1920] All ER Rep 55; Goodinson v. Goodinson, [1954] 2 QB 118, [1954] 2 All ER 255; South Western Mineral Water Co Ltd v. Ashmore, [1967] 2 All ER 953, [1967] 1 WLR 1110; Ailion v. Spiekermann, [1976] Ch 158, [1976] 1 All ER 497; Hyland v. J H Barker (North West) Ltd, (1985) ICR 861 at 863-864; Kuenigl v. Donnersmarck, [1955] 1 QB 515 at 537, [1955] 1 All ER 46 (conditions for severance not satisfied). 74 Attwood v. Lamont, [1920] 3 KB 571 per Lord Sterndale MR at 578, [1920] All ER Rep 55 at 60. 75 Re Davstone Estates Ltd's Leases, Manprop Ltd v. O'Dell, [1969] 2 Ch 378[1969] 2 All ER 849; Horwood v. Millar's Timber and Trading Co Ltd, [1917] 1 KB 305, [1916-17] All ER Rep 847(CA) ; Goldsoll v. Goldman, [1915] 1 Ch 292, [1914-15] All ER Rep 257(CA) (restraint of trade). 76 Attwood v. Lamont, [1920] 3 KB 571, [1920] All ER Rep 55 at 61(CA) . 77 [1920] 3 KB 571 at 580. 78 Goodinson v. Goodinson, [1954] 2 QB 118, [1954] 2 All ER 255(CA) . 79 Carney v. Herbert, [1985] AC 301, [1985] 1 All ER 438(PC) ; Goodinson v. Goodinson, [1954] 2 QB 118, [1954] 2 All ER 255. See also s. 24 below. 80 Kenyon v. Darwen Cotton Manufacturing Co Ltd, [1936] 2 KB 193, [1936] 1 All ER 310. 81 Asaram v. Ludheshwar, AIR 1938 Nag 335(FB) . 82 [1951] 2 All ER 264. 83 Commercial Plastics Ltd v. Vincent, [1965] 1 QB 623, [1964] 3 All ER 546(CA) ; Goldsoll v. Goldman, [1915] 1 Ch 292, [1914-15] All ER Rep 257; Goodinson v. Goodinson supra . 84 South Western Mineral Water Co Ltd v. Ashmore, [1967] 2 All ER 953, [1967] 1 WLR 1110. 85 Waman Shrinivas Kini v. Ratilal Bhagwandas and Co, [1959] Supp 2 SCR 217 at 225-26, AIR 1959 SC 689 at 694 (a case of tenancy); Surajmull Nagoremull v. Triton Insurance Co Ltd, AIR 1925 PC 83, 52 IA 126; Ratanlal v. Firm Manual Mathuralal, AIR 1963 MP 323; Nixon v. Albion Marine Insurance Co, (1867) 2 Ex 338. 86 [1971] 3 SCR 698, AIR 1971 SC 2213 at 2215. 87 Murlidhar Agarwal v. State of Uttar Pradesh, [1975] 1 SCR 575, AIR 1974 SC 1924 at 1928. 88 Mulkh Raj v. Sushil Kumar, AIR 2005 J&K 58. 89 Boissevain v. Weil, [1950] AC 327, [1950] 1 All ER 728(HL) . 90 Ralli Bro v. Compania Naviera Sota y Aznar, [1920] 2 KB 287, [1920] All ER Rep 427; Foster v. Driscoll, [1929] 1 KB 470 at 520, [1928] All ER Rep 130; Kleinwort, Sons & Co v. Ungarische Baumwolle Industrie Actiengesselschaft, [1939] 2 KB 678, [1939] 3 All ER 38(CA) ; Zivnostenska Banka National Corpn v. Frankman, [1950] AC 57, [1949] 2 All ER 671. 1 Wolff v. Oxholm, (1817) 6 M&S 92, [1814-23] All ER Rep 208, KB; cf Re Friedrich Krupp AG,[1917] 2 Ch 188; Re Helbert Wagg & Co Ltd, [1956] Ch 323 at 352, [1956] 1 All ER 129, [1956] 2 WLR 183. 2 Boissevain v. Weil, [1950] AC 327, [1950] 1 All ER 728(HL) affirming [1949] 1 KB 482, [1949] 1 All ER 146(CA) .
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3 Societa Anonmina Lucchesse Olii E Vini Lucca v. Gorakharam Gokalchand, (1964) 2 Mad 90, AIR 1964 Mad 532 at 536 (Scots law not applied).
In Lemenda Trading Co Ltd. v. African Middle East Petroleum Co Ltd., 4 Philips J. stated as under:
...the English courts should not enforce an English law contract which falls to be performed abroad where: (i) it relates to an adventure which is contrary to a head of English Public Policy which is founded on general principles of morality; and (ii) the same Public Policy applies to the country of performance so that the agreement would not be enforceable under the law of that country. In such a situation, international comity combines with English domestic policy to militate against enforcement.
If a contract is made between a party in India and a party in Italy, and the contract is illegal under the law of India, the arbitration agreement and the entire proceedings following thereon are illegal and the award would be tainted with the same infirmity. This was a case of a foreign award between a party in India and a party in Italy, in proceedings taken in London.5
However, in Renusagar Power Co v. General Electric Co Ltd, 6 the Supreme Court has observed that a distinction must be drawn while applying a rule of public policy between a matter governed by domestic law and a matter involving conflict of laws. The application of doctrine of public policy in the field of conflict of laws is more limited. Courts are slower to invoke public policy in cases involving a foreign element on the ground that 'transactions containing a foreign element may constitute a less serious threat to municipal institutions than would purely local transactions'.7
(v)
(vi)
English courts will regard as void any contract, recognition of which constitutes a hostile act against a friendly state,8 such as a contract whose object was a violation of Indian law putting an embargo on the shipping of goods from India to South Africa,9 or which involved commission of a criminal offence in the friendly foreign state.10 Thus, in Regazzoni v. KC Sethia (1944) Ltd, 11 under an agreement between the parties, the defendants undertook to sell and deliver to the plaintiff, CIF Geneva, a quality of jute bags which to the knowledge of both parties were to be shipped from India and to be resold to South Africa, contrary to the Indian regulation prohibiting export to South Africa. The contract was to be governed by English law. The agreement was held to be unenforceable by the English courts; An agreement to defraud revenue is illegal, even the revenue of a foreign country. Though the English courts would not enforce the revenue of penal laws of another country, yet they would take notice of the laws of a friendly country (whether revenue, penal or political laws or howsoever else described) to the extent that they would not enforce an agreement by two persons knowingly to break those laws or to procure someone else to break them.12 The reason for this is that it would be a breach of the comity, which should exist between countries, especially between countries of the British Commonwealth. The courts of one country should not help break the laws of another.13 Therefore, a transaction between a husband and wife, the result of which was the breach of the revenue law of a foreign country, was illegal.14 Courts would not enforce a contract to smuggle goods into or out of a foreign and friendly country.15 A breach of a provision fixing export price contrary to public policy of another country was not binding in India.16 But agreement and re-arrangement to avoid tax are made every day and are not illegal.17 A cheque issued in England on an English bank by a Pakistani resident in
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England to return for a cheque of an equivalent amount issued in England on a Pakistani bank, is not affected with illegality and Pakistan Exchange regulations do not affect the transaction between persons resident in England.18 In Howard v. Shirlstar Container Transport Ltd, 19a pilot was engaged under a contract by the defendant company to remove an aircraft from Nigerian airspace for a fee of GBP 25,000, of which GBP 12,500 were to be paid on the defendant's receiving a telex confirmation that the plaintiff had removed the aircraft and the balance was to be paid one month thereafter. The pilot, when warned by the Head of the Federal Civil Aviation Department in Nigeria, that his life was in imminent danger and the Government could not protect him, flew the aircraft out of Nigeria without obtaining the air traffic control clearance, and in breach of the Nigerian law, landed in the Ivory Coast where he sent the telex to the company confirming removal of the aircraft and returned it to Nigeria allowing the pilot to return to the United Kingdom. The plaintiff-pilot claimed the second installment of his stipulated fee with interest and the defendant put up a counter-claim for recovery of the first installment, on the ground that the plaintiff had not successfully removed the aircraft and that he had committed breach of the Nigerian law and performed the contract illegally in Nigeria, which was therefore unenforceable in England. It was held that since the plaintiff had succeeded in removing the aircraft from Nigeria and landed it safely in the Ivory Coast, and since payment of the first installment was payable irrevocably on completion of the flight out of Nigeria and the receipt of the telex, he was entitled to both installments of the fee. It was further held that although the Court would not normally enforce a contract which would enable a plaintiff to benefit from his criminal conduct, since to do so would be an affront to the public conscience, there were circumstances where it would be wrong to disqualify a plaintiff from recovery, even though his claim was derived from conduct which constituted a statutory offence. One such circumstance was where the plaintiff committed the criminal act in order to escape danger to his life. Accordingly, although the plaintiff's claim would otherwise be unenforceable in an English court because his breach of Nigerian air-traffic control regulations was central to his performance of the contract, public conscience would not be affronted, if the contract was enforced against the defendant, because the plaintiff's criminal conduct was designed to free himself and his wireless operator from pressing danger. Straughton LJ. observed:
For the avoidance of doubt, I would add that I would have reached the same conclusion if a similar offence or offences had been committed in England under English Law in similar circumstances...But, if the offences had been committed to escape danger to life, I would not have held that Captain Howard (the plaintiff) was disqualified from claiming his fee in a civil act ion here.
Void Agreements 4 [1988] QB 448, [1988] 1 All ER 513 at 523, [1988] 2 WLR 735; see Attorney-General of New Zealand v. Ortiz, [1982] 3 All ER 432, [1982] 3 WLR 570; affirmed in [1984] AC 1, [1983] 2 All ER 93, [1983] 2 WLR 809; Mansouri v. Singh, [1986] 2 All ER 619, [1986] 1 WLR 1393(CA) . 5 Societa Anonmina Lucchesse Olii E Vini Lucca v. Gorakharam Gokalchand, (1964) 2 Mad 90, AIR 1964 Mad 532 at 536, following Dhanrajamal Govindram v. Shamji Kalidas & Co, [1961] 3 SCR 1020 at 1041, AIR 1961 SC 1285. 6 AIR 1994 SC 860 at 886, (1994) 1 SCC 644 (a case involving enforcement of foreign award). 7 AIR 1994 SC 880 at 886 following Graveson, Conflict of Laws, 7th edn, p. 165. 8 Foster v. Driscoll, [1929] 1 KB 470, [1928] All ER Rep 130(CA) ; Regazzoni v. KC Sethia (1944) Ltd, [1958] AC 301, [1957] 3 All ER 286, [1957] 3 WLR 752. 9 Regazzoni v. KC Sethia (1944) Ltd, [1958] AC 301, [1957] 3 All ER 286, [1957] 3 WLR 752. 10 Euro-Diam Ltd v. Bathurst, [1990] QB 1, [1988] 2 All ER 23 at 33, [1988] 2 WLR 517. 11 [1956] 2 All ER 487 affirmed in [1958] AC 301, [1957] 3 All ER 286, [1957] 3 WLR 752.
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12 Regazzoni v. K C Sethia (1944) Ltd, [1956] 2 All ER 487 affirmed in [1958] AC 301, [1957] 3 All ER 286, [1957] 3 WLR 752; Foster v. Driscoll, [1929] 1 KB 470, [1928] All ER Rep 130. 13 Regazzoni v. K C Sethia (1944) Ltd, [1956] 2 All ER 487 at 490, affirmed in [1958] AC 301, [1957] 3 All ER 286, [1957] 3 WLR 752. 14 Emery v. Emery, Re Emery's Investments Trusts, [1959] Ch 410, [1959] 1 All ER 577, [1959] 2 WLR 461. 15 Regazzoni v. KC Sethia (1944) Ltd, [1958] AC 301, [1957] 3 All ER 286 per Lord Somervell at 297, [1957] 3 WLR 752; Foster v. Driscoll, [1929] 1 KB 470 at 510, 521, [1928] All ER Rep 130 (a partnership contrary to USA laws for importing liquor into the USA, contrary to prohibition laws was illegal, even if the object was not achieved). 16 Naihati Jute Mills Ltd v. Khyaliram Jagannath, AIR 1968 SC 522 at 528. 17 Ionian Bank Ltd v. Couvereur, [1969] 2 All ER 651 per Lord Denning at 655, [1969] 1 WLR 781(CA) . 18 Sharif v. Azad, [1967] 1 QB 605, [1966] 3 All ER 785, [1966] 3 WLR 1285(CA) . 19 [1990] 3 All ER 366 at 374 (CA).
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER II Of Contracts, Voidable Contracts and Void Agreements/S. 24.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER II Of Contracts, Voidable Contracts and Void Agreements S. 24. Agreements void, if considerations and objects unlawful in part.-If any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the agreement is void. Illustrations A promises to superintend, on behalf of B, a legal manufacturer of indigo, and an illegal traffic in other articles. B promises to pay to A a salary of l0,000 rupees a year. The agreement is void, the object of A's promise, and the consideration for B's promise, being in part unlawful.
Entire or Divisible Agreements Section 24 follows the general principle of s. 23. The rule presupposes that the agreement is indivisible. A promise made for an unlawful consideration cannot be enforced, and there is no promise for a lawful consideration if there is anything illegal in a consideration, which must be taken as a whole. On the other hand, it is well settled, that if several distinct promises are made for one and the same lawful consideration, and one or more of them are such as the law will not enforce, that will not of itself prevent the rest from being enforceable. The test is whether a distinct consideration, which is wholly lawful, can be found for the promise called in question. The general rule is that where the illegal part cannot be severed from the legal part of a covenant, the contract is altogether void; but where they can be severed, whether the illegality be created by statute
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or by the common law, the bad part may be rejected the good part retained.20 While applying the doctrine of severance, the courts have been guided by two underlying principles:
(i) (ii)
the courts will not bring about a new contract for the parties; the courts will not sever the unenforceable part of a contract, unless it accords with public policy to do so.21
But it has been stated that any alteration of a contract for the purposes of enforcement involves making a new contract or rewriting the old, and the justice of enforcing part ought not to depend on the precise form in which the parts of the whole are originally put together. Ease of excision or alteration is one consideration, their extent is another.22 Section 24 did not apply where neither the consideration nor the object was illegal.23 20 Pickering v. Ilfracombe Ry Co, (1868) LR 3 CP 235 at per Willies J at 250; VRM Ramaswamy Chettyar v. CTMN Nachiappa Chettyar, AIR 1940 Rang 45, 186 IC 709 per Roberts CJ (review of English cases). 21 See Chitty on Contracts, 28th edn, p. 938, para 17-187. 22 United City Merchants (Investments) Ltd v. Royal Bank of Canada, [1982] QB 208 per Stephenson LJ at 229, [1981] 3 All ER 142 at 157-58, on appeal [1982] 2 All ER 720, [1982] 2 WLR 1039. 23 N Purkayastha v. Union of India, AIR 1955 Assam 33 at 43.
Indivisible Agreements: Void The entire agreement is void, if a part of consideration is unlawful, and the unlawful part cannot be severed from the legal part of the agreement,24or if there is one entire consideration for two several agreements, one of them for doing an unlawful act,25 or where each part of the contract is an inducement to every other part of it, there is an entire contract for a single consideration, and the consideration cannot be divided into parts.26 In Bengal, an agreement between a zamindar and his tenant for paying an enhanced rent exceeding the rent previously paid by more than two annasin the rupee, was held void, as it directly contravened the provisions of the Bengal Tenancy Act, 1885 and the court would not, in such a case, sever the good part from the bad, and pass a decree for the good part for so much of the enhanced rent as does not exceed the twoannas in the rupee.27 Doing so would create a new agreement between the parties. An agreement with a pleader, to pay the fee of Rs. 500/-, if he won the suit and also to transfer to him part of the property in dispute, was not severable and therefore wholly void;28 so was the whole of the agreement void, where the part of a consideration for an agreement was the withdrawal of a pending criminal charge of trespass and theft;29 a promissory note for an amount which included an item in respect of lotteries prohibited by law;30 or an amount in respect of gambling losses.31 Where A promised to pay Rs. 50/- per month to a married woman B, in consideration of B living in adultery with A and acting as his housekeeper, it was held that the whole agreement was void, and B could not recover anything even the services rendered to A as housekeeper.32 Where, in consideration of A agreeing to procure a divorce from her husband and marrying B, B advanced to A Rs. 300/-, of which part was alleged by B to have been paid for expenses of procuring the divorce and part for A's ornaments, it was held that on A's failure to perform the contract, B was not entitled to recover from A any part of the money advanced.33 Similarly, a suit will not lie to recover money advanced as capital for the purpose of a partnership,
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which is partly illegal. In Gopalrav Hanmant v. Kallappa bin Dharmappa, 34A held a licence for the sale of opium and ganja. The ganja licence contained a condition prohibiting A from admitting partners into the ganja business without the permission of the collector. No such condition was contained in the opium licence. B, who was aware of the prohibition, entered into the partnership agreement with A both in the opium and ganja business without the leave of the collector, and paid A Rs. 500/- as his share of the capital. Disputes arose between A and B, and B sued A for dissolution of partnership and for a refund of Rs. 500/- paid by him. It was held that B was not entitled to recover Rs. 500/- or any part thereof, one of the objects of the agreement being to carry on ganja business in partnership. In such a case, 'it is impossible to separate the contract or to say how much capital was advanced for the opium and how much for the ganja'. In a Rangoon case,35a person had obtained a licence under the Electricity Act, 191036and transferred it to his partners, the partnership having been formed after the grant of the licence. By s. 9 (3),Electricity Act, any agreement by which a licence is transferred is void. In a suit for partnership accounts, it was held that no part of the partnership agreement was separable from the rest and it was therefore void. Where a part of the consideration was expenditure for the marriage of a girl below 14 years of age, and the rest was allegedly for other small expenses, the whole contract was void under s. 24, the marriage being prohibited by the Child Marriage Restraint Act,371929.38A stood bail for B, who was charged with an offence. As an indemnity for the bail, A took from B, a sale deed of B's house and also a rent-note whereby B agreed thenceforward to occupy the house as A's tenant and pay rent to him. It was held that A could not sue B on the rent-note. 'The sale deed and the rent-note are part and parcel of the same transaction,' and 'the rent-note is tainted with the same illegality which affects the sale deed'.39 In a Bombay case,40 the municipality corporation agreed to give for a lump sum, a contract for recovering tax from pilgrims and levying a toll on vehicles and animals. It was beyond the powers of the municipality to grant the right to collect fees from pilgrims. The court held that as the transaction was void and tainted with illegality, it could not be enforced. 24 Saundatti Yellama Municipality v. Shripadbhat Seshbhat Joshi, (1932) 57 Bom 278, 35 Bom LR 163, 143 IC 331, AIR 1933 Bom 132; Bhagwat v. Anandarao, AIR 1925 Nag 302; Shri Mahadeo Jew Balkrishna Vyas,AIR 1952 Cal 763. 25 V R M Ramaswamy Chettyar v. C T M N Nachiappa Chettyar, AIR 1940 Rang 45, 186 IC 709; Kathu Jairam Gujur v. Vishvanath Ganesh Javadekar, (1925) 49 Bom 619, AIR 1925 Bom 470, 89 IC 199. 26 Vedakannu Nadar v. Nanguneri Taluk Singikulam Annadana Chatram, AIR 1938 Mad 982. 27 Kristodhone Ghose v. Brojo Gobindo Roy, (1897) ILR 24 Cal 895, citing Pickering v. Ilfracombe Rly Co, (1868) LR 3 CP 235 at 250, and Baker v. Hedngecock, (1808) 39 Ch D 520. 28 Kathu Jairam Gujur v. Vishvanath Ganesh Javadekar, (1925) 49 Bom 619, AIR 1925 Bom 470, 89 IC 199. 29 Srirangachariar v. Ramasami Ayyangar, (1894) 18 Mad 189; Bindeshari Prasad v. Lekhraj Sahu, AIR 1916 Pat 284, 33 IC 711; Bani Ramchandra Salvi v. Jayawanti Govind Pandit, (1918) 42 Bom 339, AIR 1918 Bom 170, 45 IC 566; Nand Kishore v. International Mercantile Corpn (India) Ltd, AIR 1953 Cal 415. 30 Joseph v. Solano, (1872) 9 BLR 441. 31 Balgobind v. Bhaggu Mal, (1913) ILR 35 All 558, 21 IC 878. 32 Alice Mary Hill v. William Clarke, (1905) ILR 27 All 266; Naraini v. Pyare Mohan, AIR 1972 Raj 25. 33 Roshun v. Muhammad, (1887) Punj Rec No 46; Bai Vijli v. Nansa Nagar, (1885) 10 Bom 152. 34 (1901) 3 Bom LR 164; Chhitia Bai v. Rajkumar, AIR 1928 Nag 283 (part of transaction of registration of land did not have the sanction of the magistrate). 35 Ma Kyin Hone v. Ong Boon Hock, AIR 1937 Rang 47, 167 IC 707.
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36 Repealed by the Electricity Act, 2003 (36 of 2003). 37 Repealed by the Prohibition of Child Marriage Act, 2006 (6 of 2007). 38 Maheswar Das v. Sakhi Dei, AIR 1978 Ori 84 at 86. 39 Laxmanlal Kanakkirti Pandit v. Mulshankar Pitambardas Vyas, (1908) ILR 32 Bom 449. 40 Saundatti Yellama Municipality v. Shripadbhat Seshbhat Joshi, (1932) 57 Bom 278, 35 Bom LR 163, 143 IC 331, AIR 1933 Bom 132.
Divisible Contract Where some of the promises or considerations are unlawful and they can be separated from the lawful promises or considerations (as the case may be), the agreement is void only to the extent of the promises, which are unlawful or are based on unlawful consideration. The Law Commission of India had recommended a provision to deal with distinct promises.41 If in an agreement, different clauses are separable, the fact that one clause is void does not necessarily cause the other clauses to fall.42A person undertaking distinct engagements in one instrument to do certain acts which are legal, and others illegal, the performance of the legal act s can be enforced.43 In a Nagpur case,44 a share in the village was sold and the ex-proprietary rights in sir land appertaining to that share were surrendered. Although, the surrender of ex-proprietary rights was invalid, the sale of the share in the village was upheld, as the transactions were separable. In the case of a mortgage of an occupancy holding, the High Court at Allahabad, taking the view that the mortgage was illegal under the Agra Tenancy Act, 190145 refused to enforce the personal covenant to repay;46 but this decision seems open to question, the personal covenant being clearly separable.47In a latter case in the same court, it was held that the Act made the mortgage only inoperative and not illegal, and that no objection could be taken in any case to the enforcement of the personal covenant.48 Where a transaction of sale of lands and surrender of occupancy rights was contended to be void as being one transaction, it was held that only the surrender which defeated the tenancy law was invalid.49 Section 24 does not apply where the plaintiff is seeking to enforce an equity in respect of a perfectly valid security.50 41 The Law Commission of India in its 13th Report of 1958, recommended adding an explanation to this section: Explanation.--Where--(a) there are distinct promises based on distinct considerations, and(b) some of the promises are unlawful and can be separated from the promises that are lawful or some of the considerations are unlawful and can be separated from the considerations that are lawful, the agreement is void to the extent of the promises which are unlawful or are based on unlawful consideration. 42 Dip Narain Singh v. Nageshar Prasad, AIR 1930 All. 43 Life Insurance Corpn of India v. Devendrappa Bujjappa Kadabi, AIR 1987 Kant 129. 44 Dharamchand v. Jhamsa, AIR 1931 Nag 6, 130 IC 91. 45 See now the Agra Tenancy Act, 1926. 46 Har Prasad Tewari v. Sheo Gobind Tewari, (1922) 44 All 486, AIR 1922 All 134, 67 IC793. 47 Muhammad Khalilur Rahman Khan v. Mohammad Mazammilullah Khan, AIR 1933 All 468, 144 IC 373. 48 Gauri Datt Pandey v. Bandhu Pandey, AIR 1929 All 394, 119 IC 505; Lala Bhagwat Singh v. Hari Kishen Das, (1942) 197 IC 167, AIR 1942 Oudh 1. 49 Bhagwat v. Anandarao AIR 1925 Nag 302; Dharamchand v. Jhamsa, AIR 1931 Nag 6, 130 IC 91. 50 Rajendra Prasad v. Ram Jatan Rai, AIR 1917 All 290 (2) at 292.
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'Unlawful' Different consequences follow when a part of the consideration or 'object' of an agreement is not illegal, but merely void in the sense that it is not enforceable in law. In such a case, act ual performance of such part may be a good consideration, though a promise to perform it would not have been. Thus, a bond given by a judgment-debtor to the holder of a decree against him in consideration of the latter refraining form execution of the decree, though void under s. 257 A of the Civil Procedure Code, 1882 (now CPC , 1908), was not illegal. The decree-holder, therefore, on performing his part of the agreement, was held entitled to recover on the executed consideration51 being a voluntary lawful forbearance, but not upon the executory agreement. If the promise to postpone execution of the decree were illegal, the whole bond would be tainted with illegality, and the judgment-creditor would then have no right to enforce payment of the bond. But when the parties themselves treat debts, void as well as valid, as a lump sum, the court will regard the contract as an integral one, and wholly void. Thus, where a judgment-debtor agreed to pay without the sanction of the court, an amount in addition to the sum decreed towards a lump sum interest not awarded by a decree, it was held that the promise to pay such interest being void under s. 257A , CPC , 1882 (now CPC, 1908), the whole agreement was void.52 51 Bank of Bengal v. Vyabhoy Gangji, (1891) 16 Bom 618, (1891-92) 15-16 Bom 891(VI) . 52 Devlatsing v. Pandu, (1884) 9 Bom 176, (1885-86) ILR 9-10 Bom 118(VI) ; s. 257A has been omitted from the Code of Civil Procedure , 1908.
Section 24 and 57 The provisions of this section must be distinguished from those of s. 57 below. In a Bengal case, a Mahomedan husband agreed by a registered document, that he would pay over to his wife whatever money he might earn, and that he would do nothing without her permission, and that if he did so, she would be at liberty to divorce him. In a suit by the wife, to recover from him his earnings, it was held that though the latter part of the agreement might be unlawful, the suit was one to enforce the legal part, and the court gave a decree to the plaintiff for her maintenance at Rs. 12/- per month, stating that the fair construction of the agreement was not that the husband was to pay every rupee he earned, but that he was entitled to a reasonable deduction for expenses which he must necessarily incur.53 53 Poonoo Bibee v. Feyz Buksh, (1874) 15 Beng LR App 5.
Sections 24 and 58 Section 24 has no application to promises offered in the alternative.54 54 Mahadeo Prasad Singh v. Malhura Chaudhari, AIR 1931 All 589.
Mortgages The entire mortgage has been held void where it was executed for a certain sum misappropriated by the son of the mortgagor and also as compromise of police prosecution.55 Where the mortgagee was entitled to retain possession as a tenant on redemption, with a reduction in the mortgagor's debt to some extent, the amount reduced being illegal under rent restriction law, the covenant in the mortgage
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deed could not be enforced.56 The entire transaction was illegal where an occupancy holding (transfer illegal by law) was mortgaged with other properties,57 or with a covenant for indemnity,58 or with a personal covenant.59 55 Eastern Mercantile Bank Ltd v. VNT Philip, AIR 1960 Ker 194. 56 Gobind Ram v. Rajphul Singh, AIR 1973 Punj 94. 57 Sital Rai v. Ram Khelawan Pandey, AIR 1925 All 543. 58 Tulshi Ram v. Sat Narain, AIR 1921 All 392 (actual holding was illegal). AP Joseph v. EH Joseph AIR 1926 Rang 186, on appeal, AIR 1927 Rang 157 (covenant for indemnity void). 59 Har Prasad Tewari v. Sheo Gobind Tewari, (1922) ILR 44 All 486, AIR 1922 All 134, 67 IC 793 (personal covenant void).
Transfer of Property When a document transferring property has been once executed and registered, the transaction 'passes out of the domain of a mere contract into one of conveyance'.60It is then governed by the Transfer of Property Act, 1882 and s. 24, Contract Act had no application.61 A permanent lease by a mutawalli without the permission of the Waqf Board, is not void ab initio, it is voidable and till then, it is valid. Therefore, the lessee has a rights to transfer his right to the leasehold to another and its consideration was not unlawful under s. 24.62 60 Dip Narain Singh v. Nageshar Prasad, (1929) 52 All 338 per Sulaiman J. at 340, 122 IC 872, AIR 1930 All 1(FB) ; Gapoo Singh v. Har Charan, AIR 1935 Oudh 501, 158 IC 267; Life Insurance Corpn of India v. Devendrappa Bujjappa Kadabi, AIR 1987 Kant 129 at 135. 61 Dip Narain Singh v. Nageshar Prasad supra; Raghunath Ram v. Lachman Rai, AIR 1934 All 246 at 249; Gapoo Singh v. Har Charan supra ; but see Eastern Mercantile Bank Ltd v. VNT Philip, AIR 1960 Ker 194 (a case of mortgage for a sum embezzledn by mortgagor's son held void). 62 Ram Dhani v. Janki Rai Singh, AIR 1972 All 553 at 554; relying on Sundaramurthi Nainar v. Chotti Bibi, AIR 1942 Mad 641.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER II Of Contracts, Voidable Contracts and Void Agreements/S. 25.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER II Of Contracts, Voidable Contracts and Void Agreements S. 25. Agreement without consideration, void, unless it is in writing and registered, or is a promise to compensate for something done, or is a promise to pay a debt barred by limitation law.-An agreement made without consideration is void, unless-(1)
it is expressed in writing and registered under the law for the time being in force for the
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(2) (3)
registration of63 [documents], and is made on account of natural love and affection between parties standing in a near relation to each other; or unless it is a promise to compensate, wholly or in part, a person who has already voluntarily64 done something for the promisor, or something which the promisor was legally compellable to do; or unless it is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorised in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits.
In any of these cases, such an agreement is a contract. Explanation 1.--Nothing is this section shall affect the validity, as between the donor and donee, of any gift act ually made. Explanation 2.--An agreement to which the consent of the promisor 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. Illustrations (a) (b) (c) (d) (e) (f) (g)
A promises, for no consideration, to give to B Rs. 1,000/-. This is a void agreement. A, for natural love and affection, promises to give his son, B, Rs. 1,000/-. A puts his promise to B into writing and registers it. This is a contract. A finds B's purse and gives it to him. B promises to give A Rs. 50/-. This is a contract. A supports B's infant son. B promises to pay A's expenses in so doing. This is a contract. A owes BRs. 1,000/-, but the debt is barred by the Limitation Act.A signs a written promise to pay B Rs. 500/- on account of the debt. This is a contract. A agrees to sell a horse worth Rs. 1,000/- for R s. 10/-. A's consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration. A agrees to sell a horse worth Rs. 1,000/- for R s. 10/-. A denies that his consent to the agreement was freely given.
The inadequacy of the consideration is a fact which the court should take into account in considering whether or not A's consent was freely given.
Promises without Consideration Section 25 declares, long after consideration has been defined in s. 2(d), that (subject to strictly limited exceptions), it is a necessary element of a binding contract. This has already been assumed in s. 10. An agreement without consideration is void under this section and cannot be enforced.65 The present section goes on to state the exceptional cases in which consideration may be dispensed with, and saves them from the general rule.66 According to the Privy Council, s. 25 deals with the question of promises made without consideration.67 This section is exhaustive; and therefore, an agreement made without consideration is either enforceable under this section or not enforceable at all.68 A mere moral duty to perform a promise is without consideration and void;69 so is a mere promise to subscribe to a charitable institution,70 an agreement to pay cess on a property which was not liable to pay cess;71 as also a promise to take less than what is due and to give time for payment.72
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63 Substituted by the Amending Act, 1891 (12 of 1891), s. 2 and Schedule II, for the word 'assurances'. 64 Whitley Stokes rightly observed that this should be 'otherwise than at the desire of the promisor'. 65 Chitturi Sriramulu v. Somisetti Lakshminarayana, AIR 1927 Mad 1102; Sarwan Singh v. Malan, AIR 1929 Lah 169 at 170; Dawson's Bank Ltd. v. Maung Mya Thwin, AIR 1939 PC 219 at 221; Kavkutty Amma v. Kaliani Amma, AIR 1952 Tr & Coch 255 at 256; Ran Bahadur Singh v. Hanuwant Singh, AIR 1957 Raj 29 at 31; Rabindra Nath Sahu v. Maya Devi, AIR 1991 Pat 192 at 201. 66 Ram Rattan v. Basant Rai, AIR 1921 Lah 205 at 207. 67 Elvira Rodrigues Siqueria v. Godnicalo Hypolito Constancio Noronha, AIR 1934 PC 144 38 CWN 813, 151 IC 90; quoted in Bishun Chand v. Girdhari Lal, 61 IA 273, 56 All 376, AIR 1934 PC 147. 68 Ramaswami Pandia Thalavar v. Anthappa Chettiar, (1906) 16 Mad LJ 422 at 426. 69 Firm Gopal Co. Ltd. v. Firm Hazari Lal & Co., AIR 1963 MP 37 at 40. 70 Gopal Vinayak Deshmukh v. Trimbak Narayan Deshmukh, AIR 1953 Nag 195; Commn. of Income Tax v. Kameshwar Singh, AIR 1953 Pat 231 at 234 (promise to buy securities whose inter would go to the Viceroy's War Purposes Fund). 71 Bahadur Singh Singhee v. Sreejut Kumar Bedkantha Singha Roy, AIR 1947 Cal 70 at 73. 72 Maung Pu v. Maung Po Thant, AIR 1928 Rang 144; but see Lodd Govindoss Krishnadas Varu v. PMARM Muthiah Chetty, AIR 1925 Mad 660 at 666 (a party can give up portion of a claim); see also s. 63; further see commentary below and s. 2(d) above.
Adequacy of Consideration The most obvious example of an agreement without consideration is a purely gratuitous promise given and accepted. Such a promise has no legal force, unless it comes within the first class mentioned in the present section. But it is not enough that something, whether act or promise, appears on the face of the transaction, to be given in exchange for the promise. That, which is given, need not be of any particular value; it need not be in appearance or in fact of approximately equal value with the promise for which it is exchanged;73 but it must be something which the law can regard as having some value, so that the giving of it effects a real, though a very small change in the promisee's position.74 In other words, consideration must be real and not illusory, even though it may be inadequate; adequacy being a matter purely for the contracting parties to agree upon.75 The court will not inquire into the adequacy of the consideration.76 Third parties cannot challenge the existence or adequacy of consideration.77 Lack of consideration must be proved by the person who alleges it.78 The section, however, can only apply where the transaction is contractual in nature. Where a document in form and substance is a gift, no consideration is necessary.79 A document styled as release deed releasing the releaser's rights without consideration may operate as transfer by way of gift, if it clearly shows the intention to do so.80 A deed of settlement by the husband settling on his wife, the right, title and interest in dividends of certain shares for her life to which the wife is not a party, is a unilateral document in the nature of a gift.81 A resolution of an insurance company to donate a sum of money out of shareholders' dividend account and acceptance by the proposed trustees did not constitute a contract. There was no consideration because mere willingness to utilise the donation for a particular purpose cannot be regarded as consideration within s. 2 (d) of the Contract Act .82 Payment of the amount was merely gratuitous and acceptance thereof was a gift. 73 See also explanation to this section below. 74 See commentary below s. 2(d) above.
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75 Kulasekaraperumal v. Pathakutty Thalevana, AIR 1961 Mad 405; Anson's Law of Contract, twenty-second edn, p. 91, fourteenth edn p. 99; quoted in Keshub Mohindra v. Commissioner of Gift Tax, [1968] 70 ITR 1, (1969) 1 ITJ 293; Gaumont-British Picture Corporation Ltd. v. Alexander, [1936] 2 All ER 1686, 1691. 76 Hitchcock v. Coker, (1837) 6 A&E 438; 45 RR 522, [1835 42] All ER Rep 452; Gravely v. Barnard, (1874) LR 18 Eq 518; Alec Lobb (Garages) Ltd. v. Total Oil (GB) Ltd., [1985] 1 WLR 173 at 179, [1985] 1 All ER 303. 77 Sivarama Konar v. Thiruvadinatha Pillai, AIR 1957 TC 189; Sudhakar Sahu v. Achutananda Patel, AIR 1967 Ori 89. 78 Food Corpn. of India v. Surana Commercial Co., (2003) 8 SCC 636; Ranganayakamma v. K.S. Prakash, AIR 2009 SC 1218(Supp), (2008) 15 SCC 673. 79 Maharaja Kumar Gopal Saran Narain Singh v. Sita Devi, AIR 1932 PC 34, 34 Bom LR 470, 135 IC 753. 80 Kuppuswami Chettiar v. ASPA Arumugam Chettiar, AIR 1967 SC 1395; referring to Thayyil Mammo v. Kottiath Ramunni, AIR 1966 SC 337 at 340. 81 Provat Kumar Mitter v. Commissioner of Income Tax, AIR 1959 Cal 434, [1959] 37 ITR 91; Maharaja Kumar Gopal Saran Narain Singh v. Sita Devi 36 CWN 392, AIR 1932 PC 34. 82 A Lakshamanaswami Mudaliar v. Life Insurance Corporation of India, AIR 1963 SC 1185 at 1190, [1963] Supp 2 SCR 887.
Transfer of Immovable Property Section 25 has been held to apply to cases of sale and mortgage of immovable property. Section 4 of the Transfer of Property Act, 1882 declares that the chapters and sections relating to contracts in that Act shall be taken as part of the Contract Act.83 Thus, it has been held that in a mortgage effected by a duly registered deed was for want of consideration under this section,84 so was a duly registered sale deed, under which the purchaser had entered into possession.85 In the latter case, Farran CJ. however, was inclined to the opinion that the conveyances of land in the mofussil, perfected by possession or registration, where the consideration expressed in the conveyance to have been paid had not in fact been paid, could not be put in the same category as agreements void for want of consideration.86 83 Mulla, The Transfer of Property Act, 1882. 84 Manna Lal v. Bank of Bengal, (1876) ILR 1All 309 (decided before the Transfer of Property Act, 1882). 85 Tatia v. Babaji, (1896) 22 Bom 176 at per Fulton J at 181-82, (1897-98) ILR 21-22 Bom 699(VI), (decided before the Transfer of Property Act, 1882 was extended to the Bombay Presidency). 86 (1896) 22 Bom 176 at 183; see also Bai Hiradevi v. Official Assignee of Bombay, AIR 1955 Bom 122 (in a deed of gift, evidence to show that consideration had actually passed could not be given being barred by s. 92, Evidence Act, 1972).
Negotiable Instruments Section 118 of the Negotiable Instruments Act, 1881 affirming the well-settled general law, enacts that until the contrary is proved, the presumption shall be made that every negotiable instrument was made or drawn for consideration; and that every such instrument, when it has been accepted, endorsed, negotiated, or transferred, was accepted, endorsed, negotiated, or transferred for consideration.87 87 See the Indian Evidence Act, 1872, s. 114, illustration (c).
Agreement on Account of Natural Love and Affection
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The English doctrine that the 'solemnity of a deed' is of itself sufficient to make a promise expressed in a sealed writing, valid, has never been received in India.88 The fact that consideration has passed can be gathered from the document itself.89The Act does not allow any form alone to dispense with consideration, but only writing and registration coupled with the motive of natural love and affection between nearly related parties. The words 'near relation' have not been judicially construed. The courts would have to construe them uniformly without regard to variation in the reckoning of degrees of kindred.90 A registered agreement between a Mohammedan husband and his wife to pay his earnings to her is within this provision.91 So is a registered agreement, whereby A, on account of natural love and affection for his brother B, undertakes to discharge a debt due by B to C. In such a case, if A does not discharge the debt, B may discharge it, and sue A to recover the amount.92 But an agreement in writing and registered, whereby a member of an undivided Hindu family, without any valuable consideration, renounces all rights to the family property in favour of the remaining coparceners, is void unless it is executed for natural love and affection.93 It is not to be supposed that the nearness of relationship necessarily imports natural love and affection. Thus, where a Hindu husband executed a registered document in favour of his wife, whereby, after referring to quarrels and disagreement between the parties, the husband agreed to pay her for a separate residence and maintenance, and there was no consideration moving from the wife, it was held in a suit by the wife brought on the agreement, that the agreement was void as being made without consideration.94 It was further held that the agreement could not be said to have been made on account of natural love and affection, the recitals in the agreement being opposed to that view.95 But in Bhiwa Mahadshet Takete v. Shivaram Mahadshet Takete, 96A sued his brother B upon a registered instrument, whereby B had agreed to give A one-half of certain property. It appeared that A had previously sued B to recover that share from him, alleging that the property was ancestral, 'but the suit was dismissed on B taking a special oath that the property was ancestral. It further appeared on the plaintiff's own admission, that the brothers had long been on bad terms. Upon these facts, the Subordinate Judge held that the agreement was void for want of consideration and that it could not be said to have been made on account of natural love and affection so as to come within the first exception to the section, and the decision was affirmed by the District Judge. On appeal, the High Court held that the agreement was made for natural love and affection, and A was entitled to a decree. The court said:
The District Judge dismissed it the suit, holding the document void for want of consideration...The Subordinate Judge had held the same. He said: 'there was no consideration for the agreement. The defendant voluntarily agreed to give half of the plaint property to the plaintiff to secure reconciliation with the plaintiff.' It seems to us, however, that this is just the case to which s. 25 (1) of the Contract Act should be held to apply. The defendant had such natural love and affection for his brother that in order to be reconciled to him, he was willing to give him this property.
As natural love and affection cannot be inferred as a fact merely because no other motive of the promise is shown, it would seem that the court presumed it from the relation of the parties. One would have thought that the presumption, if any, was rebutted by the plaintiff's own admissions. A desire for a reconciliation prompted (as the learned judge of the High Court thought) by love and affection for the plaintiff, is not strongly evinced by the subsequent conduct of the defendant in declining to perform the contract and driving the plaintiff to a suit. But, however this may be, it appears anything but safe to hold that a promise by one brother to another, unsupported by any consideration, and made solely with the view to purchase peace, can be enforced in a court of law, on the bare supposition that the object was reconciliation, and that the reconciliation was prompted by natural love and affection. It is submitted that the Bombay decision is correct and the agreement in the Calcutta case could be supported on the same ground as the Bombay case. A contract to pay a certain sum of money to a near relative during his life, the consideration being
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natural love and affection and the document being registered, is enforceable as a contract against the heirs of the deceased promisor, by virtue of s. 25(1) read with s. 37, unless a contrary intention appears.1 It has also been held that an agreement by sons to pay their father every month, a sum of Rs. 50/- by way of pocket expenses, in consideration of the regard they had for him, did not require registration under this section2on the ground that an agreement did not require registration 'under the law for the time being in force for the registration of documents' being the Registration Act, 1908. 88 In England, the principle of formal operation of a deed is much older that the doctrine of consideration. The doctrine of consideration was introduced only when informal contracts were made act ionable by a series of ingenious fictions; but this is not material for Indian purposes. 89 Jagannath Sabar v. Gana Bewa, AIR 1990 Ori 164 at 167. 90 Nisar Ahmad Khan v. Rahmat Begam, AIR 1927 Oudh 146 (a Moslem wife's parents stand in a near relation to her husband). 91 Poonoo Bibee v. Fyez Buksh, (1874) 15 Beng LR App 5. 92 Venkatasami Naidu v. Rangasamy Naidu, (1902) 13 Mad LJ 428. 93 Appa Pillai v. Ranga Pillai, (1882) 6 Mad 71, (1882-84) ILR 5-7 Mad 327(VI) . The facts of the case did not show that the agreement was made on account of natural love and affection. 94 Rajlukhy Dabee v. Bhootnath, (1900) 4 Cal WN 488. 95 If the facts had disclosed such a state of circumstances, such as violence on the part of the husband, which would render it unsafe for the wife to continue to live with him, or such continued ill usage as would be termed 'cruelty' in the English court, which would have justified the wife in obtaining a separate residence and maintenance, this would have been sufficient consideration to support the agreement. 96 (1899) 1 Bom LR 495; Ram Dass v. Kishan Dev, AIR 1986 HP 9. 1 Vijaya Ramraj v. Vijaya Ananda, AIR 1952 All 564 at 576. 2 Lalit Mohun Dutta v. Basudeb Dutta, AIR 1976 Cal 430.
Compensation for Voluntary Services The second sub-section further extends the exceptions allowed in English common law,3to the principle that the past consideration is no consideration at all, since the consideration and the promise have to be simultaneous. Under English law, past consideration is no consideration, unless it is an act done or promise given at the request of the promisor.4 The language of the Act is quite clear, and must be taken as expressing a deliberate policy; it is, therefore, not necessary to refer to the English law. Section 25 (2) covers cases, where a person without the knowledge of the promisor, or otherwise than at his request, does the latter some service and the promisor undertakes to recompense him for it. Such promise does not need consideration to support it.5 'Promise' There must be a promise in the first instance. A clause in a memorandum and articles of association of a company providing for payment to a promoter of the company does not constitute a promise by the company to the promoter. Hence, a claim against a company for remuneration by a promoter of the company cannot be supported under this section, where such a claim is based merely on the provisions of the memorandum and articles of association of the company.6 'Person who has voluntarily done' The promise is enforceable under s. 25(2), if it promises to compensate that person who has voluntarily done something for the promisor. A agreed to pay an amount to B in consideration of
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having trained A in the art of singing and dancing at his own cost. It was found that not B, but B's sister had rendered those services to A. In a suit by B, it was held that as B had done nothing for the defendant, there was no consideration for the agreement.7 'For the Promisor' The act voluntarily done must have been done for the promisor. An act done at the request of the promisor is directly covered by the definition of consideration in s. 2(d). The present provision 'appears to cover cases where the person without the knowledge of the promisor, or otherwise than at his request does the latter some service, and the promisor undertakes to recompense for it'.8 In Durga Prasad v. Baldeo 9 the defendants promised by a written agreement, to pay to the plaintiff, a commission on articles sold by the defendants in a market establish by the plaintiff at his expense. The market was not established at the desire of the defendants, nor was it erected for them, but this was done at the request of the collector of the place. The only ground for making the promise was the expense incurred by the plaintiff in establishing the ganj (market). The court held that the promise could not be supported under the present sub-section. Further, the act voluntarily done must have been done for a promisor, who was in existence at the time when the act was done. Hence, work done by a promoter of a company before its formation, cannot be said to have been done for the company.10Again, the act done must have been done for a promisor, who is competent to contract at the time when the act was done. Hence, a promise by a person, that on attaining majority, he will repay money lent to him during his minority does not come within the exception, the promisor not being competent to contract when the loan was made to him,11 but a contrary view has also been taken.12 Past and Voluntary Service A case cannot come within the exception unless the act has been done voluntarily.13 The term 'voluntarily done' used in the section denotes something performed or done of one's own will, impulse and choice, and not under constraint, prompting or suggestion of another.14 This exception did not apply to the promise to pay bonus declared ex post facto to the servants of a company after the winding-up petition, as the services had not been rendered voluntarily, but in return of wages.15 But where bonus is promised for extra work put in by the servants, the consideration is lawful.16 In Raja of Venkatagiri v. Sri Krishnayya Rao Bahadur Zamindar, 17 a Privy Council case, B agreed to give his son in adoption, if A agreed to advance money to defray the expense of defending any suit challenging the adoption. There was litigation, and A advanced money towards the cost. Thereafter A died, and A's son advanced money to the adopted son. While the adoption suit was pending before the Privy Council, the adopted son passed a promissory note in favour of A's son, who agreed that if the adopted son was unsuccessful before the Privy Council, the promissory note would not be enforced. The adopted son was successful, and A's son filed a suit on the promissory note. It was held that s. 25(2) was not applicable, because to invoke the aid of that provision, it has to be proved that the payment had been made voluntarily, and this had not been established. It was held that the money was advanced to give effect to the undertaking originally made by A, not purely on the request of the adopted son. A promise to pay a woman an allowance for past cohabitation, has been regarded as an undertaking by the promisor to compensate the promisee for past services voluntarily rendered to him,18 but the correctness of these decisions can be doubted.19 It is true that in English law, past cohabitation, though no better in law than any other past consideration, is not an unlawful consideration;20 so as to make void a formal instrument given to secure an allowance therefore. But the Indian decision can be supported, if the cohabitation is at the time such, a lawful voluntary service, so as to be a proper
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subject for compensation.21 The Bombay High Court holds to the contrary,22 and dissents from these decisions. The intention of the promisor must have been to compensate for the past voluntary services. In Abdallakhan Daryakhan v. Purshottam Damodar, 23 a son had sent money to his father from time to time, not intending to make a loan. Later, at a time when the father was heavily indebted, he transferred some immovable property to his son. The transaction was held not to fall within the sub-section, as the real intention was not to compensate the son, but to defraud the father's creditors. 3 As to the English law, see Anson's Law of Contract 29th edn., 2010, p. 95 onwards; Chitty on Contracts, 28th edn., p. 183, paras 3-025 to 3-029. 4 See above s. 2(d)--'past consideration'. 5 Sindha Shri Ganpatsingji Himatsingji v. Abraham, (1895) 20 Bom 755 at 758; quoted in Govind Ram v. Piran Ditta, (1935) 16 Lah 456, 158 IC 243, AIR 1935 Lah 561(FB) . 6 Ahmedabad Jubilee S&M Co. v. Chhotalal Chhaganlal, (1908) 10 Bom LR 141; Eley v. Positive Government Security Life Insurance Co., (1876) 1 Ex D 88. 7 Bachhu Ram v. Chunder Tawaif, AIR 1916 Pat 80 at 81. 8 Sindha Shri Ganpatsingji Himatsingji v. Abraham, (1895) 20 Bom 755 per Farran CJ, at 758, (1895-96) ILR 19-20 Bom 1074(VI) ; but possible future services would be no consideration: Basanta Kumar Chowdhury v. Madan Mohun Chowdhury, AIR 1919 Cal 765, (1918-19) 23 CWN 639, 46 IC 282; Govind Ram v. Piranditta, AIR 1935 Lah 546. 9 (1881) ILR 3 All 221. 10 Ahmedabad Jubilee S&M Co. v. Chhotalal Chhaganlal, (1908) 10 Bom LR 141 at 143; it is well settled in England that a company cannot ratify acts of its promoters before it was formed. 11 Ramaswami Pandia Thalavar v. Anthappa Chettiar, (1906) 6 Mad LJ 422; Suraj Narain Dube v. Sukhu Aheer, (1928) 51 All 164, 112 IC 159, AIR 1928 All 440; Ram Sarup v. Brij Mohan Lal, AIR 1938 Oudh 14 at 15; Govind Ram v. Piran Ditta, (1935) 16 Lah 456, 158 IC 243, AIR 1935 Lah 561; See also s. 11--'Ratification'. 12 Kundan Bibi v. Sree Narayan, (1906) 11 CWN 135; followed in Karm Chand v. Basant Kaur 11 IC 321; see also s. 11--'Ratification'. 13 Kalipada Das v. Durgadas Roy, (1923) 27 CWN 769, 73 IC 10, AIR 1923 Cal 677; Powell v. Braun, [1954] 1 WLR 401, [1954] 1 All ER 484. 14 State Bank of Hyderabad v. Ranganath Rathi, AIR 1966 AP 215. 15 TV Krishna lyer v. Official Liquidator, AIR 1952 Tr & Coch 99 (but an agreement to pay a bonus in the future is just as enforceable as an agreement to pay wages alone). 16 P Kanakasabapathy Mudaliar v. Hajee Oosman Sahib, AIR 1925 Mad 192 at 194. 17 AIR 1948 PC 150. 18 Dhiraj Kaur v. Bikramjit Singh, (1881) 3 ILR All 787; Man Kaur v. Jasodha Kaur, (1877) ILR 1 All 478; Lakshminarayana Reddiyar v. Subhadri Ammal, (1902) 13 Mad LJ 7 at 13; Chandrakali v. Shambhunath, AIR 1935 Oudh 71 at 72; see also commentray below s. 23--'Immoral'. 19 Doubt is supported by Husseinali Casam Mahomed v. Dinbai, (1923) 86 IC 240 at 243, (1923) 25 Bom LR 252, AIR 1924 Bom 135. 20 Gray v. Mathias, (1800) 5 RR 48, [1775-1802] All ER Rep 534; Beaumont v. Reeve, [1846] 8 QB 483, 70 RR 552. It is doubtful whether the effect given to the present sub-section by applying these authorities to it was contemplated by the framers of the Act. 21 See also commentary below s. 23--'Immoral'; in any case, adulterous intercourse will not support a subsequent promise of compensation under this clause--Alice Mary Hill v. William Clarke, (1904) ILR 27 All 266. 22 Kisandas Laxmandas Bairagi v. Dhondu Tukaram Narwade, (1919) 22 Bom LR 762, 57 472, (1920) 44 Bom 542, AIR 1920 Bom 142; Husseinali Casam Mahomed v. Dinbai, (1923) 86 IC 240, (1923) 25 Bom LR 252, AIR 1924 Bom 135; Sabava Yellappa v. Yamanappa Sabu, AIR 1933 Bom 209, 35 Bom LR 345; Istak Kamu Musalman v. Ranchod Zipru Bhate, (1947) Bom 206, (1946) 48 Bom LR 775, AIR 1947 Bom 198.
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23 (1947) Bom 807, AIR 1948 Bom 265, (1947) 49 Bom LR 875.
Promise to pay a Time-barred Debt In order to invoke the provisions of s. 25(3), the following conditions must be satisfied:
(i) (ii) (iii)
it must refer to a debt which the creditor but for the period of limitation, might have enforced; there must be a distinct promise to pay wholly or in part such debt; the promise must be in writing signed by the person or by his duly appointed agent.
Under s. 25(3), a debtor can enter into an agreement in writing to pay the whole or part of a debt, which the creditor might have enforced but for the law of limitation,24 and a suit can lie on a written promise to pay the barred debt as it is a valid contract;25 such a promise constitutes novation, and hence, can form a basis of a suit independently of the original debt.26 The reason for this provision is that the debt is not extinguished; only the remedy gets barred by passage of time,27 and this provision does not revive a dead right but merely resuscitates the remedy to enforce the right, which already exists.28 The reason for upholding these promises was thus stated soon after the Act came into force by Westropp CJ.:29
The general rule of law, no doubt, is that a consideration merely moral, is not a valuable consideration such as would support a promise;30 but there are some instances of promise which it was formerly usual to refer to the now exploded principle of previous moral obligation, and which are still held to be binding, although that principle has been rejected. Amongst those instances is...a promise (in writing) in renewal of a debt barred by the Statute of Limitations. The efficacy of such promises is now referred to the principle that a person may renounce the benefit of a law made for his own protection.
Debt The expression 'debt', here, means an ascertained sum of money.31 In its ordinary meaning, it is a sum payable in respect of money demand recoverable by action.32 The debt must be existing.33 A promise, therefore, to pay the amount that may be found due by an arbitrator on taking accounts between the parties, is not a promise to pay a 'debt' within the section.34 But the expression 'debt' in this clause also to includes a judgment-debt; and a promise; therefore, to pay the amount of a decree barred by limitation does not require any consideration to support it.35 Debt Barred by Limitation Section 25(3) applies only where the debt is one which would be enforceable against the defendant but for the law of limitation. Where a debt is not binding on the defendant for other reasons, and consequently, not enforceable against him, there is no question of applicability of s. 25(3).36 An insolvent, who has obtained his final discharge, is under no legal obligation to pay any debt incurred therein, and any promise to pay it is accordingly without consideration. Such a debt is said to be barred by insolvency, and the Contract Act contains no exception in favour of a promise to pay it.37 Debt of the Promisor This exception applies only where the promisor is a person who would be liable for the debt, if not
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barred, and does not cover promises to pay barred debts of third persons.38A wife's pronote for a barred debt of the husband is not enforceable, as it is without consideration and not covered by s. 25(3) of the Contract Act.39 A karta of a joint Hindu family cannot promise to pay a barred debt under s. 25(3) and thus revive it.40 A Hindu son's agreement to pay his deceased father's barred debt is available only against the joint family property, which has come into his hands.41 A Christian son has no pious duty to pay the debt of his father; thus a promissory note executed by him for the debts due from the father is without consideration and therefore void, whether the debt due from the father is or is not barred.42 Promise to Pay A promise to pay a time-barred debt is a condition precedent for application of the section;43 in the sense that payment would be made in the future.44 The promise must be express,45 and unequivocal.46 An endorsement on the back of the time-barred promissory note to be valid within s. 25(3), must contain an undertaking to pay. It does not fall within s. 25(3) if it merely states that it was valid for three years without expressing promise to pay.47 Where in reply to a landlord's demand for arrears of rent including rent for the time-barred period, the tenant replied asking whether rent should be paid in cash or by cheque without specifying the amount or the period for which it was to be paid, the court held that s. 25(3) did not apply in a suit for arrears of rent for a period beyond the period of limitation.48 Absolute or Conditional Promise A promise to pay may be absolute or conditional. If it is absolute, if there is no 'but' or 'if', it will support a suit without anything else; if it is conditional, the condition must be performed before a suit upon it can be decreed.49 If the promise is to pay a barred debt 'within a month,' the promisee must wait for a month before he can sue on the promise.50 If the debtor promises to pay a barred debt out of his share of the profits of the business started by him in partnership with his creditor, the latter cannot recover the debt except in the manner provided in the agreement.51 Promise to Pay and 'Acknowledgment of Debt' under the Limitation Act The distinction between an acknowledgment under s. 18 of the Limitation Act, 196352 and a 'promise' within the meaning of this section is of great importance.53 Both an acknowledgment and a promise are required to be in writing, signed by the party or his agent authorised in that behalf; and both have the effect of creating a fresh starting point of limitation.54But while an acknowledgment under the Limitation Act, 1963 is required to be made before the expiration of the period of limitation, a promise under this section to pay a debt may be made after the limitation period.55 Limitation for filing the suit is reckoned with reference to such promise.56 After the period of limitation expires, nothing short of an express promise will provide a fresh period of limitation;57 an implied promise is not sufficient.58 If there are two debts, one barred and the other not barred, the promise to pay the latter is not a promise to pay the time-barred one.59 Where a question arises whether a writing relating to a barred debt amounts to an acknowledgment or to a promise, the court must consider the language of the particular document before it in every case;60 the court must consider the words in each case weighed on their merits with reference to the circumstances of the case to decide whether they do or do not import a promise to pay.61 If it amounts to an acknowledgment, the writing could not avail the plaintiff under this section; but it is otherwise where it amounts to a promise. An unconditional acknowledgment is sufficient for the purpose of s. 19 of the Limitation Act, 190862 because it implies a promise to pay, but such implied promise is not equivalent to a 'promise in writing'.63 However, it has also been held that an unconditional acknowledgment to pay has always been held to imply a promise to pay, because that is the natural inference if nothing is said to the
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contrary.64 A khata, or an account stated, has been held to be a mere acknowledgment and not a promise under this section;65 so also a bare statement of an account;66 the words 'baki deva' (balance due) at the foot of a Gujarati account;67 or a mablagbandi in Bengal;68 or an agreement to execute a mortgage to pay off a barred debt;69 or an intimation that a pay order had been issued in favour of the plaintiff, coupled with a request to call for payment.70 On the other hand, when a tenant wrote to his landlord in respect of rent barred by limitation, 'I shall send by the end of Veyshak month,' it was held that the words constituted a promise under this section.71 A suit on a bond, executed in consideration of a barred debt, and brought after the expiration of the period prescribed for its recovery, was maintainable.72 The words 'is payable' or 'to be paid', or 'to be taken' or 'to be given' 'baqi dena', or 'baqi lena',almost invariably amount to a promise to pay within, the meaning of s. 25(3) of the Contract Act.73 The mention of interest would make an implied promise to pay an express promise.74 Where a khata by the defendant ran, 'Rs. 200/- were found due on the account of the previous khata having been made up. For the same, this khata is passed. The moneys are payable by me. I am to pay the same, whenever you may make a demand', there was a promise to pay within the meaning of this section.75 It was a promise to pay under s. 25(3), when a notice was replied with words: 'please refer to your noticed the matter will be settled between our General Manager...', without any reference to any quantified amount.76 A letter confirming the balance 'payable by us as on 31-3-1992 in your account' was a promise to pay.77 Promise in Writing The promise to pay must be in writing in order to be enforceable,78 and if given on behalf of the government, must comply with the formalities under Art. 299 of the Constitution of India .79 Form of Promise To create a 'promise', it is not necessary that there should be an accepted proposal in writing. There can be a written proposal by the promisor accepted before act ion, for a written proposal becomes a promise when accepted.80 Hence, where the offer is rejected by the creditor, the creditor gets no right of suit.81 Where the entry is signed by the debtor, it implies a promise to pay under s. 25(3), whether the endorsement is written in the hand of the creditor that the amount is receivable by him or the debtor himself states that the amount is payable by him.82 The Calcutta High Court dissenting from this view, has held that the record in writing must come into existence after a proposal has been made and accepted.83 It is submitted that this decision is erroneous, and that on the facts of the case, where there was a written notice by the defendant to the plaintiff that a pay order had been issued to him, which was accepted by the plaintiff by calling at the specified place for payment, there had been a promise in writing, which, subject to the question of signature, fell within the ambit of s. 25(3), and could be sued upon despite subsequent repudiation by the defendant. An application by a debtor to a bank for loan to pay to the creditor named and other creditors, is not an agreement made between the debtor and the creditor.84 Unlike an acknowledgement under the Limitation Act, 1963, s. 18, a promise is made under s. 25(3) of the Act after the expiry of the period of limitation. There is no requirement under s. 25 that such a promise to pay must be an express promise, and the section covers even an implied promise. Even under s. 2(b) of the Act, the promise need not be express.85 A statement of fact of the promise to pay contained in a letter and shown as part of the cause of act ion for the claim can be considered under s. 25(3), even if the suit is barred on the original debt; but if there is no mention of interest, then interest cannot be awarded except from the date of the suit on the principal.86Section 25(3) of the Contract Act was applied to a renewed mortgage bond to pay two earlier mortgage bonds which, although for consideration, were void as mortgage bonds, because of
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para 11 of Schedule III, CPC, as there was no general incapacity to enter into a contract and the borrower was bound to restore the advantage to a lender under s. 65 of the Contract Act .87Section 25(3) would be applicable even in cases where there is no personal obligation, but the obligation arose because of accepting a legacy.88 An acknowledgment of liability contained in the balance sheet was covered by s. 25(3).89Section 25(3) also applies when there is a fresh agreement or contract between a debtor and creditor to pay a time-barred debt. A barred debt is a valid consideration for a promise to pay under s. 25(3), even if the promisor did not know of the debt being barred.90 Where a promissory note is executed in lieu of a time-barred debt, mention of the fact that the same is executed to pay off the debt, which is time-barred, is not required.91 It is not necessary to the operation of this clause that the promise should, in terms, refer to the barred debt. Thus, where A passed a promissory note for Rs. 325/- to B, and after the debt was time-barred, passed another note promising 'to pay Rs. 325/- for value received in cash,' it was held that it was open to B to show that the amount, though not paid in cash, referred to the debt due under the first note.92 'To Pay Wholly or in Part' A promise to pay a part of a time-barred debt would render the promisor liable to pay only that part and not the whole debt.93 But where a tenant gave an undertaking to the landlord to pay all arrears of rent, a part being time-barred, the landlord was entitled to recover the whole amount.94 Account Stated Where accounts are stated, the debts of items may be barred by limitation, and yet they can be taken into account while arriving at account stated, and be treated as paid off or discharged by the debts on the other side. The account stated thus results in an agreement by one party to pay to the other the balance found due on account stated and it furnishes a new cause of action to the party in whose favour the balance is found due.95 Where an account has been settled, it is immaterial that some of the items were statute-barred.96 In Siqueria v. Noronha, 97 the Privy Council pointed out the distinction between two forms of account and stated:
(i) (ii) (iii) (iv)
where it takes the form of a mere acknowledgment of a debt, the existence of which may be rebutted, in that case, there would be no consideration and no binding promise; and the other where the parties between themselves have agreed that the items on one side should be set against the items on the other side and the balance alone should be paid; there is then good consideration to pay the balance.98 the items on the smaller sides are set off and deemed to be paid by the items on the larger side and there is a promise for a good consideration to pay the balance arising from the fact that the items have been so set off and paid;99 when the entire claim is barred or all the items are barred, an implied promise contained in an account stated may not be sufficient. There must be an express promise under s. 25(3), but where only some of the items are barred, s. 25(3) applies.1
Where applicable, s. 25(3) excludes Art. 1, the Limitation Act, 1963 which prescribes the period of limitation for recovery of balance due on a mutual open and current account.2 Agent Generally or Specially Authorised in that Behalf The promise to pay the time-barred debt must be signed by the person sought to be charged thereby, or his agent generally or specially authorised.3 An executor can promise to pay the time-barred debts of the deceased.4An 'account stated' signed by a managing partner having actual authority to act and sign on behalf of the firm, bound the firm.5 A collector, as agent to the Court of Wards, is not an agent 'generally or specially authorised in that
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behalf' so as to bind a ward of the Court of Wards by a promise to pay a barred debt.6 A pleader cannot bind his client, unless he is especially authorised in that behalf,7 nor does a minor's guardian bind the minor.8 The manager of a joint Hindu family cannot bind the junior members of the family by a promise to pay a barred debt.9 Section 25(3) not Applicable An agreement between a creditor and debtor, entered into before the expiry of the period of limitation, whereby the date of payment is extended beyond the period of limitation is valid, though verbal, if there is a consideration for the agreement, for e.g., payment of interest up to the extended date. Such an agreement is not an acknowledgment within the meaning of s. 19 of the Limitation Act, 190810 nor it is a promise to pay a barred debt; it may be enforced at any time within three years from the date on which it was made.11An offer to pay compensation on certain terms which were not accepted by a party, is not a promise under s. 25(3) of the Contract Act .12 An equitable mortgage by deposit of title deeds in lieu of a barred debt is valid. It is not governed by s. 25(3), because it is a payment of the debt itself inasmuch as the mortgage virtually discharges the debt by assigning to the mortgagee, an interest corresponding in money value in the property mortgaged.13 24 Kishan Singh v. Bachna, AIR 1954 Pepsu 44 at 45. 25 David Sutherland Clark v. Rose Grimshaw, AIR 1923 Lah 481; Bharat National Bank Ltd. v. Bishan Lal, AIR 1932 Lah 212 at 213; Maidens Hotel v. Willnott, AIR 1935 Lah 984; but see S S Srinivasa Raghavan v. R Jayaraman, (1975) 1 Mad LJ 414 (although, plaint referred to the original debt, the written promise was produced as evidence only). 26 Lalji v. Ghasi Ram, AIR 1930 Oudh 287 at 289; Captain C R Smith v. Heptonstall, AIR 1938 Rang 134 at 136. 27 Bombay Dyeing and Mfg. Co. Ltd. v. State of Bombay, [1958] SCR 1122 at 1134, AIR 1958 SC 328; Nathu Singh v. Girwar Singh, AIR 1929 All 657; TS Kotagi v. Tahsildar Gadag, AIR 1985 Kant 265; but see Gharabharan v. Sri Radha Kishan, AIR 1958 All 313 at 316 (old contract is superseded by the new one and suit lies on the fresh contract independent of the old one). 28 Suresh Chandra v. Benoy Kumar Acharjya, AIR 1947 Cal 267 at 268. 29 Tilakchand v. Jitamal, (1873) 10 BHC 206, 215. 30 Eastwood v. Kenyon, (1840) 11 A&E 438, 52 RR 400, [1835-42] All ER Rep 133, QB; Beaumont v. Reeve, (1846) 8 QB 483, 70 RR 552; Firm Gopal Co. Ltd. v. Firm Hazari Lal & Co., AIR 1963 MP 37. 31 Sheobachan Pandey v. Madho Saran Choubey, AIR 1952 Pat 73. 32 Doraisami Padayachi v. Vaithilinga Padayachi, (1917) 40 Mad 31, AIR 1918 Mad 1145 at 1146 (FB); Bharat National Bank Ltd. v. Bishan Lal, AIR 1932 Lah 212. 33 Sriram Arjundas v. Governor-General in Council, AIR 1952 Cal 443 at 446. 34 Doraisami Padayachi v. Vaithilinga Padayachi, (1917) 40 Mad 31, AIR 1918 Mad 1145(FB) ; Sheobachan Pandey v. Madho Saran Choubey, AIR 1952 Pat 73 at 77. 35 Heera Lall Mookhopadhya v. Dhunput Singh, (1878) ILR 4 Cal 500; Billings v. The Uncovenanted Service Bank, (1881) 3 All 781; Shripatrav v. Govind Narayan, (1889) 14 Bom 390; Ibrahim Mallick v. Lalit Mohan Roy, (1923) 50 Cal 974, 79 IC 489, AIR 1924 Cal 388; Niaz Ahmad Khan v. Parshotam Chandra, (1930) 53 All 374, 129 IC 545, AIR 1931 All 154. 36 Pestonji Manekji Mody v. Bai Meherbai, (1928) 30 Bom LR 1407, 112 IC 740, AIR 1928 Bom 539 at 542; Mani Ram v. Badri Das-Behari Lal, AIR 1933 All 175 at 176; P R P L S Valliappa Chettiar v. N S Manida, AIR 1934 Mad 549 at 551; Mohammad Mumtaz Ali v. Raja Ram Shukul, AIR 1937 Oudh 300 at 301; Perumayammal v. Chinnammal, AIR 1967 Mad 189 at 190; Raghavendrarao Vakil and Co. v. B R Elavia, AIR 1973 Mys 203 at 205; but see Kundan Lal Munshi Ram v. Rugh Nandan Lal, AIR 1937 Lah 484. 37 Per Cur in Naoroji Nusserwanji Thoonthi v. Kazi Sidick Mirza, (1896) ILR 20 Bom 636 at 642-43. 38 Pestonji Manekji Mody v. Bai Meherbai, (1928) 30 Bom LR 1407, 112 IC 740, AIR 1928 Bom 539; Tulsabai Nathudas v. Narayan Ajabrao Raut, AIR 1974 Bom 72 at 75.
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39 Perumayammal v. Chinnammal, AIR 1967 Mad 189, following Pestonji Manekji Mody v. Bai Meherbai, (1928) 30 Bom LR 1407, 112 IC 740, AIR 1928 Bom 539. 40 HK Dasappa Setty v. Vedavathamma, AIR 1972 Mys 283, p. 285; relying on Mulla Hindu Law, 17th edn., p. 386, s. 249 (a)karta has no power to pass a promissory note so as to revive a debt barred by limitation). 41 Asa Ram v. Karam Singh, (1929) 51 All 983, 119 IC 109, AIR 1929 All 586; Champaklal Rupchand v. Rayachand Thakorbhai, AIR 1932 Bom 522, 34 Bom LR 1005. 42 Raghavendrarao Vakil and Co. v. BR Elavia, AIR 1973 Mys 203. 43 Deo Dutt v. Mahraj Lal Behari, AIR 1929 Oudh 529 (1) (acknowledgment not enough); Deoraj Tewari v. Indrasan Tewari, (1929) 8 Pat 706, 120 IC 470, AIR 1929 Pat 258 at 260; Babulal v. Badridas Jainnarayan, AIR 1930 Nag 236 at 237 (acknowledgment); Baru Mal v. Daulat Ram, AIR 1936 Lah 164; Ram Lal v. Karam Chand Gopal Chand, AIR 1938 Lah 155; Mahendrasinhji v. Abdul Vali, AIR 1952 Sau 79; Gharabharan v. Sri Radha Kishan, AIR 1958 All 313. 44 Sasi Kanta Acharjee v. Sonaulla Munshi, (1929) 121 IC 412, AIR 1929 Cal 444; Girdhari Lal v. Bishnu Chand, (1932) 54 All 506, 140 IC 783, AIR 1932 All 461; Shamlal v. Gulabchand, AIR 1935 Nag 221; Joti Prasad v. Raham Ali, AIR 1939 Lah 466; Suraiya Begam v. M Hamid Ali Khan, (1949) 23 Luck 47, AIR 1949 Oudh 48 at 51. 45 Girdhari Lal v. Bishnu Chand, (1932) 54 All 506, 140 IC 783, AIR 1932 All 461 (meaning thereby some such words as 'I promise to pay'), reversed on another point in Bishnu Chand v. Girdhari Lal, AIR 1934 PC 147; Shamlal v. Gulabchand, AIR 1935 Nag 221; but see Adivelu v. Narayanachari, AIR 2005 Kant 236. 46 Baru Mal v. Daulat Ram, AIR 1936 Lah 164. 47 Tulsi Ram v. Same Singh, AIR 1981 Del 165. 48 Daulat Ram v. Som Nath, AIR 1981 Del 354 at 356. 49 Bindae Dasya v. Chota, (1912) 16 Cal WN 636 at 638; Maniram Seth v. Seth Rupchand, (1906) 33 IA 165 at 172, (1906) 33 Cal 1047 at 1058; Bollapragada Ramamurthy v. Thammanna Gopayya, (1917) 40 Mad 701, AIR 1917 Mad 892, 35 IC 575. 50 Muhammad Abdulla v. Bank Instalments Co., (1903) 31 All 495 at 497. 51 Bindae Dasya v. Chota, (1912) 16 CWN 636. 52 Section 18(1), Limitation Act, 1963 provides:Where before the expiry of the prescribed period for a suit or application in respect of any property or right, an acknowledgment of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, or by any person through whom he derived his title or liability, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed. 53 Ram Mangal Prasad Shahi v. Achhaibar Prasad Shahi, AIR 1954 Pat 575; Tulsiram Srikishan Marawadi v. Zaboo Bhima Shankar, (1948) Nag 639, AIR 1949 Nag 229 at 234. 54 An acknowledgment in writing is not the only mode of creating a fresh starting point of limitation in the case of a debt not barred by limitation. An oral agreement to extend the time of payment may effect the same purpose--Shrinivas Subbaya v. Raghunath Narsinva, (1902) 4 Bom LR 50. 55 See Maganlal Harjibhai v. Amichand Gulabji, (1928) 52 Bom 521, AIR 1928 Bom 319, 122 IC 24; Sarangdhar Singh v. Lahhmi Narayan Wahi, AIR 1955 Pat 320; N Ethirajulu Naidu v. KR Chinnikrishan Chettiar, AIR 1975 Mad 333 at 336. 56 Madishetti Shekhar v. Puliyala Komurelli, AIR 2008 AP 131. 57 Ganga Prasad v. Ram Dayal, (1901) 23 All 502 at 504; Ram Bahadur Singh v. Damodar Prasad Singh, (1921) 6 Pat LJ 121, AIR 1921 Pat 29, 60 IC 514; Deoraj Tewari v. Indrasan Tewari, (1929) 8 Pat 706, 120 IC 470, AIR 1929 Pat 258; Janaka v. Sheo Charan, (1932) 7 Luck 313, 135 IC 390, AIR 1932 Oudh 49; Balakrishna Mansukhram v. Jayashankar Nayaran, AIR 1938 Bom 460, 40 Bom LR 1010, 178 IC 174; Nur Hossein Serang v. Tamijuddin, AIR 1941 Cal 449, 197 IC 321; Shivjiram Dhannalal Marwari v. Gulabchand Kalooram Marwari, (1941) Nag 144, 194 IC 806, AIR 1941 Nag 100; Ganeshprasad v. Rombati Bai, AIR 1942 Nag 92; Debi Prasad v. Bhagwati Prasad, AIR 1943 All 63; Suraiya Begam v. M Hamid Ali Khan, (1949) 23 Luck 47, AIR 1949 Oudh 48 at 51; Chacko Varkey v. Thommen Thomas, AIR 1958 Ker 31(FB) ; but see Bhansarlal Paramsukh v. Navalkishor Mungalal, AIR 1958 MP 21; Kishen Lal v. Gohli, AIR 1938 Lah 757; Brij Bihari Prasad v. Bir Bahadur Rai, AIR 1968 Pat 203; E Ethirajulu Naidu v. K R Chinnikrishnan Chettiar, AIR 1975 Mad 333; Tulsi Ram v. Same Singh, AIR 1981 Del 165; R Sureshchandra d' Co. v. Vadnere Chemical Works, AIR 1991 Bom 44. 58 Abdul Rafiq v. Bhajan, (1932) 53 All 963, 137 IC 243, AIR 1932 All 199; Girdhari Lal v. Bishnu Chand, (1932) 54 All 506, 140 IC 783, AIR 1932 All 461; Ghulam Murtaza v. Fasiunnissa Bibi, (1935) 57 All 434, 152 IC 370, AIR 1934 All 129; Shamlal v. Gulabchand, AIR 1935 Nag 221; Puliyath Govinda Nair v. Parekalathil Achutan Nair, AIR 1940 Mad
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678, 193 IC 399, (1940) 1 Mad 682; but see Adivelu v. Narayanachari, AIR 2005 Kant 236. 59 Nur Hossein Serang v. Tamijuddin, AIR 1941 Cal 449, 197 IC 321. 60 Govind Das v. Sarju Das, (1908) 30 All 268 (the terms of the document there considered are not clearly stated, but apparently there were no words of promise); Prahlad Prasad v. Bhagwan Das, (1926) 49 All 496, AIR 1927 All 677, 100 IC 593; Sriram Arjundas v. Governor-General in Council, AIR 1952 Cal 443; Suraiya Begam v. M Hamid Ali Khan, (1949) 23 Luck 47, AIR 1949 Oudh 48; Tulsiram Srikishan Marawadi v. Zaboo Bhima Shankar, (1948) Nag 639, AIR 1949 Nag 229. 61 Firm Shiv Ram-Punnull Ram v. Faiz, (1942) 23 Lah 282, AIR 1942 Lah 50 at 54-55 (FB). 62 Now s. 18 of the Limitation Act, 1963. 63 Tulsiram Srikishan Marawadi v. Zaboo Bhima Shankar, (1948) Nag 639, AIR 1949 Nag 229; Shamlal v. Gulabchand, AIR 1935 Nag 221. 64 Maniram Seth v. Seth Rupchand, (1906) 33 IA 165 at 172, (1906) 33 Cal 1047 at 1058; Hiralal v. Badkulal, AIR 1953 SC 225 at 227 approving Fateh Mahommed v. Ganga Singh, 10 Lah 748, AIR 1929 Lah 264 and Kahanchand Dularam v. Dayaram Amritlal 10 Lah 745, AIR 1929 Lah 263, but Gulam Murtaza v. Fasihunissa Bibi 57 All 424, AIR 1935 All 129 not approved; Sri Kapaleeswarar Temple v. T Tirunavukarasu, AIR 1975 Mad 164 at 167; R Sureshchandra d' Co. v. Vadnere Chemical Works, AIR 1991 Bom 44 at 47 (acknowledgment of liability in balance sheet covered by s. 25 (3)); Hannu Ram v. Jhanda Singh, AIR 1929 Lah 591, 129 IC 90; R Kumar d' Co. v. Chemicals Unlimited, AIR 2001 Bom 116. 65 Chowksi Himutlal Harivulubhdas v. Chowksi Achrutlal Harivulubhdas, (1883-84) ILR 7-8 Bom 503(VI), (1883) 8 Bom 194; Jethibai v. Putlibai, (1912) 14 Bom LR 1020. 66 Ramji v. Dharma, (1882) 6 Bom 683; Debi Prosad v. Ram Ghulam Sahu, (1914) 19 Cal LJ 263, AIR 1915 Cal 186, 25 IC 89; Shivjiram Dhannalal Marwari v. Gulabchand Kalooram Marwari, (1941) Nag 144, 194 IC 806, AIR 1941 Nag 100. 67 Ranchhoddas Nathubhai v. Jeychand Khushalchand, (1884) 8 Bom 405; Balakrishna Mansukhram v. Jayashankar Narayan, AIR 1938 Bom 460, 40 Bom LR 1010, 178 IC 174; but where the words 'baki lena' (balance payable) were used and the signature of the debtor appended, this was held to be a promise to pay: Fateh Mohammad v. Surya, AIR 1939 Lah 486 (but overruled in Firm Shiv Ram Punnun Ram v. Faiz, (1942) 23 Lah 282, AIR 1942 Lah 50(FB) ); Govind Das v. Sarju Das, (1908) 30 All 268; Ramaswami Pillai v. Kuppuswami Pillai, (1910) 20 Mad LJ 656; Shadi Ram v. Prabhu, AIR 1953 Punj 28 ('Baki rahe' not a promise); Ratanchand Damrumal v. Khet Singh, AIR 1954 MB 11 (the words 'balance struck' were held not sufficient); Firm of Sarabhai Hathi Singh v. Shah Ratilal Nathalal, AIR 1979 Guj 110 at 111 (baki devai), relying on Ranchhoddas Nathubhai v. Jeychand Khushalchand, (1884) 8 Bom 405 and Chunni Lal Ratanchanda Gujarathi v. Laxman Govind Dube, AIR 1922 Bom 183. 68 Sasi Kanta Acharjee v. Sonaulla Munshi, (1929) 121 IC 412, AIR 1929 Cal 444. 69 Hafiz Allah Bakhsh v. Hamid Khan, AIR 1931 All 160, (1931) All LJ 56, 130 IC 702; but a suit for specific performance may lie, or the plaintiff may sue for damages for failure to execute the mortgage. 70 Sriram Arjundas v. Governor-General in Council, AIR 1952 Cal 443 (on the ground, implied promise was not sufficient). 71 Appa Rao v. Suryaprakasa Rao, (1899) 23 Mad 94, (1899-1900) ILR 22-23 Mad 459(VI) . 72 Raghoji Bhikaji v. Abdul Karim, (1877) ILR 1 Bom 590; Chatur Jagsi v. Tulsi, (1877) 2 Bom 230. 73 Shanti Prakash v. Harnam Das, (1938) 19 Lah 193, 174 IC 277, AIR 1938 Lah 234(FB) ; Tulsiram Srikishan Marawadi v. Zaboo Bhima Shankar, (1948) Nag 639, AIR 1949 Nag 229; Prahlad Prasad v. Bhagwan Das, (1926) 49 All 496, AIR 1927 All 677, 100 IC 593. 74 Shanti Prakash v. Harnam Das, (1938) 19 Lah 193, 174 IC 277, AIR 1938 Lah 234 at 240 (FB) per Din Mohammad J. 75 Chandraprasad Hariprasad v. Varajlal Umedram, (1906) 8 Bom LR 644; Mahbub jan v. Nur-ud-Din, (1905) Punj Rec No 102; Bhagwan Singh v. Munshi Ram, (1917) Punj Rec No 66 at p. 246; cf Om Parkash Wishwa Mitter v. Abdul Rahim & Sons, AIR 1929 Lah 511, 117 IC 377 (added term fixing rate of interest, facts obscure). 76 SE Roadways v. SP Agro Industrial Corporation, AIR 1993 Bom 300. 77 In Re Business Forms Ltd. and Ashoka Agencies,AIR 1996 Cal 153. 78 Shivjiram Dhwinalal Marwari v. Gulabchand Kalooram Marwari, (1941) Nag 144, 194 IC 806, AIR 1941 Nag 100; Chela Ram-Sant Ram v. Official Receiver, AIR 1937 Lah 382; Asirvada Nadan v. S Vedamuthu Nadan, AIR 1925 Mad 1147.
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79 Sriram Arjundas v. Governor-General in Council, AIR 1952 Cal 443 at 446 (signature of Governor-General under s. 175 (3),Government of India Act, 1935). 80 Appa Rao v. Suryaprakasa Rao, (1899-1900) ILR 22-23 Mad 459(VI), (1899) 23 Mad 94 at 97-98; George Newnes Book Co. (India) Ltd. v. KVS Iyer, (1940) Rang 377, 189 IC 622, AIR 1940 Ran 159 at 160. 81 Soore Venkatapppayya v. Yalavarthi Venkatappayya, AIR 1946 Mad 72; Union of India v. Bikaner Textiles, AIR 1961 Raj 211 at 216; see also Lalam Sambayya v. Pattam Shemsherkhan, AIR 1963 AP 337 at 339 (proposal and acceptance with the consciousness of the purpose of the contract). 82 Sri Kishen Baldeo v. Dewan Chand Nain Sukh Das, AIR 1955 Ajmer 59 at 60. 83 Sriram Arjundas v. Governor-General in Council, AIR 1952 Cal 443. 84 HK Dasappa Setty v. Vedavathamma, AIR 1972 Mys 283 at 285. 85 Adivelu by Lrs v. Narayanachari, AIR 2005 Kant 236. 86 SS Srinivasa Raghavan v. R Jayaraman, (1975) 1 Mad LJ 414 at 418. 87 Lala Babu Ram v. Ganga Devi, AIR 1959 All 788. 88 Adiraja Ariga v. K Beeranna Rai, AIR 1957 Mad 14; P Rama Patter v. A Vishwanath Patter, 45 Mad 345, AIR 1922 Mad 23 (liability upon joint family properties for father's debts after his death); Puliyath Govinda Nair v. Parekalathil Achutan Nair, AIR 1940 Mad 678, 193 IC 399, (1940) 1 Mad 682. 89 R Sureshchandra & Co. v. Vadnere Chemical Works, AIR 1991 Bom 44 at 47. 90 C Simon v. MG Arogiasami Pillai, 25 IC 361, AIR 1915 Mad 242; Kasurchand Jiwaji v. Manekchand Devchand, AIR 1943 Bom 447 (document does not refer to the time-barred debt); Rao & Sons v. Bijayalaxmi Das, AIR 1969 Del 301 at 303; but see Ramaswami Pallai v. Kuppuswami Pallai, (1910) 20 Mad LJ 656 and Appa Rao v. Suryaprakasa Rao, (1899) 23 Mad 94. 91 Bishambar Dayal v. Vishwanath Agarwal, AIR 1985 All 12 at 16; Kasurchand Jiwaji v. Manekchand Devchand, AIR 1943 Bom 447; K K Rm Muthayee Achi v. A K K Rm S Rm Sabbiah, AIR 1951 Mad 903; Captain CR Smith v. Heptonstall, AIR 1938 Rang 134 at 135; State Bank of India v. Meghraj Contractor, AIR 2012 Chhat 149 (also binds the guarantor). 92 Ganapathy Moodelly v. Munisawmi Moodelly, (1909) 33 Mad 159; 5 IC 754; Sandhura Singh v. Kehr Singh, AIR 1936 Lah 1016; Abdullakin v. Maung Ne Dun, (1929) 7 Rang 292, 119 IC 738, AIR 1929 Rang 240; K K Rm Muthayee Achi v. A K K Rm S Rm Sabbiah, AIR 1951 Mad 903; Captain C R Smith v. Heptonstall, AIR 1938 Rang 134. 93 Puliyath Govinda Nair v. Parekalathil Achutan Nair, AIR 1940 Mad 678 at 679, 193 IC 399, (1940) 1 Mad 682; SS Srinivasa Raghavan v. R Jayaraman, (1975) 1 Mad LJ 414. 94 Sri Kapaleeswarar Temple v. T Tirunavukarasu, AIR 1975 Mad 164 at 167. 95 Durga Prasad Sarawgi v. Fateh Chand Kanoi, AIR 1968 Cal 292. 96 Nabendra Nath Basak v. Shasabindoo Nath Basak, AIR 1941 Cal 595 at 596, referring to Elvira Rodrigues Siqueria v. Gondicalo Hypolito Constancio Noronha, AIR 1934 PC 144, 38 CWN 813, 151 IC 90. 97 AIR 1934 PC 144 at 146, 38 CWN 813, 151 IC 90. 98 Elvira Rodrigues Siqueria v. Gondicalo Hypolito Constancio Noronha, AIR 1934 PC 144 at 146, 38 CWN 813, 151 IC 90; Tulsiram Srikishan Marawadi v. Zaboo Bhima Shankar, (1948) Nag 639, AIR 1949 Nag 229. 99 Elvira Rodrigues Siqueria v. Gondicalo Hypolito Constancio Noronha, AIR 1934 PC 144 at 146, 38 CWN 813, 151 IC 90; Gharabharan v. Sri Radha Kishan, AIR 1938 All 313. 1 Chacko Varkey v. Thommen Thomas, AIR 1958 Ker 31 at 33 (FB); following Tulsiram Srikishan Marawadi v. Zaboo Bhima Shankar, (1948) Nag 639, AIR 1949 Nag 229; Ganeshprasad v. Rombati Bai, AIR 1942 Nag 92; N Ethirajulu Naidu v. K R Chinnikrishnan Chettiar, AIR 1975 Mad 333. 2 Kahan Chand Dularam v. Dayaram Amritlal, (1929) 118 IC 764, AIR 1929 Lah 263 (a case under the Limitation Act, 1908). 3 Bansidhar v. Babu Lal, (1923) 21 All LJ 713, 75 IC 309, AIR 1924 All 12 at 15; Narottamdas Bhagwandas v. Chitta Bhagwansang, AIR 1939 Bom 464, 41 Bom LR 896, 186 IC 66. 4 Pestonji Manekji Mody v. Bai Meherbai, (1928) 30 Bom LR 1407, 112 IC 740, AIR 1928 Bom 539 at 544.
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5 Gharabharan v. Sri Radha Kishan, AIR 1958 All 313. 6 Suryanarayana v. Narendra Thatraz, (1894-96) 17-19 Mad 883(VI), (1895) 19 Mad 255; Anand Behari Lal Khandelwal v. Deputy Commissioner, (1939) 15 Luck 308, 185 IC 290, AIR 1940 Oudh 107. 7 Bansidhar v. Babu Lal, (1923) 21 All LJ 713, 75 IC 309, AIR 1924 All 12. 8 Manikya Bewa v. Pushpa Charon Majhi, AIR 1928 Cal 850, 115 IC 263; Narottamdas Bhagwandas v. Chitta Bhagwansang, AIR 1939 Bom 464, 41 Bom LR 896, 186 IC 66 (de facto guardian). 9 Nagar Mal v. Bajranglal, (1950) 77 IA 22, 29 Pat 272, 52 Bom LR 467, AIR 1950 PC 15. 10 Now s. 18 of the Limitation Act, 1963. 11 Ibrahim Mallick v. Lalit Mohan Roy, (1923) 50 Cal 974, 79 IC 489, AIR 1924 Cal 388. 12 Union of India v. Bikaner Textiles, AIR 1961 Raj 211; Shyam Sundar Misra v. Municipal Chairman, Parlakimedi, AIR 1964 Ori 111. 13 Manoj Kumar Saha v. Nabadwip Chandra Poddar, AIR 1978 Cal 111 at 115 relying on Jethabai v. Putlibai, (1912) 14 Bom LR 1020.
Explanation 1 Where a document in form and substance is a gift, no consideration is necessary.14A gift of immovable property is valid under s. 122 of the Transfer of Property Act, 1882 which permits transfer of property without consideration, provided the requirements of s. 123 of that Act are complied with. Section 25 does not apply to such transactions.15 A document styled as a release deed releasing the releasor's rights without consideration made, with the intention of giving it as a gift was valid;16 so was a deed of settlement by the husband settling on his wife the right, title and interest in dividends of certain shares for her life.17 14 Maharaja Kumar Gopal Saran Narain Singh v. Sita Devi, AIR 1932 PC 34, 34 Bom LR 470, 135 IC 753. 15 Bai Hiradevi v. Official Assignee of Bombay, AIR 1955 Bom 122 at 126. 16 Kuppuswami Chettiar v. ASPA Arumugam Chettiar, AIR 1967 SC 1395; referring to Thayyil Mammo v. Kottiath Ramunni, AIR 1966 SC 337 at 340. 17 Provat Kumar Mitter v. Commissioner of Income Tax, AIR 1959 Cal 434, [1959] 37 ITR 91; see also Maharaj Kumar Gopal Saran Narain Singh v. Sita Devi 36 CWN 392, AIR 1932 PC 34.
Explanation 2 Explanation 2 declares familiar principles of English law and equity. First, the court leaves parties to make their own bargains; it will not set up its own standard of exchangeable values. There must be some consideration, which the law can regard as valuable.18 But the fact that the promise is given for a certain consideration, great or small, shows that the promisor thought the consideration worth having at the price of his promise. Hobbes, though not a lawyer and having no love for the common law, correctly expressed its doctrine when he said in his Leviathan: 'the value of all things contracted for is measured by the appetite of the contractors, and therefore the just value is that which they be contended to give'.19 Secondly, the fact that a consideration is grossly inadequate may nevertheless be material as evidence of coercion, fraud or undue influence. Inadequacy of consideration may be evidence that the promisor's consent was not free, but is no more; it is not of itself conclusive. Standing alone, inadequacy, as such, is not a bar even to specific performance.20 In a suit to set aside a conveyance on the ground of inadequacy of consideration the Privy Council observed:21
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The question then reduces itself to whether there was such a inadequacy of price as to be a sufficient ground of itself to set aside the deed. And upon that subject it may be as well to read a passage from the case of Tennent v. Tennents 22 in which Lord Westbury very shortly and clearly stated the law upon this subject. He says: 'The transaction having clearly been a real one, it is impugned by the appellant on the ground that he parted with valuable property for a most inadequate consideration. My Lords, it is true that there is an equity which may be founded upon gross inadequacy of consideration. But it can only be where the inadequacy is such as to involve the conclusion that the party either did not understand what he was about, or was the victim of some imposition'. Their Lordships are unable to come to the conclusion that the evidence if inadequacy of price is such as to lead them to the conclusion that the plaintiff did not know what he was about or was the victim of some imposition.23
Under this explanation, inadequacy of consideration is not relevant, unless it affects the question of free consent to contract.24 The party seeking to set aside the transaction on this ground must plead25 and show such inadequacy as will involve the conclusion that either he did not understand what he was about, or was the victim of some imposition.26 Mere inadequacy of consideration would not render the transaction avoidable by undue influence, unless it is shown that the document was executed by abusing the advantageous position,27 or the transaction was unconscionable.28 In Kedari Bin Ranu v. Atmarambhat, 29 a mortgage was executed by ignorant and illiterate peasants seeking to raise moneys for tilling their lands, in favour of the plaintiffs, who were money-lenders by profession. The mortgage included, amongst other unusual provisions, a covenant to sell the property to the mortgagees at a gross undervalue in certain events. It was stated:
Mere inadequacy of consideration, it is true, unless it be so great as to amount to evidence of fraud, is not sufficient ground for setting aside a contract, or refusing a decree of specific performance of it. Inadequacy of consideration, when found in conjunction with any other such circumstances as suppression of the value of property, misrepresentation, fraud, oppression, urgent necessity for money, weakness of understanding, or even ignorance, is an ingredient which weighs powerfully with a court of Equity in considering whether it should set aside contracts, or refuse to decree specific performance to them.30
Where the consideration was much below the market value of the land and the transferor was an illiterate and pardanashin woman, it was held that the contract was caused by fraud and the sale was liable to be cancelled.31 18 HP Banerji v. Commissioner of Income Tax, Bihar, (1940) 20 Pat 202, 192 IC 204, AIR 1941 Pat 59 (natural love and affection is not a good consideration in the eye of the law, for it is incapable of being valued). 19 See above, under the heading: 'Adequacy of Consideration', and also under s. 2(d). 20 See the Specific Relief Act, 1963, s. 20(2), Explanation 1. 21 Administrator-General of Bengal v. Jugeswar Roy, (1877) ILR 3 Cal 192 at 196. 22 LR 2 HL SC 6. 23 Quoted and followed in Devji Shivji v. Karsandas Ramji, AIR 1954 Pat 280. 24 Debi Prasad v. Bhagwati Prasad, AIR 1943 All 63 at 65. 25 Ranganayakamma v. K S Prakash, AIR 2009 SC 1218(Supp), (2008) 15 SCC 673. 26 Administrator-General of Bengal v. Juggeswar Roy, (1877) 3 Cal 192 at 196; Devji Shivji v. Karsandas Ramji, AIR 1954 Pat 280 at 284. 27 Ram Chandra Singh v. Basdeo Singh, AIR 1982 All 437; Ranganayakamma v. K S Prakash, AIR 2005 Kant 426. 28 Hamelo v. Jang Sher Singh, AIR 2002 P&H 147.
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29 (1866) 3 BHCAC 11. 30 (1866) 3 BHCAC 11 at 18-19; Bhimbhat v. Yeshwantrao, (1900) 25 Bom 126; Ram Chandra Singh v. Basdeo Singh, AIR 1982 All 437 at 438; see s. 2(d) 'Adequacy of Consideration'; compare s. 53, Transfer of Property Act and ss. 17 and Explanation 1 to 20 (2), Specific Relief Act, 1963. 31 Mahiruddin Borbhuiya v. Rythun Nessa, AIR 1998 Gau 22.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER II Of Contracts, Voidable Contracts and Void Agreements/S. 26.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER II Of Contracts, Voidable Contracts and Void Agreements S. 26. Agreement in restraint of marriage, void.-Every agreement in restraint of the marriage of any person, other than a minor, is void.
Agreements in Restraint of Marriage A contract is in restraint of marriage if its object or effect is to restrain or prevent a party from marrying any person, or which is deterrent to marriage insofar as it makes any person uncertain whether he may marry or not; such an agreement is void.32 For example, a contract not to marry any person other than the party to it was void on the ground that if that party had chosen not to marry, the promisor would be restrained from marrying at all. Similarly, a contract that the plaintiff would not marry within a certain time would also be void. Any contract is void which unduly restricts or hampers the freedom of persons to marry at will. A contract restricting the right of a girl, who has attained majority, of marrying according to her own choice, was held void.33 This section is not restricted to the case of first marriage, but applies to a person already married.34 An agreement by a Hindu at the time of his marriage with his first wife not to marry a second wife,35 while the first was living would be void according to the literal terms of this section.36 Neither Hindu law (before 1955) nor Mohammedan law bound a man to marry more than one wife. Therefore, a provision in a Kabinnamah under which a Mahommedan husband authorized his wife to divorce herself from him in the event of his marrying a second wife, was not void; and if the wife divorced herself from the husband on his so marrying, the divorce was valid, and she was entitled to maintenance from him for the period of iddat.37 A distinction has been drawn between restraint on marriage generally and a restraint on remarriage. In Rao Rani v. Gulab Rani, 38 a compromise between co-widows provided that either would forfeit her share in the properties upon remarriage was held not in restraint of marriage, as it did not directly prohibit remarriage. A condition in a wakf that if the widow of a co-sharer remarried she should forfeit her right to the profits under the wakf, was accordingly upheld.39 Similarly, an agreement to pay to a woman a certain annual allowance only until death or remarriage, or during widowhood, is not invalid.
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40
32 See s. 23, under the heading--'Agreements Affecting Freedom and Security of Marriage'. 33 Shahzada v. Mahomed Rasul, AIR 1934 Pesh 22. 34 Polygamous marriages are prohibited in India under all personal laws except those applicable to Mahommedans. 35 A case before the enactment of the Hindu Marriage Act, 1955, prohibiting polygamy. 36 Nga Po v. Mi On, (1913) 15 IC 915. 37 Maharam Ali v. Ayesa Khatun 31 IC 562, AIR 1916 Cal 761; Badu Mia v. Badrannessa, (1919) 29 CLJ 230, AIR 1919 Cal 511, 40 IC 803; See also Jamila Khatoon v. Abdul Rashid, AIR 1939 Lah 165, 184 IC 105; Mulla's Principles of Mahommedan Law, 19th edn., p. 237. 38 AIR 1942 All 351. 39 Latafatunnissa v. Shaharbanu Begum, AIR 1932 Oudh 108, 139 IC 292. 40 Muhammad Hasan v. Noor Jahan 16 IC 13, (1912) 10 All LJ 185.
General and Partial Restraint The law in this section is stricter than the English law, as it declares every agreement operating as a restraint to be void (except a restraint of the marriage of a minor), without admitting of any exception in favour of partial restraints. A contract in general restraint of marriage is unenforceable on the ground of public policy, whether it contains an express undertaking that the subject will not marry, or whether on financial or other grounds it tends to discourage a subject to marry.41 A prohibition against marrying a certain person or persons identified by names, or anyone of a certain definite class of persons might be held good under the English law.42 Apparently such an agreement might be held void in India. In a case relating to bequest in a will, a direction in the will that if any person entitled to benefit under the will married a non-Zoroastrian, the interest going to him would lapse and go over to others, was held not contrary to law as being opposed to public policy.43 It has been doubted whether partial or indirect restraint on marriage was within the scope of s. 26.44 But in U Ga Zan v. Hari Pru, 45 the plaintiff had spent money for the education of his son-in-law, the defendant, in consideration of his agreeing not to marry a second wife in the lifetime of his first. The defendant married the second time. The agreement was held void under this section, and the plaintiff disentitled to recover. The defendant thus had his way with the money and the second marriage. This case interprets the section too strictly, and actually demonstrates the need to allow a reasonable restraint on marriage. The Law Commission of India in its thirteenth report recommended that the doubt raised in Rao Rani v. Gulab Rani 46 must be resolved, and that it should be provided that an agreement in partial restraint shall be void only if the court regarded it as unreasonable in the circumstances of the case.47 41 Re Michelhams Will Trusts,[1963] 2 All ER 188, [1963] 2 WLR 1238 at 1244; Re Fentem Cockerton v. Fentem, [1950] 2 All ER 1073. 42 Halsbury's Laws of England, Vol. 9(1) 4th edn. Reissue, 30 June 1998, CONTRACT, para 862 (there is no English authority on this point). 43 Khorshed Maneck v. Official Trustee Bombay, AIR 1948 Bom 319 (this section was held not applicable to bequests under a Will). 44 Rao Rani v. Gulab Rani, AIR 1942 All 351.
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45 AIR 1914 MB 156. 46 AIR 1942 All 351. 47 The 13th Report of the Law Commission of India, 1958, para 52, recommended substituting the section as follows:&uot;26. Agreement in restraint of marriage void in certain cases.(i) Every agreement in total restraint of the marriage of any person, other than a minor, is void.(ii) An agreement in partial restraint of the marriage of any person, other than a minor, is void if the court regards it as unreasonable in the circumstances of the cases.&uot;
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER II Of Contracts, Voidable Contracts and Void Agreements/S. 27.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER II Of Contracts, Voidable Contracts and Void Agreements S. 27. Agreement in restraint of trade, void.-Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. Exception I--Saving of agreement not to carry on business of which goodwill is sold.--One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided that such limits appear to the court reasonable, regard being had to the nature of the business. 48
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Introduction An agreement restraining a person from carrying on a lawful profession, trade or business is void to that extent. However, an agreement not to carry on within specified local limits, a business similar to the business of which goodwill is sold, can be enforced, provided the limits of the restraint are reasonable. 48 Exceptions2 and 3, concerning partnerships, were repealed by the Indian Partnership Act, 1932 (9 of 1932) s. 73 and Schedule II; the subject is now dealt with in s s. 11(2), 36(2) and 54 or that Act.
History of the Section This section follows the Field's Draft Code for New York; the reason for its incorporation being that 'contracts in restraint of trade have been allowed by modern decisions to a very dangerous extent,' and the framers of that Code drafted the section with the deliberate intention of narrowing the common law.49 The provision was never adopted in New York, but was adopted in four American states.50The original draft of the Indian Law Commission did not contain any specific provision on the
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subject. The provision was incorporated in this Act at a time between the resignation of the Indian Law Commission and the enactment. The object appears to have been to protect trade. It has been said that 'trade in India is in its infancy; and the legislature may have wished to make the smallest number of exceptions to the rule against contracts whereby trade may be restrained'.51 The section is general in its terms, and declares all agreements in restraint of trade void52pro tanto, except in the case specified in the exception. The earlier editors of the work have criticised this section as unfortunate.53'The law of India is tied down by the language of the section to the principle, not exploded in England, of a hard and fast rule qualified by strictly limited exceptions...'.54 This section lays down a very rigid rule invalidating restraints, not only general restraints but also partial ones, and also restricts the exception to narrow local limits. As regards the exception it was stated:
The extension of modern commerce and means of communication has displaced the old doctrine that the operation of agreements of this kind must be confined within a definite neighbourhood. But the Anglo-Indian law has stereotyped that doctrine in a narrower form than even the old authorities would justify ...Meanwhile the common law has, on the contrary, been widening; the old fixed rules as to limits of space have been broken down, and the court has only to consider in every case whether the restriction is reasonable...55
Even the Allahabad High Court has observed that 'it is unfortunate that s. 27...seriously trenches upon the liberty of the individual in contractual matters affecting trade'.56 The section was enacted at a time when trade was yet undeveloped and the object underlying the section was to protect the trade from restraints. But when trade in India has developed to a larger extent, there is no reason why a more liberal attitude should not be adopted by acknowledging such restraints as are reasonable. With these observations, the Law Commission of India recommended that this section be amended to permit reasonable restraint on the right to carry on trade.57 49 See for discussion of operation of the proposals in the Field Code under this section and the laws of the four American states where it were adopted: Gooderson,[1963] 79 LQR 410. 50 California, North Dakota, South Dakota and Oklahoma. 51 Oakes & Co. v. Jackson, (1876) ILR 1 Mad 134 per Kindersley J, at 145. 52 Certainly not 'illegal' Haribhai Maneklal v. Sharafali Isabji, (1897) 22 Bom 861 at 866, (1897-98) ILR 21-22 Bom 1158(VI) . 53 A view echoed by many; Law Commission of India, 13th report, 1959, para 55. 54 Pollock and Mulla, Indian Contract Act, Ist edn., p. 142. 55 Ibid at 136. 56 Bholanath Shankar Dar v. Lachmi Narain, AIR 1931 All 83. 57 The Law Commission of India, 13th Report, 1958, para 55, recommending the addition of the following in the main section:&uot;...except in so far as the restraint is reasonable having regard to the interests of the parties to the agreement and of the public.&uot;
Restraint of Trade Very broadly, agreements in restraint of trade are those in which one or both parties limit their freedom to work or carry on their profession or business in some way. Such agreements are attacked
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because they conflict with public interest, and because they are unfair in unduly restricting personal freedom. An agreement in restraint of trade has been defined as 'one in which a party (the covenantor) agrees with any other party (the covenantee) to restrict his liberty in the future to carry on trade with other persons not parties to the contract in such a manner as he chooses'.58 Although such agreements are commonly found in two types of contracts, viz. the sale of goodwill of a business or professional practice and contracts of employment; the categories of restraint of trade 'are not closed',59 and the principles are applied to a wide variety of other similar relationships, viz. horizontal restraints (viz. restraints operating between competitors),60 and exclusive dealing and services arrangements.61 It has also been applied to a contract between a songwriter and a publisher.62 In Wipro Limited v. Beckman Coulter International, 63 the contract between a principal and distributor prohibited parties from enticing or alluring each others' employees away from their respective employments. This restriction, it was held, restricted parties, and not the employees. It was held that this part of the agreement did not attract section 27. It had the effect however of preventing those employees from joining who did not have any restriction in their own employment contract. Hence the court granted an injunction restraining the respondent from giving of further advertisements, or soliciting or inducing employees to leave the petitioner's employment. The employees would be free to take up employment in response to the advertisement in question, for which the respondent shall compensate the petitioner for violation of non-solicitation clause. In another case, injunction was issued restraining the past employees from soliciting customers of the plaintiff so as to induce them to break their contract with the plaintiff.64 The Singapore High Court has observed that a non-solicitation clause that is unlimited in duration is void.65 For enforcing a non-solicitation obligation, the plaintiff must show that his customers have directly placed orders with the defendant.66 A forfeiture provision which forfeits an employee's benefits if he competes with his former employer after leaving (a forfeiture-for-competition clause) can amount to restraint of trade.67 On the other hand, where the employee will obtain extra payment if he remained in employment for a stipulated period (a payment-for-loyalty clause) is not a restraint. While the former clause seeks to forfeit amounts that are vested in the employee, the latter is an additional payment, is not vested in the employee, and is characterised by incentive.68 Public Policy A doctrine of restraint of trade which refuses to enforce unnecessary restraints, is justified on the grounds, first, that autonomy is a crucial ingredient in individual well-being and law should not help individuals to give up future autonomy unnecessarily; and secondly, that unnecessary restraints hinder the free flow of labour and resources crucial to the efficient functioning of a market economy.69 A covenant in restraint of trade lies between two different principles of public policy, that a person entering into a contract of his own free will be bound by his own bond, and that he should have unfettered liberty to exercise his powers and capacities for his own and community's benefit. Although there is no statutory provision for proclaiming the right to work, the Common Law has, for at least three centuries, abhorred monopolies which prohibit any person from working in a lawful trade.70A person, according to the Common Law, is entitled to exercise any trade or calling as and where he will. The law has, as a public policy, always opposed any interference with freedom of the contract and all restraints upon the liberty of an individual act ion unless injurious to the interests of the state. The principle is not confined to restraint of trade in the ordinary meaning of the word trade, but includes restraints on right of being employed.71 Every person has a right to strive for progress in career.72 An employee has the right to seek better employment.73
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In Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., 74 Lord Reid stated that as the doctrine is based on public policy, its application ought to depend less on legal niceties or theoretical possibilities than on the practical effect of a restraint in hampering that freedom which is the policy of the law to protect. In the same case Lord Wilberforce75 observed:
The development of the law does seem to show, however, that judges have been able to dispense from the necessity of the justification under a public policy test of reasonableness such contracts or provisions of contracts as under contemporary conditions may be found to have passed into the accepted and normal currency of commercial or contractual or conveyancing relations.
The doctrine does not apply to ordinary commercial contracts for the regulation and promotion of trade during the existence of the contract, provided that any prevention of work outside the contract viewed as a whole is directed towards the absorption of the parties' services and not their sterilisation,76 e.g. sole agencies, a film star who ties herself up with a company to get stardom.77 The law fetters traders by a particular inability to limit their freedom of trade; so that it may protect the general freedom of trade and the good of the community; and since the rule must be a compromise, it is difficult to define its limits or any logical basis.78 The doctrine of restraint of trade is one to be applied to factual situations with a broad and flexible rule of reason.79 Restraint In a sense, every promise relating to business dealings operates as a restraint of trade, because it restricts the promisor's future activity. It is the restraint which is 'unreasonably detrimental to a freely competitive private economy'80 which renders an agreement against public policy unenforceable. This section aims at 'contracts by which a person precludes himself altogether either for a limited time or over a limited area from exercising his profession, trade or business, not contracts by which in the exercise of his profession, trade or business, he enters into ordinary agreements with persons dealing with him, which are really necessary for the carrying on of his business'.81 Most contracts involve some restriction on the freedom of the parties; but a reasonable construction must be put upon the section, and not one which would render void the most common form of mercantile contracts. The covenantor who alleges that the agreement is hit by this section, must establish that the suit is one to enforce an agreement whereby some one is restrained from exercising a lawful profession, trade or business of any kind.82 When construed according to its literal terms, this section only strikes at agreements which operate as a total bar to the exercise of a lawful business, for however short a period or however limited the area, and does not avoid agreements which merely restrain freedom of act ion in detail in the actual exercise of a lawful business. A stipulation not to sell for less than a fixed rate is an agreement of this character. It does not restrain any party to the contract from selling; in other words, none of the parties are restrained from exercising the business of selling, but only that in the exercise of the business, certain terms shall be observed.83 Thus, a stipulation in an agreement whereby the plaintiffs agreed that they would not sell to others for a certain period any goods of the same description they were selling to the defendant, is not in restraint of trade.84 In Gujarat Bottling Co. Ltd. v. Coca Cola Company, 85 the Supreme Court has held that a negative stipulation like the one contained in franchise agreements restraining the franchisee from dealing with competing goods, was for facilitating the distribution of goods of the franchiser, and could not be regarded as a restraint on the right to trade. Similarly, an agreement to sell all the salt manufactured by the defendant during a certain period to the plaintiff at a certain price is not in restraint of trade;86 but if the agreement, while binding the manufacturers not to sell their goods to any person other than the other contracting party, does not bind the other party to buy all the produce or any definite quantity, the agreement is bad as being in restraint of trade. Where 29 out of 30 manufacturers of combs in the city of Patna agreed with
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the respondent to supply him with combs and not to sell combs to anyone else, with an option to the respondent not to accept the goods manufactured if he found there was no market for them in Patna, Calcutta, or elsewhere, the agreement was held void.87 Where A agreed to 'purchase certain goods from B at a certain rate for the Cuttack market, and the contract contained a stipulation that if the goods were taken to Madras, a higher rate should be paid for them, it was held that the stipulation for the higher rate was not in restraint of trade.88 All that the contract comes to in such a case is that the vendor is to sell the goods at one price if they are sent to Cuttack, but at another price if they are sent for sale in Madras. Of Profession, Trade or Business Where the owner of two neighbouring villages, which were let out for holding a cattle market on Tuesdays and Saturdays on payment of market fees, entered into an agreement to prevent competition and consequent loss to them, that each should let out his village for holding the market on certain specified days, it was held that the agreement was not in restraint of 'any profession, trade or business' within the meaning of this section, and it was not therefore void. The court said:
It seems to us that a landlord who, in return for market tolls or fees, allows a cattle market to be conducted on his land is not thereby exercising the trade or business of selling cattle.89 A restriction in a lease restricting the tenant to do a particular type of business in particular name and style does not amount to restraint of trade or business.90
Normal covenants imposed on a sale or lease of land are not within the principle of this decision and their validity is not affected. Ordinarily, negative covenants preventing the use of a particular site for trading of all kinds or of a particular kind are not within the scope of the doctrine of restraint of trade.91 If, however, a covenant imposed on land on such an occasion was essentially a personal trading covenant, the principle would apply.92 The doctrine against restraint of trade is not limited to a person or corporation, but also applies to the trading use to be made of a particular piece of land. A restraint on trading use of a plot of land may be so onerous that its effect will approximate to that of a restriction of an individual and thus 'take a man out of trade'.93 But if a man out of possession is let into possession by the oil company on the terms that he is to tie himself to that company, such a tie is good. It was observed:
Restraint of trade appears ... to imply that a man contracts to give up some freedom which otherwise he would have had. A person buying or leasing land had no previous right to be there at all, let alone to trade there, and, when he takes possession of that land subject to the negative restrictive covenant, he gives up no right or freedom which he previously had.94
Negative and Positive Covenants In contracts containing negative obligations, the limitation or restraint is direct. A positive obligation, when it limits freedom, imposes an indirect restraint; and it can be as restrictive or unreasonable as a negative obligation. There may be no specific undertaking not to compete and yet the effect may be the same. A post-employment restraint that if the employee works for a competitor after the termination of service he would stop receiving pension has been held to be in restraint of trade;95 or where the employment is a long one with the employer having an option to renew it from time to time. Such provisions are used to stifle competition.96 So is a solus agreement stipulating that a petrol station shall buy all of its petrol from the covenantee, in restraint of trade.97 The doctrine of restraint of trade applies in the case of covenants in mortgages of land also.98
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The Indian law: Restraint of Trade and Section 23 The Indian law is rigid, in that it invalidates all restraints, whether general or partial, and neither the test of reasonableness nor the restraint being partial apply to a case governed by s. 27, unless they fall within the exception of that section. In Madhub Chunder v. Rajcoomar Doss, 1 the parties carried on business as braziers in a certain part of Calcutta. The plaintiff and the defendant had an arrangement whereby the plaintiff agreed to stop his business in that quarter, and the defendants promised in consideration of his doing so, to pay to the plaintiff all sums which he had then disbursed as advances to workmen. The plaintiff accordingly ceased carrying on business in that locality. The defendant failed to perform their part of the contract; and the plaintiff sued them to recover Rs. 900/-, being the amount advanced by him to the workmen. The agreement was held void under this section, though the restriction put on the plaintiff's business was limited to a particular place. It was held that to escape the prohibition, it was not enough to show that the restraint created by an agreement was partial, and not general; it must be distinctly brought within one of the exceptions. Couch CJ. observed:
The words 'restraint from exercising a lawful profession, trade or business' do not mean an absolute restriction, and are intended to apply to a partial restriction, a restriction limited to some particular place, otherwise the first exception would have been unnecessary. Moreover, in the following section (s. 28) the legislative authority when it intends to speak of an absolute restraint, and not a partial one, has introduced the word 'absolutely'...The use of this word in s. 28 supports the view that in s. 27 it was intended to prevent not merely a total restraint from carrying on trade or business, but a partial one.2We have nothing to do with the policy of such a law. All we have to do is to take the words of the Contract Act, and put upon them the meaning which they appear plainly to bear.
And therefore held that:
If the agreement on the part of the plaintiff is void, there is no consideration for the agreement on the part of the defendants to pay the money; and the whole contract must be treated as one which cannot be enforced.3
The law of India is tied down by the language of this section to the principle, now outmoded in England, of a hard and fast rule qualified by strictly limited exceptions; and, however mischievous the economical consequences may be, the courts here can only administer the Act as they find it. Neither the test of reasonableness nor the restraint being partial apply to a case governed by s. 27 of the Contract Act, unless they fall within the exception of that section. It has been observed:
When a rule of English law receives statutory recognition by the Indian Legislature, it is the language of the Act which determines it scope, uninfluenced by the manner in which the analogous provision comes to be construed narrowly, or otherwise modified, in order to bring the construction within the scope and limitations of the rule governing the English doctrine of restraint of trade.4
Accordingly, a stipulation in a contract prohibiting the defendant from engaging in the cultivation of tea for a period of five years from the date of the termination of his agreement with the plaintiffs was held void, although the restriction only extended to a distance of forty miles from the plaintiff's tea gardens;5 so was an agreement where the plaintiff agreed with the defendant not to carry on the business of a dubash for the period of the three years, and to act as a stevedore only of five ships to
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be given to him by the defendant, and not to perform any services for ships belonging to anybody else for the like period; as the first branch imposed an absolute, and the second a partial, restraint on the plaintiff's business;6 or a covenant whereby the defendants agreed with the plaintiffs, at the time of entering into their service at Madras, not to carry on the same, business (that of dress-makers and milliners) on the expiry of the period of service within 800 miles from Madras.7 A service covenant extending beyond the term of service is void,8 where in similar cases the English law would allow restraint which is reasonable. However, Indian courts have consistently held that any restriction operating during the subsistence of the contract, whether of employment or otherwise, did not attract s. 27, unless the contract is one-sided. Section 27 is attracted to restrictions operating after termination of the contract.9 In Gujarat Bottling Co. Ltd. v. Coca Cola Company, 10a negative stipulation and restriction in a franchise agreement was confined in its application to the period of subsistence of the agreement and hence was held not in restraint of trade so as to attract the bar of s. 27 of the Contract Act . Under the Indian law given in this section, restrictions on an employee are completely void unless limited to the duration of the agreed period of service; restrictions that operate while the employee is serving have never been regarded as in restraint of trade.11 In two cases it was suggested that, even if the section did not apply to cases of partial restraint, they might come under ss. 23 and 24 of the Act.12 In a Madras case,13 an agreement by which certain Hindu workers bound themselves not to carry on their business with assistance of any persons not belonging to their caste, was held to be void. The decision was criticized on the ground that it would be against public policy to give effect to the agreement, as it might cause very serious restraint upon trade operations. There was no reference either in the judgment or argument of counsel to the present section. If there had been, the question might have been considered whether the word 'anyone' is limited to a party to the agreement, though in this case the parties already purported to restrain themselves to the extent of not employing persons not belonging to their caste, however difficult it might be to carry on the business otherwise. It has been observed that an agreement which confers an exclusive right on a priest to perform the religious ceremonies of a village would be void, but an agreement which restricts the right to a certain caste would be valid.14 But this approach is not sound. The present section is very strong and it invalidates many agreements which are allowed by the common law; and it does not seem open to the courts to hold that any agreement in pari materia, not coming within the terms of the section, is void on unspecified grounds of public policy. So far as restraint of trade is an infringement of public policy, its limits are defined by s. 27.15 The English Law The English law can be summarized thus:
(i) (ii)
(iii) (iv) (v)
(vi)
The fundamental principle is that every restraint, whether partial or general, is contrary to public policy and is prima facie void.16 The doctrine is not limited to particular types of contracts. It is also capable of applying to the use of a particular piece of property as well as where it relates to the act ivities of an individual.17 But the doctrine may not be invoked where the restraint relates to the use or the disposition of the property acquired by the covenantor under the very agreement under which he accepted the restraint.18 This presumption of invalidity is rebutted by a proof of the restraint being reasonable.19 The restraint must be reasonable in the interests of both contracting parties and also in the interests of the public. The onus of proving reasonableness lies upon the covenantee. But contracts of a kind which have gained general commercial acceptance and have not been subject to the doctrine, may be considered 'prima facie' reasonable.20 But the onus of proving that the contract tends to injure the public lies upon the covenantor.21 The restraint to be reasonable must not be more than what is reasonably necessary to
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(vii)
(viii) (ix) (x)
protect the covenanter's interest.22 Existence of proprietary interest necessary for protection of the covenantee has to be proved and it must be shown to the satisfaction of the court that the restraint as regards its area and time of operation and the trades, against which it is directed, is not excessive. Whether restraint is reasonable or not is a question for the court to decide.23 The doctrine applies to restraints which operate during continuance of the contract.24 Whether a particular provision operates in restraint of trade is to be determined not by the form the stipulation takes, but by its effect in practice.25
General and Partial Restraints The distinction between general and partial restraint, that a general restraint was void in cases of contracts of both employment and of sale of a business but a partial restraint was valid and enforceable if reasonable,26 was removed when the House of Lords held that a general restraint between a vendor and purchaser was not necessarily void, and that it was valid if reasonable in the interest of the parties and in the interest of the public.27 Later, Mason v. Provident Clothing and Supply Co. Ltd. 28 confirmed and accepted the statement of law given by Lord Macnaghten in Nordenfelt's case,29 in these two propositions: (a) all covenants in restraint of trade, partial as well as general, are prima facie void and they cannot be enforced unless the test of reasonableness propounded by Lord Macnaghten is satisfied; (b) a distinction was made between contracts of service and contracts of sale of a business.30 In Niranjan Shankar Golikari v. Century Spinning and Mfg Co. Ltd., 31 the Supreme Court held that a restraint on trade, whether general or partial, may be good if shown to be reasonably necessary for freedom of trade. A restraint reasonably necessary for the protection of the covenantee must prevail unless some specific ground of public policy can be clearly established against it. Validity of Restraint The validity of the restraint is assessed in three stages. First, whether the agreement amounts to a restraint in order to attract the doctrine. Secondly, whether the restraint protects a legitimate interest of the covenantee, i.e., the person benefiting from the restraint. Thirdly, whether the covenant is reasonable. The last stage involves a twofold test: the restraint must be reasonable:
(a) (b)
with reference to both the parties and; with reference to the interest of the public.32
In deciding whether a restraint of trade is reasonable, regard must be had to the 'interests' which the restraint is designed to protect; the principle being that it is valid if, and only if, it is reasonably necessary to protect the legitimate interests of the promisee. It is for this reason that a restraint on a seller of business not to carry on the same or similar business in the locality would be reasonable, as it protects the interest of the buyer of the business; but not a restraint from carrying on a new business in a place where the old business had no customers. The validity of such restraint, therefore, depends on: (a) the proprietary interest; (b) reasonableness; and (c) public interest.33 In general, unless a contract is vitiated by duress, fraud or mistake, its terms will be enforced though unreasonable or even harsh or unconscionable; but its terms in restraint of trade will not be enforced unless reasonable.34 The character and extent of the protection which a covenantee can reasonably and legitimately secure by means of the covenant in restraint of trade, depends upon the circumstances of the case. In all such cases the court must balance as best as it can the public interest in securing that members of the public shall be free to conduct their business in whatever legitimate way they may consider to be most advantageous to them and in so doing to enter into binding contracts, and the public interest of
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securing that every man shall be free to use his abilities and earn his living in whatever legitimate ways he may from time to time think fit.35 Ancillarity It has also been stated that even before these three requirements apply, the restraint should satisfy the requirement of ancillarity,36 i.e., the restraint that the promise imposes must be ancillary to the appropriate transaction or relationship. A direct or non-ancillary restraint serves no interest and is necessarily unreasonable. A simple promise not to compete in a locality in return of payment is not attached to any other transaction, and the promise is unenforceable. An agreement between parties that one would sell beef for 14 days in the month, and the other for 16 days in a month was void being in restraint of trade, though partial.37 An agreement not to set up a business in consideration of a promise to pay a sum for life is void as in restraint of trade, even if partly executed;38 so was an agreement under which the defendant, agreed to pay a large sum to the plaintiff in consideration that the latter should abstain from carrying on a similar business.39 The latter case did not fall within the Exception I, as the plaintiff had no goodwill in the rival business. Legitimate Interest of the Promisee A restraint is valid if it protects a 'legitimate' interest of the covenantee. The nature of interests recognized as legitimate by law will vary according to the subject matter of the contract. In no case will the law allow a covenant merely to avoid competition.40 An employer has an interest in preserving the trade secrets and business connections;41 a buyer of goodwill has an interest in protecting the goodwill of the business purchased by him. It has been held that covenants had legitimate interest in stabilizing the lists of customers,42 in securing a steady and profitable price,43 in protection of retail outlets from being swallowed by rivals,44 in being able to sell as large a quantity of their products as they can,45 in covering the highly speculative investment,46 in ensuring that heavy specific investments in infrastructure give a return in the form of an assured demand for the product;47 or that an agreement between employers not to engage employees employed by the other, fetters the right of a workman to offer his labour where he wished.48 The proprietary interest of an employer is more narrowly defined than that of the buyer of business. That is because courts, in restraint of trade cases, attach importance to the bargaining power49 or the disparity in it in the case of employees who require greater protection, than in the case of sale of business. The employer pays for the service of employee, but the purchaser of the business pays inter alia for freedom from competition. An employer is not entitled to protect himself against competition per se on the part of an employee after the employment has ceased.50 A bare covenant not to compete cannot be upheld.51 In an employment contract, the employer may protect two interests: trade secrets and business connections. But even though the employer has trained the employee, or enabled him to become a skilled craftsman or professional worker, he cannot demand that these skills should not be used against him. The skills or experience obtained by the employee do not belong to the employer, they are assets of the employee alone, and prima facie everyone has the right to earn his living by using his own experience, skill and knowledge, even if it was acquired in the employment of another.52 Although a restraint may reasonably be necessary for the protection of the employer, it may be oppressive and fatal to the chance of an employee earning his living in the country, and would also be unenforceable because the national economy would be deprived of the services of an experienced man.53 A covenant in restraint of trade must be reasonable in reference to the parties concerned and in reference to the interest of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed and at the same time, it is in no way injurious to the public.54 Reasonableness for Both Parties 'For a restraint to be reasonable in the interests of the parties it must afford no more than adequate
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protection to the party in whose favour it is imposed.'55 The law does not allow a restraint wider than the protection the proprietary interest requires.56 The court would take into account for the purpose the nature of the interest or activity being protected on the one hand, and on the other, the geographical area, the range of act ivities restricted and the duration of the restraint. A restraint is valid if it is necessary to have a restraint of that severity (in terms of area, range and duration) for protecting the nature of interest sought to be protected. An agreement between a firm of credit drapers and their employee, a collector salesman, providing that for five years after determination of the agreement, 'the servant shall not...sell or solicit orders...by way of the business of a credit for any person inscribed on the book of the employer during the three years immediately preceding such determination upon whom the servant has called in the course of his duties for the firm' was unreasonably restrictive.57 'A very weak restraint which protects an important interest is unjustifiable if a yet weaker restraint could do the job.'58 For example, a restraint ancillary to the sale of business must be limited to the business sold. A post-employment restraint must be restricted to the type of business of the employer. The restraint may not cover a larger geographical area or a longer time than necessary to protect the promisee's legitimate interests. The restraint must both be necessary for the protection of the legitimate interests of the promisee and also commensurate with the benefits secured to the covenantor under the contract.59 The plaintiff, who manufactured and sold BRC purchased the business of the defendants (who sold, but did not make 'Loop' road reinforcement) under a contract containing a term that the defendant will not compete, directly or indirectly, in any business in the United Kingdom for a specified period in the manufacture or sale of the road reinforcements. The defendant took employment in breach of the contract. The plaintiffs' action to enforce the contract failed as the contract was unreasonable. It would have been otherwise if the contract had been confined to the sale of 'Loop' road reinforcement.60 A restraint may be invalidated by the excessive area of its sphere of intended operation, but everything will depend upon the circumstances and a restriction that has been allowed throughout the UK.61 In another case the Eastern Hemisphere was regarded as a reasonable area.62 The absence of such a limit will be an important factor in determining whether it is in fact reasonable. The covenantee need not prove that the business for which the restraint was imposed has been carried on in every part of the area specified in the contract.63 The extension of modern commerce and means of communications must displace the old doctrine that the operation of agreements of this kind must be confined within a definite neighbourhood.64 Even if the restraint is unlimited in time65 or in space,66 it may be upheld if reasonable.67 In Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd., 68 the purchaser had purchased an armament business for a huge amount of GBP 287,000 in 1897, and the agreement contained a clause under which the seller agreed not to enter into competition with the buyer anywhere in the world for a period of 25 years. Such a wide clause was valid because the seller had business worldwide, its customers were mainly the governments, and any attempt by the seller to do the armaments business anywhere in the world should have affected the value of the purchaser's business. Worldwide restrictions have passed muster in courts where the restrictions to be reasonably effectual had to be worldwide. An agreement providing a total restriction on the manufacture, sale, etc, of beer, ale, port or lager beer for a period of 15 years for a consideration of USD 15,000 which was not only not confined to Vancouver, but to all over the world, was condemned by the Privy Counci1.69 The reasonableness of the covenant has to be determined at the date it was entered into. The fact that the employee later acquired considerable skill and knowledge of the customers of the employer is irrelevant.70 A view has been expressed that an enforceable restriction may later become unenforceable when it becomes unfair in changed circumstances.71 Fairness Procedural issues of fairness have been raised in some judgments, where the difference in bargaining
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power, for example, has affected the view about the severity of the restraint. Contracts entered into by vendors and purchasers or businesses where parties are of equal strength, are viewed differently from contracts between an employer and employee, where often they are not.72 Accordingly, a restriction unreasonable in the former case may be reasonable in the latter.73 A distinction has also been drawn between two circumstances:
(a)
where the contracting parties enter into the contract in standard form and they bargain on equal terms; and (b) which are not the subject of negotiations between the parties, not approved by any organizations representing the weaker party, and which has been dictated by the party having superior bargaining power. Type (a) contracts raise the strong presumption of their being fair and reasonable, type (b) have to be examined by the courts as they raise no such presumption.74 For example, the court may hesitate to disturb such a covenant between 'two experienced traders bargaining on equal terms'.75 Moreover, the amount of consideration paid may also be a relevant factor in considering the reasonableness of the term.76 In any case, consideration is relevant because it constitutes the interest in the investment which the covenant requires to protect. As stated in Amoco Australia Pvt. Ltd. v. Rocca Bras Motor Engineering Co. Pvt. Ltd., 77 it was observed:
The quantum of the benefit which the covenantor receives may be taken into account in determining whether the restraint does or does not go beyond adequate protection for the interests of the covenantee. For example, if a large sum is advanced, a longer period of restraint may be held to be required to give adequate protection to the covenantee than that which would be appropriate in the case of a small advance. It is to be borne in mind, also, that the benefit received by a covenantor is not limited to what he receives in money or other property. A covenantor may be regarded as obtaining, in return for a restraint, a benefit which consists simply in being able by this means to procure an agreement in aid of his trading, e.g., an agreement for the regular supply of goods which he would not be able to procure, except upon terms of submitting to a restraint. If that restraint does not exceed what is reasonably adequate for the protection of the covenantee, then it may be regarded as reasonable so far as the interest of the covenantor is concerned. It may be in his interests to be able so to bind himself.
In the interest of public The basis of the doctrine of restraint is the protection of the public interest.78 The courts have to balance the legitimate interest of the covenanted against the hardship to the covenantor and the injury to the public; and to assess the effects of a contract on the public interest. The protection of the covenantee must prevail unless some specific ground of public policy can be clearly established against it.79'The public interest requires in the interests both of the parties and of the individual that everyone should be free so far as practicable to earn a livelihood and to give to the public the fruits of his particular abilities.'80 The Privy Council,81 after pointing out that it was not aware of any case in which a restraint, though reasonable in the interests of the parties, had been held unenforceable because it involved some injury to the public,82 said:
...the onus of showing that any contract is calculated to produce a monopoly or enhance prices to an unreasonable extent will lie on the party alleging it, and that if once the court is satisfied that the restraint is reasonable as between the parties this onus will be no light one. If the restraint is reasonable in the interests of the parties, it will not be unenforceable because it involved some injury to the public.83
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The public interest test has been interpreted variously, as the interests of the public in trade being free, as also people being free to contract and being held to their contracts,84 or just simply as public policy. The term 'detriment to the public' has been held to not only mean the consuming public, but also those engaged in production and distribution.85 The interest of the covenantor has been equated with that of the public.86 It is possible that restrictions, though reasonable, according to the tests usually employe'd, may fail because they deprive the public policy of extra services, which are needed by them. For instance, in the case of the sale of a chemist's shop this may happen as the locality may be short of such shops; and the same applies in case of an employee who has special skills which are in public demand.87 But a clause is not void as being in unreasonable restraint of trade by reason of its continued application after the expiration of a patent, as there was nothing to show that the clause was likely to limit the total supply of the patented material available for sale or to have substantial effect on the price.88 Effect of a Covenant in Restraint of Trade A covenant or clause restraining a person from carrying any lawful trade, profession or business is void 'to that extent'. The court will not enforce it. But if the parties wish to implement it, they would not be act ing illegally, and the court cannot intervene to prevent them from doing so.89 58 Petrofina (Great Britain) Ltd. v. Martin, [1966] Ch 146 per Diplock LJ, at 180, [1966] 1 All ER 126, at 138, [1966] 2 WLR 318; adopted in Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1968] AC 269 per Lord Hodson at 317, [1967] 1 All ER 699 at 720, [1967] 2 WLR 871. 59 Petrofina (Great Britain) Ltd. v. Martin, [1966] Ch 146 per Lord Denning at 169, [1966] 1 All ER 126 at 131, [1966] 2 WLR 318; Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1968] AC 269, [1967] 1 All ER 699(HL) . 60 See below, under the heading: 'Horizontal Trading Agreements'. 61 See below, under the heading: 'Vertical Trading Agreements'. 62 A Schroeder Music Publishing Co. Ltd. v. Macaulay, [1974] 3 All ER 616, [1974] 1 WLR 1308(HL) . 63 2006 (3) ARBLR 118 Delhi, 2006 (2) CTLJ 57(Del) dec on 11 July 2006. 64 Embee Software Private Ltd v. Samir Kumar Shaw, AIR 2012 Cal 141. 65 Smile Inc Dental Surgeons Pte Ltd v. Lui Andrew Stewart, [2011] SGHC 266(Singapore High Court), [2012] 4 SLR 308. 66 FL Smidth Pvt Ltd v. Secan Invescast (India) Pvt Ltd, OSA 314/2012 decided on 1 Feb 2013 (Mad); see also Smile Inc Dental Surgeons Pte Ltd v. Lui Andrew Stewart, [2011] SGHC 266(Singapore High Court), [2012] 4 SLR 308. 67 Mano Vikrant Singh v. Cargill TSF Asia Pte Ltd, [2012] SGCA 42(Singapore Court of Appeal), [2012] 4 SLR 371. 68 Mano Vikrant Singh v. Cargill TSF Asia Pte Ltd, [2012] SGCA 42(Singapore Court of Appeal), [2012] 4 SLR 371. 69 Stephen,(1995) 15 OJLS 565. 70 Nagle v. Feilden, [1966] 2 QB 633, [1966] 1 All ER 689 at 693, [1966] 2 WLR 1027; Ipswich Tailors Case,(1614) 11 Co Rep 53 quoted; Niranjan Shankar Golikari v. Century Spg and Mfg. Co. Ltd., [1967] 2 SCR 367, AIR 1967 SC 1098; Gopal Paper Mills Ltd. v. Surendra Kumar Ganesh Das Malhotra, AIR 1962 Cal 61 at 65. 71 Niranjan Shankar Golikari v. Century Spg and Mfg. Co. Ltd., [1967] 2 SCR 367, AIR 1967 SC 1098, applying Halsbury's Laws of Enpland, Vol. 38, 3rd edn, p. 15; Gopal Paper Mills Ltd. v. Surendra Kumar Ganesh Das Malhotra, AIR 1962 Cal 61 at 65. 72 Wipro Limited v. Beckman Coulter International, 2006 (3) ARBLR 118 Delhi, 2006 (2) CTLJ 57 Del dec on 11 July 2006; Ambiance India Pvt. Ltd. v. Naveen Jain 122 (2005) DLT 421, 2005 (81) DRJ 538 decided on 16 March 2005. 73 American Express Bank Limited v. Priya Puri, (2006) 110 FLR 1061(Del) dec on 24 May 2006; Star India Pvt. Ltd. v. Laxmiraj Seetharaman Nayak, 2003 (3) BCR 563, 2003 (3) MahLJ 726. 74 Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1968] AC 269, [1967] 1 All ER 699, [1967] 2 WLR 871. 75 Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1968] AC 269, [1967] 1 All ER 699 per Lord
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Wilberforce at 729, [1967] 2 WLR 871. 76 [1967] 1 All ER 699 per Lord Pearce at 727. 77 Gaumont-British Picture Corpn. Ltd. v. Alexander, [1936] 2 All ER 1686; Warner Brothers Pictures Inc. v. Nelson, [1937] 1 KB 209, [1936J 3 All ER 160. 78 Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1968] AC 269, [1967] 1 All ER 699 at 724, [1967] 2 WLR 871. 79 [1967] 1 All ER 699 at 729; Petrofina (Great Britain) Ltd. v. Martin, [1966] Ch 146 at 180, [1966] 1 All ER 126, [1966] 2 WLR 318. 80 Farnsworth, Contracts, 3rd edn., p. 331. 81 Mackenzie v. Striramiah, (1890) ILR 13 Mad 472 per Handley J at 475. 82 S B Fraser & Co. v. Bombay Ice Manufacturing Co. Ltd., (1904) ILR 29 Bom 107. 83 Kuber Nath v. Mahali Ram, (1912) ILR 34 All 587; English Hop Growers v. Dering, [1928] 2 KB 174, [1928] All ER Rep 396. 84 Carlisles Nephews & Co. v. Ricknauth Bucktearmull, (1882) ILR 8 Cal 809. 85 AIR 1995 SC 2372, (1995) 5 SCC 545. 86 Mackenzie v. Striramiah, (1890) 13 Mad 472; affirmed in appeal sub nom Sadagopa Ramnjiah v. Mackenzie, (1891) 15 Mad 79, (1891-93) ILR 14-16 Mad 404(VI) . 87 Shaikh Kalu v. Ram Saran Bhagat, (1909) 13 Cal WN 388; R v. Demers, [1900] AC 103, [1895-99] All ER Rep 1325. 88 Prem Sook v. Dhurum Chand, (1890) ILR 17 Cal 320. 89 Pothi Ram v. Islam Fatema, (1915) 37 All 212, AIR 1915 All 94, 27 IC 871. 90 Vidya Wati v. Hans Raj, AIR 1993 Del 187. 91 Esso Petroleum Co. Ltd. v. Harpers Garage (Stourport) Ltd., [1968] AC 269, [1967] 1 All ER 699 per Lord Reid at 707, [1967] 2 WLR 871(HL) ; explained in Cleveland Petroleum Co. Ltd. v. Dartstone Ltd., [1969] 1 WLR 116, [1969] 1 All ER 201 at 202, [1969] 1 WLR 116. 92 [1967] 1 All ER 699 per Lord Pearce at 724. 93 Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1965] 2 All ER 933 per Mocatta J, at 945, [1965] 3 WLR 469 at 485-86. 94 Nagar Mal v. Bajranglal, (1950) 77 IA 22, 29 Pat 272, 52 Bom LR 467, AIR 1950 PC 15. 95 Wyatt v. Kreglinger Fernau, [1933] 1 KB 793, [1933] All ER Rep 349; Bull v. Pitney-Bowes Ltd., [1966] 3 All ER 384, [1967] 1 WLR 273; Howard F Hudson Pvt. Ltd. v. Ronayne, (1972) 126 CLR 449(High Court of Australia) . 96 A Schroeder Music Publishing Co. Ltd. v. Macaulay, [1974] 3 All ER 616, [1974] 1 WLR 1308. 97 Esso Petroleum Co. Ltd. v. Harpers Garage (Stourport) Ltd., [1968] AC 269, [1967] 1 All ER 699, [1967] 2 WLR 871(HL) . 98 [1967] 1 All ER 699 affirming, [1966] 1 All ER 725(CA) . 1 (1874) 14 Beng LR 76 at 85, 86. 2 Abdul Karim v. Sheikh Dubar, AIR 1937 Oudh 445; Khemchand Maneckchand v. Dayaldas Bassarmal, AIR 1942 Sind 114. 3 (1874) 14 Beng LR 76. 4 Superintendence Company of India Pvt. Ltd. v. Krishana Murgai, AIR 1980 SC 1717 per Sen J at 1728. 5 Brahmaputra Tea Co. Ltd. v. Scarth, (1885) ILR 11 Cal 545 at 549. 6 Nur Ali Du Bash v. Abdul Ali, (1892) ILR 19 Cal 765. 7 Oakes & Co. v. Jackson, (1876) ILRI 1 Mad 134 at 145 (held that the covenant was void for unreasonableness as per
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the English law). 8 Superintendence Company of India Pvt. Ltd. v. Krishana Murgai, AIR 1980 SC 1717 at 1728; Sandhya Organic Chemicals P. Ltd. v. United Phosphorus Ltd., AIR 1997 Guj 177. 9 Niranjan Shankar Golikari v. Century Spg and Mfg. Co. Ltd., [1967] 2 SCR 367, AIR 1967 SC 1098; Gujarat Bottling Co. Ltd. v. Coca Cola Company, AIR 1995 SC 2372, (1995) 5 SCC 545; VN Deshpande v. Arvind Mills Co. Ltd., (1946) Bom 89, AIR 1946 Bom 423, 48 Bom LR 90, 226 IC 138; Taprogge Gesellschaft mbH v. IAEC India Ltd., AIR 1988 Bom 157; Bhavesh J Bhatt v. Cyrus N Baxter, (1990) 92 Bom LR 474; Makhanlal Natta v. Tridib Ghosh, AIR 1993 Cal 289; Sociedade de Fomento Industrial Ltd. v. Ravindranath Subraya Kamat, AIR 1999 Bom 158. 10 AIR 1995 SC 2372, (1995) 5 SCC 545. 11 VN Deshpande v. Arvind Mills Co. Ltd., (1946) Bom 89, AIR 1946 Bom 423, 48 Bom LR 90, 226 IC 138. 12 Nur Ali Du Bash v. Abdul Ali, (1892) ILR 19 Cal 765 at 774; Haribhai Maneklal v. Sharafali Isabji, (1897) 22 Bom 861 per Candy J, at 873. 13 Vaithelinga v. Saminada, (1878) ILR 2 Mad 44. 14 Revashanker Shamji v. Velji Jagjivan Kukama, AIR 1951 Kutch 56. 15 S B Fraser d' Co. v. Bombay Ice Manufacturing Co. Ltd., (1904) ILR 29 Bom 107 per Jenkins CJ, at 120. 16 Mason v. Provident Clothing and Supply Co. Ltd., [1913] AC 724, [1911-13] All ER Rep 400. 17 Esso Petroleum Co. Ltd. v. Harpers Garage (Stourport) Ltd., [1968] AC 269, [1967] 1 All ER 699, [1967] 2 WLR 871. 18 Ibid. 19 Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd., [1894] AC 535, [1891-94] All ER Rep 1(HL) ; Lord Macclesfield's dictum in Mitchel v. Reynolds, (1711) 1 P Wms 181 interpreted. 20 Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1968] AC 269 per Lord Wilberforce at 332-33, Lord Pearce at 328, Lord Reid at 295, [1967] 1 All ER 699, [1967] 2 WLR 871. 21 Attorney-General of the Commonwealth of Australia v. Adelaide Steamship Co. Ltd., [1913] AC 781 at 796, [1911-13] All ER Rep 1120. 22 Underwood d' Son Ltd. v. Barker, (1899) 1 Ch 300 at 305; Herbert Morris Ltd. v. Saxelby, [1916] 1 AC 688 at 706, [1916-17] All ER Rep 305(HL) . 23 Haynes v. Doman, [1899] 2 Ch 13, [1895-99] All ER Rep 1468; Mason v. Provident Clothing and Supply Co. Ltd., [1913] AC 724 at 732-33, [1911-13] All ER Rep 400. 24 A Schroeder Music Publishing Co. Ltd. v. Macaulay, [1974] 3 All ER 616, [1974] 1 WLR 1308; Clifford Davies Management Ltd. v. WEA Records Ltd., [1975] 1 All ER 237, [1975] 1 WLR 61. 25 Stenhouse Australia Ltd. v. Phillips, [1974] AC 391, [1974] 1 All ER 117. 26 Maxim Nordenfelt Guns and Ammunition Co. v. Nordenfelt, [1893] 1 Ch 630 per Bowen LJ at 662 interpreting Mitchel v. Reynolds, (1711) 1 P Wms 181. 27 Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd., [1894] AC 535, [1891-94] All ER Rep l. 28 [1913] AC 724, [1911-13] All ER Rep 400; Attwood v. Lamont, [1920] 3 KB 571 per Younger LJ, at 585-86, [1920] All ER Rep 55 at 63-64. 29 [1894] AC 535, [1891-94] All ER Rep l. 30 Herbert Morris v. Ltd. v. Saxelby, [1916] 1 AC 688, [1916-17] All ER Rep 305. 31 [1967] 2 SCR 367, AIR 1967 SC 1098. 32 The 'tripartite' approach in the judgment of Lord Macnaghten in Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd., [1894] AC 535, [1891-94] All ER Rep 1 at 18; Fitch v. Dewes, [1920] 2 Ch 159 affirmed in, [1921] 2 AC 158, [1921] All ER Rep 13; Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1968] AC 269, [1967] 1 All ER 699, [1967] 2 WLR 871. 33 Vancouver Malt and Sake Brewing Co. Ltd. v. Vancouver Breweries Ltd., AIR 1934 PC 101, [1934] AC 181, [1934] All ER Rep 38(PC) ; Premji Damodar v. Firm LV Govindji and Co., AIR 1943 Sind 197; Modern Food Industries India
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Ltd. v. Shri Krishna Bottlers Pvt. Ltd., AIR 1984 Del 119 at 122. 34 Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1968] AC 269, [1967] 1 All ER 699 at 706, [1967] 2 WLR 871(HL) ; Niranjan Shankar Golikari v. Century Spg and Mfg. Co. Ltd., [1967] 2 SCR 367, AIR 1967 SC 1098; Mitchel v. Reynolds, (1711) 1 P Wms 181. 35 Petrofina (Great Britain) Ltd. v. Martin, [1965] 2 WLR 1299 per Buckley J, at 1310-11, on appeal, [1966] Ch 146, [1966] 1 All ER 126, [1966] 2 WLR 318; Attorney-General of the Commonwealth of Australia v. Adelaide Steamship Co. Ltd., [1913] AC 781 at 795, [1911-13] All ER Rep 1120. 36 Farnsworth, Contracts, 3rd edn., p. 332; Premji Damodar v. Firm LV Govindji and Co., AIR 1943 Sind 197 (restraint can be sustained when it is ancillary to some main transaction). 37 Mohamed v. Ona Mahomed Ebrahim, AIR 1922 LB 9. 38 G Hurry Krishna Pillai v. M Authilachmy Ammal, AIR 1916 LB 51 at 54 (FB). 39 Parasullah v. Chandra Kant, AIR 1918 Cal 546 at 551, (1917) 21 CWN 979, 39 IC 177. 40 Premji Damodar v. Firm LV Govindji & Co., AIR 1943 Sind 197. 41 Eastham v. Newcastle United Football Club Ltd., [1964] Ch 535, [1963] 3 All ER 139, [1963] 3 WLR 574 (a case relating to Football Association and the Football League); Mason v. Provident Clothing and Supply Co. Ltd., [1913] AC 724, [1911-13] All ER Rep 400. 42 McEllistrim v. Ballymacelleigott Co-op Agriculture and Dairy Society Ltd., [1919] AC 548 at 563. 43 English Hop Growers v. Dering, [1928] 2 KB 174 at 180-81, [1928] All ER Rep 396. 44 Petrofina (Great Britain) Ltd. v. Martin, [1966] Ch 146 per Lord Denning at 174, [1966] 1 All ER 126 at 134, [1966] 2 WLR 318. 45 [1966] Ch 146 per Lord Diplock at 188, [1966] 1 All ER 126 at 143, [1966] 2 WLR 318. 46 Like one made by a music publisher in the songwriter in A Schroeder Music Publishing Co. Ltd. v. Macaulay, [1974] 3 All ER 616, [1974] 1 WLR 1308(HL) . 47 Discussion in Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1968] AC 269, [1967] 1 All ER 699, [1967] 2 WLR 871. 48 Kores Mfg. Co. Ltd. v. Kolok Mfg. Co. Ltd., [1959] Ch 108, [1958] 2 All ER 65. 49 A Schroeder Music Publishing Co. Ltd. v. Macaulay, [1974] 3 All ER 616, [1974] 1 WLR 1308(HL) . 50 Herbert Morris Ltd. v. Saxelby, [1916] 1 AC 688, [1916-17] All ER Rep 305, applied in Kores Mfg. Co. Ltd. v. Kolok Mfg. Co. Ltd., [1959] Ch 108, [1958] 2 All ER 65; Attwood v. Lamont, [1920] 3 KB 571, [1920] All ER Rep 55; Halsbury's Laws of England, Vol. 18, 5th edn, 1 July 2009, COMPETITION, para 389; Premji Damodar v. Firm LV Govindji and Co., AIR 1943 Sind 197. 51 McEllistrim v. Ballymacelleigott Co-op Agriculture and Dairy Society Ltd., [1919] AC 548 at 562-63; Vancouver Malt and Sake Brewing Co. Ltd. v. Vancouver Breweries Ltd., AIR 1934 PC 101, [1934] AC 181 at 191, [1934] All ER Rep 38 at 41(PC) ; distinguishing Stewart v. Stewart, (1899) 1 F 1158(Ct of Sess) . 52 Atiyah, An Introduction to the Law of Contract, 5th edn., p. 328; Faccenda Chicken Ltd. v. Fowler, [1987] Ch 117, [1986] 1 All ER 617. 53 Chitty on Contracts, 28th edn., p. 889, para 17-102. 54 Niranjan Shankar Golikari v. Century Spg and Mfg. Co. Ltd., [1967] 2 SCR 367, AIR 1967 SC 1098; Lalbhai Dalpatbhai and Co. v. Chittaranjan Chandulal Pandya, (1965) 2 LLJ 284, AIR 1966 Guj 189; Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd., [1894] AC 535 per Lord McNaghten at 565, [1891-94] All ER Rep 1; Mason v. Provident Clothing and Supply Co. Ltd., [1913] AC 724, [1911-13] All ER Rep 400 (case of a convasser); Herbert Morris Ltd. v. Saxelby, [1916] 1 AC 688 at 707, 716, [1916-17] All ER Rep 305; Vancouver Malt and Sake Brewing Co. Ltd. v. Vancouver Breweries Ltd., AIR 1934 PC 101, [1934] AC 181 at 189-90, [1934] All ER Rep 38(PC) ; Peters American Delicacy Co. Ltd. v. Patricia's Chocolates and Candies Pvt. Ltd., (1947) 77 CLR 574 at 598 (ice cream manufacturer); M & S Drapers v. Reynolds, [1956] 3 All ER 814, [1957] 1 WLR 9 at 18. 55 Herbert Morris Ltd. v. Saxelby, [1916] 1 AC 688 at 707, [1916-17] All ER Rep 305 at 316. 56 Gopal Paper Mills Ltd. v. Surendra Kumar Ganesh Das Malhotra, AIR 1962 Cal 61 at 65. 57 M&S Drapers v. Reynolds, [1956] 3 All ER 814, [1957] 1 WLR 9.
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58 Stephen,(1995) 15 OJLS 565 at 578. 59 Herbert Morris Ltd. v. Saxelby, [1916] 1 AC 688 per Lord Shaw at 716, [1916-17] All ER Rep 305; A Schroeder Music Publishing Co. Ltd. v. Macaulay, [1974] 3 All ER 616 per Lord Diplock at 623, [1974] 1 WLR 1308; 20:20 London Ltd v. Riley, [2012] EWHC 1912(Ch) . 60 British Reinforce Concerte Engg. Co. Ltd. v. Schelff, [1921] 2 Ch 563, [1921] All ER Rep 202. 61 Underwood and Sons Ltd. v. Barker, (1899) 1 Ch 300; Vancouver Malt and Sake Brewing Co. Ltd. v. Vancouver Breweries Ltd., AIR 1934 PC 101, [1934] AC 181, [1934] All ER Rep 38(PC) . 62 Lamson Pneumatic Tube Co. v. Phillips, (1904) 91 LT 363 (pneumatic tube systems for use in hops invented in Western Hemisphere and practically unknown in the Eastern Hemisphere). 63 Connors Bros Ltd. v. Bernard Connors, AIR 1941 PC 75, 196 IC 871, [1940] 4 All ER 179, 57 TLR 76 (appeal from Canada). 64 Ibid. 65 Hitchcock v. Coker, (1837) 6 AandE 438, [1835-42] All ER Rep 452; Haynes v. Doman, [1899] 2 Ch 13, [1895-99] All ER Rep 1468; Fitch v. Dewes, [1921] 2 AC 158, [1921] All ER Rep 13. 66 Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd., [1894] AC 535, [1891-94] All ER Rep 1; Lamson Pneumatic Tube Co. v. Phillips, (1904) 91 LT 363; Caribonum Co. Ltd. v. Le Couch, (1913) 109 LT 385, [1911-13] All ER Rep 1411. 67 Peters American Delicacy Co. Ltd. v. Patricia's Chocolates and Candies Pvt. Ltd., (1947) 77 CLR 574. 68 [1894] AC 535, [1891-94] All ER Rep 1(HL) . 69 Vancouver Malt and Sake Brewing Co. Ltd. v. Vancouver Breweries Ltd., AIR 1934 PC 101, [1934] AC 181 at 191, [1934] All ER Rep 38 at 42(PC) (a case, not of restrictive covenants in aid of a sale, but of a sale in aid of restrictive covenants). 70 Gledhow Autoparts Ltd. v. Delaney, [1965] 3 All ER 288. 71 Shell UK Ltd. v. Lostock Garage Ltd., [1977] 1 All ER 481 per Lord Denning MR, at 489-90, [1976] 1 WLR 1187, (not supported by other members of the court). 72 Eastham v. Newcastle United Football Club Ltd., [1964] Ch 535, [1963] 3 All ER 139 at 146, [1963] 3 WLR 574 (a case of a professional football player and a football club). 73 Ronbar Enterprises Ltd. v. Green, [1954] 2 All ER 266 at 270, [1954] 1 WLR 815 (a case of partnership agreement, this statement made in reference to possible differences in the law as to severance); Jenkins v. Reid, [1948] 1 All ER 471 (a case of a medical practitioner: a borderline case); Mason v. Provident Clothing & Supply Co. Ltd., [1913] AC 724 at 731, [1911-13] All ER Rep 400; M & S Drapers v. Reynolds, [1956] 3 All ER 814 per Lord Denning at 820, [1957] 1 WLR 9. 74 A Schroeder Music Publishing Co. Ltd. v. Macaulay, [1974] 3 All ER 616, [1974] 1 WLR 1308; Clifford Davies Management Ltd. v. WEA Records Ltd., [1975] 1 All ER 237, [1975] 1 WLR 61; bargaining power invoked in Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1968] AC 269, [1967] 1 All ER 699, [1967] 2 WLR 871; Cleveland Petroleum Co. Ltd. v. Dartstone Ltd., [1969] 1 WLR 116, [1969] 1 All ER 201, [1969] 1 WLR 116; Lloyds Bank Ltd. v. Bundy, [1975] QB 326, [1974] 3 All ER 757. 75 Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1968] AC 269 per Lord Reid at 300, per Lord Pearce 323-24, [1967] 1 All ER 699, [1967] 2 WLR 871. 76 Petrofina (Great Britain) Ltd. v. Martin, [1966] Ch 146 per Lord Diplock at 182, [1966] 1 All ER126, [1966] 2 WLR 318; Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1968] AC 269 per Lord Pearce at 323 and Lord Reid at 300, 320, [1967] 1 All ER 699 at 709, [1967] 2 WLR 871; Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd., [1894] AC 535, [1891-94] All ER Rep 1; Queensland Co-operative Milling Association Ltd. v. Pamag Pvt. Ltd., (1973) 1 ALR 47 per Menzies J, at 51, (1973) 133 CLR at 260; Makhanlal Natta v. Tridib Ghosh, AIR 1993 Cal 289. 77 (1973) 1 ALR 385 per Walsh J, at 399, (1973) 133 CLR 288, affirmed in, [1975] AC 561, [1975] 1 All ER 968. 78 Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1968] AC 269 per Lord Hodson at 318, [1967] 1 All ER 699 at 720, [1967] 2 WLR 871. 79 Underwood & Sons Ltd. v. Barker, [1899] 1 Ch 300 at 305 per Lindley MR. 80 A Schroeder Music Publishing Co. Ltd. v. Macula, [1974] 3 All ER 616 at 621, [1974] 1 WLR 1308; Texaco Ltd. v. Mulberry Filling Station Ltd., [1972] 1 All ER 513 at 524, 528, [1972] 1 WLR 814.
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81 Attorney-General of the Commonwealth of Australia v. Adelaide Steamship Co. Ltd., [1913] AC 781, [1911-13] All ER Rep 1120 at 1123. 82 Ibid. 83 Ibid at 1124; North Western Sallt Co. Ltd. v. Electrolytic Alkali Co. Ltd., [1914] AC 461 at 471 (per Lord Haldane), [1914-15] All ER Rep 752 at 757. 84 Herbert Morris Ltd. vSaxelby,[1916] 1 AC 688 per Lord Atkinson at 699, [1916-17] All ER Rep 305 at 308. 85 Attorney-General of the Commonwealth of Australia v. Adelaide Steamship Co. Ltd., [1913] AC 781, [1911-13] All ER Rep 1120 at 1126. 86 Halsbury's Laws of England, Vol. 18, 5th edn, 1 July 2009, COMPETITION, para 412; Herbert Morris Ltd. v. Saxelby, [1916] 1 AC 688 per Lord Shaw at 716, [1916-17] All ER Rep 305. 87 Trietel, Outlines of Law of Contract, 2nd edn., p. 175. 88 Tool Metal Mfg. Co. Ltd. v. Tungsten Electric Co. Ltd., [1955] 2 All ER 657, [1955] 1 WLR 761(HL) ; but see s. 141 of the Patents Act, 1970, under which, a patentee, lessee or licensee of a patent, can determine a contract of patent after the term of the patent on giving three months notice, notwithstanding any provision in the contract. 89 Boddington v. Lawton, [1994] ICR 478; Joseph Evans and Co. Ltd. v. Heathcote, [1918] 1 KB 418, [1918-19] All ER Rep 279, [a case under the (English) Trade Unions Act, 1871].
Types of Agreements Contracts of Employment Restraint covenants are often found in agreements between employers and employees,90 whereby the latter covenant not to set up business on their own account on leaving the employer, or to enter into a rival firm. Employees also covenant not to carry on any other trade or business or occupation except that with the employer. Restraint during and after Employment Considerations against restrictive covenants are different in cases where the restriction is to apply during the period after termination of the contract than those in cases where it is to operate during the period of the contract. Negative covenants operative during the period of the contract of employment when the employee is bound to serve his employer exclusively, are generally not regarded as restraint of trade and do not fall under s. 27 of the Contract Act . During the period of employment, the employer has the exclusive right to the services of the employee. A restraint operating during the term of the contract fulfils one purpose, that of furthering the contract, such a restraint is designed to fulfill the contract.91 A negative covenant, that the covenantor would not engage himself in a trade or business or would not get employment under any other master for whom he would perform similar or substantially similar duties, is not a restraint of trade92 unless the contract is unconscionable or excessively harsh, unreasonable, or one-sided.93 But a restraint operating after the termination is for securing freedom from competition from a person who no longer works within the contract.94 Restraint during Employment An agreement of service by which an employee binds himself, during the term of his agreement, not to compete with his employer, directly or indirectly, is not in restraint of trade.95 If it were otherwise,
all agreements for personal service for a fixed period would be void. An agreement to serve exclusively for a
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week, a day, or even for an hour, necessarily prevents the person so agreeing serve from exercising his calling during this period for anyone else than the person with whom he so agrees. It can hardly be contended that such an agreement is void. In truth, a man who agrees to exercise his calling for a particular wage and for a certain period agrees to exercise his calling and such an agreement does not restrain him from doing so. To hold otherwise would, I think, be a contradiction in terms.'
Where the contract of employment contains a negative covenant restricting the employee from taking any other employment, and the employee leaves the service, the negative covenant can be enforced to the extent that the unexpired part of the term of service would be essential for the fulfillment of the contract.96 Thus, in Niranjan Shankar Golikari v. The Century Spinning and Mfg Co. Ltd., 1, the respondent company entered into a collaboration with a German company which agreed, for a consideration, to transfer their technical know-how to be used exclusively for the company's tyre cord yarn plant at Kalyan. The agreement provided that the company would keep the secret during the period of agreement. Three years after this, all technical information, knowledge, know-how experience, data and documents would be passed by the German company to the respondent company. The covenantor was appointed as shift supervisor on the condition that he would have to sign a contract in the standard form for the term of five years which was accepted by the covenantor, the covenant being that the covenantor would devote wholly all his time and energy to the business and affairs of the respondent company and shall not engage directly or indirectly in any business or serve in any capacity in any business whatsoever other than that of the company. In another paragraph, it was provided that in the event of the covenantor leaving the service of the covenantee before the expiry of the period, he shall not engage himself in or carry on the business being carried on by the company, nor shall he serve in any capacity, any person for the remainder of the period of service. In addition, he was to pay liquidated damages amounting to the amount spent by the company on the covenantor's training. The covenantor, after receiving training, resigned and took a similar employment with another company. The injunction sought by the company was granted. The circumstances taken into consideration were that the covenant was restricted to the period of service, to the work similar or substantially similar to the one carried by the covenantor and it was necessary and reasonable for the protection of the employer's interest. There was nothing to show that the enforcement of the covenant would lead either to the idleness or of his being compelled to go back to the employer. It was not a valid consideration that in another employment the covenantor would get a lesser remuneration than the one paid by his new employers.2 In VN Deshpande v. Arvind Mills Co. Ltd., 3 an employee contracted to serve as a weaving master for three years, and agreed not to serve anyone else in India during that period. He left the service after one year, and joined another mill as a weaving master. In terms the prohibition in the agreement was not restricted to serving anyone else as weaving master, but was absolute. The court, however, in the light of the intention of the parties, construed the prohibition as confined to the profession of weaving master, held the agreement reasonable, and issued an injunction against the employee. In Sociedade de Fomento Industrial Ltd. v. Ravindranath Subraya Kamat, 4 a clause in an adviser's appointment with the plaintiff restraining him from conducting business activities similar to those of the plaintiff company was held valid since the restraint operated only during the subsistence of the agreement. In Makhanlal Natta v. Tridib Ghosh, 5 a stage artist had agreed with a drama company not to join another drama company. The clause was considered reasonable, and the artist restrained from joining another company. The clause was reasonable considering that the remuneration given to him by the plaintiff was much more than that offered by the other company, and that injury to the plaintiff was irreparable. A negative covenant in a contract of service of an assistant engineer not to leave the service of his employer during the term of the contract, and not to serve or engage for any other firm in India or elsewhere during that period was not in restraint of trade.6 However, even the restraints which operate only during currency of employment may be subject to the doctrine of restraint of trade, if the restraints are such that one of the parties is so unilaterally fettered that the contract loses its character of a contract for the regulation and promotion of trade and acquires the predominant character of a contract in restraint of trade.7 In Gopal Paper Mills Ltd. v. Surendra Kumar Ganesh Das Malhotra, 8 the plaintiff carried on the business of manufacturing paper. He appointed the defendant as an apprentice to serve him for twenty years (of which the first three
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years as an apprentice). During the twenty years the defendant was not to give advice or services to any other person or company or to divulge to any person any information which he might receive or obtain with regard to the affairs of the plaintiff. His starting salary was Rs. 15/- per month, rising in twenty years time to R s. 300/- per month. He left one year after joining service. Injunction was refused on the ground that the contract gave the employer an arbitrary power to terminate the service without notice, if he decided not to retain the employee during the three years of apprenticeship or thereafter. No trade secrets or confidential information was imparted to the defendant; hence the question of the protection of trade secrets or connections did not arise. Effect of Premature Termination of Employment on the Restraint Wrongful dismissal of the employee, being an entire repudiation of the contract, puts an end to an ancillary agreement like the covenant in restraint of trade.9 A company, having developed its own technique for quality testing and control, and having built up its reputation, possessed certain trade secrets. It employed one R who entered into an agreement with the firm containing a post-service restraint of not taking up service with a firm in competition with the former firm, nor start his own business at the place of his last posting for a period of two years. This condition would become operative after 'you leave service'. R's service was terminated and he started his own business substantially on the same lines as his former buyers. The employers sued for injunction and damages. It was held that the terms of the contract applied only to R's voluntary giving up service, and therefore the suit failed.10 However, an employee's unilateral repudiation of contract of service keeps the contract in force, including the restrictions placed on the employee not to disclose trade secrets or deal with the employer's suppliers and customers.11 So also, payment in lieu of notice is not a wrongful dismissal amounting to a repudiation of the contract so as to free the covenantee from such a restraint, unless the contract of employment is such which obliges the employer to provide work for the employee.12 Restraint beyond Employment under Section 27 In Indian law, a service covenant extending beyond the term of service is void,13 where in similar cases; the English law would allow restraint which is reasonable. The negative covenant in a contract of employment placing a restraint on the employee that he shall not serve in any other competitor's firm for two years at the place of his last posting after the employee left the company, would be void.14 A 'garden-leave clause' operating after the termination of employment is also void.15 But a term restricting an employee from disclosing trade secrets and confidential information after ceasing employment can be enforced.16 Restraint beyond Employment Where restraint beyond employment may be valid, courts take a stricter view of covenants between master and servant than of commercial contracts.17
&uot;While construing a restrictive or negative covenant and for determining whether such covenant is in restraint of trade, business or profession or not, the courts take a stricter view in employer-employee contracts than in other contracts, such as partnership contracts, collaboration contracts, franchise contracts, agency / distributorship contracts, commercial contracts. The reason being that in the latter kind of contracts, the parties are expected to have dealt with each other on more or less an equal footing, whereas in employer-employee contracts, the norm is that the employer has an advantage over the employee and it is quite often the case that employees have to sign standard form contracts or not be employed at all;&uot;18
The principle is based on the policy that an employer has no legitimate interest in preventing an employee after he leaves service of a competitor merely because of his being a competitor.19
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...when a controversy is as to the validity of an agreement, say for service, by which someone who has little opportunity of choice has precluded himself from earning his living by the exercise of his calling after the period of service is over, the law looks jealously at the bargain; but when the question is one of the validity of a commercial agreement for regulating their trade relations, entered into between two firms or companies, the law adopts a somewhat different attitude--it still looks carefully to the interest of the public, but it regards the parties as the best judges of what is reasonable as between themselves.
If, then, the compensation provisions were, in the light of the agreed arrangement as a whole, reasonable as between the parties, they can only be invalidated if they are shown to have been against the public interest and voidable, therefore, on grounds of public policy.20
The reason for upholding restraint against an employee is to protect the proprietary rights of the employer if it is reasonably necessary in the case of trade connections or trade secrets, but it is not available if directed to prevent competition, or against the use of personal skill and knowledge acquired by the employee in his employer's business.21 The employer cannot restrain the exercise of extra skill and knowledge acquired by the employee during the course of his employment.22
'...The capacity of the servant must obviously be due mainly to natural gifts as a canvasser and only in a secondary degree to special training 'by the employers'. That did not entitle them to exclude the employee from exercising his talent within the time and the area specified in the agreement.23 A film act or, who had made a reputation under a pseudonym, could not be restrained under the term of his employment from using that name after the termination of his employment.24
The enforceability of a restrictive covenant does not extend to the business of the employer other than the one the employee was employed in.25 Thus, a tailor's assistant giving a covenant not to carry on any business within a certain range of time and space is invalid, but not if it is confined to a tailor's business.26 So also, in the case of an employee of a company, a covenant to protect associated or subsidiary companies in which he does not serve may be an unreasonable restraint.27 Restraints against the invasion of trade connection have been upheld in the case of a solicitor's clerk,28 a tailor's cutter-fitter,29 a milk roundsman,30 a stockbroker's clerk,31 and the manager of the brewery.32 On the other hand, they have been disallowed in the case of a grocer's assistant33 and in cases where the business is one in which customers do not normally recur, as, for instance, that of a house agent.34 But the law will not tolerate a restraint 'in gross', i.e., the covenantor will not trade at all.35 The question whether a particular covenant in an agreement of service is unreasonably wide depends upon the nature of the agreement, the service to be rendered, the place of employment and availability of service of the same nature.36 The fact that the employee is unqualified and uncontrolled by professional rules, may be taken into account.37 An agreement between a motor garage owner and his employee, a skilled mechanic, that the latter shall not take up employment with another garage for a period of 12 months after termination of service, was held unenforceable in Australia.38 This was because of the notorious shortage of labour and economic situation and because of the shortage of houses,39 and because it was not limited to the area where the workman was employed. A manager of a bookmaker's business had agreed to a covenant not to carry on business within 12 miles and for three years. He had the book containing the names and addresses of customers. Yet this agreement was held unenforceable, as the nature of business was not such that either the customers would seek out the defendant, or he had acquired any personal goodwill, confidential information or knowledge to endanger the plaintiff's business. The agreement was against legitimate competition.40 An agreement between an insurance company and one of its employees provided that the employee, after ceasing to be an employee of the company, would not solicit business from the company's clients, a term narrowly defined, and the period of prohibition was five years. It was held that the clause prohibiting soliciting the customers of the
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company was not unreasonable, but the term of five years was unreasonable restraint, making the agreement void.41 Contract between a renowned personality and publicity agents that after the term of the contract, the agents will be offered first right of refusal of any contract, enabling the agent to match the deal, was held void under this section.42 A promise by a director of a company that on resigning as director, he will not carry on competing business violated s. 27.43 Protection of Trade Secrets and Confidential Information In an employment contract, the employer has two interests worthy of protection; trade secrets and business connections. In case of restraints in contracts of employment, it is not enough that the employer's business will suffer from competition. It must be shown that the employee has entered into a contract with the customer, or has trade secrets of the employer. In such cases the nature of the business and the nature of the employment are relevant factors; but although an employer can protect his trade secrets or other confidential information, he cannot prevent the use of the employee's own knowledge, skill or experience, even if this is acquired during the course of employment.44 It has been stated:45
Acquisition of excellence is a very long process in the career of every one. No one else can have proprietary rights or interest in such acquisition of excellence. Such excellence cannot be acquired merely by possessing a trade secret of any one. No Hospital can prevent a heart surgeon from performing heart surgery in some other hospital by saying that the heart surgeon had acquired skill by performing heart surgeries in that hospital. It is a personal skill which the heart surgeon acquired by experience. Same is the case with the salesman who negotiates with a customer for sale of the product of his employer. He learns from the experience how to talk with the different people differently and how to canvas for the sale of the product successfully. He knows the selling points of a particular product by experience. He acquires good and sweet tongue if he is a salesman dealing with the female folks for the products required by them. He learns the art of tackling the illiterate people. He comes to know how to deal with the old and aged people. He knows the quality of his products. He knows the rates. He might perhaps also be knowing the cost of the products and the profit margin of the employer. All these factors cannot be called trade secrets.
An employee owes a duty of fidelity to his employer. He must not disclose to others or use to his own profit, trade secrets or confidential information which he learns during the course of employment. Equity awards injunction against such erring servants,46 and common law awards damages.47 An employee may not divulge trade secrets acquired during his employment, even in the absence of an express contractual prohibition. But an employer cannot protect himself against the use of confidential information acquired during employment, unless it amounts to a trade secret.48 An employer is entitled to protect confidential information which amounts to a trade secret or which prevents 'some personal influence over customers being abused in order to entice them away'.49 In Herbert Morris Ltd. v. Saxelby, 50 Lord Parker emphasised that for the restraint to be justifiable, the servant must be one of who has acquired not merely knowledge of customers, but in addition, influence over them. An employer can prohibit lawfully his employee from accepting, after determination of his employment, such a position where he is likely to utilise the information of secret processes and trade secrets acquired by him during the course of employment. He may also covenant to prohibit his employee from setting up on his own, or accepting employment with the employer's competitors likely to destroy the employer's trade connections by a misuse of acquaintance with the employers' clients. The employee may also be prevented by covenant from soliciting the former employer's customers or clients. Confidential information must be highly confidential before it could be classified as a trade secret. In deciding whether information amounted to a trade secret, the following factors are relevant: (a) the status of the employee and the nature of his work; (b) the nature of the information itself; (c) whether the employer impressed the confidentiality of the information on his employees; (d) whether the information could easily be isolated from other information which the employee was free to use. A good practical working rule is that information normally carried in the employee's head may be used,
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but if the employee takes, copies, or even memorises lists of customers or similar information, this may well be a breach of the employee's duties even in the absence of an express covenant.51 The party seeking injunction must show the information is exclusive or confidential or is a trade secret.52 The most common explanation of this duty has been that of an implied term in the contract of employment.53 But this has ceased to be the view and now it is said to be based merely on confidence.54 Where it is proved that the employer is justified in apprehending that the employee may, on joining the service of the competitor, divulge the special knowledge and secrets in business gained by him while in the employer's service, after receiving special training; an injunction to enforce negative contract which is restricted as to time, nature of employment and area, can be issued in order to protect the employer's interest.55 In Cranleigh's case,56 an injunction was given against a servant who, as a servant, acquired confidential information and sought to take advantage of it after leaving the service of the master. This would be so even where the servant's conduct is not dishonest, but inconsistent with his duty towards the master who would be entitled to dismiss the servant summarily.57 The principle was extended to licencees of a patent, who used for their own benefit, furthered ideas communicated and information given before negotiations to them by the patentees for the purpose of manufacturing their machines,58 which proved abortive. The court awarded damages as compensation even though the use by the defendant was honestly done and the breach was innocent.59 Protection of Trade Mark Where the subject matter of the suit is a trade mark, and the injunction seeks to restrain its use, this section is not applicable.60 Restraint must be Reasonable The restraint, in order to prevent misuse of trade secrets or business connections, has to be reasonable in the interest of the parties, affording no more than adequate protection to the covenantee, which will depend upon the two factors of time and space. As the time of restriction lengthens or the space of its operation grows, the weight of the onus on the covenantee to justify it grows too;61 but a restraint for life was held valid in Fitch v. Dewes, 62 a case of a solicitor's clerk. An ex-servant confidentially employed in the manufacture of an article under a secret process is under an implied obligation to his late master not to disclose any knowledge or information as to that secret process acquired during his employment.63 This applies to information retained in servant's memory as well as to information committed to writing and existing in a tangible form.64 An injunction will be granted where the court is satisfied as to the existence of a secret process the servant has learnt during his service and of its misuse by the servant, even without the disclosure of the secret process to the court.65 A restraint against competition is justifiable if its object is to prevent the exploitation of trade secrets learned by the servant, in the course of his employment, viz. in Forster & Sons Ltd. v. Suggett, 66 where a works manager had knowledge of certain confidential methods concerning to correct mixture of gas and air furnaces for making glass and glass bottles. An employer is also entitled to protect his trade connection, that is to prevent his customers from being enticed away by a servant formerly in his employment;67 but if the so-called secret is nothing more than a special method of organisation adopted in the business, or if only part of the secret is known to the servant so that its successful exploitation by him is impossible, there can be no valid restraint.68 A contract not to divulge a trade secret may be reasonable though unlimited as to space or time, and a restraint imposed in order to give effect to such a contract would apparently be treated in the same way.69 But a covenant reasonably necessary to protect an employer against the betrayal of trade secrets or confidential information is not void merely because it unavoidably protects the employer against competition.70 Breach of Confidence
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No one can divulge to the world information received in confidence without just cause or excuse, even if he acquires it innocently. But the complaining party must be entitled to have the confidence respected and be one to whom duty of good faith is owed.71 But there is an exception, e.g., to the disclosure of iniquity.72 Commenting on the word 'iniquity', Denning MR, has observed that this is not a principle, but merely a just cause or excuse for breaking confidence. There may be cases of breach of confidence which are defamatory, where the courts may intervene even though justification is pleaded.73 The confidence can be enforced by injunction as well as damages.74 The duty to observe confidence is based on the broad principle of equity, that he who has received information in confidence shall not take unfair advantage of it.75 But when the information is mixed, partly private and partly public, then the recipient must take special care to use only the material which is in the public domain.76 An injunction can also be given against an innocent third party to whom the information is passed on.77 If the information was not confidential, the agreement might be unenforceable as a restraint of trade.78 Sale of Goodwill Although a restraint seeking to protect the covenantee against competition per se is not upheld in the case of other contracts,79 a purchaser of a business is entitled to protect himself against competition per se on the part of the vendor.80 This exception deals with a class of cases which had a leading part in causing the old rule against agreements in restraint of trade to be relaxed in England. The rule apparently arose from a popular dislike of all combinations tending to raise prices, which may be compared with the agitation in America against the modern system of 'trusts'. It has been laid down in quite modern cases, as the governing principle, that 'no power short of the general law,' not even the party's own bargain, should be allowed to restrain a man's discretion as to the manner in which he shall carry on his business,81 and originally the rule was without exceptions. 'In time, however, it was found that a rule so rigid and far-reaching must seriously interfere with transactions of everyday occurrence',82 and from the early sixteenth century onwards, restrictions 'for a time certain,' to prevent the seller of a business from competing with the buyer, were allowed. In the nineteenth century, it was settled that a limit of time was not necessary, and contracts for the preservation of trade secrets were held to be outside the rule altogether, and finally, the House of Lords declared that there was no hard and fast rule as such, at all. The question is always whether the restraint objected to is reasonable with reference to the particular case, and not manifestly injurious to public interest.83 Exception 1 This exception enables the purchaser of the goodwill of a business to exact a covenant from the vendor of the business ('one who sells the goodwill of the business') and has a limit as to area and as to time. This exception imposes a limit on the area when it provides that it can operate only when the restraint is within 'specified local limits'. This provision, made when general restraints were void under the common law, appears very stringent when under that law, even worldwide covenants have been enforced as reasonable. The third limitation of this exception, is that a restraint can operate only so long as 'the buyer or any person deriving title to the goodwill from him carries on a like business therein.' This shows that the benefit of the covenant is assignable and available to the successor in title of the covenantee. It also provides that the covenant is extinguished once the goodwill comes to an end. The kind of cases covered by this exception may be illustrated by a decision before the Act. A covenant by the defendants on the sale of the goodwill of their business of carriers to the plaintiff not to convey passengers to and fro on the road between Ootacamund and Mettapalayam was not in restraint of trade. So, partial restraint is not really adverse to the interests of the public at large.84 The covenant may be justified even when the business is in an embryonic stage. In Chandra Kanta Das v. Parasullah Mullick, 85 a covenantor running a ferry for only a few months in competition with
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the long-established business of the covenantee was held to possess goodwill for the purpose of restraining him from carrying on that business for three years. One view is that in a case like Nordenfelt,86 where the goodwill was sold by a company, but the restrictive covenant agreed by its managing director, the strict wording of the section should not deprive the covenantee of the benefit of the covenant given by the director.87 Horizontal Trading Agreements An agreement between manufacturers not to sell their goods below a stated price, to pay profits into a common fund and to divide the profits in certain proportions, is not avoided by this section, and cannot be impeached as opposed to public policy under s. 23, even though it is likely to limit competition and keep up the prices.88 An agreement for a fixed period between two millers not to charge less than a certain price for milling others' rice, and to work their mills during alternate weeks and to pay penalty in case of breach, was enforceable, being an agreement for the mutual benefit of the parties;89 so was an agreement between two factory owners to work one factory alone and divide profits.90 An agreement in the nature of a trade combination for mutual benefit for the purpose of avoiding competition is not necessarily unlawful, even if it may damage others.91 The agreement which was held void in Shaikh Kalu v. Ram Saran Bhagar, 92 was clearly not for the mutual benefit of the parties and was an attempt to create a monopoly. Rules framed for regulating the market would amount to restraint of trade, if they are unreasonable and stifle trade. The restraint would be reasonable if it affords fair protection to the parties and does not interfere with public interests.93 The question whether an agreement whereby manufacturers agree with one another to carry on their work under special conditions, or traders agree amongst themselves to sell their wares at a fixed price, is in restraint of trade and has frequently arisen in English courts. Such agreements have, in some instances, been disallowed, and in others upheld, as the restraints were or were not deemed to be in excess of what was reasonably sufficient to protect the interests of the parties concerned.94 Agreements of this description do not appear to be common in India. In two decisions in the Bombay High Court, the question, though raised, was not decided.95 In a later case, however, in the Allahabad High Court, it was held that a combination among traders in a particular place to do business only among their members, paying part of their profits to a common fund and levying fines upon their members for breach of conditions laid down by the combination did not offend s. 27, and was not act ionable merely because it brought profit to the combination and indirectly damaged their trade rivals.
It is perfectly clear that the defendants did not unlawfully or by illegal means procure any breaches of contract in favour of the plaintiffs. There was no conspiracy on the part of the defendants to compel the plaintiffs' vendors not to supply goods to the plaintiffs. A certain amount of pressure was brought to bear upon their constituents, the object of which was that if the latter wished to continue to be members of the association they had to obey the edicts of the association and cease to deal with outsiders. The persons had a choice of action. They were not the victims of any coercion on the part of the defendants. Where a person has a choice of one and other of two courses with their attended advantages or disadvantages, coercion is not necessarily one of the elements involved in the transaction. There was no organized conspiracy on the part of the defendants to do harm to the plaintiffs. The association of the defendants was formed with the primary object of keeping the trade in their own hands and not with the intention of ruining the trade of the plaintiffs. The association therefore was not unlawful and there was no cause of act ion for a claim founded upon conspiracy. The plaintiffs are, therefore, not entitled to the relief claimed.1
Vertical Trading Agreements Exclusive Dealing Agreements An agreement between two ice-cream manufacturers and a milk bar whereby the latter agreed for 5 years to exclusively sell the manufactures of the former, was upheld.2 However, an agreement to supply silica sand for one year, with a stipulation not to supply sand during that period to four specified
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factories was void to the extent it restrained trade or business.3 Solus ties The essential features of solus trading4 common in the petrol distributorship industry, consists of an undertaking by the retailer to sell a particular supplier's brand or brands of motor fuels exclusively, in consideration of a solus rebate to be allowed by the supplier on all the motor fuels purchased ('the tying covenant'). Such agreement may also provide for some measure of support to be given to the products of the petrol companies other than motor fuels, particularly lubricating oils. The retailer also agrees that he will procure acceptance of existing solus obligations by a purchaser on the sale or transfer of his business and would give the petrol company the first refusal of purchase ('the continuity covenant'). The petrol company further stipulates that the retailer must be open at reasonable hours and provide an efficient service ('the compulsory trading covenant'). In Petrofina (Great Britain) Ltd. v. Martin, 5 an agreement by a filling station owner to sell only one brand of petrol, not to dispose of the premises without first offering them to the oil company, the agreement being for 12 years and thereafter to be determined by three months' notice with an additional condition of selling 600,000 gallons of motor fuel before termination, was held void as in restraint of trade. It imposed on the owner a more onerous restraint than necessary for protecting the company's competitive position and the agreement interfered with the freedom of choice of the owner as to whether and for how long he shall continue to trade at the filling station. In Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., 6 the Esso Company entered into two solus agreements with H who owned two garages C and M for the supply of motor fuel. With regard to C there was a mortgage in favour of Esso repayable in 21 years and the agreements imposed upon H not to sell any motor fuel except of Esso's. The agreement regarding M was for 4ih years and also contained a retail price maintenance clause. Esso later wrote to H deleting this clause. H started selling other petrol both at C and M garages. Esso sued for injunction which was granted.7 The Court of Appeal held the clause to be in restraint of trade, the one in case of M garage because it was for too long a period consisting all the circumstances including 'continuity' clause, 'keep open' clause and 'tie' clause and was an unreasonable restraint of trade and therefore unreasonable; and in the case of C garage where 7 000 had been advanced by Esso and the period was 21 years for buying the garage and improving it, the amount being repayable after 21 years.8 The House of Lords granted injunction granted in respect of M garage but refused it qua C garage,9 holding; (a) agreements could not be excluded from the ambit of the doctrine regarding agreements by way of restraint of trade by the fact that the restriction imposed was by way of covenant in a mortgage of land; (b) solus agreements were within the category of agreements in restraint of trade (as distinct from agreements for promoting trade) and required to be justified on the ground of reasonableness; so also did the stipulations in the mortgage in respect of C garage, the loan and mortgage being linked with the solus agreement as one transaction; (c) the crucial consideration in determining reasonableness was the length of the period for which each agreement was to last; (d) in the circumstances the period of the solus agreement for the M garage (between four and five years) was reasonable; but the period of 21 years in relation to C garage was unreasonable and the mortgage could be redeemed. Normal covenants imposed on a sale or lease of land are not within the principle of this decision and their validity is not affected. If however, a covenant imposed on land on such an occasion was essentially personal trading covenant, the principle would apply.10 In Cleveland Petroleum Co. Ltd. v. Darstone Ltd. 11S, the owner of a garage, leased the premises to the plaintiff for 25 years. The plaintiff granted an under-lease to another company with a covenant that the under-lessee will at all times carry on the business of petrol filling station and to sell and distribute motor fuel supplied by the plaintiff. After several assignments, the defendants become under-lessees and undertook to observe and perform the covenants, and then challenged the validity of the ties. The plaintiffs obtained an interim injunction on the ground that it was not an unreasonable restraint of trade because the defendants, not having been in possession previously, took possession under a lease and entered into a restrictive covenant knowing about such covenants and were bound. The principle was explained: if an owner in possession ties himself up for more than five years to take all his
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supplies from one oil company, it is unreasonable restraint of trade, but if a man out of possession is let into possession by the oil company on the terms that he is to tie himself to that company, such a tie is good. In determining whether a solus agreement is enforceable or not the court will have regard to the entire agreement and the surrounding circumstances. The Court of Appeal, taking into account surrounding circumstances, found even a tie of 21 years unobjectionable12 though previous to this it had been thought that as a result of the Esso decision, a tie for longer than five years would not be valid unless the petrol company produced evidence of economic necessity justifying a longer period. During the operation of a solus agreement by which L tied himself to sell petrol only from Shell; Shell introduced a support scheme which operated to the detriment of L and in favour of neighbouring garages working under Shell's agreement. L gave notice of termination of agreement under the contract and Shell brought an action for injunction against L restraining him from breach of the agreement. L counterclaimed that the agreement was in restraint of trade and alternatively a term should be implied therein that Shell could not discriminate against L in working the support scheme. The Court of Appeal held that no term such could be implied, but that the operation of the agreement was unreasonable restraint of trade as the support scheme unfairly and unreasonably operated against L, and further because it was not in the contemplation of the parties when the agreement was entered into.13 A legal charge on property of the defendant to whom a sum of money was advanced payable in the certain number of the years in half yearly installments, coupled with a solus tie was not void as being in restraint of trade because: (a) the restraints were reasonable in reference to the parties since they conformed to the test laid down by authorities, the test being that such restraints were no more than what was necessary for the protection of the rights of the covenantee and the restraints were part of a commercial contract between parties with equality in bargaining and the contract would not interfere with the parties' interest; (b) the restraints were reasonable in reference to the interest of the public since such interest referred to the interest of the public as recognized and recognizable by law, and it did not refer to the interest of the public at large. So the question such 'reasonable' raised was not whether the abolition of the restraints would not lead to a different organization of industry or society, and these, on a balance of different circumstances lead to the economic or social advantage to the country; but whether the restraint was in industry or society as at present organized; and with reference to which the law operated, reasonable, in the interest of the public as recognised in principle of law. Thus considered, the restrictions were reasonable in reference to the interest of the public expressed in the proposition that public had an interest in men being able to trade freely, subject (inter alia) to reasonable limitations which conformed to contemporary trade.14 Lease and Lease-back In Amoco Australia Pvt. Ltd. v. Rocca Bros Motor Engineering Co. Pvt. Ltd., 15 an agreement was entered into between Amoco, a petrol refiner and distributor, and Rocca, a service station proprietor, whereby Rocca was to build a service station on a vacant piece of land at its own expense, but the necessary plant and equipment for the station was to be supplied by Amoco. When built, Rocca was to grant lease of the premises to Amoco for 15 years at a rent of GBP 1 a year and a commission of 3 d per gallon on all petrol supplied to the service station by Amoco; and Amoco was to grant a sub-lease to Rocca at GBP 1 a year for a period of 15 years less a day. The lease and the sub-lease were to be attached to the agreement. Clauses 18 and clause 19 of the lease and under-lease provided that Rocca would not cease business during the period therein mentioned without the consent in writing of Amoco. Rocca was not to purchase and sell petrol of any other company, and there was also a condition of minimum quantity to be purchased by Rocca from Amoco. Rocca later tried to remove the plant and equipment of Amoco and replace them with equipment of another company and Amoco brought an act ion against Rocca, and the issue agreed to be tried was whether the agreement was an unreasonable restraint of trade making the under-lease and also the lease, void. The Privy Council on appeal from Australia, held that the agreement was an unreasonable restraint of trade which made both the under-lease and the lease void--the whole transaction being
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one.16 Agreements between Employers Labour and Services Agreements, which attempt to regulate labour and impose restrictions on re-employment of former employees under the guise of master-servant covenants, will be struck down as being master-servant covenant in disguise.17 An agreement between two neighbouring firms carrying on the same business, not to employ servants in their respective employment during the previous five years, was held to be void as being unreasonable and excessive in the interest of the parties because: (a) it applied to all employees without distinction between those, for example, who did manual labour, and those who possessed of trade secrets or confidential information; and (b) the real reason of the agreement was the proximity of the two firms and there was no provision for limiting the duration of the period while the proximity continued.18 Retain and Transfer System This scheme involves a combination of two systems, the retain system and the transfer system. This applied to, for example, football--all players in the football league have to be registered by a club with a football association. Once a player has been so registered with one club, he cannot play football for another club, unless the club with which he is registered, agrees to transfer him. This restriction may be worldwide in scope because of interlocking arrangements with other national governing bodies through the international governing body controlling the sport. A club would then enter into a contract with a player for a term, say a year; after the term is over, the club is not bound to offer him a new contract, but can either put him on a retain list at a modest payment, or on a transfer list. In the latter case the club can give him a free transfer or charge a transfer fee, which the transferee club is liable to pay to the transferor club, and only a small part of the fee might be paid to the player.19 Thus in Eastham v. Newcastle United Football Club Ltd., 20 under the rules of a football association, the defendant club operated a 'retain and transfer' system. The plaintiff, a professional football player employed at the club, claimed that these conditions were not binding on him as being in unreasonable restraint of trade, and were invalid. Wilberforce J. upheld this contention and held that the combined effect of retention and transfer system was in restraint of trade because, (a) the arrangement did not amount merely to giving the employer options to extend contracts from year to year;21(b) the retention system interfered with players' obtaining other employment when they no longer remained employees of the retaining club; and (c) the legitimate interests of the association could not justify the retention of the transfer system.22 Trade Unions A rule of a registered trade union that 'no person who has been convicted of a criminal offence... shall be eligible for or retain membership of the association' is not void as uncertain, unreasonable, contrary to natural justice or restraint of trade.23 A distinction was drawn between the rules for admission to a trade union and expulsion there from. The closed shop rule imposed by a registered trade union upon persons seeking employment with the employer is valid in the UK notwithstanding that it is in restraint of trade.24But 'closed shop' agreements have been criticised as of debatable value; and it has been held in India that there is no provision in the Trade Unions Act, 1926 for enforceability of a 'closed shop' agreement between an employer and the trade union of employees.25Agreements between members of a registered trade union are protected from the doctrine of restraint of trade by s. 19 of the Trade Unions Act, 1926.26 Professional Bodies The doctrine of restraint of trade was applied to the rules of professional body's code of ethics in Dickson v. Pharmaceutical Society of Great Britain, 27 where the latter society had included in its code of ethics a rule the effect of which would be the elimination of non-traditional goods being retailed by
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chemists such as 'Boots'; such goods being other than pharmaceutical goods and traditional goods like toiletries and photographic equipment. The rule was held arbitrary and capricious. The doctrine of restraint of trade was restated as reasonable 'if it is reasonable in the interests of the profession and also in the interests of the public'. A well-known and capable woman racehorse trainer was refused a licence by the stewards of a jockey club on an unwritten practice that such licences were given only to men. The Court of Appeal held that the stewards were acting capriciously and she had locus standi to avoid a rule or practice having that effect.28 Thus, the existence of a contract as a prerequisite to relief only if the defendant organization was a social club29 is no longer the law.30 90 Employees State Insurance Corporation v. Tata Engineering and Locomotive Co. Ltd., AIR 1966 Pat 445 (a contract of apprenticeship where a person is bound to another for the purpose of learning a trade, does not create the relationship of employer and employee). 91 Taprogge Gesellschaft MBH v. IAEC India Ltd., AIR 1988 Bom 157. 92 Niranjan Shankar Golikari v. Century Spg and Mfg. Co. Ltd., [1967] 2 SCR 367, AIR 1967 SC 1098; distinguishing Gopal Paper Mills Ltd. v. Surendra Kumar Ganesh Das Malhotra, AIR 1962 Cal 61; Lalbhai Dalpatbhai er Co. v. Chittaranjan Chandulal Pandya, (1965) 2 LLJ 284, AIR 1966 Guj 189; Gaumont-British Picture Corpn. Ltd. v. Alexander, [1936] 2 All ER 1686 (agreement not to serve another during term of contract not restraint of trade); William Robinson and Co. Ltd. v. Hever, [1898] 2 Ch 451; Rely-a-Bell Burglar and Fire Alarm Co. v. Eisler, [1926] Ch 609; Ehrman v. Brotholomew, [1898] 1 Ch 571; Warner Brothers Pictures Inc. v. Nelson, [1937] 1 KB 209, [1936] 3 All ER 160; VN Deshpande v. Arvind Mills Co. Ltd., (1946) Bom 89, AIR 1946 Bom 423, 48 Bom LR 90, 226 IC 138. 93 Niranjan Shankar Golikari v. Century Spg and Mfg. Co. Ltd. supra ; quoting WH Milsted and Son Ltd. v. Hamp and Ross and Glendinning, [1927] WN 233. 94 Tapragge Gesellschaft MBH v. IAEC India Ltd., AIR 1988 Bom 157. 95 Gaumont-British Picture Corpn. Ltd. v. Alexander, [1936] 2 All ER 1686; Warner Brothers Pictures Inc. v. Nelson, [1937] 1 KB 209, [1936] 3 All ER 160. 96 Niranjan Shankar Golikari v. Century Spg and Mfg. Co. Ltd., [1967] 2 SCR 367, AIR 1967 SC 1098; Blue Dart Aviation Ltd. v. Vikram Bains, (2005) 4 LW 509(Mad), 8 Jul 2005 (injunction refused on grounds of reparable injury and balance of convenience). 1 Ibid. 2 Ibid. 3 (1946) Bom 89, AIR 1946 Bom 423, 48 Bom LR 90, 226 IC 138; Bhavesh J Bhatt v. Cyrus N Baxter, (1990) 92 Bom LR 474. 4 AIR 1999 Bom 158. 5 AIR 1993 Cal 289. 6 Lalbhai Dalpatbhai & Co. v. Chittaranjan Chandulal Pandya, (1965) 2 LLJ 284, AIR 1966 Guj 189; Page One Records Ltd. v. Britton, [1967] 3 All ER 822, [1968] 1 WLR 157; Irani v. Southampton and SW Hampshire Area Health Authority, [1985] ICR 590. 7 Greig v. Insole, [1978] 3 All ER 449, [1978] 1 WLR 302 at 325; Clifford Davies Management Ltd. v. WEA Records Ltd., [1975] 1 All ER 237, [1975] 1 WLR 61; A Schroeder Music Publishing Co. Ltd. v. Macaulay, [1974] 3 All ER 616, [1974] 1 WLR 1308; Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1968] AC 269 at 328, [1967] 1 All ER 699, [1967] 2 WLR 871--in light of these cases, it would appear that Warner Brothers Pictures Inc v. Nelson, [1937] 1 KB 209, [1936] 3 All ER 160, where onerous restrictions upon a film actress were considered not to be within the doctrine of restraint of trade, since they related to her period of employment, can no longer be relied upon. 8 AIR 1962 Cal 61. 9 General Bill-posting Co. Ltd. v. Atkinson, [1909] AC 118, [1908-10] All ER Rep 619; Measures Bros v. Measures, [1910] 2 Ch 248; Briggs v. Oates, [1991] 1 WLR 407. 10 Superintendence Company of India Pvt. Ltd. v. Krishana Murgai, AIR 1980 SC 1717; affirming, AIR 1979 Del 232; referring to Muesling v. International Raiway Co. 147 NYS 177 at 178, 85 Misc 309; distinguishing Niranjan Shankar Golikari v. Century Spg and Mfg. Co. Ltd., [1967] 2 SCR 367, AIR 1967 SC 1098.
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11 Thomas Marshall (Exports) Ltd. v. Guinle, [1978] 3 All ER 193 at 202 et seq; Decro-Wall International SA v. Practitioners in Mktg Ltd., [1971] 2 All ER 216 at 223; Hill v. CA Parson and Co. Ltd., [1971] 3 All ER 1345 at 1353-54 applied. 12 Konski v. Peet, [1915] I Ch 530; distinguishing General Bill-posting Co. Ltd. v. Atkinson, [1909] AC 118, [1908-10] All ER Rep 619; Rock Refrigeration Ltd. v. Jones, [1997] 1 All ER 1(CA) (although the restrictive covenant was expressed as to take effect on termination of contract 'howsoever arising' or 'howsoever occassioned'). 13 Superintendence Company of India Pvt. Ltd. v. Krishana Murgai, AIR 1980 SC 1717 at 1728; Sandhya Organic Chemicals P. Ltd. v. United Phosphorus Ltd., AIR 1997 Guj 177. 14 Superintendence Company of India Pvt. Ltd. v. Krishana Murgai, AIR 1980 SC 1717; Taprogge Gesellschaft mbH v. IAEC India Ltd., AIR 1988 Bom 157 at 162, 163--holding that there is no conflict at all between the decisions of the Supreme Court in Niranjan Golikari and Re Superintendence Co. of India,AIR 1980 SC 1717. 15 VFS Global Services (P) Ltd. v. Suprit Roy, (2008) 3 Mah LJ 266 - 10 Dec 2007. 16 Bombay Dyeing and Manufacturing Co. Ltd. v. Mehar Karan Singh, Suit No 3313 of 2008 dec on 24 August 2010; Star India Pvt. Ltd. v. Laxmiraj Seetharaman Nayak, 2003 (3) BomCR 563, 2003 (3) MahLJ 726. 17 Wipro Limited v. Beckman Coulter International, 2006 (3) ARBLR 118 Delhi, 2006 (2) CTLJ 57 Del dec on 11 July 2006. 18 Ibid. 19 Kores Mfg. Co. Ltd. v. Kolok Mfg. Co. Ltd., [1959] Ch 108 at 126., [1958] 2 All ER 65 at 74; North Western Salt Co. Ltd. v. Electrolytic Alkali Co. Ltd., [1914] AC 461 per Lord Haldane, [1914-15] All ER Rep 752 at 757. 20 North Western Salt Co. Ltd. v. Electrolytic Alkali Co. Ltd., [1914] AC 461 per Viscount Haldane at 471, [1914-15] All ER 752 at 757; applied in Kores Mfg. Co. Ltd. v. Kolok Mfg. Co. Ltd., [1959] Ch 108 at 126, [1958] 2 All ER 65 at 74; Tool Metal Mfg. Co. Ltd. v. Tungsten Electric Co. Ltd., [1955] 2 All ER 657 at 685, [1955] 1 WLR 761(HL) . 21 Herbert Morris Ltd. v. Saxelby, [1916] 1 AC 688, [1916-17] All ER Rep 305. 22 Leng (Sir WC) d' Co. v. Andrews, [1909] I Ch 763 at 773; Mason v. Provident Clothing and Supply Co. Ltd., [1913] AC 724, [1911-13] All ER Rep 400 at 403. 23 Mason v. Provident Clothing and Supply Co. Ltd., [1913] AC 724, [1911-13] All ER Rep 400 per Lord Haldane LJ, at 403. 24 Hepworth Mfg. Co. Ltd. v. Ryott, [1920] 1 Ch 1, [1918-19] All ER Rep 1019. 25 Halsbury's Laws of England, 4th edn., Vol. 47, para 28. 26 Baker v. Hedgecock, (1888) 39 Ch D 520; Perls v. Saalfeld, [1892] 2 Ch 149; Rogers v. Maddocks, [1892] 3 Ch 346; Ehrmann v. Bartholomew, [1898] 1 Ch 671, [1895-99] All ER Rep 1680; Goldsall v. Goldman, [1915] 1 Ch 292, [1914-15] All ER Rep 257(CA) . 27 Henry Leetham d' Sons Ltd. v. Johnstone-white, [1907] 1 Ch 322 at 327; But see Stenhouse Australia Ltd. v. Phillips, [1974] AC 391, [1974] 1 All ER 117(PC) (covenant to protect company's business transacted for it by its subsidiaries as its agencies and instrumentalities, was reasonable). 28 Fitch v. Dewes, [1921] 2 AC 158, [1921] All ER Rep 13. 29 Nicoll v. Beere, (1885) 53 LT 659. 30 Cornwall v. Hawkins, (1872) 41 LJ Ch 435(CA) ; Home Counties Dairies Ltd. v. Skilton, [1970] 1 All ER 1227; Edwards v. Worboys, [1984] AC 724 at 727. 31 Lyddon v. Thomas, (1901) 17 TLR 450. 32 White Tomkins and Courage v. Wilson, (1907) 23 TLR 469. 33 Pearks Ltd. v. Cullen, (1912) 28 TLR 371. 34 Bowler v. Lovegrove, [1921] 1 Ch 642. 35 Townsend v. Jarman, [1900] 2 Ch 689 per Farwell J at 703. 36 Sunilchand C Mazumdar v. Aryodaya Spg and Wvg Mills Co. Ltd., AIR 1964 Guj 115; VN Deshpande v. Arvind Mills Co. Ltd., (1946) Bom 89, AIR 1946 Bom 423, 48 Bom LR 90, 226 IC 138; cf Marco (Productions) Ltd. v. Pagola, [1945] 1 All ER 155 ('or any time prior' held too wide).
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37 Scorer v. Seymour-Jones, [1966] 3 All ER 347 at 349. 38 Lindner v. Murdock's Garage, (1950) 83 CLR 628. 39 (1950) 83 CLR 628 at 641. 40 SW Strange Ltd. v. Mann, [1965] 1 All ER 1069, [1965] 1 WLR 629. 41 Stenhouse Australia Ltd. v. Phillips, [1974] AC 391, [1974] 1 All ER 117 at 123-24 (PC). 42 Percept D'Mark (India) (P) Ltd. v. Zaheer Khan, AIR 2006 SC 3426 affirming Zaheer Khan v. Percept D'mark (India) Private Limited, AIR 2004 Bom 362 (interim injunction refused). 43 Wrap Knits Pvt. Ltd. v. Anju Sharma, (2009) 110 DRJ 106(Del) dec 6 Feb 2009. 44 Herbert Morris Ltd. v. Saxelby, [1916] 1 AC 688 at 710, [1916-17] All ER Rep 305; Faccenda Chicken Ltd. v. Fowler, [1987] Ch 117, [1986] 1 All ER 617; Commercial Plastics Ltd. v. Vincent, [1965] 1 QB 623, [1964] 3 All ER 546(CA) ; Lansing Linde Ltd. v. Kerr, [1991] 1 All ER 418, [1991] 1 WLR 251; Universal Thermosensors Ltd. v. Hibben, [1992] 3 All ER 257, [1992] 1 WLR 840. 45 Star India Pvt. Ltd. v. Laxmiraj Seetharaman Nayak, 2003 (3) BomCR 563, 2003 (3) Mah LJ 726. 46 Lamb v. Evans, [1893] 1 Ch 218; Amber Size & Chemical Co. Ltd. v. Menzel, [1913] 2 Ch 239 (secret process); Forster and Sons Ltd. v. Suggett, (1918) 35 T LR 87 (Mixture of gas and air for glass making; knowledge gained of); Fitch v. Dewes, [1920] 2 Ch 159 at 181-82 (Customers being enticed away); on appeal, [1921] 2 AC 158, [1921] All ER Rep 13 (solicitor's managing clerk). 47 Robb v. Green, [1895-99] All ER Rep 1053. 48 Faccenda Chicken Ltd. v. Fowler, [1987] Ch 117, [1986] 1 All ER 617; Embee Software Private Ltd v. Samir Kumar Shaw, AIR 2012 Cal 141 (source code of computer programmes held a trade secret, injunction issued not to deal in it). 49 Ibid at 137, [1986] 1 All ER 617; but see Balston v. Headline Filters Ltd., (1987) 13 FSR 330. 50 [1916] 1 AC 688, [1916-17] All ER Rep 305 at 317. 51 Universal Thermosensors Ltd. v. Hibben, [1992] 3 All ER 257, [1992] 1 WLR 840; Atiyah, Introduction to the Law of Contract, 5th edn, p. 329. 52 Sanmar Speciality Chemicals Ltd. v. Biswajit Roy, AIR 2007 Mad 237; Polaris Software Lab. Limited v. Suren Khiwadkar, (2003) 3 MadLJ 557 dec on 8 Sep 2003; Numeric Power Systems Limited v. Mohammed Zafar, (2006) 4 MadLJ 698 dec on 2 August 2006. 53 Lamb v. Evans, [1893] 1 Ch 218. 54 Cranleigh Precision Engineering Ltd. v. Bryant, [1964] 3 All ER 289, [1965] 1 WLR 1293; Saltman Engg. Co. Ltd. v. Campbell Engg. Co. Ltd., [1963] 3 All ER 413. 55 Niranjan Shankar Golikari v. Century Spg and Mfg. Co. Ltd., [1967] 2 SCR 367, AIR 1967 SC 1098; Sandhya Organic Chemicals P. Ltd. v. United Phosphorus Ltd., AIR 1997 Guj 177 (in the circumstances, injunction not granted). 56 Cranleigh Precision Engineering Ltd. v. Bryant, [1964] 3 All ER 289, [1965] 1 WLR 1293 at 1311. 57 Sinclair v. Neighbour, [1966] 3 All ER 988. 58 National Broach and Machine Co. v. Churchill Gear Machines Ltd., [1965] 2 All ER 961. 59 Seager v. Copydex, [1967] 2 All ER 415. 60 Suresh Dhanuka v. Sunita Mohapatra, AIR 2012 SC 892, 2012 (1) SCC 578. 61 Attwood v. Lamont, [1920] 3 KB 571 per Younger LJ, at 589, [1920] All ER Rep 55; Fitch v. Dewes, [1920] 2 AC 158, [1921] All ER Rep 13; Halsbury's Laws of England, 4th edn., Vol. 47 para 40. 62 [1921] 2 AC 158, [1921] All ER Rep 13. 63 Amber Size and Chemical Co. v. Menzel, [1913] 2 Ch 239. 64 Ibid. 65 Ibid. 66 (1918) 35 TLR 87.
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67 Fitch v. Dewes, [1920] 2 Ch 159 at 181-82; affirmed in, [1921] 2 AC 158, [1921] All ER Rep 13. 68 Herbert Morris Ltd. v. Saxelby, [1916] 1 AC 688, [1916-17] All ER Rep 305. 69 Halsbury's Laws of England, Vol. 18, 5th edn, 1 July 2009, COMPETITION, para 409. 70 Halsbury's Laws of England, Vol. 18, 5th edn, 1 July 2009, COMPETITION, para 411; Herbert Morris Ltd. v. Saxelby, [1916] 1 AC 688 at 710, [1916-17] All ER Rep 305; Attwood v. Lamont, [1920] 3 KB 571 at 597, [1920] All ER Rep 55; Forster and Sons Ltd. v. Suggett, (1918) 35 TLR 87; Gopal Paper Mills Ltd. v. Surendra Kumar Ganesh Das Malhotra, AIR 1962 Cal 61 at 66. 71 Fraser v. Evans, [1969] 1 All ER 8 at 11; Albert (Prince) v. Strange, (1849) 1 Mac and G 25; Margaret Duchess of Argyll v. Duke of Argyll, [1967] Ch 302, [1965] 1 All ER 611 referred to. 72 Gartside v. Outram, (1857) 26 LJ Ch 113 at 1124; Initial Services Ltd. v. Putterill, [1968] 1 QB 396, [1967] 3 All ER 145. 73 Fraser v. Evans, [1969] 1 All ER 8 at 11; distinguishing Sim v. HJ Heinz & Co. Ltd., [1959] 1 All ER 547. 74 National Broach and Machine Co. Ltd. v. Churchill Gear Machines Ltd., [1965] 2 All ER 961; Saltman Engg. Co. Ltd. v. Campbell Engg. Co., [1963] 3 All ER 413. 75 Seager v. Copydex, [1967] 2 All ER 415 per Lord Denning at 417. 76 Ibid. 77 Printers & Finishers Ltd. v. Holloway, [1964] 3 All ER 731 per Cross J, at 739, [1965] 1 WLR 1; Albert (Prince) v. Strange, (1849) 1 Mac and G 25. 78 Maggbury Pty Ltd. v. Hafele Australia Pty Ltd., [2001] HCA 70 (High Court of Australia). 79 Herbert Morris Ltd. v. Saxelby, [1916] 1 AC 688, [1916-17] All ER Rep 305; applied in Kores Mfg. Co. Ltd. v. Kolok Mfg. Co. Ltd., [1959] Ch 108, [1958] 2 All ER 65; Attwood v. Lamont, [1920] 3 KB 571, [1920] All ER Rep 55; McEllistrim v. Ballymacelleigott Co-op Agriculture and Dairy Society Ltd., [1919] AC 548 at 562-63; Vancouver Malt and Sake Brewing Co. Ltd. v. Vancouver Breweries Ltd., AIR 1934 101(PC), [1934] AC 181 at 191, [1934] All ER Rep 38 at 41(PC), not applying Stewart v. Stewart, (1899) 1 F 1158(Ct of Sess) . 80 Herbert Morris Ltd. v. Saxelby supra ; Halsbury's Laws of England, Vol. 18, 5th edn, 1 July 2009, COMPETITION, para 389; Attwood v. Lamont, [1920] 3 KB 571 at 589, [1920] All ER Rep 55; Vancouver Malt and Sake Brewing Co. Ltd. v. Vancouver Breweries Ltd., AIR 1934 PC 101, [1934] AC 181, [1934] All ER Rep 38 at 41(PC) . 81 Hilton v. Eckersley, (1856) 6 E & B 47 at 74, 106 R and R 507 at 522, 25 LJQB 199. 82 Lord Macnaghten in Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd., [1894] AC 535 at 564, [1891-94] All ER Rep 1. 83 Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd., [1894] AC 535, [1891-94] All ER Rep 1. 84 Auchterlonie v. Charles Bill, (1868) 4 MHC 77. 85 (1921) 48 IA 508, (1921) 48 Cal 1030 at 1035, AIR 1922 PC 167, 65 IC 271. 86 Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd., [1894] AC 535, [1891-94] All ER Rep 1. 87 Gooderson,[1963] 79 LQR 410 at 421. 88 SB Fraser & Co. v. Bombay Ice Manufacturing Co. Ltd., (1904) ILR 29 Bom 107. 89 Tan Khwan v. Kegaw, (1913) 18 IC 183. 90 Firm Daulat Ramjai Ram Das v. Firm Dharam Chand-Kishor Chand, AIR 1934 Lah 110, 146 IC 1030. 91 Ibid. 92 Shaikh Kalu v. Ram Saran Bhagat, (1909) 13 Cal WN 388. 93 Municipal Committee Khurai v. Firm Kaluram Hiralal, AIR 1944 Nag 73 at 77. 94 The law was reviewed by the House of Lords in the case of Crofter Hand Woven Harris Tweed Ltd. v. Veitch, [1942] AC 435, [1942] 1 All ER 142, HL. 95 Haribhai Maneklal v. Sharafali Isabji, (1897) 22 Bom 861; SB Fraser and Co. v. Bombay Ice Manufacturing Co. Ltd., (1904) ILR 29 Bom 107.
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1 Bholanath Shankar Das v. Lachmi Narain, (1930) 53 All 316 at 333-34, AIR 1931 All 83 at 89, (1931) All LJ 34 (a full discussion of the authorities). 2 Peters American Delicacy Co. Ltd. v. Patricia's Chocolates and Candies Pvt. Ltd., (1947) 77 CLR 574 (Dixon J, contra). 3 Har Bilas v. Mahadeo Prasad, AIR 1931 All 539. 4 Whiteman,(1966) 29 MLR 77 and (1966) 29 MLR 507. 5 [1965] 2 WLR 1299 at 1317, on appeal, [1966] 1 All ER 126, [1966] 2 WLR 318. 6 [1968] AC 269, [1967] 1 All ER 699. 7 Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1965] 2 All ER 933, [1965] 3 WLR 469; reversed on appeal, [1966] 1 All ER 725(CA) ; affirmed in, [1968] AC 269, [1967] 1 All ER 699, [1967] 2 WLR 871(HL) ; Regent Oil Co. Ltd. v. Aldon Motors Ltd., [1965] 2 All ER 644 (but, injunction was discharged on appeal on ESSO case being allowed), [1966] 2 All ER 454. 8 Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1966] 1 All ER 725 at 703-10, referring to Petrofina (Great Britain) Ltd. v. Martin, [1966] Ch 146, [1966] 1 All ER 126, [1966] 2 WLR 318; Foley v. Classique Coaches Ltd., [1934] 2 KB 1, [1934] All ER Rep 88 (a case of sale); Horwoood v. Millars Timber and Trading Co. Ltd., [1917] 1 KB 305, [1916-17] All ER Rep 847 (a case of sale); Horwoood v. Millars Timber and Trading Co. Ltd., [1917] 1 KB 305, [1916-17] All ER Rep 847 (a case of mortgage); and distinguishing Knightsbridge Estates Trust Ltd. v. Byrne, [1939] Ch 441 at 457, [1938] 4 All ER 618 at 626 (mortgage). 9 Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1968] AC 269, [1967] 1 All ER 699, [1967] 2 WLR 871; distinguishing Petrofina (Great Britain) Ltd. v. Martin, [1966] Ch 146, [1966] 1 All ER 126; Knightsbridge Estates Trust Ltd. v. Byrne, [1939] Ch 441 at 457, [1938] 4 All ER 618 at 626. 10 Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd. supra per Lord Pearce at 724, [1967] 2 WLR 871. 11 [1969] 1 All ER 201, [1969] 1 WLR 116; applying Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1965] 2 All ER 933, [1965] 3 WLR 469. 12 Alec Lobb (Garages) Ltd. v. Total Oil (GB) Ltd., [1985] 1 All ER 303, [1985] 1 WLR 173. 13 Shell UK Ltd. v. Lostock Garage Ltd., [1977] 1 All ER 481 at 488, 490, 492, [1976] 1 WLR 1187(CA) . 14 Texaco Ltd. v. Mulberry Filling Station Ltd., [1972] 1 All ER 513 at 524, 528, [1972] 1 WLR 814; Lord Wilberforce's speech in Pharmaceutical Society of Great Britain v. Dicksons, [1968] 2 All ER 686 at 702, referring to Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1968] AC 269, [1967] 1 All ER 699, [1967] 2 WLR 871. 15 [1975] AC 561, [1975] 1 All ER 968. 16 Supra at 977-79 (PC), explaining Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1968] AC 269, [1967] 1 All ER 699 at 708, [1067] 2 WLR 871. 17 Mineral Water Bottle etc Society v. Booth, (1887) 36 Ch D 465; Kores Mfg. Co. Ltd. v. Kolok Mfg. Co. Ltd., [1959] Ch 108, [1958] 2 All ER 65; Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1968] AC 269 at 300, 319, [1967] 1 All ER 699, [1967] 2 WLR 871. 18 Kores Mfg. Co. Ltd. v. Kolok Mfg. Co. Ltd., [1959] Ch 108, [1958] 2 All ER 65. 19 For a discussion on the operation of the system and restraint on trade, see Furmston,(1964) 27 MLR 210. 20 [1964] Ch 535, [1963] 3 All ER 139, [1963] 3 WLR 574; Mineral Water Bottle etc Society v. Booth, (1887) 36 Ch D 465; Kores Mfg. Co. Ltd. v. Kolok Mfg. Co. Ltd., [1959] Ch 108, [1958] 2 All ER 65. 21 Distinguishing Warner Brothers Pictures Inc v. Nelson, [1937] 1 KB 209, [1936] 3 All ER 160. 22 Eastham v. Newcastle United Football Club Ltd., [1964] Ch 535, [1963] 3 All ER 139, [1963] 3 WLR 574. 23 Faramus v. Film Artistes' Association, [1963] 2 WLR 504, [1963] 1 All ER 636 (Denning MR dissenting); approved by House of Lords, [1964] AC 925, [1964] 1 All ER 25, [1964] 2 WLR 126; Hill v. CA Parson and Co. Ltd., [1971] 3 All ER 1345 (one month's notice to a Chartered Engineer terminating his services because of a rule of a trade union, requiring technical staff to join the union is ineffective, and injunction was issued against employer terminating service). 24 Faramus v. Film Artistes' Association, [1963] 2 WLR 504, [1963] 1 All ER 636 (Denning MR dissenting); approved by House of Lords, [1964] AC 925, [1964] 1 All ER 25, [1964] 2 WLR 126; Hill v. CA Parson and Co. Ltd., [1971] 3 All ER 1345.
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25 Tulsidas Paul v. Second Labour Court of West Bengal, AIR 1963 Cal 624. 26 Section 19 of the Trade Unions Act, 1926 provides:&uot;Enforceability of agreements.--Notwithstanding anything contained in any other law for the time being in force, an agreement between the members of a registered trade union shall not be void or voidable merely by reason of the fact that any of the objects of the agreement are in restraint of trade. . . . .&uot; 27 [1967] Ch 708, [1967] 2 WLR 718, [1967] 2 All ER 558; affirmed in, [1968] 2 All ER 686. 28 Nagle v. Feilden, [1966] 2 QB 633, [1966] 1 All ER 689, [1966] 2 WLR 1027; not applying Faramus v. Film Artistes' Association, [1964] AC 925, [1964] 1 All ER 25, [1964] 2 WLR 126(HL) . 29 R v. Lincoln's Inn Benchers, (1825) 4 B&C 855. 30 Nagle v. Feilden, [1966] 2 QB 633, [1966] 1 All ER 689, [1966] 2 WLR 1027.
Severability: 'To that extent void' The meaning of these words is that if the agreement can be broken up into parts, it will be valid in respect of those parts which are not vitiated as being in restraint of trade. The use of the words 'to that extent void' can be said to confer on a court the power to enforce the covenant to the extent it complies with the section, and excise the rest. But where the agreement is not so divisible, it is wholly void.31 In English cases, there have been a variety of opinions as to the basis upon which severance can be allowed. It is reasonably clear that the test for cases where the covenant has been entered into by the seller of a business, is the 'blue pencil' test, a formal test of verbal divisibility. If by eliminating objectionable phrases, though without adding or altering any words, there remains a covenant which is reasonable, this will be enforced, although severance has been permitted only in area, class of customer, or subject-matter. In Goldsoll v. Goldman, 32 in a sale of goodwill of an imitation jewellery business, the seller covenanted not to deal in real or imitation jewellery in any part of the United Kingdom, France, USA, Russia or Spain. The italicised words were severed, as the seller's business had been confined to imitation jewellery in the United Kingdom. Otherwise the covenant would be unreasonable and void. But where the covenant has been exacted from an employee, the courts adopt a more stringent test: severance will be permitted only if there is really a combination of several distinct covenants, and the elimination of the objectionable phrases does not alter the entire scope and intention of the agreement. In Attwood v. Lamont, 33A had a multiple store. L was an employee in the tailoring department. L covenanted not to carry on the trade of tailor, dressmaker, general draper, milliner, hatter, haberdasher, gentlemen, ladies' or children's outfitter, within ten miles. As it stood, the covenant was unreasonable. Severance was refused as this would alter the entire scope and intention of the agreement, and held the original covenant unreasonable and void. Where an inventor and maker of guns and ammunition had agreed with the purchaser of his business that he would not for 25 years engage either directly or indirectly: (a) in the trade or business of manufacture of guns, gun mountings or carriages, gunpowder explosives or ammunition; and (b) in any business competing or liable to compete in any way with that for the time being carried on by the company, the second covenant was void as unreasonable, and severed from the first, being distinct and severable from the remaining part of the covenant.34 An agreement of an unqualified employee with an estate agent who had many recurring clients, that the employee would not practise within five miles of the Knightsbridge and Dartmouth offices of the employer is not unreasonable restraint of trade in regard to the office where the employee was working, but would be unreasonable in regard to the office where the employee did not work. Such an agreement was severable to be reasonable and operative in regard to the former office and not the latter.35 Thus, an unreasonable restraint was regarded as intended by the parties to be separable, and severed from the valid restraint. It is proper to take into account that the employee is unqualified and thus uncontrolled by professional rules.36
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This rule against severance of a restrictive clause in an agreement of service applies where the covenant is bad in law, but it does not apply to granting of limited injunctions necessary to protect the employer's interests where the negative covenant is not wholly void. It would be the former if the covenantor is driven to idleness or would be compelled to serve the covenantee, the contract is void;37 but the rule does not apply to protect the employer's interest where the negative covenant is not wholly void, e.g. if the covenantor is not permitted to get himself employed in another similar employment or he might perhaps get a lesser remuneration than the one agreed to by his new employers. That is no consideration against enforcing the covenant.38 31 Parasullah v. Chandra Kant, AIR 1918 Cal 546, (1917) 21 CWN 979 at 983, 39 IC 177. 32 [1915] 1 Ch 292, [1914-15] All ER Rep 257(CA) ; Ronbar Enterprises Ltd. v. Green, [1954] 2 All ER 266, [1954] 1 WLR 815; Leather Cloth Co. v. Lorsont, (1869) LR 9 Eq 345 at 351 (Covenant good as to UK 'need not concern ourselves with France and Germany'). 33 [1920] 3 KB 571, [1920] All ER Rep 55. 34 Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd., [1894] AC 535, [1891-94] All ER Rep 1. 35 Scorer v. Seymour-Jones, [1966] 3 All ER 347. 36 [1966] 3 All ER 347 at 349. 37 Niranjan Shankar Golikari v. Century Spg and Mfg. Co. Ltd., [1967] 2 SCR 367, AIR 1967 SC 1098; Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd., [1894] AC 535 at 574, [1891-94] All ER Rep 1; Burn and Co. v. McDonald, (1908) 36 Cal 354 (a case of an engineer with a firm); Charlesworth v. MacDonald, (1898) 23 Bom 103 (case of Surgeon's Asst); Subba Naidu v. Haji Badsha Sahib, (1902) 26 Mad 168 (a case of trade agent); Madras Railway Co. v. Thomas Rust, (1890) 14 Mad 18 (a case of a carriage painter); Brahmaputra Tea Co. Ltd. v. Scarth, (1885) 11 Cal 545 (not to serve after term of engagement). 38 Niranjan Shankar Golikari v. Century Spg and Mfg. Co. Ltd., [1967] 2 SCR 367, AIR 1967 SC 1098 at 1105.
Covenant binds the Transferees and Assignees A covenant in restraint of trade is assignable, unless the terms of the covenant indicate that it is intended to be personal to the covenantee. Thus a purchaser of the 'goodwill' of a business is entitled to enforce it.39Exception 1 to the section also indicates that the covenant can be enforced by the successor in title of the purchaser of goodwill. On dissolution of partnership, the retiring partner covenanted not to carry on the same business as was carried on by the firm on his own adjoining land or in the area adjoining the factory. He, however, sold the land to this father, who in partnership with the son and wife of the former partner, started the same business of the land. It was held that the agreement was reasonable and binding on the transferees and could be enforced against them and there was nothing indefinite in the covenant.40 39 Morris Angel and Son Ltd. v. Hollande, [1993] 3 All ER 569. 40 Hukmi Chand v. Jaipur Rice and Oil Mills Co., AIR 1980 Raj 155 at 160, 164-65.
Agreements held not in Restraint of Trade An agreement of withdrawal from tender in consideration of monthly payment of a certain amount can be enforced;41 so is an agreement between two bidders that one of them shall not bid at an auction sale in consideration of a payment of Rs. 500/-.42 A non-solicitation agreement does not violate section 23.43 A negative covenant in a publishing agreement that the author shall not to publish or cause to be published any work on the same subject which might conflict with copyrighted work, was not in restraint of trade.44
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41 Mahommad Isack v. Doddapaneni Sreeramalu, AIR 1946 Mad 289. 42 Mohafazul Rahim v. Babulal, AIR 1949 Nag 113. 43 Wipro Limited v. Beckman Coulter International, 2006 (3) ARBLR 118 Delhi, 2006 (2) CTLJ 57 Del dec on 11 July 2006. 44 Chancellor Masters v. Orient Longman Private Limited, (2003) 67 DLR 661(Del) on 19 Dec 2002.
Construction of Terms Covenants in restraint of trade must be clear and definite.45 Thus, in Davies v. Davies, 46 a covenant to retire from a business 'so far as the law allows' was held to be too vague to be enforced. The terms of restraint are strictly construed. The Court will give an injunction against disclosure of the master's trade secrets and confidential information, but not the use of them, since the word disclosure did not include user.47 When a covenant or agreement is impeached for being in restraint of trade, it is the duty of the court to first interpret the covenant or agreement itself to ascertain according to the ordinary rules of construction as to what was fairly meant by the parties; and any ambiguity therein must receive a narrower rather than a wider construction.48 A covenant which appears unduly wide may, on its proper construction, be limited to the business in which the employee was employed. The covenant must be construed in the light of the surrounding circumstances and the intent of the parties.49 Applying such a construction can thus validate a covenant by a seller which is ex facie void, because either local limits or time limits have not been fixed for its operation. This rule offers a much wider scope for amendment than the blue pencil rule of severance. 'It is ordinary canon of construction that the meaning of words in an agreement which, taken by themselves, are quite general may be confined to a particular subject matter with which the parties were dealing.'50 For instance, in Charlesworth v. MacDonald 51 the defendant agreed to serve the plaintiff, a physician and surgeon practising at Zanzibar, as an assistant for three years. The letter stating the terms which the plaintiff offered and the defendant accepted contained the words 'The ordinary clause against practising must be drawn up.' No formal agreement was drawn up, and at the end of the year the defendant ceased to act as the plaintiff's assistant and began to practice in Zanzibar on his own account. It was held that the plaintiff was entitled to an injunction restraining the defendant from practising in Zanzibar on his own account during the period of the agreement.52 At first sight there seems force in the contrary view of the lower court that the agreement was too vague to be valid. There was no evidence as to what 'the ordinary clause against practising' was. There could not have been any common intention on the point as the defendant accepted the offer of the plaintiff in Edinburgh, and had no local knowledge. The court had to fix limits on the profession to be protected, the area in which the covenant was to operate, and the duration of the covenant before it could be binding. No English decision goes so far, and the court scarcely faces up to the difficulties, but in two respects at least the circumstances made it more feasible for the court to ascertain the probable intention of the parties with some degree of certainty. As to locality, it was an obvious conclusion to limit the area of the covenant to the island of Zanzibar, rather than to hold it applicable also on the mainland thus rendering it too wide to be reasonable. It also seems reasonable to restrict the time of the operation of the covenant to the duration of the agreement of service, as in India it would be void if more extensive: there was a hard and fast line available to the court. In England there is no convenient limit to rescue such a covenant from the limbo of uncertainty, a covenant being enforceable beyond the period of service provided it is reasonable. Similarly, in Burn & Co. v. McDonald, 53 an employee was brought out from England to serve Burn and Company for a five-year period on the ground of his special knowledge and skill. The company paid his expenses of the voyage etc, but injunction was granted although there were no negative covenants. The grant was on the basis of equity, justice and good conscience. But it has also been held that where restrictive clauses appear in the formal document and no local limits of restraint were prescribed, it was not
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permissible to enter upon a consideration of what the parties were likely to have contemplated.54 Thus in Hood & Moores Stores v. Jones, 55 a covenant by an employee of a corn dealer not to enter into business within two miles of the employer's shop was construed as being confined to business of the same nature as the employer carried on at the time of the covenant. 45 Davies v. Davies, (1887) 36 Ch D 539. 46 Ibid. 47 Thomas Marshall (Exports) Ltd. v. Guinle, [1978] 3 All ER 193 at 208; explaining Printers & Finishers Ltd. v. Holloway, [1964] 3 All ER 731, [1965] 1 WLR 1. 48 Superintendence Company of India Pvt. Ltd. v. Krishana Murgai, AIR 1980 SC 1717 per Sen J, at 1729. 49 Mills v. Dunham, [1891] 1 Ch 576. 50 Dubowski v. Goldstein, [1896] 1 QB 478 at 481, [1895-96] All ER Rep 1959(CA), where a covenant by a milk-seller with his employer was limited by the court to the locality where the covenantor had served, despite the absence of any express limitation in the covenant itself. 51 (1898) 23 Bom 103; distinguishing Davies v. Davies, (1887) 36 Ch D 539, (1899-1900) ILR 23-24 Bom 68; Brahmaputra Tea Co. Ltd. v. Scarth, (1885) ILR 11 Cal 545 at 550. 52 The Bombay Court based its decision on Lumley v. Wagner, (1852) 1 DeG M&G 604 at 619, 90 RR 125, 21 Ch 898, [1843-60] All ER Rep 368, a rule which is now considered anomalous and will not be extended; Whitwood Chemical Co. v. Hardman, [1891] 2 Ch 416; Ehrmann v. Bartholomew, [1898] 1 Ch 671, [1895-99] All ER Rep 1680. These later authorities cannot affect the application of the Specific Relief Act 1963. s. 42;Lalbhai Dalpatbhai & Co. v. Chittaranjan Chandulal Pandya, (1965) 2 LLJ 284, AIR 1966 Guj 189; Burn and Co. v. McDonald, (1908) 36 Cal 354; Page One Records Ltd. v. Britton, [1967] 3 All ER 822, [1968] 1 WLR 157; Irani v. Southampton and SW Hampshire Area Health Authority, [1985] ICR 590. 53 (1908) 36 Cal 354, (1909-10) ILR 36-37 Cal 208. 54 Premji Damodar v. Firm LV Govindji & Co., AIR 1943 Sind 197. 55 (1899) 81 LT 169 Cozens-Hardley J.
Foreign Contracts In England it has been held that contract in restraint of trade apply to English merchants as to foreigners in England and if a contract is void against public policy for this reason, it will not be enforced in an English court though made in a country where it is unobjectionable.56 It is submitted that the same rule applies in India.57 In Taprogge Gesellschaft mbH v. IAEC India Ltd., 58 a contract of agency contained a term restraining the agent company from selling other goods for five years after the termination of the agency. The agency was terminated and the plaintiff sought an injunction restraining the agent company from dealing in some other products. It was held that the negative covenant restraining the Indian company from carrying on the business for five years after the termination of the contract was invalid and unenforceable in India, even though it was valid under German law. The courts of this country will not enforce a contract made abroad, to be performed in this country, contrary to the policy of the law of this country. An agreement, therefore, in restraint of trade, made abroad and to be performed in India, is void in India, though it may be valid by the lex loci contractus.59 Conversely, English courts would not refuse to enforce contracts solely on account of the extra-territorial application of foreign laws which purports to illegalise them, though those contracts do not necessitate any illegal act s within the foreign jurisdiction;60 hence the English courts would not refuse to enforce an English contract simply on the ground of extra-territorial application of a foreign law purporting to illegalise such contract, e.g., the Sherman Act, 1890 (USA).61 56 Rousillon v. Rousillon, (1880) 14 Ch D 351 at 369; Halsbury's Laws of England, Vol. 47, 4th edn., para 20.
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57 Oakes & Co. v. Jackson, (1876) ILR 1 Mad 134 at 141. 58 AIR 1988 Bom 157. 59 Oakes & Co. v. Jackson (1876) ILR 1 Mad 134, p. 144; Rousillon v. Rousillon, (1880) 14 Ch D 351 at 369. 60 British Nylon Spinners Ltd. v. Imperial Chemical Industries Ltd., [1953] Ch 19, [1952] 2 All ER 780 (Sherman Anti-Trust Laws); Sharif v. Azad, [1967] 1 QB 605 at 617, [1966] 3 WLR 1285, [1966] 3 All ER 785. 61 Chitty on Contracts, 28th edn., pp. 852-53, para 17-033; British Nylon Spinners Ltd. v. Imperial Chemical Industries Ltd., [1953] Ch 19, [1952] 2 All ER 780; Sharif v. Azad, [1967] 1 QB 605 at 617, [1966] 3 WLR 1285, [1966] 3 All ER 785.
Enforcement Such an agreement may be enforced by injunction where it contains a negative clause, expressed or implied.62 Injunction to restrain a Negative Covenant A breach of a valid covenant in restraint of the trade may be restrained by injunction even though the covenant gives an alternate remedy.63 But no injunction will be granted which will have the effect of specific performance of the contract of personal service,64 although a negative covenant not to serve elsewhere may be enforced;65 but the court will not enforce it if it deprives the employee of his means of livelihood.66 Even if the covenantor is a minor, a negative covenant may be enforceable67 if it is for his benefit, so also in covenants of apprenticeships.68 But if the plaintiff is unable or unwilling to fulfill his part of the contract, no injunction will be granted.69 An injunction restricted as to time, the nature of employment and area cannot be said to be too wide or unreasonable or unnecessary for the protection of the interests of the covenantee.70 In Sunilchand C Mazumdar v. Aryodaya Spg & Wvg Mills Co. Ltd., 71 the defendant, a qualified technician and diploma-holder, in textile technology agreed to serve the plaintiff's spinning mills for five years. After serving for about a year as a senior assistant he resigned and accepted an employment in another spinning company on a salary higher than he was getting. He was employed by the plaintiff because of his specialised training and there was considerable dearth of such trained technicians. This agreement was held valid and an injunction to prevent breach of negative covenant was granted. In Littlewoods Organisation Ltd. v. Harris, 72 employers had employed the defendant in their mail order business which was fairly extensive and put him in planning of the catalogues which were of considerable importance in their trade. The defendant had entered into an agreement that he would not seek employment with a rival business within one year after leaving the employer's service. It was held that the defendant had gotten a considerable amount of information of a confidential and secret nature. Therefore, the employers were entitled to protection and the covenant was valid, but it would be confined to the business of the rival within the United Kingdom. Injunction was therefore, granted. Interim Injunction The question of interim injunctions for enforcement of contracts has to balance two needs: the need to enforce such a covenant immediately to prevent its purpose from getting frustrated; and that usually the restraint being for a limited time, the granting of the injunction may have the effect of disposing of the entire matter. It has been observed that matters involving restraint of trade in employment contract are 'singularly appropriate for a speedy trial'.73 Interim injunction may be refused on equitable grounds for example, where the employee is a young recruit, and the injunction would amount to specific performance; for if he were not to serve elsewhere he would have to starve.74 Injunction can be refused on the grounds that the injury could be compensated,75 that plaintiff's conduct violated rights
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of the defendant employee.76 It is submitted that an injunction can be granted only to protect the legitimate interests of the plaintiff, and not as a deterrent to the defendant or generally.77 A solicitor's clerk employed for one year and thereafter from year to year, had given an undertaking not to be employed in any other firm of solicitors or be interested in or concerned with the legal profession for five years within two postal districts of greater London. He did take service in another firm six months after leaving the plaintiff's firm. The Court of Appeal refused to give an interim injunction as the balance of convenience lay in refusing it. Also there was no clear evidence that the plaintiffs would suffer any damage if injunction was not granted.78 62 The Specific Relief Act, 1963, s. 42;Subba Naidu v. Haji Badsha Sahib, (1902) 26 Mad 168 at 172; Pragji Soorji v. Pranjiwan Tooljaram, (1903) 5 Bom LR 878. 63 National Provincial Bank v. Marshall, (1888) 40 Ch D 112; Texaco Ltd. v. Mulberry Filling Station Ltd., [1972] 1 All ER 513, [1972] 1 WLR 814. 64 Rely-a-Bell Burglar and Fire Alarm Co. v. Eisler, [1926] Ch 609; Lumley v. Wagner, (1852) 1 DeG M & G 604 at 619, 90 RR 125, 21 Ch 898; Whitwood Chemical Co. v. Hardman, [1891] 2 Ch 416; Ehrmann v. Bartholomew, [1898] 1 Ch 671, [1895-99] All ER Rep 1680. 65 Warner Brothers Pictures Inc. v. Nelson, [1937] 1 KB 209, [1936] 3 All ER 160; Page One Records Ltd. v. Britton, [1967] 3 All ER 822, [1968] 1 WLR 157 (no injunction as would lead to enforcement of personal services contract). 66 Palace Theatre v. Clensy, (1909) 26 TLR 28 (interim injunction). 67 Bromley v. Smith, [1909] 2 KB 235, [1908-10] All ER Rep 384; Trevor Andre v. Bashford, (1965) CLY 1984 (provided the contract is beneficial to the minor). 68 Gadd v. Thompson, [1908-10] All ER Rep 288. 69 Measures Bros v. Measures, [1910] 2 Ch 248. 70 Niranjan Shankar Golikari v. Century Spg and Mfg. Co. Ltd., [1967] 2 SCR 367, AIR 1967 SC 1098; Karamchand Thapar and Bros v. HHjethanandani 76 Cal WN 338 (11 years period); Gopal Paper Mills Ltd. v. Surendra Kumar Ganesh Das Malhotra, AIR 1962 Cal 61 (period of 20 years); see below the Specific Relief Act, 1963, s s. 38-42. 71 AIR 1964 Guj 115; but see Maganlal Rambhai Gandhi v. Ambica Mills Ltd., AIR 1964 Guj 215. 72 [1978] 1 All ER 1026 at 1035; applying Herbert Morris Ltd. v. Saxelby, [1916] 1 AC 688, [1916-17] All ER Rep 305, GW Plowman & Sons Ltd. v. Ash, [1964] 2 All ER 10, and Home Counties Dairies Ltd. v. Skilton, [1970] 1 All ER 1227; distinguishing Commercial Plastics Ltd. v. Vincent, [1965] 1 QB 623, [1964] 3 All ER 546(CA) ; Edwards v. Worboys, [1984] AC 724 at 727. 73 Lawrence David Ltd. v. Ashton, [1991] 1 All ER 385. 74 Lalbhai Dalpatbhai & Co. v. Chittaranjan Chandulal Pandya, (1965) 2 LLJ 284, AIR 1966 Guj 189; Page One Records Ltd. v. Britton, [1967] 3 All ER 822, [1968] 1 WLR 157; Irani v. Southampton and SW Hampshire Area Health Authority 1985 ICR 590; Evening Standard Co. Ltd. v. Henderson, (1987) ICR 588 where injunctions were granted to prevent breach of employment contracts. 75 Blue Dart Aviation Ltd. v. Vikram Bains, (2005) 4 LW 509(Mad), 8 Jul 2005; Jet Airways (I) Ltd. v. Jan Peter Ravi Karnik, 2000 (4) BomCR 487. 76 Jet Airways (I) Ltd. v. Jan Peter Ravi Karnik, 2000 (4) BomCR 487. 77 Such injunction granted in Independent News Service Pvt Ltd v. Anuraag Muskaan, OMP 151/2013 decided on 2 April 2013 (Del) (granting an injunction not to work for the new employer for a week, because else it would send a wrong message to others, and the defendant who had already joined another employment, shall not go scot free). 78 Fellowes v. Fisher, [1976] QB 122, [1975] 2 All ER 829; American Cynamid Co. v. Ethicon Ltd., [1975] 1 All ER 504, [1975] AC 396; JT Stratford and Son Ltd. v. Lindley, [1965] AC 269, [1964] 3 All ER 102.
Evidence, Burden of Proof and Procedure The onus of justifying the covenant in restraint of trade,79 or of proving reasonableness lies upon the covenantee.80 But once this onus is discharged, the onus of proving that the restraint tends to injure
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the public lies upon the party attacking the covenant.81 The onus of showing that any contract is calculated to produce a monopoly or enhance prices to an unreasonable extent will lie on the party alleging it, and that if once the court is satisfied that the restraint is reasonable as between the parties, this onus will be no light one. If the restraint is reasonable in the interests of the parties, it will not be unenforceable because it involved some injury to the public.82 The onus is on the covenantees to show that the restriction is reasonably necessary for the protection of their business.83 In such cases the nature of the business and the nature of the employment are relevant factors. The court will take judicial notice of illegality of a covenant, which is on the face of it in restraint of trade even though it is not pleaded; but if it is not restraint ex facie, the court in the absence of the evidence cannot decide against the covenantor.84 If the contract read as a whole appears on the face of it not to be unreasonable in the interest, either of the parties or of the public, that is enough and the question is not of evidence. The question is one of law for the court.85 No contract was ever an offence at common law merely because it was in restraint of trade.86 79 Vancouver Malt and Sake Brewing Co. Ltd. v. Vancouver Breweries Ltd., AIR 1934 PC 101 at 104, [1934] AC 181, [1934] All ER Rep 38(PC) ; Herbert Morris Ltd. v. Saxelby, [1916] 1 AC 688 at 706, [1916-17] All ER Rep 305(HL) . 80 Hukmi Chand v. Jaipur Rice and Oil Mills Co., AIR 1980 Raj 155 at 159; Connors Bros Ltd. v. Bernard Connors, AIR 1941 PC 75, 196 IC 871, [1940] 4 All ER 179, 57 T LR 76 (appeal from Canada); Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., [1968] AC 269, [1967] 1 All ER 699 at 720, [1967] 2 WLR 871. 81 Niranjan Shankar Golikari v. Century Spg and Mfg. Co. Ltd., [1967] 2 SCR 367, AIR 1967 SC 1098; Attorney-General of the Commonwealth of Australia v. Adelaide Steamship Co. Ltd., [1913] AC 781 at 796, [1911-13] All ER Rep 1120; Gopal Paper Mills Ltd. v. Surendra Kumar Ganesh Das Malhotra, AIR 1962 Cal 61; Mason v. Provident Clothing and Supply Co. Ltd., [1913] AC 724, [1911-13] All ER Rep 400; Herbert Morris Ltd. v. Saxelby, [1916] 1 AC 688 at 706, [1916-17] All ER Rep 305(HL) ; Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd., [1894] AC 535, [1891-94] All ER Rep 1. 82 Attorney-General of the Commonwealth of Australia v. Adelaide Steamship Co. Ltd., [1913] AC 781, [1911-13] All ER Rep 1120 at 1124; cited with approval in North Western Salt Co. Ltd. v. Electrolytic Alkali Co. Ltd., [1914] AC 461 per Lord Haldane at 471, [1914-15] All ER Rep 752. 83 Rely-a-Bell Burglar and Fire Alarm Co. v. Eisler, [1926] Ch 609 per Lindley MR; Attorney-General of the Commonwealth of Australia v. Adelaide Steamship Co. Ltd., [1913] AC 781, [1911-13] All ER Rep 1120; cited with approval in North Western Salt Co. Ltd. v. Electrolytic Alkali Co. Ltd., [1914] AC 461 per Lord Haldane at 471, [1914-15] All ER Rep 752; Mason v. Provident Clothing and Supply Co. Ltd., [1913] AC 724, [1911-13] All ER Rep 400; Niranjan Shankar Golikari v. Century Spg and Mfg. Co. Ltd., [1967] 2 SCR 367, AIR 1967 SC 1098. 84 North Western Salt Co. Ltd. v. Electrolytic Alkali Co. Ltd., [1914] AC 461 at 476, [1914-15] All ER Rep 752; Haynes v. Doman, [1899] 2 Ch 13, [1895-99] All ER Rep 1468; Mason v. Provident Clothing and Supply Co. Ltd., [1913] AC 724 at 732-33, [1911-13] All ER Rep 400. 85 North Western Salt Co. Ltd. v. Electrolytic Alkali Co. Ltd., [1914] AC 461, [1914-15] All ER Rep 752 at 758; Gopal Paper Mills Ltd. v. Surendra Kumar Ganesh Das Malhotra, AIR 1962 Cal 61 at 65; Attorney-General of the Commonwealth of Australia v. Adelaide Steamship Co. Ltd., [1913] AC 781, [1911-13] All ER Rep 1120. 86 Attorney-General of the Commonwealth of Australia v. Adelaide Steamship Co. Ltd. supra .
Other Statutory Provisions Partners The Indian Partnership Act, 1930 makes provision for enabling partners to impose covenants of restraint of trade in certain cases. Because of the element of mutuality involved in a contract of partnership, and the fact that each partner benefits from the restriction, a much wider restraint upon partners can be upheld. Covenants in partnership agreements need not be categorised as either falling within the vendor-purchaser or employee categories; the court in such cases simply had to determine whether the covenant was no more than was necessary to protect the interests of the covenantee.87
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Under the Indian Partnership Act, 1930 a contract between partners may provide that a partner shall not carry on any business other than that of the firm while he is a partner.88 A partner may make an agreement with his partners that on ceasing to be a partner, he will not carry on any business similar to that of the firm within a specified period or within specified local limits.89 Partners may, upon or in anticipation of the dissolution of the firm, make an agreement that some or all of them will not carry on a business similar to that of the firm within a specified period or within specified local limits.90 Any partner may, upon sale after dissolution of the goodwill of the firm, agree with the buyer that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits.91 In the last three cases, the agreement would be valid if the restrictions imposed are reasonable. On a dissolution of partnership, it was agreed between the two sets of partners that one would not carry on the business of a produce merchant for a period of five years and the other would not carry on business of trans-shipping agent. The agreement was held not binding or enforceable as there was no limitation of a particular area and it could not be implied in the contract.92 So was a clause in a partnership deed void 'that on termination of the selling agency business, neither of the parties to the agreement shall take up the selling agency from the mills'.93 But where, in a deed of partnership carrying on insurance business, it was provided that the retiring partners will not carry on the business of insurance for the period of three years within 20 miles of the place of business, it was held that the restraint was reasonable and therefore, valid and enforceable.94 Such covenants are valid during the continuance of the partnership. Thus, an agreement by one of the proprietors of a theatre not to write a play for another theatre is valid.95 In the absence of an express covenant, a partner, on dissolution, may carry on the same or similar business in his own name and not in the name of the old partnership, and may deal with the customers of the former partnership, but may not persuade them to deal with himself and not the old firm,96 nor represent his business as the business of the old firm.97 Restrictive covenants operating between parties on dissolution of partnership are valid,98 if they impose restraints which are not wider than the circumstances reasonably require.99 An agreement of partnership between two medical practitioners provided that if any partner retired or was expelled he should not, 'for a period of five years immediately following such a retirement or expulsion engage in practice as a medical practitioner either alone or jointly with any other person within a radius of 10 miles of the Market House of Godalming'. The practice was wholly confined to patients resident within a radius of five miles. The clause was held unenforceable because in its terms it was perfectly general and included a restraint on practice as a consultant and thus it was wider than was reasonably necessary for the protection of the partnership practice which was a general one.100 Competition law The Competition Act, 2002 in s. 3 prohibits and makes void any anti-competitive agreement that in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India. Tie-in arrangements, exclusive supply agreements, exclusive distribution agreements, refusals to deal and resale price maintenance are some such agreements. 87 Deacons v. Bridge, [1984] AC 705, [1984] 2 All ER 19(PC) ; Oswald Hickson Collier and Co. v. Carter-Ruck, [1984] AC 720, [1984] 2 All ER 15; Edwards v. Worboys, [1984] AC 724. 88 The Indian Partnership Act, 1932, s. 11(2). 89 The Indian Partnership Act, 1932, s. 36(2). 90 The Indian Partnership Act, 1932, s. 54. 91 The Indian Partnership Act, 1932, s. 55(3).
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92 Butt v. Long, (1953) 88 CLR 476 at 489; relying on Vancouver Malt and Sake Brewing Co. Ltd. v. Vancouver Breweries Ltd., AIR 1934 PC 101, [1934] AC 181, [1934] All ER Rep 38(PC) . 93 Deva Sharma v. Laxmi Narain Gaddodia, AIR 1956 Punj 49. 94 Geraghty v. Minter, (1979) 142 CLR 177, (1979) 53 ALJR 638. 95 Morris v. Colman, (1812) 18 Ves 437, [1803-13] All ER Rep 164. 96 Churton v. Douglas, (1859) Johns 174, 28 LJCh 841; Macfarlane v. Kent, [1965] 2 All ER 376, [1965] 1 WLR 1019. 97 Trego v. Hunt, [1896] AC 7, [1895-99] All ER Rep 804; cf Curl Brothers v. Webster, [1904] 1 Ch 685; Labouchere v. Dawson, (1872) 13 Eq 322. 98 Leighton v. Wales, (1838) 3 M & W 545, 7 L J Ex 145. 99 Whitehill v. Bradford, [1952] Ch 236, [1952] 1 All ER 115; Macfarlane v. Kent, [1965] 2 All ER 376, [1965] 1 WLR 1019; Ronbar Enterprises Ltd. v. Green, [1954] 2 All ER 266, [1954] 1 WLR 815; Lyne-Pirkis v. Jones, [1969] 3 All ER 738, [1969] 1 WLR 1293; Peyton v. Mindham, [1971] 3 All ER 1215, [1972] 1 WLR 8. 100 Lyne-Pirkis v. Jones, [1969] 3 All ER 738, [1969] 1 WLR 1293(CA) ; Routh v. Jones, [1947] 1 All ER 758 followed.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER II Of Contracts, Voidable Contracts and Void Agreements/S. 28.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER II Of Contracts, Voidable Contracts and Void Agreements S. 28. Agreements in restraint of legal proceedings void.-1
[Every agreement,-(a) (b)
by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights; or which extinguishes the rights of any party thereto, or discharges any party thereto, from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights,
is void to that extent.] Exception 1.--Saving of contract to refer to arbitration dispute that may arise.--This section shall not render illegal a contract, by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred. 2
[* * * * * *]
Exception 2.--Saving of contract to refer questions that have already arisen.--Nor shall this section render illegal any contract in writing, by which two or more persons agree to refer to arbitration any question between them which has already arisen, or affect any provision of any law in force for the time being as to references to arbitration.
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3
[Exception 3.--Saving of guarantee agreement of a bank or a financial institution.--This section shall not render illegal a contract in writing by which any bank or financial institution stipulate a term in a guarantee or any agreement making a provision for guarantee for extinguishment of the rights or discharge of any party thereto from any liability under or in respect of such guarantee or agreement on the expiry of a specified period which is not less than one year from the date of occurring or non-occurring of a specified event for extinguishment or discharge of such party from the said liability. Explanation.-(i) (a) (b) (c) (d) (k) (e) (f) (g) (ii)
In Exception 3, the expression &uot;bank&uot; means-a &uot;banking company&uot; as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949); &uot;a corresponding new bank&uot; as defined in clause (da) of section 5 of the Banking Regulation Act, 1949 (10 of 1949); &uot;State Bank of India&uot; constituted under section 3 of the State Bank of India Act, 1955 (23 of 1955); &uot;a subsidiary bank&uot; as defined in clause of section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959); &uot;a Regional Rural Bank&uot; established under section 3 of the Regional Rural Banks Act, 1976 (21 of 1976); &uot;a Co-operative Bank&uot; as defined in clause (cci) of section 5 of the Banking Regulation Act, 1949 (10 of 1949); &uot;a multi-State co-operative bank&uot; as defined in clause (cciiia) of section 5 of the Banking Regulation Act, 1949 (10 of 1949); and In Exception 3, the expression &uot;a financial institution&uot; means any public financial institution within the meaning of section 4A of the Companies Act, 1956 (1 of 1956).]
Introduction An agreement is void to the extent it restricts absolutely a party from enforcing his contractual rights by usual proceedings in ordinary courts; or if it limits the time within which he may enforce his rights. It saves two types of contracts: (a) those with a stipulation that an arbitration award shall precede a cause of act ion, and (b) a contract to refer existing disputes to arbitration. 1 Subs. by the Indian Contract (Amendment) Act, 1996 (Act I of 1997) w.e.f. 8 January 1997; s. 28 as it stood before the amendment in 1997 read:&uot;Every agreement, by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals. or which limits the time within which he may thus enforce his rights, is void to that extent.&uot; 2 Second clause of Explanation 1was repealed by s. 2 and Schedule of the Specific Relief Act, 1877. It provided: Suits barred by such contracts--When such a contract has been made. a suit may be brought for its specific performance and if a suit, other than for such specific performance, or for the recovery of the amount so awarded, is brought by one party to such contract against any other such party in respect of any subject which they have so agreed to refer the existence of such contract shall be a bar to the suit. 3 Exception 3 added by section 17 and Article 1 of the Schedule of the Banking Laws (Amendment) Act 2012 (Act 4 of 2013) notified on 5 January 2013, brought into force w.e.f. 18 January 2013.
Restraint of Legal Proceedings No man can exclude himself from the protection of courts by contract.4 The citizen has the right to have his legal position determined by the ordinary tribunals, except, subject to contract (a) when there is an arbitration clause which is valid and binding under the law; and (b) when parties to a contract agree as to the jurisdiction to which dispute in respect of the contract shall be discharged.5 The
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section affirms the Common Law. Its provisions 'appear to embody a general rule recognized in the English Courts which prohibits all agreements purporting to oust jurisdiction of the Courts'.6 4 Rehmatunnissa Begum v. Price ILR 42 Bom 380, AIR 1917 PC 116, 118. 5 ABC Laminart Pvt. Ltd. v. AP Agencies, AIR 1989 SC 1239, (1989) 2 SCC 163; Vulcan Insurance Co. Ltd. v. Maharaj Singh, [1976] 2 SCR 62, AIR 1976 SC 287. 6 Anant Das v. Ashburner & Co., (1876) 1 All 267; Kistnasamy Pillay v. Municipal Comms for the Town of Madras, (1868) 4 MHC 120, 123; Baker v. Jones, [1954] 2 All ER 553, [1954] 1 WLR 1005.
Absolute Restriction This section does not apply where the restriction is not absolute.7 Where one out of two competent jurisdictions are excluded by agreement, it does not amount to absolute ouster of jurisdiction, and such a clause does not violate s. 28.8 7 Western India Prospecting Syndicate Ltd. v. Bombay Steam Navigation Co. Ltd., AIR 1951 Sau 83. 8 ABC Laminart Pvt. Ltd. v. AP Agencies, AIR 1989 SC 1239, (1989) 2 SCC 163,(nor does it violate public policy or is a contravention of s. 23).
Agreements Restraining Enforcement of Rights An agreement by a servant not to sue for wrongful dismissal is invalid;9 so is a condition restraining a transferee from enforcing his rights under the transfer in any way.10 A special agreement between a barrister-advocate and his client that the latter would not be sued for fees has been held void under this section.11 In Hyman v. Hyman, 12 a covenant in a separation deed provided that the wife would not apply to the divorce-court for maintenance and it was held that it was void as being contrary to public policy. But in a later case, a wife's covenant not to invoke the jurisdiction of the divorce-court in respect of maintenance for the child and herself was wholly void.13 The agreement could be enforced in a case where the spouses had agreed after the decree nisi to a financial arrangement, providing for the matrimonial house to be given to the wife and she agreed to waive and relinquish all claims to maintenance.14 The rule in Hyman v. Hyman does not apply where the arrangement was brought before the court and the court passed an order in terms of the arrangement.15 In Addison v. Brown, 16an agreement between a husband and a wife for the payment of maintenance after divorce proceedings were instituted, provided that if the husband or the wife obtained a divorce in California, the provisions of the agreement shall continue in force. Neither the husband nor the wife would apply to any court for any different relief, and if any judgment of any court shall otherwise provide with respect to any of the matters in the agreement, the provisions of the agreement shall continue, notwithstanding the terms of any such judgment. The courts of California pronounced an interlocutory judgment of divorce and the maintenance agreement was embodied in the judgment of the court. In an act ion by the wife for arrears under the deed, the husband contended that the deed was void as being contrary to public policy in that it purported to oust the jurisdiction of the court. It was held that the deed would have been contrary to public policy and void, if it had purported to oust the jurisdiction of the English courts, but it was not contrary to public policy to allow the wife to sue on it merely because it purported to oust the jurisdiction of a foreign court. An agreement that the quantification of liquidated damages shall be final and could not be challenged was in restraint of proceedings and void.17 The rules of a club authorized its committee to take action against any members who approached the court to challenge the election process. In a suit for declaration of nullity of this rule, the court held (by way of prima-facie view) that such a rule violated section 28, and was opposed to public policy, because no person could be prevented from approaching a court for redress of a justiciable cause.18
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Agreement not to Appeal An agreement, whereby the parties to a suit bind themselves before judgment is passed in the court of first instance, to abide by the decree of that court and forego their right of appeal, is valid and binding.19 An agreement by which the parties agreed to a procedure to be adopted in a court deciding the case on merits and consenting that the decision will be binding on them, was tantamount to providing that no right of appeal will be exercised.20 Also, an agreement whereby a judgment-debtor engaged himself not to appeal in consideration of the judgment-creditor giving him time for the satisfaction of the judgment-debt, is not prohibited by this section.21 By the agreement not to appeal, for which the indulgence granted by the respondents was a good consideration, the appellant did not restrict himself absolutely from enforcing a right under or in respect of any contract. He forwent his right to question in appeal the decision which has been passed by an ordinary tribunal. 'Such an agreement is in our judgment prohibited neither by the language nor the spirit of the Contract Act, and an Appellate Court is bound by the rules of justice, equity, and good conscience to give effect to it and to refuse to allow the party bound by it to proceed with the appeal'.22 9 Bengal North Western Rly Co. v. Sukhdeo Prasad, AIR 1925 Pat 487. 10 Muthiah Chettiar v. Lodd Govinda Doss Krishna Doss Varu, AIR 1921 Mad 599(FB) . 11 Nihal Chand Shastri v. Dilawar Khan, AIR 1933 All 417 at 420 (FB). 12 [1929] AC 601, [1929] All ER Rep 245; criticising Gandy v. Gandy (No 1) (1882) 7 PD 168, [1881-85] All ER Rep 376. 13 Bennett v. Bennett, [1952] 1 KB 249, [1952] 1 All ER 413; Sutton v. Sutton, [1984] Ch 184 at 195-198, [1984] 1 All ER 168. 14 Minton v. Minton, [1979] 1 All ER 79 at 85; L v. L, [1961] 3 All ER 834 approved. 15 L v. L, [1961] 3 All ER 834. 16 [1954] 2 All ER 213, [1954] 1 WLR 779; distinguishing Bennett v. Bennett, [1952] 1 KB 249, [1952] 1 All ER 413. 17 Bharat Sanchar Nigam Ltd. v. Motorola India Pvt. Ltd., AIR 2009 SC 357, (2009) 2 SCC 337. 18 Tapash Majumder v. Pranab Dasgupta, AIR 2006 Cal 55. 19 Munshi Amir Ali v. Maharani Inderjit Koer, (1871) 9 BLR 460; Anant Das v. Ashburner & Co., (1876) 1 All 267(FB) ; Coringa Oil Co. Ltd. v. Koegler, (1876) 1 Cal 466; Protap Chunder Dass v. Arathoon, (1882) 8 Cal 455; Burla Ranga Reddi v. Kalapalli Sithaya, (1883) 6 Mad 368(case under the Code of Civil Procedure);Cooverji Ludha v. Bhim'i Girdhar, (1882) 6 Bom 528; Ganges Mfg. Co. Ltd. v. Indra Chand, (1906) 33 Cal 1169; Hakim Bashir Ahmed v. Sadiq Ali, (1929) 120 IC 826, AIR 1929 Oudh 451; Kedarnath Gangagopal Misra v. Sitaram Narayan Moharil, AIR 1969 Bom 221; Gousmohoddin Gajabur Saheb Bhagwan v. Appasaheb, AIR 1976 Kant 90. 20 Hakim Bashir Ahmed v. Sadiq Ali, (1929) 120 IC 826, AIR 1929 Oudh 451; Rameshwardas Benarsidas v. New Jooria Bazar Sugar Co., AIR 1926 Sind 202. 21 Anant Das v. Ashburner & Co., (1876) 1 All 267(FB) ; Hakim Bashir Ahmed v. Sadiq Ali, (1929) 120 IC 826, AIR 1929 Oudh 451; TV Balakrishnan v. TS Venkatachalam, AIR 1980 Mad 99, (tenant not to take legal proceedings against an order in return for time to vacate). 22 Anant Das v. Ashburner & Co., (1876) 1 All 267(FB) ; Bhirgunath Prasad Singh v. Annapurna Dai Sijuarin, AIR 1934 Pat 644, 153 IC 1098.
Rights under or in respect of any Contract This section applies only to cases where a party is restricted from enforcing his rights under or in respect of any contract. It, therefore, presumably does not apply if the court holds that the parties did not intend that their agreement should give rise to any legal relations.23 It does not apply to cases of wrongs or torts. Nor does it apply to decrees; the expression 'contract' does not include rights under a decree.24 The CPC contains express provisions as to adjustment of a decree and postponement of
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rights under a decree by mutual agreement of parties to a suit (O. 21, r. 2). But an agreement by a joint decree holder not to intervene in execution under O. 21, r. 15, of the CPC, is invalid.25 The section does not affect the validity of compromises of doubtful rights,26 and this view is supported by the provisions of the CPC, which enable parties to a suit to go before the court and obtain a decree in terms of a compromise.27 Nor does this section exclude agreements to refer to arbitration without order of court in a pending suit.28 23 Rose and Frank Co. v. JR Crompton & Bros Ltd., [1925] AC 445, [1924] All ER Rep 245(HL) . 24 Ramghulam v. Janki Rai, (1884) 7 All 124, 131; (1884-86) ILR 5-8 All 320. 25 Muthiah Chettiar v. Lodd Govind Doss Krishna Doss Varu, (1921) 44 Mad 919, AIR 1921 Mad 599, 69 IC 337. 26 Rameshwardas Benarsidas v. New Jooria Bazar Sugar Co., AIR 1926 Sind 202, 206; Shashi Agarwal v. Chairperson Debt Recovery Appellate Tribunal, AIR 2009 All 189. 27 Anant Das v. Ashburner & Co., (1876) 1 All 267; Code of Civil Procedure 1908, O. 23, r. 3. 28 Chanbasappa Gurushantappa Hiremath v. Baslingayya Gokurnaya Hiremath, AIR 1927 Bom 565; Jugaldas Damodar Modi & Co. v. Purshottam Umedbhai & Co., AIR 1953 Cal 690.
By the usual Legal Proceedings in Ordinary Tribunals An agreement between the parties to a suit on a contract that the suit should be decided in accordance with the result of another suit between the same parties is void under this section, as it restricts the parties absolutely from enforcing their rights by the 'usual legal proceedings'.29 The expression 'usual legal proceedings in the ordinary tribunals' refers to proceedings in India. Therefore, any agreement in which parties do not have 'recourse to Indian Courts would be void, and it would be no answer that an aggrieved party could file proceedings in a foreign court under the agreement.30 A clause selecting jurisdiction cannot oust jurisdiction of the Lok Adalat.31 29 Rajah of Venkatagiri v. Vemuru Chinta Reddy, (1914) ILR 37 Mad 408, AIR 1914 Mad 449, 15 IC 378. 30 Rajendra Sethia v. Punjab National Bank, AIR 1991 Del 285 at 290. 31 InterGlobe Aviation Ltd v. N Satchinand, (2011) 7 SCC 463, 2011 AIR SCW 6308.
Agreements Prescribing Jurisdiction Parties cannot, by private agreement, confer upon a court jurisdiction which it does not possess, nor can they divest a court of jurisdiction which it possesses under the ordinary law.32 A clause is invalid if it ousts jurisdiction of all courts having jurisdiction and confers jurisdiction on a court not otherwise having jurisdiction.33 The principle that parties cannot by consent confer jurisdiction on a court or deprive a court of jurisdiction has been stated to apply to cases of inherent jurisdiction of a court over the subject matter of the suit, and the question of territorial jurisdiction as not being a question of inherent jurisdiction.34 Where, thus, two courts have jurisdiction to try a case, there is nothing contrary to law in an agreement between parties that disputes between them should be tried at the one court rather than the other. However, parties can choose to submit their dispute to the exclusive or non-exclusive jurisdiction of a foreign court as a neutral court, although it has otherwise no jurisdiction.35 If such contract is clear, unambiguous, explicit and not vague, it is not hit by this section.36 But an agreement, however, cannot confer jurisdiction on the court which has no jurisdiction at all to entertain the suit;37 and if the court mentioned in the contract has no jurisdiction at all,38 the jurisdiction of other courts is not barred.39 A clause in a bill of lading whereby it was agreed that questions arising on the
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bill should be heard by the High Court of Calcutta instead of the Court at Mirzapur, which was the proper tribunal to try the questions, is void, and cannot be pleaded in bar of a suit brought in the Mirzapur Court.40 A contract with the words 'Madras jurisdiction' would signify agreement to get the matter adjudicated at Madras and the clause is valid;41 similarly a clause in an insurance policy providing for adjudication by Bombay courts;42 or in any other contract;43 or a clause prescribing that any disputes should be referred to 'the Bombay High Court or any courts in the town and island of Bombay as had jurisdiction in the matter'.44 Limiting Jurisdiction to one or More Competent Courts This section renders void only those agreements which 'absolutely' restrict a party to a contract from enforcing the rights under that contract in ordinary tribunals. It does not apply where a party agrees not to restrict the enforcement of his rights in the ordinary tribunals, but only agrees to a selection of one of those ordinary tribunals in which ordinarily a suit would be tried.45 The validity of an agreement by which the parties prefer one of the two courts depends upon the fact that both the courts must have jurisdiction in deciding the matter.46Where two or more courts have jurisdiction to try a suit, the agreement between the parties limiting the jurisdiction to one court is neither opposed to public policy nor a contravention of s. 28 of the Contract Act.47 Such a clause, restricting jurisdiction, applies also to proceedings in courts under the arbitration law.48 Choice Clear and Unambiguous The choice should be clearly unambiguous and explicit.49 The party invoking the clause must strictly prove that the restriction applies to the proceedings under consideration.50 The use of the words 'subject to ABC jurisdiction' do not per se exclude or oust the jurisdiction of the other courts,51 unless words like 'only' or 'exclusively' or 'alone' or the like are used to show an unambiguous intention to exclude the jurisdiction of the other courts;52 and in the absence of such words, exclusion of other courts cannot be inferred. Where parties agreed to jurisdiction of High Court of Mumbai, it meant Bombay High Court.53 Choice of Both the Parties The ouster must be agreed to by both parties.54 Where a transaction was through brokers and the invoice contained the words 'subject to Shimoga jurisdiction' and the purchaser was not aware of it, the exclusive jurisdiction of Shimoga Courts cannot be held to have been agreed to; previous course of dealings was not considered enough.55 It was held that jurisdiction of other courts was not excluded where the words were printed on a bill56 or on a consignment note.57 A party relying on a clauses excluding jurisdiction to certain courts and restricting it to specific courts only should show that it was brought to the notice of the other party specifically and adequately.58 Where a form printed by one party is signed only by that party and delivered to the other party, without anything more, it will be difficult for the court to hold that there has been consensus ad idem in regard to clause ousting jurisdiction of all courts other than the court specified therein.59 Where a consignment note contains a clause restricting the jurisdiction to one of the two courts having jurisdiction over the subject matter of the dispute and the note is not signed by the consignor and the consignee, then that clause will not be binding on the consignor or the consignee unless his attention is specially drawn to the condition,60'say by printing it in red or by a sign in red',61 indicating the condition. Choice is Binding on Parties As long as the parties to a contract do not oust the jurisdiction of all the courts which would otherwise have jurisdiction to decide the cause of act ion under the law, it cannot be said that the parties have, by their contract, ousted the jurisdiction of the court and where the parties to a contract agreed to submit the disputes arising from it to a particular jurisdiction which would otherwise also be a proper
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jurisdiction under the law, their agreement to the extent they agreed not to submit to other jurisdictions cannot be said to be void as against public policy.62 Where such an ouster clause occurs, it is pertinent to see whether there is ouster of jurisdiction of other courts. When the clause is clear, unambiguous and specific, the contract would bind the parties,63 and unless the absence of ad idem can be shown, the other courts should avoid exercising jurisdiction.64 If court chosen has jurisdiction, chosen court will exclude all other courts having jurisdiction.65 But in the case of international trade, the agreement of the parties is not conclusive, but depends on many factors.66 But in spite of a term of a contract specifying one of the courts with jurisdiction where all disputes thereunder will be litigated, the court may take into consideration the facts and the relevant circumstances of the case and may refuse to enforce the stipulation as to the choice of forum if it is oppressive, unfair or inequitable;67 and therefore, an agreement between the parties that the jurisdiction would be restricted to courts having jurisdiction over a particular territory may not oust the jurisdiction which the other courts may have under the law.68 If the court has jurisdiction in the matter and despite the stipulation to the contrary, a party to the contract resorts to its jurisdiction, a possible approach could be to saddle the party with the costs of the proceedings irrespective of the result rather than to non-suit it. In Snehalkumar Sarabhai v. Economic Transport Organisation, 69 it has been observed:
The ouster clause can operate as estoppel against the parties to the contract. It cannot tie the hands of the court and denude it of the power to do justice. It is no doubt true that ordinarily courts would respect the agreement between the parties which is borne out of the meeting of their minds and out of considerations of convenience. But the Courts are not obliged to do so in every case...a new approach to this question deserves to be made for the ouster clause is calculated to operate as an engine of oppression and as a means to defeat the ends of justice.
These words of caution were noticed by the Supreme Court in a later case.70 The clause choosing jurisdiction was ignored in a case where the goods were consigned at another place, where the witnesses also resided, and the amount claimed was comparatively small.71 But it has also been held that the selection of the parties of the forum with free consent should not be disturbed, and the excluded court cannot consider the balance of convenience or make a new approach to relieve the parties of their bargain.72 A contract between parties with regard to the exclusion of jurisdiction of a court is not binding on a third party, unless the attention of such third party is specifically drawn to such a clause in the contract and he is made aware of its implications. Thus, where the suit was filed in the court at Hyderabad by the insurance company for recovery of damages for short delivery of goods which were delivered at Hyderabad, it was held that in absence of any evidence that the insurance company who was a third party was made aware of the implications of the lorry receipt; and since no part of cause of action had arisen in Calcutta, it was not open to say that the suit could be filed only in the court in Calcutta as stipulated in the lorry receipt.73 32 ABC Laminart Pvt. Ltd. v. AP Agencies, AIR 1989 SC 1239, 1244, (1989) 2 SCC 163; Marittima Italiana Steamship Co. v. Burjor Framroze Rustomji Joshi, AIR 1930 Bom 185; National Petroleum Co. v. FX Rebello, AIR 1935 Nag 48; Continental Drug Co. Ltd. v. Chemoids and Industries Ltd., AIR 1955 Cal 161; Ram Bahadur Thakur & Co. v. Devidayal (Sales) Ltd. (1954) Bom 334, AIR 1954 Bom 176; Hoosen Kasam Dada (India) Ltd. v. Motilal Padampat Sugar Mills Co. Ltd., AIR 1954 Mad 845; Mohammed Kasim Haji Ahmad Kunju v. Sree Hanuman Industries, AIR 1956 Tr & Coch 200; Lakshminaraian Ramniwas v. NV Vereenigde Nederlandsche Scheepraartmaatschappi, AIR 1960 Cal 45; Lakhinarayan Ramniwas v. Lloyd Triestino Societa per Azinni Di Navigazione Sede in Triesta, AIR 1960 Cal 155; Hakam Singh v. Gammon (India) Ltd., AIR 1971 SC 740; Kumud Agarwalla v. Fertilizer Corpn. of India Ltd., AIR 1985 Cal 89. 33 InterGlobe Aviation Ltd v. N Satchinand, (2011) 7 SCC 463, 2011 AIR SCW 6308.
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34 Musa Ji Lukman Ji v. Durga Dass, ILR (1945) Lah 281, 223 IC 284, AIR 1946 Lah 57(FB) ; Balwant Singh v. SH Mian Mohd, AIR 1947 Pesh 48; Manoharlal Jiwanlal Chopra v. Rao Raja Hiralalji S Kalyanmalji Sarogi, AIR 1955 MB 145. 35 Modi Entertainment Network v. WSG Cricket Pte Ltd., AIR 2003 SC 1177, (2003) 4 SCC 341. 36 Angile Insulations v. Davy Ashmore India Ltd., AIR 1995 SC 1766, (1995) 4 SCC 153. 37 Patel Roadways Limited. v. Prasad Trading Co., AIR 1992 SC 1514, 1519; Jyothi Turbo Power Services Pvt Ltd v. Shenzhen Shandong Nuclear Power Construction Co Ltd, AIR 2011 AP 111. 38 The Code of Civil Procedure, 1908, ss. 16-20. 39 Jabalpur Cable Networks Pvt. Ltd. v. ESPN Software India Pvt. Ltd., AIR 1999 MP 271. 40 Crawley v. Luchmee Ram, (1866) 1 Agra High Court Reports 129; distinguished in Achratlal Keshavlal Mehta & Co. v. Vijayam & Co. 90 IC 1019, AIR 1925 Mad 1145, (1925) 49 Mad LJ 189 (an ill-drawn clause saved by its obscurity, not really reportable). 41 S Manuel Raj & Co. v. J Manilal & Co., AIR 1963 Guj 148; dissenting from Patel Bros v. Vadilal Kashidas Ltd., AIR 1959 Mad 227; distinguishing Amritsar Transport Co. Ltd. v. S Sohanlal, AIR 1957 J&K 7. 42 New India Assurance Co. Ltd. v. TK Nanjunda Shetty & Sons, AIR 1964 Mys 147. 43 Libra Mining Works v. Baldota Brothers Importers and Exporters, AIR 1962 AP 452 at 455; following Ram Bahadur Thakur & Co. v. Devidayal (Sales) Ltd., (1954) Bom 334, AIR 1954 Bom 176; distinguishing Patel Bros v. Vadilal Kashidas Ltd., AIR 1959 Mad 227; M Sheik Dawood Rowther v. South Indian Rly Co. Ltd., AIR 1944 Mad 444. 44 Khandesh Lakshmivilas Mills Co. v. Vinayak Atmaram Karpurkar, AIR 1935 Bom 198, 37 Bom LR 157, 156 IC 277. 45 Hakam Singh v. Gammon (India) Ltd., AIR 1971 SC 740 (contract in Bombay); Globe Transport Corpn. v. Triveni Engineering Works, (1983) 4 SCC 707; ABC Laminart Pvt. Ltd. v. AP Agencies, AIR 1989 SC 1239, (1989) 2 SCC 163; Angile Insulations v. Davy Ashmore India Ltd., AIR 1995 SC 1766, (1995) 4 SCC 153; Musa Ji Lukman Ji v. Durga Dass, ILR (1945) Lah 281, 223 IC 284, AIR 1946 Lah 57(FB) ; National Petroleum Co. Ltd. v. Meghraj Ramkaranji Gholcha, (1939) Nag 641, AIR 1937 Nag 334; Ram Bahadur Thakur & Co. v. Devidayal (Sales) Ltd., (1954) Bom 334, AIR 1954 Bom 176; Hoosen Kasam Dada (India) Ltd. v. Motilal Padampat Sugar Mills Co. Ltd., AIR 1954 Mad 845; T Motandas & Co. v. L Hakumat Rai, AIR 1955 J&K 26; Mohammed Kasim Haji Ahmad Kunju v. Sree Hanuman Industries, AIR 1956 Tr & Coch 200; New India Assurance Co. Ltd. v. TK Nanjunda Shetty & Sons, AIR 1964 Mys 147; Lloyds Commercial Corpn. v. Veeravilli Satyanarayana, AIR 1966 AP 256; Ajamera Bros v. Suraj Mal Naresh Kumar Jain, AIR 1968 Pat 44; Singhal Transport v. Jesaram Jamumal, AIR 1968 Raj 89; Timber Pvt. Ltd. v. Skandia Insurance Co. Ltd., AIR 1973 J&K 86; National Tar Products v. Himachal Pradesh State Electicity Board, AIR 1979 Del 255; Surajmall Shiwbhagawan v. Kalinga Iron Works, AIR 1979 Ori 126; Balsukh Refractories and Ceramics Ltd. v. Hindustan Steel Ltd., AIR 1977 Cal 20; Patel Roadways Pvt. Ltd. v. Bata India Ltd., AIR 1982 Cal 575. 46 Amritsar Transport Co. Ltd. v. S Sohanlal, AIR 1957 J&K 7; Kumud Agarwalla v. Fertilizer Corpn. of India Ltd., AIR 1985 Cal 89. 47 Hakam Singh v. Gammon (India) Ltd., AIR 1971 SC 740 (contract in Bombay); Globe Transport Corpn. v. Triveni Engineering Works, (1983) 4 SCC 707; ABC Laminart Pvt. Ltd. v. AP Agencies, Salem, AIR 1989 SC 1239 at 1244, (1989) 2 SCC 163; Tilakram Chaudhuri v. Kodumal Jethananad Wadha, AIR 1928 Bom 175, 156 IC 277; A Milton & Co. v. Ojha Automobile Engineering Co., (1930) 57 Cal 1280, 130 IC 252, AIR 1931 Cal 279; Khandesh Lakshmivilas Mills Co. v. Vinayak Atmaram Karpurkar, AIR 1935 Bom 198, 37 Bom LR 157, 156 IC 277; Gopal Das Agarwala v. L Hari Kishan Das, AIR 1936 All 514, (1936) All LJ 704, 163 IC 919; National Petroleum Co. Ltd. v. Meghraj Ramkaranji Gholcha, (1939) Nag 641, AIR 1937 Nag 334; Firm Bichchha Ram Babu Ram v. Firm Baldeo Sahai Suraj Mal, ILR (1940) All 232, AIR 1940 All 241; Kondepu Raghavayya v. Elukkoru Vasudevayya Chetty, AIR 1944 Mad 47, 211 IC 480; GR Sharma v. Sunder Talkies, AIR 1944 Oudh 275; Musa Ji Lukman Ji v. Durga Dass, ILR (1945) Lah 281, 223 IC 284, AIR 1946 Lah 57(FB) ; Vastiram Manmal & Co. v. TS Ramaswamy Iyer & Bros Ltd., AIR 1947 Mad 99, 230 IC 228; Balwant Singh v. SH Mian Mohd, AIR 1947 Pesh 48; Beni Pershad Bhargava v. Narayan Glass Works, AIR 1949 Ajm 19; Bhagat Ram v. Ramniwas, AIR 1949 Ajm 44; Unique Motor and General Insurance Co. Ltd. v. Rayma Isa Abhu, AIR 1950 Kutch 32; Ram Bahadur Thakur & Co. v. Devidayal (Sales) Ltd., (1954) Bom 334, AIR 1954 Bom 176; Hoosen Kasam Dada (India) Ltd. v. Motilal Padampat Sugar Mills Co. Ltd., AIR 1954 Mad 845; AK Kaliyappa Chettiyar & Sons v. Currimbhoy Laljee Sajun & Co., AIR 1954 Tr & Coch 461; Continental Drug Co. Ltd. v. Chemoids and Industries Ltd., AIR 1955 Cal 161; Manoharlal Jiwanlal Chopra v. Rao Raja Hiralalji S Kalyanmalji Sarogi, AIR 1955 MB 145; Singhal Transport v. Jesaram Jamumal, AIR 1968 Raj 89; Timber Pvt. Ltd. v. Skandia Insurance Co. Ltd., AIR 1973 J&K 86; Beacon Pharmaceuticals v. Dunichand Khosla, AIR 1973 Punj 160; Nanak Chand Shadurain v. Tinnelvely Tuticorin Electric Supply Co. Ltd., AIR 1975 Mad 103, 107; Balsukh Refractories and Ceramics Ltd. v. Hindustan Steel Ltd., AIR 1977 Cal 20; Shah Prabhudas Gulabchand v. Eurasian Equipments and Chemicals Ltd., AIR 1977 Cal 449; National Tar Products v. Himachal Pradesh State Electicity Board, AIR 1979 Del 255; Salem Chemical Industries v. Bird and Co. (P) Ltd., AIR 1979 Mad 16; distinguishing Achratlal Keshavlal Mehta d' Co. v. Vijayam d' Co. 90 IC 1019, AIR 1925 Mad 1145, (1925) 49 Mad LJ 189; Jhun Jhunwala Bros v. NKM Subbaramier, AIR 1968 Mad 194; Savani Transport Pvt. Ltd. v. Chinnaswami Mudaliar d' Co., AIR 1979 Mad 21; Surajmall Shiwbhagawan v.
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Kalinga Iron Works, AIR 1979 Ori 126; Patel Roadways Pvt. Ltd. v. Bata India Ltd., AIR 1982 Cal 575, 577; Tobu Enterprises Pvt. Ltd. v. Camco Industries Ltd., AIR 1984 Cal 24; Ganapatrai Agarwall v. Fertiliser Corpn. of India, AIR 1984 Cal 35; All Bengal Transport Agency v. Hare Krishna Banik, AIR 1985 Gau 7; Biswanath Chowdhury v. Uttar Pradesh Forest Corpn, AIR 1986 Cal 334; Frick India Limited. v. Sharma Cold Storage and Ice Factory (P) Ltd., AIR 1986 Pat 94; Indian Rare Earths Ltd. v. Unique Builders Ltd., AIR 1987 Ori 30 at 32. 48 Zamindara Engineering Co. v. Sunil Tractor Co., AIR 1992 SC 1545, (1993) Supp (1) SCC 468; Kumud Agarwalla v. Fertilizer Corpn. of India Ltd., AIR 1985 Cal 89, p. 91; Hakam Singh v. Gammon (India) Ltd., AIR 1971 SC 740. 49 Salem Chemical Industries v. Bird and Co. (P) Ltd., AIR 1979 Mad 16; Nanak Chand Shadurain v. Tinnelvely Tuticorin Electric Supply Co. Ltd., AIR 1975 Mad 103; Rajaram Maize Products v. MP Electricity Board, AIR 1999 MP 44; Angile Insulations v. Davy Ashmore India Ltd., AIR 1995 SC 1766, (1995) 4 SCC 153. 50 Vastiram Manmal d' Co. v. TS Ramaswamy Iyer d' Bros Ltd., AIR 1947 Mad 99, 230 IC 228; Patel Bros v. Vadilal Kashidas Ltd., AIR 1959 Mad 227; Surajmall Shiwbhagawan v. Kalinga Iron Works, AIR 1979 Ori 126. 51 RSDV Finance Co. Pvt. Ltd. v. Shree Vallabh Glass Works Ltd., AIR 1993 SC 2094, (1993) 2 SCC 130. 52 ABC Laminart Pvt. Ltd. v. AP Agencies, AIR 1989 SC 1239, (1989) 2 SCC 163; Angile Insulations v. Davy Ashmore India Ltd., AIR 1995 SC 1766, (1995) 4 SCC 153; New Moga Transport Co. v. United India Insurance Co. Ltd., AIR 2004 SC 2154, (2004) 4 SCC 677; Instruments' Inc v. Industrial Cables (India) Ltd., AIR 1996 Kant 360; KL Shroff v. State of Haryana, AIR 1998 Del 404; see also Swastik Gases Pvt. Ltd. v. Indian Oil Corporation Ltd., (2013) 9 SCC 32, 2013 (8) SCALE 433; Brahmaputra Valley Fertilizer Corporation v. Fenner India Ltd., Application No. 3735 of 2013, decided on 26 Sep 2013 (Mad). 53 ICICI Bank Ltd v. Limtex (India) Ltd, AIR 2011 Cal 111. 54 Amritsar Transport Co. Ltd. v. S Sohanlal, AIR 1957 J&K 7. 55 Melur G Venkatappa and Sons v. TVR Ramalingam PilIai, AIR 1974 Mad 186, 190; applying Chitty on Contracts, twenty-third edn, p. 227. 56 Grandhi Pitchaiah, Venkataraju and Co. v. Palukuri Jagannadha d' Co., AIR 1975 AP 32. 57 South Eastern Roadways v. United India Insurance Co. Ltd., AIR 1991 Ker 41; distinguishing ABC Laminart Pvt. Ltd. v. AP Agencies, AIR 1989 SC 1239, (1989) 2 SCC 163; United India Ins Co. Ltd. v. Associated Transport Corpn. Pvt. Ltd., AIR 1988 Ker 36 (unless signed by the consignee). 58 Road Transport Corpn. v. Kirlosker Brothers Ltd., AIR 1981 Bom 299; Mcllroy (Swindon) Ltd v Quinn Insurance Ltd, [2011] EWCA Civ 825. 59 United India Insurance Co. Ltd. v. Associated Transport Corpn. Pvt. Ltd., AIR 1988 Ker 36, 38. 60 Road Transport Corpn. v. Kirloskar Bros Ltd., AIR 1981 Bom 299, 312; Patel Roadways Pvt. Ltd. v. Republic Forge Co. Ltd., AIR 1985 AP 387. 61 Observations of Lord Denning in Thornton v. Shoe Lane Parking Ltd., [1971] 2 QB 163, [1971] 1 All ER 686(CA) ; Levison v. Patent Steam Carpet Cleaning Co. Ltd., [1977] 3 All ER 498; Olley v. Marlborough Court Ltd., [1949] 1 All ER 127. 62 ABC Laminart Pvt. Ltd. v. AP Agencies, AIR 1989 SC (1239), (1989) 2 SCC 163. 63 Shriram City Union Finance Corpn. Ltd. v. Rama Mishra, AIR 2002 SC 2402, (2002) 9 SCC 613. 64 ABC Laminart Pvt. Ltd. v. AP Agencies, AIR 1989 SC (1239), (1989) 2 SCC 163. 65 Hanil Era Textiles Ltd. v. Puromatic Filters (P) Ltd., AIR 2004 SC 2432, (2004) 4 SCC 671; AVM Sales Corporation v. Anuradha Chemicals Pvt Ltd, 2012 AIR SCW 1028, (2012) 2 SCC 315. 66 Black Sea Steamship UL Lastochkina Odessa v. Union of India, AIR 1976 AP 103 at 109; See below, 'Conflict of Laws and Choice of Jurisdiction'. 67 Indian Rare Earths Ltd. v. Unique Builders Ltd., AIR 1987 Ori 30; Ajanta Enterprisers v. Hoechst Pharmaceutical Ltd., AIR 1987 Ori 34 (the court refused to return the plaint as more than five years had elapsed since its presentation). 68 Patnaik Industries Pvt. Ltd. v. Kalinga Iron Works, AIR 1984 Ori 182; Paradeep Port Trust v. Hindustan Mercantile Transport Corpn, AIR 1985 Ori 106. 69 AIR 1975 Guj 72 per MP Thakkar at 72; Renown Biscuit Co. v. Kamalanathan, (1979) 2 Mad LJ 377; Rajasthan Golden Transport Co. (P) Ltd. v. United India Fire and General Insurance Co. Ltd., AIR 1980 Guj 184; Patnaik Industries Pvt. Ltd. v. Kalinga Iron Works, AIR 1984 Ori 182.
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70 ABC Laminart Pvt. Ltd. v. AP Agencies, AIR 1989 SC 1239 at 1246, (1989) 2 SCC 163. 71 Rajasthan Golden Transport Co. (P) Ltd. v. United India Fire and General Insurance Co. Ltd., AIR 1980 Guj 184, relying on Rai & Sons (Pvt) Ltd. v. Trikamji Kanji, (1975) 16 Guj LR 31; Snehalkumar Sarabhai v. Economic Transport Organisation, AIR 1975 Guj 72, and distinguishing Hakam Singh v. Gammon (India) Ltd., AIR 1971 SC 740; Nanak Chand Shadurain v. Tinnelvely Tuticorin Electric Supply Co. Ltd., AIR 1975 Mad 103; Salem Chemical Industries v. Bird and Co. (P) Ltd., AIR 1979 Mad 16; Ghatge and Patil (Transport) Ltd. v. Madhusudan Ramkumar, AIR 1977 Bom 299. 72 Ganapatrai Agarwall v. Fertiliser Corpn. of India, AIR 1984 Cal 35; Biswanath Chowdhury v. Uttar Pradesh Forest Corpn, AIR 1986 Cal 334. 73 East India Transport Agency v. National Insurance Co. Ltd., AIR 1991 AP 53; Patel Roadways Pvt. Ltd. v. Republic Forge Co. Ltd., AIR 1985 AP 387.
Conflict of Laws and Choice of Jurisdiction Although it is open to the parties to agree that dispute relating to their contract will be subject to the jurisdiction of courts in a particular territory to the exclusion of other courts, the parties who make their choice of tribunal will be bound by it. The enforcement in India of such contracts is not imperative where the choice restricts them to a foreign court.74 But an Indian citizen making a contract while in India would not be able, and cannot be permitted, to avoid the applicability of the Indian law to the contract made in India or to be performed in part or whole of India.75 In Adam Abdul Shakoor v. Ali Mohammad (1940) (The Fehmarn), 76 the cargo owner was in England, the cargo was found in the port of London and the survey was done in London. The ship was a frequent visitor to London. The ship owners were willing to submit to adjudication in London but objected to the giving of security. The act ion was allowed to proceed in England, although the contract provided for disputes to be judged in USSR and the cargo was loaded in a Russian port. The court laid down the following two principles against staying of suits:
(i)
(ii)
A stipulation that disputes will be judged by the tribunals of a foreign country will be respected by English Courts and normally give effect to it, but it is subject to the overriding principle that no one by his private stipulation can oust the jurisdiction of English Courts in a matter properly belonging to them. On the facts of the case the disputed property belonged to a buyer in England and it was more closely connected with England than with Russia and because the ship owners did not object to the jurisdiction of English Courts they only wished to avoid giving security.
Following this case, The Eleftheria77 summarized the principles about grant of stay, which have been approved and followed since:
(i)
(ii) (iii) (iv) (v)
Where the plaintiffs sue in England in breach of an agreement to refer disputes to the foreign court, and the defendants apply for stay, the English court, assuming the claim to be otherwise within its jurisdiction, is not bound to grant it stay, but has a discretion whether to do so or not. The discretion should be exercised by granting a stay unless strong cause for not doing so is shown. The burden of proving such strong cause is on the plaintiffs. In exercising its discretion, the court could take into account all the circumstances of a particular case. In particular, without prejudice to (iv), the following matters, where they arise, may
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properly be regarded:
74 Modi Entertainment Network v. WSG Cricket Pte Ltd., AIR 2003 SC 1177, (2003) 4 SCC 341. 75 Se Se Oil v. Gorakhram Gokulchand, (1962) 64 Bom LR 113; Societa Anonmina Lucchesse Olii E Vini Lucca v. Gorakharam, (1964) 2 Mad 90, AIR 1964 Mad 532, 536. 76 [1958] 1 All ER 333 at 335-36, [1958] 1 WLR 159. 77 [1969] 2 All ER 641, [1969] 2 WLR 1073.
The Bombay High Court79 stayed the action in a case where the contract provided for adjudication by arbitrator in England, and so did the Calcutta High Court80 in similar circumstances, where the Italian Law governed the contract of international trade. On appeal, the Calcutta High Court81 held that where, on a consideration of the circumstances, the court came to the conclusion that it would be unjust or unfair to stay the suit, it would refuse to grant the stay. It also held that the proper law of contract was Italian law, but the parties could not oust the jurisdiction of the Indian court by an agreement whether executed in India or outside. But in circumstances of that case the balance of convenience was not in favour of the Indian merchant and therefore granted the stay. In Black Sea State Steamship Line v. Minerals and Metals Trading Corporation of India Ltd., 82 the bill of lading provided that all disputes would be judged in the USSR according to the merchant shipping code of the USSR. The plaintiff sued the shipping company at Madras. The claim was small, the shipping company had its agents at Madras, and there was no difficulty in collecting facts and applying the law there. While holding that the courts in Madras had jurisdiction, the court observed:
In case of foreign jurisdiction clause, the question is not so much of freedom of contracts, and the parties are bound by their choice as of expediency in the light of what may be called the rule of convenience and the ends of justice in the particular circumstances of the case.
Considering all these cases and authorities, the Andhra Pradesh High Court has laid down the law, which may be stated thus:
It is open to the Court to consider the balance of convenience, the interest of justice and the circumstances when it decides the question of jurisdiction of the Court in the light of the clause in the agreement between the parties choosing one of the several courts or forums which were available to them. Indeed, such a consideration is essential in the interest of international trade and commerce for the better relation between the countries and the people of the world.83
A contract relating to the grant of licence to telecast cricket tournament organised in a foreign country, contained a non-exclusive jurisdiction clause choosing English Courts. It was held that the principle that parties cannot confer jurisdiction on a court where none exists would apply only to courts to which the Code of Civil Procedure applied. It would not apply when the parties agreed to submit to the exclusive or non-exclusive jurisdiction of a foreign court.84 This case also gives the principles for grant of anti-suit injunctions.85 An agreement between an Indian and English company excluding jurisdiction of Indian courts is not hit by s. 28.86 A bill of lading in connection with a contract of affreightment of goods to be carried to Calcutta entered into between two Swedish parties in Sweden provided for the decision of the disputes arising out of the contract according to Swedish law in Sweden. The clause was held to be valid and not against
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public policy.87 A clause in a bill of lading limiting jurisdiction in respect of disputes to Italian courts was upheld as the Italian court mentioned had jurisdiction to try the suit under the ordinary law.88 Nor is it any objection to an arbitration agreement that it contains a stipulation that any arbitration proceedings under the agreement shall take place in a specified country or city.89 Looking to the balance of convenience and the law applicable to the facts of the case, the Calcutta High Court stayed an act ion90 and directed the dispute to be decided in Bulgaria. The circumstances were the proper law of contract in the case, the nature of dispute, the availability of evidence and the respective convenience of the parties. 79 Haji Abdulla Haji Cassum v. George Reginald Stamp, AIR 1924 Bom 381 (marine insurance). 80 Lloyds Triestino Societa Per Azinni Di Navigazione Sede in Triesta v. Lakhinarayan Ramnivas, AIR 1959 Cal 669. 81 Lakhinarayan Ramniwas v. Lloyd Triestino Societa per Azinni Di Navigazione Sede in Triesta, AIR 1960 Cal 155; on appeal against, AIR 1959 Cal 669. 82 (1970) 1 Mad LJ 548; Far East Steamship Line v. Union of India, (1972) 2 Mad LJ 578 (cost of pursuing dispute in USSR much more than the suit claim). 83 Black Sea Steamship UL Lastochkina Odessa v. Union of India, AIR 1976 AP 103, 109. 84 Modi Entertainment Network v. WSG Cricket Pte Ltd., AIR 2003 SC 1177, (2003) 4 SCC 341. 85 See below s. 41 of the Specific Relief Act: 'Anti-suit injunctions'. 86 Rhodia Ltd. v. Neon Laboratories Ltd., AIR 2002 Bom 502. 87 Swedish East Asia Co. Ltd. v. BP Herman and Mohatta (India) Private Ltd., AIR 1962 Cal 601. 88 Lakhinarayan Ramniwas v. Lloyd Triestino Societa Per Azinni Di Navigazione Sede in Triesta, AIR 1960 Cal 155; on appeal against, AIR 1959 Cal 669; Singhal Transport v. Jesaram Jamumal, AIR 1968 Raj 89; Lakshminarayan Ramniwas v. Compagnia Genovese D'Esportazione, AIR 1960 Cal 545; Motibhai Gulabdas d' Co. v. Mahalakshmi Cotton Mills Ltd. 91 Cal LJ 1; St Pierre v. South American Stores (Gath d' Chaves) Ltd., [1936] 1 KB 382, [1937] 1 All ER 206; the Fehmarn,[1957] 1 WLR 815, [1957] 2 All ER 707 (reference to USSR courts). 89 William Jacks & Co. v. Harrowing Steamship Co. Ltd., AIR 1932 Sind 111, 139 IC 769. 90 Union of India v. Navigation Maritime Bulgare, AIR 1973 Cal 526 at 528; relying on Lakhinarayan Ramniwas v. Lloyd Triestino Societa Per Azinni Di Navigazione Sede in Triesta, AIR 1960 Cal 155; referring to Swedish East Asia Company Ltd. v. BP Herman and Mohatta (India) Private Ltd., AIR 1962 Cal 601; but see Ganapatrai Agarwall v. Fertiliser Corpn. of India, AIR 1984 Cal 35 (where, ouster clause was held to be binding, and not opperessive--balance of convenience could not be considered); Sustainable EMS LLC v. Lee Harris Pomeroy Architects PC (LHPA), AIR 2012 Cal 88.
Limitation of Time for Enforcing Rights under a Contract An agreement which provides that a suit should be brought for the breach of any terms of the agreement within a time shorter than the period of limitation prescribed by law, is void to that extent. The effect of such an agreement is absolutely necessary to restrict the parties from enforcing their rights after the expiration of the stipulated period, though it may be within the period of limitation. An agreement providing that a person in whose favour a provision for maintenance was made is not entitled to sue for maintenance which had been in arrears for more than one year, is void.91A rule under s. 35 of the Post Office Act, limiting the liability in respect of sums specified by remittance unless a claim is preferred within one year from the date of the posting of the article is void as beyond the powers conferred by the section. And even if it be treated as a contract, it is void under s. 28 of the Contract Act.92A clause prescribing less time for filing of suit than that provided under s. 10 of the Carriers Act, defeated the provisions of s. 10 of that Act, and violated this section.93 A clause that limits the time within which the parties can approach arbitration is also void.94
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Agreement relating to Release or Forfeiture of Rights Before the amendment of this section in 1997 (see below), agreements reducing the period of limitation were distinguished from those which did not limit the time within which a party might enforce his rights, but which provided for a release or forfeiture of rights if no suit was brought within the period stipulated in the agreement; and the latter class of agreements, outside the scope of the present section, were binding between the parties. Under s. 28, limiting the time for enforcing rights was void. But a term in the contract that rights accruing thereunder to a party would be forfeited or released, if the party did not sue within such short a time as given in the contract, would not fall within s. 28. The right accruing to the party ceased to exist under the contract itself by the expiry of time stipulated in the contract, and there was a simultaneous relinquishment of the rights accruing under the contract and the remedy to enforce it.95 A contract which did not limit the time within which the insured could enforce his rights, but only limited the time during which the contract would remain alive, was not hit by s. 28 of the Contract Act .96 Such common clauses found in insurance policies providing that the insurer should not be liable for loss or damage after expiration of twelve months from the happening of loss or damage unless a claim was subject to pending action or arbitration did not violate s. 28;97 nor did a condition providing for forfeiture of all benefits unless an act ion was brought within a certain time from the rejection of a claim;98 or a condition that risk was to last only for three days after arrival of a train at destination, and no liability for loss would attach unless notice was given within 10 days of the said risk;99 or a clause in a bill of lading excluding liability for loss or damage unless the plaintiff brought a suit within one year from date of delivery.100 In short, an agreement providing for the relinquishment of rights and remedies was valid, and an agreement for the relinquishment of remedies only came within the mischief of s. 28. Thus, a clause in a policy of fire insurance which provides that 'if the claim is made and rejected, and an action or suit be not commenced within three months after such rejection all benefits under this policy shall be forfeited', was valid, because such a clause operated as a release of forfeiture of the rights of the assured if the condition be not complied with, and a suit could not be maintained on such a policy after the expiration of three months from the date of rejection of the plaintiff's claim.101 Similarly, where a bill of lading provided that 'in any event the carrier and the ship shall be discharged from all liability in respect of loss or damage unless a suit is brought within one year after the delivery of the goods', the clause was valid.102 Where one of the conditions of a policy of marine insurance was that no suit by the assured should be sustainable in any court, unless the suit was commenced within six months next after the loss, and that if any suit was commenced after the expiration of six months, the lapse of time should be taken as conclusive evidence against the validity of the claim, it was held that the assured could not sue on the policy after the expiration of six months.103 A clause in an insurance policy which provided that the insured shall have no rights under the insurance policy after the expiry of six months from the date of termination of the contract, entitled the insured to make a claim for its loss up to a period of six months from the date of termination, and not beyond; it did not require a suit or legal proceedings to be filed within that period.1 The Supreme Court had also held that a clause in a policy to the effect that the insurer would not be liable for any loss if the claim was made after the expiry of 12 months from the happening of the loss, was not hit by s. 28 and was valid.2 The 1997 Amendment The 1997 Amendment to the section now also prohibits clauses which seek to extinguish the rights of any party thereto, or discharge any party thereto from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights. The Amendment gave effect to the 97th Report of the Law Commission of India.3 The history of the amendment is peculiar. In its Thirteenth Report, the Law Commission of India
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deliberated upon the section. It observed that such clauses hinged not on the interpretation of the section, but on the construction of the contract, and that 'the principle itself is well recognized that an agreement providing for the relinquishment of rights and remedies is valid but an agreement for relinquishment of remedies only falls within the mischief of s. 28'; and concluded that no change was necessary in the section as it stood earlier.4 But later, the Commission took up the matter suo motu and submitted its 97th Report in 1984.5The proposal to disallow prescriptive clauses (which extinguished rights or provided for forfeiture of rights or discharge of liability on failure to sue within a certain time) rested on the basis of economic justice, avoidance of hardship to consumers and certainty and symmetry of law. It excluded from its consideration for the purpose, special Act s containing elaborate provisions declaring liability of certain persons or regulating the institution of legal proceedings, viz,the Carriers Act, 1865, s. 10. The justification for disallowing such clauses rested on the serious hardship and likelihood of abuse, that parties were not in equal bargaining power. 'By giving a clause in an agreement that shape and character of a provision extinguishing the right (and not merely affecting the remedy), a party standing in a superior bargaining position can achieve something which could not have been achieved by merely barring the remedy.' Thus, it observed, an abrogation of rights was permissible, when a less serious device of extinction of a mere remedy became impermissible. 'If the law does not allow the latter consequence to be imposed by agreement,a fortiori, the law should not allow the former consequence also to be imposed by agreement. The amendment was also justified on the ground that it was necessary to make the law simpler. 'The argument that a contract may contain within itself the elements of its own discharge for its determination in certain circumstances...must give way to the aspects of economic justice and unequal bargaining power. The commission found the existing provision illogical, based on 'a distinction too subtle.' It is not known from the report whether the views of the insurers or others employing such clauses in their contracts were heard. The Commission considered that no provision like s. 28 existed in English law. However, clauses now prohibited by the amendment are not void under the English law. The clauses hit by the amendment have been held to have a purpose, especially in contracts of insurance. They ensure that claims under the policy are made early, investigated promptly, thereby avoiding the likelihood of loss of important evidence. If claims were not made early, the insurers might be unable to meet a fraudulent claim.6 In cases of fire insurance or insurance of accident, liability should be measured when the matters are fresh and can be measured with certain amount of accuracy; lapse of time makes it incapable of determination and the memories of men may become rather hazy.7 Such arguments were not noticed by the commission. The 1997 Amendment is prospective and will not apply to insurance contracts made before it came into operation.8It is not affected by the Repealing and Amending Act, 2001 (Act 30 of 2001).9 A provision that if demand for arbitration relating to a claim is not made within 90 days, the claim will be extinguished, is void after the Amendment of 1997.10 The 2012 Amendment The Amendment of 2012 saves clauses in guarantees stipulated by banks and other institutions of the types indicated in the amendment. The language of the amendment does not match the main provision. The main provision does not render agreements illegal, it merely renders them unenforceable. The amendment saves from illegality, and if literally interpreted, may not affect voidness. Although the purpose of the amendment is to save 'bank guarantees', its language appears to apply to any guarantee, to guarantee given by banks or by any other person on stipulation by the bank. Condition precedent before filing of Suit
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Insurance policies almost always require notice of loss sustained by the assured to be given to the insurer within a specified time.11 The purpose of the notice clause is to enable the insurer to test the genuineness of the claim within a reasonably short time of the occurrence of the loss and to ensure that immediate steps are taken to mitigate the consequences of the loss.12 A condition requiring notice of claim may be construed as a condition precedent to the liability of an insurer.13A clause in an insurance policy making an award by an arbitration as a condition precedent to the right of action against the insurer is not hit by s. 28 of the Contract Act .14 It is submitted that the 1997 Amendment will not hit the operation of clauses which make liability of one of the parties subject to any condition precedent. A distinction must also be made between an agreement restricting any party from enforcing his right, and one requiring him to make a claim or assert his right within a specified time, or prescribing a period for operation of the contract. Thus, a contract requires that a party to it assert his rights or requiring a party to make a claim within a certain time,15 will not be affected by the amendment, viz. a clause in a bank guarantee given for a term and requiring the beneficiary to make a claim within the term of the guarantee. Such agreements cannot, however, affect the right of a party to enforce his rights by approaching any court or other forum within the normal period of limitation, if, and after, the party has asserted the right or made the claim within the period stipulated in the contract. Agreement extending the period of Limitation No provision is made in the section for agreements extending the period of limitation for enforcing rights arising under it. In a case before the Privy Council,16their Lordships expressed their opinion that in an agreement in consideration of an inquiry into the merits of a disputed claim, advantage should not be taken of the statute of limitations in respect of the time employed in the inquiry. It was no bar to the plea of limitation, though an action might be brought for breach of such an agreement. There is hardly any doubt that an agreement which provides for a longer period of limitation than the law allows, does not lie within the scope of this section. Such an agreement certainly does not fall within the first branch of the section. There is no restriction imposed upon the right to sue; on the contrary, it seeks to keep the right to sue subsisting even after the period of limitation. Nor is this an agreement limiting the time to enforce legal rights. It would, however, be void under s. 23, as tending to defeat the provisions of the Limitation Act, 1908,17s. 3 of which provides that every suit instituted after the period of limitation prescribed (by the Act) shall be dismissed, although limitation has not been set up as a defence. 91 Saroj Bandhu Bhaduri v. Jnanada Sundari Debya, AIR 1932 Cal 720, 36 CWN 555, 140 IC 263; cf Nathu Mal Ram Das v. BD Ram Sarup & Co., (1931) 12 Lah 692, AIR 1932 Lah 169, 135 IC 778. 92 Union of India v. Mohd Nazim, (1966) 64 All LJ 675. 93 MG Brothers Lorry Service v. Prasad Textiles, AIR 1984 SC 15. 94 National Highways Authority India v. Mecon--Gea Energy Systems India Ltd, OMP 790/2012 decided on 2 April 2013 (Del). 95 Haji Shakoor Gany v. HE Hinde & Co. Ltd., AIR 1932 Bom 330, 34 Bom LR 634, 138 IC 793; Dawood Tar Mahomed Bros v. Queensland Insurance Co. Ltd., (1945) 1 Cal 638, AIR 1949 Cal 390; Ruby General Insurance Co. Ltd. v. Bharat Bank Ltd., AIR 1950 EP 352; Ramji Karamsi v. Unique Motor and General Insurance Co. Ltd., AIR 1951 Bom 347; Pearl Insurance Co. v. Atma Ram, AIR 1960 Pun 236(FB) ; Prithvi Nath Malla v. Union of India, AIR 1962 J&K 15; New Asiatic Insurance Co. Ltd. v. Bihar State Co-op Bank Ltd., AIR 1966 Pat 69; New Delhi Municipal Committee v. Tirath Ram Ahuja (Pvt) Ltd., AIR 1980 Del 185; Kerala Electrical and Allied Engineering Co. Ltd. v. Canara Bank, AIR 1980 Ker 151, 152-53; Rajasthan Handicrafts Emporium v. Pan American World Airways, AIR 1984 Del 396. 96 Pearl Insurance Co. v. Atma Ram, AIR 1960 Pun 236; New Delhi Municipal Committee v. Tirath Ram Ahuja Pvt. Ltd., AIR 1980 Del 185. 97 Vulcan Insurance Co. Ltd. v. Maharaj Singh, [1976] 2 SCR 62, AIR 1976 SC 287; Pearl Insurance Co. v. Atma Ram, AIR 1960 Punj 236; National Insurance Co. Ltd. v. Sujir Ganesh Nayak & Co., AIR 1997 SC 2049; Himachal Pradesh Horticultural Produce Marketing and Processing Corporation Ltd. v. United India Insurance Company Ltd., AIR 2000
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HP 11 (the last two cases do not refer to the amendment of this section in 1997, though were decided after it came into force). 98 Vulcan Insurance Co. Ltd. v. Maharaj Singh, [1976] 2 SCR 62, AIR 1976 SC 287; Kerala Electrical and Allied Engineering Co. Ltd. v. Canara Bank, AIR 1980 Ker 151. 99 New Asiatic Insurance Co. Ltd. v. Bihar State Co-op Bank Ltd., AIR 1966 Pat 69. 100 Haji Shakoor Gany v. HE Hinde & Co. Ltd., AIR 1932 Bom 330. 101 Baroda Spg and Weaving Co. Ltd. v. Satyanarayan Marine and Fire Insurance Co. Ltd., AIR 1914 Bom 225; followed in Girdharilal Hanuman Bux v. Eagle Star and British Dominions Insurance Co. Ltd., AIR 1924 Cal 186; Ideal Traders v. Union of India, AIR 1988 NOC 46(Del) --clause in the contract, showing that the claim for reimbursement would be considered only if submitted within three months from the date of clearance of material from the dock upheld); New India Assurance Co. Ltd. v. Radheshyam Motilal Khandelwal, AIR 1974 Bom 228. 102 Haji Shakoor Gany v. HE Hinde & Co. Ltd., AIR 1932 Bom 330, 34 Bom LR 634, 138 IC 793; Governor-General in Council v. Firm Badri Das Gauri Dutt, AIR 1951 All 702; Dominion of India v. Rupchand Heerachand, AIR 1953 Nag 169; Western India Prospecting Syndicate Ltd. v. Bombay Steam Navigation Co. Ltd., AIR 1951 Sau 83; Ruby General Insurance Co. Ltd. v. Bharat Bank Ltd., AIR 1950 EP 352; Dawood Tar Mahomed Bros v. Queensland Insurance Co. Ltd., (1945) 1 Cal 638, AIR 1949 Cal 390. 103 South British Fire and Marine Insurance Co. v. Brojo Nath Shaha, (1910) 36 Cal 516, 535-36, 539-42 (no reference to s. 28 in the case). 1 Food Corporation of India v. New India Assurance Co. Ltd., AIR 1994 SC 1889. 2 Vulcan Insurance Co. Ltd. v. Maharaj Singh, [1976] 2 SCR 62, AIR 1976 SC 287. 3 The language of the section as amended differs to some extent, from the recommendations of the commission in its 97th Report. 4 Law Commission of India, 13th Report, 1958, para 57. 5 The 97th Report of the Law Commission of India, 1984 on Prescriptive Clauses in Contract, proposed: Every agreement(a) ...(b) ...(c) which extinguishes the rights of any party thereto under or in respect of any contract on the expiry of a specified period or on failure to make a claim or to institute a suit or other legal proceeding within a specified period; or(d) which discharges any party thereto from any liability under or in respect of any contract in the circumstances specified in clause (c) is void to that extent. 6 Baroda Spg and Wvg Co. Ltd. v. Satyanarayan Marine and Fire Insurance Co. Ltd., (1914) 38 Bom 344, AIR 1914 Bom 225. 7 Ruby General Insurance Co. Ltd. v. Bharat Bank Ltd., AIR 1950 EP 352. 8 The Oriental Insurance Co. Ltd. v. Karur Vysya Bank Ltd., AIR 2001 Mad 489; see also H P State Forest Company Ltd. v. United India Insurance Co. Ltd., AIR 2009 SC 1407, (2009) 2 SCC 252; Reliance Industries v. P & O Containers, AIR 2006 Bom 65. 9 Central Ware Housing Corporation v. Ravi Constructions, AIR 2013 Kant 18 (The Act of 2001 does not have the effect of repealing the 1997 Amendment). 10 Central Ware Housing Corporation v. Ravi Constructions, AIR 2013 Kant 18; see also National Highways Authority India v. Mecon--Gea Energy Systems India Ltd, OMP 790/2012 decided on 2 April 2013 (Del). 11 The statement of General Insurance Practice adopted in 1986, by the Association of British Insurers (as applicable to private individuals), provides that, under the conditions regarding notification of claims, the policy-holder shall not be asked to do more than report a claim, and subsequent developments as soon as it is reasonably possible. 12 MacGillivray on Insurance Law, 9th edn., p. 469-70. 13 Roper v. Lendon, (1859) 1 E & E 825; Cassel v. Lancashire and Yorkshire Accident Insurance Co., (1885) 1 TLR 495. 14 National Insurance Co. Ltd. v. Calcutta Dock Labour Board, AIR 1977 Cal 492 at 494 (a case of car accident); applying Scott v. Ave, (1856) 5 HL Cas 811, [1843-60] All ER Rep 1, 25 LJ Ex 308, 10 ER 1121; Jagadhatri Bhandar and fagcdhatri Oil Mills v. Commercial Union Assurance Co. Ltd., AIR 1979 Cal 56; applying Aghore Nauth Bannerjee v. Calcutta Tramways Co. Ltd., (1885) 11 Cal 232, and Heyman v. Darwins Ltd., [1942] AC 356, [1942] 1 All ER 337; Rajasthan Handicrafts Emporium v. Pan American World Airways, AIR 1984 Del 396. 15 Case which recognises this distinction: Food Corporation of India v. New India Assurance Co. Ltd., AIR 1994 SC 1889.
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16 East India Co. v. Oditchurn Paul, (1849) 5 MIA 43 at 70. 17 Bollapragada Ramamurthy v. Thammanna Gopayya, (1917) 40 Mad 701, AIR 1917 Mad 892, 35 IC 575; Jawahar Lal v. Mathura Prasad, AIR 1934 All 661, 151 IC 585(FB) ; East India Co. v. Oditchurn Paul, (1849) 5 MIA 43 (decided many years before this Act, but proceeded on the English Statutes of Limitation).
Void 'To That Extent' Where an agreement contains a clause void under this section, it is only that stipulation, and not the whole agreement that is unenforceable.18 Garth CJ. said:
This section applies to agreements which wholly or partially prohibit the parties from having recourse to a court of law. If, for instance, a contract were to contain a stipulation that no act ion should be brought upon it, that stipulation would, under the first part of s. 28 be void, because it would restrict both parties from enforcing their rights under the contract in the ordinary legal tribunals, and so if a contract were to contain a double stipulation that any dispute between the parties should be settled by arbitration, and that neither party should enforce his rights under it in a court of law, that would be a valid stipulation so far as regards its first branch, viz., that all disputes between the parties should be referred to arbitration, because that of itself would not have the effect of ousting the jurisdiction of the Courts, but the latter branch, of the stipulation would be void because by that the jurisdiction of the Court would be necessarily excluded.19
In Shin Satellite Public Co. Ltd. v. Jain Studios Ltd., 20 an arbitration clause contained a provision that the arbitrator's determination shall be final and binding between the parties and the parties waived all rights of appeal or objection in any jurisdiction, was held void (as conceded by parties), and it was held that this part of the clause could be severed and would not affect the right of parties of recourse to arbitration. 18 Marittima Italiana Steamship Co. v. Burjor Framroze Rustomji Joshi, AIR 1930 Bom 185. 19 Coringa Oil Company Ltd. v. Koegler, (1876) 1 Cal 466 per Garth CJ at 468-69; Mulji Tejsing v. Ransi Devraj, (1909) 34 Bom 13. 20 (2006) 2 SCC 628.
Construction A clause, restricting jurisdiction to one of the courts, must be strictly construed. Where a condition provided that proceedings arising out of a 'contract' be instituted in court M, it did not apply to a claim when the offer had not ripened into a completed contract.21 21 Vastiram Manmal & Co. v. TS Ramaswamy Iyer & Bros Ltd., AIR 1947 Mad 99, 230 IC 228.
Exception I This exception applies to contracts where the parties have agreed that no action shall be brought until some question of amount has first been decided by the arbitrators.22 Thus, in Scott v. Avery 23 and Atlantic Shipping,24 clauses are saved by this exception. The former refers to term in a contract which
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provides that, in the event of a dispute arising, it shall be referred to arbitrators whose award shall be a condition precedent to any right of act ion in respect of the matters agreed to be referred is valid. This is so not only where the provision for arbitration relates merely to the quantum of damages due from one party to the other, but also where it is stipulated that other matters, e.g., liability shall be determined in the first instance by arbitrators. It is a clause which requires as a condition precedent to the accrual of any cause of action that the arbitrator shall have made in an award. The latter clause is one which provides that no claim shall arise, unless it is put forward in writing and an arbitrator appointed within a limited period. In order to conform to this exception, the jurisdiction of the courts must be excluded in all respects except in the matter which is the result of the arbitrator's award. The section does not forbid act ion for damages for breach of such agreement to refer to arbitration.25If there is only a clause that the parties are to refer the matter to arbitration, a suit would still lie; but under the Arbitration Act, 194026the other party had the remedy to apply for stay of suit under its s. 34, and the court had a discretion to grant the stay. However, under s. 8 of the Arbitration and Conciliation Act, 199627 the court has no discretion in referring the matter for arbitration upon an application made by one of the parties. But if the making of an award is made a condition precedent to a right of action, such suit will not lie; and if such suit is brought, it would be dismissed as premature; nor will the question of stay of such suit arise.28 A lawful agreement to refer a matter to arbitration can be made a condition precedent before going to the courts, and it does not violate s. 28.29No cause of act ion then accrues until the arbitrator has made the award.30 But where a party commences action in respect of such 'excepted matters' covered by such clauses, it is deemed to have relinquished, waived or abandoned the rights under such a clause.31 This exception applies only to a class of contracts, where (as in the cases of Scott v. Avery 32 and Tredwen v. Holman, 33 cited by Phear J,)34 the parties have agreed that no act ion shall be brought until some question of amount has first been decided by a reference, as for instance, that amount of damage which the assured has sustained in marine or fire policy. Such an agreement does not exclude the jurisdiction of the courts; it only stays the plaintiff's hand till some particular amount of money has been first ascertained by reference.35 A clause that requires in case of dispute that the party shall first approach an officer of the other party, and that his decision will be final, is valid and binding.36 Thus, where the contractor claiming payment for extra work done did not follow the procedure set out in the contract requiring a decision on the issue by the Engineer, else from an appeal authority, he could not take up the claim to arbitration.37 Such clauses will operate limited to those matters referred to such decision.38 It is not essential for the purpose of excluding the jurisdiction of the court that the contract should provide that the award of the selected tribunal shall be a condition precedent to legal proceedings. A condition on a sweepstake ticket that the decision of the stewards of a turf club should be accepted as final in the event of any dispute, was therefore held to be a condition precedent which had to be fulfilled before any action could be brought to recover the amount of a prize in the sweepstake.39 An agreement between a tramway company and a conductor, that the manager of the company shall be the sole judge as to the right of the company to retain the whole or any part of the deposit to be made by the conductor as security for the discharge of his duties, and that his certificate in respect of the amount to be retained shall be conclusive evidence between the parties in courts of justice, comes within this exception.40 Such an agreement does not oust the jurisdiction of the courts. Its effect is merely to constitute the manager the sole arbitrator between the company and the conductor, as to whether, in the event of the conductor's misconduct, the company is entitled to retain the whole or any part of the deposit. The point is very similar to those agreements where an engineer or architect is constituted the arbitrator between a contractor and the person who employs him, as to what should be allowed in case of dispute for extras or penalties.41 Such a person exercises quasi-judicial function, and his decision can be questioned in court.42 The certificate of an architect named in the agreement and deciding the matter is binding on the parties however wrong and erroneous it may be, and the final certificate can be challenged only on the ground of fraud, collusion or misconduct on the part of the architect.43
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Where the parties to the contract have expressly agreed that certain matters arising in relation to the contract were to be determined by an independent expert whose determination was to be 'conclusive and final and binding for all purposes', then, in the absence of fraud or collusion, the expert's determination could only be challenged on the ground of mistake, if it is clear from the evidence (including the determination, the terms of the contract and the letter of instruction) that the expert had departed from his instructions in a material respect. Whether the certificate or valuation is a speaking or non-speaking one, is irrelevant.44 As has been stated in Campbell v. Edwards :45
It is simply the law of contract. If two persons agree that the price of the property should be fixed by a valuer on whom they both agree, and he gives that valuation honestly, and in good faith, they are bound by it. Even if he has made a mistake they are still bound by it. The reason is that they have agreed to be bound by it. If there were fraud or collusion, of course it would be very different. Fraud or collusion unravels everything.
This class of cases must be distinguished from those where the obligation of a promisor, such as the duty of paying for work to be done or goods to be supplied, is made, by the terms of the contract, to depend on the consent or approval of some person, as in a builder's contract, the certificate of the architect that the work has been properly done. Here there is no question of referring to arbitration, or anything like arbitration, a dispute subsequent to the contract, but the contract itself is conditional, or, in the language of the Act, contingent. Thus, a contract whereby it is provided that all disputes arising between the parties should be referred to two competent London brokers, and that their decision should be final, does not come within the purview of this section.46 Nor does a contract whereby it is provided that all disputes arising between the parties should be referred to the arbitration of the Bengal Chamber of Commerce, whose decision shall be accepted as final and binding on both parties to the contract;47 still less is it wrong for the parties to a pending suit to give the court itself, if they choose so to agree, full power to decide the whole matter without further appeal.48A clause in an agreement that except where otherwise provided in the contract, the decision of the superintending engineer shall be final, conclusive and binding upon certain matters therein mentioned does not constitute him an arbitrator and the clause is not contrary to s. 28 of the Contract Act and is not hit by s. 21 of the Specific Relief Act, 1963.49 It is also possible to contemplate an agreement appointing one of the contracting parties as an arbitrator for matters arising out of the contract.50 The decision given by such person is binding on the party, and no party can be heard to say that such decision is not binding being a decision by a person in his own cause, unless it can be shown to be arbitrary or otherwise unjust.51 The parties can also question the finality of such a decision despite any agreement.52 However, a stipulation that parties to a reference shall not object at all to the validity of the award on any ground whatsoever before any court of law, does restrict a party absolutely from enforcing his rights in ordinary to set aside an award on the ground of misconduct on the part of the arbitrator, where the agreement to submit to arbitration contained a restrictive stipulation of the above character,53 and the two exceptions to this section do not have the effect of legalising such an agreement.54 A party to an arbitration agreement has now the right to have an award set aside on the ground of misconduct on the part of the arbitrator,55 and a stipulation whereby he binds himself to accept the award as final in all cases has the effect of restricting him absolutely from enforcing his right and is, therefore, void under the provisions of this section.56 Recommendation of the Law Commission In its Thirteenth Report, the Law Commission recommended amendment to the exception of substitute the words 'the parties will be bound by the award' for the words 'only the amount awarded in such arbitration shall be recoverable'.57
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The Repealed Clause of Exception I This clause58was repealed by the Specific Relief Act, 1877. Section 21 of that Act, now s. 14(2) of the Specific Relief Act, 1963 provides that:
&uot;Save as provided by the Arbitration Act, 1940 (10 of 1940),59no contract to refer present or future differences to arbitration shall be specifically enforced; but if any person who had made such a contract (other than an arbitration agreement to which the provisions of the said Act apply) and has refused to perform it, sues in respect of any subject which he has contracted to refer, the existence of such contract shall bar the suit&uot;.
If a suit is brought in respect of any such subject, it must be shown by the defendant, before he could rely upon the section as a bar to the suit, that the agreement is still operative,60 and that the plaintiff has reused to perform it. The mere act of filing the plaint is not such a refusal.61 There are two remedies open to a party to a reference far breach of the agreement. He may sue for damages for the breach,62or he may plead the agreement in bar of any suit that may be brought against him in violation of the terms of the agreement, as provided by s. 14(2) of the Specific Relief Act, 1963. But the provisions of that Act have no operation wherever the Arbitration Act, 1940 applies, and by far the greater number of arbitrations takes place under the convenient machinery of the latter. All arbitrations are now governed by the Arbitration and Conciliation Act, 1996. Exception II This exception saves any contract in writing by which two or more persons agree to refer far arbitration any question between them which has already arisen, though such a contract would now also be dealt with by the law relating to arbitration. This exception also provides expressly that the provisions of this section shall not affect any law in force for the time being as to references to arbitration. Settlement of disputes by arbitration is a recognised mode of settlement and is not opposed to public policy.63 Resolution of disputes by arbitration is now governed by the Arbitration and Conciliation Act, 1996 under which parties may, by means of agreement in writing, agree to refer to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. If a suit is filed in the same subject matter as the arbitration agreement, the party desirous of reference to arbitration may apply to the court seeking reference, which the party must do before submission of the first statement of substance on the dispute in the court. If the suit is in the same matter as the arbitration agreement, the court shall refer the parties to arbitration. Unlike s. 34 of the Arbitration Act, 1940 the Act of 1996 allows discretion to the court in referring the matter. The Arbitration and Conciliation Act, 1996 makes provisions about composition of the arbitral tribunal, its jurisdiction, the conduct of arbitral proceedings, the making of arbitral award and termination of proceedings, and the recourse against the award. The Act also provides for a procedure of conciliation, to be commenced by an invitation by one party and its acceptance in writing by the rather. Section 77 of that Act provides that the parties shall not initiate, during the conciliation proceedings, any arbitral or judicial proceedings in respect of a dispute that is the subject matter of the conciliation proceedings except where such proceedings are necessary to preserve his rights. 22 Coringa Oil Co. Ltd. v. Koegler, (1876) ILR 1 Cal 466; New Zealand Insurance Co. Ltd. v. Nagpal Hosiery Factory, AIR 1955 Punj 113. 23 Scott v. Avery, (1856) 5 HL Cas 811, [1843-60] All ER Rep 1, 25 LJ Ex 308, 10 ER 1121. 24 Atlantic Shipping and Trading Co. v. Louis Dreyfus & Co., [1922] 2 AC 250, [1922] All ER Rep 559.
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25 Coringa Oil Co. Ltd. v. Koegler, (1876) ILR 1 Cal 466. 26 Repealed by the Arbitration and Conciliation Act, 1996. 27 The Arbitration and Conciliation Act, 1996, s. 8(1)--&uot;(1) A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies, not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration&uot;. 28 New Great Insurance Co. of India Ltd. v. United Equipments and Stores Pvt. Ltd., AIR 1970 Cal 221 at 224. 29 Mulji Tejsing v. Ransi Devraj, (1909) 34 Bom 13; Union Construction Co. Pvt. Ltd. v. Chief Engineer Eastern Command, AIR 1960 All 72. 30 National Insurance Co. Ltd. v. Calcutta Dock Labour Board, AIR 1977 Cal 492; Jagadhatri Bhandar and Jagadhatri Oil Mills v. Commercial Union Assurance Co. Ltd., AIR 1979 Cat 56. 31 Food Corporation of India v. Sreekanth Transport, AIR 1999 SC 2184, (1999) 4 SCC 491. 32 (1856) 5 HL Cas 811, [1843-60] All ER Rep 1, 25 LJ Ex 308, 10 ER 1121. 33 (1862) 1 HLC 72. 34 C Koegler v. Coringa Oil Company Ltd., (1875) ILR 1 Cal 42, 51. 35 Coringa Oil Co. Ltd. v. Koegler, (1876) 1 Cal 466 per Garth CJ, 369; Cooverji Ludha v. Bhimji Girdhar, (1882) 6 Bom 528, 536. 36 Shiv Lal v. National Hydroelectric Power Corporation Ltd, AIR 2012 J&K 14; Himcon Projects Pvt Ltd v. LMZ Energy (India) Ltd, AIR 2012 Chhat 28. 37 P Manohar Reddy and Bros v. Maharashtra Krishna Valley Dev Corpn, AIR 2009 SC 1776, (2009) 2 SCC 494; see also S K Tekriwal v. State of Jharkhand, AIR 2006 Jhar 48. 38 State of Orissa v. Bhagyadhar Dash, AIR 2011 SC 3409, 2011 (7) SCC 406. 39 Cipriani v. Burnett, [1933] AC 83. 40 Aghore Nauth Bannerjee v. Calcutta Tramways Co. Ltd., (1885) ILR 11 Cal 232. 41 Aghore Nauth Bannerjee v. Calcutta Tramways Co. Ltd., (1885) 11 Cal 232; following London Tramways Co. Ltd. v. Bailey, (1877) LR 3 QBD 217; Ku pusami Naidu v. Smith & Co., (1895) 19 Mad 178; Secy. of State v. Saran Brothers and Co., AIR 1932 9udh 265, 139 IC 362; Perry v. Liverpool Malt Co., [1900] QB 339(CA) ; Central Government of India v. Chhotalal Chhaganlal Modi, AIR 1949 Bom 359, (1949) 51 Bom LR 615. As to the immunity of the person appointed a quasi-arbitrator from being sued for negligence: Chambers v. Goldthrope, [1901] 1 KB 624, [1900-03] All ER Rep 969(CA) ; Motilal Tejsi & Co. v. Ramchandra Gajanan Kherodkar, AIR 1942 Bom 334, (1942) 44 Bom LR 745 (certificate issued by architects is binding on parties to a building contract). 42 South India Railway Co. Ltd. v. SM Bhashyam Naidu, AIR 1935 Mad 356. 43 Motilal Tejsi & Co. v. Ramchandra Gajanan Kherodkar, AIR 1942 Bom 334 (1942) 44 Bom LR 745. 44 Jones v. Sherwood Computer Services plc, [1992] 2 All ER 170, [1992] 1 WLR 277, Berg, [1993] 109 LQR 35; Kendall,[1993] 109 LQR 385; Baber v. Kenwood Manufacturing Co., [1978] 1 Lloyd's Rep 175. 45 [1976] 1 All ER 785, p. 788 per Lord Denning. 46 Coringa Oil Co. Ltd. v. Koegler, (1876) ILR 1 Cal 466. 47 Ganges Mfg. Co. Ltd. v. Indra Chand, (1906) 33 Cal 1169; Champsey Purbut v. Gill and Co., (1905) 7 Bom LR 805 (in such a case the rules of the association are imported in the contract); Chaitram Rambilas v. Bridhichand Kesrichand, (1915) 42 Cal 1140, AIR 1915 Cal 689, 30 IC 681; Gainda Lal Goel v. Rameshwar Das, AIR 1937 All 650, (1937) All LJ 823, 171 IC 584. 48 Hakim Bashir Ahmed v. Sadiq Ali, (1929) 120 IC 826, AIR 1929 Oudh 451. 49 State of Bihar v. Rama Bhushan Basu, AIR 1964 Pat 326; distinguishing Aghore Nauth Bannerjee v. Calcutta Tramways Co. Ltd., (1885) 11 Cal 232; Arthur Andrew Cipriani v. Macdonald Burnett, AIR 1933 PC 91; Secy. of State v. Saran Brothers and Co., AIR 1932 Oudh 265, 139 IC 362; South India Rly Co. Ltd. v. SM Bhashyam Naidu, AIR 1935 Mad 356; Mukteshwar Singh v. State of Bihar, AIR 1979 Pat 40. 50 State of Bihar v. Rama Bhushan Basu, AIR 1964 Pat 326.
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51 Abraham Reuben v. Karachi Municipality, AIR 1933 Sind 93. 52 Mulji Tejsing v. Ransi Devraj, (1909) 34 Bom 13; South India Railway Co. Ltd. v. SM Bhashyam Naidu, AIR 1935 Mad 356. 53 Burla Ranga Reddi v. Kalapalli Sithaya, (1883) 6 Mad 368(case under Civil Procedure Code);Ram Jawaya Mal v. Devi Ditta Mal, AIR 1916 Lah 89; Naraindas v. Kewalram, AIR 1917 Sind 38; Parsram Gangandas v. Topandas Dholandas, AIR 1928 Sind 81 (an agreement to recognise an award beyond the scope of disputes mentioned in the reference is void); Abdul Majid v. Ch Bahawal Bakhsh, AIR 1950 Lah 174; Rambilas Mahto v. Babu Durga Bijai Prasad Singh, AIR 1965 Pat 239. 54 Burla Ranga Reddi v. Kalapalli Sithaya, (1883) 6 Mad 368(case under the Civil Procedure Code). 55 The Arbitration and Conciliation Act, 1996, s. 34. 56 Abdul Majid v. Ch Bahawal Bakhsh, AIR 1950 Lah 174; Union Construction Co. Pvt. Ltd. v. Chief Engineer, Eastern Command, AIR 1960 All 72; Coringa Oil Co. Ltd. v. Koegler, (1876) ILR 1 Cal 466; Rambilas Mahto v. Babu Durga Bijai Prasad Singh, AIR 1965 Pat 239 (agreement contracting out of statutory provisions is void). 57 The Law Commission of India, 13th Report, 1958, para 58. 58 Ibid. 59 Repealed by the Arbitration and Conciliation Act, 1996 (26 of 1996). 60 Tahal v. Bisheshar, (1885) 8 All 57; Sheoambar v. Deodat, (1886) 9 All 168 at 172. 61 Koomud Chunder Dass v. Chunder Kant Mookerjee, (1879) 5 Cal 498; Tahal v. Bisheshar, (1885) 8 All 57. 62 Arbitration Act, 1940, ss. 21;Doleman & Sons v. Ossett Corpn, [1912] 3 KB 257 at 267 (CA); Halsbury's Laws of England, Vol. 12(1), 4th edn, Reissue, 31 July 1998, DAMAGES, para 941. 63 Ram Lal Jagan Nath v. Punjab State, AIR 1966 Punj 436(FB) .
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER II Of Contracts, Voidable Contracts and Void Agreements/S. 29.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER II Of Contracts, Voidable Contracts and Void Agreements S. 29. Agreements void for uncertainty.-Agreements, the meaning of which is not certain, or capable of being made certain, are void. Illustrations (a) (b) (c) (d)
A agrees to sell B 'a hundred tons of oil'. There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty. A agrees to sell B one hundred tons of oil of a specified description, known as an article of commerce. There is no uncertainty here to make the agreement void. A, who is a dealer in coconut-oil only, agrees to sell to B 'one hundred tons of oil'. The nature of A's trade affords an indication of the meaning of the words, and A has entered into a contract for the sale of one hundred tons of coconut-oil. A agrees to sell B 'all the grain in my granary at Ramnagar'. There is no uncertainty here
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(e) (f)
to make the agreement void. A agrees to sell to B 'one thousand maunds of rice at a price to be fixed by C '. As the price is capable of being made certain, there is no uncertainty here to make the agreement void. A agrees to sell to B 'my white horse for rupees five hundred or rupees one thousand'. There is nothing to show which of the two prices was to be given. The agreement is void.
Introduction An agreement is void under this section only when its terms are vague and uncertain, and they cannot be made certain.
Requirement of Certainty An agreement may be uncertain either because its terms are ambiguous or vague, or because it is incomplete. The general rule is that, if the terms of an agreement are so vague or indefinite that it cannot be ascertained with reasonable certainty what is the intention of the parties, there is no contract enforceable at law. This section provides that the meaning of an agreement shall be clear on the face of it;64 but effect can be given to the contract if its meaning can be found with reasonable clearness. If this is not possible, the contract cannot be enforced.65 But mere difficulty in interpretation is not synonymous with vagueness.66 The principle has also been formulated as follows: a party who seeks a remedy from a court for breach of a contractual, obligation must be able to identify the obligation with sufficient precision to justify the remedy. The law thus stated is more flexible, and recognizes that different levels of certainty may be needed for the remedies.67 64 Kovuru Kalappa Devara v. Kumar Krishna Mitter, ILR (1945) Mad 521, AIR 1945 Mad 10, 219 IC 231; ss 93-94 of the Indian Evidence Act, 1872. 65 Barkat Ram v. Anant Ram, AIR 1915 Lah 328. 66 Kandamath Cine Enterprises Pvt. Ltd. v. John Philipose, AIR 1990 Ker 198. 67 PS Atiyah, An Introduction to the Law of Contract, 5th edn., p. 111.
Concluded Contract The parties must make their own contract. The courts will not construct a contract for the parties when the terms are indefinite or unsettled. The court must first be satisfied that the parties have in fact concluded a contract, before seeking to making certain its terms.
'Capable of Being Made Certain' A contract is not void under this section if its terms are capable of being made certain.68 It is not enough to show that the meaning of the contract is uncertain, it should further be shown that it is incapable of being made certain.69 Mere vagueness or uncertainty which can be removed by proper interpretation, cannot make a contract void. The general approach of the courts is to attempt to uphold a contract despite its lack of clarity. The courts will employ the objective test in interpreting the contract and may in appropriate circumstances, imply terms into the contract so as to give effect to the parties' intentions. Even oral agreements would not be vague if its terms are ascertainable with precision, e.g. by mention in the plaint with precision.70 The courts may have regard to what has been
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said and done, the context in which it was said or done, the relative importance of the unsettled matter, and whether the parties have provided machinery for settling it.71 A contract of which there can be more than one meaning or which when construed can produce in its application more than one result, is not void for uncertainty. So long as the language applied by the parties is not 'so obscure and so incapable of any definite or precise meaning that the Court is unable to attribute to the parties any particular contractual intention',72 the contract is not void or uncertain or meaningless. In the search for that intention, no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements. Thus will uncertainty of meaning as distinct from absence of meaning or of intention be resolved.73 As long as the contract is capable of a meaning, it will ultimately bear that meaning which the courts, or in an appropriate case, an arbitrator, decides is its proper construction, and the court or arbitrator will decide its application. The question becomes one of construction, of ascertaining the intention of the parties, and of applying it. A contract will be void for uncertainty only if its essential terms are uncertain or incomplete, unless, the uncertain part being not essential can be severed, leaving the balance of the agreement intact. In determining what is essential and what is not, one must look to the intention of the parties. Thus, there is no concluded contract where an essential or critical term is expressly left to be settled by future agreement of the parties. Again, there is no binding contract where the language used is so obscure and incapable of any precise or definite meaning, that the court is unable to attribute to the parties any particular contractual intention.74 Under the UNIDROIT Principles, if the parties intend to conclude a contract, the fact that they intentionally leave a term to be agreed upon in further negotiations or to be determined by a third person, does not prevent a contract from coming into existence. The contract is not affected if subsequently they do not reach an agreement upon the term, or the third person fails to determine it, provided there is an alternative means of rendering the term definite by what is reasonable in the circumstances having regard to the intention of the parties.75 68 Bahadur Singh v. Fuleshwar Singh, AIR 1969 Pat 114; Bai Mangu v. Bai Vijli, AIR 1967 Guj 81. 69 Bai Mangu v. Bai Vijli, AIR 1967 Guj 81. 70 Suresh Narain Sinha v. Akhauri Balbhadra Prasad, AIR 1957 Pat 256. 71 Anson's Law of Contract, 29th edn., 2010, p. 62. 72 Scammell v. Ouston, [1941] AC 251 per Lord Wright at 268-69, [1941] 1 All ER 14, 25. 73 Upper Hunter County District Council v. Australian Chilling and Freezing Co. Ltd., (1968) 118 CLR 429 per Barwick CJ. at 436-37 (High Court of Australia); Scammell v. Ouston, [1941] AC 251, [1941] 1 All ER 14 (per Lord Wright); Tropwood, A G of Zug v. Jade Enterprices Inc (Tropwind), [1982] 2 Lloyd's Rep 232; Deutsche Schachtbau und Tiefbohrgesellschaft MBH v. Ras Al Khaimah National Oil Co., [1987] 2 All ER 769 at 779; reversed on other grounds in, [1988] 2 All ER 833; Grace Shipping Inc and Hai Nguar v. CF Sharpe (Malaysia) Pte, [1987] 1 Lloyd's Rep 207; Didymi Corpn. v. Atlantic Lines & Navigation Co. Inc, [1987] 2 Lloyd's Rep 166; affirmed in, [1988] 2 Lloyd's Rep 108. 74 Thorby v. Goldberg, (1964) 112 CLR 597, 607 (High Court of Australia). 75 LTNIDROIT Principles, Art. 2.14.
Resolving Uncertainty The courts are reluctant to hold void for uncertainty any provision that was intended to have legal effect.76Id certum est quod certum reddi potest (that which is certain can be made certain).77 It has been emphasized that the problem 'must always be so as to balance matters that, without violation of essential principle, the dealings of men may as far as possible be treated effective, and that the law may not incur the reproach of being the destroyer of bargains.'78
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But the court will not undertake to supply defects or remove ambiguities according to its own notions of what is reasonable;79 for this would be not to enforce a contract made by the parties, but to make a new contract for them.80 A court cannot supply lacunae to perfect and imperfect an arbitration agreement wherein the language used is not clear or meaningful or unambiguous.81 As Lord Wright stated in Scammell v. Ouston :82
The object of the court is to do justice between the parties, and the court will do its best, if satisfied that there was an ascertainable and determinate intention to contract, to give effect to that intention, looking at substance and not mere form. It will not be deterred by mere difficulties of interpretation. Difficulty is not synonymous with ambiguity so long as any definite meaning can be extracted. But the test of intention is to be found in the words used. If these words, considered however broadly and untechnically and with due regard to all the just implications, fail to evince any definite meaning on which the court can safely act, the court has no choice but to say that there is no contract...It is a necessary requirement that an agreement in order to be binding, must be sufficiently definite to enable the court to give it a practical meaning. Its terms must be so definite, or capable of being made definite without further agreement of the parties, that the promises and performances to be rendered by each party are reasonably certain.
Implying Terms It is for the parties, and not the court, to define the terms of the contract. A contract which is intended to be binding may be enforceable even though certain terms have not been precisely agreed, if the nature of the terms can be ascertained by implication.83 The court will construe business agreements fairly and broadly and imply terms84 to the extent necessary,85 to give business efficacy to the transaction.86 To give efficacy to the contract, the courts would imply a term on the ground that without it, the contract will not work.87 Thus a term has been implied into a contract for driving lessons that the vehicle provided would be covered by insurance;88 into a contract for a Turkish bath that the couches for reclining were free from vermin;89 and into a contract of agency that the principal would not deprive the agent of his commission by committing a breach of contract between himself and a purchaser who released the purchaser from his obligation to pay the price.90The terms 'containing necessary stipulations' was not void for uncertainty, and these meant the stipulations implied in a sale under the Transfer of Property Act, 1882.91 Commercial Agreements Although the courts will not make contract for the parties where none exists,92 they will seek to uphold bargains made between businessmen wherever possible, recognising that they often record the important agreements in a crude and summary fashion, and will seek to construct documents fairly and broadly, without being too astute or subtle in finding defects.93 Commercial documents are sometimes expressed in language which does not, on its face, bear a clear meaning. The effort of the courts is to give a meaning if possible.94 If satisfied that there was an ascertainable and determinate intention to contract, the courts will strive to give effect to that intention, looking at the substance and not mere form,95particularly where the parties have act ed on the faith that certain terms are agreed between them. But the court is not to make a contract for the parties, or to go outside the words they have used, except in so far as they are appropriate implications of law. Cases of commercial contracts are different because there are standards of commercial custom and usage to appeal in deciding what terms are just and reasonable. There are many examples of this benevolent approach to commercial agreements, whether executed or executory.96 Thus, words, which are grammatically meaningless, may be found to be used in a mercantile sense and construed accordingly.97 The mere fact that it is difficult to interpret a commercial contract is not fatal, nor is difficulty synonymous with ambiguity so long as any definite meaning can be extracted.98 A contract is not necessarily ineffective simply because it is open to more than one construction if the court can
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ascertain the meaning intended,1 as for example in the case of exemption clauses and negligence liability.2 An agreement is not uncertain where it leaves one of the parties some latitude as to the manner of its performance;3 or because it uses words such as 'about' or 'approximating to'.4 Gaps in a contract may be filled by reference to the previous course of dealings between the parties,5 or normal practice or trade custom,6 or even by the court on the basis of what is reasonable.7 Custom and Trade Usage Vagueness apparent on the face of the contract may be resolved by reference to the custom or trade usage. Extrinsic evidence of such custom or usage can be given.8 A commercial contract for the sale and purchase of American cotton was not void for vagueness or uncertainty by reasons of a clause 'subject to the usual force majeure clause'. Such a clause was capable of being made certain and definite by proving that to the parties in the trade, or in dealing with the parties in British East Africa there was invariably included a force majeure clause of a particular kind.9 The addition of the word 'usual' in a commercial contract referred to something invariably to be found in contracts of a particular type.10 An agreement to lease a shop 'in a prime location' was not uncertain; it could be determined by expert evidence since the phrase was one commonly used in the particular property trade;11 but a lease subject to 'all other usual clauses' was held too vague.12 Previous Course of Dealings A covenant for renewal of lease which does not specify the period or the rent must be presumed to be for the same period and rent as the original lease and is not void for uncertainty on that ground.13 A lease with a provision for renewal gets renewed on the same terms when the lessee exercises his option for renewal.14 In Hillas & Co. Ltd. v. Arcos Ltd., 15A agreed to sell to B a certain quantity of Russian softwood timber 'of fair specification'. The agreement gave an option to B to purchase further timber the next year, but this did not specify the kind, size or quality of the timber, or the manner of shipment. When B exercised the option, A pleaded that the clause was vague and amounted to an agreement to agree. The House of Lords held that there was an intention to be bound on the basis of the previous course of dealings and that the terms could be ascertained from the original contract and the practice of the timber trade. Reasonableness Where an intention to transact is clear, viz. the intention to buy and sell, the terms can be determined by the standard of reasonableness. This may also be implied by law.16 When goods are sold without naming a price, the agreement is understood to be for payment of a reasonable price.17 Where the remuneration in a contract of service was to be fixed by the employer, the contract was enforceable, and the rate fixed on the basis of what was fair and reasonable.18 But a condition for the purchase of a motor van to be partly paid on 'hire purchase terms' over a period of two years was held to be indefinably too vague to constitute a binding contract.19 The courts may sometimes give effect even to an agreement providing for further terms 'to be agreed'. In Foley v. Classique Coaches Ltd., 20 the plaintiff, who owned a petrol filling station and its adjoining land, sold it to the defendants on the condition that they should enter into an agreement to purchase petrol exclusively from them for their motor coaches. The agreement was duly executed, and the defendants committed breach and justified it on the ground that the agreement was incomplete, as it provided the petrol to be bought 'at price to be agreed by the parties from time to time'. The Court of Appeal, rejecting this contention, held that in default of an agreement, reasonable price must be paid, and therefore the contract was enforceable although no definite price was fixed for the petrol at the time the contract was made. Performance Executed The degree of certainty required for creating obligations varies according to whether the transaction remains wholly executory or has been partly performed or acted upon. Courts may be more willing to
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find a binding contract where the contract has been partly performed, or where significant reliance has taken place. For instance, eggs cannot be unscrambled.21 Where the parties have act ed upon the agreement, the courts will be more reluctant to find the agreement void for uncertainty;22 the actions of the parties themselves may clarify what was previously unclear. Particularly in commercial and business contracts, the contracts may be rejected for uncertainty only in extreme cases.23 Where the alleged agreement has been wholly or partially executed, i.e., performed by any party, the very fact of the performance being executed may itself lead to the conclusion that the 'agreement' is binding.24 Where it is partially executed on the one side, the court may alternatively deduce that there is a binding contract broadly on the terms of the 'agreement', and not merely in respect of the executed part;25 and where the 'agreement' has been partly or wholly executed on both sides, it would seem probable that the courts would give their assistance. Where, for example, as in the case of many large commercial 'contracts', two parties continued to send each other counter-offers even after they commenced performance ('the battle of forms' cases), a court may decide that there is a contract on one of the following bases: (i) the terms agreed, with the court's idea of what are reasonable terms being supplied to fill all areas of omission or disagreement; or (ii) the entire contract being constructed on the basis of what the court thinks is reasonable, the terms which the parties have agreed being evidence of what is reasonable in the circumstances.26 Where a proposal is accepted by act ing upon it, the absence of an express acceptance does not make the contract uncertain.27 The plea that an agreement is void for uncertainty cannot be sustained where the parties themselves did not regard it as vague and had acted on it.28 Machinery for Ascertainment A contract would not be vague if it provides machinery for ascertaining a term. In Damodhar Tukaram Mangalmurti v. State of Bombay, 29 the renewal clause contained a provision--'subject to such fair and equitable enforcement as the lessor shall determine'. The clause was held not to be vague or uncertain. It did not oust the jurisdiction of the court and made the lessor's determination final and binding. In Talbot v. Talbot, 30 the provision in a will giving option to the beneficiaries under the will to purchase the farms in which they lived 'at a reasonable valuation' was enforceable. In Sudbrook Trading Estates Ltd. v. Eggleton, 31 a lease contained an option to the lessee to buy the freehold in the future at a price to be fixed by valuers appointed by both parties, and in default of their agreement, by an umpire. When the lessee gave notice of his option, the lessor did not appoint any valuer. The lessor's later contention that there was no other manner to fix the price was rejected by the House of Lords, which held that if the machinery appointed by the parties failed to work, the court could find alternative machinery, viz., by directing an inquiry as to the fair price. An agreement for sale of shares of a private company that provided for fixing price later either by the parties themselves or by a third party, was capable of being made certain not void for uncertainty.32 However, the High Court of Australia in Hall v. Busst, 33 held by majority that the words 'reasonable sum to cover depreciation' as uncertain and therefore unenforceable. In Milnes v. Gery, 34 an agreement to sell at a fair valuation was also held to be uncertain. Where an intending vendor and intending purchaser entered into a binding contract for the sale of land with completion in phases, a term could not be implied about the power to select as to which part was to be included in each phase. It was not a mere matter of machinery which could readily be implied, because if the power was implied in the purchaser, the vendor might be severely prejudiced thereby. Therefore, in the absence of any express term as to how the land to be included in each phase was to be selected, the contract was void for uncertainty.35 Severance of uncertain part Where there is agreement on all substantial terms, the court may disregard a subsidiary term on the grounds that it is meaningless.36 But this rule cannot be applied to a major term;37 for instance, an agreement to buy goods 'on hire purchase terms'; or subject to a 'war clause' or to 'force majeure
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conditions'; or an option 'on terms to be agreed'.38 This severance can take place if the clause in question has been agreed and is found meaningless, but not where the clause is yet to be agreed.39 76 Brown v. Gould, [1972] Ch 53, 57, [1971] 2 All ER 1505; cf Smith v. Morgan, [1971], 2 All ER 1500, [1971] 1 WLR 803, 807; Snelling v. John G Snelling Ltd., [1973] 1 QB 87, 93, [1972] 1 All ER 79; Queensland Electricity Generating Board v. New Hope Collieries Pty Ltd., (1989) 1 Lolyd's Rep 205, 210. 77 Rajkishor Mohanty v. Banabehari Patnaik, AIR 1951 Ori 291; Khivraj Chordia v. Esso Standard Eastern Inc, AIR 1975 Mad 374. 78 Hillas d' Co. Ltd. v. Arcos Ltd., [1932] All ER Rep 494, 499 per Lord Tomlin; (1932) 147 LT 503(HL) . 79 Barkat Ram v. Anant Ram, AIR 1915 Lah 328. 80 Scammell v. Ouston, [1941] AC 251, [1941] 1 All ER 14. 81 Teamco Pvt. Ltd. v. TMS Mani, AIR 1967 Cal 168; followed in ITC Classic Finance Ltd. v. Grapco Mining d' Co. Ltd., AIR 1997 Cal 397 (the name of the person who would appoint arbitrators left blank). 82 [1941] AC 251 per Lord Wright at 268-69, [1941] 1 All ER 14, 26. 83 Gulabchand Gambhirlal v. Kudilal Govindram Ratilal Bhagwandas d' Co., AIR 1959 MP 151 at 161; on appeal, AIR 1966 SC 1734; Hillas d' Co. Ltd. v. Arcos Ltd., [1932] All ER Rep 494(HL) (particulars of option not defined but intention of parties ascertained from commercial usage so that there was a concluded contract). 84 Dwarkadas d' Co. v. Daluram Goganmull, AIR 1951 Cal 10(FB) . 85 Bell v. Lever Bros Ltd., [1932] AC 161, [1931] All ER Rep 1, 32 (Lord Atkin). 86 Gulabchand Gambhirlal v. Kudilal Govindram Ratilal Bhagwandas d' Co., AIR 1959 MP 151 at 161; on appeal, AIR 1966 SC 1734; Uttam Singh Dugal d' Co. Pvt. Ltd. v. Hindustan Steel Ltd., AIR 1982 MP 206; The Moorcock,(1889) 14 PD 64 at 68, [1886-90] All ER Rep 530 at 534-35. 87 Liverpool City Council v. Irwin, [1977] AC 239, 262, [1976] 2 All ER 39; Tai Hing Cotton Mills Ltd. v. Liu Chong Hing Bank Ltd., [1986] AC 80, [1985] 2 All ER 947. 88 British School of Motoring Ltd. v. Simms, [1971] 1 All ER 317. 89 Silverman v. Imperial London Hotels Ltd., (1927) 137 LT 57, [1927] All ER Rep 712. 90 Alpha Trading Ltd. v. Dunnshaw Patten Ltd., [1981] 1 All ER 482, [1981] 1 Lloyd's Rep 122. 91 Ram Sundar Saha v. Kali Narain Sen Choudhury, AIR 1927 Cal 889. 92 Hillas d' Co. Ltd. v. Arcos Ltd., [1932] All ER Rep 494, 503 obiter per Lord Wright (HL); Carmel Exporters and Importers Ltd. v. Francis Huber India Ltd., [1951] 1 Lloyd's Rep 15(CA) . 93 Hillas d' Co. Ltd. v. Arcos Ltd., [1932] All ER Rep 494 per Lord Wright at 503(HL) . 94 Dhanrajamal Gobindram v. Shamji Kalidas d' Co., [1961] 3 SCR 1020 at 1035, AIR 1961 SC 1285; Hillas d' Co. Ltd. v. Arcos Ltd., [1932] All ER Rep 494, (1932) 147 LT 503(HL) ; Adamastos Shipping Co. Ltd. v. Anglo-Saxon Petroleum Co. Ltd., [1959] AC 133, 158, [1958] 1 All ER 725, 733 (HL). 95 Scammell v. Ouston, [1941] AC 251 at 268, [1941] 1 All ER 14 at 25 (HL), obiter per Lord Wright; Adamastos Shipping Co. Ltd. v. Anglo-Saxon Petroleum Co. Ltd., [1959] AC 133 at 158, [1958] 1 All ER 725 per Viscount Simonds at 734 (HL), per Lord Morton at 736, per Lord Keith at 747, per Lord Somervell at 753; Snelling v. John G Snelling Ltd., [1973] QB 87 per Ormrod J, at 94-95, [1972] 1 All ER 79 at 85-86. 96 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1988, CONTRACT, para 674. 97 Ashforth v. Redford, (1873) LR 9 CP 20. 98 Scammell v. Ouston, [1941] AC 251 at 268, [1941] 1 All ER 14, 25 (HL) obiter per Lord Wright. 1 Wade v. Robert Arthur Theatres Co. Ltd., (1907) 24 TLR 77 per Parker J; Adamastos Shipping Co. Ltd. v. Anglo-Saxon Petroleum Co. Ltd., [1959] AC 133, [1958] 1 All ER 725(HL) ; cf J Gordon Alison & Co. Ltd. v. Wallsend Slipway & Engineering Co. Ltd., [1927] 43 TLR 323(CA) . 2 White v. John Warrick & Co. Ltd., [1953] 2 All ER 1021, 1025, [1953] 1 WLR 1285, 1292-93 (CA); Canada Steamship Lines Ltd. v. R, [1952] AC 192, [1952] 1 All ER 305(PC) ; James Archdale & Co. Ltd. v. Comservices Ltd., [1954] 1 All ER 210, [1954] 1 WLR 459(CA) .
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3 Thorby v. Goldberg, (1964) 112 CLR 597(High Court of Australia) . 4 Edwards v. Skyways Ltd., [1964] 1 All ER 494, [1964] 1 WLR 349 ('approximating to'); Three Rivers Trading Co. Ltd. v. Gwiner and District Farmers Ltd., (1967) 117 Sol Jo 831(CA) ('approx'). 5 Hillas & Co. Ltd. v. Arcos Ltd., [1932] All ER Rep 494(HL) . 6 British Crane Hire Corp. Ltd. v. Ipswich Plant Hire Ltd., [1974] 1 All ER 1059, [1974] 2 WLR 856(CA), Shamrock SS Co. v. Storey & Co., (1899) 81 LT 413(CA) . 7 Sweet & Maxwell Ltd. v. Universal News Services Ltd., [1964] 2 QB 699, [1964] 3 All ER 30(CA) . 8 The Indian Evidence Act, 1872, s. 92, proviso 5. 9 Dhanrajamal Gobindram v. Shamji Kalidas & Co., [1961] 3 SCR 1020, 1035, AIR 1961 SC 1285; but see Bishop and Baxter Ltd. v. Anglo-Eastern Trading and Industrial Co. Ltd., [1944] KB 12, [1943] 2 All ER 598 (where the words were subject to the clauses, and there was no evidence that the parties had any particular form in mind, and no consensus ad idem). 10 Shamrock SS Co. v. Storey & Co., (1899) 81 LT 413(CA) ; cf Hart v. Hart, (1881) 18 Ch D 670, [1881-85] All ER Rep 1745. 11 Ashburn Anstalt v. Arnold, [1989] Ch 1, [1988] 2 All ER 147; overruled on another ground in Prudential Assurance Co. Ltd. v. London Residuary Body, [1992] AC 386, [1992] 3 All ER 504. 12 Baijanth v. Kshetrahari Sarkar, AIR 1955 Cal 210. 13 Lani Mia v. Muhammad Easin Mia, AIR 1917 Cal 509; Hitkarini Sabha Jabalpur v. Corporation of the City of Jabalpur, AIR 1961 MP 324. 14 Hindustan Petroleum Corporation Ltd. v. Rajkumari Padma Kumari, AIR 2008 1035(Supp) . 15 [1932] All ER Rep 494, (1932) 147 LT 503(HL) . 16 Section 46 of this Act (if no lime for performance fixed, performance within reasonable time); the Sale of Goods Act, 1930, s. 9 (if price is not determined, buyer must pay reasonable price). 17 Nair Service Society v. RM Palat, AIR 1966 Ker 311. 18 S Rajam v. Indian Union, AIR 1966 Mad 235. 19 Scammell v. Ouston, [1941] 1 All ER 14. 20 [1934] 2 KB 1, [1934] All ER Rep 88; Beer v. Bowden, [1981] 1 All ER 1070, [1981] 1 WLR 522; Thomas Bates d' Son Ltd. v. Wyndham's (Lingerie) Ltd., [1981] 1 All ER 1077, [1981] 1 WLR 505 at 518; Tropwood AG of Zug v. Jade Enterprises Inc (Tropwind), [1982] 2 Lloyd's Rep 233 at 236; Voest Alpine International GMBH v. Chevron International Oil Co. Ltd., [1985] 2 Lloyd's Rep 547. 21 PS Atiyah, An Introduction to the Law of Contract, 5th edn., p. 115. 22 Foley v. Classique Coaches Ltd., [1934] 2 KB 1, [1934] All ER Rep 88; Brown v. Gould, [1972] Ch 53, [1971] 2 All ER 1505; Sudbrook Trading Estates Ltd. v. Eggleton, [1983] 1 AC 444, [1982] 3 All ER 1. 23 Uttam Singh Dugal d' Co. Pvt. Ltd. v. Hindustan Steel Ltd., AIR 1982 MP 206, 215. 24 Hart v. Hart, (1881) 18 Ch D 670 per Kay J, at 685, [1881-85] All ER Rep 1745; Carlill v. Carbolic Smoke Ball Co., (1893) 1 QB 256 per Lindley LJ, at 263-64, per Bowen LJ, at 267-68 and per Smith LJ, at 274, (1891-94) All ER Rep 127(CA) ; and Bryant v. Flight, (1839) 5 M&W 114; Powell v. Braun, [1954] 1 All ER 484, [1954] 1 WLR 401(CA) ; Edwards v. Skyways Ltd., [1964] 1 All ER 494, [1964] 1 WLR 349; Re Richmond Gate Property Co. Ltd.,[1964] 3 All ER 936, [1965] 1 WLR 335. 25 Tomlin v. Standard Telephones and Cables Ltd., [1969] 3 All ER 201, [1969] 1 WLR 1378(CA) . 26 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, CONTRACT, para 675. 27 Indraraj Singh v. Chaitram, AIR 1929 Nag 194, 117 IC 271. 28 Ibid. 29 (1959) SCR Supp (2) 180, AIR 1959 SC 639; New Beerbhoom Coal Co. v. Boloram Mahata, (1880) 7 IA 107 referred to in Secretary of State for India in Council v. Volkart Bros, (1926) 50 Mad 595; Gourlay v. Duke of Somerset, [1803-13] All ER Rep 85, 35 ER 576.
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30 [1968] Ch 1, [1967] 2 All ER 920(CA) . 31 [1983] 1 AC 444, [1982] 3 All ER 1. 32 M S Madhusoodhanan v. Kerala Kaumudi Pvt. Ltd., AIR 2004 SC 909, (2004) 9 SCC 204. 33 (1960) 104 CLR 206, 4 ALJR 322 (High Court of Australia). 34 (1807) 14 Ves 400, [1803-13] All ER Rep 369, 33 ER 574. 35 Bushwall Properties Ltd. v. Vortex Properties Ltd., [1976] 2 All ER 283, [1976] 1 WLR 591 reversing, [1975] 2 All ER 214. 36 Nicolene Ltd. v. Simmonds, [1953] 1 QB 543, [1953] 1 All ER 822(CA) (an acceptance with words 'I assume that ... the usual conditions of acceptance apply' was good acceptance and these words were meaningless); Hart v. Hart, (1881) 18 Ch D 670, [1881-85] All ER Rep 1745; J Gordon Alison & Co. Ltd. v. Wallsend Slipway and Engineering Co. Ltd., [1927] 43 TLR 323(CA) ; EJR Lovelock Ltd. v. Exportles, [1968] 1 Lloyd's Rep 163(CA) (first part of clause made provision for 'any dispute' to be arbitrated in London, but the second part provided that 'any other dispute' be arbitrated in Moscow--arbitration clause could be ignored). 37 Kingsley and Keith Ltd. v. Glynn Bros Chemicals Ltd., [1953] 1 Lloyd's Rep 211; whilst there is no authority on the point, it seems likely that a 'major' term in this context is one concerned with the substantial obligations of the parties, whereas 'subsidiary' terms are only concerned with regulating the manner in which those obligations are performed. 38 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, CONTRACT, para 672. 39 Nicolene Ltd. v. Simmonds, [1953] 1 QB 543 at 551, [1953] 1 All ER 822, 825 (CA).
Agreements held certain Where both the parties were fully aware of the identity of the property to be conveyed under the agreement, the agreement would not be uncertain merely because the exact boundaries, survey number or location were not mentioned in the agreement, if the identity of the property could be reasonably ascertained therefrom.40 Where the property agreed to be sold was described as 'one acre of front land' out of the total land area of five acres and two cents lying on the northern side of the public road leading to Government Engineering College, it was held that this clearly meant one acre of land lying on the northern side of the Engineering College road and it could not be interpreted that the portion intended to be sold was from the extreme northern side of the entire property.41 A mortgage of 'their property' was valid where, at the date of the mortgage, the mortgagors had specific interest in the mortgaged property, and the terms could be made certain.42 An agreement for sale of land with the name of the land, but without its survey number or area, was not void for uncertainty.43 A promise to execute a reconveyance in favour of anyone of the specified four persons who could pay the price mentioned in the sale deed and get the reconveyance executed could be specifically enforced, as any one of them or all of them could exercise the option of purchase by determining the priorities between themselves.44 Where the proprietor of an indigo factory mortgaged to B all the indigo cakes that might be manufactured by the factory from crops to be grown on lands of the factory from the date of the mortgage up to the date of payment of the mortgage debt, it was held that the terms of the mortgage were not vague, and that the mortgage was not void.45 A contract, giving rise to a right of pre-emption is not void on the ground of uncertainty.46 A clause in an agreement for supply of electricity in bulk providing that &uot;during the terms of this agreement if the suppliers' costs shall vary in other respects than as has been here in before provided, the suppliers shall have the right to vary the maximum demand charge...&uot; was not uncertain and the expression 'suppliers' cost' was not meaningless, even though the area of possible disagreement as to its denotation in a particular case was very wide.47
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A clause in the arbitration agreement referring the dispute to the superintending engineer is not vague merely because the reference is to the officer holding the office for the time being;48 nor is an arbitration clause that all disputes shall be referred to arbitration 'in accordance with the rules of the Mill owners Association for the time being in force' vague and uncertain on the ground of want of mode of reference.49An agreement for arbitration according to 'rules in force in the State of Maharashtra' when no such rules existed, was not vague; arbitration clauses were to be construed liberally, and considering the intention of the parties, the provisions of the Arbitration Act applied.50An agreement to pay on a promissory note a specified interest or such higher rate of interest which the directors of the creditor association may from time to time decide was not contrary to s. 29 of the Contract Act .51 Use of the term 'approximate' does not make a contract vague, as it means rounding off, in the case of money, few pounds to a round figure;52 nor did the words 'other necessary and indispensable expenses' to be paid besides the purchase price for reconveyance and the cost of execution.53 An agreement to pay prevailing market rent which was ascertainable was not void for uncertainty.54 A contract is not uncertain merely because the time for performance,55 or the terms of delivery,56 or the maximum quantity of goods to be purchased, is not specified.57 40 SR Varadaraja Reddiar v. Francis Xavier Joseph Periaria, AIR 1991 Ker 288. 41 Kandamath Cine Enterprises Pvt. Ltd. v. John Philipose, AIR 1990 Ker 198, 201. 42 Shadi Lal v. Thakur Das, (1890) ILR 12 All 175. 43 Mithu Khan v. Pipariyawali, AIR 1986 MP 39. 44 P R Kanakasabapathi Chettiar v. V P V Govindarajulu Naidu, AIR 1964 Mad 219. 45 Baldeo Parshad Sahu v. AB Miller, (1904) ILR 31 Cal 667. 46 Aulad Ali v. Akhtar Ali Sued, [1927] 49 All 527, 100 IC 683, AIR 1927 All 170; Basdeo Rai v. Jhagru Rai, [1924] 46 All 333, 83 IC 390, AIR 1924 All 400. 47 Upper Hunter County District Council v. Australian Chilling and Freezing Co. Ltd., [1968] 118 CLR 429 per Barwick CJ, at 437 (High Court of Australia). 48 Daulat Ram Rala Ram v. State of Punjab, AIR 1958 Punj 19; Basantlal Jagatramka v. Dominion of India, AIR 1952 Cal 340. 49 Bhagwati Prosad Harialka v. Kamala Mills Ltd., AIR 1959 Cal 687; Basantlal Jagatramka v. Dominion of India, AIR 1952 Cal 340. 50 Corn Products Company (India) Limited v. Ayaz Ghadiya, AIR 1997 Bom 331. 51 D Lohiah Chetty v. MPHJS Nidhi, AIR 1972 Mad 407; Gopal Madhorao Deshpande v. Achut Sadasheo Deshpande, AIR 1941 Nag 271; distinguishing Raghunath Prasad v. Mangi Lal, AIR 1960 Raj 20. 52 Edwards v. Skyways Ltd., [1964] 1 All ER 494, [1964] 1 WLR 349, 357. 53 Dasarath Gayen v. Satyanarayan Ghosh, AIR 1963 Cal 325 (agreement of sale when not uncertain); Sohbat Dei v. Devi Phal, AIR 1971 SC 2192. 54 Brown v. Gould, [1972] Ch 53 at 57, [1971] 2 All ER 1505; Khivraj Chordia v. Esso Standard Eastern Inc, AIR 1975 Mad 374; Remington Rand of India Ltd. v. Sohanlal Rajgharia, AIR 1984 Cal 153, 155. 55 Mirza Mahomad Jan v. Shaikh Fazl Uddin, (1924) 46 All 514, AIR 1924 All 657, 5 IC 482; Rajammal v. R Gopalaswami Naidu, AIR 1951 Mad 767; Varudayammal v. Balasubramania Gounder, (1979) 1 Mad LJ 294 (must be held to provide for performance in reasonable time). 56 Jamna Auto Industries v. Union of India, AIR 1984 Del 235 (on facts, contract was concluded). 57 Gani Latif v. Manilal Mulji, AIR 1916 Bom 315.
Agreements held Uncertain and Vague
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Where the defendants, describing themselves as residents of a certain place, executed a bond and hypothecated as security for the amount 'our property, with all the rights and interest', the hypothecation was held too indefinite to be acted upon. The mere fact that the defendants described themselves in the bond as residents of a certain place was not enough to indicate their property in that place as the property that was hypothecated. If they had described themselves as the owners of certain property, it would have been reasonable to refer the indefinite expression to the description.58 An agreement to sell a house that did not contain sufficient details in the description or the plans, as would enable identifying the part of the house being sold, cannot be enforced,59 nor an agreement from the terms of which the area of the land to be sold cannot be determined,60 or an agreement for sale of share where the extent of share is not stated, and cannot be ascertained.61 A stipulation in a patta (lease) by which the tenant agreed to pay whatever rent the landlord might fix for any land not assessed which the tenant might take up, is void for uncertainty. Under such a patta, the landlord might fix any rent he liked, and the tenant might be liable for an unreasonable rent beyond the value of the land.62 Where, in an agreement for the sale of goods, the seller reserved the right to vary the price at will, there was no contract.63 An agreement to sell mortgaged property to the mortgagee which the mortgagee had an option to purchase as and when he decided to do so at prevailing market price, was vague, and unenforceable.64 An agreement for sale of land by installments could not be enforced where it provided for conveyance of a 'proportionate part' as each installment of price was paid, but did not specify which part was to be conveyed on each payment.65 The agreements could not be enforced being uncertain where a compromise stated 'the following five gentlemen shall decide all matters relating to our movable and immovable property';66 or an agreement to refer to arbitration to a person not described in certain terms;67 or an agreement to refer to 'sole arbitration of A or B' and did not indicate how the choice was to be made or who was to have the option of deciding.68 A renewal clause in a lease 'on such terms and conditions as may be agreed to between the parties' was uncertain and vague and did not form a valid contract for renewal of the lease;69 so was an agreement to pay a certain amount after deductions as would be agreed upon;70 or an agreement to pay a certain sum of money when able to pay;71 or an alleged contract in which the quantity, duration of supply or price of supply could not be ascertained.72 It has been suggested that an agreement is too uncertain to be enforced if no limit to the time for performance is expressed or can be inferred from the nature of the case.73 This does not appear acceptable as a general proposition.74 A document in favour of a bank promising to pay a specified amount on or before a certain date 'and a similar sum monthly every succeeding month' could not be regarded as a promissory note, as it did not specify the period for which it was to subsist and the amount to be paid.75 An agreement to lease in which the date of commencement could not expressly or impliedly be fixed was uncertain,76 but not where the commencement was dependent upon a contingency which had occurred.77 Similarly a contract for sale of goods was unenforceable where the contract was subject to force majeure conditions;78 as also a contract for the sale of woollen goods subject to 'war clause'.79 A manufacturer who had agreed to supply goods wrote to the buyer: 'We cannot fulfill the orders placed by you in time...please note that the delivery time of all your pending contracts with us shall be automatically understood as extended for the period the working is stopped and till the normal state of affairs recurs'. There were thus two conditions for extension of time, which, even if accepted by the buyers, were held to be vague and uncertain because it was not possible to ascertain definitely the period for which the time for performance was intended to be extended.80 An agreement to negotiate in good faith cannot be enforced because it is too uncertain to enforce.81 58 Deojit v. Pitambar, (1876) ILR 1 All 275.
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59 Sambhajirao v. Vimlesh Kumari Kulshrestha, AIR 2004 MP 74 confirmed on this point, but reversed on another point in Vimlesh Kumari Kulshrestha v. Sambhajirao AIR 2009 SC 806, 2008 (5) SCC 58; Surendra Kumar Gupta v. Narayan Ram, AIR 2011 Chhat 138; V Sudhakar Naidu v. M Padmavathamma, Second Appeal 176/2012 decided on 28 Feb 2013 (AP). 60 Surjit Singh v. Manohar Lal, AIR 2005 P&H 37; P Panneerselvan v. A Baylis, AIR 2006 Mad 242; Rajni Kumar Mahto v. Uma Devi Budhia, AIR 2005 Jhar 13. 61 N K Giriraja Shetty v. N K Parthasarathy, AIR 2006 Kant 180. 62 Ramasami v. Rajagopala, (1887) 11 Mad 200, (1888-90) ILR 11-13 Mad 139. 63 Bengal Agency and Stores Syndicate v. TN Khanna, (1945) 1 Cal 87, AIR 1949 Cal 231; Rajkishor Mohanty v. Banabehari Patnaik, AIR 1951 Ori 291(no uncertainty if a reasonable price is to be fixed); Haji Ayub v. Devji Bhanji, AIR 1953 Sau 91 (no uncertainty if it is to be at the market rate). 64 Sahadeva Gramani v. Perumal Gramani, (2005) 11 SCC 454. 65 Bushwall Properties Ltd. v. Vortex Properties Ltd., [1976] 2 All ER 283, [1976] 1 WLR 591, reversing, [1975] 2 All ER 214. 66 Jai Gobind Singh v. Bagal Lal Singh, AIR 1950 Pat 445. 67 Governor-General in Council v. Simla Banking & Industrial Co. Ltd., AIR 1947 Lah 215, 226 IC 444. 68 Delhi and Finance Housing and Construction Ltd. v. Brij Mohan Shah, AIR 1956 Punj 205. 69 Shanti Prasad Devi v. Shankar Mahto, AIR 2005 SC 2905, (2005) 5 SCC 543; see also Hitkarini Sabha Jabalpur v. Corporation of the City of Jabalpur, AIR 1961 MP 324; following Ramaswami v. Raja Gopala, (1887) 11 Mad 200; distinguishing Damodhar Tukaram Mangalmurti v. State of Bombay 1959 SCR Supp (2) 180, AIR 1959 SC 639. 70 Kovuru Kalappa Devara v. Kumar Krishna Mitter, ILR (1945) Mad 521, AIR 1945 Mad 10, 219 IC 231, distinguished in East Asiatic Co. (India) Ltd. v. Rugnath Tricumdas, AIR 1953 Sau 122. 71 Puspabala Ray v. Life Insurance Corporation of India, AIR 1978 Cal 221, 223. 72 Mahabir Auto Stores v. Indian Oil Corpn. Ltd., AIR 1989 Del 315, 328. 73 Tirumala Chetty Rangayya Chetty v. Kandalla Srinivasa Raghavachari, AIR 1929 Mad 243. 74 Mirza Mahomad Jan v. Shaikh Fazl Uddin, (1924) 46 All 514, AIR 1924 All 657, 5 IC 482 (opinions divided); Rajammal v. R Gopalaswami Naidu, AIR 1951 Mad 767. 75 Carter v. Agra Savings Bank Ltd., (1883) ILR 5 All 562. 76 Giribala Dasi v. Kalidas Bhanja, (1920) 22 Bom LR 1332, 57 IC 626, AIR 1921 PC 71; Central Bank Yeotmal Ltd. v. Vyankatesh Bapuji, ILR (1949) Nag 106, AIR 1949 Nag 286; Marshall v. Berridge, (1881) 19 Ch D 233, [1881-85] All ER Rep 908(CA) ; Khushi Ram v. Munsi Lal, AIR 1940 Lah 225; Vasant Sakharam Sanas v. Chabildas Sobhagchand, (1974) 76 Bom LR 584. 77 LC Sitlani v. Viroosing Ramsing, AIR 1947 Sind 6, (1947) 225 IC 264. 78 British Electrical & Associated Industries (Cardiff) Ltd. v. Patley Pressings Ltd., [1953] 1 All ER 94, [1953] 1 WLR 280. 79 Bishop and Baxter Ltd. v. Anglo-Eastern Trading & Industrial Co. Ltd., [1944] KB 12, [1943] 2 All ER 598. 80 Keshav Lal Lallubhai Patel v. Lalbhai Trikumlal Mills Ltd., AIR 1958 SC 512; Nicolene Ltd. v. Simmonds, [1953] 1 QB 543 at 552, [1953] 1 All ER 822; Scammell v. Ouston, [1941] AC 251, [1941] 1 All ER 14. 81 Petromec Inc v. Petroleo Brasileiro SA Petrobras, [2005] EWCA Civ 891, later, [2007] EWCA Civ 1372; Walford v. Miles, [1992] 2 WLR 174, [1992] 1 All ER 453.
Extrinsic Evidence Extrinsic evidence is admissible to cure uncertainty. Where a written proposal is accepted orally with variations, it is a question of fact, to be decided by extrinsic evidence, what are the terms of the contract between the parties;82 and such evidence is in all cases admissible to show what are the act
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ual terms of the contract where the written document is not intended to express the whole of the agreement between the parties.83 Section 93 of the Indian Evidence Act, 1872 provides that when the language used in a document is, on its face, ambiguous or defective, evidence may not be given of facts which would show its meaning or supply its defects; and s. 94 precludes giving evidence when the language in the document is plain and applies accurately to existing facts, to show that the language was not meant to apply to such facts. But evidence may be given when the language in a document is clear but meaningless to existing facts, to show that the language was used in a peculiar sense, or that it applies to one of several persons or things, or to give meaning to illegible characters.84 82 Stones v. Dowler, (1860) 29 LJ Ex 122(Ex Ch) ; Reuss v. Picksley, (1866) LR 1 Exch 342(Ex Ch), [1861-73] All ER Rep 2022; Stewart v. Eddowes, (1874) LR 9 CP 311, [1874-80] All ER Rep 2024; Moore v. Garwood, (1849) 4 Exch 681(Ex Ch) ; Bolckow v. Seymour, (1864) 17 CBNS 107; Howden Bros Ltd. v. Ulster Bank Ltd., [1924] 1 IR 117; Hutton v. Watling, [1948] Ch 387, [1948] 1 All ER 803(CA) ; Gold v. Patman and Fotheringham Ltd., [1958] 2 All ER 497, [1958] 1 WLR 697(CA) . 83 Harris v. Rickett, (1859) 4 H&N 1; Ardennes (Owners of Cargo) v. Ardennes (Owners), [1951] 1 KB 55, [1950] 2 All ER 517. 84 The Indian Evidence Act, 1872, ss. 95-98.
Specific performance Where a contract is proved, but the terms cannot be ascertained with such certainty that the defendant can be ordered to perform them specifically, damages will be awarded, but not specific performance.85 In such cases, the contract is valid, but not capable of effectively enforced if specific performance were to be granted.86 85 See for example, V.R. Sudhakara Rao v. T.V. Kameswari, (2007) 6 SCC 650. 86 See below: section 14 of the Specific Relief Act, 1963.
Pleadings and Procedure The plea that a particular contract is void for uncertainty under s. 29 is a question of law; and if the terms of the contract are vague and uncertain, the contract itself would be void and unenforceable. Such a plea goes to the root of the matter and could be raised even at the appellate stage.87 87 Kandamath Cine Enterprises Pvt. Ltd. v. John Philipose, AIR 1990 Ker 198 at 200; following Phuljhari Devi v. Mithai Lal, AIR 1971 All 494; Keshav Lal Lallubhai Patel v. Lalbhai Trikumlal Mills Ltd., AIR 1958 SC 512.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER II Of Contracts, Voidable Contracts and Void Agreements/S. 30.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER II
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Of Contracts, Voidable Contracts and Void Agreements S. 30. Agreements by way of wager, void.-Agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won on any wager, or entrusted to any person to abide the result of any game or other uncertain event on which any wager is made. Exception in favour of certain prizes for horse-racing.--This section shall not be deemed to render unlawful a subscription or contribution, or agreement to subscribe or contribute, made or entered into for or toward any plate, prize or sum of money, of the value or amount of five hundred rupees or upwards, to be awarded to the winner or winners of any horse-race. Section 294A of the Indian Penal Code not affected.--Nothing in this section shall be deemed to legalize any transaction connected with horse-racing, to which the provisions of section 294A of the Indian Penal Code (45 of 1860) apply.
Introduction This section declares wagering agreements void, and prohibits suits for recovering anything won on a wager or entrusted to a person to abide by the result of any game or event on which wager is made. It saves certain subscriptions or contributions in connection with horse-races.
Law relating to Wagers This section represents the whole law of wagering contracts now in force in India, supplemented in Bombay State by the Act for Avoiding Wagers (Amendments) Act, 1865 which amended the Act for Avoiding Wagers, 1848. Before the Act of 1848, the law relating to wagers in force in British India was the Common Law of England. By that law an act ion might be maintained on a wager, if it was not against the interest or feelings of third persons, did not lead to indecent evidence, and was not contrary to public policy.88 The nature of gambling is inherently vicious and pernicious.89 Gambling activities which have been condemned in India from ancient times, appear to have been equally discouraged and looked upon with disfavour in Scotland, the United States of America and Australia.90 Gambling is now legalised in English law subject to the provisions of the Gambling Act, 2005 in force in England, Wales and Scotland. The Hindu Law relating to gambling has not been introduced in the law of contract in India.91 Gambling is not trade and commerce, but res extra commercium and therefore is not protected within Art. 19(1) or Art. 301.92 Prize competitions or crossword puzzles have also been held to be of a gambling nature.93 88 Ramloll Thackoorseydass v. Soojunmull Dhondmull, (1848) 4 MIA 339; Doolubdas Pettamberdass v. Ramloll Thackoorseydass, (1850) 5 MIA 109; Rughoonauth Sahoi v. Manickchund, (1856) 6 MIA 251; Gherulal Parakh v. Mahadeodas Maiya, (1959) Supp 2 SCR 406, AIR 1959 SC 781. 89 State of Bombay v. RMD Chamarbaughwala, [1957] SCR 874, AIR 1957 SC 699, 721. 90 AIR 1957 SC 699 at 720. 91 Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406, AIR 1959 SC 781.
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92 RMD Chamarbaugwala v. Union of India, AIR 1957 SC 628 at 631, [1957] SCR 930; State of Bombay v. RMD Chamarbaugwala, [1957] SCR 874, AIR 1957 SC 699, 720. 93 State of Bombay v. RMD Chamarbaugwala, [1957] SCR 874, AIR 1957 SC 699, 721.
Policy The policy of the law is not to prevent or discourage betting. There is no technical objection to the validity of a wagering contract. It is an agreement by mutual promises, each of them conditional on the happening or not happening of an unknown event. These promises will support each other as well as any other reciprocal promises. This Act neither prevents nor discourages betting, but simply declares it void.94 The betting industry is said to serve useful purpose by providing mutually satisfactory gambling facilities to the betting public. Laws relating to some gaming contracts and lotteries act ually authorise wagering subject to certain conditions. The purpose of making such transactions void, and hence not enforceable, is that the courts have more important functions than to adjudicate on matters of this kind. Law prefers to deal with wagers like social engagements or family matters and likewise, settled outside the courts.95Under common law, wagering agreements were valid contracts, until the (English) Gaming Act, 1845 declared them null and void. The Gambling Act, 2005 in force in England, Wales and Scotland provides that the contract relating to gambling is not necessarily therefore unenforceable. 94 But see below: 'Act for Avoiding Wagers (Amendment) Act, 1865 (Bombay Act, 3 of 1865)'. 95 PS Atiyah, Introduction to the Law of Contract, 5th edn, p. 338.
Three Branches of the Section The first branch declares the agreement of wager void; the second prevents the winner from bringing an action to recover amount won (even under a substituted contract); and the third prevents the winner from suing the stakeholder.
Definition A wagering contract is one by which two persons, professing to hold opposite views touching the issue of a future uncertain event, mutually agree that, dependent on the determination of that event, one shall win from the other, and that other shall pay or hand over to him, a sum of money or other stake; neither of the contracting parties having any other interest in that contract than the sum or stake he will so win or lose, there being no other real consideration for the making of such contract by either of the parties. It is essential to a wagering contract that each party under may it either win or lose, whether he will win or lose being dependent on the issue of the event, and, therefore, remaining uncertain until that issue is known. If either of the parties may win but cannot lose, or may lose but cannot win, it is not a wagering contract.1 The above definition excludes events which have occurred. Hence Sir William Anson's definition, 'a promise to give money or money's worth upon the determination or ascertainment of an uncertain event', is nearer and more accurate.2 1 Carlill v. Carbolic Smoke Ball Co., [1892] 2 QB 484 per Hawkins J, at 490; affirmed in [1893] 1 QB 256, [1891-94] All ER Rep 127. 2 Sir William Anson, Law of Contracts quoted with approval by the Supreme Court in Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406 at 416-17, AIR 1959 SC 781, 785.
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Features of a Wagering Agreement Mutual chances of gain and loss There must be two parties, or two sides, and mutual chances of gain and loss,3 i.e., one party is to win and the other to lose upon the determination of the event. It is not a wager where one party may win but cannot lose, or if he may lose but cannot win, or if he can neither win nor lose. '[I]f one of the parties has the event in his own hands, the transaction lacks an essential ingredient of wager.'4'It is of the essence of a wager that each side should stand to win or lose according to the uncertain, or unascertained event in reference to which the chance or risk is taken.'5 Where two wrestlers therefore agreed to a contest with a stipulation that the wrestler who failed to appear should forfeit Rs. 500- and that the winner, if the contest took place, should receive a fixed sum out of the gate-money, in a suit to recover the Rs. 500-, the defence of gaming and wagering failed.6 Thus, persons who contribute to sweepstakes, place bets with a totalisator, take part in bingo sessions, or enter coupons for a football pool, do not make wagering contracts. The organisers neither win nor lose; they merely pay out of the collection, money staked to those who are successful after deducting their own expenses.7 Two Parties There must be two persons, either of whom is capable of winning or losing.
'...you cannot have more than to parties or two sides to a bet. You may have a multipartite agreement to contribute to a sweepstake (which may be illegal as a lottery if the winner is determined by chance, but not if the winner is determined by skill), but you cannot have a multipartite agreement for a bet unless the numerous parties are divided in to two sides, of which one wins or the other loses, according to whether an uncertain event does not does not happen'.8
Uncertain Event An event may be uncertain, but need not be a future event. Parties may wager about the qualities or attributes of existing things, or the result of events already occurred, where they both do not know about these. The subject of the wager is then the accuracy of each person's judgment and not the determination of the event.9 No Interest other than the Stake To constitute a wager, the parties must contemplate the determination of the uncertain event as the sole condition of their contract. The stake must be the only interest which the parties have in the contract.10 One may thus distinguish a genuine wager from a conditional promise or a guarantee.11 Neither party must have any interest in the contract other than the sum which he will win or lose.12 The transaction must 'wholly depend on the risk in contemplation' and neither must look to anything but the payment of money on the determination of an uncertainty.13 This is what distinguishes a contract of insurance from a wager. Every contract of insurance in one sense is a bet on the outcome of a future uncertain event, and it would be a wager if the insurer had not an insurable interest in the event upon which insurance money is payable. 3 Gianmal Sobhagmal v. Mukundchand Balia AIR 1926 PC 119, 53 IA 241, 51 Bom 1; Ram Prasad-Shyam Sundar Lal v. Ramji Lal, (1927) 50 All 115, 103 IC 218, AIR 1927 All 795. 4 Per Birdwood J, in Dayabhai Tribhovandas v. Lakhmichand Panachand, (1885) 9 Bom 358 at 363 (after citing the
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passage from Sir W Anson, as it stood in an earlier edition). 5 Per Jenkins CJ, in E Sassoon v. Tokersey Jadhawjee, (1904) 28 Bom 616 at 621; Boppana Venkataratnam v. Kamalakara Hanumantha Rao, AIR 1935 Mad 135; definition in Carlill v. Carbolic Smoke Ball Co., [1892] 2 QB 484 at 490, [1891-94] All ER Rep 127, approved in Weddle, Beck & Co v. Hackett, [1929] 1 KB 321 at 329, [1928] All ER Rep 539, and in Ellesmere (Earl) v. Wallace, [1929] 2 Ch 1 at 24; cf Tote Investors Ltd v. Smoker, [1968] 1 QB 509 at 516, 518, [1967] 3 All ER 242. 6 Babasaheb Rahimsaheb v. Rajaram Raghunath Alpe AIR 1931 Bom 264, 133 IC 254, 33 Bom LR 260. 7 Ellesmere (Earl) v. Wallace, [1929] 2 Ch 1; Tote Investors Ltd v. Smoker, [1968] 1 QB 509, [1967] 3 All ER 242. 8 Ellesmere (Earl) v. Wallace, [1929] 2 Ch 1 per Russell LJ at 52. 9 Anson's Law of Contract, 27th edn, pp. 337-38. 10 Carlill v. Carbolic Smoke Ball Co., [1892] 2 QB 484, affirmed in [1893] 1 QB 256, [1891-1894] All ER Rep 127. 11 Boppana Venkataratnam v. Kamalakura Hanumantha Rao, AIR 1935 Mad 135. 12 Boppana Venkataratnam v. Kamalakara Hanumantha Rao supra ; Walyti Ram Ram Ditta Mal v. Bhagwan Dass Rajinder Kumar, AIR 1960 Punj 471 (interest only in the stake). 13 Dayabhai Tribhovandas v. Lakhmichand Panachand, (1885) 9 Bom 358 at 363.
English Law and Wagers under the Section The expression 'by way of wager' in the section has been interpreted14 to mean what the expression 'gaming and wagering' under the (English) Gaming Act of 1845 meant.15The cases under the English Act of 1845 and the Act for Avoiding Wagers, 1848,16have therefore a bearing on the expression used in those Act s that are still useful in construing the expression 'by way of wager,' used in the present section. In Alamai v. Positive Government Security Life Assurance Co Ltd, 17 a case of life insurance, Fulton J. said:
What is the meaning of the phrase 'agreements by way of wager' in s. 30 of the Contract Act? Can it be that the words mean something different in India from what the corresponding words 'agreements by way of wagering' mean in England? I do not see how such an argument can be maintained, or how the fact that the 14 Geo III c 48 is not in force in India affects the question.
In Hampden v. Walsh, 18 Cockburn CJ defined a wager as a contract by A to pay money to B on the happening of given event, in consideration of B paying money to him on the event not happening, and said that since the passing of 8 and 9 Vict, c. 109 there is no longer, as regards action, any distinction between one class of wager and another, all wagers being made null and void at law by the statute. In Thacker v. Hardy, 19 Cotton LJ said that the essence of gaming and wagering was that one party was to win and the other was to lose upon a future event, which at the time of the contract was of an uncertain nature; but he also pointed out that there were some transactions in which the parties might lose and gain according to the happening of a future event which did not fall within the phrase. Such transactions, of course, are common enough, including the majority of forward purchases and sales.20 A certain class of agreements, such as bets by common consent, comes within the expression 'agreements by wagers'. Others, such as legitimate forms of life insurance, do not, though, looked at from one point of view, they appear to come within the definition of wager. The distinction is doubtless rather subtle, and probably lies more in the intention of the parties than in the form of the contract. In such doubtful cases it seems to me that the only safe course for the Courts in India is to follow the
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English decisions, and that when a certain class of agreement has indisputably been treated as a wagering agreement in England it ought to receive the same treatment in India.21 In the English law, the Gambling Act, 2005 repeals with prospective effect all statutory provisions which provide that gambling contracts are unenforceable. This Act, seeks to regulate gambling. Section 335 of that Act provides that the fact that a contract relates to gambling shall not prevent its enforcement. Further, the Gambling commission created by the Act can make an order that any contract or other arrangement in relation to a bet is void. It also has the power to order that any money paid in relation to the bet shall be repaid to the person who paid it, and that the repayment may be enforced as a debt due to that person. 14 Kong Yee Lone & Co v. Lowjee Nanjee, (1901) 28 IA 239, (1901) 29 Cal 461 at 467 (PC); Maung San Ya v. Indian Telegraph Association Club, AIR 1917 LB 18. 15 See especially Universal Stock Exchange Ltd. v. Strachan, [1896] AC 166, [1895-99] All ER Rep 751, and Re Gieve,[1899] 1 QB 794, both decided under the English Act of 1845. 16 The provisions of these two Act s of 1845 to the extent these prevented enforcement of gambling contracts, are repealed by the Gambling Act, 2005 in force in England, Wales and Scotland. Under the provisions of this Act, gambling contracts are now rendered enforceable. 17 (1898) 23 Bom 191 at 209-10 (a case of life insurance). 18 [1876] 1 QBD 189. 19 (1878) 4 QBD 685 at 695; Ismail Lebbe Marikar Ebrahim Lebbe Marikar v. Bartleet & Co., (1942) 199 IC 574, AIR 1942 PC 19. 20 See notes below, under the heading, 'Speculative transactions'. 21 Trimble v. Hill, (1879) 5 App Cas 342; and Kathama Natchiar v. Dorasinga Tever, (1875) 2 IA 169 at 186.
Wagers Distinguished From Contract of Insurance A transaction of insurance resembles a wager. Every contract of insurance is a wager if the insurer has no insurable interest in the event upon which insurance money is payable. The insurable interest lies normally in that the event is one which is prima facie adverse to the interest of the insurer.22 If A insures cargo which he has loaded on a vessel, his contract is not a wager because his property is at risk during the voyage; but if he has no cargo on board, the contract is a wager; because if the vessel is lost, he gains the insured amount without suffering any loss of goods, and if the vessel is not lost, he loses the amount of premium. If a cricketer and the organisers have insurance contracts against the fall of more than a certain amount of rain during a match, the organiser's contract would be valid in the not happening of the event, but the cricketer's contract would be valid if he is financially interested in the match, viz., it is played for his benefit and a wager if he has no such interest.23 Section 6 of The Marine Insurance Act, 1963 provides that every contract of marine insurance by way of wager is void; and that a contract of marine insurance is deemed to be a wagering contract where the assured has not an insurable interest. Section 4 of the (English) Marine Insurance Act, 1906 also provides that a contract or marine insurance is deemed to be a gaming or wagering contract if the insured has no 'interest' in the adventure. In Alamai v. Positive Government Security Life Assurance Co Ltd .,24 the defendant company issued a policy for a term of 10 years for Rs. 25,000/- on the life of Mehbub Bi, the wife of a clerk in the employment of the plaintiff's husband. After about a week, Mehbub Bi assigned the policy to the plaintiff. Mehbub Bi died a month later, and the plaintiff, as assignee of the policy, sued to recover Rs.
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25,000/- from the defendants. Evidence showed that the policy was not effected by Mehbub Bi for her own use and benefit, but had been effected by the plaintiff's husband for his own use and benefit, and that it was void as a wagering transaction, he having no interest in the life of Mehbub Bi. The High Court of Bombay held that in India, insurance for a term of years on the life of a person in whom the insurer had no interest, was void under this section. In Vappakandu Marakayar v. Annamalai Chetti, 25 the plaintiff lent a sum of money to the defendants on the risk of a ship belonging to them. On 3 August 1896, the defendants passed a writing to the plaintiff which, after reciting the loan on the risk of the ship 'now under sail to Nicobars' from Negapatam, provided for the payment by the defendants to the plaintiff on 20 March 1897 of the loan with interest at the rate of 18 per cent if the ship returned safely to Negapatam after the completion of her voyage; but that if ship did not return, the plaintiff lost his money. The ship had left Negapatam on 23 July 1896, and was lost at sea three days later. In a suit by the plaintiff to recover the amount of the loan on the ground that the ship was lost before the date of the agreement, it was held that the agreement was by way of wager and void under this section. Davies J said that agreements similar to this were in vogue in England up to the time of the passing of 19 Geo II c. 37 under the names sometimes of foenus nauticum and sometimes usura maritima, but as they were considered to give an opening for usurious and gaming contracts, they were forbidden by that statue. A truck owned by A was transferred benami to B who got it insured in his own name. The truck was involved in an accident and it seriously injured a young army officer who claimed heavy damages from the owner, driver and the benamidar and the insurance company. It raised the plea that an ostensible owner (a benamidar) had no insurable interest and that it was a wager for that reason. Both these pleas were negatived by the High Court.26 Contract of Gaming A gaming contract consists of the mutual promises which the players of a game necessarily make, express or by implication, in paying for a stake as to its transfer upon the result of the game. Such contract may be a wager if the parties are two.27 In KR Lakshmanan (Dr) v. State of Tamil Nadu, 28the Supreme Court had an occasion to decide whether horse racing amounts to 'gaming' as defined under The Madras City Police Act, 1888 and the Madras Gaming Act. It stated:
Gambling in a nutshell is a payment of a price for a chance to win a prize. Games may be of chance or of skill and chance combined. A game of chance is determined entirely or in part by lot or mere luck. A game of skill--although the element of chance necessarily cannot be entirely eliminated--is one in which success depends principally upon the superior knowledge, training, attention, experience and adroitness of the player. There are few games, if any, which consist purely of chance and skill, and as such a game of chance is one in which the element of chance predominates over the element of skill and a game of skill is one in which the element of skill predominates over the element of chance. It is the dominant element--'skill' or 'chance', which determines the character of the game...Gaming is the act or practice of gambling on a game of chance. It is staking on chance where chance is the controlling factor. 'Gaming' in the two Acts would therefore, mean wagering or betting on games of chance. It would not include games of skill like horse-racing. The two Act s specifically save the games of mere skill. The expression 'mere skill' would mean substantial degree or preponderance of skill...Horse-racing is a game where winning depends substantially and preponderantly on skill and hence did not amount to gaming under these Acts.
Speculative Transactions A speculative contract is not necessarily a wagering contract,29 and must be distinguished from agreements by way of wager. Mere speculation, apart from special legislation, is not illegal or
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opposed to public policy.30 This distinction comes into prominence in a class of cases where the contracts are entered into through brokers. The modus operandi of the defendant in this class of cases is, when he enters into a contract of purchase, to sell again the same quantity deliverable at the same time in one or more contracts, either to the original vendor or to someone else, so as to either secure the profit, or to ascertain the loss, before the vaida day; and when he enters into a contract of sale, to purchase the same quantity before the vaida day. This mode of dealing, when the sale and purchase are to and from the same person, has the effect, of course, of cancelling the contracts, leaving only differences to be paid. When they are different persons, it puts the defendant in a position vicariously to perform his contracts. This is, no doubt, a highly speculative mode of transacting business; but the contracts are not wagering contracts, unless it be the intention of both contracting parties at the time of entering into the contracts, neither to call for nor give delivery from or to each other. 'There is no law against speculation, as there is against gambling'.31 A fortiori, dealings between stockbrokers, whose regular course of business is periodical settlement of differences, are not presumed to be wagering agreements.32 It may well be that the defendant is a speculator who never intended to give delivery, and even that the plaintiffs did not expect him to deliver; but that does not convert a contract, otherwise innocent, into a wager. Speculation does not necessarily involve a contract by way of wager, and to constitute such a contract a common intention to wager is essential.1 It is in cases of the above description that 'there is a danger of confounding speculation, or that which is properly described as gambling, with agreements by way of wager; but the distinction in the legal result is vital'.2 Every forward contract is to some extent speculative, but is not a wager or a gamble on that account.3 The distinction between the two is a narrow one. This modus operandi was adopted by the defendant in JH Tod v. Lakhmidas Purshotam Das, 4 where the dealings were in Broach cotton; Perosha Cursetji Parakh v. Maneckji Dossabhoy Watcha, 5 where the dealings were in government paper and shares of a spinning and weaving company, and in E Sassoon v. Tokersey Jadhawjee, 6 where the dealings were in American cotton. In all these cases the contracts were entered into through a broker. In the first of these cases, the contracts were made by bought and sold notes, so that the principals would not be brought into contact with each other until after the bought and sold notes were executed. This would at once raise a presumption against the existence of a common intention to wager. In the second and third cases, the contracts were made by the broker with third persons in his own name on behalf of the defendant according to the practice of the trade. Here, the presumption against the existence of a common intention to wager is still stronger, for the defendant may not know at all with whom the broker has contracted on his behalf. The broker may be a sutta broker or a mere agent for gambling, but this fact is immaterial, for he is not a contracting party, and it is the intention of the contracting parties alone that is material in these cases.7 In each of the above cases it was contended for the defendant that the contracts sued upon were wagering contracts. But in each it was held that, though the transactions were of a highly speculative character, and though, so far as the defendant personally was concerned, he entered into the contracts as gambling transactions, there was no evidence to show that the other contracting party had also the intention to gamble.8 22 Prudential Insurance Co v. Commrs of Inland Revenue, [1904] 2 KB 658 at 663; as explained in Gould v. Curtis, [1913] 3 KB 84(CA) . 23 Cheshire and Fifoot's Law of Contract, 10th edn, p. 285. 24 (1898) 23 Bom 191; Brahm Dutt Sharma v. Life Insurance Corporation of India, AIR 1966 All 474. 25 (1901) 25 Mad 561 per Davies J, at 567. 26 Northern India General Insurance Co. Ltd. v. Kanwarjit Singh Sobti, AIR 1973 All 357 at 360; distinguishing Alamai v. Positive Government Security Life Assurance Co. Ltd., (1898) 23 Bom 191. 27 See also Halsbury's Laws of England, Vol. 9(1), 4th edn, Reissue, 30 June 1998, CONTRACT, para 879. 28 AIR 1996 SC 1153, (1996) 2 SCC 226, 233, 249. 29 Bhagwandas Parasram v. Burjorji Ruttonji Bomanji, (1918) 45 IA 29, AIR 1917 PC 101, 42 Bom 373, 44 IC 284; Sukhdevdoss Ramprasad v. Govindoss Chathurbhujadoss & Co., (1928) 55 IA 32, 107 IC 29, AIR 1928 PC 30
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(patta-patti contracts); Bisseswar Lal Kedia v. Basir Ali, AIR 1921 Cal 362; Firm Sanchiram Baijnath v. Surajmal Marwari, AIR 1922 Pat 220; Firm Hazari Lal Chhanga Mal v. Firm Kesho Das Ram Gopal, AIR 1923 All 273 at 276; Narainrao v. Seth Hanumantram, AIR 1930 Nag 273; Vithalsa Narayansa Dukan v. HH Raoji Bhoy & Co., AIR 1934 Nag 129; Firm Aya Ram Tola Ram v. Sadhu Lal, AIR 1938 Lah 781. 30 Central Brokers v. N.K. Murthy, AIR 1954 Mad 699. 31 JH Tod v. Lakhmidas Purshotamdas, (1892) 16 Bom 441, at 445-46; Manubhai Premanund v. Keshavji Ramdas, AIR 1922 Bom 66 at 68, 24 Bom LR 60, 65 IC 682; Chimanlal Purshottamdas v. Nyamatrai Madhavlal, AIR 1938 Bom 44 at 46, 39 Bom LR 1083, 173 IC 205; Firm Jonnavitula Seetharamanjaneyulu v. Firm Vadlapata Sobhanachalam & Co., AIR 1958 AP 438 at 440. 32 G. Sirur v. AM Bhamia, AIR 1925 Mad 330, (1924) 85 IC 410; Firm Pratapchand Nopaji v. Firm of Kotrike Venkata Shetty & Sons, [1975] 3 SCR 1, AIR 1975 SC 1223 at 1227, applying Bhagwandas Parasram v. Burjorji Ruttonji Bomanji, (1918) 45 IA 29 at 33, AIR 1917 PC 101 at 106, ILR 42 Bom 373, 44 IC 284. 1 Bhagwandas Parasram v. Burjorji Ruttonji Bomanji, (1917) 45 IA 29 at 33, AIR 1917 PC 101, ILR 42 Bom 373, 44 IC 284; Firm Kanwar Bhan-Sukha Nand v. Firm Ganpat Rai-Ram Jiwan, (1926) 7 Lah 442, 94 IC 304, AIR 1926 Lah 318; Mahomed Valli Patel v. East Asiatic Co. Ltd., (1936) 14 Rang 347, 164 IC 654, 1936, AIR 1936 Rang 319 (definition of forward sale); Firm Aya Ram Tola Ram v. Sadhu Lal, AIR 1938 Lah 781; Sitaram v. Chamanlal, AIR 1952 Hyd 95; TK Narayanan v. Alleppey Chamber of Commerce, AIR 1952 Tr & Coch 435; Mannalal v. Biharilal, AIR 1956 MB 38; Hagami Lal Ram Prasad v. Bhuralal Ram Narain, AIR 1961 Raj 52. 2 E Sassoon v. Tokersey Jadhawjee (1904) 28 Bom 616 per Jenkins CJ. at 621. 3 Bullion and Grain Exchange Ltd v. State of Punjab, [1961] 1 SCR 668, AIR 1961 SC 268; Mannalal v. Biharilal, AIR 1956 MB 38. 4 (1892) ILR 16 Bom 441. 5 (1898) ILR 22 Bom 899. 6 (1904) ILR 28 Bom 616. 7 Perosha Cursetji Parakh v. Maneckji Dossabhoy Watcha (1898) 22 Bom 899 at 907; E Sassoon v. Tokersey Jadhawjee, [1904] 28 Bom 616 at 624; Khimji Punja & Co v. Maun Devshi Bhanji AIR 1950 Kutch 24. 8 Mannalal v. Biharilal, AIR 1956 MB 38; Firm Aya Ram Tala Ram v. Sadhu Lal, AIR 1938 Lah 781.
'Alleged to be won on any wager' The second limb of the section is the same that as in the (English) Gaming Act, 1845.9 While interpreting s. 18 of that Act, it was held that the expression 'alleged to be won upon a wager' in the second limb was framed in a different and wider terms, and was aimed at defeating the attempt to recover betting losses. 'The statute has been framed to defeat an act ion, though not brought on the original contract, if it was brought on an alleged new contract to pay a sum won on a wager.'10 The second part is comprehensive enough to take in a claim for the recovery of money alleged to be won upon a wager though the said claim is based upon a substituted contract between the same parties. In Hill v. William Hill (Park Lane) Ltd, 11H lost an amount to W in a betting transaction, and failed to pay it. W reported the default to the committee, which ordered H to pay the debt by installments, else he would be declared defaulter. H failed to pay. W then agreed with H not to have him declared a defaulter in consideration of H agreeing to pay the amounts partly by a post-dated cheque, with a promise to pay the balance by installments. H failed to honour the cheque and pay the installments. In W's action to enforce the payment, where W relied on the later agreement between H and W, H contended that the agreement was unenforceable as the amount was claimed as money 'alleged to be won upon a wager' under the second part of s. 18 of the (English) Gaming Act, 1845. W contended that the second part of the section 'alleged to be won upon a wager' applied only to the first branch of the section in suits seeking to enforce gaming and wagering agreements as decided in Hyams v. Stuart King. 12 It was held that although the agreement contained a new promise by H for good consideration (viz,
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not to have him declared a defaulter), it was a promise to pay money 'won on a wager', and the action was for money so won. It was further held that the second branch 'alleged to be won upon a wager' was not restricted to suits brought on wagering contracts, but applied to all suits brought to recover money alleged to have been won on the wager. The agreement was therefore unenforceable. A customer laid bets at one of the plaintiffs' betting shops, lost a sum of GBP 1,000, and did not pay. The owner sued the manager of the shop for the amount on the basis of breach of contract of employment, alleging that he had broken his contract by accepting bets on credit when he knew grant of credit facilities was not allowed. It was held that the amount claimed by the plaintiffs was 'a sum of money alleged to be won upon a wager' within the provisions of the (English) Gaming Act, 1845 since it was money which the plaintiffs alleged they had won on bets placed by the customer, and therefore the action failed. It was held that a sum of money won on a wager could not be recovered, and no act ion was maintainable.13 The second limb is a direction to the court not to entertain a suit of the nature indicated.14 If the plaintiff alleges his claim without giving particulars of or disclosing the wagering or betting nature of the transaction, the defendant may establish it;15 the word 'alleged' must embrace allegations by the plaintiff as well as the defendant.16 9 Provisions now repealed by the (English) Gaming Act, 2005. 10 Hyams v. Stuart King, [1908] 2 KB 696 per Fletcher Moulton LJ (dissenting opinion), at 705; approved in Hill v. William Hill (Park Lane) Ltd., [1949] AC 530, [1949] 2 All ER 452. 11 [1949] AC 530, [1949] 2 All ER 452. 12 [1908] 2 KB 696, overruled in Hill v. William Hill (Park Lane) Ltd., [1949] AC 530, [1949] 2 All ER 452. 13 AR Dennis & Co v. Campbell, [1978] 1 All ER 1215, reversing [1977] 1 All ER 158 and applying Thomas Cheshire & Co. v. Vaughan Bros & Co., [1920] 3 KB 240[deemed to be wager under s. 2 of the (English) Marine Insurance Act]. 14 Hill v. William Hill (Park Lane) Ltd., [1949] AC 530, [1949] 2 All ER 452 per Lord Greene at 468. 15 [1949] 2 All ER 452 per Viscount Simon at 463. 16 [1949] 2 All ER 452 per Lord Macdermott at 481.
Effect of Wagering Agreements Wagering agreements are void, and not forbidden by law. A contract which is 'void' and unenforceable is not 'forbidden by law' within s. 23. What is 'void' cannot be equated with what is 'forbidden by law'.17 A wagering agreement is void ab initio, and s. 65 has no application to it.18 Money paid directly by a third party to the winner of a bet cannot be recovered from the loser.19 Even if a loser makes a new promise to pay for his losses in consideration of his not being posted, the promise cannot be enforced; but if he gives a cheque in discharge of his liability, the cheque may not be tainted with illegality because of the winner's promise not to have the name posted. The cheques will not be enforceable by the original payee, but may be enforced by a third party holder of the cheque, even if he knew of the facts leading up to giving of the cheque. 17 Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406 at 415, 421, AIR 1959 SC 781 at 792; High Court judgment in Mahadeodas v. Gherulal Parakh, AIR 1958 Cal 703 at 707-8 (wagering agreement is not opposed to public policy or is not immoral or unlawful). 18 Dayabhai Tribhovandas v. Lakhmichand Panachand, (1885) ILR 9 Bom 358; Srikakolapur Venkataraju v. Gudivada Ramanujan, AIR 1918 Mad 163 (but recovery allowed because plaintiff not tainted). 19 CHT Ltd v. Ward, [1965] 2 QB 63, [1963] 3 All ER 835; Woolf v. Freeman, [1937] 1 All ER 178.
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Certain Transactions Contracts for Differences A contract for differences is a contract intended by both parties to end in the payment of differences. For this purpose, a difference is the difference between a sale or purchase price at the time when a contract is made and the corresponding purchase or sale price when it is closed. In order to give rise to a difference, the price by reference to which the sale or purchase is notionally supposed to take place is the published price of a stock, commodity, or other property or alternatively of an index. Which party will have to pay, and which to receive, a difference contracted for is 'dependent on the issue of the event', that is the price at which the chosen stock, commodity or other property or index is standing when the transaction is closed out. Until that closing price is determined, the result of the contract remains uncertain. Such contract, therefore, would be a wagering contract.20 An agreement to settle differences arising out of a nominal agreement for sale which was really a gamble, is no less void than the original wagering transaction.21 One type of wagering contract which the courts have frequently dealt with is one which provides for the payment of differences22 in stock transactions, with or without colourable provisions for the completion of purchases. The transactions may be cloaked behind the forms of genuine commercial transactions.23 Such provisions, if inserted, will not prevent the court from examining the real nature of the agreement as a whole.24'In order to constitute a wagering contract neither party should intend to perform the contract itself, but only to pay the differences.'25 Though in form, an agreement for sale purports to contemplate delivery of goods and payment of price therefore, yet both parties may contemplate merely the payment and receipt of differences according to variation of prices in the market. Such a transaction is not a commercial transaction but a wager, and can be so inferred from all the surrounding circumstances.26 Under the scheme of the Forward Contract (Regulation) Act, 1952 contracts for sale of goods are divided into two categories 'ready delivery contracts' and 'forward contracts'. 'Forward contracts' are divided into specific delivery contracts and others. Specific delivery contracts are transferable and non-transferable and the latter are exempted from the operation of the Act, s. 18(1). All forward contracts except non-transferable specific delivery contracts can be declared illegal by a notification under the Act .27 Contracts for delivery of groundnuts at a future date, if they are for specific quality, for specific price and for specific delivery under the rules of the Veraval Merchants' Association and if they are not transferable, are not forward transactions within the Saurashtra Order.28 The ordinary course of business in jute trade is by 'chain contracts' to pay against shipping documents, which amounts to delivery of possession of goods, passing from one buyer to another, and the ultimate buyer gets physical possession of goods. This was held not to be a speculative transaction with the intention of dealing in differences in rates only,29 but was 'actual delivery' within West Bengal Jute Goods Future Ordinance (5 of 1949), which included symbolical as well as constructive delivery. The contract in this case did not provide for the payment or receipt of margins and the seller did not possess or have control over a godown, other means and equipment necessary for the storage and supply of jute goods. 20 Leggatt LJ, in City Index Ltd v. Leslie, [1991] 3 All ER 180 at 189 (CA). 21 Jivanchand Gambhirmal v. Laxminarayan Ganesharam, (1925) 49 Bom 689, AIR 1925 Bom 511, 89 IC 885 (void under s. 1 of the Bombay 3 of 1865, but not under s. 30 of the Contract Act). 22 Doshi Talakshi v. Shah Ujamsi Velsi, (1889) 24 Bom 227 at 229; (1889-1900) ILR 23-24 Bom 688. 23 Ismail Lebbe Marikar Ebrahim Lebbe Marikar v. Bartleet & Co., (1942) 199 IC 574, AIR 1942 PC 19. 24 Re Gieve,[1899] 1 QB 794(CA) .
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25 Perosha Cursetji Parakh v. Maneckji Dossabhoy Watcha, (1898) 22 Bom 899 at 903; Universal Stock Exchange Ltd. v. Strachan, [1896] AC 166, [1895-99] All ER Rep 751; Eshoor Doss v. Venkatasubba Rau, (1895) 18 Mad 306; Sukhdevdoss Ramprasad v. Govindoss Chathurbhujadoss & Co., (1928) 55 IA 32, 107 IC 29, AIR 1928 PC 30 (a case of patta-patti transactions in Madras); Chimanlal Purshottamdas v. Nyamatrai Madhavlal, AIR 1938 Bom 44, 39 Bom LR 1083, 173 IC 205; Firm Ram Krishna Das Jawahar Lal v. Firm Mutsaddi Lal Murli Dhar, AIR 1942 All 170; Khimji Punja & Co. v. Maun Devshi Bhanji, AIR 1950 Kutch 24; TK Narayanan v. Alleppey Chamber of Commerce, AIR 1952 Tr & Coch 435; Sheo Narain v. Bhallar, AIR 1950 All 352; EL Ebrahim Lebbe Marikar v. Austin De Mel Ltd, AIR 1946 PC 63, 224 IC 466; Bullion and Grain Exchange Ltd v. State of Punjab, [1961] 1 SCR 668 at 671, AIR 1961 SC 268; Buddulal Goerlal Mahajan Dhar v. Shrikisan Chandmal, AIR 1961 MP 57; Jethmal Madanlal Jokotia v. Nevatia & Co., AIR 1962 AP 350; Sukhram v. Baldeodas Manilal, AIR 1957 MP 138 (onus on party pleading contract is a wagering contract); Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406 at 415, AIR 1959 SC 781 at 784. 26 Bullion and Grain Exchange Ltd v. State of Punjab, [1961] 1 SCR 668, AIR 1961 SC 268; Buddulal Goerlal Mahajan Dhar v. Shrikisan Chandmal, AIR 1961 MP 57. 27 Modi Co v. Union of India, [1968] 2 SCR 565, AIR 1969 SC 9. 28 Thakkar Hemraj Keshavji v. Shah Haridas Jethabhai, [1964] 2 SCR 686, AIR 1964 SC 1526; Uma Satyanarayanamurty v. Kothamasu Sitaramayya & Co., (1950) 1 Mad LJ 557; Boddu Seetharamaswami v. Bhagvathi Oil Co., ILR (1951) Mad 723; Hussain Kasam Dada v. Vijayanagram Commercial Association, AIR 1954 Mad 528. 29 Duni Chand Rataria v. Bhuwalka Bros Ltd., [1955] 1 SCR 1071 at 1081, AIR 1955 SC 182 at 187.
Intention to Wager The nature of the contract depends upon the intention of the parties at the time of making the contract.30 Such common intention may be express or may be implied from the course of dealings and other circumstances on record.31 It may also be gathered from the position of the parties and the history of the dealings.32 Though an agreement in writing may ostensibly be for the purchase and sale of goods deliverable on a certain day, oral evidence is admissible to prove that the intention of the parties was only to pay the difference, the burden of proof, of course, being on the party who alleges that it was a wager.33Such 'intention' is a 'fact' within the meaning of s. 3 of the Indian Evidence Act, 1872 [see clause 1, illustration (d)], and it may be proved by oral evidence under proviso 1 of s. 92 of that Act, because if proved, it would invalidate the agreement under the provisions of the section now under consideration.34 The courts should lean towards a construction favouring the validity of the contract rather than its illegality.35 As regards approach of the court, it has been observed:36In this class of suits it would be almost idle to expect to get at the truth unless the court takes the widest possible outlook consistent with the provisions of the Indian Contract Act ; otherwise the result would be that the statute could be violated with impunity by the simple and habitual device of cloaking wagers in the guise of contracts.37 In Doshi Talakshi v. Shah Ujamsi Velsi, 38 while admitting evidence to show that, with one doubtful exception, no contracts similar to those in the suit were completed otherwise than by payment of differences, it was stated:
We are not ... bound by the mere formal rectitude of the documents if in fact there lurks behind them the common intention to wager, and parties cannot be allowed to obtain from the courts any sanction for their wagers merely because they use a form which is not a true expression of their common purpose and intention. The 'surrounding circumstances and the position of the parties and the history of dealings of this class are legitimate, though not exclusive, matters for our investigation into the true intention of the parties.
The conduct of the parties in the matter of the transaction in question is relevant, for if no delivery is asked for or offered, the presumption is that the transaction was a wager on the rise or fall of the market.39 There can be no question of a wager, if a substantial part of the goods has been delivered.40 In Motilal Partabchand v. Govindram Jeychand, 41 the fact that the plaintiff took the panch
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rate as the measure of his damages, and not the market rate, was held to be a plain indication that the parties never intended to give and take delivery. The means and ability of the parties to perform the contract in question are also relevant,42 as also The general character of the plaintiff's business is also material, for if it appears that the normal and regular course of the plaintiff's transaction was to pay and receive differences only, the presumption is that the transaction in question was merely a bargain for differences. This presumption was applied in a case where the plaintiff dealt in several lakhs of government paper, and the evidence showed that he neither delivered nor received government paper except on one single occasion just before he brought the suit;43 and in a case where the plaintiff's transactions in linseed amounted to about 350,000 cwts in two years, and the only linseed actually delivered during that period was 2,219 cwts, and that, too, under exceptional circumstances.44 To determine the general character of the plaintiff's business, the court ought to inquire how other contracts that may have been entered into by the plaintiff with the same defendant, or even with third parties, and relating to the goods in question, were previously performed by the plaintiff, whether by payment of differences or by delivery of goods. Thus, where it appeared that at the vaida for which the contracts in question had been made, the plaintiff had neither given nor taken any delivery of any cotton, it was held that the evidence tendered by the plaintiff to show that at other vaidas he had given and taken delivery of cotton was admissible, and that the lower court was wrong in excluding this evidence.45 Upon the same principle, evidence is admissible to show that in the case of a particular class of contracts, or of contracts relating to a particular commodity, the normal course of dealing is to pay differences only. Thus in Motilal Partabchand v. Govindram Jeychand, 46 where the question was whether certain forward contracts between two Marwari firms for the sale and delivery of linseed were gambling transactions, evidence was admitted which showed that contracts of similar form were commonly made in the Marwari Bazar in Bombay in samvat 1957 with no intention of giving or taking delivery of linseed, but with the sole object of gambling in differences. This evidence was objected to on the ground that it was res inter alios acta, but the objection was overruled, and Bachelor J. observed:
In admitting this evidence as to the real character of precisely similar agreements made under the same conditions of time and place and circumstances I do not think that I am straining the provisions of the Evidence Act, e.g., s. 7,47 and I may call in aid a passage from the judgment of Jenkins CJ in Doshi Talakshi's case;48 there the learned Chief Justice, in speaking of the 'surrounding circumstances' of the agreements in that case, says that these circumstances 'and the position of the parties and the history of dealing of this class are legitimate, though not exclusive, matters for our investigation into the true intention of the parties.49
In E Sassoon v. Tokersey Jadhawjee, 50 evidence was admitted which showed that in contracts for the sale and purchase of American cotton incorporating the rules of the Liverpool Cotton Association, delivery does take place to a considerable extent. In Kong Yee Lone & Co v. Lonjee Nanjee, 51 the defendants--rice millers, entered into several contracts with the plaintiff--rice trader during seven weeks in June, July and August 1899, for the sale of 199,000 bags of rice at various prices, aggregating more than five crore rupees, and the latest delivery was to be on 7 October, 1899. The defendants had a small mill capable of putting out 30,000 bags in a month. The rice was to be delivered from a number of specified mills, in which the defendants' mill was not included. In the same year, by fourteen contracts, ranging in time from January to the end of August, the defendants sold to the plaintiff 22,250 bags of rice, to be delivered from the defendants' mill. The latter contracts were all duly fulfilled by delivery and payment. None of the former contracts were performed and the defendants passed to the plaintiff a promissory note for 'difference on rice.' In a suit upon the note, the Privy Council held that the consideration for the note was a number of wagering contracts within the meaning of the present section. It observed:
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Now the output of the firm itself would not be much over 60,000 bags during the currency of the contracts; and they (defendants) had dealings with other persons besides the plaintiff. The capital of the firm as stated was a trifle more than a lac of rupees. The cost of the goods would be that amount multiplied five hundredfold. It is possible for traders to contemplate transactions so far beyond their basis of trade, but it is very unlikely. In point of fact, they never completed, nor were they called on to complete, any one of the ostensible transactions. The rational inference is that neither party ever intended completion. When the two classes of contracts are compared, the one class suitable to traders, such as the defendants, and fulfilled by them, the other extravagantly large and left without any attempt at fulfilment, the rational inference is strengthened into a moral certainty.
and further:52
If the circumstances are such as to warrant the legal inference that they never intended any actual transfer of goods at all, but only to pay or receive money between one another according as the market price of the goods should vary from the contract price at the given time, that is not a commercial transaction, but a wager on the rise or fall of the market.
In Doshi Talakshi v. Shah Ujamsi Velsi, 53 certain contracts were entered into in Dholera for the sale and purchase of Broach cotton, a commodity which, it was admitted, never found its way either by production or delivery to Dholera. The contracts were made on terms contained in a printed form which incorporated the rules framed by the cotton merchants of Dholera. Those rules expressly provided for the delivery of cotton in every case, and forbade all gambling in differences. The course of dealings was, however, such that none of the contracts was ever completed except by payment of differences between the contract price and the market price in Bombay on the vaida (settlement) day. It was held upon these facts that the contracts were by way of wager within the meaning of this section. Jenkins CJ, said:
Here in each case the contract was made at Dholera, between mean of Dholera, and under the rules of Dholera, and from the evidence we know that the witnesses who have been called have not been able to indicate with certainty or even to suggest, with one doubtful exception, a single instance since the formulation of those rules in 1892 in which any one of the numerous contracts similar to that with which we are now dealing has been completed otherwise than by payment of differences. Is it an unnatural or strained inference to draw from these facts that behind these apparently innocent documents there is a tacit and recognised understanding according to which parties who enter into these contracts do so without any intention of performing them otherwise than they have consistently and without exception been performed, that is to say, by payment of differences? In my opinion that is the reasonable and natural inference to be drawn; it agrees with the experience of the past; and it represents the act ual results in the particular instances we are now considering.54
No Presumption of Intention to Wager On the other hand, the modus operandi may be such as to raise a presumption against the existence of a common intention to wager. Where agreements of a speculative character are entered into through the medium of brokers, and when, according to the practice of the market, the principals are not brought into contact with each other, they do not know the name of the person with whom they are contracting 'until after the bought and sold notes are executed. Under such circumstances, when a party launches his contract orders he does not know with whom the contracts would be made.55 And this presumption is considerably strengthened when the broker is authorised by the principal to contract with third persons in his (the broker's) own name; for the third person may in such case remain undisclosed even after the contract is made.56 The fact that in the past transactions no
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delivery was given or taken cannot alone be sufficient to presume the wagering nature of a later transaction.57 The mere fact that in certain contingencies delivery could be asked for would still not render the contract enforceable.58 The presumption against a wager was applied in a case where the transactions were in government paper to the extent of about half a crore of rupees, and the plaintiff was both stockbroker and stockjobber, and the defendant was a stockjobber. The magnitude of the transactions in the case was set up by the defendant to support the contention that the transactions were by way of wager, and reliance was placed on the Privy Council decision in Kong Yee Lone's case.59 But the contention was overruled and the court said:
In the Privy Council case the defendant was a rice miller or a producer by trade, and the wager related to quantities of rice enormously out of proportion to his output and capital, deliverable at option from a number of specified mills. Here there is, I think, sufficient proof that the defendant was known in the market as the largest of jobbers,60 and the capital available for the purchases which he bargained for was at least presumably to be supplied by the constituents for whom a jobber is ordinarily supposed to be acting.61
But the presumption may be rebutted by evidence of a common intention to wager, though the contract has been brought about by a broker. In Eshoor Doss v. Venkatasubba Rau, 62 the same broker had act ed for both the plaintiff and the defendant, and it was found that, though the parties were not brought into contract at the time defendant contracted to sell government paper to the plaintiff, each had made inquiry beforehand of the broker, not whether the other would be able to deliver government paper, but whether he would be able to pay differences. This circumstance was deemed sufficient to establish that the intention on either side was to pay differences only. In Re Gieve,63 the contract in terms gave the buyer an option to demand delivery upon the payment of a small excess commission. It was argued that even if the contracts were for the payment of differences only, the power in either party to turn them into real contracts by insisting upon delivery prevented them from being wagering contracts, but the Court of Appeal disallowed the contention. Lindley MR said, 'It is a gaming transaction plus something else.'64 The case must be distinguished from that of a forward contract for the sale of goods, with the condition that if the seller fails to give the delivery order in time the contracts shall be settled by payment of the difference between the contract rate and the market rate prevailing on the due date. In such a case, if the seller forwards the delivery order in time to the buyer, no question arises as to payment of differences, and the contract, it has been held, is not a wagering contract.
As observed by Scott CJ:
There is no authority for the proposition that because under the terms of a contract an obligation to pay or receive differences may arise on the happening of a particular event, the contract is void as a wager, if that event does not arise. Such a result would be inconsistent with the principle underlying s. 57 of the Indian Contract Act.65 However, what if the seller fails to send the delivery order in time, in which case the contract is to be settled by payment of difference? The point arose in Chapsey Purbut v. Gill & Co, 66 where it was held that in such a case the agreement was by way of wager. That was a case of forward contract for the sale of cotton with the condition that 'if before the maturity of the contract either party thereto shall suspend payment or become bankrupt or insolvent, the other party...shall be bound to forthwith close the contract and when the contract is thus closed, the measure of damages shall be the difference between the market price current at the time of closing for similar goods for delivery at the time named in the contract so closed and the rate named in the contract... the damages ascertained as aforesaid shall become at once payable to or by the party closing the contract.'
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The seller suspended payment before the due date and subsequently sued the buyer to recover the difference. It was held that the contract was a wager.67 In Firm Pratapchand Nopaji v. Firm of Kotrike Venkata Shetty & Sons, 68 the defendant appointed the plaintiffs as his commission agents to do business according to custom of badla of the Bombay market. He also authorised the plaintiff to do business through subagents on commission basis. Both parties knew that their object was to indulge in speculative transactions. It was held that there was no wagering contract between the plaintiffs and the defendant. In a wagering contract, there has to be mutuality in the sense that the gain of one party would be the loss of the other on the happening of a certain event which is the subject matter of a wager. The court held that the contract was not a wagering contract and observed, 'speculation does not necessarily involve a contract by way of wager, and to constitute such a contract a common intention to wager is essential. No such intention has been proved.'69 Intention of Both Parties To bring the contract under s. 30, it is necessary that the common intention of both parties was that no delivery or acceptance shall take place and that the mere differences in price shall be paid. It is not sufficient if the intention to gamble exists on the part of only one of the contracting parties.70'Contracts are not wagering contracts unless it be the intention of both contracting parties at the time of entering into the contracts under no circumstances to call for or give delivery from or to each other.'71 It is not necessary that such intention should be expressed. But later, exception was taken to the words 'under no circumstances' as overstating the requirement of law,72 and too wide and liable to render the provisions of this section nugatory if taken literally.73 On the other hand, the statement was approved as perfectly correct and that 'before a court can hold a contract, on the face of it genuine, or at any rate not clearly wagering as the contract in Re Gieve74 was, to be a wagering contract, the court must be satisfied that the intention of the parties was in no circumstances either to give or take delivery.'75 Both the parties must clearly understand not only that no delivery is ordinarily to be given or taken, but that none could even be asked for under any circumstances.76 Transferability From the mere absence of a provision in a contract expressly prohibiting transfer against delivery orders, railway receipts or bills of lading, it cannot be inferred that the contract is transferable. Transferability of a contract would depend upon the language of the contract interpreted in the light of surrounding circumstances. This also applies to the Saurashtra Groundnut Control Order, 194977 and to an order under Forward Contract (Regulation) Act of 1952, relating to jute goods.78 In Modi Co v. Union of India, 79 the court held that such contract was not void and illegal under s. 30 of Contract Act.80 The circumstances from which non-transferability was concluded were:(i) The contract could not be sub-let nor even be assigned by the contractor; the bags were intended for food grains which were arriving in bulk at an Indian port.(ii) Shipment had to be made by a vessel to be nominated by the buyers.(iii) A provision of prior inspection of the goods by Inspector of ATIGS.(iv) Arrangements for shipping of goods approved by Inspectors.(vi) The consignee of the goods was the Assistant Director of Storage.(vii) Price was to be paid by the government.(viii) This was in spite of bill of landing being transferable. Teji Mandi Transactions Teji mandi contracts were described in Pirthi Singh-Jamiat Rai v. Matu Ram 81 as follows:
...one party pays a premium to the other party thus acquiring an option to buy and sell, as he decides, a certain quantity of gold at certain rate on a certain date. Either on, or some date prior to, that date the purchaser decides whether he will buy or sell. According to his decision, communicated to his broker, the broker enters into a contract with some third person in order to meet the situation. On the due date the parties can either
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take or give delivery of the stipulated quantity of gold or settle on the difference.
Earlier, such transactions were held wagers and therefore void.82 But later presumption is that a teji mandi is not a mere wagering transaction;83 and this, it is submitted, is the correct rule. Nazarana or cali transactions in Ujjain are similar to teji mandi contracts of the Bombay market and by themselves are not necessarily wagering contracts.84 In Suganchand v. Fulchand, 85 it was held that the contracts in gold made in the Indore market were not wagering contracts, because the rules on the basis of which transactions in gold are conducted in Indore market provided that all the contracts outstanding on the date of maturity will be performed by delivery, unless already squared. The test is the same as for determining a wagering contract, i.e., a common intention of the parties that in no case delivery be given or taken, but that in all cases, differences be paid.86 Agreements between pakka adatia and his constituents Though initially a pakka adatia was held merely an agent of his constituent, in Bhagwandas Narotamdas v. Kanji Deoji, 87 it was held on the evidence of custom that as regards his constituent, the pakka adatia was a principal and not a disinterested middleman bringing two principals together. Since then it has been held that a transaction between a pakka adatia and his constituent may be a wager like any other transaction between two contracting parties, and that the existence of the pakki adat relationship does not of itself negative the possibility of a contract being a wagering contract as between them.88 The same view has been taken by the High Court of Allahabad,89 and the east Punjab High Court,90 and the Madhya Pradesh High Court.91 The rule of wagering contracts can apply to contracts between a pakka adatia and his constituents.92 Trading of derivatives and financial instruments Contracts in derivatives are legal and valid if traded on a recognised stock exchange or settled on the clearing house of the recognised stock exchange, in accordance with the rules and bye-laws of such stock exchange.1 Master circulars of the Reserve Bank of India enable and permit transactions in derivatives and financial instruments for transferring or hedging risk. Hence they are not void, on the principle that what is expressly permitted by law cannot be void.2 Interest-rate Swap Agreements In Hazell v.Hammersmith and Fulham London Borough Council,3 an interest rate swap agreement has been described:
An interest rate swap agreement is an agreement between two parties by which each agrees to pay the other on a specified date or dates an amount calculated by reference to the interest which would have accrued over a given period on the same notional principal sum assuming different rates of interest are payable in each case. For example one rate may be fixed at 10 per cent and the other rate may be equivalent to the six month London Inter-Bank Offered Rate (LIBOR). If the LIBOR rate over the period of the swap is higher than 10 per cent, then the party agreeing to receive 'interest' in accordance with LIBOR will receive the 10 per cent. Normally neither party will in fact pay the sums which it has agreed to pay over the period of the swap, but instead will make a settlement on a 'net payment basis' under which the party owing the greater amount on any day simply pays the difference between the two amounts due to the other.
This transaction enables traders solve financial problems arising out of variation in interest rates, currency exchange rates, different taxation regimes and rates of inflation and different creditworthiness. In a simplest case, a bank which found it easy to raise fixed finance would swap its interest obligations with a company which could only borrow at variable rates, but for commercial reasons needed the certainty and security of fixed rates.4 It has been held that interest rate swap contracts entered into by parties or institutions involved in the
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capital market and in making and receiving loans are commercial and financial transactions which the law would enforce, and cannot be inferred to be of gaming or wagering nature, because the main purpose of the contract was not wagering, but financial and commercial transactions.5 30 Narainrao v. Seth Hanumantram, AIR 1930 Nag 273 at 276. 31 Suganchand v. Fulchand, AIR 1957 MP 194. 32 Firm Gurdas Mal-Ram Lal v. Ram Lal, AIR 1925 Lah 564. 33 Gangadas Narayandas v. Jekisondas Mancharam, AIR 1923 Bom 458, (1923) 25 Bom LR 520, 73 IC 1032. 34 Anupchand Hemchand v. Champsi Ugerchand, (1888) 12 Bom 585, dissenting from Juggernauth Sew Bux v. Ram Dyal, (1883) 9 Cal 791; Maganbhai v. Manchhabhai, (1866) 3 BHCOC 79; Universal Stock Exchange Ltd. v. Strachan, [1896] AC 166, [1895-99] All ER Rep 751. 35 Balvant Vishnu v. Mishrilal Shivnarayan, AIR 1925 Bom 115. 36 Hurmukhrai Amoluckchand v. Narotamdas Gordhandass, (1907) 9 Bom LR 125 at 137. 37 Per Bachelor J, in Motilal Partabchand v. Govindram Jeychand, (1905) 30 Bom 83 at 99. 38 (1899) 24 Bom 227 at 230. 39 Motilal Partapchand v. Govindram Jeychand, (1905) 30 Bom 83 at 95; Eshoor Doss v. Venkatasubba Rau, (1895) 18 Mad 306 at 309. 40 Shewkissen Mohata v. Mangalchand Maloo, AIR 1941 Cal 341, 195 IC 885. 41 (1905) 30 Bom 83 at 96. 42 Kong Yee Lone & Co v. Lowjee Nanjee, (1901) 28 IA 239, (1901) 29 Cal 461 at 467, 469; Kesarichand Nathu v. Merwanjee Naorojee, (1899) 1 Bom LR 263 at 264; Perosha Cursetji Parakh v. Maneckji Dossabhoy Watcha, (1898) 22 Bom 899 at 907; Lal Chand Gela Ram v. Nathu Ram, AIR 1916 Lah 329. 43 Eshoor Doss v. Venkatasubba Rau, (1895) ILR 18 Mad 306 at 308, 309. 44 Motilal Partabchand v. Govindram Jeychand, (1905) 30 Bom 83 at 93, (1905-06) ILR 29-30 Bom 459. 45 Chandulal Suklal v. Sidhruthrai Sooranrai, (1905) 28 Bom 291, (1905-06) ILR 29-30 Bom 187. 46 (1905) 30 Bom 83 at 92. 47 'Facts which ... constitute the state of things under which they (facts in issue) happened, are relevant.' 48 Doshi Talakshi v. Shah Ujamsi Velsi, (1899) 24 Bom 227 at 231. 49 Motilal Partabchand v. Govindram Jaychand supra . 50 (1904) ILR 28 Bom 616, 624. 51 (1901) 28 IA 239 at 244, (1901) 29 Cal 461 at 469 (PC) (from Rangoon). 52 (1901) 29 Cal 461 at 467. 53 (1899) 24 Bom 227 at 231-32. 54 Cf Firm Bashi Ramjai Ram Das v. Ram Sahai, AIR 1934 Lah 85, 154 IC 384; Chimanlal Purshottamdas v. Nyamatrai Madhavlal, AIR 1938 Bom 44, 39 Bom LR 1083, 173 IC 205. 55 JH Tod v. Lakhmidas Purshotamdas, (1892) ILR 16 Bom 441, 446. 56 Perosha Cursetji Parakh v. Maneckji Dossabhoy Watcha, (1898) ILR 22 Bom 899 (contract in the name of the principal). 57 Kundan Mal v. Qadir Ahmad Ali, AIR 1924 Nag 290; Hasanali Kurjibhai v. Ratilal Nyalchand Chitalia, AIR 1953 Sau 141; Sukhram v. Baldeodas Manilal, AIR 1957 MP 138. 58 Diwan Bahadur Govindoss Chathurbhujadoss d' Co v. Sukhdevadoss Ramprasad, AIR 1926 Mad 326. 59 (1901) 28 IA 239, (1901) 29 Cal 461.
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60 The evidence showed that seven lakhs would be a small day's turnover for a big jobber in an act ive market. 61 Dady Rustomjee Dady v. Madhuram Mathoordas, (1903) 5 Bom LR 768. 62 (1895) ILR 18 Mad 306. 63 [1899] 1 QB 794. 64 [1899] 1 QB 794 at 800. 65 Joshi Narbadashankar Hurjivan v. Mathuradas Gokuldas, (1910) 34 Bom 519 at 533, (1910) 12 Bom LR 1058, in appeal from Modhuradas Gokuldas d' Co. v. Narbadashankar Harjivan, (1909) 11 Bom LR 997. 66 (1905) 7 Bom LR 805; in appeal from (1905) 7 Bom LR 154. 67 Firm Hira Lal-Umrao Singh v. Firm Sri Ram-Brij Mohan Lal, AIR 1925 All 102, (1925) 86 IC 656. 68 [1975] 3 SCR 1, AIR 1975 SC 1223 at 1227. 69 Quoting with approval from Bhagwandas Parasram v. Burjorji Ruttonji Bomanji, (1918) 45 IA 29 at 33, AIR 1917 PC 101 at 106, ILR 42 Bom 373, 44 IC 284. 70 Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406, AIR 1959 SC 781 at 784; Bhagwandas Parasram v. Burjorji Ruttonji Bomanji, (1918) 45 IA 29, AIR 1917 PC 101 at 102, ILR 42 Bom 373, 44 IC 284 (common intention is required); Kong Yee Lone & Co v. Lowjee Nanjee, (1901) 28 IA 239, (1901) 29 Cal 461 at 467 (PC). 71 JH Tod v. Lakhmidas Purshottam Das, (1892) 16 Bom 441 at 445, 446; Ajudhia Prasad v. Lalman, (1902) 25 All 38; E Sassoon v. Tokersey Jadhawjee, (1904) 28 Bom 616; Motilal Partabchand v. Govindram Jeychand, (1905) 30 Bom 83; Hurmukhrai Amoluckchand v. Narotamdas Gordhandass, (1907) 9 Bom LR 125; Kesarichand Nathu v. Merwanjee Naorojee, (1899) 1 Bom LR 263; Meghji Vallabdas v. Jadhowji Morarji, AIR 1930 Nag 111, (1910) 12 Bom LR 1062. Therefore, a contract cannot become a wager by any subsequent matter; Rangasa v. Hukumchand, AIR 1930 Nag 111, (1929) 120 IC 406. 72 Motilal Partabchand v. Govindram Jeychand, (1905) 30 Bom 83 per Bachelor J, at 90. 73 Hurmukhrai Amoluckchand v. Narotamdas Gordhandass, (1907) 9 Bom LR 125 per Davar J, at 136-37. 74 [1899] 1 QB 794. 75 Mathuradas Gokuldas & Co v. Narbadashankar Harjivan, (1909) 11 Bom LR 997 per Beaman J at 1004; Lockwood v. Cooper, [1903] 2 KB 428 at 431 (players must have an even chance of winning or losing); Ismail Lebbe Marikar Ebrahim Lebbe Marikar v. Bartleet & Co., (1942) 199 IC 574, AIR 1942 PC 19 at 21 (ordinary commercial transaction); Balwant Vishnu v. Mishrilal Shivnarayan, AIR 1925 Bom 115; Chimanlal Purshottamdas v. Nyamatrai Madhavlal, AIR 1938 Bom 44, 39 Bom LR 1083, 173 IC 205; Shewkissen Mohata v. Mangalchand Maloo, AIR 1941 Cal 341, 195 IC 885; G Sirur v. AM Bhamia, AIR 1925 Mad 330, (1924) 85 IC 410; Bhagwandas Parasram v. Burjorji Ruttonji Bomanji, (1918) 45 IA 29 at 33, AIR 1917 PC 101, ILR 42 Bom 373, 44 IC 284 (speculation not necessarily a wager); Sukhdevdoss Ramprasad v. Govindoss Chathurbhujadoss & Co, (1928) 55 IA 32, 107 IC 29, AIR 1928 PC 30 (no wager as payment of differences not proved); Duni Chand Rataria v. Bhuwalka Bros Ltd., [1955] 1 SCR 1071, AIR 1955 SC 182 (symbolical or constructive delivery enough). 76 Kesarichand Nathu v. Merwanjee Naorojee, (1899) 1 Bom LR 263 at 266. 77 Thakkar Hemraj Keshavji v. Shah Haridas Jethabhai, [1964] 2 SCR 686, AIR 1964 SC 1526; Khardah Co. Ltd v. Raymon & Co (India) Private Ltd., [1963] 3 SCR 183 at 207, AIR 1962 SC 1810 at 1820. 78 Modi Co v. Union of India, [1968] 2 SCR 565, AIR 1969 SC 9, referring to Thakkar Hemraj Keshavji v. Shah Haridas Jethabhai, [1964] 2 SCR 686, AIR 1964 SC 1526. 79 [1968] 2 SCR 565, AIR 1969 SC 9. 80 Modi Co v. Union of India, [1968] 2 SCR 565, AIR 1969 SC 9 at 12. 81 (1932) 13 Lah 766, at 771, 138 IC 241, AIR 1932 Lah 356 (called nazrana contract); Sukhram v. Baldeodas ManUal AIR 1957 MP 138 (a teji mandi transaction need not relate only to gold). 82 Ramchandra Shivdar v. Gangabison Jaideo, (1910) 12 Bom LR 590; Jessiram Juggonath v. Tulsidas Damodar, (1912) 37 Bom 264 at 272. 83 Gianmal Sobhagmal v. Mukundchand Balia, AIR 1926 PC 119, 53 IA 241, ILR 51 Bom 1; Narandas Sunderlal Rathi v. Ghanshyamdas B Dalal, AIR 1933 Bom 348, 35 Bom LR 640, 147 IC 412; Lakshmi Narain v. Lala Bala Parshad, AIR 1938 Lah 825; Baldeosahai Surajmal & Co v. Radha Kishan Joharilal, AIR 1939 Bom 225, 41 Bom LR 308, 183 IC 22; Hasanali Kurjibhai v. Ratilal Nyalchand Chitalia, AIR 1953 Sau 141 at 142-3; Manilal Dharamsi v. Allibhai Chagla,
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(1922) 47 Bom 263, AIR 1922 Bom 408, 68 IC 481; Manubhai Premanund v. Keshavji Ramdas, AIR 1922 Bom 66, 24 Bom LR 60, 65 IC 682; Gianmal Sobhagmal v. Mukundchand Balia, AIR 1926 PC 119, 53 IA 241, ILR 51 Bom 1 (Kutcha aditia: not wager); Ram Prasad-Shyam Sundar Lal v. Ramji Lal, (1927) 50 All 115, 103 IC 218, AIR 1927 All 795. 84 Sukhram v. Baldeodas Manilal, AIR 1957 MP 138; Suganchand v. Fulchand, AIR 1957 MP 194. 85 AIR 1957 MP 194. 86 Manilal Dharamsi v. Allibhai Chagla, (1922) 47 Bom 263, AIR 1922 Bom 408, 68 IC 481. 87 (1905) 30 Bom 205. 88 Bhagwandas Burjorji v. Parasram Ruttonji Bomanji, (1913) 38 Bom 204, AIR 1914 Bom 319, 20 IC 834, reversed on facts only, and principle upheld by the Privy Council in Bhagwandas Parasram v. Burjorji Ruttonji Bomanji, (1918) 45 IA 29, AIR 1917 PC 101, ILR 42 Bom 373, 44 IC 284, applied in Firm Pratapchand Nopaji v. Firm of Kotrike Venkata Shetty & Sons, [1975] 3 SCR 1, AIR 1975 SC 1223 at 1233; Chhogmal Balkisondas v. Jainarayan Kanaiyalal, (1913) 39 Bom 1, AIR 1914 Bom 142, 24 IC 743; Firm Sagarmal Har Saran Das v. L Bishambar Sahai, AIR 1947 All 14, 230 IC 23; Manilal Raghunath v. Radhakisson Ramjiwan, (1920) 45 Bom 386, AIR 1921 Bom 238, 62 IC 361; Harcharan Das Somparkash v. Jai Jai Ram, ILR (1940) All 136, 188 IC 29, AIR 1940 All 182; Dhruv Chhotalal Khushalchand v. Gandhi Gulabray Pragji, AIR 1954 Sau 99 at 102. 89 Firm Ram Krishna Das Jawahar Lal v. Firm Mutsaddi Lal Murli Dhar, AIR 1942 All 170; Shaull Lal v. Madan Lal, AIR 1954 All 789. 90 Firm Ram Dev Jai Dev v. Seth Kaku, AIR 1950 EP 92(FB) . 91 Buddulal Goerlal Mahajan Dhar v. Shrikisan Chandmal, AIR 1961 MP 57 (dealing in shares); Suganchand v. Fulchand, AIR 1957 MP 194. 92 Jethmal Madanlal Jokotia v. Nevatia & Co, AIR 1962 AP 350. 1 Section 18A of the Securities Contracts (Regulation) Act, 1956. 2 Rajshree Sugars and Chemicals Ltd v. Axis Bank Ltd, AIR 2011 Mad 144. 3 [1990] 3 All ER 33, 63. 4 Hammond, Bank of England Quarterly Bulletin, 1987, quoted in Hazell v. Hammersmith and Fulham London Borough Council, [1990] 3 All ER 33. 5 Morgan Grenfell & Co. Ltd. v. Welwyn Hatfield District Council, [1995] 1 All ER 1(QBD) ; referring to Hazel Hammersmith & Fulham London Borough Council,[1990] 3 All ER 33.
Agreements Collateral to Wagering Contracts A contract collateral to a wagering agreement is not necessarily unenforceable.6Section 30 of the Contract Act is based upon the provisions of s. 18 of the (English) Gaming Act, 1845 and though a wager is void and unenforceable, it is not forbidden by law. Therefore, the object of a collateral agreement is not unlawful under s. 23 of the Contract Act .7 But it was8 otherwise under the (English) Gaming Acts of 1845 and 1892, the Act s being wider and more comprehensive in phraseology, because they expressly render void even collateral transactions.9 As a result, though an agreement by way of wager is void, a contract collateral to it or in respect of a wagering agreement is not void except in Bombay State (see below). There is nothing illegal in the strict sense in making bets. They are merely void and there would be no illegality in paying them or giving a cheque, but payment cannot be compelled.10 But an arbitration clause in a wagering contract is a part of the contract and not collateral to it and cannot therefore be enforced.11 A collateral agreement is not unlawful under s. 23 of the Contract Act. A hundi given to a bookmaker, in consideration of his withdrawing the maker's name from the Royal Calcutta Racing Club and so preventing the maker being posted as a defaulter was valid, although the amount of the hundi was the same as that of the unpaid bet;12 but in Bombay such a hundi would be void.
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Apart from a Bombay enactment,13 there is no statute declaring void agreements collateral to wagering contract. Nor is there anything in the present section14 to render such agreements void. The policy of law in India has been to sustain the legality of wagers and not to hit at collateral contracts.15 It has accordingly been held that a broker or an agent may successfully maintain a suit against his principal to recover his brokerage,16 commission, or the losses sustained by him, even though contracts in respect of which the claim is made are contracts by way of wager.17 The Supreme Court has held that18 if an agreement collateral to another or of aid in facilitating the carrying out of the object of the other agreement, which, though void, is not in itself prohibited within the meaning of s. 23 of the Contract Act, may be enforced as collateral agreement. If on the other hand it is part of a mechanism to defeat what the law has actually prohibited, courts will not countenance a claim based upon the agreement because it will be tainted with an illegality of the object sought to be achieved, which is hit by s. 23 of the Contract Act . An agreement cannot be said to be forbidden or unlawful merely because it results in a void contract. A void agreement when coupled with other facts may become part of a transaction which creates legal rights but this is not so if the object is prohibited or mala in se. In England also, agreements collateral to wagering contracts were not void before the enactment of the Gaming Act, 1892 (55 Viet c 9). Thus in Read v. Anderson, 19a betting agent, at the request of the defendant, made bets in his own name on behalf of the defendant. After the bets were made and lost, the defendant revoked the authority to pay conferred upon the betting agent. Notwithstanding the revocation, the agent paid the bets, and sued the defendant to recover the amounts thereof. It was held, that the defendant having empowered the agent to bet in his name, the authority was irrevocable, and that the agent was entitled to judgment. The statute of 1892, passed in consequence of this decision, is almost to the same effect as the Bombay Act . It is interesting to note that the statute was not passed until 27 years after the Bombay Act. It is hoped that in future, the revision of the Contract Act will corporate provisions of the Bombay Act in the present section, so as to render the law uniform on this subject in the whole of India. The Act for Avoiding Wagers (Amendment) Act, 1865 (Bombay Act, 3 of 1865) The law is, however, different in the State of Bombay. In that state, contracts collateral to or in respect of wagering transactions are prevented from supporting a suit by the special provisions of The Act for Avoiding Wagers (Amendment) Act, 1865 (Bombay Act, 3 of 1865).20 It was observed:
That Act was passed to...to close the doors of the Courts of Justice in the Presidency to suits upon contracts collateral to wagering transactions where such collateral contracts have been entered into or have arisen since the Act came into force, a purpose which it has effectually answered.21
Sections 1 and 2 of the Act are as follows:
Section 1: All contracts, whether by speaking, writing or otherwise knowingly made to further or assist the entering into, effecting or carrying out agreements by way of gaming or wagering, and all contracts by way of security or guarantee for the performance of such agreements or contracts, shall be null and void; and no suit shall be allowed in any Court of Justice for recovering any sum of money paid or payable in respect of any such contract or contracts, or any such agreements as aforesaid.
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Section 2: No suit shall be allowed in any Court of Justice for recovering any commission, brokerage, face, or reward in respect of the knowingly effecting or carrying out, or of the knowingly aiding in effecting or in carrying out or otherwise claimed or claimable in respect of, any such agreements by way of gaming or wagering or any such contract as aforesaid, whether the plaintiff in such suit be or be not a party to such last-mentioned agreement or contract, or for recovering any sum of money knowingly paid or payable on account of any persons by way of commission, brokerage, fee, or reward in respect of any such agreement by way of gaming or wagering or contract as aforesaid.
However, the transaction in respect of which the brokerage, commission, or losses are claimed must amount to a wagering agreement, and it is no answer to a suit by a broker in respect of such a claim against his principal that, so far as the defendant was concerned, he entered into the contracts as wagering transactions with the intention of paying the differences only, and that the plaintiff must have known of the inability of the defendant to complete the contracts by payment and delivery, having regard to his position and means. It must, further, be shown that the contracts which the plaintiff entered into with third persons on behalf of the defendant were wagering contracts as between the plaintiff and those third persons.22It has also been held that a deposit paid on a wagering contract cannot be recovered in a case subject to the provisions of s. 1 of the Bombay Act, whether the person suing was a winner or a loser in the transaction.23 Nor could such a deposit be recovered under s. 65 of the Contract Act; 'for if the agreement was one merely to pay differences, its nature must necessarily have been known to the plaintiff and defendant at the time when they entered into it, and they must be presumed to have known also that it was void'.24 Loans and Security A deposit made by one gambler with another, as security for the observance of the terms of a wagering agreement can be recovered, unless the amount has in fact been appropriated for the purpose for which it has been deposited.25 On the same principle, a suit will lie to recover a sum of money paid by the plaintiff for the defendant and at his request, though such sum represents the defendant's loss on a bet.26 Similarly money lent for gaming purposes,27 or to enable the defendant to payoff a gambling debt28 is recoverable. Such transactions are neither against the provisions of the present section nor of s. 23.29 The lender can bring an act ion for recovery of loan made in a foreign country to bet in a foreign country where the game is legal, e.g., for playing roulette in Monte Carlo where it was legal under the law of Monaco.30 A lender can sue in England to recover a loan made in a foreign country where the loan was given to enable the lenders to bet on a game legal in the foreign country. In Societe Anonyme Des Grands Establissements De Touquet Paris-Plage v. Baumgart, 31 a man borrowed a sum of money to play roulette at Le Touquet, which by the law of France was legal. He brought an action in England on the cheque and the loan. He later abandoned the claim on the cheque. The act ion on the loan succeeded as the loan was governed by French law. Monies Deposited The prohibition in this section against recovery of money deposited pending the event of a bet applies only to the case of winners. The winner of a wager or a bet cannot sue to recover the amount deposited by the loser with the stakeholder, but it is quite competent for the loser to recover back his deposit before the stakeholder has paid it over to the winner.32 Where a bookmaker took sums of money from a client on account of possible future losses and went into liquidation, it was held that the sums could be recovered by the client in so far as they had not yet been appropriated to any wager.33 The words 'entrusted to any person to abide by the result of a game' in this section have been held to refer only to monies deposited with stakeholders.34In a case, however, governed by the provisions of Bombay Act for Avoiding of Wagers (Amendment) Act, 1865 even a loser cannot recover back the deposit.35 Principal and Agent 'Wagers being only void, no taint of illegality attached to a transaction, whereby one man employed
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another to make bets for him; the ordinary rules which govern the relation of employer and employed applied in such a case.'36 Under s. 222 of this Act, the principal is bound to indemnify the agent against the consequences of all lawful act s. Since a wagering contract is void and not unlawful, the principal, when sued, cannot be discharged from liability on the ground that the loss on betting paid by his agent was the consequence of an unlawful act.37'The fact that a person has constituted another person his agent to enter into and conduct wagering transactions in the name of the latter, but on behalf of the former (the principal) amounts to a request by the principal to the agent to pay the amount of the losses, if any, on those wagering transactions'38 and if such payment is made, the agent is entitled to recover the amount from him. The agent's right to recover is limited to payments act ually made and enforceable liabilities incurred.39 Conversely, an agent who has received money on account of a wagering contract is bound to restore the same to his principal.40 A principal entered into several forward contracts for the purchase and sale of bullion through his agent at Indore, which resulted in a loss which the agent had to pay to third parties on behalf of the principal. The agent sued the principal for the amount paid. The defence inter alia was illegality due to prohibition of forward contracts under the Marwar law applicable to Jodhpur where the profits, if any, were payable and where the suit was filed. The Supreme Court held that all the transactions took place outside Marwar and the payments by the agent were lawful.41 Though a raffle may constitute several agreements by way of wager by the person promoting the raffle and the persons purchasing tickets with the object of winning the prize depending on the uncertain event of a draw in favour of the ticket holder, is, not by itself illegal, nor is it opposed to public policy. A collateral contract of agency for the purpose of sale of raffle tickets is therefore perfectly valid and enforceable in law.42 Partnership The same principle has been applied to collateral contracts of partnership. On dissolution of partnerships for such transactions, accounts may be ordered.43An agreement of partnership was not unlawful under s. 23 of this Act, although its object is to carry on wagering transactions, and amounts paid to third parties by a partner could be recovered from the other partners.44 According to English law, each partner is entitled to recover the share of capital unspent, but not claim an account of profits because of the gaming Act, nor can he claim repayment of amounts advanced by him and actually applied in paying bets of the partnership.45 Promissory Note for Payment of Wagering Debt Agreements by way of wager being void, no suit will lie on a promissory note for a debt due on a wagering contract. Such a note is regarded 'as made without consideration'; for 'a contract which is itself null and void cannot be treated as any consideration for a promissory note'.46 Similarly, a cheque given cannot be compelled to be paid although there is nothing illegal in paying the bet.47 A cheque drawn on an English bank could not be enforced in England, even though the lender gave the cheque to repay a loan made in a foreign country, France, to enable the borrower to bet on a game legal in the foreign country, eg, to play baccarat.48 Gambling with Stolen Money In Lipkin Gorman v. Karpnale Ltd, 49a partner in a solicitor's firm stole money from a client's account and used it to buy gaming chips from a licensed club and eventually lost the chips in the course of a lawful gaming carried on at the club's premises. It was held that since the club took money in good faith and without notice of the circumstances in which it was acquired, the club was not liable to refund the money since it had received the money for value. Where however the wager was prohibited by Act of Parliament which made winnings subject of forfeiture and imposed penalty on the winner, it was held that stolen money lost on wager was recoverable by the victim as the theft from the winner.50
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6 Ram Gopal v. Govind Das, AIR 1944 All 196 (held to be a wager); D Hormasji v. Po Hmyin, AIR 1919 Low Bur 71. 7 Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406, AIR 1959 SC 781 followed. 8 Provisions in these Acts of 1845 and 1892 that prevent enforcement of gambling contracts, have been repealed by the Gaming Contracts Act, 2005 in force in England, Wales and Scotland. 9 [1959] Supp 2 SCR 406 at 432, AIR 1959 SC 781 at 792. 10 Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406 at 421, AIR 1959 SC 781 at 787; Hyams v. Stuart King, [1908] 2 KB 696; overruled in Hill v. William Hill (Park Lane) Ltd., [1949] AC 530, [1949] 2 All ER 452. 11 Karunakumar Datta Gupta v. Lankaran Patwari, (1933) 60 Cal 856, AIR 1933 Cal 59. 12 Leicester d' Co v. SP Malik, AIR 1923 Cal 445, followed in W Banvard v. MM Moolla, (1928) 7 Ran 263, 119 IC 215, AIR 1929 Rang 241; but see Hill v. William Hill (Park Lane) Ltd., [1949] AC 530, [1949] 2 All ER 452 overruling Hyams v. Stuart King, [1908] 2 KB 696, where the facts were similar to the Calcutta case; Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406 at 421, AIR 1959 SC 781. 13 Act for Avoiding Wagers (Amendment) Act, 1865 (Bom Act, 3 of 1865). 14 The expression 'void' in the section does not mean unlawful: Pringle v. Jafar Khan, (1883) 5 All 443 at 445; Shibho Mal v. Lachman Das, (1901) 23 All 165 at 166; Juggernauth Sew Bux v. Ram Dyal, (1883) 9 Cal 791 at 796. 15 Per Subba Rao J, in Gherulal Parakh v. Mahadeodas Maiya, 1959 Supp (2) SCR 406 at 442, AIR 1959 SC 781 at 795-96. 16 Hagami Lal Ram Prasad v. Bhuralal Ram Narain, AIR 1961 Raj 52; following Gianmal Sobhagmal v. Mukundchand Balia, AIR 1926 PC 119, 53 IA 241, ILR 51 Bom 1. 17 Shibho Mal v. Lachman Das (1901) 23 All 165; Jagat Narain v. Sri Kishan Das, (1910) 33 All 219; Choudhry Bidhi Chand v. Kacchu Mal, (1923) 45 All 503, AIR 1923 All 585; Daya Ram v. Murli Dhar, (1927) 49 All 926, AIR 1927 All 823,102 IC 605; Chekka Venkataswamy v. Gajjila Nagabhushanam, (1904) 14 Mad LJ 326; Firm Bankey Lal-Nanhey Mal v. Bhagirath Mal, AIR 1940 All 95, 186 IC 511; Bhagwandas Motilal v. Deochand Gokuldas, AIR 1951 Nag 392 at 394; Pringle v. Jafar Khan, (1883) 5 All 443; Kishan Lal v. Bhanwar Lal, [1955] 1 SCR 439 at 447, AIR 1954 SC 500 (losses on bullion transaction at Indore; defence of prohibition at Jodhpur, where profits were payable, was held not applicable). 18 Firm Pratapchand Nopaji v. Firm of Kotrike Venkata Shetty d' Sons, [1975] 3 SCR 1, AIR 1975 SC 1223 at 1228. 19 [1884-85] All ER Rep 1104, [1884] 13 QBD 779. 20 Dayabhai Tribhovandas v. Lakhmichand Panachand, (1885) 9 Bom 358 at 362; Perosha Cursetji Parakh v. Maneckji Dossabhoy Watcha, (1898) 22 Bom 899 at 902; Doshi Talakshi v. Shah Ujamsi Velsi, (1899) 24 Bom 227 at 232. 21 Parakh Govardhanbhai Haribhai v. Ransordas Dulabhdas, (1875) 12 BHC 51, per Westropp CJ. at 58. 22 Perosha Cursetji Parakh v. Maneckji Dossabhoy Watcha, (1898) 22 Bom 899 at 906; E Sassoon v. Tokersey Jadhawjee, (1904) 28 Bom 616; Chimanlal Purshottamdas v. Nyamatrai Madhavlal, AIR 1938 Bom 44, 39 Bom LR 1083, 173 IC 205. 23 Dayabhai Tribhovandas v. Lakhmichand Panachand, (1885) 9 Bom 358; Ramchandra Shivdar v. Gangabison Jaideo, (1910) 12 Bom LR 590. 24 Dayabhai Tribhovandas v. Lakhmichand Panachand, (1885) 9 Bom 358 at 362. 25 SP Bhoominathan Chettiar v. KSN Chari & Co., ILR (1944) Mad 713, AIR 1944 Mad 321, 216 IC 183. 26 Pringle v. Jafar Khan, (1883) 5 All 443 (agent getting his money back from the principal), applied in Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406, AIR 1959 SC 781 at 791. 27 Subbaraya v. Devandra, (1884) ILR 7 Mad 301. 28 Beni Madho Das v. Kaunsal Kishor Dhusar, (1900) ILR 22 All 452. 29 Ibid. 30 Saxby v. Fulton, [1909] 2 KB 208, [1908-10] All ER Rep 857. 31 [1927] All ER Rep 280, [1927] 96 LJKB 789.
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32 Maung Po Hmein v. Maung Aung Mya, (1925) 3 Rang 543, 93 IC 105, AIR 1926 Rang 48 (but not after it is paid over to the winner); Ratnakalli Gurana Saheb v. Vachalapu Appala Naidu, AIR 1928 Mad 434, 109 IC 377; nor will the court discuss the correctness of the umpire's decision. 33 Re Futures index,(1985) FLR 147. 34 Srikakolapur Venkataraju v. Gudiwada Ramanujan, AIR 1918 Mad 163 (security for performance deposited by party to contract is recoverable); English decisions to the same effect are collected in Burge v. Ashley and Smith Ltd., [1900] 1 QB 744. 35 Ramchandra Shivdar v. Gangabison Jaideo, (1910) 12 Bom LR 590; Dayabhai Tribhovandas v. Lakhmichand Panachand, (1885) 9 Bom 358. 36 As cited in Sir William Anson on Law of Contracts; approved in Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406 at 416-17, AIR 1959 SC 781 at 786. 37 Telu Mal v. Subha Singh, (1880) Pun Rec No 90; Ragnath Sahal v. Mam Raj, (1895) Pun Rec No 80; Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406 at 416-17, AIR 1959 SC 781; Krishnamma Naidu v. Krishna Iyer, AIR 1960 Ker 122; Kishan Lal v. Bhanwar Lal, [1955] 1 SCR 439, AIR 1954 SC 500. 38 Parakh Govardhanbhai Haribhai v. Ransordas Dulabhdas, (1875) 12 Bom HCR 51. This case, though decided in 1875, was not decided under the Bombay Act for Avoiding Wagers (Amendment) Act, 1865, as the agreement sued upon was entered into before that Act came into operation. 39 Mutsaddi Lal Sewa Ram v. Bhagirth, (1929) 115 IC 424, 10 Lah LJ 522, AIR 1929 Lah 375; Bhagwandas Motilal v. Deochand Gokuldas, AIR 1951 Nag 392 at 394; Firm Bashi Ramjai Ram Das v. Ram Sahai, AIR 1934 Lah 85, 154 IC 384. 40 Bhola Nath v. Mul Chand, (1903) 25 All 639; Hardeo Das Nanak Chand v. Ram Prasad Shyam Sundar Lal, (1926) 49 All 438, 100 IC 774, AIR 1927 All 238; Maung Po Htaik v. Bramadin, (1929) 7 Rang 300, 119 IC 740, AIR 1929 Rang 244; R Muthuswami Pillai v. S Veeraswami Pillai, AIR 1936 Mad 486, 70 Mad LJ 433, 163 IC 251 (interest also awarded); Khitendra Nath Roy Choudhery v. Madaneswar Chatterjee, (1936) 63 Cal 1234, 169 IC 177, AIR 1937 Cal 297. 41 Kishan Lal v. Bhanwar Lal, [1955] 1 SCR 439 at 447, AIR 1954 SC 500. 42 TT Augustine v. Changanacherry Municipality, AIR 1982 Ker 307 at 309. 43 Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406 at 421, AIR 1959 SC 781; Thawaites v. Coulthwaite, [1896] 1 Ch 496; Brookman v. Mather, (1913) 29 TLR 276; Thomas v. Dey (1908) 24 TLR 272 distinguished. 44 Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406 at 432, AIR 1959 SC 781 at 788, 792; see post; Thawaites v. Coulthwaite, [1896] 1 Ch 496; Saffery v. Mayer, [1901] 1 KB 11. 45 Thawaites v. Coulthwaite, [1896] 1 Ch 496 (such an account was ordered but the Gaming Act was not considered); Saffery v. Mayer, [1901] 1 KB 11. 46 Trikam Damodar v. Lal Amirchand, (1871) 8 BHCAC 131; Perosha Cursetji Parakh v. Maneckji Dossabhoy Watcha, (1898) 22 Bom 899; Kong Yee Lone & Co v. Lowjee Nanjee, (1901) 28 IA 239, (1901) 29 Cal 461; Badridas Kothari v. Meghraj Kothari, AIR 1967 Cal 25; Rajaram Sampat Kumar Rathi v. Sha Kapoor Chandji Kishorilal, AIR 1964 AP 537, distinguishing Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406, AIR 1959 SC 781. 47 Gherulal Parakh v. Mahadeodas Maiya, [1959] Supp 2 SCR 406, AIR 1959 SC 781. 48 Moulis v. Owen, [1907] 1 KB 746; cf Browne v. Bailey, (1908) 24 TLR 644. 49 (1989) FLR 137 at 143, 167-68, [1992] 4 All ER 512. 50 Clarke v. Shee & Johnson, (1774) 1 Cowp 197.
Pleadings, Evidence and Procedure The question whether the transaction between parties was a wager is a question of fact,51 that it was agreed between the parties that no delivery was ever to be demanded or given.52 The burden of proving that a particular contract was a wagering contract is on the party alleging it to be so.53 The terms of the contract have to be proved in every case.54 The court must look at surrounding
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circumstances to infer the real nature of the transaction.55 The party who alleges that the alleged contract is a wager will be allowed to let in oral evidence to prove that it is so.56 The court must view with suspicion the defence of wagering agreement set up by the defendant who has accepted payments in successful dealing, but is now pleading so when the transaction ends in loss.57 51 Ismail Lebbe Marikar Ebrahim Lebbe Marikar v. Bartleet & Co., (1942) 199 IC 574, AIR 1942 PC 19 at 20; Eshoor Doss v. Venkatasubba Rau, (1894) 17 Mad 480 at 491; Motilal Partabchand v. Govindram Jeychand, (1905) 30 Bom 83 at 89; Gangadas Narayandas v. Jekisondas Mancharam, AIR 1923 Bom 458, (1923) 25 Bom LR 520, 73 IC 1032; Chimanlal Purshottamdas v. Nyamatrai Madhavlal, AIR 1938 Bom 44 at 46, 39 Bom LR 1083, 173 IC 205. 52 Kundan Mal v. Qadir Ahmad Ali, AIR 1924 Nag 290; Shanti Lal v. Madan Lal, AIR 1954 All 789; Nand Kishore v. Lachmi Narain, AIR 1954 Raj 24; Mannalal v. Biharilal, AIR 1956 MB 38. 53 Motilal Partabchand v. Govindram Jeychand, (1905) 30 Bom 83 at 89; Vithalsa Narayansa Dukan v. HH Raoji Bhoy & Co., AIR 1934 Nag 129; Arjunsa Raghusa v. Mohanlal Harak Chand, AIR 1937 Nag 345; Nidumukkala Venkata Rangayya v. V. Narayana, (1951) 2 Mad LJ 393; Shanti Lal v. Madan Lal, AIR 1954 All 789; Nand Kishore v. Lachmi Narain, AIR 1954 Raj 24; Mannalal v. Biharilal, AIR 1956 MB 38; Sukhram v. Baldeodas Manilal, AIR 1957 MP 138; Walyti Ram Ditta Mal v. Bhagwan Dass Rajinder Kumar, AIR 1960 Punj 471; Nand Kishore v. Lachmi Narain, AIR 1954 Raj 24; Sukhram v. Baldeodas Manilal, AIR 1957 MP 138; Hagami Lal Ram Prasad v. Bhuralal Ram Narain, AIR 1961 Raj 52. 54 Mannalal v. Biharilal, supra . 55 Chimanlal Purshottamdas v. Nyamatrai Madhavlal, AIR 1938 Bom 44 at 46, 39 Bom LR 1083, 173 IC 205. 56 Beni Madhab Dass v. Sadasook Kotary, (1905) 32 Cal 437 at 442 (FB); Chimanlal Purshottamdas v. Nyamatrai Madhavlal, AIR 1938 Bom 44, 39 Bom LR 1083, 173 IC 205; Eshoor Doss v. Venkatasubba Rau, (1894) 17 Mad 480 at 491. 57 Bisseswar Lal Kedia v. Basir Ali, AIR 1921 Cal 362.
Statutory Provisions Lotteries A lottery has been described as a scheme for distributing prizes by lot or chance. As between the adventurers, the agreement in a simple form of lottery contains an element of gambling, for all stand to lose the amount of subscriptions in favour of the winner.58 Lotteries, ordinarily understood, are games of chance in which the event to either gain or loss of the absolute right to a prize or prizes by the person concerned is made wholly dependent upon the drawing or casting of lots, and the necessary effect of which is to beget a spirit of speculation and gaming that is often productive of serious evils.59 A 'chit fund' plan under which all subscribers are repaid their capital by a fixed date, though some determined by lot get more and sooner, is not a lottery.60 Section 294A of the Indian Penal Code, 1860 (IPC) makes it penal to keep any office or place for the purpose of drawing any lottery not authorised by the government or to publish any proposal to pay any sum, or to deliver any goods, or to do or forbear doing anything for the benefit of any person on any event or contingency relative or applicable to the drawing of any ticket, lot, number or figure in any such lottery. Before the enactment of this section of the IPC, lotteries not authorised by the government were prohibited in India by the Private Lotteries Act, 1844 which declared all such lotteries 'common and public nuisances and against law.' It was repealed by the Indian Penal Code (Amendment) Act, 1870 when s. 294A was inserted in the IPC . A lottery is not unlawful in the sense of being prohibited by law. It is only in relation to s. 294A of the IPC that it becomes illegal.61The Lotteries (Regulation) Act, 1998 regulates lotteries organised or conducted by State Governments. State legislations now control and licence (and tax) lotteries, and declare that a lottery not licenced under those legislations would be unlawful. Where a particular association was authorised by the Government of India by a letter to hold a lottery, the effect was that
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no prosecution would lie under the criminal law. But a sale or purchase of a ticket in such a lottery would still be a wagering contract under this section as well as under the Bombay Act; for the government could not, by a letter, overrule the Central Act or the Acts of the Provincial Legislature.62 In BR Enterprises v. State of Uttar Pradesh, 63 the Supreme Court has stated that even in state-sponsored lotteries, there is an element of chance with no skill involved. The measures provided in the legislations are only meant to inculcate faith in the participants that the lottery is being conducted fairly with no possibility of fraud, misappropriation, and assure the hopeful recipients of high prizes that all is fair and safe. It stated:
The lotteries authorised by the state also has a sanction in law. A ... gambling may be taxed and may be authorised for a specified purpose, but it would not attain the status of trade like other trades or become res commercium.
Relying upon this observation, it has been held that an agreement for payment of prize won on a lottery ticket was in the nature of a wager and unenforceable under this section even if the lottery was organised by the state.64 In Kamakshi Achari v. Appavu Pillai, 65 an agreement between 20 persons provided that each should subscribe Rs. 200/- by monthly installments of Rs. 10/-, and that each in his turn, as determined by lot, should take the whole of the subscriptions for one month. The defendant contributed Rs. 10/every month for a period of 10 months, and in the tenth month he got his lot of Rs. 200/-. Thereupon a bond was taken from him by the plaintiff, who was the agent in the business, for the remaining Rs. 100/- in order to ensure the future regular payment of monthly installments for a further period of ten months. In a suit upon the bond it was contended that the transaction was illegal as being a lottery within the meaning of the Private Lotteries Act, 1844 and that the suit therefore could not be maintained. It was held that the transaction did not amount to a lottery. The court said:
Here no such lottery appears to have taken place. It is not the case of a few out of a number of subscribers obtaining prizes by lot. By the arrangement all got a return of the amount of their contribution. It is simply a loan of the common fund to each subscriber in turn, and neither the right of the subscribers to the return of their contributions nor to a loan of the fund is made a matter of risk or speculation. No loss appears to be necessarily hazarded, nor any gain made a matter of chance.
Prize-chits and Money Circulation Schemes The Prize-chits and Money Circulation Schemes (Banning) Act, 1978 bans prize-chits and money circulation schemes or enrolment as members or participation therein; contravention of which is punishable. Prize-chit is a form of lottery. Its basic feature is that the foreman or promoter who ostensibly charges no commission collects regular subscriptions from the members; once the member gets the prize, he is often not required to pay further installments and his name is dropped from the further lots.66 A prize-chit includes any transaction or arrangement under which a promoter collects monies in a lump sum or installments in any manner, and utilises the monies so collected or income from the monies for:
(i) (ii)
giving a specified number of subscribers determined by lot or draw, prizes or gifts in cash or in kind; or refunding to the subscribers as having not won any prize or gift, the whole or part of the
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subscriptions on the termination of the scheme. A money-circulation scheme means any scheme for the making of quick or easy money, or for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions. The Act excepts conventional chits in which the person responsible for the conduct of the chit enters into an agreement with a specified number of subscribers, and each subscriber is liable to subscribe a certain amount for a definite period, and each is entitled to a prize amount. Prize Competitions The Prize Competitions Act, 1955 provides for control and regulation of prize competitions. A prize competition is a competition (whether called a crossword prize competition, a missing-word prize competition, a picture prize competition or by any other name) in which the prizes are offered for the solution of any puzzle based upon the building up, arrangement, combination or permutation, of letters, words or figures. The Act prohibits prize competitions where prizes offered exceeds the amount specified; and requires licenses for conducting those for prizes below that amount. Contravention of this prohibition is punishable. It has been held that the Act applies to competition in which success does not depend to any substantial degree of skill, and not to competitions in which success depends upon a substantial degree of skill.67 58 Halsbury's Laws of England, vol 4, fourth edn, para 4. 59 Kamakshi Achari v. Appavu Pillai, (1863) I Mad HCR 448. 60 Narayana Aiyangar v. K Vellachami Ambalam, (1927) 50 Mad 696, 103 IC 318, AIR 1927 Mad 583; Durga Venkataramana v. Kedari Setti Sanyasayya, AIR 1934 Mad 136, 66 Mad LJ 76, 149 IC 489. 61 Sesha Ayyar v. Krishna Ayyar, AIR 1936 Mad 225(FB) . 62 Dorabji Jamshedji Tata Ltd v. Edward F Lance, (1918) 42 Bom 676, AIR 1917 Bom 138, 41 IC 869 (the lottery in this case was a War Loan lottery); but see Halsbury's Laws of England, Vol. 9(1), 4th edn, Reissue, 30 June 1998, CONTRACT, para 879 (a winner of a lottery which is not prohibited by a statute, can sue for his winnings at common law); and see: 'An entry into a lottery not a wagering contract' supra. 63 AIR 1999 SC 1867. 64 Subhash Kumar Manwani v. State of Madhya Pradesh, AIR 2000 MP 109, relying on Dorabji Jamshedji Tata Ltd v. Edward F Lance, (1918) 42 Bom 676, AIR 1917 Bom 138, 41 IC 869. 65 (1863) 1 Mad HCR 448. 66 Statement of Objects and Reasons of the Act . 67 RMDC Hamarbaugwala v. Union of India, AIR 1957 SC 628, 631-32, [1957] SCR 930.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER III Of Contingent Contracts/S. 31.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER III Of Contingent Contracts S. 31.
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&uot;Contingent contract&uot; defined-A &uot;contingent contract&uot; is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. Illustrations A contracts to pay B Rs. 10,000/- if B's house is burnt. This is a contingent contract.
General What are described as 'contingent contracts' in this chapter are familiar to English law as 'conditional promises'1 or 'conditional agreements'.2A contractual promise may be absolute or conditional. A conditional promise is one where the liability to perform the promise depends upon some thing or event which may or may not happen, or on one of the parties doing or abstaining from doing an act . A contract of insurance is an example of a contingent contract,3 where the liability of the insurer depends upon the occurrence of the event, viz. damage or destruction arising out of fire. A contract of indemnity to make good the loss arising out of the conduct of the indemnity holder is a contract contingent upon the act of a party. Such condition may be express or may also be implied into a contract. A contract for storage of potatoes in a cold storage cooling system was held subject to an implied condition that it could be performed only when there was continuous electric supply.4 A 'contingent condition' may produce a number of effects:5 First, it may prevent formation of contract, in which case it is a condition precedent to the formation of contract, e.g., an agreement 'subject to contract' or 'subject to confirmation or approval'.6 When parties enter into an agreement on the understanding that some other person shall be a party to it, there is no contract if the other person does not join in the agreement.7 No contract comes into existence until the contingency occurs. Secondly, one party may assume an immediate unilateral obligation subject to a condition. Here, the fulfillment of the condition depends upon the will of the option holder, viz., an option of a hire-purchaser, or of a purchaser under a 'sale or return' transaction. The other party cannot withdraw. It may also depend upon the discretion of any of the parties. Thirdly, the parties may enter into an immediately binding contract; and either the operation of the contract is made to depend upon the happening of the specified event, viz. a contract for transfer of agricultural land 'subject to permission of an authority', or the liability under the contract is to arise after the occurrence of the event, viz. the liability of an insurance company to pay policy amount on occurrence of a fire. In the second and third types, there is a binding contract between the parties. The chapter deals with contingencies arising under a binding contract and covers a third of the cases mentioned above, and illustration (c) to s. 32 and illustration (b) to s. 36 seem to suggest that it would apply in the second type of cases also. 1 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, CONTRACT, para 962. 2 Chitty on Contracts, 28th edn., p. 150, paras 2-134 to 2-44. 3 Commr of Excess Profits Tax v. Ruby General Insurance Co. Ltd., AIR 1957 SC 669, p. 673. 4 State of Assam v. Mukunda Oja, AIR 1997 Gau 113. 5 Anson's Law of Conract, 29th edn., 2010, p. 140. 6 See s. 7, under the heading: 'Acceptance Subject to Confirmation or Approval' and 'Acceptance Subject to Formal Document'. 7 Jainarain Ram Lundia v. Surajmull Sagarmull, (1949) FCR 379, 51 Bom LR 979, AIR 1949 FC 211 (where however, it was held that no such understanding had been established, and therefore, specific performance was decreed).
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Effect of Such a Condition If the operation of the contract or the liability under it is subject to such a condition, first, there is no duty on either party to perform their respective promises under the contract before the event occurs. An agreement to sell 1000 shares of a bank held by the plaintiff at Rs. 50/- per share within 12 months of the conversion of the bank into a finance corporation or in default to buy them himself at that rate was a contingent contract. First, the plaintiff's liability did not arise at the time of the agreement, and the contingent liability would ripen into a perfect obligation at the end of 12 months.8 Secondly, neither party undertakes that the condition or event will occur. Thirdly, neither party can withdraw unilaterally from the contract before the occurrence of the event occurs. 8 Jethalal C Thakkar v. RN Kapur, AIR 1956 Bom 74.
Subsidiary Obligations However, even if the obligations under the main contract (which contains the condition) have not arisen, other obligations are imposed upon the parties. Both the parties must not to do anything to prevent the occurrence of the event. This duty is implied into the contract.9 Although there is no undertaking by either party that the event shall occur, a term may also be implied that one of the parties will use all reasonable efforts to secure the fulfillment of the condition or bring about the event,10 without any absolute undertaking that the efforts would succeed. A distinction has been drawn between principal and subsidiary obligations,11 principal obligations being those arising of the main contract containing the condition, and the subsidiary obligations being those relating to efforts for bringing about the condition, not to withdraw, nor to prevent occurrence, or to make reasonable efforts to bring about the event. In Shardaprasad v. Sikandar, 12 the seller undertook to apply for the sanction under tenancy law to the contracted sale of four anna share in a village. He applied for sanction, but the sanction was refused. In a suit for specific performance by the purchaser, the court made this distinction and held that the seller-defendant had made two undertakings. The first one to apply for sanction for sale, which he had performed. The other to sell the share if the sanction were granted. Since the parties had made no provision for the event of sanction being applied for and refused, the latter undertaking was a contingent contract, and having become impossible by refusal, the contract fell through. A party in breach of the subsidiary obligation ought to be as much liable as if a primary obligation has been breached. But holding him so would amount to punishing him, more so because there is always a possibility that despite his efforts, the condition or event may not occur at all. Breach of subsidiary obligation must impose liability for damages, but in assessing such damages, the court can take into account the possibility that the condition or event may not have occurred despite efforts. 9 Chitty on Contracts, 28th edn., p. 152, para 2-140. 10 Motilal v. Nanhelal, AIR 1930 PC 287. 11 Chitty on Contracts, 28th edn., p. 154, para 2-143. 12 AIR 1915 Nag 15.
Liability of the Parties to take Efforts to Fulfil the Condition
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If a property cannot be transferred under the provisions of a statute without the permission, consent or approval of an authority, the contract would be contingent upon the obtaining of such permission, etc.13 Similar would be the case if the parties have also contemplated the possibility of the event of the permission not being obtained, or being refused, and have not made provision for the non-happening of the event.14 A contract with a stipulation that the vendor shall get the permission of the attaching court was held to be a contingent contract.15 But a term stipulating execution of sale deed 'after permission is obtained' or 'after land is converted' was held to indicate the point of time for the execution of the sale deed, and hence, not a contingent contract.16 Nor was it a contingent contract where the agreement provided that 'the vendor shall obtain permission' for transfer.17 In any case such an agreement to transfer the property must be deemed subject to an implied condition that the transferor will obtain the sanction of the authority concerned,18 and failure to take best endeavours will make him liable for damages.19 The transferee is entitled to specific performance where the transferor has refused to obtain such permission, or has failed to do so.20 The decree for specific performance is granted by directing the transferor to obtain such permission,21 and on failure to do so, to pay damages.22 Specific performance may be granted also where the promisor has failed to take full efforts to obtain permission or perform the condition on which the contract is contingent.23 13 Balu Baburao Zarole v. Shaikh Akbar Shaikh Bhikan, AIR 2001 Bom 364; Rameshwarlal v. Dattatraya, AIR 2010 MP 187. 14 Shardaprasad v. Sikandar, AIR 1915 Nag 15 at p. 16; Ganga Saran v. Firm Ram Charon Ram Gopal, AIR 1952 SC 9 (supply of goods 'as soon as supplied by a mill', the court observed that the parties had never contemplated the possibility of the goods not being supplied at all). 15 Dalsukh M Pancholi v. Guarantee Life and Employment Insurance Co. Ltd, AIR 1947 PC 182. 16 Rojasara Ramjibhai Dahyabhai v. Jani Narottamdas Lallubhai, AIR 1986 SC 1912. 17 Chandnee Widya Vati Madden v. Dr. CL Katial, AIR 1964 SC 978. 18 Nathulal v. Phoolchand, AIR 1970 SC 546 at 547 (judgment does not refer to ss. 31-33); relying on Motilal v. Nanhelal, AIR 1930 PC 287 (issue of contingent contract was not argued); and Chandnee Widya Vati Madden v. CL Katial, AIR 1964 SC 978 (defendant had agreed to obtain permission); Bishambhar Nath Agarwal v. Kishan Chand, AIR ' 1998 All 195 (even where the term about permission was implied). 19 MK Distripark Pte Ltd v. Pedder Warehousing & Logistics (S) Pte Ltd, [2013] SGHC 84 (Singapore High Court). 20 Chandnee Widya Vati Madden v. CL Katial , AIR 1964 SC 978; Ramesh Chandra Chandiok v. Chuni Lal Sabharwal, AIR 1971 SC 1238 at 1242-43; Ram Das v. Ram Rekha, AIR 1995 All 66. 21 Chandnee Widya Vati Madden v. CL Katial, AIR 1964 SC 978 (but the court held it was not a contingent contract); Manzoor Ahmed Magray v. Gulam Hassan Aram, AIR 2000 SC 191 (permission for transfer of orchard); Laxman Tatyaba Kankate v. Taramati Harishchandra Dhatrak, AIR 2010 SC 3025, (2010) 7 SCC 717; Rajesh Aggarwal v. Balbir Singh, AIR 1994 Del 345 (permission under s. 269 UC of the Income Tax Act, 1961);Indra Prasad Saxena v. Cham an Lal Malik, AIR 1994 All 105; Sewa Singh v. R S Malhotra, AIR 2004 Del 152 (permission of Delhi Development Authority). 22 Chandnee Widya Vati Madden v. CL Katial, AIR 1964 SC 978 (but the court held it was not a contingent contract); Matadin Agarwal v. Syed Abdul Razak, AIR 1997 AP 103 (vendor did not pursue application for permission actively, damages were liquidated in the contract). 23 Samina Venkata Sureswara Sarma v. Mccsala Kota Muvullayya, AIR 1996 AP 440; Indra Prasad Saxena v. Chaman Lal Malik, AIR 1994 All 105 (compliance with s. 26 of The Urban Land Ceiling Act, 1976).
Nature of Event The words 'some event collateral to such contract' suggest that the event is neither a performance directly promised as part of the contract, nor the whole of the consideration for a promise. Thus, if a reward is offered for the recovery of lost goods and there is no contingent contract, there is no contract at all unless and until someone, act ing on the offer, finds the goods and brings them to the
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offeror. If A tells B that he would pay B Rs. 1,000/- if B married C, it is not a contingent contract but merely an offer which will become a contract if, without any revocation of it in the meantime, B does marry C. Therefore, illustration (c) to s. 32 and the illust. to s. 34 below must be read as implying that the agreement is made for some present and independent consideration. A contract to pay a man for a piece of work is made on the terms that he is to have no pay till the work is all done; the completion of the work being the very thing contracted for, is not collateral to the contract, and the contract is not contingent, though the performance of the work is a condition precedent to the payment of the wages. Where a surety agrees on a surety-bond to procure the attendance of the judgment-debtor in court, else to pay an amount, the promise to produce him in court is an agreement that the event shall happen, and is the principal promise, and therefore not contingent.24 A contract is not contingent merely because it is only to be performed on the happening of a certain future event. In order for it to be a contingent condition, the event must be contingent (one which may or may not happen), as well as future. Such a condition has been described as 'an event, not certain to occur, which must occur, unless occurrence is excused, before performance under a contract becomes due.'25 All contracts of insurance and indemnity are contingent.26 It has also been held that in order to make a contingent contract, the happening of the event must be beyond the control of the parties.27 For example, a contract to supply to a person, in return for a fixed payment, with extracts of newspaper articles or paragraphs relating to a given subject which may appear during a given time is contingent; for the duty arises only if and when such matter is published in one of the journals contemplated by the parties. A wager is a contingent agreement, but s. 30 prevents it from being enforceable. A contract between A and Z that if A succeeds in his suit with regard to certain land in the possession of Z, he shall purchase the land from Z for Rs. 300/- is contingent.28 A contract for delivery of certain documents of importance for a case by the plaintiff to the defendant, the plaintiff to receive for it at a value of Rs. 750/- if the suit was compromised, and Rs. 3,000/- if the suit was fought to a finish and decreed, was a contingent contract.29 A contract that R would become a member of a company and subscribe to its shares if he were appointed a sole agent was held to be contingent upon his being so appointed by the company.30 A condition that the seller of property will discharge the loan, redeem the mortgage and hand over title deeds redeemed to the purchaser, is a contingent contract.31 A contract may be contingent also where payment is to be made on the happening of an event that is certain. The event may be certain, but its happening in a particular manner, or within a particular time may be uncertain. In a contract of life insurance, one party agrees to pay a given sum upon the happening of a particular event contingent upon the duration of human life in consideration of the immediate payment of a smaller sum or certain equivalent periodical payments by another party. It is a contingent contract.32 Parties cannot agree for performance on the happening of an event (viz. repeal of a statute) to get over the prohibition of that statute. Thus, where the sale of property was dependent upon repeal of law relating to fragmentation and consolidation of land holdings, such transfers being prohibited by law and hence void ab initio, could not be specifically enforced.33 24 Maung Kywe v. Maung San Tin, AIR 1923 Rang 26. 25 US Restatement (2d), para 224. 26 Commr of Excess Profits Tax v. Ruby General Insurance Co. Ltd., [1957] SCR 1002 at 1011, AIR 1957 SC 669; Chandulal Harjivandas v. Commissioner of Income Tax, AIR 1967 SC 816, 63 ITR 627. 27 Balwant Singh v. Rajaram, AIR 1975 Raj 73. 28 Ismal Mahamad v. Daudbhai Musabhai, (1900) 2 Bom LR 118. 29 Boppana Venkataratnam v. Kamalanara Hanumantha Rao, AIR 1935 Mad 135. 30 Re Jaunpur Sugar Factory Ltd., Re, 89 IC 438, AIR 1925 All 658, 23 All LJ 608.
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31 J P Builders v. A Ramadas Rao, (2011) 1 SCC 429. 32 Chandulal Harjivandas v. Commissioner of Income Tax, AIR 1967 SC 816, 63 ITR 627. 33 Parvathamma v. Uma, AIR 2011 Kant 58.
Absolute Obligation It is necessary to distinguish a contingent condition from a condition which one party promises to make good, called a promissory condition.34 If the latter is not performed, the other party may be discharged from performance (see ss. 39, 55), and can also sue for damages for breach (s. 73). There is a clear distinction between a case where there is a present obligation under a contract with the performance postponed to a later date, and a case where there is no present obligation at all with the obligation arising by reason of some condition being complied with or some contingency occurring.35 The term in a contract for sale of goods stating 'the goods have been purchased by us from X and will be shipped to you as soon as delivered to us' creates an absolute and not a conditional obligation. The words denote the mode or manner of performance.36 A contract containing an undertaking by the vendor that he will pay ten times the rent of sirdari lands was not a contingent contract, as there was no condition that the sale of the land depended upon the deposit of the stipulated amount, i.e., ten times the sirdari rent.37 Where a contract provided that the goods were to be delivered when they arrived, the word 'when' could not be read as 'if' and the contract was not a contingent but an absolute one, the obligation undertaken by the seller not being conditional or contingent upon the arrival of the goods in India.38 Merely because a contract is 'for forward delivering' of goods ordered from a foreign country, it cannot be said that the performance of it will depend upon the arrival of goods at the port in India. Hence, even if the goods have not been shipped from the foreign country, the seller cannot avoid the consequences of his failure to supply according to the terms of his contract by raising the plea of impossibility of performance.39 A contract where the vendor of land agreed to pay the Government dues and obtain the sanad was not a contingent contract.40 A provision for payment of a deposit on signing a memorandum of agreement was not a condition precedent, i.e., contingent condition to the formation of the contract, but was a promissory condition of a concluded contract.41 A contract for carrying out water-proofing work of building such that it required cooperation of its occupant is an absolute obligation, mainly because this fact would have been known to the contractor with due diligence.42 The Government of Hyderabad purchased the plaintiff's book of medicinal preparations with a view to start a company for the manufacture and sale of medicines. The Government bought the book and paid the advance. The balance was to be invested by way of shares in the capital in the company. The company could not be floated. The plaintiff sued for the balance price. It was held that the contract was not contingent upon the formation of the company. The Government had taken delivery of the book and was liable to pay the price.43 A clause in a deed of sale that the vendee will pay the balance of consideration money as soon as possible but when the vendee 'would be in a position to make the payment' meant payment within a reasonable time. The contract was not a contingent one under s. 31, the obligation being absolute, and the facility in payment was only a concession.44 A clause in a contract for sale of land providing 'subject to the approval of the title of the vendor by the purchaser's lawyer' is a term of a contract, which, if assented to by the vendor, must be fulfilled to make the contract enforceable. It does not make the contract a conditional contract.45 But such approval cannot unreasonably be withheld. In such an event, the vendor can enforce the contract. Such approval has to be obtained in a reasonable time. 34 Chitty on Contracts, 28th edn., p. 150, para 2-135; Anson's Law of Contract, 29th edn., 2010, p. 140.
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35 Jethalal C Thakkar v. RN Kapur, AIR 1956 Bom 74. 36 Navnit Lal d' Co v. Kishanchand d' Co., AIR 1956 Bom 15; Ganga Saran v. Firm Ram Charan Ram Gopal, AIR 1952 SC 9; Harnandrai Fulchand v. Pragdas Budhsen, AIR 1923 PC 54, 50 IA 9. 37 Pahunchi Lal v. Man Singh, AIR 1971 All 444 at 447; distinguishing Rudra Das Chakravarti v. Kamakhya Narayan Singh, AIR 1925 Pat 259, ILR 3 Pat 968; Kirpal Das Jivraj Mal v. Manager Encumbered Estates, AIR 1936 Sind 26; and Govind Luxman Gokhale v. Harichand Mancharam, AIR 1919 Bom 154, 50 IC 403. 38 F Ranchhoddas v. Nathmal Hirachand & Co., AIR 1949 Bom 356(DB), (1949) 51 Bom LR 491. 39 Pragdas Mathuradas v. Jeewanlal (1929) Ltd., AIR 1948 PC 217; Naihati Jute Mills Ltd. v. Khyaliram Jagannath, AIR 1968 SC 522. 40 Balwant Singh v. Rajaram, AIR 1975 Raj 73. 41 Damon Cia Naviera SA v. Hapag-Lloyd International SA, [1985] 1 WLR 434, (1985) 1 All ER 475(CA) ; Aberfoyle Plantations Ltd. v. Cheng, [1960] AC 115, [1959] 3 All ER 910. 42 Gujarat Housing Board v. Vipul Corporation, AIR 2004 Guj 319. 43 Bashir Ahmad v. Government of Andhra Pradesh, AIR 1970 SC 1089. 44 IK Sohan Singh v. State Bank of India, AIR 1964 Punj 123. 45 Panem Venkanarayana Sastry v. Rajupalli Chinna Yella Reddy, AIR 1959 AP 256.
Mere Postponement of Performance A contingent contract must be distinguished from a contract stipulating the time for performance. A contract under which the vendor had agreed to sell his one-half share in the property in question, but the sale deed was agreed to be executed after a month of the partition of the property and separation of his share, was not a contingent contract as it was only the execution of the sale deed which was postponed to a future date. The vendee, after completing the sale through the courts, was entitled to get the share separated. Nor could the contract be frustrated by the failure of the vendor to carry out the obligation undertaken by him for the benefit of the vendee.46 A stipulation by the vendor to execute the sale deed, 'after permission is obtained' or 'after land is converted' to plots, indicated the point of time at which the sale deed within the contemplation of the parties had to be executed in accordance with the terms of the document, and the contract was not a contingent contract.47 46 Harbakhsh Singh Gill v. Ram Rattan, AIR 1988 P&H 60 at 63; but see Kirpal Das Jivraj Mal v. Manager Encumbered Estate, AIR 1936 Sind 26 (the transferor obtaining the share sold depended on its allocation to him by agreement by the other co-sharers). 47 Rojasara Ramjibhai Dahyabhai v. Jani Narottamdas Lallubhai, AIR 1986 SC 1912 at 1914.
Contracts Dependant on an Event The contract may be contingent because the performance of the promise depends upon the occurrence of some thing or event independent of any act of any party and which may or may not happen, or may depend on one of the parties or a third party doing or abstaining from doing an act . Where the agreement provided that the agent appearing in the case in the Supreme Court would be paid the taxed costs if the case was successful, it was held that the obligation which was contingent would ripen into an absolute obligation in the event of the success of the case.48 A contract of fire insurance is contingent on the happening of such an event independent of act of parties. Agreement for sale of evacuee property on condition that execution of sale deed to take place
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after obtaining certificate from the custodian under s. 40 of the Administration of Evacuee Property Act, 1950 (now repealed by the Displaced Persons Claims and other Laws Repeal Act, 2005) was a contingent contract.49 It has been suggested that a contract between a tenderer and his sub-contractor executed in anticipation of acceptance of tender is contingent on the tender being accepted.50 48 Firm of N Peddanna Ogeti Balayya v. Ketta v. Srinivasayya Setti Sons, AIR 1954 SC 26 at 28. 49 Abdul Satar Haji Ibrahim v. Shah Manilal Talakchand, AIR 1970 Guj 12. 50 UP Rajkiya Nirman Nigam Ltd. v. Indure Pvt Ltd., AIR 1996 SC 1373 at 1377, (1996) 2 SCC 667.
Contingency Dependant on the Act of a Person A condition may be subject to an event which is dependent upon the will of one51 or both the parties to the contract or of a third party.52 An undertaking by a mother to make good the amount claimed by the younger son of the maharaja against the elder brother if the latter refused or failed to pay him the amount out of the father's estate was a contingent contract and enforceable.53 A contract to purchase shares on condition of being appointed the sole agent by the company was contingent on the company so appointing him, and the defendant was not liable as a contributory in liquidation of the company.54 51 Suggested by s. 32 illustration (c); s. 36 illustration (b). 52 Suggested by s. 34; s. 32 illustration (b). 53 Commr of Wealth-tax v. Vijayaba Dowger Maharani of Bhavnagar, AIR 1979 SC 982 at 984, [1979] 3 SCR 545; Kesoram Industries & Cotton Mills Ltd. v. Commr of Wealth-tax, 59 ITR 767, AIR 1966 SC 1370 and Bombay Dyeing and Mfg Co. Ltd. v. Commr of Wealth-tax, AIR 1975 SC 756 relied on; Standard Mills Co. Ltd. v. Commr of Wealth-tax, AIR 1967 SC 595 distinguished. 54 Re Jaunpur Sugar Factory Ltd. Re, 89 IC 438, AIR 1925 All 658, 23 All LJ 608.
Contract Dependent on the Act of a Party to the Contract A contract where one party has complete discretion whether he will perform or not is no contract. This principle may be justified on the basis of lack of consideration or lack of intention to create legal relations. Words of promise amount to no promise at all if their operation is expressed to be dependent, in terms or effect, on the mere will and pleasure of the promisor, e.g., a promise to pay for a certain service whatever the promisor himself thinks right or reasonable,55but the operation of a promise may be dependent on a voluntary act other than a mere will or declaration of the promisor. It may be an act of the promisor himself, so long as it is not an act of mere arbitrary choice whether he will be bound or not, as in the case of goods sold on approval, where the sale is not completed until the buyer has either approved the goods or kept them beyond the time allowed for trial.56 Where an agreement contained a clause 'in case the sale deed is not made by you or if you refuse to accept, in addition of earnest money an amount of Rs. 500/- shall be given and taken and no sale deed will be executed', it was held that the agreement itself provided for a contingency of either the seller refusing to sell or the purchaser refusing to buy, and there was no obligation on the seller to complete the sale transaction.57 The purchaser of a property had an option that if its sale deed could not be executed, he would purchase another specified property. Where he did not exercise such an option, the contingency did not arise, and he was entitled to specific performance for sale of the first property.58 A provision in a contract that the sale would be effected after the vendor had obtained alternative accommodation for residence, was a contingent condition.59
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The operation of the promise may be dependent upon the 'satisfaction' of the promisor about the subject matter or about the other party's performance.60 A contract may provide that the work must be completed to the approval of the employer. There is, after all, nothing to prevent a party from requiring that work shall be done to his own satisfaction.61 This is construed to mean reasonable satisfaction, and the condition is satisfied, if he does not reasonably withhold the approval. Even if he is allowed by the contract to decide without reference to reasonable cause, he should still act in 'good faith'.62 Whether the contract provides that the other party's performance shall be subject to the satisfaction of the employer, or that it shall be a condition precedent to payment, the approval must not be unreasonably or capriciously withheld.63 In the case of goods manufactured to order, it may be a term of the contract that the work shall be done to the customer's approval; then the customer's judgment, act ing 'bona fide and not capriciously,' is decisive.64 Payment of a policy of insurance may be conditional on proof of a claim satisfactory to the directors of the insurance company being furnished; this means such proof as they may reasonably require.65 On the same principle, if a clause in a contract provides that a party's disability to perform his promise shall be a cause for annulling the contract, but shall give no remedy in damages, this does not apply to a disability brought about by the promisor's own conduct.66 The contingency may depend on an act of discretion to be exercised by him. In Secretary of State for India in Council v. Augustus John Arathoon, 67 the plaintiff had entered into a contract to supply the Government with a certain quantity of timber. The contract provided that the timber should be of unexceptionable quality, and should be liable to be rejected if not approved by the superintendent of that gun carriage factory for which it was required. The timber tendered was not approved by the superintendent and was accordingly rejected. The plaintiff sued for breach of the contract, contending that the timber tendered answered the description in the contract. It was not alleged that the superintendent failed to exercise a judgment in regard to the suitability of the wood. The lower court held that, the superintendent being substantially a party, his judgment could not be regarded as conclusive, and that it was open to the plaintiff to show that his tender ought to have been accepted. Reversing this judgment, the Madras High Court held that it was not open to the plaintiff to question the reasonableness of the superintendent's disapproval. Innes CJ. drew a distinction between a contract where the condition was dependent on the will of the promisor, who was not bound to exercise a discretion, and one which was 'subject to the result of a mental process of discrimination on the part of one party', the latter being valid. Failure to perform a condition precedent by a party may defeat the right of that party under the contract. A purchased B's land, and leased the same to him for a period of six years, there being a forfeiture clause on failure to pay rent on the due dates. It was also agreed that if B paid rent regularly, A would reconvey the land to B at the end of the six years. B failed to pay the rent regularly, and A, while waiving the right of re-entry, gave notice cancelling the agreement to reconvey. In a suit by B for reconveyance, it was held that waiver of the right of re-entry did not affect the contract of reconveyance, and that B, not having strictly complied with the condition precedent to his right to reconveyance, was not entitled to specific performance.68 An agreement under which the mortgaged property was agreed to be sold by the defendant to the plaintiff on redemption of the mortgage by the plaintiff, was in the nature of a contingent contract under s. 31 and became enforceable as soon as the event of redemption by the plaintiff happened.69 55 Roberts v. Smith, (1859) 4 H&N 315, 118 RR 462; Firestone Tyre and Rubber Co. v. Vokins & Co., [1951] 1 Lloyd's Rep 32. 56 Elphick v. Barnes, (1880) 5 CPD 321. 57 Dadarao v. Ramrao, (1999) 8 SCC 416.
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58 R Velammal v. R Daivasigamani, AIR 1993 Mad 100. 59 Deokabai v. Uttam, (1993) 4 SCC 181. 60 Minister Trust. Ltd. v. Traps Tractors Ltd., [1954] 1 WLR 963, [1954] 3 All ER 136; Braunstein v. Accidental Death Insurance Co, (1861) 1 B&S 782, 124 RR 745; Docker v. Hyams, [1969] 3 All ER 808, [1969] 1 WLR 1060(CA) . 61 Minister Trust Ltd. v. Traps Tractors Ltd., [1954] 1 WLR 963 at 973; [1954] 3 All ER 136. 62 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, CONTRACT, para 964. 63 Parsons v. Sexton, (1847) 4 CB 899; Braunstein v. Accidental Death Insurance Co., (1861) 1 B&S 782, 124 RR 745. 64 Andrews v. Belfield, (1857) 2 CBNS 779, 109 RR 885. 65 Braunstein v. Accidental Death Insurance Co., (1861) 1 B&S 782, 124 RR 745. 66 New Zealand Shipping Co. Ltd. v. Societe des Ateliers et Chantiers de France, [1919] AC 1, [1918-19] All ER Rep 552, applied in Alghussein Establishment v. Eton College, [1991] 1 All ER 267; Chunilal Dayabhai and Co. v. Ahmedabad Fine Spinning and Weaving Co., (1921) 46 Bom 806, 67 IC 223, AIR 1922 Bom 44; Chotelal Lallubhai v. Champsey Umersey & Sons, (1922) 24 Bom LR 877, 75 IC 233, AIR 1923 Bom 75; VK Kandasami Chettiar v. Shanmugha Thevar, AIR 1949 Mad 302; this principle does not apply where there never was a contract for want of form; Gordhandas Pursottam Sonawala v. Natvarlal Chandulal & Co, AIR 1952 Bom 349 at 359. 67 (1882) ILR 5 Mad 173. 68 Shanmugam Pillai v. Annalakshmi Ammal, (1949) FCR 537, AIR 1950 FC 38 affirming Annalakshmi Ammal v. Shanmugam Pillai, ILR (1946) Mad 470, 224 IC 308, AIR 1946 Mad 47. 69 Ramzan v. Hussaini, AIR 1990 SC 529, (1990) 1 SCC 104, 106.
Contract Dependent on the Act of a Third Party The liability under the contract may depend on the act of a third party (see s. 34). A builder's right to recover for his work is often made conditional on the architect or engineer certifying that the work has, in fact, been done and properly done, and such a condition is good.70 This does not prevent the court or arbitrator from ordering payment of the amount if the dispute arises out of refusal to issue the certificate, and the court or arbitrator can determine that a certificate ought to have been given.71 Conversely, the operation of penal clauses in a contract may be made to depend not only on some default of one party, but on the decision of a person appointed by the other party that a default contemplated by the contract has taken place. In Aghore Nauth Bannerjee v. Calcutta Tramways Co Ltd, 72 a conductor deposited a sum of money on taking service with the defendant company as security for the performance of his duties, subject to the condition that the deposit should be forfeited if there was any dereliction of duty on his part for which the certificate of the company's manager was to be conclusive. In a suit by the conductor to recover the amount of his deposit, the Court held that he was bound by the certificate of the manager. The manager is not the company any more than the engineer or the architect, who is constituted the arbitrator under a contract for works, to settle disputes as to extras or penalties and in that capacity is identical with the person or body for whom the work is done. The case, however, was argued and decided on s. 28. An agreement to sell a property within a specified time coupled with a separate oral agreement to the effect that the former agreement is subject to the condition that the vendor is able to persuade the lessee to surrender possession within the specified time, constitutes a contingent contract and hence, if the vendor fails to secure the agreement of the lessee, the contract fails to create any obligation.73 70 Clarke v. Watson, (1865) 18 CBNS 278, 144 RR 491, [1861-73] All ER Rep 482. 71 Russell on Arbitration, 20th edn., p 324; Hickman & Co v. Roberts, [1911-13] All ER Rep Ext 1485; Windsor Rural Distric Council v. Otterway & Try Ltd., [1954] 3 All ER 721(QBD) ; but see East Ham Borough Council v. Bernard Sunley & Sons Ltd., [1965] 3 All ER 619(HL) .
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72 (1885) ILR 11 Cal 232. 73 TV Kochuvareed v. p. Mariappa Gounder, AIR 1954 Tr & Coch 10.
Discharge of Contingent Contracts Parties may provide in the contract for their rights and obligations if the contingent event does not occur as contemplated. After holding that a contract for sale of share subject to sanction under tenancy law was a contingent contract, specific performance was refused because the parties did not provide for any alternative in the event of the sanction being refused.74 Parties may provide for refund of amount, or for liquidated damages. Where the contract itself embodies a condition, express or implied, that on happening of an event the contract would stand discharged, it will be dealt with under s. 32.75 If two parties stipulate that the contract shall be void upon the happening of an event over which neither party shall have any control, then the contract is void on the happening of that event. But where the contract is that the contract shall be void on the happening of an event which one or either of them can bring about, then the blameworthy party cannot take advantage of that stipulation, because to do so, would be to permit him to take advantage of his own wrong.76 This principle was accepted in Australia, but with a modification that in both cases the contract was voidable, rather than void in one case and voidable in the other, because the construction could differ according to events.77 74 Shardaprasad v. Sikandar, AIR 1915 Nag 15. 75 Ka Ron Lanong v. State of Assam, AIR 1959 Assam 75 (see also s. 32). 76 New Zealand Shipping Co. Ltd. v. Societe des Ateliers et Clantiers de France, [1919] AC 1 at 9, [1918-19] All ER Rep 552, applied in Alghussein Establishment v. Eton College, [1991] 1 All ER 267, (1988) 1 WLR 587, cf Cheall v. Association of Professional, Executive, Clerical & Computer Staff, [1983] 2 AC 180, [1983] 1 All ER 1130; Thompson v. ASDA-MFI Group plc, [1988] Ch 241, [1988] 2 All ER 722; Samina Venkata Sureswara Sarma v. Meesala Kota Muvullayya, AIR 1996 AP 440. 77 Suttor v. Gundowda Pty Ltd., (1950) 81 CLR 418 at 441-42.
Right of Termination In some kinds of contracts, especially for the sale or letting of immovable property, clauses are commonly inserted expressly giving one or both of the parties an option to rescind the contract in specified events.78In these or other cases where there is a complete and act ive obligation subject to being defeated by subsequent matter, the contract cannot properly be called contingent. In principle, since the parties are free to incorporate whatever terms they wish for the termination of their agreement, no question arises under common law whether the provision is reasonable, or whether it is reasonable for a party to enforce it, unless the situation is one in which equity would grant relief against forfeiture.79 Pleadings and evidence The defence of contract being contingent must be raised in the written statement.80 A plea that a contract is contingent has to be alleged and proved by the party who sets it up, for the trial court to consider suo motu.81 78 Section 62 below.
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79 Chitty on Contracts, 28th edn., p. 1162, para 23-046; China National Foreign Trade Transportation Corpn v. Evlogia Shipping Co. SA, [1979] 1 WLR 1018, [1979] 2 All ER 1044(HL) ; Mardorf Peach & Co Ltd. v. Attica Sea Carriers Corpn of Liberia, [1977] AC 850, [1977] 1 All ER 545(HL) ; Afovos Shipping Co SA v. Pagnan (The Afovos), [1983] 1 WLR 195, [1983] 1 All ER 449(HL) ; Scandinavian Trading Tanker Co. AB v. Flota Petrolera Ecuatoriana, [1983] 2 AC 694, [1983] 1 All ER 301(CA), affirmed in [1983] 2 All ER 763(HL) . 80 R Velammal v. R Daivasigamani, AIR 1993 Mad 100 at 105. 81 Nemi Chand v. Harak Chand, AIR 1965 Raj 132.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER III Of Contingent Contracts/S. 32.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER III Of Contingent Contracts S. 32. Enforcement of contracts contingent on an event happening.-Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void. Illustrations (i) (ii) (iii)
A makes a contract with B to buy B's horse if A survives C. This contract cannot be enforced by law unless and until C dies in A's lifetime. A makes a contract with B to sell a horse to B at a specified price, if C, to whom the horse had been offered, refuses to buy him. The contract cannot be enforced by law unless and until C refuses to buy the horse. A contracts to pay B a sum of money when B marries C. C dies without being married to B. The contract becomes void.
Occurrence of an Event A contract contingent upon the happening of an event can be enforced after that event occurs. The parties are under no obligation till such event occurs, though as mentioned earlier, a term may be implied requiring one party to make reasonable efforts to bring about the event. The contract can be enforced when the event occurs. If the event becomes impossible, the contract becomes void, and consequences mentioned in s. 65 follow.
Matter of Construction Whether a contract is of the kind specified in this section may be a question of fact or construction.82 Four out of five joint owners agreed to sell the entire property after obtaining court's permission for sale of the share of the fifth owner, a minor. The court refused permission. The contract did not
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provide that the entire contract would fail if minor's share could not be sold. It was held that the contract was not contingent, and hence specific performance of the shares of four owners could be ordered.83 In one case under this section, the Privy Council held on the construction of the document, that it operated as an unconditional undertaking on the defendant's part to procure a loan, and out of the loan, to repay the money due to the plaintiff.84 It has been held in Singapore that the promisor agreeing to obtain approval of a third party must use best endeavours to obtain it, failing which he will be liable for damages.85 82 Re Jaunpur Sugar Factory, 89 IC 438, AIR 1925 All 658, 23 All LJ 608; see above para 'Absolute Obligation' and 'Mere Postponement of Performance'. 83 P C Varghese v. Devaki Amma Balambika Devi, AIR 2006 SC 145, (2005) 8 SCC 486. 84 Vissanji Sons d' Co v. Shapurji Burjorji Bharoocha, (1912) 39 IA 152, ILR (1912) 36 Bom 387. 85 MK Distripark Pte Ltd v. Pedder Warehousing d' Logistics (S) Pte Ltd, [2013] SGHC 84 (Singapore High Court).
When a contingent contract becomes enforceable A co-sharer in land agreed to sell certain land adjacent to the land of the purchaser and promised to get the specified land measured out and to hand it over to the purchaser. The contract was held dependent on a contingency, and a suit premature under s. 32 of the Act .86 An ante-nuptial agreement to give land in consideration of marriage is contingent contract and becomes enforceable on marriage.87 The insurance company was liable to pay for the full amount of loss of the insured vehicle after the police had lodged the charge sheet for theft of the vehicle.88 Specific performance may be granted in certain cases even before occurrence of the event, especially in cases of transfers of immovable property requiring permission, consent or approval for the transfer.89 Statutory permission for transfer of land was not a condition precedent for a suit for specific performance, and such a decree could be granted subject to grant of permission.90 Where performance of the promise depended on renewal of lease by the local authority, a conditional decree of specific performance could be granted subject to such renewal.91 An agreement to assign a sub-lease, where the terms of the lease and sub-lease prohibited assignment, can be enforced by a decree of specific performance; the permission is not a condition precedent to grant of a decree.92 Once the event occurs, later conditions or events would not affect the enforceability of the contract. The conditional transfer of business with police permit required for carrying it on, becomes binding when the police permission is given. Even if the police subsequently refuse to alter or reissue the permit in the name of the transferee unless and until another distinct condition relating to the issue of permits is complied with, the completed contract of transfer would not be affected in any way.93 86 Kirpal Das Jivraj Mal v. Manager Encumbered Estates, AIR 1936 Sind 26(DB) . 87 Ma Etin v. Ma Byaw, AIR 1928 Rang 286 (2). 88 Mohit Kumar Saha v. New India Assurance Co., AIR 1997 Cal 179 (no other final report of police required). 89 Balu Baburao Zarole v. Shaikh Akbar Shaikh Bhikan, AIR 2001 Bom 364; Rameshwarlal v. Dattatraya, AIR 2010 MP 187; see also above 'Subsidiary Obligations'. 90 K Raheja Constructions v. Alliance Ministries, (1995) Supp 3 SCC 17 (amendment of plaint seeking specific performance seven years after filing of suit for injunction was refused). 91 Nirmala Anand v. Advent Corporation Pvt Ltd, AIR 2002 SC 3396, (2002) 8 SCC 146. 92 Vishwa Nath Sharma v. Shyam Shanker Goela, (2007) 10 SCC 595.
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93 Antonio Buttigieg v. Inez Faizon, AIR 1949 PC 118.
Becomes Void If the event on the happening of which the contract is contingent becomes impossible, the contract becomes void.1 All the parties to the contract are discharged of any liability of performance, or of payment of damages.2 A contract becomes void only if the contingency becomes impossible. Where the vendor of land had agreed to execute the sale deed after eviction of the tenants, and did not take sincere steps to evict the tenants, he is himself in default, and cannot be heard to say that the contract has become impossible,3 nor a seller who has agreed, but failed to repay the loan, redeem the mortgage on the property agreed to be sold, and get the documents from the mortgagee.4 An agreement to sell land held on a restricted tenure, the performance of which is contingent on sanction of revenue authorities being obtained under s. 73A of the Bombay Land Revenue Code, 1879 cannot be enforced specifically on refusal of sanction, nor can an action for damages be maintained for its breach.5 If the authority refuses permission, the contract becomes impossible.6 By notification under the town planning law, the use of land was frozen. It was held that it became impossible to obtain permission for transfer of agricultural land for non-agricultural purposes, and the vendor was liable to return the price.7 The contract for storage of potatoes in cold storage cooling system was held subject to an implied condition of continued supply of electricity, and was discharged on failure of electric supply.8 Where the performance is dependent on permission or consent of any authority or officer, the correctness or validity of the consent cannot be decided by the court deciding the contract between parties to the contract. The orders refusing permission or consent can be challenged only in appropriate proceedings under the law applicable to the permission or consent.9 Where the possibility of completing a contract is dependent upon the will of a third person, a defendant who has entered into the contract to the performance of which such consent is necessary, will not, if consent cannot be procured, be decreed to obtain it and thus perform an impossibility.10A whose property had been attached, agreed to sell it to B upon terms inter alia: (i) that A should apply to the court for its approval to the sale of the property to B; (ii) that part of the sale price should be paid to the attaching creditors; (iii) that the balance of the price should be paid in the presence of the Sub-Registrar. A applied to the court for its approval, but the application was rejected. Thereafter A sold the property to C, who had notice of the contract with B. B sued A and C for specific performance. It was held that the contract with B was a contingent contract, and the contingency having failed; there was no contract which could be enforced.11 1 Satyabrata Ghose v. Mugneeram Bangur & Co, AIR 1954 SC 44 at 48; Shardaprasad v. Sikandar, AIR 1915 Nag 15. 2 But see s. 65 for the liability of restitution. 3 Samina Venkata Sureswara Sarma v. Meesala Kotal Muvullayya, AIR 1996 AP 440; see also Volition Investment Pvt. Ltd. v. Madhuri Jitendra Mashroo, AIR 2003 Bom 360. 4 J P Builders v. A Ramadas Rao, (2011) 1 SCC 429. 5 Ismail Khan Mir Axam Khan v. Official Receiver, AIR 1928 Sind 63. 6 See observation in Ram Das v. Ram Rekha, AIR 1995 All 66, p. 69; Raghuvir Singh Bhatty v. Ram Chandra Waman Subhedar, AIR 2002 All 13 (however, reference made to Section 56 of the Indian Contract Act). 7 Raj Kumar Gupta v. Des Raj, AIR 1995 HP 107.
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8 State of Assam v. Mukunda Oja, AIR 1997 Gau 113. 9 M Meenakshi v. Metadin Agarwal, AIR 2007 1848(Supp), (2006) 7 SCC 470. 10 Shardaprasad v. Sikandar, AIR 1915 Nag 15; Vasudeo Harchand Kolhe v. Nadarsingh Rajput, AIR 1994 Bom 124 (revenue authorities having given permission to a third party, the chance of their permission to the transfer under suit agreement became remote). 11 Dalsukh M Pancholi v. Guarantee Life and Employment Insurance Co. Ltd, AIR 1947 PC 182; other instances of contingent conditions precedent--William Cory & Son Ltd. v. IRC, [1965] AC 1088; Haslemere Estates Ltd. v. Baker, (1982) 1 WLR 1109, [1982] 3 All ER 525(Ch D) ; United Dominions Trust (Commercial) Ltd. v. Eagle Aircraft Services Ltd., (1968) 1 WLR 74 at 82, [1968] 1 All ER 104; Smallman v. Smallman, (1972) Fam 25, [1971] 3 WLR 588, [1971] 3 All ER 717.
Sections 32 and 56 of the Act A question arises whether s. 32 or s. 56 applies to a contract that has become void because the event has become impossible. Where the contract itself, as a matter of construction, contains impliedly or expressly a term according to which it would stand discharged on the happening of certain circumstances, the question of dissolution of the contract according to its terms falls to be determined under s. 32 or other similar provisions, and not under s. 56 of the Act. The doctrine of discharge by frustration cannot be available where the contract makes full and complete provision, so intended, for a given contingency.12 This distinction is important, and should not be ignored.13 Under English law they are all treated as cases of frustration, but under the Indian law such cases would fall under s. 32, which deals with contingent contracts. 12 Satyabrata Ghose v. Mugneeram Bangur & Co, AIR 1954 SC 44 at 48; Naihati Jute Mills Ltd. v. Khyaliram Jagannath, AIR 1968 SC 522; Court of Wards Dada Siba Estate v. Raja Dharam Dev Chand, AIR 1961 Punj 143; Ka Ron Lanong v. State of Assam, AIR 1959 Assam 75. 13 Section 56 of the Act mentioned in similar cases in Nirmala Anand v. Advent Corporation Pvt Ltd, AIR 2002 SC 3396, (2002) 8 SCC 146; Raghuvir Singh Bhatty v. Ram Chandra Waman Subhedar, AIR 2002 All 13.
Manner of Occurrence of the Event A party suing to enforce an obligation which is conditional upon the occurrence of an event, has to establish for the obligation to arise, that the event occurred in the manner contemplated by the contract.14 A clause in an insurance policy provided that the insurer would indemnify against loss or damage to a motor car whilst in transit by road, rail, etc. A car was sent, after the partition of India, by rail from Quetta to be carried to Jabalpur but could not be sent from Karachi because of want of an export permit. This was held not to be covered by the indemnity clause because the car was not in transit when lost and there was no loss which meant loss in bulk by 'destruction or disappearance.'15 A contract for purchase of two flats on the thirteenth floor of a building was dependent upon the sanction of additional floor-area-ratio by the local authority. The authority declined the sanction. It could not be specifically enforced where the thirteenth floor was constructed by reducing the floor area of the lower floors.16Where the contract for the transfer of property in a cantonment area was subject to obtaining unconditional permission from the Military Estate Officer, and the MEO issued permission subject to the condition that the purchaser shall not object to any resumption of property in future by the cantonment under the powers it had under the Act; it was held that the purchaser could not repudiate the contract on the mere fact that at a future point of time the property would be liable for resumption.17 Time for occurrence of event Where parties have not stated any time for the happening of the event, &uot;it has to be held that
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obtaining of Court's sanction within a reasonable period and in any case within a period well before commencement of recovery proceedings for dues and taxes, was in contemplation of the parties as an implied term.&uot;18 In this case, the seller agreed to sell immovable property after obtaining sanction of a court. The sanction did not come for two years for reasons beyond control of parties. He terminated the agreement and sold the property to a third party. The termination was held valid, and the purchaser was refused specific performance. 14 Toolsidas Tejpal v. MP Venkatachalapathy Iyer, AIR 1921 PC 46 at 47. 15 VP Desa v. Union of India, AIR 1958 MP 297. 16 Baij Nath v. Ansal and Saigal Properties Pvt Ltd., AIR 1993 Del 285. 17 Rameshwar Swarup v. Saroj Tyagi, AIR 1998 SC 3389. 18 HPA International v. Bhagwandas Fateh Chand Daswani, AIR 2004 SC 3858, (2004) 6 SCC 537.
Condition Becoming Redundant Where the condition of obtaining the certificate for transfer of evacuee property became unnecessary because of the property being restored free from restrictions under the Act applicable, the contract no longer depended upon the condition which could not be enforced by law, or which had become impossible of performance so as to render it void.19 However, once the condition becomes impossible, the contract becomes void, and should not be revived if the condition is removed because of repeal of the law.20 19 Abdul Satar Haji Ibrahim v. Shah Manilal Talakchand, AIR 1970 Guj 12 at 23. 20 But see Raghuvir Singh Bhatty v. Ram Chandra Waman Subhedar, AIR 2002 All 13 (court holds contract became void, yet holds specific performance is possible).
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER III Of Contingent Contracts/S. 33.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER III Of Contingent Contracts S. 33. Enforcement of contracts contingent on an event not happening.-Contingent contracts to do or not to do anything if an uncertain future event does not happen, can be enforced when the happening of that event becomes impossible, and not before. Illustrations A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks.
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Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER III Of Contingent Contracts/S. 34.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER III Of Contingent Contracts S. 34. When event on which contract is contingent to be deemed impossible, if it is the future conduct of a living person.-If the future event on which a contract is contingent is the way in which a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time, or otherwise than under further contingencies. Illustrations A agrees to pay B a sum of money if B marries C, C marries D. The marriage of B to C must now be considered impossible, although it is possible that D may die and that C may afterwards marry B.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER III Of Contingent Contracts/S. 35.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER III Of Contingent Contracts S. 35. When contracts become void, which are contingent on happening of specified event within fixed time.-Contingent contracts to do or not to do anything, if a specified uncertain event happens within a fixed time, become void if, at the expiration of the time fixed, such event has not happened, or if, before the time fixed, such event becomes impossible. When contracts may be enforced, which are contingent on specified event not happening within fixed time.--Contingent contracts to do or not to do anything, if a specified uncertain event does not happen within a fixed time, may be enforced by law when the time fixed has expired, and such event has not happened, or before the time fixed has expired, if it becomes certain that such event will not happen. Illustrations (a)
A promises to pay B a sum of money if a certain ship returns within a year. The contract may be enforced if the ship returns within the year; and becomes void if the ship is burnt within the year.
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(b)
A promises to pay B a sum of money if a certain ship does not return within a year. The contract may be enforced if the ship does not return within the year, or is burnt within the year.
Specified event within fixed time Where parties agreed that the seller will obtain permission under the Urban Land Ceiling Act, and if permission is not granted within a specified time, the agreement shall become inoperative, the agreement becomes unenforceable if the permission is not obtained within that time.21 Where parties have not specified any time for happening or non-happening of the event, it is implied that parties expect the event to happen within reasonable time. If the event does not happen within reasonable time, the contract ends.22 Sureties for the appearance of a judgment-debtor in court could not be directed to pay the amount where the judgment-debtor was convicted for an offence and in jail, and hence could not be produced as agreed. Section 35 applied only if the specified event was independent of the will of either party, and in this case it did not apply as the agreement was that the specified event shall happen. The sureties had undertaken the production of the judgment-debtor, i.e., that the event shall happen. This was the principal promise, which became impossible because of his imprisonment.23 21 P Purushotham Reddy v. Pratap Steels Ltd., AIR 2003 AP 141. 22 HPA International v. Bhagwandas Fateh Chand Daswani, AIR 2004 SC 3858, (2004) 6 SCC 537. 23 Maung Kywe v. Maung San Tin, AIR 1923 Rang 26 (case fell under s. 56).
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER III Of Contingent Contracts/S. 36.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER III Of Contingent Contracts S. 36. Agreements contingent on impossible event void.-Contingent agreements to do or not to do anything, if an impossible event happens, are void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made. Illustrations (a) (b)
A agrees to pay B 1,000 rupees if two straight lines should enclose a space. The agreement is void. A agrees to pay B 1,000 rupees if B will marry A's daughter C. C was dead at the time of the agreement. The agreement is void.
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Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER IV Of the Performance of Contracts/Contracts which must be performed/S. 37.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which must be performed S. 37. Obligations of parties to contracts.-The parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law. Promises bind the representatives of the promisor in case of the death of such promisors before performance, unless a contrary intention appears from the contract. Illustrations (a) (b)
A promises to deliver goods to B on a certain day on payment of R s. 1,000. A dies before that day. A's representatives are bound to deliver the goods to B, and B is bound to pay the R s. 1000 to A's representatives. A promises to paint a picture for B by a certain day, at a certain price. A dies before the day. The contract cannot be enforced either by A's representatives or by B.
Introduction The section states the duty of performance in general. A promisor under a contract is under an obligation to perform his promise under the contract, or at least to offer to perform it, i.e., to attempt to perform it (s. 38). The section also states the extent to which the promises bind legal representatives of deceased promisors.
Performance as a Mode of Discharge A contract, being an agreement enforceable by law1 creates a legal obligation, which subsists until discharged. Performance of the promise or promises remaining to be performed is the principal and most usual mode of discharge, but there are several others. It is usual for writers on the subject to treat performance as a mode of discharge.2 However, the Act includes in the separate chapter on performance, various sections including s s. 62-67 about contracts which need not be performed, and also ss. 51-58 relating to reciprocal promises, which are really principles of interpretation. This section lays down the general principle that the parties to a contract are under a duty of performing their respective promises. 1 See s. 2(h) above. 2 Food Corpn of India v. Surana Commercial Co, (2003) 8 SCC 636.
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Exact Performance The basic rule is that the promisor must perform exactly what he has undertaken to do. The obligation to perform is absolute.3 It is not open to lessee to avoid responsibility under the lease by pleading that his name on the lease was only benami, the real lessee being his father.4 Where all the partners had, on behalf of the firm, executed the documents in favour of the bank in connection with the loan, a mere declaration by one of them that he alone was liable to repay the loan would not bind the bank, as the contract existed between the bank and all the principal borrowers.5 The parties are bound by the terms of the agreement. If the contract does not provide for the contingency, a party cannot claim extra consideration on the ground that he had to spend extra amounts on account of the contingency.6 In Kanoria Chemicals and Industries Ltd v. Uttar Pradesh Electricity Board, 7 the notification of the board demanding surcharge or interest on late payment of electricity charges was stayed in a prior petition, but the petition was ultimately dismissed. The petitioners again sought to challenge the demand of the surcharge/interest on the ground that the amount could not be paid due to the stay order. Dismissing the writ petition, the Supreme Court held that interim orders did not have the effect of relieving the petitioners of their obligation to pay amounts, nor did the order prevent the petitioners from paying the electricity charges. The party must perform, within the time specified and the standard required by the contract. The standard of obligation may vary according to the type of contract. In some contracts, it may be strict,8 e.g., where the contract relates to supply of goods. On the other hand, in some cases the contract may require only reasonable care or due diligence, viz. in a contract for services,9 or of using best10or reasonable endeavours. Whether the performance is sufficient according to the contract is a question in each case of the construction of the terms of the contract. The construction of the obligation to ascertain the nature of obligation is a question of law. Further, whether the act ual performance satisfies the standard prescribed by the contract, is a mixed question of law and fact.11 An obligation to supply a machine reasonably fit for a known purpose was performed when the machine was supplied at the place of delivery. It did not involve an undertaking to guarantee future performance or an undertaking to do whatever was necessary from time to time, to ensure that the machine fulfilled the purpose for which it had been purchased.12 Agreement to execute a conveyance implied an agreement to execute a valid conveyance, and therefore where a vendor agreed to execute the conveyance without specifically agreeing to register it, the agreement was not to be fully performed until the vendor had done all that he was required to do to have the document registered.13 Builder's liability in obtaining sanction of the municipal authorities is a liability to assist in obtaining sanction. He will not be liable if the plan is not sanctioned, or is required to stop construction work following a stop-work notice issued by the municipal authorities.14 An order for final payment of the balance due on the completion of work in a contract for construction of tube wells discharged the contract by performance, and it was not necessary to wait for a completion certificate; and though ordinarily a contract continues to subsist till a completion certificate is obtained, unreasonable delay in issuing the certificate discharges the contract.15 The liability of a carrier comes to an end when he informs the consignee of the arrival of goods.16 Where the charterer nominated after the ship set sail, it was the obligation of the charterer to nominate a port where the ship could unload.17 When a contract expressly or impliedly provides that performance is to be done in a customary manner, it must be carried out in that manner which is customary.18 A CIF contract is a contract for the sale of goods to be performed by the delivery of documents relating to the goods, but they have to be performed in a particular manner, first, by placing the goods aboard the ship, and secondly, by transferring to the purchaser the shipping documents.19 Where goods are sold for net cash under a CIF contract, the buyer is bound to pay for goods on tender of usual shipping documents, even though the goods have not arrived at their destination and the contract does not provide for payment against the documents.20 If there is deviation in performance, the aggrieved party is entitled to sue for damages for breach (s. 73), or may also be discharged from performance of his own promise (s. 54). Specific performance of the obligation is not the rule, and is a discretionary remedy,21and can be enforced in circumstances given in Ch II of The Specific Relief Act, 1963.
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However, a trivial or slight omission in the completion of the contract does not prevent the enforcement of the contract;22 for, de minimis non curat lex.23 The contract is not, on that account, discharged.24 It would also result in unjust enrichment without the necessity of paying for it.25 3 Magnum Films v. Golcha Properties Pvt. Ltd., AIR 1984 Del 162. 4 Ranvijaya Shahi v. Bala Prasad Motani, AIR 1978 Pat 91 at 93. 5 Keshari Engg Works v. Bank of India, AIR 1991 Pat 194 at 198. 6 Mohammad Dalil Khan v. State of Andhra Pradesh, AIR 1963 AP 216 at 221 (DB). 7 (1997) 5 SCC 772, affirming AIR 1994 All 273. 8 Pagnan Spa v. Tradax Ocean Transportation, SA, [1987] 3 All ER 565; Kurt A Becher GMBH & Co KG v. Roplak Enterprises SA (The World Navigator), [1991] 2 Lloyd's Rep 23. 9 Samuels v. Davis, [1943] 1 KB 526, [1943] 2 All ER 3(CA) ; Lister v. Romford Ice and Cold Storage Co. Ltd., [1957] AC 555, [1957] 2 WLR 158, [1957] 1 All ER 125; Smith v. Eric s. Bush, [1990] 1 AC 831; Henderson v. Merrett Syndicates Ltd., [1995] 2 AC 145 at 176, [1994] 3 WLR 761, [1994] 3 All ER 506. 10 Jet2 com Ltd v. Blackpool Airport Ltd, [2012] EWCA Civ 417 (comparison with 'reasonable endeavours'). 11 Chitty on Contracts, 28th edn., p. 1097, para 22-001. 12 Viskase Ltd. v. Paul Kiefel GMBH, [1999] 3 All ER 362(CA) (issue of locating the place of contract for the purposes of jurisdiction). 13 K Hutchi Gowder v. H Bheema Gowder, AIR 1960 Mad 33. 14 MD, Army Welfare Housing Organisation v. Sumangal Services Pvt Ltd, AIR 2004 SC 1344, (2004) 9 SCC 619. 15 Pyari Mohan Das v. Durga Shankar Das, AIR 1958 Ori 125 at 130. 16 Delta Air Lines, INC v. Haresh Babubhai Daruwall, AIR 2011 SC 480(Supp) . 17 Shipping Corporation of India Ltd v. Mare Shipping Inc, AIR 2011 SC 2608, (2011) 8 SCC 39. 18 Carapanayoti & Co. Ltd. v. ET Green Ltd., [1959] 1 QB 131 at 145, [1958] 3 All ER 115 at 119; Tsakiroglou & Co. Ltd. v. Noblee Thorl Gmbh, [1962] AC 93 at 113, [1961] 2 All ER 179 at 183. 19 Arnhold Karberg & Co v. Blythe, Green, Jourdain & Co Ltd, [1916] 1 [1914-15] All ER Rep 1221, CA; Joseph Pyke and son (Liverpool) Ltd v. Kedarnath Mohanlal, AIR 1959 Cal 328; Johnson v. Taylor Bros & Co Ltd, [1920] AC 144; BR Herman & Mohatta (India) Ltd v. Pran Ballav Majumdar, AIR 1960 Cal 524; RV Narayanaswami Chetti v. Soundararajan & Co Ltd, AIR 1958 Mad 43; Kwei Tek Chao v. British Traders and Shippers Ltd, [1954] 2 QB 459. 20 E. Clemens Horst Co. v. Biddell Bros, [1911-13] All ER Rep 93(HL) . 21 Contrast UNIDROIT Principles Art. 7.2.2, under which, specific performance is not a discretionary remedy, and the Court must order performance, unless one of the exceptions laid down in the Article apply. Under Art. 7.2.3, the right to performance inlcudes, in appropriate cases, the right to require repair, replacement, or other cure of defective performance. 22 Lowther v. Heaver, [1889] 41 Ch D 248; Wilkinson v. Clements, (1872) LR 8 Ch App, 96 at 106, quoted in Phillips v. Ellinson Bros (Pvt) Ltd, [1941] 65 CLR 221, 235. 23 Arcos Ltd. v. EA Ronaasen & Son, [1933] AC 470 at 479, 480, [1933] All ER Rep 646(HL) ; microscopic deviation in Bremer Handelsgesellschaft MBH v. Vanden Avenue- Izegem PVBA, [1978] 2 Lloyd's Rep 109 (HL); Electronic Enterprises v. Union of India, AIR 2000 Del 55 (change in location of inspection of goods). 24 Hoenig v. Isaacs, [1952] 2 All ER 176(CA) (a case of an interior decorator). 25 Anson's Law of Contract. 29th edn., 2010, p. 454.
Nature of obligation Contractual obligations must be distinguished from liberties26 and enabling provisions. In a contract of pledge of goods for repayment of loan to the bank, the borrower was required to insure the goods, and the
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bank was also entitled to insure the goods at the risk and expense of the borrower, but did not do so. The goods were destroyed. The bank was not liable because the provision was an enabling provision for the bank, the primary liability of insuring the goods being that of the borrower.27 26 See also Section 2(a) above: &uot;Proposal and Option&uot;. 27 Haryana Pesticides v. Bank of Rajasthan Ltd, AIR 2004 P&H 83.
No Obligation without Contract In a building contract there was a term that if extra or extended items of work for which no rates were fixed in the schedule were ordered by the engineer-in-charge, the contractor would give a notice in writing about proposed rates, and if the engineer did not agree, he could, by a notice in writing, cancel the order; and if the contractor had incurred any expenditure or carried out any work before the determination of rates he would be entitled to such rate or rates as are fixed by the engineer, but he was not entitled to be paid at the rates quoted by him in his notice. The mere fact that the engineer-in-charge did not exercise his power to cancel the order would not mean a contract concluded on contractor's terms. Until the rates were settled, the contractor was under no obligation to carry out the altered work.28 Where a document is proposed to be signed by several parties and only some of them execute it and others do not, the question of the document being binding on the others who have executed it, depends on intention of parties. The intention that the document will not bind the executing parties has to be established by the executing parties by showing that they would not have executed the document, if the other party had not joined in the agreement or that they did not intend to be bound unless the others who were proposed to be parties joined in the execution.29 Where an agreement was signed by A for self and on behalf of his minor sons and the name of A's mother appeared in the document, but she had not signed it and her interest was a charge for maintenance payable by A, it was held that the parties could not have intended to be bound only if A's mother joined in the execution of the document.30 28 Bombay Housing Board v. Karbhase Naik and Co., AIR 1975 SC 763 at 765, [1975] 3 SCR 407. 29 Sethu Parvathy Ammal v. Bajji K Srinivasan Chettiar, AIR 1972 Mad 222 at 227; applying Sivasami Chetti v. Sevugan Chetti, (1901) 25 Mad 389; Ullattil Kalathil Nethiri Menon v. Mullapulli Gopalan Nair ILR 39 Mad 597, AIR 1916 Mad 692; Wilkinson v. Malin, (1832) 2 Tyr 544, [1824-34] All ER Rep 177; distinguishing Re Whiteley, Bishop of London v. Whiteley, (1910) 1 Ch 600; Charavur Teramath v. Urath Lakshmi, (1882) 6 Mad 270. 30 Sethu Parvathy Ammal v. Bajji K Srinivasan Chettiar, AIR 1973 Mad 222 at 227.
Entire Contracts and Substantial Performance A distinction must be drawn between contractual obligations which are divisible, and those which are entire or indivisible. Where one party's promise is made conditional on complete and entire performance by the other, the obligation is 'entire', and the party in default cannot recover anything if he incompletely performs his side of the contract. The general rule is that no claim can be made in respect of the partial performance of a lump sum contract.31'If the parties have provided that certain work shall be done for a lump sum, no judge can assert that it was their intention that a reasonable sum should be paid for each part of the work as it was performed'.32 Nor can a person recover for work done in a quantum meruit unless there is evidence of a fresh contract to pay for the work already done. Where the circumstances are such as to give to the defendant no option whether he will take the benefit or not, there is no inference of a fresh contract in the absence of other facts.33 This 'draconian' principle is justified, first, on the ground that a promisee who has contracted a price for the whole contract cannot be compelled to pay for part of the performance, and secondly, on the ground that such a stipulation is a strong incentive to the promisor to complete the performance of the promise.34 The
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rule is criticised because a promisor may be deprived of the entire payment for his performance because of a small or trivial defect in workmanship, and the promisee may retain the benefit and not pay the money, resulting in unjust enrichment. The courts are therefore reluctant to construe an obligation as 'entire and indivisible'. When a contract provides for a specified sum to be paid on completion of specified work, the courts lean against a construction of the contract which would deprive the contractor of any payment at all simply because there are some defect or omissions of so minor a character that he can be said to have substantially performed his promise. This doctrine of 'substantial performance' mitigates the rigour of the law of exact performance. In considering whether there has been substantial performance, the court may take into account both the nature of the defects and the proportion between the cost of rectifying them and the contract price.35 Thus a party who has performed his obligation under the contract, except for minor matters, will be allowed to enforce the obligation of the other party subject to the other party's right to counterclaim for damages in respect of the defects.36 Thus, a substantial completion of carpentry work entrusted to a sub-contractor in the refurbishment of flats entitled him to payment for the flats in which the work was substantially completed with a small deduction for defective and incomplete items.37 However, parties may provide that there should be complete and exact performance by one party before claiming performance of the other party, thereby excluding this doctrine, and it is a question of construction in each case whether the parties so intend.38 It has been suggested that applying the principle of substantial performance is to set aside the contractual allocation of risks, and therefore there should be greater caution in categorisation of an obligation as entire.39 In a general employment involving continuous services, specific act s of misconduct do not go to the entire consideration. Before the remuneration in an agency agreement can be forfeited, interdependence must be found to exist between the act of misconduct and the performance of the work or the fulfillment of the condition upon which the right to remuneration arises.40 Where salary, though annual, is payable monthly, any salary for the period subsequent to the period during which misconduct is established was claimable by the employee because the contract was found to be divisible and the right to the salary became vested at the end of each month.41 31 Cutter v. Powell, (1795) 6 TR 320, [1775-1802] All ER Rep 159(KB) ; Anson's Law of Contract, 29th edn., 2010, p. 452; Regent OHG Aisenstadtund Barig v. Francesco of Jermyn Ltd., [1981] 3 All ER 327 at 333-34. 32 GL Williams, The Law Reform (Frustrated Contracts) Act, p. 3 quoted in Cheshire and Fifoot, Law of Contract, 9th edn., p. 523; Britain v. Rossiter, [1879] 11 QBD 123, [1874-80] All ER Rep Ext 1483(CA) (such an implication is impossible so long as the express contract to pay the full amount remains in existence). 33 Sumpter v. Hedges, [1898] 1 QB 673 at 676; Madras,(1898) Pat 90 at 94; Forman and Co. Pty Ltd. v. The Ship 'Liddesdale', [1900] AC 190 at 202; Philips v. Ellinson Bros (Pvt.) Ltd., (1941) 65 CLR 221; Heywood v. Wellers, [1976] 1 QB 446 at 458, [1976] 1 All ER 300. 34 Anson's Law of Contract, 29th edn., 2010, p. 453. 35 Bolton v. Mahadeva, [1972] 2 All ER 1322, [1972] 1 WLR 1009(CA) . 36 Hoenig v. Isaacs, [1952] 2 All ER 176(CA) ; H Dakin & Co Ltd v. Lee, [1916] 1 KB 566(CA), [1914-15] All ER Rep Ext 1302(KBD) ; Bolton v. Mahadeva, [1972] 2 All ER 1322, [1972] 1 WLR 1009(CA) . 37 Williams v. Roffey Bros & Nicholls (Contractors) Ltd, [1990] 1 All ER 512; following Hoenig v. Issacs, [1952] 2 All ER 176(CA) . 38 Hoenig v. Isaacs, [1952] 2 All ER 176(CA) . 39 Anson's Law of Contract, 29th edn., p. 455. 40 Peninsulor & Orientals Steam Navigation Co. v. Johnson, (1938) 60 CLR 189. 41 Healey v. Societe Anonyme Francaise Rubastic, [1917] 1 KB 946.
Performance of Promises in the Alternative
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A contract may involve performance of one of alternative promises; it may then either require an election to be made, or may provide for one alternative giving an option to any of the parties to perform the other alternative, called the 'business option'. In either case, the contract may provide which of the parties may choose the alternative42 and in the absence of such provision, the right to elect the alternative is impliedly vested in the promisor, he being the party obliged to perform the first act .43 If the promisee is entitled to elect, he must give a notice to the promisor of his election before the liability of the promisor can arise. An election once made is binding on the person making the election, and he is absolutely bound by his choice. Where the promisor has the option of performing either alternative, 'if one of the two things which have been contracted for subsequently becomes impossible, it becomes a question of construction whether, according to the true intention of the document, the obligor is bound to perform the alternative or is discharged altogether'.44 In the 'business option', the contract specifies a single, primary or basic obligation to be performed in one way, unless the holder of option chooses to substitute another way. This power is for the advantage of the option-holder, and 'the holder (of the option) is not bound to consider the convenience or the interest of the other party'.45 A policy of insurance gave an option to the insurer to replace or to make, good accidental loss or damage to the aircraft. The insurer having exercised the option to replace, it ended the obligation to pay money.46 42 Paula Lee Ltd. v. Robert Zehil & Ltd., [1983] 2 All ER 390. 43 Chitty on Contracts, 28th edn., para 22-006, p. 1099. 44 Anderson v. Commercial Union Assurance Co., [1855] 55 LJQB 146 (an insurer's option to preinstate or replace property damaged or destroyed, instead of paying the amount of loss). 45 Reardon Smith Line Ltd. v. Ministry of Agriculture Fisheries & Food, [1963] AC 691, [1961] 2 All ER 577 on appeal [1963] 1 All ER 545; Libyan Arab Foreign Bank v. Bankers Trust Co., [1989] 1 QB 728. 46 CIT v. Kasturi & Sons Ltd., (1999) 3 SCC 346, AIR 1999 SC 1275.
Effect of Death Section 306 of the Indian Succession Act, 1925 provides:
&uot;Demands and rights of action of or against deceased sutvive to and against executor or administrator.--All demands whatsoever and all rights to prosecute or defend any act ion or special proceeding existing in favour of or against a person at the time of his decease, survive to and against his executors or administrators; except causes of action for defamation, assault, as defined in the Indian Penal Code, 1860 (45 of 1860) or other personal injuries not causing the death of the party; and except also cases where, after the death of the party; the relief sought could not be enjoyed or granting it would be nugatory&uot;.
Although s. 306 of the Indian Succession Act, 1925 speaks only of executors and administrators, the same principle must necessarily prevail in the case of other legal representatives.47 The section applies to devolution of liabilities in contracts and proceedings relating to contracts.48 The section applies to all causes of action except those referred to therein. While interpreting the scope of 'personal injuries', it has been held:
The Act must be supposed to have envisaged a logically coherent class of causes of action, and that result can only be achieved by construing 'personal injuries' as meaning not 'injuries' to the body merely, but injuries to the person in Blackstone's sense, other than those which either cause death or tangibly affect the estate of the deceased/injured person or cause an accretion to the estate of the deceased wrongdoer. In effect we think that the words which we have to construe are ejusdem generis not merely with the last preceding word 'assault' but with the two preceding words 'defamation' and 'assault'.49
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In the English law, the Law Reform (Miscellaneous Provisions) Act, 1934 provides that on the death of any person, all causes of action (with four exceptions, all relating to tortious or wrongful act s and not here material) subsisting against or vested in him are to survive against, or for the benefit of, his estate. Where damage has been suffered by reason of any act or omission which would have given rise to a cause of act ion against a person, if he had not died before or at the same time as the damage was suffered, a cause of action is deemed for the purpose of the Act to have been subsisting against him before his death in respect of that act or omission. But a claim for exemplary damages will not survive.But where there is already a vested right of act ion for breach of contract, the death of either party has no effect upon it, whether or not it arose from a contract of a personal nature.50 In M Veerappa v. Evelyn Sequeira, 51 it was held that such part of the claim of a client against his legal counsel as was based on contract (as against in tort) would survive the death of the client. 'Representative' The word 'representatives' is neither defined in this Act nor in the General Clauses Act, 1897. A representative is a person who stands in the place of another as heir, or in the right of succeeding to an estate of inheritance; one who takes by representation; one who occupies another's place or succeeds to his rights or liabilities.52Under the Code of Civil Procedure, 1908 the term 'legal representative' means a person in law who represents the estate of the deceased person, and includes a person who intermeddles with the estate of the deceased.53 The term includes a universal legatee;54 but does not include members of the joint family in relation to a personal contract by its manager.55 In U P State Sugar Corporation v. Mahalchand M Kothari, 56 the question arose whether the transferee undertaking was liable for a contract made and breached by the receiver of property having custody of the undertaking under acquisition. It was held that the liability for breach attached to the property of the transferor mill, and was not personal liability of the receiver, and the transferee was liable. Death of Promisor Generally speaking, contracts bind the executor or administrator, though not named. Legal representatives are bound by the promise to perform the contract in absence of a contrary intention.57 A promise to perform the obligations under a contract of sale is not personal, and binds the legal representatives of the vendor under this section.58 Heirs of a guarantor are bound to fulfil the guarantee.59 A contract to pay a certain sum of money to a near relative during his life, the consideration being natural love and affection and the document being registered, is enforceable against the heirs of the deceased promisor, by virtue of s. 25(1), read with s. 37, unless a contrary intention appears.60 The universal legatee is the legal representative of the deceased testator and is liable for the debts of the testator to the extent of the property of the testator in his hands.61 The representatives of a promisor are bound to perform his contracts (except personal contracts) to the extent of the assets of the deceased falling in their hands. They are not personally liable on the contracts of the deceased, but only to the extent of the assets of the estate.62 Personal representatives are bound to complete the performance at the demand of the other party so far as the assets of the estate will allow.63'Just as many of a man's rights survive him, so also do many of his liabilities; and these inheritable obligations pass to his representative, and must be satisfied by him. Being, however, merely the representative of another, he is not liable in propria persona, and his responsibility is limited by the amount of property which he has acquired from the deceased'.64 Whether the deceased left any property in the hands of the representatives, or whether the properties in hands of the representatives are inherited or not, can be decided in the suit or arbitration proceedings before which the liability of the deceased promisor is an issue.65 Where however, personal considerations are of the foundation of the contract, as in cases of principal and agent, and employer and employee, the death of either party puts an end to the relation; and the contract ends in respect of performance remaining, unless there is a stipulation express or implied to the contrary.66 Such personal considerations extend, as shown by Illustration (b) of the section, to contracts involving special personal confidence or exercise of special skill (see also s. 40 below). They do not
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extend to contracts involving mere exercise of ordinary discretion. The executors of a man who has ordered goods deliverable by instalments under a continuing contract, may be bound to accept the remaining instalments, for the duty or discretion of seeing that the goods supplied are according to contract and do not require any personal qualification.67 Generally the court will not invent exceptions to the general rule, which are not expressed or apparent from the nature of the contract. Death of Promisee (Succession to Benefit of Contract) The Act makes no provision as to the manner in which or the extent to which persons other than the original promisee may become entitled to enforce a promise. An executor or administrator can sue on a contract made with the deceased for money due, material supplied, or work done. The representative can also recover damages for breach of contract of the deceased, or claim specific performance.68 Generally the representatives of a deceased promisee may enforce for the benefit of his estate, contracts subsisting during his lifetime, unless the nature of the contract is such, or may be so made by the intention of the parties, that the death of the promisee determines the obligation. The most obvious example is the contract to marry. Another example is where performance by the other party was conditional on some performance by the deceased, and was not completed during his lifetime and is of such a personal character that performance by his representatives cannot be equivalent.69 An architect's executor, for example, cannot insist on completing an unfinished design even if he is a skilled architect himself; and thus cannot fulfill the conditions on which payment or further payment would have become due. But a builder's executors may be entitled and bound to perform his contracts for ordinary building work, for they have only to procure workmen of ordinary competence. All such rules are in aid of the presumed intention of the parties, and if the parties have expressed a special intention, it must prevail. Payments act ually earned and due to a man before his death, though for services of a confidential or personal kind, are a portion of his estate as much as any other debts, and accordingly his representatives succeed to his right of action for them, and may recover them.70Representatives may also recover sums accrued at the time of death, where the terms of the contract allow remuneration after the services have ceased. The same rule applies to rights of act ion for conventional damages or penalties.71 Nominations Some statutes or rules provide for the facility of nomination for amounts due under insurance policies, pensions, provident funds, deposits and investments,72 under which the creditor is entitled to nominate a person to receive the amounts due after death. One view is that there can be no nomination apart from that provided by such statutes or rules. The other view is that these statutes or rules provide for nomination as of right, precluding the debtors from denying this facility to the creditor promisee. Can a promisee under a contract then indicate the person to whom the benefit of contract or the right to enforce the contract shall devolve after his death? This section enables parties to decide the mode of devolution of liabilities, in that they can decide that an obligation shall cease upon death of a promisor. The Act is silent about devolution of rights under a contract after death. The view that the parties are free to agree as to a term of performance of contract, the devolution of rights under contract after the death of the parties and that a promisee may specify the person entitled to claim performance after his death, is supported by a judgment of the Supreme Court in Habiba Khatoon v. Ubaidul Huq, 73 where the agreement contained a term of reconveyance stipulating that if the original vendor died within three years, only one son of the vendor (and not any other heirs) shall be competent to get the property reconveyed within that period. The vendor died, and the son assigned the right to a stranger, who filed a suit for specific performance. The stranger was held entitled to specific performance. Effect was given to a direction that the benefit of the contract should be available after death to the person indicated in the contract. Whether the nominee receives the moneys or property as an owner,74 or as a mere receiver and therefore liable to account to the true representatives of the deceased,75 depends on the provisions of the statute. 47 Melepurath Sankunni Ezhuthassan v. Thekittil Geopalankutty Nair, AIR 1986 SC 411; M Veerappa v. Evelyn Sequeira, AIR 1988 SC 506; Law Commission of India, 110th Report (1985) on the Indian Succession Act, 1925, para 40.22:
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recommending the amendment of the section, to provide for survival of demands, act ions etc., against representatives. 48 M Veerappa v. Evelyn Sequeira, AIR 1988 SC 506; Keshavalal Girdharlal Gandhi v. Patel Vithalbhai Shankarbhai, AIR 1965 Guj 275 (right to claim relief under debt-relief law); Executive Director Usha Sewing Machines Works Ltd v. Sujata Roy, AIR 1986 Cal 224 (employment: suit for declaration, that retirement was illegal). 49 Rustomji Dorabji v. WH Nurse, AIR 1921 Mad 1; approved in M Veerappa v. Evelyn Sequeira, AIR 1988 SC 506. 50 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, CONTRACT, Para 903; Stubbs v. Holywell Rly Co., [1867] LR 2 Exch 311. 51 AIR 1988 SC 506. 52 R. Ramaswamy Aiyar, The Law Lexicon, reprint, 1987, p. 1112. 53 The Code of Civil Procedure, 1908, s. 2(11) . 54 Dwarka Singh v. B Harihar Baksh Singh, AIR 1936 Oudh 7. 55 Ramdulari Kuer v. Jang Bahadur Singh, AIR 1923 Pat 589. 56 AIR 2005 SC 61, (2005) 1 SCC 348. 57 Ram Baran Prosad v. Ram Mohit Hazra, [1967] 1 SCR 293, AIR 1967 SC 744; Vaman Trimbak Joshi v. Changi Damodar Shimpi, AIR 1926 Bom 97; s. 15 (b) of the Specific Relief Act, 1963. 58 Manni Devi v. Ramayan Singh, AIR 1985 Pat 35. 59 R K Dewan v. State of UP, AIR 2005 All 202, Kamal Gupta v. Bank of India, AIR 2008 Del 51; State Bank of India v. Jayanthi, AIR 2011 Mad 179. 60 Vijaya Ramraj v. Vijaya Ananda, AIR 1952 All 564. 61 Dwarka Singh v. B Harihar Baksh Singh, AIR 1936 Oudh 7. 62 Chitty on Contracts, 28th edn., para 21-008, p. 1071; Purushottam Vasudeo v. Ramakrishna Govind, AIR 1945 Bom 21 (obligation of deceased tenant to render accounts); R K Dewan v. State of UP, AIR 2005 All 202; Technica International Engineering Pvt Ltd v. Kokan Mercantile Coop Bank Ltd, Arbitration Petition 85/2010 decided on 2 April 2013 (Bom). 63 Ibid p. 1070; William v. Burrell, (1845) 1 CB 402; Wills v. Murray, (1850) 4 Ex Ch 843; Kennewell v. Dye, [1949] Ch 517, [1949] 1 All ER 881. 64 Salmond on Jurisprudence,12th edn., pp. 443-44; the Code of Civil Procedure, 1908, ss. 50 and 52 and O. 22, which enables an executing court to go into the question regarding the extent of property of the deceased which comes into possession in the hands of the representatives. 65 Technica International Engineering Pvt Ltd v. Kokan Mercantile Coop Bank Ltd, Arbitration Petition 85/2010 decided on 2 April 2013 (Bom); Sheonarayan Harilal v. Kanhaiyalal Devidin, AIR 1948 Nag 168; Ranjitsingh v.NarmadiAIR 1931 Nag 173; Oriental Bank of Commerce v. Rajrani AIR 2005 MP 49. 66 Farrow v. Wilson, [1896] LR 4 CP 744 per Willes J at 746, [1861-73] All ER Rep 846; followed in Jagannath Patnaik v. Pitambar Bhupati Harichandan Mohapatra, AIR 1954 Ori 241. 67 Wentworth v. Cock, (1839) 10 A & E 42, 50 RR 316. 68 Section 15 of the Specific Relief Act, 1963. 69 See the Specific Relief Act, 1963, s. 15(b). 70 Stubbs v. Holywell R Co., (1867) LR 2 Ex 311 (death put an end to the contract, but did not destroy rights of action, which he had already acquired). 71 Beckham v. Drake, (1849) 2 HLC 579, 81 RR 301; (action by trustee in bankruptcy). 72 The Banking Regulation Act, 1949, s s. 45ZA-ZC; the Companies Act, 1956, s. 109A; Employees' Provident Funds and Miscellaneous Provisions Act, 1952, Schedules II, III and IV; the Government Savings Banks Act, 1873, s. 4; Insurance Act, 1938, s. 39; Payment of Gratuity Act, 1972, s. 6; the Pensions Act, 1871, s. 12A; the Public Debt Act, 1944, s. 9B; the Securities and Exchange Board of India (Mutual Funds) (Second Amendment) Regulations, 2002 (mutual funds). 73 AIR 1997 SC 3236 (but this question was not directly in issue). 74 Harsha Nitin Kokate v. The Saraswat Co-Op Bank Ltd, Suit No 1972/2008 Bombay High Court dec. on 20 April, 2010.
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75 Sarbati Devi v. Usha Devi, AIR 1984 SC 346 (nominee does not deprive the heirs of their shares in the property nominated); Vishin N Khanchandani v. Vidya L Khanchandani, AIR 2000 SC 2747, (2000) 6 SCC 724.
Dispensed with or Excused It is the obligation of each party to perform his respective promise as agreed, unless the promisee has dispensed with the performance, or it is excused by this Act or any other law. Difficulty of performance or the fact that the contract is burdensome, are not excuses.76 A contracting party is bound by termination clauses,77 exemption clauses and clauses entitling forfeiture.78 It is also no excuse that the performance of an obligation would constitute breach of contractual obligation to someone else.79 The performance of a promise is dispensed with or excused under the Act under s s. 32-36 (effect of occurring of contingent event); s. 39 (refusal by other party to perform), s. 54 (on default in performance of reciprocal promise), s. 62 (novation, rescission and alteration of contract), s. 63 (performance dispensed with or remitted by the promisee), s. 64 (on rescission of contract by the other party), s. 65 (contract has become void), s. 67 (failure to afford facilities for performance). The performance may be partially dispensed with under this Act .80 The most important statutory discharge of contracts under 'any other law' is that following insolvency.81 An arbitration agreement was held discharged when one of the parties was acquired under statute, which provided that all contracts relating to its affairs stood terminated.82Performance may be excused by rent control legislation affecting tenancy rights under the Transfer of Property Act, 1882.83Section 37 does not affect the rule of damdupat.84Strict performance is excused under the Usurious Loans Act, 1918, and it is not then obligatory under s. 37 to make a decree according to the terms of the contract.85 Obligations under contracts can also be suspended by operation of the statute.86 76 See Section 56 below: &uot;Difficulty and Disappointed Expectations&uot;. 77 See Section 62 below: &uot;Provision of Termination in the Contract&uot;. 78 Hotel Vrinda Prakash v. Karnataka State Financial Corporation, AIR 2007 Kant 187 (provision of foreclosure premium binds the borrower). 79 Hilton v. Barker Booth and Eastwood, [2005] LTKHL 8, [2005] 1 All ER 651. 80 Bhayyaji Raghobaji Janefalkar v. Damodhar Madhaorao Deshpande, ILR (1946) Nag 334, AIR 1946 Nag 336. 81 See the Presidency Towns Insolvency Act, 1909, s s. 38-45; and the Provincial Insolvency Act, 1920, s s. 41-44. 82 Bharat Hydro Power Corpn v. Assam State Electricity Board, AIR 1999 Gau 151. 83 Milap Chand v. Dwarka Das, AIR 1954 Raj 252 at 256. 84 Bapurao s/o Lalji v. Anant Kashinath, ILR (1946) Nag 407, 227 IC 466, AIR 1946 Nag 210. 85 Sadanand Jha v. Aman Khan, AIR 1939 Pat 55 at 60 (FB). 86 Under s. 22(3) of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) [now repealed by Sick Industrial Companies (Special Provisions) Repeal Act, 2003 (1 of 2004)], the Board of Industrial and Financial Reconstruction can order suspension of any contracts to which a sick industrial undertaking is a party, or enforce them with adaptations or in any other manner specified.
Presumption and Proof In a proceeding concerning the assessment to wealth tax the assessee in his revised return sought to have the value of the loan advanced by him to his partner, excluded from his wealth on the claim that the loan was what is known to Muslim Law as Quaraza-e-Hasana--a debt of good faith and goodwill carrying
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with it no legal obligation on the part of the debtor to repay, and correspondingly, no right on the part of the assessee to expect, much less enforce repayment. The claim for the non-inclusion of this asset in the wealth of the assessee was sought to be supported by the declaration furnished by the debtor that the sum was received by him 'without any obligation and without any rate of interest and without any consideration'. The Court, negating the contention, held that the onus is on the parties asserting the absence of legal obligations and the test is not subjective to the parties; but is an objective one. Where the tax implications of large financial obligations are sought to be put to an end, the burden is heavy on the assessee to establish that what would otherwise be the incidents of the transaction, were excluded from contemplation by the parties. Here, one partner lent a large sum of the other to be utilised as capital in the partnership venture and the transaction was in the context of a commercial venture raising a presumption that legal obligations were intended.87 When the defendant admitted receipt of goods sent by the plaintiff, it was sufficient to initially raise the presumption that an order for supply of goods was placed. The plaintiff had discharged the burden to prove the contract, and it was for the defendant to rebut the presumption.88 A person who wishes to obtain a decree on the basis of assignment must allege and prove a valid assignment in order to show that he has a cause for action.89 87 Commr of Wealth-Tax, Bhopal v. Abdul Hussain Mulla Muhammad Ali, (1988) 3 SCC 562, AIR 1988 SC 1417; Edwards v. Skyways Ltd, [1964] 1 All ER 494; Bahamas Oil Refining Co v. Kristiansands Tankrederie A/S, (The Polyduke), [1978] 1 Lloyd's Rep 211; Rose d' Frank Co v. JR Crompton d' Bros Ltd, [1923] 2 KB 261 at 288, [1924] All ER Rep 245. 88 Khushalbhai Mahijibhai Patel v. Firm Mohamad-hussain Rahimbux, AIR 1981 SC 977, 1980 (Supp) SCC 1. 89 Prem Singh Devi Ditta Mal v. Sat Ram Das, AIR 1958 Punj 52.
Assignment of Contract The Contract Act has no section dealing generally with the assignability of contracts. The topic belongs to the law of property. The right of a contracting party to assign the contract, (benefits and burdens) is recognised. In Khardah Company Ltd. v. Raymon & Co (India) Private Ltd, 90 the Supreme Court held:
An assignment of a contract might result by transfer either of the rights or of the obligations thereunder. As a rule, obligations under a contract cannot be assigned except with the consent of the promisee and then it is a novation resulting in substitution of liabilities. On the other hand, rights under a contract are assignable unless the contract is personal in its nature or the rights are incapable of assignment, eg., as in the case of goods covered by personal licences. In the case of goods covered by import licences the buyer cannot assign his right to a non-holder of a licence as the import licences are personal.91
Thus, assignability of contract rights is the rule and the contrary an exception.92 Burden of proof lies on the person who pleads against assignability, and he has to prove it by showing the contrary intention.93 The assignability of a contract depends on its nature. The contract may show an intention that the promise shall be personal to the promisee, and that his rights under the contract shall not be assigned. Thus contracts in the nature of personal contracts94 cannot be assigned. Rights under a contract can be assigned, but not the obligations.95 Rights under a contract can be assigned before breach:
There is a distinction in law between assignment of rights under a contract by a party who has performed his obligation thereunder and assignment of a claim for compensation which one party has against another for breach of contract. The latter is a mere claim for damages which cannot be assigned in law, the former is a benefit under a contract which is capable of assignment.96
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An assignment need not be in writing or in any form,97 unless any statute requires so,98 in which case it must be effected in the manner and subject to the provisions of the statute. An assignment need not be absolute.99 It takes effect from the date of assignment, notice being necessary only for the purpose of binding the debtor. Notice is desirable as it would prevent further equities from attaching to the debt, or may affect priorities. Without the notice, the debtor may get a discharge by making payment to the promisee or by performing the promise for the promisee. An assignee cannot sue in his own name and without joining the assignor as a party,1 unless he has the right under the statute providing for the assignment. An assignee can claim specific performance.2 An assignee of a fire insurance policy can directly claim from the insurer the amount awarded by a court to the insured against the insurer, without a decree in his favour for the amount.3 An assignment takes effect 'subject to equities', enabling setting off of any claim against the assignor for unliquidated damages arising out of the transaction. Further, the assignee cannot recover more from the debtor than the assignor could have done, had there been no assignment.4 In order that the assignment must be effective, all the interest of the assignor under the contract must be transferred and conveyed to the assignee. The only question, which the court must consider, is whether the debtor would get a complete and proper discharge of the amount paid to the assignee.5 Statutes may provide for assignment of only some of the rights of the assignor. A deed of assignment executed by the Central Government in favour of a company transferring shares along with land and all rights and privileges, was held to have also transferred the privilege of the Central Government not to pay land revenue.6 Where A assigned a mortgage to B, agreeing to indemnify him against any loss on the mortgage, and B assigned his rights to C, C was entitled to sue on the contract of indemnity.7 Assignment and negotiation An assignment differs from transfer by negotiation.8 The essential difference between the two is that the assignee acquires all right, title and interest of the assignor, subject to defences and equities between the assignor and original debtor. The transferee (of a negotiable instrument) is provided with the rights and advantages of a holder in due course, thus getting a better title than the transferor.9Notwithstanding that The Negotiable Instruments Act, 1881 provides for transfer by negotiation; a negotiable instrument is an actionable claim and can be assigned as such.10 Assignment and subrogation 'Subrogation' is a convenient way of describing a transfer of rights from one person to another, without assignment or assent of the person from whom the rights are transferred and which takes place by operation of law in a whole variety of widely different circumstances.11It operates independent of contractual relations. An assignment, on the other hand, occurs by act of, and with consent of, parties. A surety is entitled to be subrogated to all rights of the creditor in respect of the debt after he has paid the guaranteed debt to the creditor.12 An insurer automatically gets subrogated to the rights and remedies of the insured against the third party that has caused the loss.13 It is not necessary for the insurer to have the rights of the insured transferred to itself. However, once a subrogation is put into writing, the rights between the insured and the insurer get regulated by terms of such document as agreed between the parties. In Economic Transport Organisation v. Charan Spinning Mills (P) Ltd, 14 a consignment insured for transit was damaged. The insurer settled the claim with the insured, took from the insured a letter of subrogation-cum-special power of attorney, and filed a complaint before the Consumer Forum. It was held that the insurer could file a complaint in the name of the insured as his power-of-attorney holder of insured, or jointly with the insured, under the subrogation. It did not matter whether the subrogation was based in common law and not put in writing, or was evidenced by an instrument or a letter. However, the insurer could not file a complaint in his own name under an assignment, as decided in Oberai Forwarding
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Agency v. New India Assurance Co. Ltd, 15 but held that the decision of Oberai case was not correct in holding that a subrogation-cum-assignment letter was an assignment. The Supreme Court summarised the law relating to subrogation affecting insurance thus:16
(i)
(ii) (iii) (iv)
(v)
Equitable right of subrogation arises when the insurer settles the claim of the assured, for the entire loss. When there is an equitable subrogation in favour of the insurer, the insurer is allowed to stand in the shoes of the assured and enforce the rights of the assured against the wrong-doer. Subrogation does not terminate nor put an end to the right of the assured to sue the wrong-doer and recover the damages for the loss. Subrogation only entitles the insurer to receive back the amount paid to the assured, in terms of the principles of subrogation. Where the assured executes a Letter of Subrogation, reducing the terms of subrogation, the rights of the insurer vis--vis the assured will be governed by the terms of the Letter of Subrogation. A subrogation enables the insurer to exercise the rights of the assured against third parties in the name of the assured. Consequently, any plaint, complaint or petition for recovery of compensation can be filed in the name of the assured, or by the assured represented by the insurer as subrogee-cum-attorney, or by the assured and the insurer as co-plaintiffs or co-complainants. Where the assured [has] executed a subrogation-cum-assignment in favour of the insurer (as contrasted from a subrogation), the assured is left with no right or interest. Consequently, the assured will no longer be entitled to sue the wrongdoer on its own account and for its own benefit. But as the instrument is a subrogation-cum-assignment, and not a mere assignment, the insurer has the choice of suing in its own name, or in the name of the assured, if the instrument so provides. The insured becomes entitled to the entire amount recovered from the wrong-doer, that is, not only the amount that the insured had paid to the assured, but also any amount received in excess of what was paid by it to the assured, if the instrument so provides.
Assignments under Provisions of Statutes Some claims under a contract are 'actionable claims',17and their assignment if made in the manner provided in s. 130 of the Transfer of Property Act, gives the right to the assignee to sue in his own name the debtor.18 Certain other assignments are also regulated by statutes, viz. bills of lading,19 copyright,20 negotiable instruments,21 patents,22 policies of life insurance,23 policies of marine insurance,24 policies of fire insurance,25policies of insurance against third party risks under the Motor Vehicles Act 1988,26 securities,27 trade marks,28 and rights and liabilities under railway receipt.29 The respective statutes enable assignments, and may provide for the formalities of assignments including registration and consequences of non-registration, extent of assignable rights, requirement of notice, the time from which the assignment would be effective, and the respective rights and liabilities of the parties including the assignee's right of suit, and restrictions on assignment. Statutes may also prohibit assignments in certain cases.30 Non compliance of statutory requirements might not affect equitable assignments or impair their effect,31 and an assignment failing to comply with the statutory requirements may still be valid.32 No right of assignment Personal Contracts A contract which is such that the promisor must perform it in person,33viz. involving personal considerations or personal skill or qualifications (such as his credit), are by their nature not assignable. The benefit of contract is assignable in 'cases where it can make no difference to the person on whom the obligation lies to which of two persons he is to discharge it.'34 The contractual rights for the payment of money or to building work, for e.g., do not involve personal considerations.
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In Toomey v. Rama Sahi, 35R agreed with M, the proprietor of an indigo concern, to sow indigo on four bighas of land out of his holding, selected by M or his Amlah, taking the seed from M's concern, and to weed and reap according to the instructions of the Amlah of the concern when the indigo was fit for weeding and reaping. If any portion of the said land, in the judgment of the Amlah was found bad, in lieu thereof, R would get some other land in his holding selected and measured by the Amlah. It was held that the contract was entered into with reference to the personal position, circumstances, and qualifications of M and his Amlah, and M could not assign the contract without the consent of R. The Court held:
When considerations connected with the person with whom a contract is made from a material element of the contract, it may well be that such a contract on that ground alone is one which could not be assigned without the promisor's consent, so as to entitle the assignee to sue him on it.
Where the contract is for the supply of some materials, there is nothing personal in it.36 An arbitration clause is not a personal covenant in the sense that it cannot be assigned.37 Nor does an arbitration clause affect either the rights or the assignability of a contract if it is otherwise assignable.38 A, a salt manufacturer, agreed with B to manufacture for him for a period of seven years, such quality of salt as B required in consideration of B paying him at a fixed rate, four month's credit after each delivery being allowed to B, and of his paying Government taxes and dues, and executing all but petty repairs in A's factory. It was held that the contract was based upon personal considerations, and that it was not therefore competent to B to assign the contract without A's consent.39 After referring to the terms of the contract the Court said that there was therefore, not only credit given to B in the matter of payment, but other liabilities thrown upon him, the discharge of which depended upon his solvency, and that there was also a certain discretion vested in him in regard to the quantity of salt to be demanded.40 It is observed that: 'You have a right to the benefit you contemplate from the character, credit and substance of the party with whom you contract'.41 But where A agreed to sell certain gunny bags to B which were to be delivered in monthly instalments for a period of six months, and the contract contained certain buyer's option as to quality and packing, it was held that the clause as to buyer's option did not preclude B from assigning the contract.42'There is nothing,' it was said, 'on the face of the contract to suggest that any credit was given by the defendant company to the original purchaser or that any circumstance of an especial or particular character existed which led to the making of the contract between the parties thereto'.43 Services of employees could not be transferred to another employer without their consent.44 In Pacific Brands Sport and Leisure Pty Ltd v. Underworks Pty Ltd, 45 it was held a purchaser of a business did not acquire the right to terminate a trade mark sub-licence the vendor had granted to a competitor, because the some terms of the sub-licence indicated that the relationship between the seller and the sub-licence were personal and unassignable. Prohibition against Assignment of Contract Parties may expressly prohibit assignment.46 The benefits of the contract are not then assignable. In such a case, a purported assignment by one party of the contract is invalid as against the other party, but it is valid and enforceable between the assignor and the assignee. The terms of a contract could be expressed, or may be implied from what had been expressed. It is legitimate to take the surrounding circumstances into account.47 Therefore on the question whether there was an agreement between the parties that the contract was to be non-transferable, the absence of a clause forbidding transfer was not conclusive.48 But it has also been held that that a prohibition of assignment cannot be implied because there is no express prohibition considering all circumstances of the case.49 In Linden Gardens Trust Ltd v. Lenesta Sludge Disposals Ltd, 50a building contract between an employer and a contractor expressly prohibited 'assignment of contract' by either party without the consent of the other. The contractor committed breaches and the employer commenced act ion for the breach. The employer then assigned the property including the rights of action to Linden without the consent of the
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contractor, and Linden continued the act ion commenced by the employer. The Court of Appeal made a distinction between assignment of rights to claim future performance under the contract and assignment of benefits under it like enforcing payments, and held that while the earlier was prohibited by the contract, the latter assignment was valid, and Linden could recover damages. On appeal, the House of Lords held that the words 'assignment of contract' meant benefits of contract as frequently used by lawyers and held that the assignment of all benefits was barred. Nor was such prohibition contrary to public policy. Such prohibition had a legitimate purpose of ensuring that the original parties to the contract were not brought into direct contractual relations with third parties. The assignment was therefore ineffective and Linden was not entitled to claim damages. The term prohibiting 'assignment of contract' in a contract may include variety of rights, viz. right to require future performance, the right to benefits accrued (viz. payments due) etc. It is possible for a contractual term to prohibit one and not the other, or to assign all the rights. In the Linden Gardens case, a question had arisen whether prohibition of assignment expressed as above prohibited assignment of both the rights mentioned above, or only the former. Parties who intend to draw sophisticated distinction between the different rights would provide so expressly.51 The clause was construed to prohibit assignment totally. Lord Browne-Wilkinson stated:
'Parties who have specifically contracted to prohibit the assignment cannot have intended to draw a distinction between the right to performance of a contract and the right to the fruits of the contract. This could have been achieved by drafting so...'.52
Prohibition against assignment of a contract or a part thereof or any benefit or interest therein or thereunder without the written permission of the council in a contract of road works would cover the assignment of a sum of money, due to the contractor, i.e., a debt to a financier, and he cannot recover it from the council. When the subject matter of a contract is a 'chose in action' which was not to be assigned without a written consent of a contractee, a debt due from the latter cannot be assigned as it is both a chose in act ion or a benefit or interest under the contract, and accordingly cannot be validly assigned without the consent of the Council.53 The assignee of a plot in the industrial development corporation under an assignment made without the consent of the corporation could not question the order of resumption of the plot by it for breach of terms by the assignor (original allottee).54 Where there is a prohibition to assign a contract, the legal representative of a deceased party cannot enforce the contract unless the deceased had performed part of his contract,55 or the performance by the legal representative has been accepted by the other party. Burden cannot be Assigned Broadly speaking, the benefit of a contract can be assigned,56 subject to the exception of personal contracts, but not the burden.57 This is because every person has the right to choose with whom he will contract, and no-one is obliged to accept the liability of a person other than the one with whom the contract is made. The principles were thus stated in Tolhurst v. Associated Portland Cement Manufacturers by the Court of Appeal:58
Neither at law nor in equity could the burden of a contract be shifted off the shoulders of a contractor onto those of another without the consent of the contractee. A debtor cannot relieve himself of his liability to his creditor by assigning the burden of the obligation to someone else; this can be brought about by the consent of all three, and involves the release of the original debtor...On the other hand, it is equally clear that the benefit of a contract can be assigned, and wherever the consideration has been executed, and nothing more remains but to enforce the obligation against the party who has received the consideration, the right to enforce it can be assigned, and can be put in suit by the assignee in his own name after notice...There is, however, another class of contracts where there are mutual obligations still to be enforced, and there it is impossible to say that the whole consideration has been executed. Contracts of this class cannot be assigned at all in the sense of discharging the original contractee and
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creating privity or quasi-privity with a substituted person...To suits on these contracts, therefore, the original contractee must be a party whatever his rights as between him and assignee. He cannot enforce the contract without showing ability on his part to perform the conditions performable by him under the contract. This is the reason why contracts involving special personal qualifications in the contractor are said, perhaps somewhat loosely, not to be assignable.
The assignee of the benefit of contract involving mutual rights and obligations does not transfer to the assignee the obligations of the assignor. In Pan Ocean Shipping Ltd v. Creditcorp Ltd, 59P chartered the Trident Beauty from T and agreed to pay hire twice monthly. T assigned the hire to C, to whom P paid an instalment in advance. The ship was out of action during all this period. P repudiated the contract and sought refund of the instalment. It was held that an assignee, who was never intended to be under any obligation to supply the consideration, could not be liable to repay. The remedy of P lay against T under the terms of the charter-party, and C's rights to receivables remained unaffected by T's obligations to P.60 Liabilities under the contract or burdens must be distinguished from 'conditional benefits'.61 A right assigned may be conditional or qualified, requiring the condition being satisfied before exercising the rights. The restrictions or qualifications are an intrinsic part of the right which the assignee has to take as it stands. 'Conditions can be attached to the exercise of a power in express terms or by implication...The condition must be relevant to the exercise of the right'.62 An exemption clause would bind an assignee. So did a condition bind the defendant that if it did purchase chalk from the plaintiff, it was bound to obtain all its requirements for the manufacture of cement on the piece of land from the plaintiff.63 A clause restraining an employee from soliciting or doing business with the employer's clients was held binding on the employee and could be enforced by the purchaser of the business of the original employer.64 Assignment: Specific InstancesAssignment by Operation of Statute Burden or liability under contracts may be assigned or transferred by operation of statute, viz. as a consequence of acquisition or taking over of undertakings or their managements.65 Statutes regarding acquisition, transfer or vesting of undertakings may provide, for example, for transfer of services of employees without affecting the terms and conditions,66 or transfer of rights and liabilities to and their exercise by the Central Government.67 Such statutes may also give the power to the Central Government or the transferee undertaking by approaching a tribunal,68 or by their own decisions,69 to cancel or vary agreements of the existing undertaking which appear to have been entered into in bad faith, or are detrimental to the interests of the undertaking, or are onerous or acquired for excessive consideration. Yet other statutes may provide that existing contracts shall continue to be in force and effect unless terminated by the Government of transferee undertaking,70 or that such contracts shall cease to have effect unless ratified by them.71 A transferee undertaking will be liable for any contract made by any received during the pendency of the acquisition or transfer.72 The contract with the transferor (acquired) undertaking is discharged from the date of the transfer.73 Assignment in a Contract for Future Delivery of Goods A contract for the future delivery of goods can be assigned, under s. 130 of The Transfer of Property Act, 1882 as an actionable claim so as to enable the assignee to sue on the claim in his own name. Thus ifA agrees to sell rapeseed, cotton or gunny bags to B, deliverable at a future date, either party can assign the contract without the consent of the other, while the contract is still executory, so as to enable the assignee to maintain an action in his own right and in his own name. As regards the interests of a buyer of goods in a contract for forward delivery, the Calcutta High Court has held in Jaffer Meher Ali v. Budge Budge Jute Mills Co, 74that such interest being an act ionable claim within the meaning of The Transfer of Property Act, 1882, may be assigned as such so as to enable the assignee to sue in his own name. Sale J. said:
The rule as regards the assignability to contracts in this country is that the benefit of a contract for the purchase of goods as distinguished from the liability thereunder may be assigned, understanding by the term benefitthe beneficial right or interest of the party under the contract and the right to sue to recover the benefits created thereby. This rule, is, however, subject to two qualifications: first, that the benefit sought to be assigned is not
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coupled to any liability or obligation that the assignor is bound to fulfil, and, next, that the contract is not one which has been induced by personal qualifications or considerations as regards the parties to it. Neither of these exceptions, I think, applies to the present case. There is nothing on the face of the contract to suggest that any credit was given by the defendant company to the original purchaser, or that any circumstance of an especial or personal character existed which led to the making of the contract between the parties thereto, nor, looking at the terms of the contract, does it appear to impose any liability or obligation of a personal character on the assignor which would prevent the operation of the rule of assignability. The contract is for the sale on the usual terms of a certain quantity of gunny bags to Kassim Karim, and subject to the exercise of certain options the purchaser has an absolute right to call for delivery of the goods on payment of the price. I am inclined to think that the right to claim the benefit of the contract, or in other words, the right on certain conditions to call for delivery of the goods mentioned in the contract, constitutes a 'beneficial interest in movable property, conditional or contingent', within the meaning of the definition of an act ionable claim in section 3 of the Transfer of Property Act, and as such is assignable.75
The right of the seller to call for payment of the price of goods on delivery is an act ionable claim and as such, assignable. The dicta in Jaffer Meher Ali v. Budge Budge Jute Mills Co are wide enough to include the seller's interest. A seller of goods can assign his rights, and the assignee is entitled to sue for damages in case the buyer wrongfully refuses to accept delivery.76 Assignment in a Contract of Pre-emption and of Repurchase A covenant in a deed of sale giving an option of pre-emption without any limit of time to the vendor and his heirs from the purchaser and his heirs, is void as offending the rule against perpetuities.77However, a covenant for preemption being a personal covenant is binding on the immediate parties and on their personal representatives; it creates an obligation arising out of contract and is enforceable under s. 40 of the Transfer of Property Act against a purchaser for value with notice or against a gratuitous transferee,78 but the benefit of it is restricted to the covenantee and cannot be transferred by him.79 An option to repurchase property sold is prima facie assignable, but the contract may be so worded as to show that it was to be personal to the grantee, and not assignable.80 Where the right to repurchase was not given as personal to the promisee (vendee) it was assignable, and the assignee could file a suit of specific performance to enforce it,81 and the seller must show that assignment was prohibited.82 Where the instrument of reconveyance is silent, a prohibition of assignment cannot be implied.83 Consignee of Goods under a Railway Receipt Under s. 74 of the Railways Act, 1989, the delivery of the railway receipt to the consignee now passes to the consignee the property in the consignment, and the consignee shall have all the rights and liabilities as the consignor.84 Before this amendment, the proposition that the transferee of a benefit under a railway receipt will have a right to sue the railway administration could not be accepted absolutely.85 A consignee with a railway receipt duly endorsed could maintain as owner, a suit for loss or damage to goods against the railways, but a bare consignee could not.86 An assignee had a right to sue only if he could bring his case within any of the exceptions to the general rule,87 which debarred any person who is not privy to a contract from instituting action for breach thereof.88In the absence of usage or statutory provision, the railway receipt cannot be accorded the benefits flowing from negotiability under the Negotiable Instruments Act, 1881.89 Negotiation of railway receipt might pass the property in goods; it could not however, transfer the contract contained in the receipt. Where title had passed to the consignee, he could sue.90 Whether title had passed or not depedned on the facts of each case.91 Assignment and Champerty A claim for damages for breach of contract, after breach, is not an 'actionable claim' within the meaning of s. 3 of the Transfer of Property Act, 1882, but a mere 'right to sue' within the meaning of s. 6(e) of that Act, and it cannot therefore be assigned.92Rights of action arising out of or incidental to rights of property can be assigned with the property transferred. An assignment of a bare right of act ion may also be upheld if the assignee has a genuine commercial or financial interest in taking the assignment; but a 'step toward the sale of a bare cause of action to a third party who had no genuine commercial interest in the claims' will be void as champertous since it involves trafficking in litigation.93 An assignment of an insured's right
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of act ion to an insurer who has indemnified the insured under the policy of insurance is valid because an insurer has a genuine interest in recovering the loss sustained by the payment on the policy.94 90 AIR 1962 SC 1810, [1963] 3 SCR 183. 91 AIR 1962 SC 1810 at 1817; Hindustan Steel Works Construction Ltd v. Bharat Spun Pipe Co, AIR 1975 Cal 8 at 11. 92 Ram Baran Prasad v. Ram Mohit Hazra, AIR 1961 Cal 152. 93 Ali Mistri v. Kayem Ali Sheikh, AIR 1955 Cal 621. 94 See below: &uot;Personal Contracts&uot;. 95 See below: &uot;Burden Cannot be Assigned&uot;. 96 Khardah Company Ltd v. Raymon & Co (India) Private Ltd, [1963] 3 SCR 183, AIR 1962 SC 1810 at 1818; See also Section 6(e) of the Transfer of Property Act, 1882: Mere right to sue cannot be transferred. 97 Nilliam Brandt's Sons & Co v. Dunlop Rubber Co, [1905] AC 454 at 462, [1904-7] All ER Rep 345; Re Wale Wale v. Harris, [1956] 1 WLR 1346 at 1350, [1956] 3 All ER 280; Re Tout & Finch Ltd,[1954] 1 WLR 178, [1954] 1 All ER 127; James Talcott Ltd v. John Lewis & Co Ltd, [1940] 3 All ER 592. 98 See below: &uot;Assignments under Provisions of Statutes&uot;. 99 Official Assignee v. Fakirji Cowasji, AIR 1930 Sind 77 at 79. 1 PR Viswanatha Iyer v. A Muthukumaraswami Pillai, AIR 1948 Mad 139; JH Tod v. Lakhmidas Purshotamdas, (1892) ILR 16 Bom 441 (there was no objection to a suit brought by the assignor and assignee as co-plaintiffs). 2 Section 15 of the Specific Relief Act, 1963. 3 Krishna Food and Baking Industry P Ltd v. New India Assurance Co Ltd, AIR 2009 SC 1000, (2008) 15 SCC 631 (Section 130 and 135 of the Transfer of Property Act. Section 38 of Insurance Act stated in the judgment does not apply to non-life insurance). 4 Chitty on Contracts, 28th edn., pp. 1059-1062, paras 20-068 to 20-074. 5 Jethalal Nagji Shah v. Municipal Corpn for Greater Bombay, ILR (1954) Bom 424, 55 Bom LR 901, AIR 1954 Bom 167. 6 Steel Authority of India v. State of Madhya Pradesh, AIR 1999 SC 1630. 7 Dharshi Monji v. Chandulal Girdharilal, AIR 1950 Kutch 84. 8 The Negotiable Instruments Act, 1881, s s. 14, 46-48. 9 See for distinction, Kamalakant Gopalji v. Madhavji Vaghji, AIR 1935 Bom 343; s. Maruthamuthu Naicker v. P Kadir Badsha Rawther, AIR 1938 Mad 377; Vaddadi Venkataswami v. Hanura Noor Muhamad Begum, AIR 1956 AP 9 (overruled on another point in AIR 1964 SC 1526). 10 Vaddadi Venkataswami v. Hanura Noor Muhamad Begum, AIR 1959 AP 9 (overruled on another point in AIR 1964 SC 1526); Kamalakant Gopalji v. Madhavji Vaghji, AIR 1935 Bom 343; Ghanshyam Das Marwari v. Ragho Sahu, AIR 1937 Pat 100(FB) ; TN Seshachalam Naidu v. A Venkatachalam Chetty, AIR 1954 Mad 820. 11 Halsbury's Laws of England, Vol. 16(2), 4th edn., Reissue, 1 November, 2003, EQUITY, para 770. 12 Section 140 of this Act. 13 New India Assurance Co Ltd v. Pawan Transport Corporation, AIR 2005 Jhar 44 (insurer can sue carrier for damage to insured goods carried). 14 2010 AIR SCW 1687, (2010) 4 SCC 114. 15 AIR 2000 SC 855; see also Gujrath Andhra Road Carriers Transport Contractors v. United India Insurance Company Ltd, AIR 2006 AP 401. 16 Economic Transport Organisation v. Charan Spinning Mills (P) Ltd, 2010 AIR SCW 1687 at 1703-1704, (2010) 4 SCC 114; for a discussion of the complex issues arising from such transactions, see the 70th Report of the Law Commission of India (1977) on the Transfer of Property Act, 1882, paras 109.32 to 109.37. 17 These are claims to the payment of liquidated sums of money, or debt, or price; or claims to beneficial interest in moveable property not in possession, act ual or constructive. See the Transfer of Property Act, s. 3.
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18 The Transfer of Property Act, 1882, s. 130-36. 19 The Indian Bills of Lading Act, 1856, s. 1. 20 The Copyright Act, 1957, s. 19. 21 The Negotiable Instruments Act, 1881, s s. 14,46-48. 22 The Patents Act, 1970, s s. 68-70. 23 The Insurance Act, 1938, s. 38. 24 The Marine Insurance Act, 1963, s s. 17,52-53. 25 The Transfer of Property Act, 1882, s. 135; seeKrishna Food and Baking Industry P Ltd v. New India Assurance Co Ltd, AIR 2009 SC 1000, (2008) 15 SCC 631. 26 The Motor Vehicles Act, 1988, s. 157 (automatic transfer of policy upon transfer of vehicle). 27 The Major Port Trusts Act, 1963, s. 70. 28 The Trade Marks Act, 1999, s s. 2(b), 37-45. 29 The Railways Act, 1989, s. 74. 30 See for example, the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, s. 10; the Employees' State Insurance Act, 1948, s. 60; the Pensions Act, 1871, s. 12; the Personal Injuries (Emergency Provisions) Act, 1962, s. 8. 31 Brandt's Sons & Co. v. Dunlop Rubber Co., [1905] AC 454 at 462, [1904-7] All ER Rep 345; Jugulkishore Saraf v. Raw Cotton Co. Ltd., [1955] 1 SCR 1369; AIR 1955 SC 376; Sethloon Karan Sethiya v. Ivan Ejohn, [1969] 1 SCR 122, AIR 1969 SC 73; Bharat Nidhi Ltd. v. Takhatmal, [1969] 1 SCR 595, AIR 1969 SC 313 (irrevocable power of attorney amounted to equitable assignment); but see now Suraj Lamps and Industries Pvt Ltd v. State of Haryana, SLP (C) No 13917 of 2009 dec on 11 Oct 2011 (A power of attorney does not create any right, title or interest in an immovable property.). 32 PR Viswanatha Iyer v. A Muthukumaraswami Pillai, AIR 1948 Mad 139; Jethalal Nagji v. Municipal Corpn, Greater Bombay, ILR (1954) Bom 424, 55 Bom LR 901, AIR 1954 Bom 167. 33 Section 40 below. 34 Tolhurst v. Associated Cement Manufacturers (1900) Ltd, [1902] 2 KB 660 at 668; affirmed [1903] AC 414, [1900-3] All ER Rep 386(HL) . 35 Toomey v. Rama Sahi, (1889) 17 Cal 115 at 121. 36 Hindustan Steel Works Construction Ltd. v. Bart Spun Pipe Co., AIR 1975 Cal 8 at 11, referring to Khaddar d' Co. Ltd. v. Raymond d' Co. (India) Pvt Ltd., AIR 1962 SC 1810. 37 Shayler v. Woolf, [1946] Ch 320, [1946] 2 All ER 54, distinguishing Cottage Club Estates v. Woodside Estates Co (Amersham) Ltd, [1928] 2 KB 463, [1927] All ER Rep 397; Khardah Company Ltd v. Raymon d' Co (India) Private Ltd, [1963} 3 SCR 183, AIR 1962 SC 1810; Hindustan Steel Works Construction Ltd v. Bharat Spun Pipe Co, AIR 1975 Cal 8 at 11; RK Associates v. v. Channappa, AIR 1993 Kant 247. 38 Khardah Company Ltd v. Raymon d' Co (India) Private Ltd, AIR 1962 SC 1810, [1963] 3 SCR 183. 39 Namasivaya Gurukkal v. Kadir Ammal, (1894) ILR 17 Mad 168. 40 (1894) ILR 17 Mad 168 at 174, the decision also proceeded on the ground that the contract was executory, and its assignment, as such, was invalid without A's consent. 41 Humble v. Hunter, [1848] 12 QB 310, per Lord Denman CJ. at 317, [1843-60] All ER 468; Arkansas Valley Smelting Co. v. Belden Mining Co., (1888) 127 US 379, 389. 42 Jaffer Meher Ali v. Budge Budge Jute Mills Co., (1906) ILR 33 Cal 702; affirmed on appeal: (1909) ILR 34 Cal 289. 43 (1906) ILR 33 Cal 702 at 707. 44 BCPP Mazdoor Sangh v. NTPC, AIR 2008 SC 336, (2007) 14 SCC 234 (employees of public sector undertaking entitled to hearing). 45 (2006) 230 ALR 56, [2006] FCAFC 40 (Federal Court of Australia). 46 So may statutes, see above, under the heading: 'Assignment under Statutes'.
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47 See Shyam Singh v. Daryao Singh, AIR 2004 SC 348, (2003) 12 SCC 160 (right of reconveyance held not personal in this case). 48 Khardah d' Co. Ltd. v. Raymon d' Co. Ltd., [1963] 3 SCR 183 at 207, AIR 1962 SC 1810 at 1820. 49 Shyam Singh v. Daryao Singh, AIR 2004 SC 348, (2003) 12 SCC 160 (long term of 10 years for reconveyance). 50 [1994] 1 AC 85, [1993] 3 All ER 417(HL) ; Re Duncan Wallace,[1994] 110 LQR 42. 51 Re Tettenborn,[1994] 53 CLJ 24. 52 Linden Gardens Trust Ltd. v. Lenesta Sludge Disposals Ltd., [1994] AC 85, [1993] 3 All ER 417 at 429. 53 Helstan Securities Ltd. v. Hertfortshire County Council, [1978] 3 All ER 262. 54 Indu Kakkar v. Haryana State Industrial Development Corporation Ltd, (1999) 2 SCC 37, AIR 1999 SC 296. 55 The Specific Relief Act, 1963, s. 15(b). 56 Khardah & Co Ltd v. Raymon & Co (India) Pvt Ltd, AIR 1962 SC 1810, [1963] 3 SCR 183. 57 Section 40 for vicarious performance, s. 41 for acceptance of performance from third person, and s. 62 for novation. 58 MR Collins in Tolhurst v. Associated Portland Cement Manufacturers(1900) Ltd, [1902] 2 KB 660 at 668-69; affirmed in [1900-3] All ER Rep 386(HL) . 59 Pan Ocean Shipping Ltd. v. Creditcorp Ltd. (The Trident Beauty), [1994] 1 WLR 161, [1994] 1 All ER 470(HL) . 60 Re Tettenbom,(1993) CLJ 220; Re Friedman,[1994] 110 LQR 521. 61 Chitty on Contracts, 28th edn., p. 1063, para 20-077. 62 Rhone v. Stephens, [1994] 2 AC 310, [1994] 2 WLR 429(HL) per Lord Templeman at 437; Halsall v. Brizell, [1957] Ch 169, [1957] 1 All ER 371. 63 Tolhurst v. Associated Portland Cement Manufacturers Ltd, [1902] 2 KB 660 at 668; affirmed in [1900- 3] All ER Rep 386 (HL). 64 Morris Angel & Son Ltd. v. Hollande, [1993] 3 All ER 569 (transfer of employment under statutory regulations, held that regulations were to protect interests of the employees, and the benefit as well as the burden devolved upon the transferee). 65 See the Companies Act, 1956, s. 394(2) (effect of reconstruction and amalgamation of companies). 66 See the Air Corporations Act, 1953, s. 20 [Repealed by the Air Corporations (Transfer of undertakings and Repeal) Act, 1994]; the Airports Authority of India Act, 1994, s. 18. 67 See the Atomic Energy Act, 1962, s. 13, contracts relating to prospecting or mining certain prescribed substances. 68 The Air Corporations Act, 1953, ss. 23, 24 [Repealed by the Air Corporations (Transfer of undertakings and Repeal) Act, 1994]. 69 The Indian Copper Corporation (Acquisition of Undertaking) Act, 1972, s. 17; the Indian Iron and Steel Company (Taking over of Management) Act, 1972, s. 14 [Repealed by the Iron and Steel companies (Amalgamation and take over Laws) Repeal Act, 2000 (26 of 2000)]. 70 The Burmah Shell (Acquisition of Undertakings in India) Act, 1976, s. 13. 71 The Auroville Foundation Act, 1988, s. 28; the Coal Mines (Nationalisation) Act, 1973, s. 29. 72 U P State Sugar Corporation v. Mahalchand M Kothari, AIR 2005 SC 61, (2005) 1 SCC 348. 73 Shrikant v. Vasantrao, AIR 2006 SC 918, (2006) 2 SCC 682. 74 (1906) 33 Cal 702; affirmed on appeal in (1907) 34 Cal 289; Hunsraj Morarji v. Nathoo Gangaram (1907) 9 Bom LR 838. 75 Jaffer Meher Ali v. Budge Budge Jute Mills Co, (1906) 33 Cal 702 at 707-08. 76 PL Rangiah Chettiar v. Parthasarathy Iyengar, AIR 1947 Mad 258. 77 Dinkerrao Ganpatrao v. Narayan Vishwanath Mandalik, (1922) 47 Bom 191, AIR 1922 Bom 841, 82 IC 628; Maharaj Bahadur Singh v. Balchand, (1920) 48 IA 376, AIR 1922 PC 165, 61 IC 702; Kolathu Ayyar v. Ranga Vadhyar, (1912) 38 Mad 114, AIR 1916 Mad 856; Nabin Chandra Sarma v. Rajani Chandra Chakrabarti, (1920) 25 CWN 901, AIR 1921 Cal 162, 63 IC 196; Gopi Ram v. Jeot Ram, ILR (1923) 45 All 478, 82 IC 646, AIR 1923 All 514; Ratanlal Kanhaiyalal Bania v.
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Ramanujdas Ramchandra, ILR (1945) Nag 174, 216 IC 266, AIR 1944 Nag 187. 78 Basdeo Rai v. Jhagru Rai, AIR 1924 All 400, 83 IC 390; Aulad Ali v. Syed Ali Akhtar, AIR 1927 All 170, 100 IC 683(FB) ; Harkisandas Bhagwandas v. Bai Dhanu, 98 IC 634, (1926) 50 Bom 566, AIR 1926 Bom 497; Rakhama Sitaram Ghadge v. Laxman Sitaram Ghadge, (1959) Bom 1705, 61 Bom LR 1170, AIR 1960 Bom 105; Karichori Raman Nair v. Kodoth Krishnan Nair, AIR 1976 Ker 22. 79 Ram Baran Prasad v. Ram Mohit Hazra, [1967] I SCR 293, AIR 1967 SC 744. 80 Vishweshwar Narsabhatta Gaddada v. Durgappa Irappa Bhatkar, (1940) Bom LR 653, 191 IC 139, AIR 1940 Bom 339, approved in TM Balakrishna Mudaliar v. M Satyanarayana Rao, AIR 1993 SC 2449. 81 TM Balakrishna Mudaliar v. M Satyanarayana Rao, AIR 1993 SC 2449; approving Vishweshwar Narsabhatta Gaddada v. Durgappa Irappa Bhatkar, (1940) Bom LR 653, 191 IC 139, AIR 1940 Bom 339 and Sinnakaruppa Gounder v. Karuppuswami Gounder, AIR 1965 Mad 506. 82 Raghunath Bali v. Pandit Sriniwas, AIR 2012 Uttar 100. 83 Shyam Singh v. Daryao Singh, AIR 2004 SC 348, (2003) 12 SCC 160. 84 The Railways Act, 1989, s. 74 provides:Passing of property in the goods covered by railway receipt.--The property in the consignment covered by a railway receipt shall pass to the consignee or the endorsee, as the case may be, on the delivery of such railway receipt to him, and he shall have all the rights and liabilities as the consignor. 85 Shah Mulji Deoji v. Union of India, AIR 1957 Nag 31. 86 Chhangamal Harpaldas v. Dominion of India, 59 Bom LR 704, AIR 1957 Bom 276. 87 Utkal Farm and Road Machinery v. Union of India, AIR 1995 Mad 185; consignee can sue because consignor entered into contract of carriage 'for the benefit' of the consignee. 88 Ibrahim Isaphai v. Union of India, AIR 1966 Guj 6; following Chhanganul Harpaldas v. Dominion of India, AIR 1957 Bom 276. 89 Morvi Mercantile Bank v. Union of India, AIR 1965 SC 1954 at 1965 per Mudholkar and Ramaswami JJ.; Devi Charan Sri chand v. Union of India, AIR 1982 All 396; s. 74 of the Railways Act 1989, its statement of objects : '... the Bill provides for statutory recognition of the railway receipt as a negotiable instrument'. 90 Morvi Mercantile Bank Ltd v. Union of India, AIR 1965 SC 1954 at 1960; approving Shamji Bhanji & Co v. North Western Railway Co, AIR 1947 Bom 169; Union of India v. West Punjab Factories Ltd, AIR 1966 SC 395; Bhai Mehar Singh Kishan Singh v. Union of India, AIR 1979 Del 158; Lal Chand Madhav Das v. Union of India, AIR 1986 Del 29; New India Assurance Co Ltd v. Union of India, (1995) 2 SCC 417. 91 New India Assurance Co. Ltd. v. Union of India, (1995) 2 SCC 417; Union of India v. West Punjab Factories, AIR 1966 SC 395. 92 Abu Mahomed v. SC Chunder, (1909) ILR 36 Cal 345; Pansulari Vencataswami v. Mentara Ramachandra Raju, (1915) ILR 38 Mad 138 at 140, AIR 1916 Mad 595, 18 IC 520. 93 Chitty on Contracts, 28th edn., para 20-048, p. 1052; Trendtex Trading Corporation v. Credit Suisse, [1982] AC 679, [1981] 3 All ER 520(HL) ; Bourne v. Coloderse Ltd., (1985) ICR 291; Browntonn Ltd,' Edward Moore Inbucon Ltd.,[1985] 3 All ER 499. 94 King v. Victoria Insurance Co. Ltd., [1896] AC 250; Compania Colombiana de Seguros v. Pacific Steam Navigation Co., [1965] 1 QB 101, [1964] 1 All ER 216; Hindustan Corpn (Hyd) Pvt Ltd. v. United India Fire and General Insurance Ltd., AIR 1997 AP 347 (a letter of subrogation was an assignment or transfer of the rights and remedies of the insured); United India Fire and General Insurance Co. Ltd. v. Pelaniappa Transport Carriers, AIR 1986 AP 32.
Currency The money tendered must be current legal tender of the country.95 Where the money obligations are expressed in a certain currency, the payment must be made in that currency. When a mortgage debt is contracted in a particular currency, it should be repaid in that currency. Where a loan to a mortgagor was made of Rs 450 in the Poona currency, equivalent to Rs 435. 20 of the British Indian currency, the mortgagee could not claim Rs 450/- in the British Indian currency, and the mortgagor was entitled to redeem on payment of Rs 435.20 in the British Indian currency.96 But where property was sold in Ceylon
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by an agent, and due to currency exchange restrictions the money could not be brought into India, the agent was not liable to pay the price in India in rupees.97 Irrespective of the currency in which the obligation or debt is expressed (the money of account), the currency in which it will be discharged (the money of payment) will be determined by reference to the law of the place where the amount is to be paid or the obligation discharged. 'There is no necessary correlation between the proper law that governs an obligation and the...currency in which the obligation is to be discharged'.1 The English law is that if a debt or other liability expressed in a foreign currency is payable in England, the debtor must tender pounds in discharge. The debtor may also discharge his debt or liability by tendering foreign currency, but the creditor cannot compel him to do so.2 He must pay in sterling if payment in foreign currency is impossible.3 The UNIDROIT Principles, for example, allow the promisor to pay in a currency of the place of payment in certain circumstances, even when parties have expressed payment in a certain currency, unless it is expressly stated that the payment is to be made only in a particular currency.4 This recognises the definite advantages of paying in the currency of the place of payment. Such circumstances arise when it is impossible to make payment in the currency expressed, eg., because of exchange regulations, non-availability of currency. Under the principles, if the obligation is not expressed in a particular currency, payment must be made in the currency of the place of payment.5 The plaintiff who brings an act ion to enforce a foreign money obligation under a contract is entitled to claim judgment in foreign currency, if the proper law of the contract was the law of the foreign country and the money of account and payment was that of foreign country.6 An English company agreed to purchase yarn from a Swiss company in non-EEC area. The payment was to be made in Swiss francs and the law governing the contract was Swiss law. In an action by the Swiss company for recovery of the price in Swiss francs, the Court of Appeal held that the judgment should be for payment in Swiss francs and not in pound sterling because the contract contemplated payment in Swiss francs and pound sterling was not a stable currency.7 The House of Lords affirmed the judgment and held that the plaintiff was entitled to claim and obtain judgment for the amount of the debt expressed in the currency of a foreign country, if the proper law of contract was the law of that country and the money of account and payment was that of the same country.8 Where the currency of the contract between the parties was a foreign currency, the English Courts have power to give judgments in that currency.9 In the event of awarding damages, they should be calculated in the currency in which the loss was effectively felt or borne by the person suffering it, considering the currency in which he generally operated or with which he had the closest connection. Where French charterers of a Swedish ship working in Paris has to pay damages to the Brazilian receivers for damage to the cargo due to the failure of machinery of the ship in Brazilian currency purchased with French francs, the House of Lords10 applied the principle of restitutio in integrum and awarded damages in French francs as that would truly express the French company's loss. It was held that in ascertaining the currency, the court must ask what is the currency, payment in which will as nearly as possible compensate the plaintiff in accordance with the principle of restitution, and whether the parties must be taken reasonably to have had this in contemplation.11 Principle of Nominalism If the obligation is to pay an amount in a particular currency, and the creditor claims a higher amount on account of devaluation in the rupee, the principle of nominalism applies. This principle is that if a debt payable in the future involves an obligation to pay the nominal amount of debt at the time of payment in whatever is the legal tender for that currency at that date, irrespective of the fluctuations in the currency between the date of the contract and the date of payment the principle of nominalism applied. 'A man who stipulates for a pound must take a pound when payment is made, whatever the pound is worth at that time.'12 The principle of nominalism has been stated thus:
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A debt expressed in the currency of any country involves an obligation to pay the nominal amount of the debt in whatever is legal tender at the time of payment according to the law of the country in whose currency the debt is expressed (lex monetae), irrespective of any fluctuations which may have occurred in the value of that currency in terms of sterling or any other currency, of gold, or of any commodities between the time when the debt was incurred and the time of payment.13
The date on which payment becomes due is the crucial date. If the payment becomes due periodically and is of a recurring nature, the devaluation effected up-to-date must be taken into account every time, because the payment becomes due only then. Both the creditor and the debtor, bear the risk of the appreciation of the currency in which the debt is expressed. Thus where English law was the proper law of the contract, a debt expressed in pounds was liable to be discharged in English currency at the date fixed for payment14 and a debt expressed in a foreign currency, eg. marks, the same nominal amount of marks.15 The rule is the same in all foreign systems of law.16 This does not mean that where a party to a contract with international elements makes a late payment, it does not become liable to compensate the creditor for the exchange losses if the currency in which the debt is expressed falls in value relative to the currency in which the creditor operates.17 Where the sellers were in breach of contract in failing to ship the goods on or before the due date, the effect of accepting the goods was that the term as to the payment of price remained in full force. If in the meanwhile, between the date of the contract and the date the full price fell to be paid, the currency rates changed, the buyers were obliged to pay an enhanced price. But the buyer could recover the difference between the original price and the enhanced price as damages, which were not too remote.18 Parties to the contract are free to contract out of this principle of nominalism, as the principle itself rests on the presumed intention of the parties. Creditors can protect themselves from the risk of depreciation of currency, viz. by adopting a gold clause or clauses linking payment with cost-of-living index or other indices. The validity, meaning and effect of a gold clause are determined by the proper law of the contract. Dollar bonds repayable by the British Government in New York in gold coin of the United States or at a fixed rate of 4.86 1/2 dollars to a pound had to be paid in New York, according to the law of the USA at the time of payment. And by that law, making the payment in gold being illegal, the payment would be dollar for dollar at the nominal amount of the bonds and not in gold coins or equivalents thereof.19 Where English law is the proper law of contract, the clause referring to gold is presumed to be a gold value clause. It does not impose an obligation to pay in gold or gold coins, but it is used to ascertain the amount of the debt so that the debtor has to pay in legal tender of the currency the amount necessary to purchase gold or gold coins to the nominal amount of the debt.20 Insulation against decline in the domestic purchase power of the currency would come from index-linking to a domestic index, such as the retail price index.21 The validity of an English mortgage under which both the principal debt and interest were 'index-related' to a foreign currency, was upheld by the Court. Although payments were due in pound sterling, their amounts were to vary proportionately to the variation in the rate of exchange between the pound and the Swiss franc.22 Exchange Rate If the parties have by agreement fixed the rate of exchange, the court will apply that rate.23 Whether increase in exchange rate can be claimed from the other party is a matter of construction of the agreed term.24 Else the rule of English law is, that a debt expressed in a foreign currency payable in England must be converted into sterling with reference to the rate of exchange prevailing on the day when the debt is paid.25 In Renusagar Power Co Ltd v. General Electric Co, 26 the Supreme Court has also observed that conversion of currency at the stage of discharge of a monetary obligation is to be made on the basis of the exchange rate on the date of payment. This rule would also apply where payment in foreign currency is impossible, and the debtor must pay in sterling.27
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In Syndic in Bankruptcy of Nasralla Khoury v. Khayat, 28 a question arose about the date for the rate of exchange applicable for payment on a bill or note. The Privy Council held that the rate of exchange to be applied was at the date of maturity of a bill or note and not the date of act ual payment. Lord Wright said:
there are at least four different alternative rules which might be adopted. The rate of exchange might be determined as at the date at which payment was due, or at the date of actual payment, or at the date of the commencement of proceedings to enforce payment, or at the date of judgment. English law has adopted the first rule,not only in regard to obligations to pay a certain sum at a particular date, but also in regard to obligations the breach of which sounds in damages, as for an ordinary breach of contract, and also in regard to the satisfaction of damages for a wrongful act or tort.
However, where payment of a sum of money was required to be calculated at a rate expressed in US dollars, but was payable in British pounds sterling equivalent, and there was a default in payment, then in the absence of any agreement to the contrary, any payment after the default and before any judgment or award enforcing payment was to be converted at the rate of exchange prevailing on the date of payment, and not at the rate prevailing on the date of default or the date of judgment or award.29 Where payment in foreign currency can only be made after permission under exchange control laws, the debt does not become payable till then, and the exchange rate for payment would be the date of obtaining of permission.30 In comparison, the UNIDROIT Principles give to the promisee an option to require payment according to the applicable rate of exchange prevailing at the time payment is due, or at the time of actual payment, if the promisor does not make the payment at the time it is due.31 Judgments in Foreign Currency In 1975, the House of Lords in Milliangos v. George Frank (Textiles) Ltd 32 held that a judgment could be given for an amount expressed in foreign currency or the sterling equivalent at the date the court authorises enforcement of the judgment in terms of sterling, approving the decision of the Court of Appeal which had held that, unless the parties expressly or impliedly agreed otherwise, an arbitrator could make an award in foreign currency when it was both the money of account and the money of payment.33 In doing so, the House of Lords overruled its own decision in an earlier case which had held that an English court could not give judgment for the payment of an amount expressed in foreign currency.34 In Forasol v. Oil and Natural Gas Commission, 35 the Supreme Court extensively reviewed the English judgments and laid down the law relating to conversion of foreign currency into Indian currency in enforcing judgments and awards. In this case, the arbitration award directed certain payments to be made in French francs, but did not specify the rate of exchange at which the French francs were to be converted into Indian rupees. The Court examined the question with reference to the following dates:
(i) (ii) (iii) (iv) (v) (vi)
the date when the amount became due and payable; the date of the commencement of the act ion; the date of the arbitration award; the date of the decree; the date when the court orders execution to issue; and the date when the decretal amount is realised or paid,
After discussion of the English authorities on the subject, the Court held first, that a court in India would have jurisdiction to pass a decree for a sum expressed in foreign currency; by making the payment of foreign currency subject to permission of the foreign exchange authorities under the Foreign Exchange Regulation Act, 1973. It rejected the view that the plaintiff should be given judgment in the form in which he asked for it and must be left to extricate himself from the intricacies of the law relating to execution and
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exchange control,36 and held that the decree should provide, in the alternative, for payment of a sum of money in Indian rupees. As regards the date for converting foreign currency into Indian rupees, it was held that a court must select a date which puts the plaintiff in the same position in which he would have been had the defendant discharged his obligation when he ought to have done, keeping in mind that the rate of exchange is not a constant factor but fluctuates from time to time. It discarded the first and second of the above dates on the ground that it did not satisfy this condition, and that selecting it would expose the parties to the unforeseeable changes in the monetary market. The date of decree was rejected because 'the money decree and the payment by the judgment debtor...are two different matters widely separated by successive execution applications and objections', and if the decretal debt were recovered in portions, different rates of exchange would come to be fixed at different times. The opinion in the Milliango's case37 that the date of conversion should be the date when the court authorises the enforcement of the judgment, would be inapplicable to India. The date of payment or realisation was rejected as the proper date of conversion on the ground of procedural difficulties relating to payment of court fees, pecuniary limits of jurisdiction of courts, and difficulties in execution proceedings. The Court held that among all the dates, the latest of the dates, i.e., the date of passing of the decree (final judgment) was the fairest to both the parties.38 The Supreme Court has also set out in detail the practice which ought to be followed in suits in which a sum of money expressed in foreign currency can legitimately be claimed by the plaintiff and decreed by the Court,39 but has specified that execution can issue only in the rupee equivalent specified in the decree. As regards the powers of the arbitrator to give an award in foreign currency, the Supreme Court held that the arbitrators and umpires had this power, and that they should provide in the award the rate of exchange at which the sum awarded in a foreign currency should be converted, which shall be done on the basis of the rate of exchange prevailing on the date of the award or the date nearest or most nearly preceding the date of award; but omission to mention the rate of conversion would not vitiate the award. A person desirous of making payment of the amount so awarded (whether the rate of exchange is mentioned therein or not) could do so without the award being made rule of the court. But when the award is filed in the court for passing a judgment in its terms, the court passing a decree would direct payment of rupee equivalent to the foreign currency debt at the rate of exchange prevalent at the date of the decree (final order).40 In a later judgment, the Supreme Court41 rejected the contention that the exchange rate for conversion should be that prevailing on the date of payment, and refused to reconsider the judgment in the Forasol case mentioned above. 95 For tender of coinage, see the Indian Coinage, Act 1906, s s. 11-15A; for tender of currency notes, see the Reserve Bank of India Act, 1934ss. 22, 26;Salik Ram Upadhia v. B Jai Gopal Singh, AIR 1955 All 350. 96 Trimbak Jivaji Deshamukha v. Sakharam Gopal, (1891) 16 Bom 599. 97 VD Kumarappan v. L Suppiah, AIR 1965 Mad 314. 1 Re United Railways of the Havana & Regia Warehouses Ltd, [1961] AC 1007 at 1060, [1960] 2 All ER 332. 2 Dicey and Morris, Conflict of Laws, 12th edn., p. 1580. 3 Libyan Arab Foreign Bank v. Bankers Trust Co., [1989] QB 728, [1989] 3 All ER 252; but see VD Kumarappan v. L Suppiah, AIR 1965 Mad 314. 4 UNIDROIT Principles, Art. 6.1.9. 5 UNIDROIT Principles, Art. 6.1.10. 6 Jean Kraut AG v. Albany Fabrics Ltd, [1977] 2 All ER 116, applying Miliangos v. George Frank (Textiles) Ltd, [1975] 3 All ER 801(HL), [1976] 3 WLR 477. 7 Miliangos v. George Frank (Textiles Ltd), [1975] 1 All ER 1076; affirmed in [1975] 3 All ER 801(HL) ; following Schorsch Meier Gmbh v. Hennin, [1975] 1 All ER 152 (a case of a country within EEC); applying Young v. Bristol Aeroplane Co Ltd, [1944] 2 All ER 293; affirmed in [1946] 1 All ER 98; Jean Kraut AG v. Albany Fabrics Ltd, [1977] 2 All ER 116; Re United
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Rlys of the Havana and Regla Warehouses,[1960] 2 All ER 332 distinguished. 8 Miliangos v. George Frank (Textiles) Ltd, [1975] 3 All ER 801(HL), [1976] 3 WLR 477; Deutsche Bank v. Humphrey, (1926) 272 US 517 referred to. 9 Schorsch Meier GMBH v. Hennin, [1975] I All ER 237. 10 Services Europe Atlantique Sud (SEAS) v. Stockholms Rederiaktieholag SVEA-The Folias, [1979] 1 All ER 421 at 431, 433, applying Jugoslavenska Oceanska Plovidba v. Castle Investment Co Inc, [1973] 3 All ER 498; approving Jean Kraut AG v. Albany Fabrics Ltd, [1977] 2 All ER 116, [1977] QB 182; Federal Commerce & Navigation Co Ltd v. Tradax Export SA, [1977] 2 All ER 41, [1977] QB 324. 11 Services Europe Atlantique Sud (Seas) v. Stockhoms Rederiaktieholag SVEA-The Folias, [1979] 1 All ER 421. 12 Treseder Griffin v. Co-op Insurance Society Ltd, [1956] 2 QB 127 at 144 (CA), [1956] 2 All ER 33 per Denning LJ. at 36; Mann,[1957] 78 LQR 181; Dicey and Morris, The Confict of Laws, 12th edn., Vol. 2, p. 1550-52. 13 Dicey and Morris, The Conflict of Laws, Vol. 2, 12th edn., r. 204, p. 1550. 14 Ottoman Bank v. Chakarian, [1938] AC 260; Sforza v. Ottoman Bank of Nicosia, [1938] AC 282; Bonython v. Commonwealth of Australia, [1951] AC 201; Treseder Griffin v. Co-op Insurance Ltd, [1956] 2 QB 127, [1956] 2 All ER 33; Re United Rlys of Havana & Regla Warehouses Ltd, [1961] AC 1007, [1960] 2 All ER 332(HL) ; [1960] 2 WLR 969. 15 Re Chesterman's Trusts,[1923] 2 Ch 466; cf Addison v. Brown, [1954] 1 WLR 779 at 785, [1954] 2 All ER 213. 16 Dicey and Morris, The Confict of Laws, Vol 2, 12th edn., p. 1552. 17 International Minerals & Chemicals Corpn v. Karl O Helm AG, [1986] 1 Lloyd's Rep 81; President of India v. Lips Maritime Corp The Lips, [1988] AC 395, [1987] 3 All ER 110. 18 Aruna Mills Ltd v. Dhanrajmal Gobindram, [1968] 1 QB 655, [1968] 2 WLR 101, [1968] 1 All ER 113. 19 R v. International Trustee for the Protection of Bondholders Akt, [1937] AC 500, [1937] 2 All ER 164(HL) . 20 Feist v. Societe Intercommunale Beige d'Electricite, [1934] AC 161, [1933] All ER Rep 228; Chitty on Contracts, 28th edn., p. 1133, para 22-070. 21 Stanwell Park Hotel Co. Ltd. v. Leslie, [1952] 85 CLR 189. 22 Multiservice Bookbinding Ltd. v. Marden, [1979] Ch 84, [1978] 2 All ER 489; Nationwide Building Society v. Registry of Friendly Societies, [1983] 1 WLR 1226, [1983] 3 All ER 296. 23 Boissevain v. Weil, [1950] AC 327, [1950] 1 All ER 728. 24 Pure Helium India Pvt Ltd v. Oil and Natural Gas Commission, AIR 2003 SC 4519, (2003) 8 SCC 593. 25 Syndic in Bankruptcy of Nasralla Khoury v. Khayat, [1943] AC 507, [1943] 2 All ER 406(PC) . 26 AIR 1994 SC 860 at 901, (1994) Supp 1 SCC 644 at 647. 27 Libyan Arab Foreign Bank v. Bankers Trust Co., [1989] QB 728, [1989] 3 All ER 252. 28 [1943] AC 507, [1943] 2 All ER 406. 29 George Veflings Rederi A/S v. President of India (The Bellami), [1978] 3 All ER 838. 30 Cummings v. London Bullion Co. Ltd., [1952] 1 KB 327, [1952] 1 All ER 383. 31 UNIDROIT Principles, Art. 6.1.9(4). 32 [1976] AC 35, [1975] 3 All ER 801, [1976] 3 WLR 477(HL) . 33 Jugoslavenska Oceanska Plovidba v. Castle Investment Co Inc, [1974] QB 292, [1973] 3 All ER 498(CA) . 34 Re United Rlys of Havana and Regla Warehouses Ltd, [1961] AC 1007, [1960] 2 All ER 333(HL) . 35 (1984) Supp SCC 263, AIR 1984 SC 241. 36 Schorsch Meier GMBH v. Hennin, [1975] QB 416, [1975] 1 All ER 152, [1974] 3 WLR 823(CA) . 37 Miliangos v. George Frank (Textiles) Ltd, [1976] AC 35, [1975] 3 All ER 801, [1976] 3 WLR 477(HL) . 38 Applied in Sea Stream Navigation Ltd v. LMJ International, GA 3333/2011 decided on 5 Feb 2013 (Cal).
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39 Forasol v. Oil and Natural Gas Commission (1984) Supp SCC 263, AIR 1984 SC 241 at 270-72 (discussing possible reliefs which can be claimed by a plaintiff, payment of court fees at the time of filing the suit, and at the time of the decree, proof of rate of exchange, modification in orders in appeal etc). 40 AIR 1984 SC 241 at 271. 41 Renusagar Power Co. Ltd. v. General Electric Co., AIR 1994 SC 860, (1994) Supp 1 SCC 644.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER IV Of the Performance of Contracts/Contracts which must be performed/S. 38.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which must be performed S. 38. Effect of refusal to accept offer of performance.-Where a promisor has made an offer of performance to the promisee, and the offer has not been accepted, the promisor is not responsible for non-performance, nor does he thereby lose his right under the contract. Every such offer must fulfil the following conditions: (1) (2)
(3)
it must be unconditional; it must be made at a proper time and place, and under such circumstances that the person to whom it is made may have a reasonable opportunity of ascertaining that the person by whom it is made is able and willing there and then to do the whole of what he is bound by his promise to do; if the offer is an offer to deliver anything to the promisee, the promisee must have a reasonable opportunity of seeing that the thing offered is the thing which the promisor is bound by his promise to deliver.
An offer to one of several joint promisees has the same legal consequences as an offer to all of them. Illustration A contracts to deliver to B at his warehouse, on the first March, 1873, 100 bales of cotton of a particular quality. In order to make an offer of performance with the effect stated in this section, A must bring the cotton to B's warehouse, on the appointed day, under such circumstances that B may have a reasonable opportunity of satisfying himself that the thing offered is cotton of the quality contracted for, and that there are 100 bales.
Introduction Section 38 provides that the promisor is not responsible for non-performance, if his offer of performance is not accepted by the promisee. The second paragraph provides the conditions of a valid offer to perform.
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Tender: Offer to Perform An 'offer to perform' is referred to as 'tender' under the English law. The word 'tender' is not used in the section. The first sub-section is chiefly, though not exclusively, appropriate to an offer of payment; the second and third concern offers of other kinds of performance, such as delivery of goods. The principles have been stated in Startup v. Macdonald :42
The law considers a party who has entered into a contract to deliver goods or pay money to another as having substantially performed it, if he has tendered the goods or money to the party to whom the delivery or payment was to be made, provided only that the tender has been made under such circumstances that the party to whom it has been made has had a reasonable opportunity of examining the goods or the money tendered, in order to ascertain that the thing tendered really was what it purported to be.
42 (1843) 5 Man & G 593 at 610, 64 RR 810 at 824, per Rolfe B.
Effect of Non-acceptance of Tender Where the promisee refuses to accept the performance, the promisor will not be treated as having performed the obligation. It discharges the promisor from performing that obligation. It does not, however, discharge the contract. It gives the promisor an option to terminate the contract and sue for damages. Refusal of a tender of money does not discharge the debtor from the obligation to pay, he must continue to be ready and willing to pay it. The tender may be good defence in an act ion on the debt, relieve him from payment of interest after the date of the tender, and entitle him to costs of the proceedings.43 43 Anson's Law of Contract, 29th edn., 2010, p. 451; observations in Pyari Mohan Das v. Durga Shankar Das, AIR 1958 Ori 125, that performance of a contract is complete on tender of performance, it is submitted, are not correct.
Tender must be Unconditional The person making a tender has a right to exclude presumptions against himself by saying: 'I pay this as the whole that is due, but if he requires the other party to accept it as all that is due, that is imposing a condition; and when the offer is so made, the creditor may refuse to consider it as a tender. A mere specifying of the account on which a payment is offered, though accompanied by such words as 'in settlement' or the like, does not amount to a condition in this sense; for it is no more than saying that the debtor offers all that he believes to be due.44 More than this, a debtor may tender, expressly under protest, a greater sum than he admits to be due, and thus reserve the right of taking further proceedings to rest the justice of the claim. Such a protest does not impose any condition. &uot;The creditor has only to say, 'I take the money; protest as much as you please', and neither party makes any admission'.&uot;45 A tender of the full sum due is not conditional, even if combined with a demand of something which the creditor is bound by law to perform on being paid,46 e.g., requiring a mortgagee to hand over the title-deeds. An incomplete or conditional tender is not equivalent to payment.47 Where the payee does not agree to accept payment to a third party as equivalent to payment to himself, there is no proper tender.48 44 Bowen v. Owen, [1847] 11 QB 130 at 136, 75 RR 306 at 310, per Erle J.; Bank of Mysore v. BD Naidu, AIR 1954 Mys
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168. 45 Scott v. Uxbridge and Rickmansworth Rly Co., (1866) LR 1 CP 596 at 599, per Willes J. 46 Graham v. Seal, (1918) 88 LJ Ch 31(CA) ; Pandurang Krishnaji v. Dadabhoy Nowroji, (1902) ILR 26 Bom 643. 47 Narain Das v. Abinash Chandar, AIR 1922 PC 347. 48 Kesho Ram v. Thakur Das, AIR 1925 Lah 180.
Offer must be of the Whole of the Promise With regard to the validity of an offer of performance, it must be not only unconditional, but entire; i.e., it must be an offer of the whole payment or performance that is due.49 Such requirement is not prominent in the section, but the rule applies, because the Act does not expressly negative the English rule, or because of the words 'the whole of what he is bound by his promise to do' in sub-s. (2), or because an offer to pay or perform only in part is not really 'an offer of performance' of an entire promise at all. A creditor is not bound to accept a sum smaller than he is entitled to, and therefore, the tender of such a sum does not stop interest running on it.50 A comparison with the UNIDROIT Principles would be interesting. The Principles provide that the promisee may reject offer of performance in part, if the offer is not coupled with an assurance about the balance of performance.51 Thus, a tender of part with assurance about balance is valid under the Principles. Moreover, the promisee will be entitled to reject such an offer, only if he has legitimate interest in so doing. This deals with situations, where temporary acceptance will not cause any significant hand to the obligee. However, if partial performance is accepted, additional expenses entailed thereby by the promisee must be borne by the promisor so tendering part performance. Under the Indian law, however, the right of the promisee to reject partial performance is absolute. 49 Dixon v. Clark, (1848) 5 CB 365; 75 RR 747; Read's Trustee in Bankruptcy v. Smith, [1951] Ch 439, [1951] 1 All ER 406. 50 Watson & Co. v. Dhonendra Chunder Mookerjee, (1877) ILR 3 Cal 6 at 16; Chunder Count Mookerjee v. Jodoonath Khan, (1878) ILR 3 Cal 468. 51 UNIDROIT Principles, Art. 6.1.3.
Offer of Payment of Part A debtor must tender the full amount of debt. A creditor is not bound to accept less than what is act ually due and payable, and therefore by refusing to accept only a portion of the principal amount, he cannot lose his right to interest on that portion. A tender of part of the entire amount payable is therefore invalid.52 An offer to pay an unascertained sum cannot be a valid tender.53 Tender of amount after deduction of money order charges is also not valid.54 A purported tender of less than the debtor admits to be due is not a tender at all but an offer of payment on account, which the creditor may accept or not, and risks nothing by not accepting. Tender is essentially the offer of a sum which the debtor asserts to be the whole sum due, but which is less than the creditor claims; for if the parties are agreed on the amount due, a formal offer is needless and useless. Thus, the creditor refuses money at his peril in case his further claim turns out unfounded; but if he accepts, the debtor is still only offering what is due, and the creditor is not bound to make any admission in return. He may take the debtor's offered payment without prejudice to his claim to a further balance. The debtor is entitled to a receipt for what he pays, but not to a release. It remains to be seen whether there was a discharge or only a payment on account. Hence, a tender will be vitiated by the addition of any terms, which amount to requiring the creditor to accept the sum offered in full satisfaction, or to admit in any other
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way that no more is due. If the creditor accepts part payment, he is not precluded from claiming the residue unless it is the condition of the tender that it is in full discharge.55 However, under the Bombay Regulation (5 of 1827), a debtor (including a mortgagor) can tender even a part of the debt.56 If the part is tendered as such, and not as in full payment of the debt, further interest on the amount so tendered ceases under s. 14 of the Regulation.57 In Haji Abdul Rahman v. Haji Noor Mohamed, 58 decided by the Bombay High Court, the defendant had tendered a sum, which was only a small fraction of the whole sum claimed and found due. The question in the case was whether interest was due after the date of this offer on the whole sum or only on the residue. Telang J. thought that the rule in Dixon v. Clark, 59 that a tender of part of an entire debt was bad, applied only to cases when the party making the tender admitted more to be due than was tendered, and that it had no application where the debtor tendered the amount as in full payment of the debt. The court decided against the defendant, on the ground that the tender was ineffectual, as it had not been followed by a payment into court in the suit,60 as required by an established rule in practice. This opinion of Telang J. was not along the lines of the true principle involved and the English authorities. 52 Dixon v. Clark, (1848) 5 CB 365, 75 RR 747; Read's Trustee v. Smith, [1951] Ch 439. 53 Lal Batcha Sahib v. Arcot Narainaswami Mudaliyar, (1910) 34 Mad 320, (1909-11) ILR 32-34 Mad 926. 54 Mohanlal Soh v. Sabitri Devi Poddar, AIR 1980 Pat 282. 55 Beharilal Biswas v. Nasimannessa Bibi, AIR 1923 Cal 527. 56 Section 14, Bombay Regulation (5 of 1827):If a debtor can prove that he has tendered to a creditor the whole of any portion of the amount due, all further interest shall cease on the amount tendered. 57 Nadershaw Sheriarji Rabodi v. Shirinbai Bapuji Musa, (1923) 25 Bom LR 839, 87 IC 129, AIR 1924 Bom 264. 58 (1891) ILR 16 Bom 141. 59 5 CB 365, 16 LJ CP 237. 60 Pana Ana Rana Arunachallam Pillai v. Govindaswami Naicker, AIR 1932 Mad 109.
Tender in Instalments When payment of money or delivery of goods in instalments is provided for by the contract, a tender of instalments is a good tender. In the absence of any agreement as to repayment of the loan in instalments, a lender is entitled to decline to receive in instalments, the payment of the sum due to him, and he can claim that the whole sum due be paid at one and the same time.61 A contract made stipulated for delivery to the defendant of 7,500 bags of Madras coast castor seed to be shipped per 'steamers', and then stated that shipment of 2,500 bags was to be made in December. 1,690 bags arrived on 12 December, and the plaintiff offered their delivery to the defendant, who refused to take them on the ground that he was not bound to take less than the whole of the 2,500 bags at one time. The bags were then resold by the plaintiff. The remaining 810 bags of the December shipment arrived on 19 December, but were also refused by the defendant on the same ground, and were also resold by the plaintiff. The plaintiff sued the defendant for damages for breach of the contract in not accepting the bags. The Court held that there was a legal and proper tender of the December shipment by the plaintiff according to the terms of the contract.62 61 Behari Lal v. Ram Ghulam, (1902) ILR 24 All 461. 62 GC Simson v. Gora Chand Doss, (1883) ILR 9 Cal 473.
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Proper Time and Place A tender of a debt before the due date is not a valid tender, and will not prevent interest from running on the loan.63 A cheque sent in payment of both monies immediately due as well as of monies not payable for sometime, is not a good tender.64 63 Eshahuq Molla v. Abdul Bari Haldar, (1903) ILR 31 Ca1183. 64 Hira Lal v. Khizar Hayat Khan, AIR 1936 Lah 168, 161 IC 251; See ss. 46-50 below.
'Reasonable Opportunity' A tender of goods must be so made that the person to whom the goods are offered has reasonable time to ascertain that the goods offered are goods of the quality contracted for. A tender of goods does not mean a delivery or offer of packages containing them, but an offer of those packages under such circumstances that the person who is to pay for the goods shall have an opportunity afforded him, before he is called on to part with his money, of seeing that those presented for his acceptance are in reality those for which he has bargained.65 A tender made at such a late hour of the appointed day that the buyer has no time to inspect them is not good.66 In Ruttonsey v. Jamnadas, 67 the defendant agreed to purchase from the plaintiff 100 bales of 'fully goods fair Kishli cotton' to be delivered from 15 March to 1 April 1881. On 30 March, the plaintiffs sent the defendant, a letter enclosing a sampling order, which was received by the defendant's agent at 11.30 a.m. that day. The defendant got samples taken of the cotton. The plaintiffs wrote to the defendant on 31 March asking him to attend with his surveyor at 1 p.m. on that day to survey the cotton for its quality and classification, else an ex parte survey would be held. It being a mail day, the defendant's surveyor could not attend at the appointed hour. The plaintiffs had an ex parte survey held by their own surveyors, and they pronounced the cotton to be of the description contracted for. Shortly afterwards, the defendant asked for a survey by a letter, which reached the plaintiffs at 2.19 p.m. on that day. The plaintiffs did not comply with the application, and called upon the defendant to take delivery of the goods. In a suit by the plaintiffs for damages for breach of contract, it was contended for the defendant, that no reasonable opportunity was afforded to the defendant to examine the goods, as there was no joint survey, and that the time allowed by the plaintiffs for the examination of the cotton was not sufficient. Holding that the defendant had reasonable opportunity within the meaning of this section, Latham J. observed: 'Reasonable opportunity of inspection is all that the Act requires. It is the receiving party's business to verify, not the delivering party's to supply further proof that the goods are according to contract.' The goods need not be in the delivering party's act ual possession; control is enough.68 The natural place of inspection is the place of delivery.69 A tender, which did not disclose the name of the sender, was not valid.70 An insured cover, which purported to contain currency notes amounting to the full sum due was not a legal tender, for the creditor was not bound to accept the insured cover and take the risk of it not containing the said amount.71 65 Isherwood v. Whitmore, (1843) 11 M & W 347, 63 RR 624. 66 Startup v. Macdonald, (1843) 6 Man & G 593, 64 RR 810. 67 Ruttonsey Morarji v. Jamnadas Pitamberdas, (1882) 6 Bom 692. 68 PLSARS Arunachallam Chettiar v. Krishna Ayyar, (1925) 49 Mad LJ 530, 90 IC 481, AIR 1925 Mad 1168. 69 Re Andrew, Yule & Co., AIR 1932 Cal 879. 70 Parekh Nandlal Bhimji Bhoy Choksi v. Anand Govind Jog, AIR 1940 Nag 140 at 141.
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71 Salik Ram Upadhia v. B Jai Gopal Singh, AIR 1955 All 350.
'Able and Willing' Sub-section (2) provides that the tender must be made under such circumstances that the person to whom it is made may have a reasonable opportunity of ascertaining that the person by whom it is made is able and willing there and then to do the whole of what he is bound by his promise to do.72 Being able means having the means, being capable to do what is required. Being willing means being favourably disposed, favourably inclined, agreeable, having made a conscious decision to do something. Mere expression of willingness in the letter to execute a release deed is not proper offer without having the document ready for delivery.73 A seller need not be in possession of goods in order to be ready and willing to deliver.74 Where a vendor is to notify arrival of goods from the manufacturers, after which the vendee was to take delivery at the vendor's godown, it was not necessary for the vendor to prove presence of goods at the godown.75 In an action for damages, it is sufficient that the plaintiff was ready up to the time when the defendant refused to go on with the contract and was ready and willing to do all that was required to be done by him up to that time. But in a suit for specific performance, the plaintiff is required to prove readiness to perform his part of the contract from the date of the contract up to the date of hearing.76 72 Ismail Bhai Rahim v. Adam Osman, (1938) 2 Cal 337, 181 IC 539, AIR 1939 Cal 131; S. Sabapathi Pillay v. Vanmahalinga Pillai, (1915) 38 Mad 959 at 970, 23 IC 581, AIR 1915 Mad 210 (delivery of document not necessary). 73 S Sabapathi Pillay v. Vanmahalinga Pillai, (1915) 38 Mad 959 at 970, 23 IC 581, AIR 1915 Mad 210. 74 GK Chengravelu Chetty v. Akarapu Venkanna & Sons, AIR 1925 Mad 971. 75 Obla K. Subbier v. CM Venkalachalapathi Ayyar, AIR 1925 Mad 1290. 76 Teju Kaya & Co. v. Gangji Nensey & Co., AIR 1933 Bom 7; see also the Specific Relief Act, 1963s. 16(1)(c), and commentary.
Actual Production of Money In an earlier edition of this book, it was stated, citing Mulpuri Veerayya v. Saragavarapu Sivayya 77as authority, that a tender of money in payment must be made with an act ual production of the money. However, in Ismail Bhai Rahim v. Adam Osman, 78 this statement was doubted and Panckridge J. expressed the opinion that in the Madras case, the contract may have contained an express obligation to tender. It was held that condition (2) in this section does not necessarily require the production of money in the case of a debt. On further consideration, however, it is thought that the statement in the earlier edition may have been too wide. The tendering of the actual money is of course the best proof of ability and willingness to pay.79 It has also been held that a plea of tender before act ion must be accompanied by a payment into court after action, otherwise the tender is ineffectual.80 Where a contract is to be performed by the execution and delivery of a document, a mere offer by post to execute the document without leaving the document ready to be delivered is not a valid tender.81Where a contract for the purchase and sale of Government paper provides for the delivery of the paper to the defendant, it is not necessary that the plaintiff should have taken the Government paper contracted for to the place of business of the defendant and then and there made an act ual tender of it. If the plaintiff was ready and willing to perform his part of the contract and did his best to inform the defendant by going to his place of business that he was so, that would be sufficient, in the absence of evidence to the contrary, to constitute readiness and willingness.82
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77 (1914) 27 Mad LJ 482, 26 IC 121 (mere offer by letter to tender expenses of execution and registration of sale deed is not a legal tender). 78 (1938) 2 Cal 337, 181 IC 539, AIR 1939 Cal 131. 79 Bank of India Ltd v. Jamsetji AH Chinoy, (1950) 77 IA 76, AIR 1950 PC 90; Sohanlal Pachisia & Co v. Bilasray, AIR 1954 Cal 179. 80 Haji Abdul Rahman v. Haji Noor Mohamed, (1892) 16 Bom 141 at 149-50; s. Sabapathi Pillay v. Vanmahalinga Pillai, (1915) 38 Mad 959 at 970; Rakhal Chandra Chakladar v. Baikuntha Nath Barai, (1928) 117 IC 687, 32 CWN 1082, AIR 1928 Cal 874; the form of the plea of tender in Form No. 4, Schedule I, Appendix A, Civil Procedure Code, 1908 states:As to the whole (or as to Rs ... part of the money claimed) the defendant made tender before suit of Rs . . . . and has paid the sum into Court. Also see O. 24 rr., 1-3, CPC, 1908. 81 S Sabapathy Pillai v. Vanmahalinga Pillai, (1915) ILR 38 Mad 959 at 370, 23 IC 581, AIR 1915 Mad 210. 82 Juggernauth Sew Bux v. Ram Dyal, (1883) ILR 9 Cal 791.
Manner of Payment Payment must be offered in the mode expressly or impliedly authorised by the contract, if so authorised. Payment by credit card or charge card may be accepted by the creditor. Unless expressly or impliedly agreed to do so, a creditor is not bound to accept a negotiable instrument in payment of a debt.83 Such a tender is not valid, but may be waived by the creditor. A creditor is not bound to accept a cheque; but if a cheque is tendered and received, and the creditor or his agent objects only to the amount, or makes no immediate objection at all, he cannot afterwards object to the nature of the tender. Downright refusal by the creditor to accept payment at all precludes any subsequent objection to the form of the tender.84 The sufficiency of a tender of money depends on the circumstances of each case. But if a party to whom tender of money is made, is prepared to accept it or would have been prepared to accept it, the tender is good, even if it is not strictly according to law, because any objection to the form of the tender can be waived. It is not open to a party later to object to the form of the tender.85 Tender by cheque will be a valid tender, if the person to whom it is tendered is willing to receive payment by a cheque.86 But where payment by the Government is of a large amount, it is reasonable and proper to make it by cheque, and unless the payee went to collect the cheque personally, the cheque must be sent by post. Therefore, where the Government waited till the last date of payment and since the payee did not come to collect the cheque, the despatch by post of the cheque on that date was held to be according to ordinary course of business usage, and amounted to tender of payment to the payee on that day.87 Section 40A(3) of the Income Tax Act, 1961 imposes a disability, if payments are made otherwise than by crossed cheque or bank draft. It provides that where any expenditure is incurred, for which payment is made of an amount of more than Rs 20,000/- otherwise than by account payee cheque or account payee bank draft, no deduction shall be allowed in respect of such expenditure. Rule 6DD of the Income Tax Rules, 1962 provide for certain payments which need not be so made. Section 40A(4) of, this Act provides that a tender of amount required as above to be made by cheque or bank draft is so made, shall be valid.88Section 269T of this Act also requires that repayment of deposits be made only by account payee cheque or bank draft drawn in the name of the person who has made the deposit, where the deposit or interest held by such person, or aggregate of deposits held by such persons in his own name or jointly with others, on the date of prepayment, exceeds Rs 20,000/-. Where the contract requires 'payment in cash' into the payee's bank account, payment need not be made literally in cash, but may be made, in any manner equivalent to cash, by any 'commercially recognised method of transferring funds, the result of which is to give the transferee the right to immediate use of the funds transferred'.89 The term means that the payee to whose account it is credited, must be able to use it
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immediately, meaning thereby use it by immediate transfer to a deposit account where it would earn interest. A telex credit transfer to the payee's bank account was irrevocable, but interest on the funds credited would begin only four days thereafter. This was held by the House of Lords as not equivalent to 'payment in cash',90 because the amount was available for withdrawal, but only subject to payment of interest to the bank, making it as equivalent to overdraft facility. Tender made in the form of a bank draft has been held as equivalent to tender of cash,91 though in practice, a bank draft may not be encashed immediately. Under the UNIDROIT Principles, the promisor can make payment in any form used in the ordinary course of business at the place of payment, as the promisee should be satisfied to receive payment in such a form.92 A cheque, order to pay or promise to pay, accepted by the promisee, is presumed to have been accepted on condition that it shall be honoured. A landlord sent in rent bills to his lessee through his agent. The lessee gave the agent a cheque in favour of her attorney for the amount demanded and obtained a receipt from him. The landlord's agent then took the cheque to the lessee's attorney, who cashed it and handed the amount to the agent, and requested him to get the rent bills received and returned to him. The landlord's solicitor, to whom the money was taken, refused to accept it, and the money was then returned to the lessee's attorney. In a suit by the landlord for the rent, it was held that under the circumstances, the tender amounted to payment, and the suit was dismissed with costs.1 83 Blumberg v. Life Interests and Reversionary Securities Corpn, [1897] 1 Ch 171, [1898] 1 Ch 27; Johnston v. Boyes, [1899] 2 Ch 73. 84 VR Venkatarama Iyer v. T Gopalakrishna Pillay, (1928) 52 Mad 322, 116 IC 844, AIR 1929 Mad 230; Hira Lal v. Khizar Hayat Khan, AIR 1936 Lah 168, 161 IC 251; Harnath Rai Binjraj v. Hirdyanarain Kumar, (1947) 25 Pat 451, 2,31 IC 243, AIR 1947 Pat 208; C s. Krishnaswamy Ayyar v. Mohanlal Binjani, (1949) Mad 657, AIR 1949 Mad 535 (tender of more amount); Keshav Mills Co v. Commissioner of Income Tax, AIR 1950 Bom 166; Narain Das v. Rikhab Chand, AIR 1952 Raj 72; cf Re Charge Card Services Ltd,[1988] 3 All ER 702. 85 Hassanally Esmaiiee & Co v. Abdul Rahman Hajee Noor Mohammed & Co, AIR 1936 Rang 164; Deputy Commissioner v. Puran Chand Har Narain, AIR 1938 All 15. 86 VR Venkatarama Iyer v. T Gopalakrishna Pillay, AIR 1929 Mad 230; Keshav Mills Co v. Commr of Income Tax, AIR 1950 Bom 166; Ismail Essak Chand Nagori v. Abdulla Haji Cassum, AIR 1931 Bom 118, where tender by cheque was held valid. 87 Prima Realty v. Union of India, (1996) 11 SCC 65 (case about payment of consideration upon compulsory acquisition). 88 Section 40A(4), Income Tax Act, 1961 provides:Notwithstanding anything contained in any other law for the time being in force or in any contract, where any payment in respect of any expenditure has to be made by *[an account payee cheque drawn on a bank or account payee bank draft] in order that such expenditure may not be disallowed as a deduction under sub-section (3), then the payment may be made by such cheque or draft; and where the payment is so made or tendered, no person shall be allowed to raise, in any suit or other proceeding, a plea based on the ground that the payment was not made or tendered in cash or in any other manner.* The words &uot;a crossed cheque drawn on a bank or by a crossed bank draft&uot; substituted by the Taxation Laws (Amendment) Act, 2006 (29 of 2006), s. 9 (w.e.f. 13-7-2006). 89 A/S Awilco of Oslo v. Fulvia SpA Di Navigazione of Cagliari (The Chikuma) [1981] 1 WLR 314; The Brimnes (Tenax Steamship Co Ltd v. The Brimnes (Owners), [1975] QB 929. 90 A/S Awilco v. Fulvia SpA di Navigazione (The Chikuma), [1981] 1 WLR 314, [1958] 1 All ER 652. 91 Sohan Singh v. Sarwan Singh, (1996) 5 SCC 759 (it was assumed that a draft could be encashed immediately). 92 UNIDROIT Principles, Art. 6.1.7. 1 Bolye Chand Singh v. Moulard, (1878) 4 Cal 572; Cf Jones v. Arthur, (1840) 59 RR 833, 8 Dowl Pr Ca 442.
Payment by Negotiable Instrument or Credit Cards A creditor is not bound to accept payment except in cash, i.e., legal tender. If he accepts it by a negotiable
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instrument like a bill of exchange, a cheque or pro-note, it is a question of fact in each case, whether the payment has been received in absolute satisfaction of the debt, as a satisfaction conditional upon the realisation of the instrument. It is however presumed that the creditor has accepted it as a conditional or qualified payment. When a new form of payment is introduced, the question whether it is absolute or conditional, would depend on its own circumstances. Where the question arose about payment by credit card, the Court of Appeal held that there was no general presumption that whenever a payment was agreed to be made through a third party (the issuer of the credit card), the acceptance by the seller (creditor accepting the credit card payment) of the method was conditional upon the third party act ually making the payment to the seller.2 2 Re Charge Card Services Ltd., [1989] Ch 497, [1988] 3 All ER 702(CA) .
Currency and Rate of Exchange The money tendered must be current coin of the country.3 Where the money obligations are expressed in a certain currency, the payment must be made in that currency. If the contract does not indicate the currency for payment, the payment must be made in the currency of the 'place where the payment is to be made. The plaintiff, who brings an action to enforce a foreign money obligation under a contract; is entitled to claim judgment in foreign currency, if the proper law of the contract was the law of the foreign country and the money of account and payment was that of the foreign country.4 If the parties have, by agreement, fixed the rate of exchange, the court will apply that rate.5 Else, the rule of English law is, that a debt expressed in a foreign currency payable in England must be converted into sterling with reference to the rate of exchange prevailing on the day when the debt is paid.6 A court in India would have jurisdiction to pass a decree for a sum expressed in foreign currency; by making the payment of foreign currency subject to permission of the foreign exchange authorities under the Foreign Exchange Regulation Act, 1973 [now see Foreign Exchange Management Act, 1999 (42 of 1999)]. As regards the date for converting foreign currency into Indian rupees, it was held that a court should pass an order for conversion of foreign currency on the date of the final judgment.7 3 For tender of coinage: see ss. 11-15A, Indian Coinage Act, 1906; for tender of currency notes: see ss. 22-26, Reserve Bank of India Act, 1934;Salik Ram Upadhia v. B Jai Gopal Singh, AIR 1955 All 350. 4 Jean Kraut AG v. Albany Fabrics Ltd, [1977] 2 All ER 116; applying Miliangos v. George Frank (Textiles) Ltd, [1975] 3 All ER 801 HL, [1976] 3 WLR 477. 5 Boissevain v. Weil, [1950] AC 326, [1950] 1 All ER 728. 6 Syndic in Bankruptcy of Khoury v. Khayat, [1943] AC 507, [1943] 2 All ER 406,(PC) ; Renusagar Power Co Ltd v. General Electric Co, AIR 1994 SC 860 at 901, 1994 Supp (1) SCC 644 at 647. 7 Forasol v. Oil and Natural Gas Commission, (1984) Supp SCC 263, AIR 1984 SC 241 at 270-72. For discussion of currency, rate of exchange, principle of nominalism, see s. 37 above.
Tender by Whom Tender may be made by the promisor, or by his agent, unless it was otherwise intended. Tender for payment of shares by the purchaser's attorney was sufficient proof of readiness and willingness.8 8 Sohanlal Pachisia d' Co v. Bilasray Khemani, AIR 1954 Cal 179.
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Tender to Executor of Deceased Promisee In Pandurang v. Dadabhoy, 9 the creditor died, and before taking out probate, the executors called upon a mortgagor to whom the deceased had lent money on mortgage, to pay the amount due on the mortgage. The money for repayment was available before the notice expired, but probate was not obtained until after that date. The debtor offered by letter, to pay the debt, on a proper release being executed. The Court held that act ual tender by production of money was not necessary, since there was no legally constituted representative to whom it could be made; and that interest on the mortgage debt should, in the circumstances, stop on the expiration of the notice, since the executors might, if they had been diligent, have obtained probate before the date. It was sufficient that the debtor was able to pay the debt and had money available for that purpose. But a different view was taken in Ismail Bhai Rahim v. Adam Osman, 10 that a debtor must either tender to a legally constituted representative, or take the risk of tendering to a person not entitled to receive the debt and of a subsequent suit by the executor or administrator, or wait until someone obtained probate or letters of administration and incur liability to pay additional interest in the meanwhile. It is submitted that the latter view is more correct, because a debtor may be able to escape from the embarrassment of such a situation by taking advantage of the Administrator-General's Act 1213, ss. 9-11.11 9 Pandurang Krishnaji v. Dadabhoy Nowraji, (1902) ILR 26 Bom 643 at 647-48. 10 Watson d' Co v. Dhonendra Chunder Mookerjee, (1877) 3 Cal 6 at 16; Chunder Caunt Mookerjee v. Jodoonath Khan, (1878) 3 Cal 468. 11 Now the Administrator-General's Act, 1963.
Effect of Repudiation or Prevention by Promisee Under the Indian law as well as the English law, prevention by one party amounts to a fulfillment of the promise by the (other) party prevented in the case of conditional contract or a contract of reciprocal promises.12 Where, in an agreement of reconveyance, a party repudiates the contract before the expiry of the period stipulated for reconveyance, the other party can sue for specific performance without the formal tender of the purchase price.13 Where the contract provided that in case of neglect of the vendor to complete the transaction, the purchaser was to deposit the sale price in court and the money was not so deposited in the court but was deposited after the decree, it was held that it would be purposeless making the deposit, if the vendor had made it clear that he was not going through the sale.14 Where the plaintiff agreed to manufacture chairs for a railway company, and after parts had been delivered, the company gave orders to the plaintiff not to make and send any more, it was held that the plaintiff was entitled to recover without actually making and tendering the remainder of the goods.15 12 Makineni Nagayya v. Makineni Bapamma, AIR 1958 AP 504. 13 International Contractors Ltd v. Prasanta Kumar Sur, [1961] 3 SCR 579, AIR 1962 SC 77, this decision does not affect the liability of a person claiming specific performance of showing readiness and willingness to perform the contract; Jawahar Lal Wadhwa v. Haripada Chakroberty, AIR 1989 SC 606 at 610; Chelikani Venkatanarayanim Garu v. Venkata Subadrayamma Jagapathi Bahadur Garu, 50 IA 41, AIR 1923 PC 26. 14 Devendra Basappa Doddannavar v. Sonubai Tuljansa Kosandal, AIR 1971 Mys 217 at 233. 15 Cort v. Ambergate Railway Company, [1851] 17 QB 127 (the measure of damages in such a case would ordinarily be the difference between the cost of production and delivery and the contract price). As to repudiation of a contract by one party before the time for performance, see s. 39 and s. 51 under the heading: 'Readiness and Willingness' below.
Offer to one of Joint Promisees
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The last paragraph of the section provides that an offer to one of the several joint promisees has the same legal consequences as an offer to all of them. If such tender is not accepted by any of the joint promisees, the promisor is not responsible for non-performance. It is not necessary for the promisor to tender performance to any other or all the promisees. If the performance is tendered to one of the joint promisees, and is accepted, does such accepted performance give a valid discharge to the promisor? The Indian law differs from the English law in this respect. In Barber Maran v. Ramana Goundan, 16 the Madras High Court held that s. 38 did not make it incumbent on the debtor to satisfy all the joint promisees before obtaining a complete discharge, and therefore, a release of a mortgagor by one of two mortgagees on payment to him of the mortgage debt, discharged the mortgagor as against the other mortgagee. The Madras High Court had followed the English judgment in Wallace v. Kelsall, 17decided long before the Contract Act, and upon the last paragraph of s. 38. The correctness of this decision was doubted later by the same Court,18 and also by the High Courts of Bombay19 and Calcutta,20 because the authority of the decision in Wallace's case was considerably shaken in Powell v. Brodhurst .21 Later, however, a Full Bench of the Madras High Court (White CJ. dissenting),22 approved of the decision in Barber Maran v. Ramana, and held that one of several payees of a negotiable instrument could give a valid discharge of the entire debt without the concurrence of the other payees.23 It was observed that there was no distinction as regards the question of discharge between claims under a mortgage bond and those under a negotiable instrument. The principle in Wallace's case was approved, as it was good law when the Indian Contract Act was passed. Referring to the last paragraph of s. 38, Sankaran Nair J. said:
It is difficult to impute an intention to the Legislature that the promisor was entitled to make the offer though the promisee was not entitled to accept it. It seems clear that if the promisor was entitled to offer payment to one of the promisees which the latter was entitled to accept, the promisor cannot be held to be liable to pay over again to the other promisees what he has already paid. The payment therefore must be treated as a complete discharge.24
Delivering his dissenting judgment, White CJ. said:
It (s. 38) provides in effect that all the joint promisees get the benefit of the legal consequences, whatever those consequences may be, of an offer, or a tender, to one of them. The section does not deal with the legal consequences of an accepted tender, or of an accepted offer of performance, but with the legal consequences where a tender or offer has been made and the tender or offer has not been accepted. No doubt the last paragraph of the section is general and not restricted to an offer which has not been accepted, but apparently the Legislature was not contemplating the legal consequences of an offer which had been accepted but the legal consequences of an offer which had been refused. I do not think we can infer from this enactment that the Legislature intended to lay down by implication the acceptance of payment by one of several promisors operated as a discharge of the claims of the other. On the other hand, as it seems to me now, s. 45, which deals with the devolution of rights where a person has made a promise to two or more persons 'jointly' throws very little, if any, light on the question which we have to decide...If we are unable to find an answer to the question within the four corners of the Contract Act, we have to look to the general law and to see whether the rule of law as laid down in Wallace v. Kelsall applies or whether the rule or rather the presumption of equity on which Steeds v. Steeds 25 was decided is to prevail. I think the equitable presumption applies and I do not think this presumption is negatived by the provisions of the Contract Act.26
The opinion of White CJ. has been adopted by the High Courts of Punjab,27 Calcutta,28 Patna,29 Allahabad,30 Nagpur,31 Mysore32 and Bombay.33 The editors of the earlier editions agreed with the dissenting opinion of White CJ., so far as concerns the present section. Tender of a money debt does not discharge the debt, because the material section of the
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Contract Act as regards the right to give a discharge in the name of joint debtors was not s. 38 but s. 45. Following the opinion expressed by the earlier editors, the Law Commission of India recommended adding the words 'which has not been accepted' after the words 'joint promisees' in the section for clarifying the law,34 without any further discussion about the question in s. 45. Instead, it recommended adding a new section to provide that one of several joint promisees cannot accept an offer of performance without the concurrence of the others.35 The rule laid down in Wallace v. Kelsall seems to have been accepted in England,36 and the rule that payment to one of joint creditors is a good discharge is still the general rule.37 In English law, release by one of the creditors releases the debtor qua all the creditors, and in Indian law, the position is that the joint creditors are presumed to be tenants-in-common and therefore, release by one of such creditors does not give a release on behalf of all the creditors.38 In any case, discharge by one of the co-promisees or payment to him is valid only to the extent of his own share in the debt.39 It is submitted that the opinion of White CJ. and the earlier editors of the book as well as the judgments of the High Courts mentioned above and the recommendation of the Law Commission of India rests on the interpretation of s. 38 read with s. 45 of the Act. But it is very respectfully submitted that the operation of the rule as so stated, places a promisor tendering performance into a dilemma. If his tender made to one of the joint promisees is not accepted, he is relieved of his obligation. On the other hand, if it is accepted, he does not get a valid discharge. In order to have a valid discharge, which he would like to have, he must therefore offer to all joint promisees together; for he cannot anticipate having his tender refused by one of the joint promisees. Such a promisor must have an assurance that his tender would give him a valid discharge from performance, whether accepted or refused. It is therefore submitted that payment of debt to any of the joint creditors ought to discharge the debtor. The rule has been applied to payment made to one of joint decree holders. One of several joint decree-holders cannot receive payment or give a valid discharge for the whole debt, so as to bind his co-decree-holders; and this is so, even if the joint decree-holders are partners, unless the partner receiving payment has been constituted their agent for the purpose by his fellow partners.40 In any case, a payment to one of several joint creditors does not operate as a payment to them all, where the payment is fraudulently made to him and not for the benefit of them all.41 But a tender of rent by a lessee to one of several joint lessors42 and of a mortgage debt by a mortgagor to one of several mortgagees43 would be a valid tender under this section. However, in the absence of proof of any agreement between co-lessors that they should hold the rent jointly or of a mutual grant of authority between them to receive rent, a tenant was held not discharged by paying rent to one of them.44 The principle of the decision in Barber Maran v. Ramana Govndan, 45 applies only where there are two or more joint promisees. It does not apply to the case of co-heirs who are not joint promisees, but the heirs of a single promisee, and a release therefore of the debtor by one of heirs of the deceased creditor on payment to him of the amount due on the bond is not a valid discharge to the debtor.46 Nor does that principle apply when a debt, though due to a joint Hindu family, stands in the name of one member. In such a case, he is the person prima facie entitled to realise it, and a payment made to him is a valid discharge of the debt; if the payment is made to any other member of the family, it does not operate as a discharge, unless there be circumstances justifying the payment.47 Where a bond is passed to the manager of a joint Hindu family, payment made to a junior member of the family during the lifetime of the manager, does not discharge the promisor from his liability under the bond.48 16 (1897) 20 Mad 461. See Shrinivasdas Bavri v. Meherbai, (1917) 44 IA 36, (1916) 41 Bom 300, AIR 1916 PC 5, 39 IC 627, where the question was one of title to immovable property. 17 (1840) 7 M & W 264, 56 RR 707. 18 Ahinsa Bibi v. Abdul Kader Saheb, (1901) 25 Mad 26 at 38-39; Ramaswamy v. Muniyandi Servai, (1910) 20 Mad LJ 709; Sheik Ibrahim Tharagan v. Rama Aiyar, (1911) 35 Mad 685 at 687. 19 Sitaram Apaji Kodea v. Shridhar Anant Prabhu, (1903) 27 Bom 292 at 294.
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20 Jagat Tarini Dasi v. Naba Gopal Chaki, (1907) 34 Cal 305 at 320-21; Hossainara Begam v. Rahimannessa Begam, (1910) 38 Cal 342 at 349-50. 21 [1901] 2 Ch 160. 22 M Annapurnamma v. U Akkayya, (1913) 36 Mad 544 (nothing short of actual payment will do); followed in Ammalammal v. Gnanammal, AIR 1954 Mad 473, and applied to a case where payment had been made to a promisee after the death of the other promisee; P Ramasami v. Chandra Kottayya, (1924) 48 Mad 693, AIR 1925 Mad 261, 85 IC 297. 23 See ss. 78 and 82, Negotiable Instruments Act, 1881. 24 36 Mad 544 at 549. 25 (1889) 22 QBD 537. 26 36 Mad 44 at 545-46. 27 Mathra Das v. Nizam Din 41 IC 921, AIR 1917 Lah 443. 28 Abdul Hakim v. Adyata Chandra Das Dalal, (1918) 22 CWN 1021, AIR 1919 Cal 593, 49 IC 63. 29 Parbhu Ram Pandey v. Raghubir Sah, (1917) 2 Pat LJ 520, AIR 1917 Pat 82, 42 IC 408; Syed Abbas v. Misri Lal, (1920) 5 Pat LJ 376, 56 IC 403, AIR 1921 Pat 271; see also Banamali Satpathi v. Talua Ramhori Pattra, (1920) 5 Pat LJ 151, 55 IC 841, AIR 1920 Pat 464; Mulla, Contract Act, 6th edn. 30 Shyam Lal v. Jagannath, AIR 1937 All 527, (1937) All LJ 395, 168 IC 198; Joti Bhushan Gupta v. BN Sarkar, (1945) All 165, AIR 1945 All 311. 31 Mahadeosingh Hirasingh v. Balmukund Jayanarain, (1947) Nag 553, AIR 1948 Nag 279. 32 C Venkatasetty v. Rangasetti, AIR 1952 Mys 68. 33 Govindlal Bhikhulal Maheshwari v. Firm Thakurdas Bhallabhadas, AIR 1974 Bom 164 at 168. 34 The Law Commission of India, 13th Report, para 65. 35 The Law Commission of India, 13th Report, para 66, and proposed s. 38A. 36 Chitty on Contracts, 28th edn., p. 1123, para 22-049. 37 Powell v. Brodhurst, [1901] 2 Ch 160 at 164; the question that matters, as pointed out there, is whether the debt is really joint. 38 Govindlal Bhikalal Maheshwari v. Firm Thakurdas Bhallabhadas, AIR 1974 Bom 164. 39 C Venkatasetty v. Rangasetti, AIR 1952 Mys 68. 40 Periasami v. Krishna Ayyan, (1901) 25 Mad 431; Mohomed Silar Sahib & Co v. Nabi Khan Sahib, AIR 1917 Mad 988, 35 IC 157; VN Muthuswamy Iyer v. VS Narasimha Ayyar, (1934) 57 Mad 696, AIR 1934 Mad 330, 148 IC 860. 41 Sheik Ibrahim Tharagan v. Rama Aiyar, (1911) 35 Mad 685; Joti Bhushan Gupta v. BN Sarkar, (1945) All 165, AIR 1945 All 311. 42 Krishnarav v. Manaji, (1874) 11 BHC 106, where it was held that payment of rent by a lessee to one of several joint lessors discharges the debt as to all. But payment to a partner in fraud of his co-partners is not a valid discharge: Chinnaramanuja Ayyangar v. Padmanabha Pillaiyan, (1896) 19 Mad 471. 43 Barber Maran v. Ramana Goundan, (1897) 20 Mad 461, where it was held, relying upon this section principally, that payment of the amount due on a mortgage by a mortgagor to one of several mortgagees discharges the mortgage debt as to all. 44 Ananda Prakash Dey v. Lokendranath Maulik, AIR 1972 Ori 269; see also C Venkatasetty v. Rangasetti, AIR 1952 Mys 68. 45 (1897) 20 Mad 461. 46 Alluri China Bapanna v. Sri Muttangi Jaggiah, AIR 1939 Mad 818, (1939) 2 Mad LJ 214; Ahinsa Bibi v. Abdul Kader Saheb, (1901) 25 Mad 26; Sitaram Apaji Kode v. Shridhar Anant Prabhu, (1903) 27 Bom 292; Ramaswamy v. Muniyandi Servai, (1910) 20 Mad LJ 709 at 715-16; Ankalamma v. Bellan Chenchayya, (1918) 34 Mad LJ 315, AIR 1918 Mad 29, 45 IC 419. 47 Ramasami Chetti v. Manikka Mudali, (1899) 9 Mad LJ 155; Adaikkalam Chetti v. Marimuthu, (1899) 22 Mad 326.
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48 Ankalamma v. Bellam Chenchayya, (1918) 41 Mad 637, AIR 1918 Mad 29; Dau v. Sensmal, AIR 1951 Ajmer 11.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER IV Of the Performance of Contracts/Contracts which must be performed/S. 39.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which must be performed S. 39. Effect of refusal of party to perform promise wholly.-When a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance. Illustrations (a)
(b)
A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two nights in every week during the next two months, and B engages to pay her 100 rupees for each night's performance. On the sixth night A wilfully absents herself from the theatre. B is at liberty to put an end to the contract. A, a singer, enters into a contract with B, the manager of a theatre, to sing at his theatre two nights in every week during the next two months, and B engages to pay her at the rate of 100 rupees for each night. On the sixth night A wilfully absents herself. With the assent of B, A sings on the seventh night. B has signified his acquiescence in the continuance of the contract, and cannot now put an end to it, but is entitled to compensation for the damage sustained by him through A's failure to sing on the sixth night.
Introduction Section 39 is found in the group of sections dealing with contracts which must be performed, but it deals with a situation where it need not be performed (s s. 62-67), and with consequences of breach (chapter VI). This section only means to enact what was the law in England and the law here before an Act was passed, namely, that where a party to a contract refuses altogether to perform or is disabled from performing his part of it the other side has a right to rescind it.49 Section 39 applies to executory contracts where the time of performance has not yet arrived, and not to executed contracts. It presupposes a contract which is subsisting and something yet to be performed under it. The option to the promisee to keep the contract alive clearly implies that.50 Nor is the section confined to anticipatory refusals; it covers the refusal to perform any substantial part of the contract which remains to be performed.51 But the section is ordinarily confined to cases of anticipatory breach or of
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continuing contracts, under which obligations remain to be performed, like installment contracts. This section applies to contracts only; a lease52 or a mortgage53 when registered, is not a contract but a transfer of property.54 Hence, a mortgage, notwithstanding partial failure of consideration, may be enforced to the extent of money actually advanced by the mortgagee to the mortgagor.55 49 Sooltan Chund v. Schiller, (1878) 4 Cal 252 per Garth J. at 255. 50 Kedarnath Lal v. Sheonarain Ram, AIR 1957 Pat 408; VK Kumaraswami Chettiar v. PASV Karuppuswami Mooppanar, AIR 1953 Mad 380; Sheikh Sultan Ahmad v. Syed Maksad Hussain, (1943) 22 Pat 306, 211 IC 35, AIR 1944 Pat 3. 51 Phulchand Fateh Chand v. Jugal Kishore Gulab Singh, 106 IC 10, AIR 1927 Lah 693. 52 Kandaswami Pillai v. Ramasami Mannadi, (1919) 42 Mad 203, AIR 1919 Mad 168, 51 IC 507; dissenting from Subba Rau v. Devu Shetti, (1894) 18 Mad 126. 53 Rashik Lal v. Ram Narain, (1912) 34 All 273; Makhan Lal Marwari v. Hanuman Baksh Marwari, (1917) 2 Pat LJ 168, 38 IC 877, AIR 1917 Pat 514; dissenting from Subba Rau v. Devu Shetti, (1894) 18 Mad 126. 54 See s. 58, the Transfer of Property Act, 1882. 55 Motichand Jivraj Guzarathi v. Sagun Jethiram Guzarathi, (1905) 29 Bom 46; Bhagabai v. Narayan Gopal, (1907) 31 Bom 552; Rajani Kumar Dass v. Gaur Kishore Shaha, (1908) 35 Cal 1051; Tatia v. Babaji, (1896) 22 Bom 176 at 183 (sale void for want of consideration).
Types of Breach The three sets of circumstances giving rise to discharge of a contract by breach are:
(i) (ii) (iii)
renunciation of a party of his liabilities under it; impossibility of performance created by his own act; and total or partial failure or performance.
In all the three cases, one party has repudiated its contractual obligations. In the case of the first two, the renunciation may occur or impossibility be created either before or at the time for performance. In the case of the third, it can occur only at the time or during the time for performance of the contract. Moreover, if the third be partial, the failure must occur in a manner that goes to the root of the contract. All these act s may be compendiously described as repudiation, though that expression is more particularly used for renunciation before the time for performance has arrived.56 Any intimation, whether by words or by conduct, that a party declines to continue with the contract is repudiation, if the result is likely to deprive the innocent party of substantially the whole benefit of the contract.57 Repudiation may occur if one party refuses to perform his part (renunciation), or makes it impossible for himself to perform (disables himself) or even fails to perform his part of the contract, in each of the cases in such a manner as to show an intention not to fulfill his part of the contract. This section deals with refusal or renunciation by the promisor to perform, or disabling himself from performing the promise in its entirety. Failure of performance with an intention to end the contract may amount to refusal of performance (see below). Mere failure by the promisor to perform the promise, without evincing an intention to end the contract, would not be repudiation,58 and will not be dealt with by this section, but by ss. 54 and 55. 56 Heymans v. Darwins, [1942] AC 356 at 397, [1942] 1 All ER 337 at 359; Universal Cargo Carrier Corporation v. Citati, [1957] 2 WLR 713 at 730, [1957] 2 QB 401, [1957] 2 All ER 70 at 84; affirmed on appeal [1957] 3 All ER 234. 57 Federal Commerce and Navigation Ltd v. Molena Alpha Inc, [1979] AC 757, [1979] 1 All ER 367, [1978] 3 All ER 1066.
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58 VL Narasu v. PSV Iyer, AIR 1953 Mad 300 at 306.
Breach and Discharge Every breach of contract does not discharge the innocent party from performance of his part of the contract. The expression 'discharge by breach' therefore is not very accurate. Discharge from liability is not necessarily coincident with the right to sue for damages. The rule can be stated as follows: 'Any breach of contract gives rise to a cause of action; not every breach discharges from liability.'59 A discharge may follow at the option of one party where the other party has 'repudiated' the contract. Repudiation does not discharge the contract, thereby automatically terminating the obligations of the innocent party. It gives an option to the innocent party to regard itself as discharged. If the innocent party 'rescinds' the contract, the primary obligations of both parties are over, but the defaulting party becomes liable for payment of compensation for the breach. If the innocent party elects not to end the contract, it continues. The innocent party may also waive the defective performance and elect to accept damages instead of ending the contract. 59 Chitty on Contracts, 28th edn., p. 12, 19, para 25-001.
'Refusal' or Renunciation A renunciation may occur when one party refuses to perform his obligations under the contract in some essential respect, either by expressly so declaring it, or by words or conduct demonstrating an intention not to perform. It can also occur where one party declares that he is or will be unable to perform his obligations under the contract in some material respect.60It is often immaterial that a party act ually intends to sever the contractual relationship. If the threat is reasonably understood by the other party as likely to deprive him of substantially the whole benefit of the contract, and it is unjustified, it constitutes repudiation.61 This may occur before or at the time fixed for performance. Mere failure to perform a contract without more cannot be said to be a repudiation of it,62 unless it evinces an intention not to go on with the contract. Thus, where a contractor did not construct beyond the plinth and some pillars over seven years, termination of his contract was valid.63 Motive for cancellation is irrelevant.64 Express or Implied An unambiguous assertion by one party that he will not be able to perform at the time of performance also amounts to a refusal.65 Where, according to the custom of the caste to which the plaintiff and defendant belonged, marriages ordinarily took place when the bride was between 12 and 15 years of age, and the plaintiff, who was betrothed to the defendant's daughter, required the defendant to fix a date for his marriage within a certain period, after which the marriage could not take place for 18 months, owing to the intervention of the Sinhasth year, and the girl would then have passed her fifteenth year, it was held that the declaration by the girl that she was unwilling to be married for three or four years, and by the father that he could not compel her to change her mind, was practically a repudiation of the contract of marriage, and entitled the plaintiff to damages for the breach.66 Since promise of indemnity is an implied term of a contract of agency, the refusal by the principal to indemnify the agent for any act done by him in the course of agency, justifies him to rescind the contract of agency under this section.67 If the seller of property is not in a position to hand over possession of the property agreed to be sold, the buyer is entitled to rescind the contract and ask for refund of earnest money.68 A letter by a distributor of a film to the exhibitor, wanting to postpone the exhibition of that picture, at the theatre amounted to repudiation of contract.69 By unilaterally fixing a time, a party cannot be permitted to repudiate the contract. Repudiation of contract is a serious matter and it is not to be lightly found or inferred. The act must clearly indicate an intention to
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refuse to perform the contract and to set the other party free from performing his part. It should be such an act by which a party renounces its full intention to perform its part of the contract, setting free the other party.70 Repudiation of a contract is a serious matter, not to be lightly found or inferred.71 Thus:
If A and B, parties to a contract, form different views as to the construction and effect of their contract, and A demands performance by B of some act which B denies he is obliged to perform upon the true interpretation of the contract, then, if B says &uot;I am ready and willing to perform the contract according to its true tenor, but I contend that what you, A, require of me is not obligatory upon me according to the true construction of the contract,&uot; and if in so saying he is acting in good faith, he does not manifest the intention to refuse to perform the contract. On the contrary, he affirms his readiness to perform the contract, but merely puts in issue the true effect of the contract.72
By Conduct An agreement may stand repudiated either by words expressing an intention not to perform, or the conduct from which the said intention can be gathered. Refusal by the buyer to accept documents in a CIF contract amounts to repudiation.73 Insisting on the performance of a condition, which was not one of the terms of the contract and which has been unilaterally imposed by a party, amounts to inability of that party to perform his part of the contract or repudiation of the contract.74Failure to fulfill an obligation under s. 55 clause (1) of the Transfer of Property Act, 1882, amounts to a refusal to perform the contract of sale within the meaning of this section.75 Where an employer unilaterally reduces his employee's pay or diminishes the value of his salary package, and such conduct is deliberate and shows an emphatic denial of his obligation to pay, the employee would be entitled to treat the contract of employment discharged by the employer's breach, and would be relieved of the clause restricting him from seeking employment with competitors.76 The owners of a vessel, by their conduct, evinced an intention not to be bound by the terms of the charterparties, for they were threatening without justification to commit a fundamental breach of their obligation under the charterparties, and were taking steps to implement that threat by instructions which they gave to their masters. Their conduct amounted to anticipatory breach of the terms of the charterparties and they could not excuse it by saying that they had acted on legal advice, or by relying on lien given by the charterparties. It was open to the charterers to accept the repudiation, as they did, and to treat themselves as discharged from any further performance.77 There is no distinction between the tests for which repudiation amounts to an anticipatory breach and breach at the time for performance.78 Thus, where the conduct of the promisor is such as to lead a reasonable person to the conclusion that he will not be able to perform when the time for performance arrives, the promisee may treat this as a renunciation of the contract and sue for damages forthwith.79 Anticipatory breach of the charterparty by the charterer would be established, only if the owners show that on the date of the breach the charterer was not willing and able to perform his part of the contract. This, the owners could show by establishing either renunciation by the charterer, or impossibility created by him.80 Unreasonable postponement will entitle the vendor to terminate the contract for sale of land.81 The law is similar where a party renounces a contract in the course of his performance, eg., where the subject matter is the sale of goods to be delivered in installments. Thus, where the purchaser, after accepting some goods, refuses to take any more of the goods concerned, the vendor may sue him for damages at once without manufacturing and tendering the remainder.82 Failure or delay in making payment will show repudiation where there is clear indication of absence of readiness and willingness to perform.83 No Renunciation Not every intimation of refusal would amount to renunciation. It is not a mere refusal or omission of one of the contracting parties to do something which he ought to do, that will justify the other in repudiating the contract; but there must be an absolute refusal to perform his
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side of the contract.84 It would discharge the other party, if it amounts to breach of a condition of the contract, or where it shows an intention not to perform the whole of the contract. Further, the refusal or renunciation must be unequivocal. In Sooltan Chund v. Schiller, 85 the defendants agreed to deliver to the plaintiffs, 200 tons of linseed at a certain price in April and May, the terms as to payment being cash on delivery. Certain deliveries were made by the defendants between the 1 May and 8 May, and a sum of Rs 1,000/- was paid on account by the plaintiffs, which left a large balance due to the defendants in respect of linseed already delivered. This balance was not paid, and the defendants thereupon wrote to the plaintiffs cancelling the contract and refusing to make further deliveries under it. The plaintiffs answered expressing their willingness to pay on adjustment of a sum, which they claimed for excess refraction and an allowance for some empty bags. The defendants stated that they would make no further delivery, and the plaintiffs thereupon brought in other linseed and sued the defendants for damages for nondelivery of the remaining linseed. Upon these facts, it was held, following Freeth v. Burr, 86 that there was no refusal on the part of the plaintiffs to pay for the linseed delivered to them, as they were willing to pay the sum due as soon as their cross-claims were adjusted. An unsuccessful attempt to perform a contract, which does not disable the promisor from still performing it effectually within the time limited, or a reasonable time and does not cause any damage to the promisee, cannot be treated as a refusal. Such an attempt does not of itself affect the legal rights of the parties at all.87 A conditional refusal, withdrawn before the time for performance, cannot be treated by the other party as fina1.88 Talking of refusal but seeking further information and indicating that a definite reply will be given when information arrives, does not amount to repudiation.89If one of the parties to a contract, under a mistaken impression, treats a contract to have been terminated after the lapse of time given in the contract, and negotiates for better or new terms, the contract is not terminated by this unilateral act ; and if the negotiations fail, he is still entitled to enforce the contract as it stood before the negotiations.90 Where two transactions are separate, repudiation of one cannot affect the other.91 The expression of an erroneous but bona fide view on the construction of an agreement does not amount to a repudiation and therefore, where an agreement for a lease contained a clause that the lease 'shall be non-assignable' for the period of lease and the lessee refused to accept an absolute prohibition against such letting, parting with possession in the lease, it does not amount to repudiation of the agreement.92 A purchaser having preemptive right to purchase shares of a private company had not repudiated the contract by questioning valuation of shares by auditors made under the terms of the contract. In fact by showing willingness go pay earnest, filing proceedings, sending letters, the purchaser showed readiness to proceed with the agreement.93 A purchaser of land for development agreed to buy land for a sum of money and he was to pay GBP 150,000 to a third party. A compulsory purchase of a part of the land had already commenced. The price of the land fell. The purchaser rescinded the contract and he claimed that the contract was discharged. The vendor did not accept the rescission and brought an action for declaration that the purchaser could not rescind. The purchaser, in his defence and counter-claim, claimed that the rescission was valid. The vendors brought another act ion for declaration that the position taken by the purchaser amounted to repudiation, which they accepted and claimed damages and included in their claim, damages for the third party.94 The trial judge and the Court of Appeal held that the purchasers were not entitled to rescind and had repudiated the contract; and awarded damages. The House of Lords, on appeal, held that unjustified rescission did not always amount to repudiation and when deciding the question, the court had to consider the conduct of the party as a whole. The purchasers were (albeit) wrongly relying on the contract itself, which provided for the power of rescission in case of compulsory purchase of the land. In the circumstances, they were not abandoning the contract or refusing further performance, if the court decided against them. The erroneous, or unsuccessful attempt at rescission did not amount to repudiation.95 A finance corporation lent a large sum of money to the respondent and demanded from him, in terms of the contract, to insure the property mortgaged to it and to pay the installments due together with interest. The respondent failed to do so, and demanded a further loan, which the finance corporation in its
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discretion, refused to give under the circumstances. It could not be said that the corporation had refused to perform its promise in its entirety. It had only exercised discretion under the contract.96 If the law lays down a particular form for the act of repudiation, and it is not in that form, it cannot enable the promisee to end the contract. In Thakurain Raj Rani v. Dwarka Nath Singh, G executed an agreement in January 1904 in favour of S to make monthly payments to S of Rs 50/- during S's life, from the time s. should execute a will in his favour and obtain the consent of the Court of Wards, s. being a disqualified proprietor. S executed such a will in G's favour and obtained sanction in July 1904. G did not make any of the agreed monthly payments. S did not revoke that will, but on several occasions, he submitted fresh wills in favour of his wife to the Court of Wards, which were never sanctioned. S's widow sued for a declaration that G had no rights under S's will, but the court held for G. One plea raised by S's widow was that section had repudiated the contract under S 39 by making fresh proposals for new wills to the revenue authorities, but the court held that S'sobvious course to terminate the contract was to revoke his will, and that he could do this by only using the special procedure laid down in the Indian Succession Act, 1925.1 60 Brinkibon Ltd v. Stahag Stahl and Stahlwarenhandelgesselschaft mbH, [1980] 2 Lloyd's Rep 556; affirmed [1983] 2 AC 34; Chitty on Contracts, 28th edn., para 25-017, pp. 12, 32. 61 Universal Cargo Carrier Corporation v. Citati, [1957] 2 QB 401 at 438, [1957] 2 All ER 70; Forslind v. Becheley Crundal, AIR 1922 SC 173(HL) . 62 VL Narasu v. PSV Iyer, AIR 1953 Mad 300 at 306. 63 Chua Tian Chu v. Chin Bay Ching, [2011] SGHC 126 (Singapore High Court); see also Kuwait Rocks Co v. AMN Bulkcarriers (The Astra), [2013] EWHC 865(Comm) . 64 Yarlagadda China Rattayya v. Donepudi Venkataramayya, AIR 1959 AP 551. 65 Anchor Line Ltd. v. Keith Rowell Ltd., [1980] 2 Lloyd's Rep 351; Texaco Ltd. v. Eurogulf Shipping Co. Ltd., [1987] 2 Lloyd's Rep 541. 66 Purshotamdas Tribhovandas v. Purshotamdas Mangaldas Nathubhoy, (1896) 21 Bom 23 at 35; Khimji Kuverji Shah v. Lalji Karamsi Raghavji, (1941) Bom 211, 43 Bom LR 35, 196 IC 208, AIR 1941 Bom 129; Ramalinga Mudali v. Natesa Mudali, AIR 1989 Ker 304. 67 Rajaram Nandlal v. Abdul Rahim, AIR 1915 Sind 30. 68 Chaudhary Rambabu Singh v. Dalip Kumar, AIR 1981 MP 158; Vuddadam v. Venkatakameswara, AIR 1951 Mad 470; Anandilal v. Abdul Hussain, AIR 1964 Raj 240. 69 Sreedhara Shenoy v. K Thanumalayan, AIR 1953 Tr & Coch 90. 70 Claude-Lila Parulekar v. Sakal Papers Pvt Ltd, AIR 2005 SC 4074, (2005) 11 SCC 73. 71 Ross T Smith d' Co Ltd v. TD Bailey Son d' Co, [1940] 3 All ER 60 per Lord Wright, quoted in Claude-Lila Parulekar v. Sakal Papers Pvt Ltd, AIR 2005 SC 4074, (2005) 11 SCC 73. 72 Sweet and Maxwell Ltd. v. Universal News Services Ltd., [1964] QBD 699 at 737, [1964] 3 WLR 356(CA) quoted in Claude-Lila Parulekar v. Sakal Papers Pvt Ltd, AIR 2005 SC 4074, (2005) 11 SCC 73. 73 M Gulamali Abdul Hussain & Co. v. A P M S Mohamed Yusuf, AIR 1954 Mad 268. 74 Tadepalli Kutumba Rama Sastry v. Seetepalli Dahhina Murthy, AIR 1960 AP 178. 75 Jhamak-Lal v. Mishri-Lal, AIR 1957 MB 23. 76 Cantor Fitzgerald International v. Callaghan, [1999] 2 All ER 411(CA) . 77 Federal Commerce and Navigation Ltd v. Molena Alpha Inc, [1978] 3 All ER 1066 at 1081-82, distinguishing Shaffer (James) Ltd v. Findlay Durham & Brodie, [1953] 1 WLR 106; Sweet & Maxwell Ltd v. Universal News Services Ltd, [1964] 3 All ER 30. 78 Thorpe v. Fasey, [1949] Ch 649 at 661, [1949] 2 All ER 393; Universal Cargo Carrier Corporation v. Citati, [1957] 2 QB 401 at 438, [1957] 2 All ER 70 at 85-86.
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79 Universal Cargo Carrier Corporation v. Citati, [1957] 2 QB 401 at 438, [1957] 2 All ER 70 at 84; affirmed on appeal [1957] 3 All ER 234. 80 Universal Cargo Carrier Corporation v. Citati, [1957] 2 QB 401, [1957] 2 All ER 70, [1957] 2 WLR 713; Lakshmijit v. Sherani, [1974] AC 605, [1973] 3 All ER 737(PC) ; Thomas Marshall (Exports) Ltd v. Guinle, [1979] Ch 227, [1978] 3 All ER 193 (repudiation by employee); Tai Hing Cotton Mills Ltd v. Kamsing Knitting Factory, [1979] AC 91, [1978] 1 All ER 515; Fercometal SARL v. Mediterranean Shipping Co SA (The Simona) [1988] 2 All ER 742, [1989] AC 788. 81 Suri Chetty Ranganathan Chetty v. G Parthasarathy Chetty, AIR 1921 Mad 141. 82 Withers v. Reynolds, (1831) 2 B & Ad 882; Cort v. Ambergate etc Ry, (1851) 17 QB 127. 83 Gurudev Developers v. Kurla Konkan Niwas CHS Ltd, AIR 2013 Bom 67. 84 Longbottom & Co. Ltd. v. Bass Walker & Co. Ltd., [1922] WN 245. 85 (1878) 4 Cal 252; Burn & Co v. Thakur Saheb Sree Lukhdirjee 83 IC 260, AIR 1924 Cal 427, a case on rather similar lines; Simson v. Virayya, (1886) 9 Mad 359; Volkart Bros v. Rutnavelu Chetti, (1892) 18 Mad 63. 86 (1874) LR 9 CP 208, [1874-80] All ER Rep 751. 87 Borrowman Phillips & Co. v. Free & Hollins, [1878] 4 QBD 500. 88 Phulchand Fateh Chand v. Jugal Kishore Gulab Singh, 106 IC 10, AIR 1927 Lah 693. 89 SV Sivaram Aiyar v. KM Subbier & Sons, AIR 1922 Mad 28 at 29. 90 Hindustan Construction Company v. State of Bihar, AIR 1963 Pat 254 at 260; Jainarain Ram Lundia v. Surajmull Sagarmull, 1949 FCR 379, AIR 1949 FC 211. 91 Madholal Sindhu v. Official Assignee of Bombay, (1949) FCR 441, 51 Bom LR 906, AIR 1950 FC 21, reversing, AIR 1947 Bom 217; Johnson v. Johnson, (1802) 3 B&P 162. 92 Sweet and Maxwell Ltd. v. Universal News Services Ltd., [1964] QBD 699, [1964] 3 WLR 356; Telfair Shipping Corpn v. Athos Shipping Co. SA, [1983] 1 Lloyd's Rep 127. 93 Claude-Lila Parulekar v. Sakal Papers Pvt Ltd, AIR 2005 SC 4074, (2005) 11 SCC 73. 94 Woodar Investment Development Ltd v. Wimpey Construction UK Ltd, [1980] 1 All ER 571 at 574; Shaffer (James) Ltd v. Findlay Durham & Brodie, [1953] 1 WLR 106 applied; Sweet & Maxwell Ltd v. Universal News Services Ltd, [1964] 3 All ER 30; Federal Commerce and Navigation Ltd v. Molena Alpha Inc, [1979] 1 All ER 367 distinguishing. 95 Woodar Investment Development Ltd v. Wimpey Construction UK Ltd, [1980] 1 All ER 571 at 576 at 583; Anchor Line Ltd v. Keith Rowell Ltd, [1980] 2 Lloyd's Rep 351 at 353; Telfair Shipping Corpn v. Athos Shipping Co SA, [1983] 1 Lloyd's Rep 127; Metro Meat Ltd v. Fares Rural Co Pty Ltd, [1985] 2 Lloyd's Rep 13; Sanko Steamship Co Ltd v. Eacom Timber Sales Ltd, [1987] 1 Lloyd's Rep 487. 96 West Bengal Financial Corpn v. Glurco Series Pvt Ltd., AIR 1973 Cal 268 at 275. 1 (1946) 21 Luck 314, 223 IC 206, AIR 1946 Oudh 193; affirmed in [1953] SCR 913 (the plea of s. 39 not raised in appeal).
Disability Where one party has, by his own act or default, disabled himself from performing his contractual obligations in some essential respect, the other party may put an end to the contract and treat himself discharged. A party is deemed to have incapacitated himself from performing his side of the contract, not only when he deliberately puts it out of his power to perform the contract, but also when, by his own act or default, circumstances arise which render him unable to perform his side of the contract or some essential part thereof.2 Between renunciation and impossibility, it has been suggested, renunciation is much easier to establish. This is because whereas in the case of renunciation, the innocent party has to establish that the conduct of the defaulting party has been such as to lead a reasonable man to believe that he did not intend to
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perform his promise, in the case of impossibility, he must show that the contract is in fact impossible of performance due to the other party's default.3 In an English case, the defendant promised the plaintiff, his intended wife, in consideration of the marriage which afterwards took place, to leave a certain house and land to her by will for her life. After the marriage he sold the property to a third person. The court, having decided on the facts that there was a contract, held that the plaintiff was entitled to treat the defendant's conveyance to a stranger as an immediate breach and to sue for damages.4 But where a shipper demanded for space as per terms of contract, without having goods to ship on that date, he could not be said to have disabled himself on the date of this demand from performing his part of the contract.5 Insolvency A bare notice of insolvency does not necessarily amount to a declaration of intention not to fulfill the obligation under the contract. It is a question of facts in each case.6 This is not of itself equivalent to a total refusal or disability to perform the contract, though it may be accompanied by conduct which amounts to a notice of the insolvent debtor's or his representative's intention not to pay his debts or perform his contracts. Insolvency does not determine a contract nor does it operate as rescission of a contract. A contract after initiation of insolvency proceedings and before adjudication is not per se void.7 But conduct of the insolvent or the official receiver that he does not mean to perform the contract, may amount to refusal to perform, entitling the other party to rescind.8 A seller, however, is not bound to go on delivering goods to an insolvent buyer.9 2 Smith's Leading Cases, Vol 2, 13th edn., 1929, p 40, cited by Devlin J. in Universal Cargo Carrier Corporation v. Citati, [1957] 2 QB 401 at 441, [1957] 2 All ER 70 at 88. 3 Chitty on Contracts, 28th edn., p. 1238, para 25-038. 4 Synge v. Synge, [1894] 1 QB 466 CJ. 5 BR Herman & Mohatta v. Asiatic Steam Navigation Co. Ltd., AIR 1941 Sind 146. 6 James Finlay & Co v. David Sassoon & Co, AIR 1914 Sind 53. 7 Kusampudi Sunadra Rama Raju v. Official Receiver, AIR 1964 AP 299. 8 AIR 1964 AP 299; Pulgaon Cotton Mills Ltd v. Gulabai, AIR 1953 Nag 345, (interim receiver did not immediately adopt the contract). 9 Ex p. Chalmers,(1873) LR 8Ch App 289; this preceded what is now s. 41(1)(c), Sale of Goods Act, 1979 in England, See corresponding s. 47(1)(c), the Sale of Goods Act, 1930.
'In its entirety' A refusal to perform any part of a contract, however small, is a refusal to perform the contract 'in its entirety'; but the kind of refusal contemplated in this section is one which affects a vital part of the contract, and prevents the promisee from getting, in substance, what he bargained for. In Hoenig v. Isaacs, 10 the plaintiff sued the defendant for the balance of GBP 750 for decorating and furnishing the defendant's flat. The defendant claimed that the work was defective and not according to contract, and the contract being an 'entire' contract, the plaintiff could recover nothing. The Court of Appeal held for the plaintiff, as there had been substantial compliance, but made a deduction for the defects. They referred to Cutter v. Powell, 11 the case of the ship's mate, who agreed to serve from port to port for a lump sum, but died on the voyage. His legal representatives could recover nothing. The Court of Appeal said it would have been otherwise, had he merely failed on some occasion in his duty whereby some damage had been caused. The words used by Garth CJ, 'where a party to a contract refuses altogetherto perform...his part of it,'
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clear up a slight verbal ambiguity in the Act, where the words 'his promise in its entirety' means the substance of the promise taken as a whole. Lord Atkin, in Spettabile Consorzio v. Northumberland Ship-building, 12 stated:
A repudiation has been defined in different terms--by Lord Selborne as an absolute refusal to perform a contract; by Lord Esher as a total refusal to perform it; by Bowen LJ as a declaration of an intention not to carry out a contract when the time arrives, and by Lord Haldane as an intention to treat the obligation as altogether at an end. They all come to the same thing, and they all amount at any rate to this, that it must be shown that the party to the contract made quite plain his own intention not to perform the contract.13
Mere failure to make one of a series of payments will not generally, in the absence of a prospective refusal, discharge the other party from proceeding with the contract.14 In Rash Behary Shaha v. Nrittya Gopal Nundy, 15 the court observed that the views expressed in the judgments in English cases, decided after the passing of this Act, can be taken as a useful guide in determining what amounts to a 'refusal' in cases of this class. In this case, the plaintiff had agreed to purchase from the defendant 300 tons of sugar, 'the shipment (to) be made during September and October next in lots of about 75 tons in a shipment,' the terms as to payment being cash before delivery. Notice of the arrival of the September shipment was given to the plaintiff, and he was called upon to pay before delivery. The plaintiff was unable to pay, and asked for time, but the defendant would not give it, and ultimately wrote to the plaintiff stating that he had cancelled the contract. On the arrival of the October shipment, the plaintiff tendered payment for the same, but the defendant refused to accept the money, saying that the contract had been cancelled. The plaintiff thereupon sued the defendant for damages for refusing to deliver the October shipment. It was held, following English cases, that mere failure on the part of the plaintiff to pay for and take delivery of the September shipment did not amount to 'a refusal' to perform the contract within the meaning of this section, so as to entitle the defendant to rescind the contract, and that it did not exonerate him from delivering the October shipment.16 In deciding whether there has been repudiation of contract, regard must be had, first, to the ratio quantitatively which the breach bears to the contract as a whole, and secondly, the degree or probability or improbability that the breach will be repeated.17 The illustrations to the Act must be construed with an assumption that there are not any terms beyond those stated in the illustrations; the agreements in practice almost always contain special terms. It has been held that a singer engaged to perform in concerts, as well as in operas, has agreed, amongst other things, to be in London six days before the beginning of his engagement, for the purpose of rehearsals, does not, merely by failing to be in London at the time so named, entitle the manager to put an end to the contract.18 10 [1952] 2 All ER 176. 11 (1795) 6 TR 320. 12 Spettabile Consorzio Veneziana di Armamento di Navigazione v. Northumberland Ship-building Co, (1919) 121 LT 628 at 634-35; Shaffer (James) Ltd v. Findlay Durham d' Brodie, [1953] 1 WLR 106 at 117; EE Master v. Garret d' Taylor Ltd, AIR 1931 Rang 126, 131 IC 220; Steel Bros d' Co Ltd v. Dayal Khatav d' Co, AIR 1924 Bom 247. 13 Decro-Wall International v. Practitioners in Marketing Ltd, [1971] 2 All ER 216, [1971] 1 WLR 361. 14 Freeth v. Burr, (1874) LR 9 CP 208, [1874-80] All ER Rep 751, Finch Sel Ca 714; Mersey Steel and Iron Co v. Naylor, Benzon d' Co, (1884) 9 App Cas 434; Chilean Nitrate Sale Corpn v. Marine Transportation Co Ltd, [1982] 1 Lloyd's Rep 570 at 572; Aktion Maritime Corporation of Liberia v. S. Kasmas d' Brother (The Aktion) [1987] 1 Lloyd's Rep 283 at 306; Chua Tian Chu v. Chin Bay Ching, [2011] SGHC 126 (Singapore High Court); Kuwait Rocks Co v. AMN Bulkcarriers (The Astra), [2013] EWHC 865(Comm) . 15 Rash Behary Shaha v. Nrittya Gopal Nundy, (1906) 33 Cal 477 per Maclean CJ at 481. 16 Rash Behary Shaha v. Nrittya Gopal Nundy, (1906) 33 Cal 477; cf Sha Moolchand Kesarimull v. Associated Agencies, (1941) 2 Mad LJ 281, AIR 1942 Mad 139.
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17 Sha Moolchand Kesarimull v. Associated Agencies, (1941) 2 Mad LJ 281, AIR 1942 Mad 139, relying on Maple Flock Co Ltd v. Universal FurnitureProducts (Wembley) Ltd, [1934] 1 KB 148, [1933] All ER Rep 15. 18 Bettini v. Gye, (1876) 1 QBD 183, Finch Sel Ca 742, [1874-80] All ER Rep 242.
Essential Terms of Contract As to failure in performing particular terms of a contract, no positive general rule can be laid down as to its effect. The question in every case is whether the conduct of the party in default is such as to amount to an abandonment of the contract or a refusal to perform it, or, having regard to the circumstances and the nature of the transaction, to 'evince an intention not to be bound by the contract'.19 In other words, a party renunciating must 'evince an intention' not to go on with the contract, which may be by words or by conduct, provided it is clearly made. The test, whether the intention is sufficiently evinced by conduct is whether the party renunciating has act ed in such a way as to lead a reasonable person to the conclusion that he does not intend to fulfill his part of the contract.20 One view is that the material intention is not that with which the contract is broken, but that with which it was made. Parties can undoubtedly make any term essential or non-essential; they can provide that failure to perform it shall discharge the other party from any further duty of performance on his part, or shall not so discharge him, but shall only entitle him to compensation in damages for the particular breach. Omission to make the intention clear in this respect is the cause of the difficulties, often considerable, which the courts have to overcome in this class of cases. The other view is that both intentions are material, first that with which the contract was made, for unless there is a breach of a vital term, there can be no repudiation under this section; secondly, that with which the contract is broken, for unless the defendant is refusing to perform the said vital term, there can be no repudiation. Before the plaintiff can repudiate, both these circumstances must concur:
(i) (ii)
a term held fundamental; refusal to perform that term by the defendant.
Proof of (i) will depend upon the intention of the parties at the making of the contract; and proof of (ii) on the intention of the party in default at the time of breach. The plaintiffs, a French manufacturing company, appointed the defendants sole concessionaires of their products in the UK. The plaintiffs were to dispatch goods with reasonable promptness against orders of the British concessionaires, who were to pay the bills drawn on them. The agreement between the parties was terminable by reasonable notice on either side. The defendants were consistently late in meeting the bills of exchange drawn on them. The plaintiffs, without notice, arranged with another British firm to be their sole concessionaires and wrote to the defendants saying that as the latter had wrongfully repudiated the contract by failing to pay the bills on time, so, the plaintiffs accepted the repudiation. The plaintiffs also demanded payment for the unpaid bills. They brought an action on that allegation and also prayed for a declaration that the defendants had ceased to be their sole concessionaires in UK. The defendants claimed to be continuing as sole concessionaires. The trial court gave judgment for the plaintiffs for the unpaid bills and for the defendants continuing to be the sole concessionaires. The Court of Appeal held that there was no repudiation by the defendants, but there was repudiation by the plaintiffs, as a reasonable notice of 12 months was necessary to terminate the agreement. The plaintiffs were released from their positive undertaking to continue to supply the defendants with the goods, but could not be relieved of their negative undertaking not to supply their goods to anyone else.21 Where the employer seeks to substantial changes to the essential terms of the employment, the employee can treat the contract as repudiated. If the employee leaves the job, he has not resigned, but has been constructively dismissed, and will be entitled to compensation in lieu of notice of damages.22 19 Freeth v. Burr, (1874) LR 9 CP 208, [1874-80] All ER Rep 751; Peter Dumenil & Co Ltd v. James Ruddin Ltd, [1953] 1 WLR 815, [1953] 2 All ER 294.
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20 Heymans v. Darwins, [1942] AC 356, 397; [1942] 1 All ER 337, 350; Universal Cargo Carrier Corporation v. Citati, [1957] 2 QB 401 at 436, [1957] 2 WLR 713 at 730, [1957] 2 All ER 70, on appeal [1957] 3 All ER 234; Smith's Leading Cases, Vol 2, 13th edn., 1929, p 40 referred to; Forslind v. Becheley Crundall, AIR 1922 SC 173(HL) ; Hochester v. De La Tour, (1853) 2 E&B 678, [1843-60] All ER Rep 12. 21 Decro-Wall International SA v. Practitioners in Marketing Ltd, [1971] 2 All ER 216, [1971] 1 WLR 361. 22 Farber v. Royal Trust Co., [1997] 1 SCR 846 (Supreme Court of Canada); Cantor Fitzgerald International v. Callaghan, [1999] 2 All ER 411(CA) .
Anticipatory Breach The parties to a contract, which is wholly executory, have a right to something more than the performance when the time arrives. This is the right to the maintenance of the contractual relation right up to that time, as well as to the performance of the contract when due. A contract is a contract from the time it is made, and not from the time performance is due.23 The repudiation of the obligations under the contract before the time for performance is due, therefore entitles the other party to treat the contract at an end. If, before the time for performance arrives, a party refuses to perform it in its entirety or disables himself from performing it in its entirety, this constitutes 'anticipatory breach' of the contract. Though the term 'anticipatory breach' has been used, it is in fact a breach in the present repudiation.24The renunciation supplies the cause of act ion, and not the future breach.25 The rule indicated by this phrase, is that, on the promisor's repudiation of the contract, even before the time for performance has arrived, the promisee may, at his option, treat the repudiation as an immediate breach, putting an end to the contract for the future and giving the promisee a right of action for damages. In Hochster v. De la Tour, 26 the defendant engaged the plaintiff as his courier on a continental tour from 1 June for three months at GBP 10 a month. Before the scheduled day, the defendant changed his mind and wrote to the plaintiff that the services were not wanted. The plaintiff immediately, before 1 June, sued the defendant for breach of contract. The defendant contended that the plaintiff should have waited till 1 June before bringing his act ion, as the contract could not be considered as broken till then. It was held that the contract had been broken by express renunciation, and the plaintiff was not bound to wait until the day of performance. The doctrine of anticipatory breach does not apply to contracts completely executed on one side or to promissory notes and bills of exchange.27 In the US, the repudiation or renunciation of a bill or note not yet due cannot be treated as an immediate breach of contract entitling the holder to sue upon the note,28 as the doctrine does not apply to unilateral obligations to pay money.29 23 Anson's Law of Contract, 29th edn., 2010, p. 514. 24 See Bradley v. H Newsom Sons & Co., [1919] AC 16 at 53. 25 Maredelanto Compagnia Naviera SA v. Bergbau-Handel Gmbh [The Mihalis Angelo],[1971] 1 QB 164, [1970] 3 All ER 125; Moschi v. Lep Air Services Ltd, [1973] AC 331 at 356; [1972] 2 All ER 393; Tai Hing Cotton Mills Ltd v. Kamsing Knitting Factory, [1979] AC 91, [1978] 1 All ER 515. 26 95 RR 747. 27 McKenzie v. Rees, (1941) 65 CLR 1 (High Court of Australia); Melanson v. Dominion of Canada General Insurance Co., (1934) 2 DLR 459 at 464. 28 Roehm v. Horst, (1900) 178 US 1 at 17, 44 Law Ed 953 at 960. 29 17A Am Jur 2d, Contracts, 735.
Promisee's Option
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If one party to a contract repudiates the contract, the other party, i.e., the innocent party, has an option. He may accept that repudiation and sue for damages for breach of contract, whether or not the time for performance has come; or he may, if he chooses, disregard or refuse to accept it and then the contract remains in full effect.30 Anticipatory breach was not devised as a whip to be used for the chastisement of deliberate lawbreakers, but from which the shiftless, the dilatory or the unfortunate are to be spared. Anticipatory breach means simply that a party is in breach from the moment his actual breach becomes inevitable. It is not confined to any particular class of breach, deliberate or blameworthy or otherwise.31 The rule also applies to situations where the performance is contingent.32The defendant promised to marry the plaintiff on the death of his (defendant's) father. While the father was still alive, he announced his intention of not fulfilling the contract and the plaintiff brought a suit for damages. It was held by the Court of Exchequer, that the promisee could treat the repudiation of the other party as wrongful putting an end to the contract and may at once bring an act ion for damages for breach of contract, subject to abatement in respect of any circumstance which may have afforded the means of mitigating his loss. The effect of 'anticipatory breach' was summed up in this judgment before this Act came into force:33
The promisee, if he pleases, may treat the notice of intention as inoperative, and await the time when the contract is to be executed, and then hold the other party responsible for all the consequences of non-performance: but in that case he keeps the contract alive for the benefit of the other party as well as his own; he remains subject to his own obligations and liabilities under it, and enables the other party not only to complete the contract, if so advised, notwithstanding his previous repudiation of it, but also to take advantage of any supervening circumstance which would justify him in declining to compete it.
On the other hand, the promisee may, if he thinks proper, treat the repudiation of the other party as wrongful, put an end to the contract, and bring his act ion at once as on a breach of it; and in such action, he will be entitled to such damages as would have arisen from the non-performance of the contract at the appointed time, subject, however, to abatement in respect of any circumstances which may have afforded him the means of mitigating his loss.34
The innocent party has an option to either accept the wrongful repudiation or to affirm its continuance. There is no third choice, as a sort of via media, to affirm the contract and yet be absolved from tendering further performance, unless and until the party who refused to perform obligations gives reasonable notice that he is once again able and willing to perform. Such a choice would negate the contract being kept alive for the benefit of both parties and would deny the party who successfully sought to rescind the right to take advantage of any supervening circumstance which would justify him in declining to complete.35 Under the UNIDROIT Principles, if it is clear that prior to the date for performance by one party there will be fundamental non-performance by that party, the other party may terminate the contract.36 An interest provision is that the party who has reason to believe that the other will be unable or unwilling to perform the contract at due date, may demand adequate assurance of due performance and in the meanwhile, withhold its own performance. If the assurance is not provided within a reasonable time, he may terminate the contract.37 This provision protects the interest of a party, who has reason to believe that the other party might be unable or unwilling to perform, but is not sure, there being still a possibility that the other party may perform. It helps to resolve his dilemma; if he were to wait and the contract is not performed, he would incur loss; if he terminated the contract, and it became apparent that the contract could have been performed by the other party, he would be guilty of non-performance, and liable in damages. What is adequate assurance would depend upon the circumstances; sometimes mere declaration would suffice, at other times, request of security or guarantee from a third person may be required. 30 White & Carter (Councils) Ltd v. McGregor, [1962] AC 413 at 427, [1961] 3 All ER 1178, [1962] 2 WLR 17 at 20 (HL) per Lord Reid; quoted with approval in Motilal Srinivasa Sarda v. Netha Cooperative Spinning Mills Ltd, AIR 1975 AP 169 at
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175. 31 Universal Cargo Carrier Corporation v. Citati, [1957] 2 QB 401 at 438, [1957] 2 All ER 70 per Devlin J at 86; affirmed on appeal [1957] 3 All ER 234(CA) . 32 Frost v. Knight, (1872) LR 7 Ex 111 at 113; Synge v. Synge, (1894) 1 QB 466 CJ. 33 Frost v. Knight, (1872) LR 7 Ex 111 at 118 per Cockburn CJ. 34 Florrie Edridge v. Rustomji Danjibhoy Sethna, (1933) 60 IA 368, 36 Bom LR 127, 146 IC 730, AIR 1933 PC 233; Ratanlal Khushalrai v. Brijmohan Prahladka, AIR 1931 Bom 386, 33 Bom LR 703, 133 IC 861; notes to illustration (h) to s. 73 below; Dhanraj Mills Limited Liability Co v. Narsingh Prasad Boobna, (1949) 27 Pat 723, AIR 1949 Pat 270; Maredelanto Compagnia Naviera SA v. Bergbau Handel Gmbh (The Mihalis Angelos) [1971] 1 QB 164, [1970] 3 All ER 125. 35 Fercometal SARL v. Mediterranean Shipping Co SA (The Simona), [1988] 2 All ER 742, [1989] AC 788(HL) . 36 UNIDROIT Principles, Art. 7.3.3. 37 UNIDROIT Principles, Art. 7.3.4.
Affirmation of Contract: Acquiescence The words in the section 'may put an end...unless he has signified his acquiescence' seem to indicate the loss of the right to repudiate, once the promisee has affirmed the continuance of the contract. If the innocent party, having the option of accepting the repudiation and ending the contract, instead elects to treat the contract as continuing, he has 'affirmed' the contract.38 The section uses the word 'acquiesce'. The term acquiescence is used where a person having a right and seeing another person about to commit or in the course of committing an act infringing upon that right, stands by in such a manner as really to induce the person committing the act, and who might otherwise have abstained from it, to believe that he assents to its being committed; a person standing by cannot afterwards be heard to complain of the act .39 It takes place when a person, with full knowledge of his own rights and of any rights which infringe them, has, either at the time of infringement or after infringement, by his conduct, led the persons responsible for the infringement to believe that he has waived or abandoned his rights.40 It is necessary that for such affirmation or acquiescence, he must have knowledge of the facts giving rise to the breach,41 and also of his right to elect, i.e., to choose between the alternatives of accepting the repudiation and affirmation of the contract.42 Affirmation may be express or implied, particularly if the innocent party has done some unequivocal act from which he shows that he intends to go on with the contract regardless of the breach,43 or intends not to exercise the right to end the contract.44 The words or conduct ordinarily required to constitute an election must be unequivocal in the sense that it is consistent only with the exercise of one of the two sets of rights and inconsistent with the exercise of the other.45 Mere inactivity therefore, may not itself amount to affirmation.46 Where a contract can be terminated at the option of a promisee, the right to terminate is not necessarily lost by the promisee doing any act consistent with the continuance of the contract. If the act is also consistent with the reservation of a right to terminate in certain events, the right to terminate is not lost by the doing of the act .47 The affirmation must be total, and the innocent party cannot affirm a part of the contract and disaffirm the rest.48 The election to affirm must be conveyed to the other party in 'clear and unequivocal terms'.49 This is indicated by the use of the word 'has signified' in the section. This is justified on the ground of policy that the guilty party needs to know with certainty whether the contract which he has repudiated has been terminated or kept alive, for if it is still alive, he will yet have an opportunity of performance; and further
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that the guilty party must be entitled to treat the other party's assertion that the contract is still alive as a reliable indication that when the time comes for performance, he must perform it, if he is to avoid committing the actual breach and he is therefore entitled to assume that the innocent party will not change his mind in the meantime.50 An affirmation once made is irrevocable, if it has been communicated to the party committing the breach.51 If he freely and with full knowledge elects not to accept the repudiation, he cannot go back on this election, and sue before the date of performance has arrived.52 Effect of Affirmation The innocent party can insist on performance by the other party. By a compromise decree, B agreed to take A's son in adoption and A would leave B in undisturbed possession and enjoyment of certain properties. A not only refused to give his son in adoption, but made the adoption impossible by performing the marriage of the boy. B was held entitled to enforce her right to the property, as she should be deemed to have performed her part of the agreement.53 Further, the innocent party can continue with his own performance, and claim the price. In White and Carter (Councils) Ltd v. McGregor, 54 an agreement for display of advertisement of a garage owner was made for three years, and on the same day the garage owner cancelled the contract on the ground of mistake of his representative. The advertising contractor refused to accept the cancellation and displayed the advertisements as agreed. The House of Lords held that the advertising contractor was entitled to carry out the contract and claim the full contract price and was not obliged to accept the repudiation and sue for damages. The contention, that on renouncing the contract, the contractor was not entitled to carry out the agreement and sue for the price, was not accepted. In another case, a charterer redelivered a vessel before the earliest permissible date of redelivery. It was held that the owner could reject the repudiation and instead continue to claim hire at the charterparty rate.55 This approach is criticised on the ground that it would encourage wasteful performance.56 In the same case, it was suggested that the remedy of the innocent party would be damages only, if its performance could not have been carried out except with the cooperation of the other party.57 Further, the right to complete the contract and claim the price might not be available if 'it can be shown that a person has no legitimate interest, financial or otherwise, in performing the contract rather than claiming damages'.58 By electing to affirm, the innocent party does not lose his rights to claim damages sustained because of the breach.59 Having elected to affirm the contract, the innocent party cannot then seek to repudiate it. A contractor required to supply the army charpoys in certain quantities by installments, failed to supply the requisite number. Even after that breach, an installment of charpoys was received by the Army authorities. They could not therefore cancel the work orders and put an end to the contract.60 Upon affirmation, the right to terminate is lost despite any anti-waiver clause in the contract.61 The party repudiating the contract is entitled to withdraw his repudiation before the date fixed for completion of the contract and to insist that the contract be performed in its entirety, unless the other party has accepted the repudiation and elected to treat the contract as terminated.62 The contract will remain in force for the benefit of both parties. A promisee not rescinding the contract, but acquiescing in its performance, is not entitled to demand the price of the goods before the date due under the contract, and then he must perform his own part fully before he can claim to be entitled to insist on the performance by the promisor.63 A principal, who continues the agency, despite shortcomings in discharge of duties of the agent, is liable to pay the agent's commission according to the agreement till the dismissal of the agents.64 A seller not accepting the buyer's repudiation of contract is not entitled to damages unless
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he has offered the delivery of goods in time.65 If the contract is continued, the contract subsists at the risk of both parties and the anticipatory renunciation is ineffective.66 Either party can then take advantage of any supervening circumstances of such a character as to discharge the contract.67 In Avery v. Bowden, 68 a ship chartered by A to B was to sail to Odessa and take cargo from B's agent, to be loaded within a certain number of days. On reaching Odessa, the master of the ship demanded the cargo, but B's agent was unable to supply any. The master of the ship continued to demand the cargo. Before the specified days had elapsed, the Crimean war broke out between England and Russia, rendering performance of the contract impossible. A sued B for breach. It was held that even if the conduct of B'sagent amounted to renunciation, it did not constitute any cause of act ion once the master continued to insist on performance by demanding the cargo. The contract was discharged, and A's action failed. 38 Suisse Atlantique Societe' d'Armement Maritime SA v. NV Rotterdamsche Kolen Centrale, [1967] 1 AC 361 at 368, [1966] 2 All ER 61, [1966] 2 WLR 944. 39 Halsbury's Laws of England, Vol. 16(2), 4th edn., Reissue, 1 November 2003, EQUITY, para 1473. 40 Jowitt's Dictionary of English Law, Vol. l, 2nd edn. 41 Kammins Ballrooms Co Ltd v. Zenith Investments (Torquay) Ltd, [1971] AC 850, [1970] 2 All ER 871. 42 Kendall v. Hamilton, [1879] 4 AC 504, [1874-80] All ER Rep 932; Peyman v. Lanjani, [1985] Ch 457, [1984] 3 All ER 703; Sea Calm Shipping Co SA v. Chantiers Navals De L'Esterel, [1986] 2 Lloyd's Rep 294; Khoury v. Government Insurance Office, (1984) 165 CLR 622 (High Court of Australia); Immer (No 145) Pty Ltd v. The Uniting Church in Australia Property Trust, (1993) 182 CLR 26. 43 China National Foreign Trade Transportation Corpn v. Evolgia Shipping Co SA, [1979] 1 WLR 1018, [1979] 2 All ER 1044; Yukong Line Ltd of Korea v. Rendsburg Investments Corp of Liberia, [1996] 2 Lloyd's Rep 604, [1998] 4 All ER 82; Peyman v. Lanjani, [1985] Ch 457, [1984] 3 All ER 703. 44 Pust v. Dowie, (1863) 5 B&S 33; Bentsen v. Taylor Sons & Co, [1893] 2 QB 274; Suisse Atlantique Socie'te' d'Armement Maritime SA v. NV Rotterdamsche Kolen Centrale, [1967] 1 AC 361 at 368, [1966] 2 All ER 61, [1966] 2 WLR 944. 45 Sargent v. ASL Developments Ltd, (1974) 131 CLR 634 (High Court of Australia) per Stephen J at 646. 46 Perry v. Davis, (1858) 3 CBNS 769; Cranleigh Precision Engg Ltd v. Bryant, [1965] 1 WLR 1293, [1964] 3 All ER 289. 47 Immer (No 145) Pty Ltd. v. The Uniting Church in Australia Property Trust, (1993) 182 CLR 26 per Brennan J, para 3. 48 Suisse Atlantique Societe' d'Armement Maritime s. A v. N v. Rotterdamsche Kolen Centrale, [1967] 1 AC 361, [1966] 2 All ER 61, [1966] 2 WLR 944. 49 The Kanchenjunga, [1990] 1 Lloyd's Rep 391. 50 Stocznia Gdanska SA v. Latvian Shipping Co, [1997] 2 Lloyd's Rep 228 at 235-36 (CA); reversed in [1998] 1 All ER 883(HL) ; Treitel,[1998] 114 LQR 22. 51 Peyman v. Lanjani, [1985] Ch 457, [1984] 3 All ER 703; Motor Oil Hellas (Corinth) Refineries SA v. Shipping Corpn of India, [1990] 1 Lloyd's Rep 391; affirming [1989] 1 Lloyd's Rep 354; Yukong Line Ltd of Korea v. Rendsburg Investments Corpn of Liberia, [1996] 2 Lloyd's Rep 604, [1998] 4 All ER 82. 52 Haroon Tar Mohammed v. Bengal Distilleries Co Ltd, (1948) 2 Cal 11 at 46; Fercometal SARL v. Mediterranean Shipping Co SA (The Simona), [1988] 2 All ER 742, [1989] AC 788(HL) ; Bentsen v. Taylor Sons d' Co, [1893] 2 QB 274. 53 Makineni Nagayya v. Makineni Bapamma, AIR 1958 AP 504 (also held that the defendant could not take advantage of his own wrong). 54 [[1962] AC 413, [1962] 2 WLR 17(HL) . 55 Isabella Shipowner SA v. Shagang Shipping Co Ltd (Aquafaith), [2012] EWHC 1077(Comm) . 56 Goodhart,[1962] 78 LQR 263; Furmston,(1962) MLR 364; Cumberbatch,(1989) 31 JILI 346. 57 Denmark Production Ltd v. Boscobel Productions Ltd, [1968] 3 All ER 513, [1969] 1 QB 699 of; London Borough Hounslow v. Twickenham Garden Developments Ltd, [1970] 3 All ER 326, [1971] Ch 233; Attica Sea Carriers Corpn v. Ferrostaal Poseidon Bulk Reederei GmbH, [1976] 1 Lloyd's Rep 250.
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58 White and Carter (Councils) Ltd v. McGregor, [1962] AC 413 per Lord Reid at p 431; dictum approved in Attica Sea Carriers Corpn v. Ferrostaal Poseidon Bulk Reederei GmbH, [1976] 1 Lloyd's Rep 132; Clea Shipping Corp v. Bulk Oil International Ltd, [1983] 2 Lloyd's Rep 645, [1984] 1 All ER 129. 59 Bentsen v. Taylor Sons d' Co, [1893] 2 QB 274; Chandris v. Isbrandtsen Moller Co Inc, [1951] 1 KB 240, [1950] 2 All ER 618; Suisse Atlantique Socie'te' d'Armement Maritime SA v. NV Rotterdamsche Kolen Centrale, [1967] 1 AC 361 at 395, [1966] 2 All ER 61, [1966] 2 WLR 944. 60 Union of India v. s. Kesar Singh, AIR 1978 J&K 102 at 106. 61 Tele2 International Card Co Sa & others v. Post Office Ltd, [2009] EWCA Civ 9. 62 Panoutsos v. Raymond Hadley Corporation of New York, [1917] 2 KB 473, [1916-17] All ER Rep 448; Cohen & Co v. Ockerby & Co Ltd, (1917) 24 CLR 288 at 298; Jhandoo Mal Jagan Nath v. Phul Chand Fateh Chand, (1924) 5 Lah 497, 85 IC 118, AIR 1925 Lah 217; Phulchand Fateh Chand v. Jugal Kishore Gulab Singh, AIR 1927 Lah 501, 106 IC 10, AIR 1927 Lah 693; Hindustan Construction Company v. State of Bihar, AIR 1963 Pat 254; Peter Turnbull & Co Pty Ltd v. Mundus Trading Co (Australiasia) Pty Ltd, (1954) 90 CLR 235 at 250. 63 Burn & Co Ltd v. His Highness Thakur Sahib Shree Lukhdhirji, AIR 1925 PC 188. 64 Boulton Bros & Co Ltd v. New Victoria Mills Co Ltd, (1928) 119 IC 837, AIR 1929 All 87. 65 Motilal Srinivasa Sarda v. Netha Co-operative Spinning Mills Ltd, AIR 1975 AP 169; relying on NKN Ramier & Bros v. SS Ramudu Ayyar, AIR 1933 Mad 176 at 178; State of Kerala v. Cochin Chemical Refineries Ltd, AIR 1968 SC 1361 at 1364; and referring to NM Rayulu Aiyar v. Thirukondas M Kuppu Aiyar & Sons, AIR 1925 Mad 974; Nannier v. NM Rayulu Iyer Nagasami Iyer & Co, (1925) 49 Mad 781, 93 IC 673, AIR 1926 Mad 778; Burn & Co Ltd v. His Highness Thakur Sahib Shree Lakhdhirji, AIR 1925 PC 188; Mathra Das v. Secy of State, AIR 1930 Lah 979. 66 Johnstone v. Milling, (1886) 16 QBD 460 Per Cotton LJ at 470, [1886-90] All ER Rep Ext 1701; Gill & Duffus SA v. Berger & Co Inc, [1984] AC 382 at 395-96. 67 Avery v. Bowden, (1856) 6 E & B 953, 119 ER 1119; Peter Turnbull & Co Pty Ltd v. Mundus Trading Co (Australiasia) Pty Ltd, (1954) 90 CLR 235 at 250. 68 (1856) 6 E & B 953, 119 ER 1119.
'Put an End': Acceptance of Repudiation The innocent party wishing to treat himself as discharged, where there is repudiatory breach of a contract, must make his decision known to the party in default, otherwise the contract continues, for 'an unaccepted repudiation is a thing writ in water'.69 A contract is not necessarily broken by the mere notice of intention to break the contract,70 or by repudiation.71 There must be two parties to end the contract.72 The words 'may put an end to the contract' have been held to make the contract 'voidable' at the option of the promisee.73 The common law rights of a promisee, on refusal by the promisor to perform his promise, were stated in 1863,74 and the statement remains applicable under the Act :
If a vendor contracts to deliver goods within a reasonable time, payment to be made on delivery, and before the lapse of that time, before the contract becomes absolute, he says to the purchaser, 'I will not deliver the goods', the latter is not thereby immediately bound to treat the contract as broken, and bring his action. The contract is not necessarily broken by the notice. That notice is, as respects the right to enforce the contract, a perfect nullity, a mere expression of intention to break the contract, capable of being retracted until the expiration of the time for delivering the goods. It cannot be regarded as giving an immediate right of act ion unless, of course, the purchaser thereupon exercises his option to treat the contract as rescinded, when he may go into the market and supply himself with similar goods, and sue upon the contract at once for any damage then sustained.
An employee gave his letter of resignation from service. The employer, instead of accepting the same, gave a notice dismissing him. If he had resigned from service, he was entitled to additional terminal
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benefits, if he were dismissed, he was not so entitled. Applying the present section, it was held that the dismissal was valid. The letter of resignation being not accepted, could not operate, but it intimated an intention not to perform his services. The company only took him at his word...and it seems to me that there was on the 13th [date of letter of dismissal] an anticipatory breach which in the events entitled them to determine the contract by dismissing the plaintiff.75 Where one party purports to put an end to the contract, and the court holds that there has been no repudiation by the other party to justify such rescission, and the termination by the other party amounts to repudiation of the contract.76 A party seeking to terminate can justify the termination on any grounds available to it at the time, even if those grounds were not known to it, or were not mentioned in its notice of termination.77 Mode of Acceptance Acceptance of repudiation by the promisee must be equivocal, and it must be communicated to the party in breach. Since the repudiatory breach makes the contract voidable,78 the innocent party can rescind the contract, and the rescission must, under s. 66 of the Act, be communicated in the same manner and be subject to the same rules as communication of proposal.79 The receiving of a three months' notice of resignation of a managing director of his seven years' agreement by the other directors in silence, without anything more, is not acceptance of the anticipatory breach by the directors, and would have no legal effect. Nor would the mere calling of an extraordinary meeting to remove the managing director (which meeting was never held) be anticipatory breach by the company or repudiation of contract by them.80 The acceptance of repudiation requires no particular form.81 It must generally be communicated to the party in breach,82 personally or by an agent, or even by bringing it to the notice of the repudiating party through an intermediary.83
... an acceptance of a repudiation must be communicated to the party in breach or at least overtly evinced. But saying and doing nothing at all, other than continuing failure to perform, cannot constitute acceptance of a repudiation even if the grounds for such an acceptance exist. Such conduct could be equivocal and equally consistent with a decision not to exercise the right to treat the contract as repudiated.84
In Vitol SA v. Norelf Ltd (the Santa Clara), 85cargo shipped from Houston was to be delivered to the purchasers between 1-7 March. On 8 March, the purchasers sent a telex to the sellers asserting that they were advised that loading would not complete until 9 March (which was outside the agreed period), and hence, they rejected the cargo and ended the contract. The cargo was unloaded, and neither party took steps to perform the contract. The sellers, in particular, did not tender the bill of lading in terms of the contract. The sellers sold the cargo and claimed damages for the difference in price, alleging that by their failure to take any further steps, the sellers had accepted the repudiation of the purchasers. The question before the court was whether an innocent party could accept repudiation of the contract merely by failing to perform its own obligations under it. The Court of Appeal held for the purchaser on the ground that mere failure to perform did not constitute acceptance of the repudiation, because mere failure could not be unequivocal. Such act, or inaction, was equally consistent with a misunderstanding by the innocent party of his rights, or indecision, or even inadvertence. The House of Lords reversed the decision and found for the seller; holding that a failure to perform was not necessarily and always equivocal. 'Sometimes in the practical world of businessmen an omission to act may be as pregnant with meaning as a positive declaration.' It held that an act of acceptance required no particular form. It was sufficient that the communication or conduct clearly and unequivocally conveyed to the repudiating party that the aggrieved party was treating the contract at an end. In the days and weeks following loading and sailing of the
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vessel, the seller had failed to tender the bill of lading to the purchaser, which was the precondition for payment of price. Thereby, the seller had clearly conveyed to the purchaser that he was treating the contract as an end. An election was inferred from the failure, inter alia, to tender the bill of lading after the rejection of the telex. By issuing a writ, a party elects to treat a contract as terminated--that he is rescinding it.86 But a writ claiming a contract to be valid and subsisting, must mean that the party is refusing to treat it as terminated.87 In Garnac Grain Co Inc. v. HMF Faure and Fairclough Ltd, 88 the House of Lords did not decide whether a writ without service could constitute election to treat the refusal as repudiation. The renunciation or disclaimer of a contract takes place when and where it is communicated to the other party to the contract.89 The contract terminates when the promisee terminates by exercising his option, and the breach takes place when the promisor receives the letter of cancellation.90 Acceptance not Revocable Rochester v. De La Tour 91 established that a renunciation, when acted upon, becomes final. Thus, if a man proclaimed by words or conduct, an inability to perform, the other party could safely act upon it without having to prove that when the time came for performance, the inability was still effective.92 Where on account of breach of the obligation by the vendor to make out a good title, which the purchaser rightly considered repudiation, the purchaser in the clearest terms rescinds the contract of purchase, the parties cannot revive the contract unless it is by something that amounts to a new agreement, because an effective rescission brings a contract to an end and entitles the purchaser to the return of his deposit.93 A buyer, who has refused to receive goods on the ground that they were not tendered within the agreed time, cannot afterwards change his ground and raise the objection that in fact, the goods were not according to contract;94 for the election to rescind, once made, is conclusive.95 69 Howard v. Pickford Tool Co, [1951] 1 KB 417 per Lord Asquith LJ at 421; Thomas Marshall (Exports) Ltd v. Guinle, [1979] Ch 227, [1978] 3 All ER 193; London Transport Executive v. Clarke, (1981) ICR 355; Gunton v. London Boraugh of Richmondon Thames, [1980] 3 All ER 577; Bank of Nova Scotia v. Hellenic Mutual War Risks Assn (Bermuda) Ltd (The Goodluck) [1989] 3 All ER 628, [1988] 1 Lloyd's Rep 514. 70 Nannier v. N M Ra u Iyer Nagasami Iyer & Co, (1925) 49 Mad 781, 93 IC 673, AIR 1926 Mad 778 at 781; Jhandoo Mal Jagan Nath v. Phul Chand Fateh Chand, (1924) 5 Lah 497, 85 IC 118, AIR 1925 Lah 71 Heyman v. Darwins Ltd, [1942] AC 356 at 397, [1942] 1 All ER 337 at 360; Hirji Mulji v. Cheong Yue SS Co Ltd, [1926] AC 497, [1926] All ER Rep 51 at 58 (difference between frustration and rescission or repudiation pointed out). 72 Narainu v. Sant Ram, AIR 1952 Bilaspur 6; v. Harihara lyer v. Mathew George, AIR 1965 Ker 187; Zainab Begum alias Varalakshmi v. Khursheed Begum, AIR 1963 AP 370; Hindustan Construction Co. v. State of Bihar, AIR 1963 Pat 254. 73 Muralidhar Chatterjee v. International Film Co Ltd, AIR 1943 PC 34, (1943) 70 IA 35. 74 Mansuk Das v. Rangayya Chetti 1 Mad HC 162 per Scotland CJ; the observation of Mulla J in Steel Brothers & Co Ltd v. Da al Khatav & Co, (1923) 47 Bom 924, AIR 1924 Bom 247, 87 IC 67 (a case of a contract on CIF terms 75 Ganesh Ramchandra Gadgil v. G I P Railway Company, (1900) 2 Bom LR 790. This appears a strange decision, for if the resignation was inoperative, there was no breach at all. There might have been, if the plaintiff had said, 'I shall not return to your service, whether you accept my resignation or not.' 76 Acre 1127 Limited (In Liquidation) v. De Montfort Fine Art Limited, [2011] EWCA Civ 87. 77 Leofelis v. Lonsdale Sports, [2012] EWHC 485(Ch) . 78 Muralidhar Chatterjee v. International Film Co. Ltd., AIR 1943 PC 34. 79 See s. 3 above. 80 Cranleigh Precision Engg Ltd. v. Bryant, [1964] 3 All ER 289. 81 Vitol SA v. Norelf Ltd (the Santa Clara), [1996] 3 All ER 193(HL) . 82 Maredelanto Compagnia Naviera SA v. Bergbau-Handel Gmbh (The Mihalis Angelos), [1970] 3 All ER 125.
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83 Vitol SA v. Norelf Ltd (the Santa Clara), [1996] 3 All ER 193(HL) . 84 State Trading Corporation of India v. M Golodetz Ltd., [1989] 2 Lloyd's Rep 277. 85 [1996] 3 All ER 193 (HL). 86 Heyman v. Darwins Ltd, [1942] AC 356 at 361, 379, [1942] 1 All ER 337. 87 Garnac Grain Co Inc. v. HMF Faure & Fairclough Ltd, [1968] AC 1130, [1967] 3 WLR 143 at 151, [1967] 2 All ER 353; see Heyman v. Darwins Ltd, [1942] AC 356 at 361, 379, [1942] 1 All ER 337. 88 [1967] 3 WLR 143 at 151. 89 Firm Seth Hajarimal v. Gulabchand Udechand Firm, AIR 1956 Nag 118; Dhanraj Mills Limited,Liability Co. v. Narsingh Prasad Boobna, AIR 1949 Pat 270. 90 Gaekwar Baroda State Railway v. Sheikh Habib-Ullah, AIR 1934 All 740(DB) rsed on a different point in AIR 1938 PC 165). 91 (1853) 2 E&B 678 at 689, [1843-60] All ER Rep 12. 92 Univeral Cargo Carriers Corpn v. Citati, [1957] 2 QB 401 at 437; Forslind v. Becheley Crundall, AIR 1922 SC 173(HL) . 93 Re Stone & Saville's Contract,[1962] 1 WLR 461 at 466; on appeal [1963] 1 WLR 163, [1963] 1 All ER 353(CA) . 94 Nannier v. N M Rayulu Iyer Nagasami Iyer & Co, (1925) 49 Mad 781, 93 IC 673, AIR 1926 Mad 778; but as to a case where the vendor was not ready and willing to perform at all, see British and Beningtons v. NW Cachar Tea Co, [1923] AC 48 per Lord Summer at 70. 95 Narasimha Mudali v. Potti Narayanasami Chetty, (1925) 49 Mad LJ 720, AIR 1926 Mad 118, 92 IC 333 (facts rather confused); cf Bhai Jawahar Singh & Sons v. Secretary of State, (1926) 94 IC 635, AIR 1926 Lah 292.
Effect of Acceptance When one party assumes to renounce the contract, i.e., by anticipation, refuses to perform it, he thereby, as far as he is concerned, declares his intention then and there to rescind the contract. The other party may adopt such renunciation of the contract by so acting upon it, as in effect to declare that he too treats the contract as at an end, except for the purpose of bringing an act ion upon it for damages sustained by him in consequence of such renunciation.96 Three legal effects follow from the acceptance of the breach:
(i)
(ii)
(iii)
It releases the innocent party from his obligation to perform.1 For example, wrongful dismissal of an employee has been held to determine not only the contract of employment, but also a term restraining the employee from carrying on the same business after his termination.2 He can bring an action without showing that he could have performed within the stipulated time.3 But proof by the guilty party that the other party could not have performed by that time, may affect damages and in appropriate cases, reduce them to a nominal sum.4 Though a party may exercise his right to treat the contract as at an end as regards obligations de futuro, it remains alive for the purpose of vindicating rights already acquired under it on either side.5 Acceptance of the breach also releases the guilty party from the obligation to perform, as s. 64 of the Act provides.6 He can henceforth be sued for damages. When the promisee has so determined his choice, then, whether he sues for damages or not, it is not open to the promisor to go back on his refusal to treat the contract as subsisting and to insist on performance or sue for damages for non-performance.7 The innocent party can sue for damages.8 Once the innocent party has accepted the breach that is final, his right to damages is not defeated by actual or possible supervening events.9 Subsequent events may affect the amount of damages,10 but not the right to damages. The innocent party can claim damages at once even though his right to future performance of the contract is only contingent.11 Where the vendor has repudiated the
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contract before the agreed date of performance, he is liable to refund the amount of earnest money, irrespective of the readiness and willingness on the part of the vendee to perform the vendee's obligations.12 The promisee might not be able to claim return of entire price paid, and his claim for damages might be restricted to loss arising from the failure.13 If a substituted agreement is put to an end under this section on account of breach, the original contract is not thereby revived.14 The contract which 'may be put an end to' under s. 39 is 'voidable', and the innocent party is liable under s. 64 (subject to the right of set-off for damages),15 to restore to the guilty party, any benefit received under the contract.16Earnest money is not a 'benefit' under s. 64 of the Act . The seller, rescinding the contract for the buyer's failure to pay the purchase money, is not liable to refund the earnest money to the buyer.17 Where a servant or a clerk, who is engaged by the month, leaves his employer's service wrongfully in the course of the then current month, he is not entitled to any salary for the broken portion of the month in the course of which he left the service.18 But where the engagement is for one full year, from 1 April 1908 to 31 March 1909, and the salary is fixed at an amount of Rs 18 per month, the servant wrongfully leaving his employer's service on 20 March 1909, is nevertheless entitled to his salary for the 11 months, during which he actually served his employer, less the damages incurred by the employer by the breach, although, the salary was payable under the terms of the agreement in a lump sum of Rs 216 at the end of the year. It was so held by the High Court of Madras, the court observing that the case was governed by the present section and s. 64, and that illustration (c) to s. 65 was almost conclusive in the plaintiff's favour.19 Specific Performance Where a party to a contract commits an anticipatory breach of the contract, the other party to the contract may treat the breach as putting an end to the contract and sue for damages, but in that event, he cannot ask for specific performance.20 The other option open to the aggrieved party is that he may choose to keep the contract alive till the time for performance and claim specific performance, and in that event, though he need not tender his performance according to the terms,21 he cannot claim specific performance of the contract, unless he shows that he is ready and willing to perform the contract.22 Measure of Damages A repudiation by the buyer of goods, gives to the seller an immediate cause of act ion, if he chooses to rescind the contract. He may at once sue for damages.23 The measure of damages for 'anticipatory breach' is not necessarily the same as it would be for a failure or refusal occurring at the time when performance was due.24 The injured party is under an obligation to take all reasonable steps to mitigate the loss flowing from the breach; the emphasis is on the word 'reasonable'. In Ramgopal v. Dhanji Jadhavji Bhatia, 25 the defendant owners of a cotton ginning mill, contracted in October 1919, to put their mill at the disposal of the plaintiff cotton merchant for a period of six months, for half its working time at fixed rates in order to gin raw cotton, which the plaintiff contemplated buying and which the plaintiff agreed to supply to them for the purpose. In November, before any of the plaintiff's cotton had been taken by the mill, the defendants repudiated the contract. The plaintiff sued the defendants for damages. It was held that the breach being anticipatory, the damages' were the estimated loss of profit to the plaintiff by the reason of the contract not being carried out and that the plaintiff was not bound to buy cotton and have it ginned at other mills under his obligation to mitigate the damages. Lord Sumner in delivering the judgment of the Privy Council observed:
Though no doubt the plaintiff was bound to take reasonable steps to mitigate his loss, the present argument requires that, after the appellant's breach, he should have bought the cotton, which both parties knew he had not yet done, and then have tendered it for ginning to other mills in order to cut down his loss for their benefits to a mere difference in ginning rate. The fact, however, is that this was a case of anticipatory breach. The contract was repudiated almost as soon as it was made, and, the intended operation being thus baulked, the plaintiff was entitled
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to measure his damages as they then stood and could not be required by the defendants to buy the cotton, which they had announced in advance they would not gin for him.
Where the plaintiff has accepted an anticipatory repudiation, e.g., has begun an action for damages, it is his duty forthwith to mitigate the damage, if a reasonable opportunity arises. If the opportunity is lost, the defendant is entitled to have the damages assessed at the time when the opportunity occurred. If, however, the plaintiff does not accept the anticipatory repudiation, but holds the defendant to his contract, damages are to be assessed at the time fixed for performance, and no duty to mitigate arises until that date. Golden Strait Corpn v. Nippon Yusen Kubishika Kaisha, The Golden Victory, 26 takes a new approach. In this case, charterers repudiated a seven-year charter-party after three years. Fifteen months after the repudiation, Iraq war broke out, which would have entitled the charterers to terminate the charter-party under a war clause. Had the contract been alive, they would have done so. A question arose whether damages must be assessed on the basis of the value of remaining four years ignoring the fact of the war, or the value of remaining fifteen months before the outbreak of war. Damages were assessed as on the date of trial on the second basis. In Acre 1127 Limited (In Liquidation) v. De Montfort Fine Art Limited, 27 the innocent party was not entitled to damages arising from the other party's repudiatory breach if the innocent party had no intention of performing his obligations. In Howard -Jones v. Tate, 28 T agreed to install electricity and water supplies in the property he sold to H within six months of completion, but failed to do so. H rescinded the contract, and sought to recover the purchase price, costs and damages. This was repudiatory breach. But H could not recover return of price unless there was failure of consideration. He could only recover cost of installing these supplies and losses because these were not installed in time. In Leofelis v. Lonsdale Sports, 29 X terminated his contract alleging that Y had committed repudiatory breach. It was found that Y's conduct was not breach. X later discovered that Y had committed a distinct breach justifying termination. It was held that X could rely on the unknown breach to defeat claim of Y, but could not claim damages for such breach. Effect on Arbitration Clause When a contract is terminated by acceptance of the repudiation, an agreement to refer all disputes to arbitration does not become void.30 If a dispute is that a contract with an arbitration clause was never entered into or that it is void ab initio, the arbitration clause is inoperative, but if the dispute is, a s. to whether there is a breach or discharge of the contract, the arbitration clause will operate. In the former case, the court and not the arbitrator has to decide the issue.31 Although, on allegation by a party that he never entered into a contract, the question whether any contract exists cannot go to arbitration, but when the parties are agreed on having entered into the contract and the differences have arisen as to breach or its discharge, such differences are regarded being 'in respect of' or 'with regard to' or 'under' the contract.32 The Supreme Court in Jawahar Lal Barman v. Union of lndia, 33 quoted with approval the following passage from the speech of Lord Macmillan in Heyman v. Darwina Ltd 34 that the arbitration clause was:
...quite distinct from the other clauses. The other clauses set out the obligations which the parties undertake towards each other hinc inde; but the arbitration clause does not impose on one of the parties an obligation in favour of the other.
Where frustration is alleged, the performance of contract may have come to an end, but the contract remains in existence for the purpose of resolution of disputes including the question whether the contract
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was discharged under the doctrine of frustration or by breach.35 Rescission and Frustration Rescission (except by mutual consent or by a competent court) is the right of one party, arising upon conduct by the other, by which he intimates his intention to no longer abide by the contract. It is a right to treat the contract as at an end, if he chooses, and to claim damages for its total breach, but it is a right in his option and does not depend in theory on any implied term providing for its exercise, but is given by the law in vindication of a breach. Frustration, on the other hand, is explained in theory as a condition or term of the contract, implied by the law ab initio, in order to supply what the parties would have inserted had the matter occurred to them, on the basis of what is fair and reasonable, having regard to the mutual interests concerned and of the main objects of the contract.36 96 Johnstone v. Milling, [1886] 16 QBD 460 at 467 [1886-90] All ER Rep Ext 1701. 1 Michael v. Hart & Co, [1902] 1 KB 482; Mathura Mohan Saha v. Ram Kumar Saha, AIR 1916 Cal 136. 2 General Billposting Co. Ltd v. Atkinson, [1909] AC 118, Rep 619; Rock Refrigeration Ltd. v. Jones, [1997] 1 All ER 1(CA) ; Cantor Fitzgerald International v. Callaghan, [1999] 2 All ER 411(CA) . 3 British & Beningtons Ltd. v. NW Cachar Tea Co. Ltd., [1923] AC 48; Gill & Duffus SA v. Bergar & Co. Inc.,[1984] AC 382 at 395-96. 4 Maredelanto Compagnia Naviera SA v. Bergbau-Handel Gmbh (The Mihalis Angelos) [1971] 1 QB 164, [1970] 3 All ER 125. 5 Hirji Mulji v. Cheong Yue SS Co Ltd, [1926] AC 497 at 509-510, [1926] All ER Rep 51 at 59. 6 Muralidhar Chatterjee v. International Film Co Ltd, AIR 1943 PC 34, (1943) 70 IA 35 (s. 64 applies to such rescission). 7 Jhandoo Mal Jagan Nath v. Phul Chand Fateh Chand, (1924) 5 Lah 497, 85 IC 118, AIR 1925 Lah 217 (the only difficulty was on the construction of the correspondence); Panoutsos v. Raymond Hadley Corporation of New York, [1917] 2 KB 473, [1916-17] All ER Rep 448; Cohen & Co v. Ockerby & Co Ltd, (1917) 24 CLR 288 at 298; Peter Turnbull & Co Pty Ltd v. Mundus Trading Co, (Australiasia) Pty Ltd, (1954) 90 CLR 235. 8 Hochester v. De La Tour, (1853) 2 E & B 678, [1843-60] All ER Rep 12. 9 Xenos v. Danube & Blacksea Ry, (1863) 13 CBNS 825; Synge v. Synge, [1894] 1 QB 466. 10 Maredelanto Compagnia Naviera SA v. Bergbau-Handel Gmbh (The Mihalis Angelos), [1971] I QB 164. 11 Ibid; Xenos v. Danube & Blacksea Ry, (1863) 16 CBNS 825. 12 Gurdial Singh v. Pearey Lal Malhan, AIR 1982 Del 120. 13 Howard -Jones v. Tate, [2011] EWCA Civ 1330, [2012] 2 AllER 369. 14 Union of India v. Kishorilal Gupta & Bros, AIR 1953 Cal 642. 15 Muralidhar Chatterjee v. International Film Co. Ltd., AIR 1943 PC 34, (1934) 70 IA 35. 16 Union of India v. Bungo Steel Furniture Pr Ltd, AIR 1963 Cal 70 following Murlidhar Chatterjee v. Internationa Film Co Ltd 70 IA 35 at 48, AIR 1943 PC 34. 17 T Ranganayakamma v. SR Subudhi, AIR 1955 Ori 20. 18 Dhumee Behara v. CHC Sevenoaqs, (1886) 13 Cal 80; Ralli Bros v. Ambika Prasad, (1913) 35 All 132; Amar Singh v. Gopal Singh, AIR 1931 Lah 133 (2), 132 IC 577; Aryodaya Spinning and Weaving Co Ltd v. Siva Virchand (1911) 13 Bom LR 19, cases decided with reference to the special terms of the contract. 19 AM Chokalinga Mudaliar v. G Mahomed Sheriff Saheb, (1912) 23 Mad LJ 680. 20 International Contractors Ltd. v. Prasanta Kumar Sur, [1961] 3 SCR 579, AIR 1962 SC 77; Jawaharlal Wadhwa v. Haripada Chakroberty, AIR 1989 SC 606. 21 International Contractors Ltd. v. Prasanta Kumar Sur, [1961] 3 SCR 579, AIR 1962 SC 77. 22 Jawahar Lal Wadhwa v. Haripada Chakroberty, AIR 1989 SC 606 at 610; see Roy v. Kloepfer Wholesale Hardware and
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Automotive Corpn., (1951) 3 DLR 122(Ontario) (in the case of an anticipatory breach by the vendor, a purchaser of land may issue a writ for specific performance before the date for performance has arisen). 23 State of Kerala v. Cochin Chemical Refineries Ltd., (1968) 3 SCR 556, AIR 1968 SC 1361. 24 Millett v. Van Heek & Co, [1921] 2 KB 369, [1921] All ER Rep 519 CJ; Manindra Chandra Nandi v. Aswini Kumar Acharjya, (1921) 48 Cal 427, 433; 60 IC 337; AIR 1921 Cal 185; Maung Po Kyaw v. Saw Tago, AIR 1933 Rang 25; see further on s. 73, below. Wright v. Dean, [1948] Ch 686, [1948] 2 All ER 415; Maredelanto Compagnia Naviera SA v. Bergbau-Handel Gmbh (The Mihalis Angelos), [1971] 1 QB 164, [1970] 3 All ER 125; Tai Hing Cotton Mill Ltd v. Kamsing Knitting Factory, [1979] AC 91, [1978] 1 All ER 515. 25 (1928) 55 IA 299, 55 Cal 1048, 111 IC 480, AIR 1928 PC 200. 26 [2007] UKHL 12 HL, [2007] 3 All ER 1. 27 [2011] EWCA Civ 87. 28 [2011] EWCA Civ 1330, [2012] 2 AllER 369. 29 [2012] EWHC 485 (Ch). 30 Firm Karam Narain Daulat Ram v. Messrs Volkart Bros, (1946) Lah 692, 227 IC 546, AIR 1946 Lah 116; Radhakishin C Chawla v. General Construction Co, AIR 1947 Sind 57, 230 IC 20. Following Heyman v. Darwins Ltd, [1942] AC 356, [1942] 1 All ER 337(HL) . 31 Jawaharlal Barman v. Union of India, [1962] 3 SCR 769 at 781, AIR 1962 SC 378; Waverly Jute Mills Co Ltd v. Raymon & Co (India) Pvt Ltd, [1963] 3 SCR 209, AIR 1963 SC 90; Heyman v. Darwins Ltd, [1942] AC 356, [1942] All ER 337; Khardah Company Ltd v. Raymon & Co (India) Private Ltd, [1963] 3 SCR 183, AIR 1962 SC 1810 at 1814; Shiva Jute Baling Ltd v. Hindley & Co Ltd, [1960] 1 SCR 569; Union of India v. Kishorilal Gupta & Bros, [1960] 1 SCR 493, AIR 1959 SC 1362; East India Trading Co v. Badat & Co, (1959) Bom 1004, AIR 1959 Bom 414; Contra Hirji Mulji v. Cheong Yue SS Co Ltd, [1926] AC 491 at 497; [1926] All ER Rep 51 PC; for cases of novation see s. 62 below. 32 Khardah Company Ltd v. Raymon & Co (India) Private Ltd, [1963] 3 SCR 183, AIR 1962 SC 1810 at 1814; Union of India v. Kishorilal Gupta & Bros, [1960] 1 SCR 493, AIR 1959 SC 1362; Heyman v. Darwins Ltd, [1942] AC 356, [1942] 1 All ER 337. 33 [1962] 3 SCR 769 at 780; AIR 1962 SC 378. 34 [1942] AC 356, [1942] 1 All ER 337 at 347. 35 Union of India v. Kishorilal Gupta & Bros, [1960] 1 SCR 493 at 514, AIR 1959 SC 1362 at 1371; Naihati Jute Mills Ltd v. Khyaliram Jagannath, AIR 1968 SC 522 at 528; Khardah Company Ltd v. Raymon & Co (India) Private Ltd, AIR 1962 SC 1810 at 1814, [1963] 3 SCR 183; Heyman v. Darwins Ltd, [1942] AC 356, [1942] 1 All ER 337; Jureidini v. National British & Irish Millers' Insurance Co Ltd, [1915] AC 499, [1914-15] All ER Rep 328 (a case of repudiation) distinguished; but see Hirji Mulji v. Cheong Yue SS Co Ltd, [1926] AC 497, [1926] All ER Rep 51. 36 Dahl v. Nelson, Donkin & Co, [1881] 6 AC 38, 50 LJ Ch 411, 44 LT 381 per Lord Watson; Hirji Mulji v. Cheong Yue SS Co Ltd, [1926] All ER Rep 51 at 58; see s. 56 below.
Breach by Both Parties Where each party alleges that the other has committed breach of such type as entitling it to terminate the agreement, the order in which breaches are committed is relevant. If A breaches the contract (which is repudiatory), and later B breaches the contract (which breach is also repudiatory), A's breach gives B the right to terminate the contract. If he accepts the repudiation and ends the contract, his failure to perform would not amount to breach at all. However, if B does not accept the repudiation, this leaves the primary obligations of both parties unchanged.37 Despite A's earlier repudiation, A will have then the option to terminate the contract upon B's breach. In State Trading Corporation of India v. M Golodetz Ltd, 38 Kerr J. observed:
If A is entitled to treat B as having wrongfully repudiated the contract between them and does so, then it does not avail B to point to A's past breaches of contract, whatever their nature. A breach by A would only assist B, if it was
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still continuing when A purported to treat B as having repudiated the contract and if the effect of A's subsisting breach was such as to preclude A from claiming that B had committed a repudiatory breach. In other words, B would have to show that A, being in breach of an obligation in the nature of a condition precedent, was therefore not entitled to rely on B's breach as a repudiation.
A seller agreed in November to sell oats at 7s. 4d. per bushel FOB Sydney to be loaded on a ship nominated by the buyer during January and February 1951. The buyer was to give 14 days' notice of ships and shipping date. The buyer nominated a ship, The Afric, but at no time was the firm nomination of the ship or the firm shipping date given. The buyer agreed to sell to a third party at 8/60 fob Sydney. The seller then informed the buyer his inability to deliver at Sydney and offered to supply at Melbourne. The seller could not arrange at Melbourne and informed the buyer accordingly. The Afric arrived at Sydney in March. The buyer then bought oats at l0s. 4d. per bushel after giving the seller an opportunity to supply at the agreed price of 7/6. The High Court, on appeal, held in favour of the buyer and awarded damages.39The decision turned on the question whether the completion of the contract proceeded from the wrongful act and conduct of the buyer-appellant in not nominating a February ship and giving due notice of its shipping date, or of the seller-respondent by continuing to refuse to load oats at Sydney. By March, the buyer was ready and willing to perform his part of the contract, but the refusal of the seller continued. The buyer was therefore entitled to say that by the seller's default, he had lost the benefit of the contract and was entitled to recover damages. A clause in a voyage charterparty entitled the charterers to cancel the charter, if the vessel was not ready to load by 9 July 1982. The charterers, prior to that date, purported to cancel it and committed anticipatory breach. This repudiation of contract was not accepted by the ship owners. The House of Lords held that the ship owners, by affirming the contract, had kept it alive for the benefit of both the parties, so that the charterers were entitled, notwithstanding their previous repudiation, to cancel the ground of the vessel's non-readiness to load in accordance with the terms of the charterparty.40 By Whom Contracts must be Performed 37 Chitty on Contracts, 29th edn., para 25-014, p. 1231. 38 State Trading Corporation of India v. M Golodetz Ltd., [1989] 2 Lloyd's Rep 277 per Kerr J at 286. 39 Peter Turnbull & Co. Pty Ltd. v. Mundus Trading Co. (Australiasia) Pty Ltd, (1954) 90 CLR 235. 40 Fercometal SARL v. Mediterraneam Shipping Co. SA (The Simona), [1988] 2 All ER 742, [1989] AC 788.
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The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which must be performed S. 40. Person by whom promise is to be performed.-If it appears from the nature of the case that it was the intention of the parties to any contract that any
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promise contained in it should be performed by the promisor himself, such promise must be performed by the promisor. In other cases, the promisor or his representatives may employ a competent person to perform it. Illustrations (a)
(b)
A promises to pay B a sum of money. A may perform this promise, either by personally paying the money to B, or by causing it to be paid to B by another; and, if A dies before the time appointed for payment, his representatives must perform the promise, or employ some proper person to do so. A promises to paint a picture for B. A must perform this promise personally.
Introduction Section 40 provides that personal contracts must be performed personally by the promisor; others may be performed by the promisors, or by any other person employed by him.
Vicarious Performance In certain circumstances, the promisor may get his promise performed by getting someone else to do it. The promisor continues to be liable on the contract and not the other person act ually doing the work. The promisor will be liable for any breach which may occur. The promisee will be bound to accept performance, if it is in accordance with the terms of the contract. The promisee cannot sue or hold liable such other person performing it, though the latter may be liable to the promisee in tort. Such performance is vicarious performance, and differs from an assignment of contract.41 He must perform the promise himself, if such is the intention of the parties. Such intention may be gathered from, (a) the express terms of the contract; or (b) as an inference from the terms of the contract, its subject matter and surrounding circumstances. In ascertaining the intention of the parties, usage may also be considered. One useful question to ask would be: did the promisor promise personal performance or did he merely promise a result? 41 See also s. 37: 'Personal Contracts'.
Personal Contracts If the contract involves exercise of individual skill or taste of the promisor, or depends upon the competency or personal qualification of the promisor, or is otherwise founded on special personal confidence between the parties, the promisor has to perform the promise himself, and not by a representative. Personal skill has been held to be required in contracts by a warehouseman for storage of furniture,42 a publishing firm for publishing of a book43 and an architect in designing of a building.44 Contract of service is also personal to the promisor.45 The hiring of a carriage from Sharpe, a coach-maker trading under his own name alone but in fact with a partner, was held to be a personal contract, which the hirer was not bound to go on with after Sharpe had retired from business. It was observed that:
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He may have been induced to enter into the contract by reason of the confidence he reposed in Sharpe, and at all events had a right to his services in the execution of it.46
This has been considered an extreme application of the principle,47 which ought to be applied only where the contract really and substantially has relation to the personal conduct of the contracting party.48 Where a person contracts with another to do work or perform service and it can be inferred that the person employed has been selected with reference to individual skill, competency or other personal qualifications, the inability or unwillingness of the party so employed, is a sufficient answer to any demand by a stranger to the contract of the performance of it by the other party, and entitles the latter to treat the contract at an end.49 But in a case of a contract of repairing a carriage when necessary, or painting it once a year, there is sufficient performance where it is done by a sub-contractor or an assignee, so long as the original company continues to exist and the assignee continues to fulfill the contract.50 A contract for personal agency or other service entered into with partners would be generally determined by the death of a partner, i.e., it would not continue with the surviving partner unless there was something to show a distinct intention to that effect.51 On the other hand, a contract with a firm, which has nothing really personal about it so far as regards the partners, for example, a contract to perform at a music hall belonging to the firm, would not be determined by the death of one member of the firm, especially if the individual members of the firm were not named in the contract and not known to the other party.52 In this case, the defendants were undisclosed partners trading under a quasi-corporate name and the plaintiffs were a troupe of performers. If one of the plaintiffs had died, the case would have been different, as they had undertaken active and personal performances. Every case must really be judged on its own circumstances. Where a contract requires personal performance by a promisor because of his personal qualifications, his death or disablement discharges the contract and frees the other party from liability.53 Even where a contract involves personal skill, it may not be necessary that he personally perform each and every act in the promise. A sculptor, painter or architect may design and supervise the work, and its manual execution may be done subject to the promisor's final touches by other skilled persons. Less important parts of the work may at times be executed by pupils and assistants under the direction of the promisor; the promisor is bound to perform his promise personally in that he cannot delegate the design or general supervision to a junior. 42 Edwards v. Newland & Co., [1950] 2 KB 534, [1950] 1 All ER 1072. 43 Griffith v. Tower Publishing Co. Ltd., [1897] 1 Ch 21, [1895-99] All ER Rep 323. 44 Moresk Cleaners Ltd. v. Hicks, [1966] 2 Lloyd's Rep 338. 45 Nokes v. Doncaster Amalgamated Collieries Ltd., [1940] AC 1014, [1940] 3 All ER 549(HL) . 46 Robson and Sharpe v. Drummond, (1831) 2 B & Ad 303, 36 RR 569 at 572. 47 British Waggon Co. v. Lea & Co., [1880] 5 QBD 149, [1874-80] All ER Rep 1135. 48 Phillips v. Alhambra Palace Co., [1901] 1 KB 59. 49 Robson & Sharpe v. Drummond, (1831) 2 B & Ad 303, 36 RR 569; British Waggon Co. & Parkgate Waggon Co. v. Lea & Co., (1880) 5 QBD 149 at 153. 50 The British Waggon Co. v. Lea & Co., [1880] 5 QBD 149. 51 Tasker v. Shepherd, (1861) 6 H & N 575, 123 RR 697. 52 Phillips v. Alhambra Palace Co., [1901] 1 KB 59. 53 Jagannath Patnaik v. Pitambar Bhupati Harichandan Mohapatra, AIR 1954 Ori 241; Sri Madana Gopalastoamy Temple v. Saride Manikyam, AIR 1957 AP 643; see also s. 37 above.
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Contracts which may be Performed by Representative The last sentence of the section signifies that a contract which is not personal may be performed not only by the promisor, but by his representatives, and that the representatives may also employ a competent person to perform the promise. This however, does not absolve the promisor of his liability of performance, or for improper performance.54 In the absence of contrary intention, therefore, a contract can be enforced against parties and their legal heirs and representatives, including assignees and transferees.55 Ordinary contracts for delivery of goods, payment for them and the like, may be performed by a deputy.56'There is clearly no personal element in the payment of the price.'57 Specific performance of a contract for purchase of immovable property can be claimed against the legal representative of the vendor.58 54 Kay Lim Construction & Trading Pte Ltd v. Soon Douglas (Pte) Ltd, [2012] SGHC 186 (Singapore High Court), [2013] 1 SLR 1. 55 Ram Baran Prasad v. Ram Mohit Hazra, AIR 1967 SC 744 (pre-emption clause). 56 JH Tod v. Lakhmidas Purushotamdas, (1892) 16 Bom 441(assignment) ; followed in Vaman Trimbak Joshi v. Changi Damodar Shimpi, (1925) ILR 49 Bom 862, 27 Bom LR 1261, 91 IC 360, AIR 1926 Bom 97. 57 Tolhurst v. Associated Portland Cement Manufacturers, [1902] 2 KB 660 at 672, per Collins MR, [1900-03] All ER Rep 386. 58 U Dan Htaw v. Maung Aw, AIR 1929 Rang 274; See The Specific Relief Act 1963, s. 19(b); see also notes to s. 37 above.
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The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which must be performed S. 41. Effect of accepting performance from third person.-When a promisee accepts performance of the promise from a third person, he cannot afterwards enforce it against the promisor.
Introduction A promisee cannot have double satisfaction of his claim from the promisor as well as a third party. This section gives a cause of act ion to the promisor to contend that the promisee who has accepted satisfaction from the third party, cannot insist on the satisfaction of its claim from the promisor as well.59
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Thus, performance even by a stranger, if accepted by the promisee, discharges the promisor, although the promisor has neither authorised nor ratified such act of the stranger.60 Section 41 does not apply to executory contracts, but only when a contract has in fact been performed by a third person.61 A promisor accepting performance of the promise from a third person cannot afterwards enforce it against the promisor.62 Thus, if a creditor is paid a lesser sum by a third party on the condition that it would be in discharge of the whole debt, the creditor accepting the payment would be bound by the condition. Therefore, where a jeweller with a claim of Rs 27 lakhs accepted Rs 20 lakhs in full discharge of his claim from the state, he could not subsequently sue the original debtor, a Hyderabad prince, for the balance.63 The section not only enables a promisee to release a debt at the instance of the third party, but also enables the promisor, whose debt has been released at the instance of the third party, to take advantage of that release.64 For this section to apply, the payment must have been made by a stranger, and in full. A agreed to supply timber to B and B assigned the contract to C, who received the timber from A. A had received part of the price from B and another sum from C, but had not received the whole price of the timber. In the absence of a contract to the contrary, A could recover the balance from B.65 This section also does not apply where the stranger (third party) has not performed the original promise, but has substituted the performance. In such a case section 63 will apply.66 The section will not apply where the payment made by the 'third person' arises not in contract, but under liability in tort. A, a cashier of a company, executed in the company's favour, a promissory note for an amount of Rs. 50,000/-, the amount misappropriated by him. B, an auditor was found liable for negligence in connection with the said misappropriation, and paid Rs. 60,000/- to the company in full discharge of the liability. It was held that A's liability was not discharged under this section because of the payment made by B, because the liability of A was in contract, and that of B in tort.67 Nor would the section apply where the promisee has received payment equivalent to the promise of the promisor, but such payment received is not in performance of the promise.68 59 Citibank NA v. Standard Chartered Bank, (2004) 6 SCC 1. 60 Lala Kapurchand Godha v. Mir Nawab Himayatali Khan, [1963] 2 SCR 168 at 179, AIR 1963 SC 250 at 254 (The rule of English law that discharge of a contract is effectual only if authorised or ratified by the debtor is not applicable in India, as the matter is governed by statute); Gaya Muzaffurpur Roadways Co. v. Fort Gloster Industries Ltd., AIR 1971 Cal 494 at 499. 61 Sri Sarada Mills Ltd. v. Union of India, AIR 1966 Mad 381, affirmed in Union of India v. Sri Sarada Mills, AIR 1973 SC 281, relying upon Har Chandi Lal v. Sheoraj Singh, (1917) 44 IA 60, 39 All 178, 39 IC 343, AIR 1916 PC 68; Dhanpat Mal v. Niamat Rai, AIR 1933 Lah 335; Gaya Muzaffurpur Roadways Co. v. Fort Gloster Industries Ltd., AIR 1971 Cal 494 at 498. 62 Lala Kapurchand Godha v. Mir Nawab Himayatali Khan, [1963] 2 SCR 168; AIR 1963 SC 250; distinguishing Day v. McLea, [1889] 32 QBD 610 and Hirachand Punamchand v. Temple, [1911] 2 KB 330 [1911-13] All ER Rep 1597; Textile and Yarn (P) Ltd. v. Indian National Steamship Co. Ltd., AIR 1964 Cal 362; Union of India v. Gangabishan Banshilal, AIR 1973 Cal 141 at 144: the last two cases would be no longer good law in view of the Supreme Court judgment in Union of India v. Sri Sarada Mills, AIR 1973 SC 281. 63 Lala Kapurchand Godha v. Mir Nawab Himayatalikhan Azamjah, [1963] 2 SCR 168, AIR 1963 SC 250 at 254. 64 In Re Industrial Bank of Western India,AIR 1931 Bom 123; see also observations in Citibank NA v. Standard Chartered Bank, AIR 2003 SC 4630, (2004) 1 SCC 12. 65 Chandrasekhara Hebbar v. Vittala Bhandari, AIR 1966 Mys 84; Har Chandi Lal v. Sheoraj Singh, (1917) 44 IA 60, 39 All 178, 39 IC 343, AIR 1916 PC 68 followed. Although the Privy Council did not say in so many words, it meant that contract must be performed in full. 66 Citibank NA v. Standard Chartered Bank, AIR 2003 SC 4630, (2004) 1 SCC 12. 67 London d' Lancashire Insurance Co. Ltd. v. Binoy Krishna Mitra, AIR 1945 Cal 218. 68 See 'Assignment and Subrogation' below.
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Assignment and Subrogation Section 41 applies to cases of assignment,69 but not subrogation. The payment made to the consignor by an insurer for the amount of loss of the consignor's goods by the railway, is not in discharge of the obligation of the railways.70 Even after the insurer has fully settled the claim of the consignor, this section is not attracted. 'It is not...that the contract of the [consignor] with them had been performed by the insurer. The company did not expect performance by the insurer.'71 Therefore, a consignor of goods can sue the railway for the loss of goods, even though the insurer has satisfied his loss.72 The view that the plaintiff, having accepted performance of the contract of a promise from the insurer by receipt of his total claim, and hence is not allowed to enforce the same,73 is, it is submitted, no longer good law in view of the judgment of the Supreme Court in Union of India v. Sri Sarada Mills Ltd. 74 The consignor in such a case will be answerable and accountable to the insurer for the monies received in the suit to the extent of the amount paid by the insurer to the consignor.75 69 Sri Sarada Mills Ltd. v. Union of India, AIR 1966 Mad 381; affirmed in Union of India v. Sri Sarada Mills, AIR 1973 SC 281. 70 Union of India v. Sri Sarada Mills, AIR 1973 SC 281; followed in Hindustan Corporation (Hyderabad) Pvt Ltd. v. United India Fire and General Insurance Co. Ltd., AIR 1997 AP 347. 71 Union of India v. Orissa Textile Mills Ltd., AIR 1979 Ori 165. 72 Sri Sarada Mills Ltd. v. Union of India, AIR 1966 Mad 381; affirmed in Union of India v. Sri Sarada Mills, AIR 1973 SC 281; Union of India v. Orissa Textile Mills, AIR 1979 Ori 165; but see Union of India v. Gangabishan Banshilal, AIR 1973 Cal 141. 73 Union of India v. Gangabishan Banshilal, AIR 1973 Cal 141. 74 Union of India v. Sri Sarada Mills, AIR 1973 SC 281; affirming Sri Sarada Mills Ltd. v. Union of India, AIR 1966 Mad 381. 75 Union of India v. Sri Sarada Mills Ltd., AIR 1973 SC 281; Lord Napier d' Etrick v. Hunter, [1993] 1 All ER 385(HL) (the insurer entitled to injunction restraining the insured from disbursing the damages recovered from the wrong-doer without providing or paying out of the damages found due to the insurers by subrogation).
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The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which must be performed S. 42. Devolution of joint liabilities.-When two or more persons have made a joint promise, then, unless a contrary intention appears by the contract, all such persons, during their joint lives, and, after the death of any of them, his representative jointly with the survivor or survivors, and, after the death of the last survivor, the representatives of all
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jointly, must fulfil the promise.
Introduction Section 42 provides that the liability of a joint promisor is joint and several. All promisors are bound to perform the promise. On death of any of them, his liability does not devolve by survivorship upon the surviving promisors, but upon the representatives of the deceased promisor along with surviving promisors. This differs from the general rule of English law, under which the liability of one joint promisor devolves upon his death upon the survivors.76 76 Halsbury's Laws of England, Vol. 9(1), 4th edn. Reissue, 30 June 1998, CONTRACT, para 1082.
'Unless a Contrary Intention Appears' 'Unless a contrary intention appears' indicates that parties may make a contract, under which the promise of the joint promisors becomes binding on the survivor(s) after the death of any of the promisors. Such intention may also appear from the nature of the contract or other terms, or other circumstances.
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The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which must be performed S. 43. Anyone of joint promisors may be compelled to perform.-When two or more persons make a joint promise, the promisee may, in the absence of express agreement to the contrary, compel any77 [one or more] of such joint promisors to perform the whole of the promise. Each promisor may compel contribution.--Each of two or more joint promisors may compel every other joint promisor to contribute equally with himself to the performance of the promise, unless a contrary intention appears from the contract. Sharing of loss by default in contribution.--If any one of two or more joint promisors makes default in such contribution, the remaining joint promisors must bear the loss arising from such default in equal shares. Explanation.--Nothing in this section shall prevent a surety from recovering, from his principal, payments made by the surety on behalf of the principal, or entitle the principal to recover anything from the surety on account of payments made by the principal. Illustrations
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(a) (b) (c) (d)
A, B and C jointly promise to pay D 3,000 rupees. D may compel either A or B or C to pay him 3,000 rupees. A, Band C jointly promise to pay D the sum of 3,000 rupees. C is compelled to pay the whole. A is insolvent, but his assets are sufficient to pay one-half of his debts. C is entitled to receive 500 rupees from A's estate, and 1,250 rupees from B. A, B and C are under a joint promise to pay D 3,000 rupees. C is unable to pay anything, and A is compelled to pay the whole. A is entitled to receive 1,500 rupees from B. A, B and C are under a joint promise to pay D 3,000 rupees. A and B being only sureties for C. C fails to pay. A and B are compelled to pay the whole sum. They are entitled to recover it from C.
Introduction This section makes all joint contracts joint and several,78 unless there is an express agreement to the contrary, materially departing from the rules of common law.79Section 43 entitles the promisee to claim performance from anyone or more of the promisors. It also provides for a right of one or more promisors to compel contribution from the others, and the sharing of loss in the event of default in contribution. These provisions can be altered by providing to the contrary in the contract. 77 Subs. by the Amending Act, 1891 (12 of 1891), s. 2 and Schedule II, for the word 'one'. 78 Motilal Bechardass v. Ghellabhai Hariram, (1892) ILR 17 Bom 6 at 11; Bhishunath Sahay v. Nanku Prasad Singh, (1923) 2 Pat 446, AIR 1924 Pat 164; Raghunath Das v. Baleshwar Prasad Chaudhuri, (1927) 7 Pat 353, 105 IC 484, AIR 1927 Pat 426. 79 Lukhmidas Khimji v. Purshotam Haridas Oodhaoji Wallji, (1882) ILR 6 Bom 700 at 701.
Types of Joint Obligations Several liability arises when two or more persons make separate promises to another, under a single or different instruments. Their promises are cumulative and payment by one does not discharge the other. Joint liability arises when two or more persons jointly promise to do the same thing. This is one obligation. Payment by one discharges the other. Joint and several liability arises when two or more persons in the same instrument promise jointly to do the same thing, and also make separate promises to do the same thing. It gives rise to one joint obligation and as many several obligations as there are joint and several promisors. Like joint liability, the performance by one discharges all.80 80 Chitty on Contracts, 28th edn., p. 947, paras 18-001 to 18-003.
Joint and Several Liability The section makes all joint contracts joint and several. Where the debts are jointly incurred, each promisee is liable for the whole amount.81 A joint contract unenforceable against one of the joint promisors on the ground of lack of his signature or his not having agreed at all, can be enforced against the other who has signed.82 Neither the minority83 nor insolvency84 of one joint promisor affects the liability of the others. 81 Dhanki Mahajan v. Rana Chandubha Vakhatsing, AIR 1969 SC 69 (case of joint usufructuary mortgage debt); Abdur Rahman v. Rura, AIR 1928 Lah 962; Abdul Latif v. Durgah Committee, AIR 1954 Ajmer 7, (joint indemnity bond).
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82 Sonkole v. Badridas, (1925) 89 IC 976, AIR 1926 Nag 196. 83 Jamna Bai Saheb Mohitai Avergal v. Vasanta Rao Anand Rao Dhybar, (1916) 43 IA 99, 39 Mad 409, AIR 1916 PC 2; Sain Das v. Ram Chand, (1923) 4 Lah 334, 85 IC 701, AIR 1924 Lah 146; Laltapati Kuer v. Narain Mahton, AIR 1934 Pat 663; Keka v. Sirajuddin, AIR 1951 All 618; Govinda Mohapatra v. T Venkatakrishnayya, AIR 1950 Ori 6; V Geeri Naicken v. Nary, AIR 1957 TC 305; Dasarath Gayen v. Satyanarayan Singh, AIR 1963 Cal 325 at 328. 84 Gokhul Bihari Pande v. Khijhu Rai, AIR 1934 Pat 43; BR Nagendra Iyer v. RV Subburamachari, AIR 1935 Mad 1055; Amrita Lal Ghose v. Narain Chandra Chakrabarti, AIR 1919 Cal 781.
Death of one of the Joint Promisors If one of the joint promisors dies pending suit, the suit can be proceeded against the other defendant promisors without bringing his legal representatives on record.85 But when a suit against a number of joint promisors has been dismissed, the plaintiff cannot prosecute an appeal against only some of them, renouncing his claim against the rest.86 Where, one of the promisors dies pending an appeal against a decree obtained against joint promisors, and the appeal against him abates, the appeal can proceed against the other joint promisors. The abatement does not affect the right of the surviving promisors for contribution against the deceased joint promisor's estate.87 85 Jai Kishen Das v. Arya Priti Nidhi Sabha, AIR 1921 Lah 357. 86 Kedar Nath v. L Manak Chand, AIR 1961 Punj 555. 87 Ganeshmull Sahasmull v. Sohanlal Punamchand, AIR 1956 Nag 111; But see Kedar Nath v. L Manak Chand, AIR 1961 Pun 555 (ss. 43-44 did not apply because the respondent will not get contribution from the other respondent).
Suit against Joint Promisors Under this section, the lender may sue all or any of the joint promisors as he may choose,88 even where one of the promisors has undertaken the liability as a surety.89Section 43 read along with O. 1, r. 6, CPC,90 makes the effect of joint liability arising on a contract the same as where the liability is several. But this is limited to the question of joinder of parties liable on the same contract and is a matter of procedure.91 This section allows a promisee to sue such one or more of several joint promisors as he chooses, and excludes the right of a joint promisor to be sued only along with his co-promisors.92 It is no defence to such a suit that all the promisors must have been made parties. However, this right of the promisee to sue any one or more of the joint promisors is distinct from, and does not affect the right of a defendant to apply to the court under O. 1, r. 10, of CPC 93 to have his co-contractor added as a party,94 not on the ground that such co-contractor ought to be joined, but if the 'court considers it necessary to do so'. A decree requiring one of the joint promisees to pay in the first instance and then to proceed against the others, was bad in law.95 88 Bhishnunath Sahay v. Nanku Prasad Singh, AIR 1924 Pat 164; Shankerlal v. Motilal, AIR 1957 Raj 267; Govinda Mohapatra v. T Venkatakrishnayya, AIR 1950 Ori 6; K Balakrishna Patro v. C Balu Subudhi, AIR 1949 Pat 184. 89 Padmanabha Kakkothaya v. Keshava Derinjithaya, AIR 1951 Mad 239; K Appukuttan Panicker v. S K R A K R Athappa Chettiar, AIR 1966 Ker 303. 90 The Code of Civil Procedure, 1908, O. 1, r. 6 provides:Joinder of parties liable on same contract. The plaintiff may, at his option, join as parties to the same suit all or any of the persons severally, or jointly and severally, liable on anyone contract, including parties to bills of exchange, hundis and promissory notes. 91 Union of India v. East Bengal River Steamer Service Ltd., AIR 1964 Cal 196 at 206; Kailash Chandra Mitra v. Brojendra K Chakravarti 53 Cal 197, AIR 1925 Cal 1056(FB) .
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92 Hemendro Coomar Mullick v. Rajendrolall Monshee, (1878) 3 Cal 353 at 360; Muhammad Askari v. Radhe Ram Singh, (1900) 22 All 307 at 315; Dick v. Dhunji Jaitha, (1901) 25 Bom 378 at 386; Vaishni Das v. Mukarram, AIR 1934 Pesh 94; K Balakrishna Patro v. C Balu Subudhi, AIR 1949 Pat 184; Jainarain Ram Lundia v. Surajmull Sagarmull, [1949] FCR 379, 51 Bom LR 979, AIR 1949 FC 211; Union of India v. East Bengal River Steamer Service Ltd., AIR 1964 Cal 196 at 206 (a case under the Indian Independence (Rights, Liabilities & Properties) Order, 1947). 93 The Code of Civil Procedure, 1908, O. 1, r. 6 gives the power to the court to strike out parties in a proceedings, who are improperly joined, or to add parties who ought to have been joined as parties or, whose presence before the court is necessary in order to enable the' court effectually and completely to adjudicate and settle all questions involved in the suit. 94 Muhammad Askari v. Radhe Ram Singh, (1900) 22 All 307 per Strachey CJ at pp. 316-17; Dick v. Dhunji Jaitha, (1901) 25 Bom 378 per Crowe J at 386; Muhammad Ismail Khan v. Said-ud-Din Khan, (1927) 104 IC 700, AIR 1927 Lah 819. 95 Joint Family of Mukundas Raja Bhagwandas & Sons v. State Bank of Hyderabad, AIR 1971 SC 449 at 454, [1971] 2 SCR 136.
Suit against one of the Several Partners The section applies as much to partners as to other co-contractors.96 In a suit brought upon a contract made by a partnership firm, a plaintiff may select as defendants, those partners of the firm against whom he wishes to proceed, without making all the partners defendants.97Where a partner of a registered firm entered into a contract of tenancy on behalf of the firm, a suit against that partner for recovery of rent was maintainable in the absence of the other partners, who were not necessary parties, non-payment of rent being an act of the firm within the meaning of the Indian Partnership Act, s. 25.98 Where one partner, having himself settled a decree against the partnership, sued another partner for contribution, he could not rely upon s. 43 to defeat a plea by the defendant that a suit for one item in the account could not be a subject of claim because the partnership had been dissolved and the suit for accounts of the dissolved partnership was time-barred.99 96 Muhammad Ismail Khan v. Said-ud-Din Khan, AIR 1927 Lah 819; Re Vallibhai Adamjee,AIR 1933 Bom 407, 35 Bom LR 881, 145 IC 619; Promode Ranjan Sen Gupta v. Swadesh Chandra Deb, AIR 1964 Tripura 13. 97 Lukmidas Khimji v. Purshotam Haridas, (1882) 6 Bom 700, approved in Motilal Bechardass v. Ghellabhai Hariram, (1892) 17 Bom 6 at 11; followed in Narayana Chetti v. Lakshmana Chetti, (1897) 21 Mad 256(s. 43 of the Act read with s. 29,Civil Procedure Code, 1882);Hemendro Coomar Mullick v. Rajendrolall Monshee, (1878) 3 Cal 353 at 359-60; Muhammad Askari v. Radhe Ram Singh, (1900) 22 All 307 at 315; Appa Dada Patil v. Ramakrishna Vasudeo Joshi, (1930) 53 Bom 652, 121 IC 581, AIR 1930 Bom 5. 98 Jatindra Kumar Dass v. Dhirialal Vrajlal Kanakia, AIR 1975 Cal 123 at 127; Lukmidas Khimji v. Purshotam Haridas, (1882) 6 Bom 700; Sahu Rajeshwar Nath v. Income Tax Officer, AIR 1969 SC 667 referred to. 99 T K P Rajagopala Chettiar v. A P S Palani Chettiar, AIR 1954 Mad 1101.
Effect of Decree against only some of the Joint Promisors There is considerable difference of opinion among the High Courts about the operation of this section, where a judgment has been obtained against some or one of joint promisors. The Calcutta High Court held that a decree obtained against one of several joint makers of a promissory note is a bar to a subsequent suit against others,1 which was followed initially by the Madras High Court,2 but it later held that if the decree against some only of the joint promisors remained unsatisfied, a second suit against other joint contractors was not barred.3 The Allahabad High Court held in Muhammad Askari v. Radhe Ram Singh 4 that a judgment obtained against some of several mortgagors remaining unsatisfied, was no bar to another suit against the other joint mortgagors. The Bombay High Court held that a promisee was not barred from filing a second suit.5The Patna High Court has also held that a judgment without satisfaction against one of two joint debtors was not a bar to
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an act ion against the other, where the debt was joint and several.6 The reasoning seems to be conclusive; but until it has been adopted generally by the other High Courts, or confirmed by the Supreme Court, the point must be regarded as open. It has been the opinion of the earlier editors of this book that the enactment should be carried out to its natural consequences, and that, notwithstanding the English authorities founded on a different substantive rule (now abrogated by statute), a judgment against one or some joint promisors remaining unsatisfied, ought not, in India, to be held a bar to a subsequent action against the other promisor or promisors. A foreign judgment passed on admission against one joint promisor; who had admitted the claim after institution of the suit, 'would not bar the continuation of the suit against other joint promisors in the domestic forum'.7 1 Hemendro Coomar Mullick v. Rajendrolall Monshee, (1878) 3 Cal 353. 2 Gurusami Chetti v. Samurti Chinna Mannar Chetti, (1882) ILR 5 Mad 37. 3 Moolchand v. P Alwar Chetty, (1916) 39 Mad 548, 29 IC 303, AIR 1915 Mad 934; Ramanjulu Naidu v. Aravamudu Aiyangar, (1909) 33 Mad 317; T Radhakrishna Chettiar v. K V Muthukrishnan Chettiar, AIR 1970 Mad 337(DB) . 4 (1900) ILR 22 All 307; see also Abdul Aziz v. Basdeo Singh, (1912) 34 All 604 at 606, 17 IC 89. 5 In re Vallibhai Adamji,AIR 1933 Bom 407, (1933) 35 Bom LR 881, 145 IC 619; distinguishing Raja Bahadur Shivlal Motilal v. Birdichand Jivraj, AIR 1917 Bom 268, (1917) 19 Bom LR 370, 40 IC 194 and Markandrai Kalyanrai Mehta v. Virendrarai Chandra Prasad Desai, AIR 1917 Bom 262, (1917) 19 Bom LR 837. 6 Traders Co-operative Bank Ltd. v. A K Malick, AIR 1934 Pat 52(2). 7 Nilratan Mukhopadhya v. Cooch Behar Loan Office Ltd. (1941) 1 Cal 171, 194 IC 746, AIR 1941 Cal 64.
Situations of Such Liability When a contract is concluded with a joint venture group, all members are made jointly and severally liable, even if only one is capable of rendering the service in question.8 Each of a number of co-tenants is under s. 43 separately liable to the landlord for the whole rent,9 and a suit is maintainable also against all the heirs of one deceased co-tenant without making other co-tenants a party.10As the rights of one of joint mortgagors, who had redeemed the mortgage, are specifically dealt with in s. 92 of the Transfer of Property Act, 1882, s. 43 of this Act has no application.11 The liability of the members of a company formed illegally is joint and several, and a suit can be maintained against only some of them.12 The principle has also been applied also to joint statutory liability for compensation for use of vessels requisitioned by governments under the Vessel of India Rules.13 8 Asia Foundations & Construction Ltd. v. State of Gujarat, AIR 1986 Guj 185 at 204. 9 Rama Shankar Singh v. Shyamlata Devi, AIR 1970 SC 716; Raghunath Das v. Baleshwar Prasad Chaudhuri, (1927) 7 Pat 353, 105 IC 484, AIR 1927 Pat 426; Kuman Das v. Kameshwar Singh, AIR 1935 Pat 146, 156 IC 352. 10 Mahendra Nath Bose v. Abinas Chandra Bose, AIR 1923 Cal 615; Abinash Chandra Roy v. Fulchand Chaudhari Singh, AIR 1924 Cal 165. 11 Kedar Lal Seal v. Hari Lal Seal, AIR 1952 SC 47. 12 Appa Dada Patil v. Ramkrishna Vasudeo Joshi, AIR 1930 Bom 5; But see Nalin Behari Roy v. Bisweswar Bhattacharjya, AIR 1961 Cal 393 (s. 43 not applied to unregistered society). 13 Union of India v. East Bengal River Steamer Service Ltd., AIR 1964 Cal 196.
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Co-heirs Section 43 speaks of two or more persons making a joint promise, and it has no application where parties become jointly interested by operation of law in a contract made by a single person.14 Hence, the section does not apply to the case of several heirs of the original debtor, and they all must be joined as parties to the suit.15 But later, a Full Bench of the Calcutta High Court held that a case of a rent suit against some only of the heirs was maintainable, as the court had the power to add parties under O. 1, r. 10, CPC.16 The Orissa17 and Rajasthan18 High Courts have followed the Full Bench judgment of the Calcutta High Court and applied s. 43 to co-heirs of a single promisor. As a matter of fact, in the Full Bench decision of the Calcutta High Court, Mukherji J. had expressly referred to s. 43 and confined his opinion to cases not falling under contract, but where there is privity of estate.19It is submitted that the former view is correct on the wording of the section and the Calcutta Full Bench judgment cannot be said to be an authority to the contrary under s. 43 of the Contract Act . 14 Shaikh Sahed v. Krishna Mohan Basak, (1916) 24 Cal LJ 371, 35 IC 563, AIR 1917 Cal 829; Hazara Singh v. Naranjan Singh, (1929) 119 IC 419, AIR 1929 Lah 783 (co-heirs of a mortgagor); Veerni Soorayya v. Kateeza Begum, AIR 1957 AP 688; Devi Dayal v. Bhupendar Kumar, AIR 1973 Del 290. 15 Shaikh Sahed v. Krishna Mohan Basak, AIR 1917 Cal 829; see also Hazara Singh v. Naranjan Singh, (1929) 119 IC 419, AIR 1929 Lah 783 (co-heirs of a mortgagor); Veerni Soorayya v. Kateeza Beegum, AIR 1957 AP 688; Devi Dayal v. Bhupendar Kumar, AIR 1973 Del 290. 16 Kailash Chandra Mitra v. Brojendra K Chakravarti, 53 Cal 197, AIR 1925 Cal 1056(FB) . 17 Mawaji Ramji v. Premjit Kumbhabhai Chanda, AIR 1967 Ori 158. 18 Chandra Bhan v. Misrimal, AIR 1955 Raj 11. 19 Kailash Chandra Mitra v. Brojendra K Chakravarti 53 Cal 197, AIR 1925 Cal 1056 at 1060 (FB).
'In the Absence of Express Agreement' Whether a sale deed by a number of vendees makes all vendees jointly liable or makes each vendee responsible for his own share only, is a question of fact depending on the intention of the parties.20 The burden of showing that under the contract, each promisor is not separately liable lies on that joint promisor who wishes to resist the suit on this ground.21 20 Sham Lal v. Gurbachan Singh, AIR 1930 Lah 806. 21 Raghunath Das v. Baleshwar Prasad Chaudhuri, (1927) 7 Pat 353, 105 IC 484, AIR 1927 Pat 426.
Contribution 'Contribution' signifies payment by each of the parties interested of his share in any common liability. Mutuality is the test of contribution.22 The words 'contribution' in s. 43 and 'reimbursement' in s. 69 convey two different ideas and applicable in two different circumstances. Contribution is between persons equally bound, while reimbursement lies between a person interested in payment and a person bound to pay.23 Unless contrary intention appears, the right to claim contribution is an absolute right, and the courts have no option but to give effect to it.24 Section 43 applies to liability for contribution arising out of an express contract.25 It also gives a promisor, compelled to perform a promise, a right to compel his co-promisors to make contribution.26 This contract of contribution is independent of any contract as between the joint promisors and the promisee, and the latter cannot absolve in any way the joint promisor from his liability to contribution towards the other joint
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promisors, who may have performed the promise.27 In order to claim contribution, one joint promisor should have made payment to the promisee either under compulsion or voluntarily. The fact that the promisor claiming contribution made the payment without consulting his co-promisor, does not affect his right to contribution.28 The liability of joint promisors is only to contribute to the performance of the promise. This liability may not, unless the joint promise includes costs, generally apply to recovery of contribution in respect of costs,29 but the court may order contribution towards costs on equitable considerations.30 A joint promisor can sue another joint promisor for contribution, even though the claim of the creditor against the latter was barred by limitation,31 or was otherwise barred.32 Co-promisors are liable to contribute to the co-promisor satisfying the decree, even though they were exonerated in the prior proceedings.33 Where two out of three judgment-debtors were discharged from their debt under a statute giving debt-relief and the decree was executed against the remaining debtor, the latter was held nevertheless entitled to contribution from the other two.34 Joint promisors are liable to contribute equally, unless a contrary intention appears from the contract. If one of the persons liable to contribute is not in a position to pay his share, then that amount should be divided between the others only in the proportion of the benefit each has received at the time of the original contract.35 In a suit for contribution, all persons whose presence would be necessary to ascertain the liabilities of the parties, would be necessary parties, and must be impleaded in the suit.36 The remedy of a partner, who has been compelled to pay the whole or 'more than his share of a partnership debt, is a suit for account, and a suit for contribution is not maintainable.37By a decree in a partition suit, the properties were allotted in equal shares to 25 persons, but no arrangement was made to discharge a money liability imposed by a previous final decree. This liability was enforced against the allottees of the properties and some had to pay more than their due share. In a suit by these allottees for contribution, the court held that such a claim was neither covered by ss. 82 and 92 of the Transfer of Property Act, 1882, nor by s. 43 of the Contract Act . But all the allottees were bound to contribute, not on the principle of common ownership of property, but on the principle which prescribes equality of burden and of benefit and which creates a right of contribution.38 In England, the liability of two or more persons in respect of the same damage (as against in respect of the same debt) is regulated by the Civil Liability (Contribution) Act, 1978. A person liable for any damage suffered by another person may recover contribution from any other person liable in respect of the same damage, whether the liability has arisen jointly or otherwise (namely, under separate contracts). The amount of contribution, however, shall be decided by the court according to what is just and equitable and considering the extent of the person's responsibility for the damage. 22 Satya Bhusan Bandapadhyaya v. Krishnakali Bandopadhyaya, AIR 1915 Cal 278; Radhasyam Dutta v. Ananga Munjari Dassi, AIR 1934 Cal 626. 23 Nandlal Singh v. Ram Kirit Singh, AIR 1950 Pat 212; Shankarlal v. Motilal, AIR 1957 Raj 267; Baijnath Thakur v. Bijadhar Kamkar, AIR 1961 Pat 103. 24 Nityanand Sahu v. Radhacharan Sahu, AIR 1934 Pat 411. 25 Meyyappa v. Murugappa & Sons, AIR 1960 Mad 117 at 119. 26 Union of India v. East Bengal River Steamer Service Ltd., AIR 1964 Cal 196 at 206; see also Kailash Chandra Mitra v. Brojendra K Chakravarti, 53 Cal 197, AIR 1925 Cal 1056(FB) . 27 Narendra Chandra v. Pushupati Nath Malia, AIR 1949 Cal 242. 28 Appana Maha Sadasiva Suryanarayana Rao v. Palakurthi Rajalingam, AIR 1933 Mad 382. 29 Kanto Mohan Mullick v. Gour Mohan Mullick, (1940) 45 Cal WN 357. 30 Nandlal Singh v. Ram Kirit Singh, AIR 1950 Pat 212.
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31 Kunju Naina Nina v. Eapen Chacko, AIR 1954 TC 499; Gopendra Narayan Bagchi v. Golokendra Kumar Chaudhury, AIR 1955 Cal 62; S P Abraham Servai v. Raphial Muthirian, (1916) 39 Mad 288, 27 IC 337, AIR 1915 Mad 675. 32 Gopendra Narayan Bagchi v. Golokendra Kumar Chaudhury, AIR 1955 Cal 62. 33 Rangoti Mangarao v. Chinnadi Kishan Rao, AIR 1965 AP 98. 34 Jankibai v. Rama Manaji Dhangar, (1947) Nag 881, AIR 1948 Nag 292; but see Nayudu Sivayya v. Yandrathi Chinna Venkatappayya, AIR 1945 Mad 266. 35 Padmanabha Kakkothaya v. Keshava Derinjithaya, AIR 1951 Mad 239. 36 A James v. Ch Achaibar Singh, AIR 1940 Pat 119. Kala Mal v. Sohara Mal, AIR 1916 Lah 9 (contribution from partners). 37 A R M M Mayappa Chettiar v. P N M M Palaniappa Chettiar, AIR 1949 Mad 109; T K P Rajagopala Chettiar v. A P S Palani Chettiar, AIR 1954 Mad 1101(FB), overruling Ellappa Mudaliar v. A Swaminatha Mudaliar, AIR 1933 Mad 755. 38 O. R. M. M. S. P. S. V. Meyappa Chettiar v. Murugappa and Sons, AIR 1960 Mad 117 at 119.
Contribution between Judgment-debtors Persons liable jointly and severally under a decree are in the same position as joint promisors.39 They will be bound to contribute to the extent of their respective shares towards the discharge of the decree.40 A co-debtor may not be liable to contribute, if he shows that the other co-debtor had amount of joint money sufficient to discharge the decree.41 A decree-holder (promisee) can recover his decretal debt from one or more or any of the judgment-debtors (joint promisors) and the latter can compel contribution from the other judgment debtors, who have not been compelled to pay. In the absence of a contract to the contrary, the liability to contribute is not affected by the release of any judgment-debtor by the decree-holder.42 Where a decree for costs does not indicate any proportion in which they are to be borne, the decree as a rule, imposes a joint and several liability on all the judgment-debtors,43 even if both the defendants were equally delinquent in taking up a defence.44 An exception to this doctrine could be that of contribution between joint tort-feasors.45 A co-defendant paying full amount of costs cannot claim contribution, unless some equity exists in his favour,46 and the defendant seeking to avoid liability has to show some equity, which entitles him to exemption from contribution to the costs.47 The question as to whether there is any right of contribution as between persons against whom a joint decree has been passed, depends upon the question whether the defendants, in the former suit were wrongdoers in the sense that they knew or ought to have known that they were doing an illegal or wrongful act . In that case, no suit for contribution will lie.48If an act is manifestly unlawful, or the doer of it knows it to be unlawful as constituting either a civil wrong or a criminal offence, he cannot maintain an act ion for contribution or indemnity against the liability resulting therefrom. An express promise of indemnity to him for the commission of such act is also void.49 Thus, where a decree for costs against two defendants jointly was executed against one of them, who had set up a false defence in the suit in collusion with the other, and the former sued the latter for contribution, it was held that the suit would not lie.50 39 Shankerlal v. Motilal, AIR 1957 Raj 267. 40 Moti Lal Agarhari v. Champa Lal, AIR 1929 All 795. 41 Bepat Singh v. Sham Lal Sao, AIR 1931 Pat 234. 42 Shankerlal v. Motilal, AIR 1957 Raj 267. 43 Jamuna Prosad SinghBahuria v. Ram Sakhi Kuer, AIR 1933 Pat 24; but see Nandlal Singh v. Ram Kirit Singh, AIR 1950 Pat 212. 44 Bhimavarapu Veerareddi v. Adusumalla Angayya, AIR 1935 Mad 347; Nandlal Singh v. Ram Kirit Singh, AIR 1950 Pat 212; Saran Dyal v. Dal Chand, AIR 1938 Lah 579; Javvadi Venkayya v. Dwarampudi Basivireddi, AIR 1936 Mad 167.
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45 Bhagwan Das v. Rajpal Singh, AIR 1921 Oudh 128. 46 Muthuswami Aiyar v. Subramania Aiyar, AIR 1932 Mad 146; Baijnath Thakur v. Bijadhar Kamkar, AIR 1961 Pat 103. 47 Baijnath Thakur v. Bijadhar Kamkar, AIR 1961 Pat 103; Baldeo Tewari v. Harbhajan Singh, AIR 1963 Pat 227. 48 Suput Singh v. Imrit Tewari, (1880) 5 Cal 720; Adamson v. Jarvis, [1824-34] All ER Rep 120, (1827) 4 Bing 66, 29 RR 503; Kishna Ram v. Rakmini Sewak Singh, (1887) 9 All 221; Sudhangshu Kumar Roy v. Banamali Roy, AIR 1946 Cal 63, 223 IC 537. 49 Mantrala Vegnanarayana v. Vankamamidi Yagannadha Rao, AIR 1932 Mad 1(2) (FB); Panday Bisambhardeo Narayan Singh v. Hitnarayan Singh, AIR 1936 Pat 49; Baijnath Thakur v. Bijadhar Kamkar, AIR 1961 Pat 103; but see Nani Lal De v. Tirthalal De, AIR 1953 Cal 513; Dharni Dhar v. Chandra Shekhar, AIR 1951 All 774(FB) ; overruling Parbhoo Dayal v. Dwarka Prasad, AIR 1932 All 334. 50 Vayangara Vadaka Vittil Manja v. Pariyangot Padingara Kuruppath Kadugochen, (1883) 7 Mad 89; Gobind Chunder Nundy v. Srigobind Chowdhry, (1896) 24 Cal 330; see also as to contribution between judgment-debtors Brojendro Kumar Roy Chowdhry v. Rash Behari Roy Chowdhry, (1886) 13 Cal 300, and Lakshmana Ayyan v. Rangasami Ayyan, (1894) 17 Mad 78, where it was held upon the facts of the case that one judgment-debtor against whom execution had been levied was entitled to contribution against the rest.
Principal Debtors and Sureties A surety is not liable to pay contribution to the principal debtor.51 The liability of the principal debtor and the surety is joint and several, but upon payment to the creditor, the surety is entitled to recover from the principal debtor, the entire sum he has rightfully paid under the guarantee.52 Liability of co-sureties to contribute is separately provided in s. 146 of the Act . 51 Padmanabha Kakkathaya v. Keshava Derinjithaya, AIR 1951 Mad 239; see s. 145 below. 52 See s. 145 below.
Commencement of Liability for Contribution In a case decided before this Act, it was held that the mere existence of a decree against one of several joint debtors did not afford ground for a suit for contribution against the other debtors. Until he has discharged that which he says ought to be treated as a common burden, or at any rate done something towards the discharge of it, he cannot say that there is anything of which he has relieved his co-debtors, and which he can call upon them to share with him.53 As seen from the illustrations below the section, a co-promisor can seek contribution from other co-promisors only after he has fully satisfied the joint decree.54 For contribution, a prima facie case is made by the production of the judgment and the certificate of satisfaction.55 Mere execution of a mortgage decree for costs does not entitle a defendant to contribution, unless he redeems the mortgage or the mortgaged property is sold in satisfaction of the mortgage.56 Limitation for contribution begins to run only from the date of payment.57 53 Ram Pershad Singh v. Neerbhoy Singh, (1872) 11 BLR 76; but if the decree has been realised against one of the joint-debtors, in proceedings for contribution, a plea by one of the other joint debtors that the money was lent to the plaintiff alone is inadmissible: Nityanand Sahu v. Radhacharan Sahu, AIR 1934 Pat 411, 148 IC 434. 54 Rangoti Mangarao v. Chinnadi Kishan Rao, AIR 1965 AP 98; SP Abraham Servai v. Raphial Muthirian, (1916) 39 Mad 288, 27 IC 337, AIR 1915 Mad 675. 55 Ahmadi Begum v. Abdullah, AIR 1934 Oudh 437 at 439. 56 Raghubar Dayal v. Shaikh Abdul Ghaffar, AIR 1936 Oudh 253.
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57 Shankerlal v. Motilal, AIR 1957 Raj 267.
Default in Contribution Joint promisors are liable to contribute equally, unless a contrary intention appears from the contract. The last paragraph of the section does not contemplate cases where one of the joint contributors has not paid and others have to pay that sum, however, those others received the benefits in the original contract in unequal proportions. The fact that one happens to escape from legal liability to the creditor, without the consent of his associates, and perhaps even without their knowledge, cannot be allowed to disturb the original obligation between co-debtors or to alter the proportions of liability or contribution, which must be ascertained from the note at the time it was made.58 If one of the persons liable to contribute is not in a position to pay his share, then that amount should be divided between the others equally under the section; but it has been held that the amount may be divided in the proportion of the benefit each has received.59 58 Ramskill v. Edwards, (1885) 31 Ch D 100 per Gibson J; quoted with approval in Abraham Servai v. Raphial Muthirian, AIR 1915 Mad 675 (2) per Tyabji J. at 678. 59 Padmanabha Kakkothaya v. KeshavaDerinjithaya, AIR 1951 Mad 239.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER IV Of the Performance of Contracts/Contracts which must be performed/S. 44.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which must be performed S. 44. Effect of release of one joint promisor.-Where two or more persons have made a joint promise, a release of one of such joint promisors by the promisee does not discharge the other joint promisor or joint promisors; neither does it free the joint promisors so released from responsibility to the other joint promisor or joint promisors.
Introduction The effect of a release of any of the joint promisors by the promisee does not release or discharge the other joint promisors, nor does it affect the right of such others to claim contribution from the joint promisor so released.
Release of one Joint Promisor
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Section 44 also deviates considerably from the English law, under which, since joint liability creates one obligation, release of one joint debtor under seal or by accord and satisfaction discharges all. The position is same in case of joint and several liability.60 This section applies equally to a release given before or after breach. Thus, where in a suit for damages against several partners, the plaintiff compromised the suit with one of them, and undertook to withdraw the suit as against him, it was held that the release did not discharge the other partners, and the suit might proceed as against them.61The contention, that the section occurred in the portion of the Act relating to the performance of contracts and therefore did not apply to liabilities arising out of breach, was held to be too narrow a construction of the section. The section applies as much to partial discharge as to complete discharge.62 Abatement of an appeal against one joint debtor or the death of one joint promisor does not release the other joint promisors.63 The same principle has also been applied to judgment-debts, and a release by a decree-holder of some of the joint judgment-debtors from liability under the decree, does not operate as a release of the other judgment-debtors.64 It also applies to co-mortgagors jointly and severally liable.65 Where the promisee releases one or more joint promisors, the liability as between joint promisors to contribute equally does not end. Where one of the executants makes payment on the joint promissory note and the promisee agrees to discharge him from liability, the coexecutant is liable for the balance, but subject to his right to claim, the first co-executant for contribution.66 Where two out of three judgment-debtors were discharged from their debt under debt relief law, and the decree was executed against the remaining debtor, the latter was held entitled to contribution from the other two.67 60 Chitty on Contracts, 28th edn., para 18-017, p. 952; Halsbury's Law of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, CONTRACT, para 1085. 61 Kirtee Chunder Mitter v. Struthers, (1879-80) 4-5 Cal (VI) 336. 62 Mahadeosingh Hirasingh v. Balmukund Jayanarain, AIR 1948 Nag 279. 63 Devi Lal v. Himat Ram, AIR 1973 Raj 39 at 41; Chhotelal Ratanlal v. Rajmal Milapchand, AIR 1951 Nag 448; Maung Mu v. Maung Kan Gyi, AIR 1924 Rang 127; Jwala Prasad v. Kopeya Munda, AIR 1920 Pat 801; 59 IC 890 applied. 64 Moolchand v. P Alwar Chetty, (1916) 39 Mad 548, AIR 1915 Mad 934, 29 IC 303; Daulat Ram v. Punjab National Bank Ltd., AIR 1933 Lah 505, 144 IC 981; Narendra Chandra v. Pushupati Nath Malia, AIR 1949 Cal 242; Arjun Lal v. Banbehari, AIR 1944 Cal 328(2). 65 Krishna Charan Barman v. Sanat Kumar Das, AIR 1917 Cal 502. 66 AMKM Firm v. Baishmaw, AIR 1937 Rang 137. 67 Hardas v. Ramguljarilal, AIR 1947 Nag 61 FB; Jankibai v. Rama Manaji Dhangar, (1947) Nag 881, AIR 1948 Nag 292.
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The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which must be performed
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S. 45. Devolution of joint rights.-When a person has made a promise to two or more persons jointly, then, unless a contrary intention appears from the contract, the right to claim performance rests, as between him and them, with them during their joint lives, and, after the death of any of them, with the representative of such deceased person jointly with the survivor or survivors, and, after the death of the last survivor, with the representatives of all jointly. Illustration A, in consideration of 5,000 rupees lent to him by B and C, promises B and C jointly to repay them that sum with interest on day specified. B dies. The right to claim performance rests with B's representatives jointly with C during C's life, and after the death of C, with the representatives of B and C jointly.
Introduction Section 45 deals with devolution of joint rights in the case of joint promisees. Joint promisees can enforce the promise jointly, and in the event of death of any of them, the legal representatives of the deceased promisee can claim performance along with the surviving promisees.
Joint Promisees Under the English law, the right of a joint promisee devolves, after his death, on the survivors.68 The section departs from the English law in that the right devolves not on the survivors alone, but on them along with the legal representatives of the deceased promisee. Section 45 applies to all joint promisees, whether they be partners,69 co-sharers70 or members of a Joint Hindu family carrying on business in partnership,71 and co-promisees of a promissory note.72 However, the rule of survivorship applies to trustees, and the authority devolves upon the survivor. Therefore, a sole surviving trustee can sue to recover arrears of rent.73 68 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, CONTRACT, para 1082. 69 Motilal Bechardass v. Ghellabhai Hariram, (1892) 17 Bom 6 at 13; Aga Gulam Husain v. Albert David Sassoon, (1897) 21 Bom 412 at 421; Manghanmal Mantanomal v. Pahlajrai, (1927) 105 IC 544, AIR 1928 Sind 16; subject to special grounds of exception, as where the plaintiff's partners have ceased to have any interst: Mulibai v. Shewaram Menghraj, (1925) 90 IC 111, AIR 1926 Sind 78. 70 Balkrishna Moreshwar Kunte v. Municipality of Mahad, (1885) 10 Bom 32; Ramakrishna Moreshwar v. Ramabai, (1892) 17 Bom 29. 71 Ramsebuk v. Ramlall Koondoo, (1881) 6 Cal 815; Kalidas Kevaldas v. Nathu Bhagvan, (1883) 7 Bom 217; Ram Narain Nursing Doss v. Ram Chunder Jankee Loll, (1890) 18 Cal 86; Alagappa Chetti v. Vellian Chetti, (1894) 18 Mad 33; Nabendra Nath Basak v. Shasabindoo Nath Basak, AIR 1941 Cal 595, 197 IC 321. 72 Munshi Sahu v. Bhupal Mahton, AIR 1936 Pat 274. 73 Karavadi Manikya Rao v. Nalluri Adenna, AIR 1949 Mad 654; see the Indian Trusts Act, 1882, s. 44.
Co-heirs of Single Promisee Section 45 does not indicate what happens to a single right when the owner of it dies, and several persons
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become entitled to it.74 On death of the original promisee, his heirs do not become themselves several joint promisees.75 In such a case, it has been held that all of them must join in a suit to enforce the right, and if any of them refuses to join as plaintiff, he must be added as a defendant.76 74 Kandhiya Lal v. Chandar, (1884-86) 5-8 All 482. 75 Kalip Bibi v. Fakir Chandra Ghose, AIR 1960 Cal 187 at 189. 76 Ahinsa Bibi v. Abdul Kader Saheb, (1902) ILR 25 Mad 26 at 35.
Right to Claim Performance As the right to claim performance of a promise in the case of joint promisees rests with them all during their joint lives, all the joint promisees should sue upon the promise.77 Obviously, joint promisees cannot divide the debt among themselves and sue severally for the portions.78 If a suit is instituted against a debtor in his individual capacity, he cannot set off a debt owed jointly to him by the creditor.79 It is not open to one of two or more joint promisees to sue alone either for performance of the whole promise or to the extent of his share,80 all of them being necessary parties, the suit is liable to be dismissed on omission to implead any of them.81 Those joint promisees, who cannot be joined as plaintiffs, may be joined as defendants.82 This applies equally to a suit by an assignee of part of a debt, who must join the transferee and the other promisees as parties to the suit.83 Therefore, where two persons contract with a third person, a suit by one of the joint promisees making the other a co-defendant is maintainable, even if the plaintiff does not prove that the other co-promisee has refused to join as a co-plaintiff.84 If a suit is brought by some of the joint promisees only, and the other promisees are subsequently added as plaintiffs, whether on objection taken by the defendant,85 or by the court of its own motion,86 the whole suit will be dismissed, if it is at that time barred by limitation as regards the other promisees.87Notwithstanding s. 45 of this Act, a partner in a registered firm can sue in the firm's name under O. 30, r. 4 of CPC, and need not join the legal representatives of a deceased partner as parties to the suit.88 Where any one of the joint promisee dies, the right to enforce the promise vests in the surviving promisees jointly with the legal representatives of the deceased. Hence, an appeal would abate on death of one of the joint promisees, if his legal representatives were not brought on record.89 77 Vyankatesh Oil Mill Co. v. Velmahomed, (1927) 30 Bom LR 117, 109 IC 99, AIR 1928 Bom 191. 78 Siluvaimuthu Mudaliar v. Muhammad Sahul, (1926) 51 Mad LJ 648, AIR 1927 Mad 84, 98 IC 549; Rameshwar Bux Singh v. Ganga Bux Singh, AIR 1950 All 598, FB. 79 Nath Bank Ltd. v. Sisir Kumar Sarkar, AIR 1954 Cal 303. 80 Veerni Soorayya v. Kateeza Begum, AIR 1957 AP 688 at 690; Siluvaimuthu Mudaliar v. Muhammad Sahul, AIR 1927 Mad 84. 81 Manghanmal Mantanomal v. Pahlajrai, (1927) 105 IC 544, AIR 1928 Sind 16; Panbai v. Sajjanraj, AIR 1969 Raj 278. 82 Jahar Roy v. Premji Bhimji Mansata, AIR 1977 SC 2439 at 2444; Nirmala Bala Dasi v. Sudarsan Jana, AIR 1980 Cal 258; Ponnuswami Gounder v. Rama Boyan, AIR 1979 Mad 130; Veerni Soorayya v. Kateeza Beegum, AIR 1957 AP 688; Sarojdevi v. Charushil, AIR 1986 Bom 315. 83 Firm Ram Kishen Mohan Lal v. Firm Gurdial Mal Sagar Mal, AIR 1941 Lah 337; In re A K Fazlal Huq,AIR 1937 Cal 532. 84 Jahar Roy v. Premji Bhimji Mansata, AIR 1977 SC 2439, (1978) 1 SCR 770, approving Biri Singh v. Nawal Singh 24 All 226, Pyari Mohun Bose v. Kedarnath Roy, (1899) 26 Cal 409(FB), and Monghibai v. Cooverji Umersey, 66 IA 210 at 219, AIR 1939 PC 170; see also Ponnuswami Gounder v. Rama Boyan, AIR 1979 Mad 130 at 132 (a suit for specific performance by some of the promisees making others party defendants pro forma). 85 Ramesbuk v. Ramlall Koondoo, (1881) 6 Cal 815; Kalidas Kevaldas v. Nathu Bhagvan, (1883) 7 Bom 217; Fatmabai v.
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Pirbhai Virji, (1897) 21 Bom 580. 86 Imam-ud-din v. Liladhar, (1892) 14 All 524; Ram Kinkar Biswas v. Akhil Chandra Choudhuri, (1907) 35 Cal 519. 87 Firm Seth Hiralal Hazarilal v. Jagan Nath, AIR 1957 Raj 298. 88 Godavari Pravara Canal Co-op Purchase and Sale Union Ltd. v. Krishnarao, AIR 1974 Bom 52; Tarachand v. Hulkar Mal, AIR 1979 Del 160 (suit can be filed by all partners, or under O. 30, r. 4 by anyone or more partners, but a single partner cannot sue in his own name). 89 Pyarelal v. Modi Sikharchand, AIR 1957 MP 89.
Discharge by one of Several Joint Promisees In English law, the rule laid down in Wallace v. Kelsall, seems to have been accepted in England,90 and the rule that payment to one of joint creditors is a good discharge is still the general rule.91 In English law, release by one of the creditors, releases the debtor qua all the creditors,92 but in Indian law, the position is that the joint creditors are presumed to be tenants-in-common, and therefore, release by one of such creditors does not give a release on behalf of all the creditors,93 unless a contrary intention appears from the contract. In any case, discharge by one of the co-promisees or payment to him is valid only to the extent of his own share in the debt.94 90 Chitty on Contract, 28th edn., para 22-049, p. 1123. 91 Powell v. Brodhurst, [1901] 2 Ch 160 at 164; the question that matters, as there pointed out, is whether the debt is really joint. 92 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, Contract, para 1088. 93 Govindlal Bhikhulal Maheshwari v. Firm Thakurdas Bhallabhadas, AIR 1974 Bom 164. 94 C Venkatasetty v. Rangasetti, AIR 1952 Mys 68; see also s. 38 above (offer to one of joint promisees), where it has been submitted that payment of debt to any of the joint creditors ought to discharge the debtor.
'Unless a Contrary Intention Appears' Payment to one joint mortgagee, who was the manager and agent of others, discharged the liability.1 Where the agreement contained a term that half of the rent will be paid to each sharer, and the tenant actually paid rent accordingly, each sharer had the right to maintain suit for recovery of rent separately, without joining the other as a party.2 Only some of the joint promisees have been held to file a suit, where a hatchita was executed by a person in favour of himself and three others, each having a definite share.3 1 Gulzar Mondal v. Trailakyanath Shah, AIR 1928 Cal 125. 2 Dhanbhagvati v. Mandsaur Electric Supply Co. Ltd., AIR 1981 MP 259. 3 Nabendra Nath Basak v. Shasabindoo Nath Basak, AIR 1941 Cal 595, 197 IC 321.
Partners A suit can be filed by all the partners of a firm,4 or under O. 30, r. 1 of CPC, by any or all of them in the name of the firm. These provisions constitute an exception to s. 45 of this Act, provided the plaint discloses that the suit has been brought by the firm and the partners signing have done so only as partners.5 A suit under O. 30, r. 1 of CPC can be instituted even by one of the partners, even 'though the other partners are not joined as necessary parties.6 But a single partner cannot sue in his own name,
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especially when the firm is found not to exist.7 A suit to enforce a mortgage in favour of a firm can be brought, under O. 30, r. 4 of CPC, and the persons suing will be all the partners constituting the firm, whose name is registered in the Register of Firms, when the cause of action arose.8 The provisions of O. 30 of CPC, are enabling provisions, and do not prevent the partners of a firm from suing or being sued in their individual names.9 If partners sue in their individual names, all must join as co-plaintiffs, or in any case, be joined as defendants.10 Order 30, Rule 4 of the Civil Procedure Code, 1908 is an exception to the provisions of this section and provides that where a suit is brought in the name of the firm, it is not necessary to join the legal representatives of a partner;11 thereby setting at rest the divergent views of various High Courts. But if a partner has died before the commencement of a suit against the firm, the plaintiff cannot make the deceased partner's separate estate liable without adding his legal representatives as parties to the suit.12 The representative of the estate of a deceased partner may maintain a suit for the recovery of a partnership debt, and may join the surviving partners as defendants in the suit where they refuse to join as plaintiff.13 On the death of the last surviving partner in a partnership, the representatives of all the partners are entitled to be impleaded and the suit will be proceeded with and not abate.14 4 Bharat Suryodaya Mills Co. Ltd. v. Mohatta Bros, AIR 1969 Guj 178; reversed on facts in Mohatta Brothers v. Bharat Sarvodaya Mills Co. Ltd., AIR 1976 SC 1703. 5 Bholabhai Bhogilal v. Rattan Chand, AIR 1958 Punj 260; Bharat Sarvodaya Mills Co. Ltd. v. Mohatta Bros, AIR 1969 Guj 178. 6 Bhadreswar Coal Supply Co. v. Salish Chandra Nandi & Co., AIR 1936 Cal 353. 7 Hari Singh v. Firm Karam Chand Kanshi Ram, (1926) 8 Lah 1, 100 IC 721, AIR 1927 Lah 115. 8 Gurushiddayya Kalkayya Selimath v. Shah Hirachand Vanechand and Co., AIR 1972 Mys 209 at 212. 9 Purushottam Umedbhai & Co. v. Manilal & Sons, AIR 1961 SC 325; Thomas v. George, AIR 1973 Ker 94. 10 Rabindra Nath Sen v. First Industrial Tribunal, AIR 1963 Cal 310; Ramlal Kanhaiyalal Somani v. Ajit Kumar Chatterjee, AIR 1973 Cal 372. 11 Anokhe Lal v. Radhamohan Bansal, AIR 1997 SC 257, (1996) 6 SCC 730. 12 Mathuradas Canji Matani v. Ebrahim Fazalbhoy, (1927) 51 Bom 986, 105 IC 305, AIR 1927 Bom 581. 13 Aga Gulam Husain v. Albert David Sassoon, (1897) ILR 21 Bom 412 at 421. 14 Jagatjit Industrial Corpn v. Union of India, AIR 1981 Del 34 at 39.
Co-mortgagees Mortgagees taking a joint security for the money advanced must, in the absence of anything shown to the contrary, be regarded as tenants-in-common, having separate interest in the money advanced and not as joint tenants.15 But a payment to one co-mortgagee, without consent of others, does not give a valid discharge of debt due to others.16 A suit for ejectment and rent by a co-mortgagee lessor without impleading the legal representatives of a deceased co-mortgagee lessor was not maintainable.17Where a mortgagee dies leaving male and female heirs in accordance with the Hindu Succession Act, 1956, no one heir, not even thekarta of the coparcenery, can bring a suit on the mortgage without joining all the heirs as parties to the suit; the reason is that mortgage being one and indivisible and the mortgage having devolved on all the heirs jointly, no suit can be brought except on the principle of individuality.18 Where, by the terms of a mortgage, interest was payable by the mortgagor to two mortgagees jointly, it was held that upon the death of one of the mortgagees, his legal representative was entitled to moiety of the interest due under the mortgage.19 15 Syed Abbas v. Misri Lal, AIR 1921 Pat 27 at 28 Sakhiuddin Saha v. Sonaulla Sarkar, AIR 1918 Cal 411.
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16 Sukh Lal v. Kanjman, AIR 1930 All 98; Arunachalam Chetty v. C S Ramasamy Ayyar, AIR 1928 Mad 933; Ray Satindra Nath Choudhury v. Ray Jatindra Nath Choudhury, AIR 1927 Cal 425; Musammat Malan v. Tara Singh, AIR 1922 Lah 64; Syed Abbas v. Misri Lal, AIR 1921 Pat 27; Banamali Satpathi v. Talua Ramhari Pattra, AIR 1920 Pat 464; Abdul Hakim v. Adyata Chandra Das Dalal, AIR 1919 Cal 593; but see P Ramaswami v. Chandra Kottayya, AIR 1925 Mad 261 (actual payment valid discharge, not mere undertaking to pay). 17 Moolchand v. Renuka Devi, AIR 1973 Raj 63 at 67; Rama Motibhai v. Dalwadi Tupoo Rama, AIR 1956 Bom 264; Rameshwar Bux Singh v. Ganga Bux Singh, AIR 1950 All 598(FB) . 18 P Govinda Reddy v. Golla Obulamma, AIR 1971 AP 363 at 376 (FB). 19 Kanthu Punja v. Vittamma, (1901-02) 25 Mad (VI) 754.
Government Securities The application of the principle in this section may be excluded by statutes, especially those relating to securities,20 which provide that:
(i) (ii) (iii)
securities payable to one or more persons jointly shall, on death of any of them, be payable to the survivor or survivors; securities payable to one or more persons severally, shall be payable on death of any of them to any of the survivors or the legal representative(s) of the deceased holder; any one or more joint holder can give effectual receipt for interest, unless notice is given by the other holders to the promisor.
Time and Place for Performance 20 See the Government Securities Act, 2006, s. 8; the Major Port Trusts Act, 1963, ss. 68-69; the Public Debt Act, 1944, s. 8.
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The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which must be performed S. 46. Time for performance of promise, where no application is to be made and no time is specified.-Where, by the contract, a promisor is to perform his promise without application by the promisee, and no time for performance is specified, the engagement must be performed within a reasonable time. Explanation.--The question &uot;what is a reasonable time&uot; is, in each particular case, a question of fact.
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Introduction Section 46 places an obligation on the promisor to perform his promise within reasonable time, if no time is fixed, and the promise is to be performed without application by the promisee. Later sections deal with performance, where time is fixed, and the circumstances in which the promisee must apply for performance. The word 'engagement' in the section is synonymous with 'promise'.21 21 As noted by the earlier editors, the word survives from the language of the original draft.
Reasonable Time The Act itself states that the question of what is reasonable time is always a question of fact.22 Where no time is specified for performance, the promise must be performed within reasonable time23 having regard to all the circumstances of the case.24 In Bengal Coal Co Ltd v. Homee Wadia & Co, 25 the defendants agreed to supply coal to the plaintiffs from time to time as required by the plaintiffs, on reasonable notice given to them. A notice given by the plaintiffs on 22 July 1898 for the supply of 2648 tons of coal on or before 31 August 1898, was held not to be reasonable. Perhaps it might have been physically possible for the defendants to carry out such an order, but it would clearly have required an effort which the plaintiffs had no right to demand. I do not think that a notice involving such an effort from businessmen with innumerable other matters to attend to can be held to be such a reasonable notice as was intended by both parties when this document was given. Where the defendant agreed to discharge a debt due by the plaintiff to a third party and in default to pay to the plaintiff such damages as he might sustain, and no time was fixed for the performance of the obligation, it was held that the failure of the defendant to perform it for a period of three years amounted to a breach of contract.26 In 1950, reasonable period for completion in a contract for purchase of shares was held to be two months;27 today, it would be shorter, even in matter of hours. Where in a contract for sale of goods, goods were to be delivered in installments and the dates of installments were not fixed, the installments must be deemed to be rateably distributed over the period appointed for delivery of the whole quantity of goods.28 Even where an amount is payable on demand, the reasonableness of the opportunity given to a debtor, who is required to pay on demand, would depend on the debtor's knowledge or means of knowledge of the amount due and on the information supplied by the creditor.29 When no time is fixed for completion of sale, it must be completed in a reasonable time.30 In a case, where a consent decree was passed for conveyance by one party to another, on payment of a specified amount, but no time was fixed for completion, the transfer should be obtained at any time within the period of limitation.31 The performance in reasonable time is implied, and the agreement cannot be challenged on the ground of vagueness.32 If a contract does not specify the time within which the purchase price was to be paid and the contract was performed, the purchase price had to be paid within a reasonable time.33 Even where time is fixed, but is not of the essence, contract for sale of immovable property must be performed within reasonable time.34 Where time was fixed, but the promisee extended the time, the extensions could not go on indefinitely even applying the doctrine of reasonable time, and the promisee could terminate the contract after a certain extension.35 Where the act to be done is such that both parties are to concur, the implied condition is that each party shall use reasonable diligence in performing his part. The implied engagement is not that the act shall be done within a fixed or a reasonable time, or within the time usually taken, but that each shall use
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reasonable diligence in performing his part.36 The time within which the preliminary duties are to be performed is to be calculated by relation to the time prescribed for the main duty, they need not be performed any earlier than necessary, to enable the main duty to be performed on time, but they may not be performed any later. In a charter, time was prescribed for loading the cargo, but none for the obligations to nominate a berth and provide a cargo. The latter were preliminary to the loading of the cargo. The nomination of the berth and the provision of the cargo must be made in sufficient time to enable the vessel to be completely loaded within the lay days.37 In HPA International v. Bhagwandas Fateh Chand Daswani, 38 a seller having life interest in a property and required to sell it for meeting public dues, agreed to sell the property. Under the terms of the agreement, he applied to the High Court for permission to sell. He waited for two years, did not get permission, terminated the contract by notice, withdrew the application from the Court, and sold his life interest to another person; and used a large part of the amount for to pay his dues. In view of the pressure for payment of dues, it was implied that the Court's permission was to be obtained within a reasonable period, well before proceedings began against him for recovery of dues. He had not committed breach in ending the contract. 22 Firm Bachhraj Amolakchand v. Firm Nand Lal Sitaram, AIR 1966 MP 145; Jnanda Debi v. Nath Bank Ltd., AIR 1979 Cal 246. 23 Byomkesh Mukharji v. Madhabji Mepa Maru, AIR 1940 Pat 609 (payment of royalty in mining lease); Rustomji Ardeshir Cooper v. Dhairyawan Annasaheb Narandas Thakersey Mulji, AIR 1930 PC 165 (sale of land); National Co-op Consumers' Federation of India Ltd. v. Union of India, AIR 1995 Del 204 (carriage of goods by railway). 24 Bengal Coal Co. Ltd. v. Homee Wadia & Co., (1899) 24 Bom 97; Dorasinga Tevar v. Arunachalam Chetti, (1899) 23 Mad 441 (nature of business to be considered). 25 (1899) 24 Bom 97 at 104. 26 Dorasinga Tevar v. Arunachalam Chetti, (1899) 23 Mad 441; Subramanian v. Muthia (1912) 35 Mad 639, 17 IC 721. 27 Bank of India Ltd. v. Jamsetji AH Chinoy, AIR 1950 PC 90. 28 Bilasiram Thakursidass v. Ezekiel Abraham Gubbay, AIR 1917 Cal 721. 29 Bunbury Foods Pty Ltd. v. National Bank of Australasia Ltd., (1984) 153 CLR 491 (High Court of Australia). 30 Rustomji Ardeshir Cooper v. Dhairyawan Annasaheb Narandas Thakersey Mulji, AIR 1930 PC 165 at 169; Hungerford Investment Trust Ltd. v. Haridas Mundhra, AIR 1972 SC 1826; Binda Prasad v. Kishori Saran, AIR 1929 PC 195; Dinkerrai Lalit Kumar v. Sukh Dayal Rambilas, (1948) Bom 91, AIR 1947 Bom 293. 31 Jnanda Debi v. Nath Bank Ltd., AIR 1979 Cal 246 at 248. 32 Rajammal v. R Gopalaswami Naidu, AIR 1951 Mad 767. 33 Hungerford Investment Trust Ltd. v. Haridas Mundhra, AIR 1972 SC 1826 at 1833. 34 KS Vidyanadam v. Vairavan, AIR 1997 SC 1751, (1997) 3 SCC 1. 35 Colles Cranes of India Ltd. v. Speedeo Spares Corporation, AIR 1970 Cal 321. 36 Ford v. Cotesworth, [1868] 4 QB 127, [1870] 5 QB 544, [1861-73] All ER Rep 473; Chitty on Contracts, 28th edn., para 22-0, 20, p. 1109. 37 Universal Cargo Carriers Corpn v. Citati, [1957] 2 All ER 70. 38 AIR 2004 SC 3858, (2004) 6 SCC 537.
General terms stipulated about time If a contract uses stipulations that the promise is to be performed 'as soon as possible' or 'forthwith', the stipulation is construed; by reference to what is reasonable in the circumstances.39 Words like 'immediately' or 'directly' impose a more stringent requisition than 'reasonable time'.40 By the terms of a charterparty, the cargo was 'to be discharged with all dispatch according to the custom of the port' of
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discharge, it was held that this bound the charterer to discharge the cargo within a reasonable time, regard being had to every impediment arising out of the custom or practice of the particular port, which the charterer could not have overcome by the use of reasonable diligence.41 A clause in a sale deed providing for payment of a balance of Rs 25,000/- out of the purchase price 'as soon as possible but at a time when the former (the purchaser) is in a position to make the payment' stipulated for payment within a reasonable time and was governed by s. 46, and could not be treated as contingent contract under s. 31 of the Contract Act.42 39 See Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, CONTRACT, para 930; Hydraulic Engg. Co. Ltd. v. McHaffie, (1879) 4 QBD 670(CA) . 40 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, CONTRACT, para 930. 41 Postlethwaite v. Freeland, [1880] 5 AC 599(HL) . 42 IK Sohan Singh v. Stale Bank of India, AIR 1964 Punj 123.
'No time is specified' Time for performance may be expressly fixed by the contract (in terms of a specific date or time, or at the end of a period specified from a date or an event). Time for performance may also be determined from the other terms of the contract or the nature of the contract. The meaning of stipulation of time may sometimes be explained by the other words of the contract. Section 46 would apply only when time is neither expressly fixed, not determinable from the contract. In a CIF contract, if no time was specified, payment must be made when the bill of lading and other shipping documents were presented to buyer.43 But where the agreement for sale of a plot of land provided that the sale was to be effected within a month after completion of roads, the application, of s. 46 was excluded.44 43 Shah Moolchand Kesarimull v. Associated Agencies, AIR 1942 Mad 139. 44 Mugneeram Bangur & Co. Pvt Ltd. v. Gurbachan Singh, AIR 1965 SC 1523.
Notice Where no time is fixed by contract and the performance of the contract is to be effected within a reasonable time, it is not necessary in such cases to give notice before treating the contracts as rescinded;45 the promisee may nevertheless end the contract by notice.46 The law engrafts a condition into the contract that reasonable time, in the absence of any specific time provided in the contract, will be of the essence, and if the contract is not performed within reasonable time, the party in default will be guilty of breach of contract, and liable in damages.47 45 Official Receiver v. Baneshwar Prasad Singh, AIR 1962 Pat 155; Sat Parkash L Tara Chand v. Bodh Raj L Bhagwan Das Khatri, AIR 1958 Punj 111. 46 Dau Alakhram v. Kulwantin Bai, AIR 1950 Nag 238; Food Corporation of India v. Anupama Warehousing Establishment, AIR 2004 Ker 137. 47 Sat Parkash L Tara Chand v. Bodh Raj L Bhagwan Das Khatri, AIR 1958 Punj 111; Phillips v. Lamdin, [1949] 2 KB 33, [1949] 1 All ER 770.
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The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which must be performed S. 47. Time and place for performance of promise, where time is specified and no application to be made.-When a promise is to be performed on a certain day, and the promisor has undertaken to perform it without the application by the promisee, the promisor may perform it at any time during the usual hours of business on such day and at the place at which the promise ought to be performed. Illustration A promises to deliver goods at B's warehouse on first January. On that day A brings the goods to B's warehouse, but after the usual hour for closing it, and they are not received. A has not performed his promise.
Introduction Section 47 applies only when a certain day is fixed for performance.48 The words 'time is specified' in the marginal note seems to suggest that the word 'certain' is to be interpreted as 'specified'. The section provides that the promise must be performed during usual business hours and at the place where the promise ought to be performed. 48 Kedarmal Bhuramal v. Surajmal Govindram, (1907) 9 Bom LR 903 at 909.
'Day' A day is a period running from midnight to midnight,49 and not a period of 24 consecutive hours, unless so intended. If a promisor has to perform a promise on (or before) a certain day, he would have the whole of the day to perform the promise,50 subject to the provisions of this section. Performance required on a specified day means that the performance must reach the promisee on that day. Where installment was payable on a certain day, payment must reach the creditor on that date. Remittance on that date is not sufficient.51 In a suit for damages against the defendant, a German, for non-delivery of goods, it was contended that he was not bound to deliver the goods on Sunday, which was the last day named in the contract for performance. It was held that the 'Lords Day Act ' did not apply to India, and in the absence of a custom to the contrary, he was bound to deliver the goods on that day, if they had not already been delivered.52 49 Gordon v. Walmsley (The Katy), [1895] P 56; Cartwright v. MacCormack, [1963] 1 WLR 18, [1963] 1 All ER 11; see National Insurance Co. Ltd. v. Jijubhi Nathuji Dabhi, AIR 1997 SC 2147 (commencement of insurance policy).
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50 Afovos Shipping Co. SA v. Pagnan (The Afovos), [1983] 1 WLR 195, [1983] 1 All ER 449(HL) (until midnight). 51 Narayanrao Jageswar Rao v. Tanbaji Damaji, (1954) ILR Nag 452, AIR 1954 Nag 270. 52 Lalchand Balkissan v. John L Kersten, (1890) 15 Bom 338; Kasiram v. Harnandroy, AIR 1921 Cal 809, 58 IC 396; Rolloswin Investments Ltd. v. Chromolit Portugal Cutelarias e Produtos Metalicos SARL, [1970] 2 All ER 673; See also the Negotiable Instruments Act, 1881, s. 105 which provides that in calculating what is reasonable time, public holidays shall be excluded.
Usual Business Hours Where the vendor was bound to tender delivery backed by goods before 1:00 p.m. of the due date according to the rules of the Bombay Cotton Trade Association applicable to the contract, and the buyer failed to do so, he failed to perform under this section.53 If a notice is to be received by a specified person by a specified day, it must be received at a time when in the ordinary course of routine, the information would reach that person.54 53 Mukanchand Rajaram Balia v. Nihalchand Gurmukhrai, AIR 1916 Bom 268 at 272. 54 Tenax Steamship Co. Ltd. v. Owners of Motor Vessel Brimnes (The Brimnes), [1974] 3 All ER 88, [1974] 3 WLR 613; Eaglehill Ltd. v. J Needham Builders Ltd., [1973] AC 992, [1972] 2 WLR 789, [1972] 3 All ER 895.
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The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which must be performed S. 48. Application for performance on certain day to be at proper time and place.-When a promise is to be performed on a certain day, and the promisor has not undertaken to perform it without application by the promisee, it is the duty of the promisee to apply for performance at a proper place within the usual hours of business. Explanation.--The question 'what is a proper time and place' is, in each particular case, a question of fact.
Introduction This section requires the promisee to ask the promisor to perform, where the promise is to be performed on the promisor's application.
Application by promisor
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Such provision might be express in the contract, or may be implied. Thus, a carrier need not give the bill of lading unless the consignor has demanded it.55 55 Shaw Wallace and Co Ltd v. Nepal Food Corporation, AIR 2012 SC 72; see also MV X-press Annapurana v. Gitanjali Woolens Pvt Ltd, AIR 2011 Bom 105.
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The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which must be performed S. 49. Place for the performance of promise, where no application to be made and no place fixed for performance.-When a promise is to be performed without application by the promisee, and no place is fixed for the performance of it, it is the duty of the promisor to apply to the promisee to appoint a reasonable place for the performance of the promise, and to perform it at such a place. Illustration A undertakes to deliver a thousand maunds of jute to B on a fixed day. A must apply to B to appoint a reasonable place for the purpose of receiving it, and must deliver it to him at such place.
Introduction If the place of contract is fixed, and the day specified, but the promisor is required to perform upon application by the promisee, the promisee must seek performance by applying to the promisor at the proper place and during usual hours of business on that day. If the promisor is to perform the promise without application by the promisee, but no place is fixed for performance in the contract, the promisor must apply to the promisee to fix the place, and then perform at that place. The place fixed by the promisee must be reasonable.
Proper Place If the place for performance is not fixed expressly, it may be ascertained from the intention of the parties as indicated by the nature of the contract, its terms and the other circumstances of the particular case.56 Where the place for performance is specified, the promisor must tender performance at that place in order to discharge himself, unless the place is varied by consent, or the stipulation is waived. Section 48 would apply where the place is fixed, but the performance requires concurrence of the promisee, i.e., where the promisor has not agreed to perform except upon application by the promisee. It is then the duty of the
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promisee to fix a 'proper' place for performance, and it is suggested57 also to attend the place fixed in order to enable the promisor to fulfill the contract. Where more than one place is named, the question, whether the promisor or the promisee has the right of selection depends on the intention of the parties, and then it is the duty of such party to notify the other party at which place he intends to perform, or to require performance.58'It is for person to whom payment is to be made to fix the place at which he will be paid; until he has selected the place at which he will be paid there can be no default.'59 56 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, CONTRACT, para 937. 57 Ibid. 58 Rippinghall v. Lloyd, (1833) 5 B & Ad 742 (option regarding verification of title by vendor, duty of vendor to notify); Thorn v. City Rice Mills, (1889) 40 Ch D 357 (option of the creditor to choose place). 59 Thorn v. City Rice Mills, (1889) 40 Ch D 357 at 360.
No Place is Fixed Where promise is to be performed without application and no place is fixed, the promisor is under an obligation to apply to the promisee to fix the place of performance. If he fails to do so, he may be liable for breach.60 Even where the place is fixed in the alternative, the promisor must apply for performance,61 else perform it where the promisee requires. It is only when the contract does not stipulate the place of performance that s. 49 comes into play.62The Act makes no provision for place of performance when no time or place is fixed and where there is no provision to perform without application.63 In contrast, the UNIDROIT Principles provide that unless the place of performance can be determined from the contract, the promise to make a payment must be performed at the promisee's place of business, and any other obligation at the promisor's place of business.64 Where no place is fixed, the rule would apply, whether the performance is for payment or any other mode.65 The words 'no place is fixed' in this section do not exclude any inference, which the court may draw as to the intention of the parties from the nature and circumstances of the contract,66 especially where the obligation is to pay money.67 This is a question of fact, but cases in which an inference as to the intention of the parties has been drawn, illustrate the section.68 When the manner and the place of performance are not the subject of express contract, it is the duty of the court to gather what, by necessary implication, having regard to the nature of the contract and the circumstances in which it was entered into, the parties must have meant.69 60 Armitage v. Insole, 80 RR 388, 14 QB 728 (liable for breach of whole contract). 61 LN Gupta v. Tara Mani, AIR 1984 Del 49 (promissory note stated to be payable 'at Bangalore or any other place in India'). 62 G. Venkatesha Bhat v. Kamlapat Motilal, AIR 1957 Mad 201; Madan Lal v. Chawla Bank Ltd., AIR 1959 All 612. 63 Kedarmal Bhuramal v. Surajmal Govindram, (1907) 9 Bom LR 903. 64 UNIDROIT Principles, Art. 6.1.6. 65 Soniram Jeetmull v. RD Tata & Co. Ltd., AIR 1927 PC 156; Bhagauti Shakul v. Chandrika Prasad Kueri, AIR 1933 All 147 (promise to pay money as well as promise to deliver goods). 66 Johri Mull Prahlad Rai v. Hira Lal Seth, AIR 1961 Pat 198. 67 Galley & Co. v. Dathi China Appalaswami Naidu, AIR 1946 Mad 300, 226 IC 133; Mahaluxmi Bank Ltd. v. Chotanagpur Industrial & Commercial Assn, AIR 1955 Cal 413. 68 Nathubhai Ranchhod v. Chhabildas Dharamchand, (1935) 59 Bom 365, 37 Bom LR 357, 157 IC 248, AIR 1935 Bom 283;
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Muhammad Esuff Rowther v. M Hateem & Co., AIR 1934 Mad 581, 67 Mad. LJ 296, 153 IC 111. 69 Sheikh Mehtab v. Dharamrao Bhujangrao, (1945) Nag 252, AIR 1944 Nag 330 at 332; Johri Mull Prahlad Rai v. Hira Lal Seth, AIR 1961 Pat 198.
Debtor must seek the creditor In the Common law, the general rule about money payments is that if no place is named expressly or by implication,70 the debtor is bound to find the creditor,71 provided he is within the jurisdiction.72 The debtor cannot ask the creditor to come to him and take the money.73 But if the obligation is to deliver heavy or bulky goods, the creditor must appoint a place to receive them. This general rule will not apply if the place for payment is agreed. Although s. 49 lays down a reasonable rule, the common law rule that the debtor must pay his debt by going to his creditor, unless there is an express contract to the contrary, has been followed in a number of cases,74 as a reasonable rule and in conformity with justice and equity, or has been taken cognisance of as a factor for determining the place of payment.75 The Law Commission of India recommended adding an explanation incorporating the rule of English common law.76 But the application of common law rule was not applied by the Punjab High Court,77 because in a vast country like India, it will not only be inconvenient but oppressive, the rule enabling the creditor to sue at his place quite contrary to the principle behind s. 20 of the CPC .78 It has also been held that the common law rule must not be applied unreservedly, and the place of payment must be determined independently of any such general maxim, with reference to the terms of the contract, the circumstances attending on it, the necessities of the case and the statutory provisions of the CPC.79 An express provision that payment shall be made through a specified bank excludes application of the general rule.80 It has also been held that the where the plaintiff sues on the basis of breach of contract, the jurisdiction must be decided on the basis of determination of question of breach and not on the relationship of debtor and creditor.81 It is, in any case, reasonable to suppose that if the debtor applies to the creditor for appointment of place of performance, the creditor will appoint a place where he himself resides, at any rate, the creditor has the power to so appoint.82 In Soniram Jeetmull v. RD Tata & Co. Ltd., 83 the Privy Council held that this was only where the promisor fails to apply for the appointment of a reasonable place. This judgment has been interpreted to mean that in the absence of anything to the contrary, the parties to a contract of payment of money by a debtor to the creditor will be deemed to have intended that payment to be made by the debtor to the creditor at the place of latter's business.84 The Privy Council did not lay down that the common law rule applies to India, but in the absence of specification of place of payment by the contract, it would be legitimate for the court to infer from the circumstances that the debtor should pay the creditor at the latter's place of business. It was a mere implication of the meaning of the parties. The rule that the debtor must seek the creditor, has been applied to payments by factories and establishments under the Employees' State Insurance Act to the Insurance Corporation at Madras,85 refund of security deposit by the government,86 payment of rent by lessee to the lessor,87hiba jewels receivable by a wife where she resided,88 to bilticut deposits returnable to the depositor on transaction proving ineffective,89 the place of payment being the place of residence of the constituent in the case of pakki adat agency,90 payment of profit and losses in a contract of agency,91 and to a promissory note payable at 'Bangalore or any part of India' and the debtor did not apply for fixing the place of performance.1 The rule has been held not to apply to wages payable by employers of labour, who have a regular payday and regular office for making payment,2 or to repayment of a fixed deposit by a bank,3 unless the depositor proved that it was repayable at the place where he resided.4 It has been held not to arise to a wife claiming maintenance from her husband and return of ornaments, for the reason that the claim did not arise out of contract.5
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Where money is deposited with an Indian money lender, who is a permanent resident of India, it is implicit that the money lender will pay back the money in India in Indian currency. Investment by him in a foreign firm does not enable him to claim that the depositor must claim the money in the country where it has been invested.6 The rule applies even if the debt is disputed.7 In applying this rule, regard must be had to the proper place at the time when the money is payable.8 The creditor's place of residence at the time when the contract is made will often be deemed the place of performance of contract.9 But a debtor, however, cannot be held liable to pay wherever the creditor may choose to shift his business.10 Nor is the debtor required to seek the creditor beyond the jurisdiction of the country.11 The UNIDROIT Principles provide that if a party to the contract changes its location after the conclusion of the contract, any additional expenses incidental to performance caused by the change in such place must be borne by the person changing such place.12 70 Mahaluxmi Bank Ltd. v. Chotanagpur Industrial d' Commercial Assn, AIR 1955 Cal 413. 71 See Haldane v. Johnson, (1853) 8 Ex 689, 91 RR 705; Kedarmal Bhuramal v. Surajmal Govindram, (1907) 9 Bom LR 903 at 911; Puttappa Manjaya v. Virabhadrappa N, (1905) 7 Bom LR 993; Mahaluxmi Bank Ltd. v. Chotanagpur Industrial d' Commercial Assn, AIR 1955 Cal 413; Gopiram Kashiram v. Shankar Rao, AIR 1950 MB 72; Employees' State Insurance Corporation v. Md Haji M Ismail Sahib, AIR 1960 Mad 64(FB) (payment of ESI contributions). 72 Bharumal Udhomal v. Sakhawatmal Veshomal, AIR 1956 Bom 111. 73 Gopiram Kashiram v. Shimkar Rao, AIR 1950 MB 72. 74 Motilal Pratabchand v. Surajmal Joharmal, (1904) 30 Bom 167 at 171; KSPLA Annamalai Chettiyar v. Daw Huin, AIR 1936 Rang 251; Srilal Singhania v. Anant Lal Mondal, (1940) 1 Cal 323, 191 IC 52, AIR 1940 Cal 443; Satibai v. Vishnibhai Kimatrai, AIR 1953 Bom 280; Bharumal Udhomal v. Sakhawatmal Veshomal, AIR 1956 Bom 111; Balloram v. Firm Seth Uttamchand Bishan Das, AIR 1961 Raj 93; State of Punjab v. AK Raha (Engineers) Ltd., AIR 1964 Cal 418 (final bill in works contract); Maria Munnisa Begum v. Noore Mohammad Saheb, AIR 1965 AP 231; SP Consolidated Engg Co. (P) Ltd. v. Union of India, AIR 1966 Cal 259; HS Shobasingh and Sons v. Saurashtra Iron Foundary and Steel Works (Pvt.) Ltd., AIR 1968 Guj 276; but see Firm Hiralal Girdhari Lal v. Baij Nath Hardial Khatri, AIR 1960 Punj 450(FB) ; applying S Niranjan Singh v. Jagjit Singh, AIR 1955 Punj 128; SM Kadirsa Rawther v. K Shanmugha Mudaliar, AIR 1960 Ker 188 (a case of sale of goods). 75 Manohar Oil Mills v. Bhawani Din Bhagwandin, AIR 1971 All 326. 76 The Law Commission of India, 13th Report, 1958, para 72 recommended adding an explanation to s. 49: 77 Piyara Singh v. Bhagwandas, AIR 1951 Punj 33; S Niranjan Singh v. Jagjit Singh, AIR 1955 Punj 128; but see HS Shobasingh and Sons v. Saurashtra Iron Foundary and Steel Works (Pvt.) Ltd., AIR 1968 Guj 276 (rule does not conflict with s. 20 of the CPC, 1908). 78 Section 20 of the CPC, enables the plaintiff to file a suit where the defendant resides or where the cause of act ion arises. 79 Galley & Co. v. Dathi China Appalaswami Naidu, AIR 1946 Mad 300, 226 IC 133; G Venkatesha Bhat v. Kamlapat Motilal, AIR 1957 Mad 201. 80 Ashok Kumar Sahoo v. Hindustan Paper Corpn Ltd., AIR 2006 Cal 39. 81 G Venkatesha Bhat v. Kamlapat Motilal, AIR 1957 Mad 201; see also SM Kadirsa Rawther v. K Shanmugha Mudaliar, AIR 1960 Ker 188 (obligation arising out of breach of contract, agency, tort); Lakshmi Insurance Co. Ltd. v. B K Kaula, AIR 1940 Lah 85 (recovery from agent after cancellation of agency). 82 Nathubhai Ranchodd v. Chhabildas Dharamchand, (1935) 59 Bom 365, 37 Bom LR 357, 157 IC 248, AIR 1935 Bom 283. 83 (1927) LR 54 IA 265, 269, 29 Bom LR 1027, 102 IC 610, AIR 1927 PC 156. 84 Manohar Oil Mills v. Bhawani Din Bhagwandin, AIR 1971 All 326; see also Johri Mull Prahlad Rai v. Hira Lal Seth,AIR 1961 Pat 198. 85 Employees State Insurance Corpn. v. M Haji M Ismail Sahib, AIR 1960 Mad 64 (issue of jurisdiction in a criminal case under s. 39, ESI Act); but seeG Venkatesha Bhat v. Kamlapat Motilal, AIR 1957 Mad 20 where the applicability of the rule was doubted. 86 Babu Nandan Gir v. Sub Divisional Officer, AIR 1966 All 158; Rajasthan State Electricity Board v. Dayal Wood Works, AIR 1998 AP 381.
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87 Narayan Rajaram v. Shankar Diwakar, AIR 1955 Nag 202 (not dependent on demand by lessor); Bhagauti Shukul v. Chandrika Prasad Kueri, AIR 1933 All 147; Satibai v. Vishnibai Kimatrai, AIR 1953 Bom 280. 88 Maria Munnisa Begum v. Noore Mohammad Saheb, AIR 1965 AP 231. 89 Firm Shah Chandanmal Fatehraj v. Hazarilal, AIR 1962 Raj 122. 90 Kedarmal Bhuramal v. Surajmal Govindram, (1907) 9 Bom LR 903; as to the incidents of pakki adat in general; Kanji Deoji v. Bhagwandas Narotamdas, (1905) 7 Bom LR 57 at 65; on appeal sub nom: Bhagwandas Narotamdas v. Kanji Deoji, (1906) 30 Bom 205; but see Kishan Lal v. Bhanwar Lal, AIR 1954 SC 500 at 502. 91 Kishan Lal v. Bhanwar Lal, AIR 1952 Raj 81; KSPLA Annamalai Chettiyar v. Daw Huin, AIR 1936 Rang 251; but see Galley & Co. v. Dathi China Appalaswami Naidu, AIR 1946 Mad 300, 226 IC 133 and SM Kadirsa Rawther v. K Shanmugha Mudaliar, AIR 1960 Ker 188 (to be determined independently of the rule on terms of contract and circumstances and necessities of the case). 1 LN Gupta v. Tara Mani, AIR 1984 Del 49 (cause of action arose from where promisee demanded the payment). 2 Riley v. William Holland & Sons Ltd., [1911] I KB 1029 at 1031 (CA). 3 Sheikh Mehtab v. Dharamrao Bhujangrao, (1945) Nag 252, AIR 1944 Nag 330. 4 Allahabad Bank Ltd. v. Gulli Lal, AIR 1940 All 243. 5 M Ramalinga Iyer v. TKjayalakshmi, AIR 1941 Mad 695. 6 Vinaitheethal Achi v. Chidambaram Chettiar, AIR 1972 Mad 238 at 240; following NS KR Karuppan Chettiar v. ARVRS Somasundaram Chettiar, AIR 1961 Mad 122. 7 State of Punjab v. AK Raha (Engineers) Ltd., AIR 1964 Cal 418. 8 Mahaluxmi Bank Ltd. v. Chotanagpur Industrial & Commercial Assn, AIR 1955 Cal 413 at 415. 9 Madan Lal v. Chawla Bank Ltd., AIR 1959 All 612; Firm Hiralal Girdhari Lal v. Bail Nath Hardial Khatri, AIR 1960 Punj 450(FB) . 10 Madan Lal v. Chawla Bank Ltd., AIR 1959 All 612; Rameshwar Lal Ram Karan v. Gulab Chand Puranmal, AIR 1960 Raj 243. 11 Firm of Rai Bahadur Bansilal Abirchand v. Ghulam Mahbub Khan, AIR 1925 PC 290 at 292. 12 UNIDROIT Principles, Art. 6.1.6 (2).
Place of Delivery of Goods Where by an agreement for the sale of goods, it was stipulated that the goods were 'to be delivered at any place in Bengal in March and April 1891,' and it was added, 'the place of delivery to be mentioned hereafter,' the Privy Council held that the buyer had the right to fix the place, subject only to the express contract that it must be in Bengal and to the implied one that it must be reasonable. The use of the words 'place of delivery to be mentioned hereafter' did not take away that right, nor did they leave the question of the place of delivery to be settled by a subsequent agreement. If the latter had been meant, the expression used would have been 'agreed on' instead of 'mentioned'. It was also held that such a contract did not fall within s. 94 of the Act (now s. 36(1),Sale of Goods Act, 1930), but rather resembled what was contemplated in the present section.13 Goods ordered by VPP are to be delivered at the place where the goods are to be received.14 An intention can be inferred that payment is to be made at the buyer's place where the seller has taken the goods to the buyer without any order for the goods,15 or in a bilticut16 transaction, where delivery of railway receipt to the buyer is necessary after endorsement.17 13 Grenon v. Lachmi Narain Augurwala, (1896) 23 IA 119, (1896) 24 Cal 8. 14 Muhammad Esuff Rowther v. M Hateem & Co., AIR 1934 Mad 581.
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15 SM Kadirsa Rawther v. K Shanmugha Mudaliar, AIR 1960 Ker 188. 16 Goods under a railway receipt are consigned by the seller to self and right of disposal reserved till the delivery of the railway receipt is taken by the buyer on making payment. 17 Firm Shah Chandanmal Fatehraj v. Hazarilal, AIR 1962 Raj 122.
Negotiable Instruments Section 49 does not apply to matters governed by the Negotiable Instruments Act, 1882,18 nor does the normal rule of 'debtor must seek the creditor' apply. Jurisdiction lies in the court of the place, where the maker executed the note or now resides in the case of promissory not and in the case of a bill of exchange, the place where the drawee resides. The court, where the promisee resides, has no jurisdiction.19 18 Jivatlal Purtapshi v. Lalbhai Fulchand Shah, (1942) Bom 620, AIR 1942 Bom 251; JN Sahni v. State of Madhya Bharat, AIR 1954 MB 184, (FB); Jagadish Chandra Sikdar v. Santimoyee Choudhuri, AIR 1961 Cal 321. 19 Raman Chettiyar v. Gopalachari, (1908) ILR 31 Mad 223, (FB); Dalsukh Nathmal Firm v. Motilal Balchand Parmar, (1940) Nag 502, AIR 1938 Nag 262; Gopikisan Sheonarain v. Jethmal Govardhandas, AIR 1935 Nag 144, 155 IC 958; Jivatlal Purtapshi v. Lalbhai Fulchand Shah, (1942) Bom 620, AIR 1942 Bom 251; Piyara Singh v. Bhagwan Das, AIR 1951 Punj 33; Sailum Eshwarayya v. Thakur Devi Singh, AIR 1953 Hyd 289, FB; JN Sahni v. State of Madhya Bharat, AIR 1954 MB 184, (FB); WP Horsburgh v. Chandroji Sambajirao, AIR 1957 MB 90; Jagadish Chandra Sikdar v. Santimoyee Choudhuri, AIR 1961 Cal 321; but see Srilal Singhania v. Anant Lal Mondal, (1940) 1 Cal 323, 191 IC 52, AIR 1940 Cal 443 (debtor must follow the creditor) and LN Gupta v. Tara Mani, AIR 1984 Del 49 at 53 (debtor to follow creditor, where promissory note payable on demand).
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The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which must be performed S. 50. Performance in manner or at time prescribed or sanctioned by promisee.-The performance of any promise may be made in any manner, or at any time which the promise prescribes or sanctions. Illustrations (a)
(b)
B owes A 2,000 rupees. A desires B to pay the amount to A's account with C, a banker. B, who also banks with C, orders the amount to be transferred from his account to A's credit, and this is done by C. Afterwards, and before A knows of the transfer, C fails. There has been a good payment by B. A and B are mutually indebted. A and B settle an account by setting off one item against another, and B pays A the balance found to be due from him upon such settlement. This
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(c) (d)
amounts to a payment by A and B, respectively, of the sums which they owed to each other. A owes B 2,000 rupees. B accepts some of A's goods in reduction of the debt. The delivery of the goods operates as a part payment. A desires B, who owes him Rs. 100, to send him a note for Rs. 100 by post. The debt is discharged as soon as B puts into the post a letter containing the note duly addressed to A.
Introduction The promisee may prescribe or sanction the manner or time for performance by the promisor, and the promisor may perform in that manner and at that time. This section assumes that a completed contract exists, therefore the facts of illustration (d) must not be confused with those which have given rise to questions in cases of contracts by correspondence (ss. 4 and 5 above).
Provision in Contract A promise has to be performed at the place and in the manner agreed upon.20'The party to a contract must perform exactly what he undertook to do.21If the contract states that a particular act for furtherance of the contract is to be done in a particular manner, it should be done in that manner.22 The agreed mode of performance cannot be changed or substituted,23 unless waived or varied by agreement, even though the substituted performance might appear better than or equivalent to the agreed performance.24 The manner of performance may also be inferred from the nature of the contract and the circumstances of the case, also from the previous conduct of the parties.25 Performance done in this manner discharges the promisee.26 Obligation to pay dividend arises at the registered office of the company.27 If money is due from one person to another, it can be discharged by payment in cash, unless another mode of payment is agreed upon.28 Whether a payment by cheque by debtor is equivalent to payment, depends on facts of each case.29 A cheque issued by one customer of a bank in favour of another customer, with instructions by the payee of the cheque to credit the proceeds to his (payee's) account, is a good payment.30 If the payee presents the cheque beyond reasonable time, the drawer stands discharged.31 Where the debtor, by express or implied contract, is authorised to send the payment by cheque to the creditor, the post office is the agent of the creditor to receive the cheque and the creditor receives the payment as soon as the cheque is posted to him.32 When a retailer agrees that a credit card holder may make payment for a purchase by having the price charged to the company on the credit card, he accepts payments by this mode as an unconditional payment of price under the contract of sale between himself and the creditor.33 If the 'performance is to be in a customary manner,' the manner is judged as at the time when performance is due.34 Payment to an agent, who, to the debtor's knowledge, had no authority to receive the payment, does not discharge the debtor.35 20 Hanuman Prashad Gupta v. Hiralal, AIR 1971 SC 206, [1970] 3 SCR 788. 21 Chitty on Contracts, 28th edn., p. 1097, para 22-001. 22 Bishambhar Nath Agarwal v. Kishan Chand, AIR 1990 All 65 at 71. 23 Firm Bachhraj Amolakchand v. Firm Nand Lal Sitaram, AIR 1966 MP 145. 24 Forman & Co. Proprietory Ltd. v. The Liddesdale, [1900] AC 190; Arcos Ltd. v. EA Ronaasen & Son, [1933] AC 470, [1933] All ER Rep 646; Bremer Handeslgesellschaft mbH v. Vanden Avenne-Izegem PVRA, [1978] 2 Lloyd's Rep 109; Re an Arbitration between L Sutro & Co. and Heilbut Symons & Co., [1 9171 2 KB 348 (contract to carry goods by sea, not performed, if carried partly by sea and partly by rail). 25 Krishnan Neelakandhan v. Kerala Gilt Edged Security Life Insurance Co., AIR 1952 Tr & Coch 181 (sending premium by money order).
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26 Travancore National bank Subsidiary Co. Ltd. v. MS Venkataraman, AIR 1942 Mad 337. 27 Hanuman Prashad Gupta v. Hiralal, AIR 1971 SC 206 : [1970] 3 SCR 788 (agreed mode being posting the cheque or warrant, place of performance is where it is posted). 28 Haji Sheikh Hasanoo v. S. Natesa Mudaliar & Co., AIR 1959 Bom 267. 29 Navin Chandra v. Yogendra Nath Bhargava, AIR 1967 All 293. 30 Mohanlal Malpani v. Loan Company of Assam, AIR 1960 Assam 191. 31 Ramlal Onkarmal Firm v. Mohanlal Jogani Rice & Atta Mills, AIR 1965 SC 1679 at 1681-82; Mohanlal Malpani v. Loan Company of Assam, AIR 1960 Assam 191. 32 Indore Malwa United Mills Ltd. v. Commr of Income Tax, AIR 1966 SC 1466. 33 Re Charge Card Service Ltd.,[1989] Ch 497, [19881 3 All ER 702, [1988] 3 WLR 764. 34 Reardon Smith Line Ltd. v. Black Sea & Baltic General Insurance Co. Ltd. [1939] AC 562; Tsakiroglou & Co. Ltd. v. Noblee & Thorl GmbH, [1960] 2 QB 318; affirmed in [1962] AC 93 at 113-14, [1961] 2 All ER 179, [1961] 2 WLR 633. 35 Mackenzie v. Shib Chunder Seal, (1874) 12 BLR 360.
Payment Prescribed by Promisee If the promisor performs the promise in the manner or at the time prescribed by the promisee, he is thereby discharged, irrespective of the actual terms of the agreement. This section appears to give an option to the promisor to perform in the manner or at the time prescribed or sanctioned by the promisee after the contract. Under this section, the payment of a debt may be made in cash,36 or in such other manner as the creditor may prescribe. Therefore, if money out of a compulsory deposit under the provident fund scheme is, at the instance of the depositor, to be paid in sterling and for that purpose, it has to be, and is paid to, the Reserve Bank, it is a good discharge and good payment to the extent of money paid.37 A plaintiff asking the defendant to sell his rice and 'send' the proceeds to the plaintiff implies a request to send money by post.38 The debt was discharged as soon as B puts into the post, a letter containing the note duly addressed to A,39 but not where there is no specific or implied request to send cheques by post.40 Where the request is to send not legal currency, but a cheque or other negotiable instrument, this does not imply any variation of the rule that payment by a negotiable instrument is conditional on its being honoured on presentation within due time.41 To support a plea of payment, passing of cash need not to be shown. Payment made by means of transfer entries is sufficient.42 A bank at Madras transferred a customer's amount standing in his name at its London office, to the branch at Karachi, upon the customer's instructions. It was held that the agency came to an end on such transfer, and the bank was not liable to repatriate the amount from Karachi to Madras.43 But where payment under a bank guarantee furnished pursuant to the interim orders of the court as a condition for restoring electrical supply disconnected for non-payment of electricity bills, it could not be said that the payment towards the electricity bills was made in the manner sanctioned or prescribed by the electricity board.44 Performance of Reciprocal Promises 36 But see The Income Tax Act, 1961, s. 40(A). 37 Union of India v. Kashi Prosad Agartvalla, AIR 1962 Cal 169. 38 Union of India v. Lallan Prasad Singh, AIR 1963 Pat 216; Commr of Income Tax v. Ogale Glass Works Ltd., [1955] 1 SCR 185, AIR 1954 SC 429.
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39 Commr of Income Tax v. Ogale Glass Works Ltd., AIR 1954 SC 429 at 434-6 (post office becomes the agent of the addressee). 40 Patny & Co. v. Comm. of Income Tax, AIR 1956 Ori 147; but see Prima Realty v. Union of India, (1996) 11 SCC 65 (cheque of large amount payable by government sent by post was held to be in the ordinary course of business usage). 41 Kedarmal Bhuramal v. Surajmal Govindram, (1907) 9 Bom LR 903 at 911; Hairoon Bibi v. United India Life Insurance Co. Ltd., AIR 1947 Mad 122; Commr of Income Tax v. Kamestvar Singh of Darbhanga, (1933) 35 Bom LR 731, AIR 1933 PC 108; Keshav Mills Co. v. Commr of Income Tax, (1950) Bom 750, 52 Bom LR 72, AIR 1950 Bom 166. 42 Narayandas Shreeram Somani v. Sangli Bank Ltd., AIR 1966 SC 170, [1965] 3 SCR 777 at 353-55. 43 N Mohamed Hussain Sahib v. Chartered Bank, AIR 1965 Mad 266. 44 Modi Industries Limited (Steels) v. Executive Engineer ED Division Modinagar, AIR 1991 All 351.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER IV Of the Performance of Contracts/Contracts which must be performed/S. 51.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which must be performed S. 51. Promisor not bound to perform, unless reciprocal promisee ready and willing to perform.-When a contract consists of reciprocal promises to be simultaneously performed, no promisor need perform his promise unless the promisee is ready and willing to perform his reciprocal promise. Illustrations (a)
A and B contract that A shall deliver goods to B to be paid for by B on delivery.
A need not deliver the goods, unless B is ready and willing to pay for the goods on delivery. B need not pay for the goods unless A is ready and willing to deliver them on payment. (b)
A and B contract that A shall deliver goods to B at the price to be paid by instalments, the first instalment to be paid on delivery.
A need not deliver, unless B is ready and willing to pay the first instalment on delivery. B need not pay the first instalment, unless A is ready and willing to deliver the goods on payment of the first instalment.
Introduction The section deals with concurrent reciprocal promises where the promise of one party is to be performed simultaneously with the promise of the other party.
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Concurrent Promises and Independent Promises The question whether the promises are dependent or independent, is a question of construction to be determined by the intention of the parties collected from the agreement as a whole and the circumstances of the case. The dependence or independence of covenants was to be collected from the evident sense and meaning of the parties;1 and must depend on the good sense of the case, and on the order in which the several things are to be done.2 The terms of a promise may express or imply conditions of many kinds, and the other party's performance of the reciprocal promise, or at least readiness and willingness to perform it, may be a condition. It is obviously immaterial whether it is called a condition or not, if in substance it has that effect. To say 'I will pay when you deliver the goods' is more courteous than to say 'If you do not deliver the goods in a reasonable time you will not be paid', but 'when' implies 'if' and the result is the same. If it appears on the whole from the terms or the nature of the contract that performance on both sides was to be simultaneous, the law will attach such a condition to each promise, with the operation laid down in the present section. Thus, a covenant by a husband to pay an annuity to his wife during his lifetime 'whilst she shall comply with the covenants and conditions on her part' was held to be discharged and had the effect of absolving the husband from liability to pay on the breach of covenant on his part not to molest, as the two covenants were interdependent.3 Unless otherwise agreed, delivery of goods and payment of price are concurrent conditions.4A contract for the sale of shares in a company to be transferred to the name of the purchaser upon payment of the price by him, on or before a certain day, falls within this us section. Th, transfer of the shares and payment of the purchase money are concurrent act s.5 Where the contract between the parties was that the vendee would reconvey the property to the vendor if he paid the purchase price back to the vendee by a specified date, it was held that the contract fell within s. 51 rather than s. 55, as it was a contract of reciprocal promises.6 However, an arbitration award that B would pay to D a sum of Rs. 2,000/- and D to deliver 200 ordinary shares held by him, and in default of payment within fortnight, B to pay interest from the expiry of the fortnight, was interpreted to mean that payment by B was not dependent upon tender of shares by D.7 Where in an agreement to sell immovable property, time for payment of price was fixed and made of essence, but was not linked to the execution of the sale deed, and execution of the deed shall be at convenience of purchaser and dependent on satisfaction of title, it was held that payment was an unconditional obligation, and independent of satisfaction of title.8 1 Kingston v. Preston, (1773) 2 Doug 689 per Lord Mansfield; cited in Joens v. Barkley Doug 659, Finch Sel Ca 735, at 736. 2 Morton v. Lamb, (1797) 7 TR 125, 4 RR 395, Finch Sel Ca 741, per Lord Kenyon. 3 Newcombe v. Newcombe, (1934) 34 SR (NSW) 446; Huntoon Co. v. Kolynos (Inc), [1930] 1 Ch 528, at 548-49. 4 GK Chengravelu Chetti & Sons v. Akarapu Venkanna & Sons, [1924] 86 IC 299, (1925) 49 Mad LJ 300, AIR 1925 Mad 971; Nanik Lal Karmarkar v. Shankar Lal Shah, AIR 1962 Cal 103; The Sale of Goods Act, 1930, s. 32. 5 Imperial Banking and Trading Co. v. Atmaram Madhayji, (1865) 2 BHC 246; Imperial Banking and Trading Co. v. Pranjivandas Harijivandas, (1865) 2 BHC 258. 6 Benode Behari Das Gupta v. Benoy Bhusan Choudhury, AIR 1973 Gau 66; Ramesh Chandra Chandiok v. Chuni Lal Sabharwal, AIR 1971 SC 1238; Nanik Lal Karmarkar v. Shankar Lal Shah, AIR 1962 Cal 103 relied on. 7 Brahma Swaroop Gupta v. Diwan Chand Minotra, AIR 1963 Cal 583; Kaikhushroo Pirojsha Ghiaral V. CP and Syndicate Ltd. Nagpur,(1949) FCR 501, (1950) 52 Bom LR 189, AIR 1950 FC 8. 8 Saradamani Kandappan v. S Rajalakshmi, AIR 2011 SC 3234, (2011) 12 SCC 18; see also Sushil Choudhary v. Bal Krishna Agarwal, 203 (2013) DLT 603.
Readiness and Willingness
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Willingness is a mental process to do an act ; readiness implies close proximity of such willingness and its ultimate physical manifestation. Readiness is something to do with translating the will to do an act into act ion, and is preceded by necessary preparation of being in a position to be ready. Willingness refers to the wanting by the plaintiff to do an act, while readiness refers to his capacity, viz., financial, to do it. Being ready and willing does not mean that the performance should be actually tendered. Nor is it necessary that in the case of performance by payment of money, the money should be in possession continuously. The question whether a party to a contract was ready and willing to perform his obligation is one of fact.9 In an act ion for damages it was sufficient that the plaintiff was ready up till the time the defendant refused to go on with the contract, and he was ready and willing to do all that was required to be done by him up to that time. However, in a suit for specific performance, the plaintiff is required to prove readiness to perform his part of the contract from the date of the contract upto the date of hearing.10 Further, the readiness must be for the performance of the contract as it really was, and not in the way the plaintiff thought it to be.11 It is not necessary to actually tender the money, or the goods, or documents of title of shares, nor is it necessary that the plaintiff be the owner of the goods agreed to be sold. The capacity to tender is sufficient.12 It has been held that a purchaser in an agreement to purchase land and a factory, need not have produced the money to vouch a concluded scheme for financing the transaction.13 In a suit for damages for non-delivery, the plaintiff has to show that he is ready and willing, and his capacity to pay, or a reasonable preparation for securing the purchase price and his demanding the goods on the due date.14 A mere demand for delivery of goods without payment or tender is not evidence of the buyer who is ready and willing to pay on delivery.15 In the case of a contract for the sale of shares of a company it is not necessary, in order to prove that the vendor was ready and willing to perform his part of the agreement, that he should be the beneficial owner of the shares, or that he should tender, to the purchaser, the final documents of title of the shares. It is enough that he should be able and willing to constitute the purchaser, the legal owner of the shares once they are sold. Thus, where the vendor tendered to the purchaser share allotment and receipt papers, and together with each, a transfer paper and an application paper, both signed in blank by the original allottee, it was held that the vendor was ready and willing to perform his promise.16 However, where neither the transfer nor the form of application for transfer was offered to the purchaser, nor had the vendor any such documents signed by the original allottee in his possession, it was held that the vendor could not be said to be ready and willing to perform his promise. The allottee, in such a case, had it in his power to decline to complete the contract until he had executed the transfer and the application paper.17 In the absence of evidence to the contrary, it is sufficient if the seller of government securities has informed the purchaser that he is in a position to transfer securities by the due date.18 It is not necessary, to prove readiness and willingness, that the vendor should have made an act ual tender of the transfer deed to the purchaser of property.19 Thus, actual tender of delivery of goods was also held not necessary in the case of cross-contracts for purchase and repurchase of goods entailing exactly similar quantities of goods on either side, and the person could claim the difference without deliveries.20A vendor may be ready and willing to deliver without having the goods in his act ual custody or possession; it is enough, if he has such control of them that he can cause them to be delivered.21 Where goods are sold for 'cash on delivery,' and the vendor delivers a portion of the goods, and the purchaser offers to pay the price thereof if certain cross-claims set up by him are adjusted, it cannot be said that he is not ready and willing to perform his promise, so as to entitle the vendor to refuse delivery of the remaining goods.22 It is also not necessary that the vendor should have the goods in his possession continuously from the date of the contract down to the time of performance. It is sufficient if a party bound to do an act upon request is ready to do it, and wilfully perform his part of the contract when it is required, although he might not have happened to be ready, had he been called upon at some anterior period.23 Where the vendor of goods repudiates the contract on being called upon for delivery, it is enough for the
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purchaser to prove that he was ready and willing to carry out his part of the bargain, and had made preparations with the object of having the money ready in hand to pay for the goods on delivery. This section does not require him to show that he made an act ual tender of the money.24 Where the purchaser, before the day fixed for delivery gives notice to the vendor that he will not accept the goods, or where he has absconded or is so financially embarrassed that he could not have paid for them if they had been delivered, the vendor is exonerated from giving proof of his readiness and willingness to deliver the shares.25 Although payment of consideration must be simultaneous with the execution of a deed of conveyance in absence of a special contract, actual tender of money is not necessary as a condition precedent by a party seeking specific performance.26 A plaintiff seeking the relief of specific performance is, however, required to 'aver and prove' that he is, and has been, always ready and willing to perform his part of the contract,27 despite repudiation by the promisor. 9 Bank of India Ltd. v. Jamselji AH Chinoy, (1950) 77 IA 76, ILR (1950) Bom 606, AIR 1950 PC 90. 10 Gomathinayagam Pillai v. Palaniswami Nadar, [1967] 1 SCR 227, AIR 1967 SC 868; reversing N Palanichami Nadar v. Gomathinayagam Pillai, AIR 1966 Mad 46; Ardeshir H Mama v. Flora Sassoon 55 IA 360, AIR 1928 PC 208, 216; the Specific Relief Act, 1963, s. 16(1)(c) and commentary. 11 Narinjan v. Muhommad Yunus, AIR 1932 Lah 265. 12 Rattan Lal-Sultan Singh v. Bishen Sahai Bhagwan Das, AIR 1928 Lah 834; Firm Kidar Nath-Behari Lal v. Firm Shimbhu Nath Nandu Mall, (1926) 8 Lah 198, 99 IC 812, AIR 1927 Lah 176; Begraj v. Alisher, AIR 1923 Sind 50. 13 Nathulal v. Phoolchand, [1970] 2 SCR 854, AIR 1970 SC 546, (1969) 3 SCC 120. 14 Dina Nath Dutt v. Mahavir Gupta, AIR 1958 Punj 289; Firm Ganesh Das Ishar Das v. Ram Nath, (1927) 9 Lah 148, at 163-65, 111 IC 498, AIR 1928 Lah 20. 15 And the want is not supplied by the fact that the seller was not ready and willing to deliver: GK Chengravelu Chetti & Sons v. Akarapu Venkanna & Sons, (1924) 86 IC 299, (1925) 49 Mad LJ 300, AIR 1925 Mad 971. 16 Imperial Banking and Trading Co. v. Atmaram Madhavji, (1865) 2 BHC 246; Parbhudas Pranjivandas v. Rarnlal Bhagirath, (1866) 3 BHC 69, where 'share receipts' with applications for transfer were tendered to the purchaser. 17 Jivraj Megji v. Poulton, (1865) 2 BHC 253. 18 Juggernauth Sew Bux v. Ram Dyal, (1883) ILR 9 Cal 791, at 797. 19 Imperial Banking and Trading Co. v. Pranjivandas Harijivandas, (1865) 2 BHC 258. 20 Karuppaswarni Moopanar v. Chottabhai Janerbhai & Co., AIR 1945 Mad 59. 21 Firm Kanwar Bhan-Sukha Nand v. Firm Ganpat Rai-Ram Jiwan, (1926) 94 IC 304, AIR 1926 Lah 318. 22 Sooltan Chund v. Schiller, (1878) 4 Cal 252, (1879-80) ILR 4-5 Cal 161. 23 Jivraj Megji v. Poulton, (1865) 2 BHC 253, 256; Maganbhai Hemchand v. Manchabhai Kallianchand, (1866) 3 BHC 79, 86. Bank of India Ltd. v. Jamsetji AH Chinoy, (1950) 77 IA 76, (1950) Bom 606, AIR 1950 PC 90. 24 Shriram Rupram v. Madangopal Gowardhan, (1903) 30 Cal 865; Ganesh Das-Ishar Das v. Ram Nath, (1927) 9 Lah 148, at 163-65, 111 IC 498; Firm Kidar Nath-Behari Lal v. Firm Shimbhu Nath Nandu Mall, (1926) 8 Lah 198, 99 IC 812, AIR 1927 Lah 176; Raminder Singh v. Sham Lal, AIR 1984 P & H 145. 25 Dayabhai Dipchand v. Maniklal Vrijbhukan, (1871) 8 BHCAC 123; Emil Adolph Zippel v. KD Kapur & Co., AIR 1932 Sind 9, 139 IC 114 (purchaser absconding); Jagannath Sagarmal v. JJ Aaron & Co., ILR (1940) Rang 593, 191 IC 766, AIR 1940 Rang 284 (purchaser financially embarassed); Pulgaon Cotton Mills Ltd v. Gulabai, AIR 1953 Nag 345 (buyer filed application for insolvency and interim receiver, did not act within reasonable time). 26 Nanik Lal Karmarkar v. Shankar Lal Shah, AIR 1962 Cal 103 (unless special contract). 27 See commentary below, the Specific Relief Act, 1963, s. 16(c).
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Right of the Parties Where promises are reciprocal, each party has the option to perform his part of the contract, but cannot insist on the other party performing his part without himself performing what he has agreed to do,28 or is ready and willing to do it. However, a buyer cannot be obliged to be willing indefinitely to accept delivery without the seller performing his part.29 A tenant agreed to pay higher rent after reconstruction of the tenanted premises and provision for a toilet. He filed a suit for mandatory injunction for construction of the toilet for declaration that he was liable to pay rent at old rate. It was held that the tenant was liable to pay higher rent only after the toilet block was constructed and handed over to the tenant.30 Where there are reciprocal promises for simultaneous performance, a promisor need not perform his part of the contract unless the promisee is ready and willing to perform his. Where the defendant agreed to keep in cold storage the plaintiff's apple boxes, and it was agreed that upon payment of hire charges the plaintiff could lift the goods, and the plaintiff failed to make payment, it was held that the defendant was justified in refusing to deliver the boxes to the plaintiff. It was also held that the plaintiff had committed a breach of contract and, hence was not entitled to damages.31 28 Vairavan Chettiar v. Kannappa Mudaliar, AIR 1925 Mad 1029, 1030, 86 IC 436. 29 Colles Cranes of India Ltd. v. Speedeo Spares Corporation, AIR 1970 Cal 321. 30 Mohammed v. Pushpalatha, AIR 2009 SC 479, (2008) 8 SCC 335 31 Himachal Fruit-Growers Co-operative Marketing and Processing Society Ltd. v. Upper India Food Preservers and Processors Pvt. Ltd., AIR 1984 HP 18.
Waiver of Performance The section does not give any special remedy to a party who has chosen to perform his part without insisting on the reciprocal performance, which was intended to be simultaneous with his own--for example, where a seller of goods 'for cash on delivery' chooses to deliver the goods without receiving the price.32 32 Sooltan Chund v. Schiller, (1878) 4 Cal 252, (1879-80) ILR 4 Cal 161 (the case seems to turn on s. 39).
Burden of Proof In a suit for damages for breach of one of the two concurrent obligations, the burden of proving readiness and willingness to carry out his promise is on the plaintiff.33 The plaintiff is required to show, for example, that he had the entire money to pay for goods.34 It is presumed that in a sale of goods, the goods are to be paid for on delivery, and the plaintiff must plead and prove any special contract to the contrary.35 33 Abdullah Bey Chedid v. Tenenbaum, AIR 1934 PC 91, 92; Tan Ah Boon v. State ofjohore, AIR 1936 PC 236, 238; Mahomed Ismail Khan v. Hasan Ali Khan, AIR 1923 All 220; GK Chengravelu Chetty & Sons v. Akarapu Venkanna & Sons, (1924) 86 IC 299, (1925) 49 Mad LJ 300, AIR 1925 Mad 971; Dina Nath Dutt v. Mahavir Gupta, AIR 1958 Punj 289, 294. 34 Alapati Ramamurthi Gelli Krishnamurthi & Co. v. Maddi Sitharamayya, AIR 1958 AP 427. 35 GB Verman & Co. v. Firm Gopal Das Ram Lal, AIR 1923 Lah 363, 365.
Pleadings
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The Code of Civil Procedure, 1908 requires36 that any condition precedent, the performance or occurrence of which is intended to be contested, shall be distinctly specified in his pleading by the plaintiff or defendant, as the case may be; and, subject thereto, an averment of the performance or occurrence of all conditions precedent, necessary for the case of the plaintiff or defendant, shall be implied in the pleading.37 36 The Code of Civil Procedure, 1908, O. 6, r. 6. 37 Also see, the Specific Relief Act, 1963, s. 16 about pleadings and proof of readiness and willingness in a suit for specific performance.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER IV Of the Performance of Contracts/Contracts which must be performed/S. 52.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which must be performed S. 52. Order of performance of reciprocal promises.-Where the order in which reciprocal promises are to be performed is expressly fixed by the contract, they shall be performed in that order; and where the order is not expressly fixed by the contract, they shall be performed in that order which the nature of the transaction requires. Illustrations (a) (b)
A and B contract that A shall build a house for B at a fixed price. A's promise to built the house must be performed before B's promise to pay for it. A and B contract that A shall make over his stock-in-trade to B at a fixed price, and B promise to give security for the payment of the money. A's promise need not be performed until the security is given, for the nature of the transaction requires that A should have security before he delivers up his stock.
Introduction The section deals with dependent promises where one promise is dependent upon, and must be performed, after the performance of the other. This order may be fixed by the nature of the promises, as the performance of one cannot be performed without the other. The parties may also agree to perform the promises in a certain order, even though they are otherwise capable of simultaneous performance. The order may be expressly fixed in the contract, or else will be determined according to the nature of the transaction. The promise to be performed first may also be implied.38 38 Bishambhar Nath Agrawal v. Kishan Chand, AIR 1998 All 195.
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Order of Performance The order of performance may be fixed by the nature of the transaction. In a case, under an agreement, the appellant was to pay to the respondent GBP 5000, on payment of certain costs, etc, by the respondent. It was held that the payment of the costs was a condition precedent to the respondent claiming the amount from the appellant. These were not reciprocal promises capable of simultaneous performance.39 In another case, a consent decree directed A to pay certain sum in instalments to R, upon which R was to assign debentures, the oil company, and agency of the oil company to A. On default by A, the whole amount was to become payable. It was held that there was no contract for simultaneous performance.40 Furthermore, in a contract for grant of lease, the plaintiff was liable to pay consideration in advance before the lease was granted, which the plaintiff had not paid. It was held that since the order of performance was fixed, and the plaintiff had not performed his part, he could not be heard to say that the lessor had committed breach.41 It has been held, for example, that work must be completed before claiming payment,42 the nature of the dispute must be specified and one's own arbitrator nominated before submitting dispute to arbitration,43 the line-out and the decision on the cutting edge for construction of a bridge must be given first by the employer-government before the contractor can proceed with the work of construction of the bridge.44 Where a consumer of electricity agreed with the electricity supplier &uot;to guarantee a minimum monthly consumption equivalent to 40% load factor of the contract demand&uot;, the customer's promise to pay the the minimum guaranteed amount arose only if the Board supplied electricity to that extent.45 Where the promise is implied, one cannot expect to find its mention in the order of performance of terms in the agreement. Thus, where permission to sell land was required before executing the transfer, the vendor has to apply for and obtain it before the transfer, even though there is no express stipulation to that effect in the agreement.46 Whether one promise is dependent on the other must be determined on the true construction of the contract. Thus, an agreement to sell immovable property stipulated that a road of 5 metre width shall be constructed as approach to the land, which had another approach. It was held that construction of the road was not a condition precedent for completing the sale of land.47 39 The Code of Civil Procedure, 1908, O. 6, r. 6. 40 Kaikhushroo Pirojsha Ghiara v. C P and Syndicate Ltd. Nagpur, (1949) FCR 501, (1950) 52 Bom LR 189, AIR 1950 FC 8. 41 Aanat Bharthi v. Sarup Singh, (1928) 26 All LJ 492, 115 IC 793, AIR 1928 All 360. 42 JG Hashman v. Lucknow Improvement Trust, AIR 1927 Oudh 616 (unless there is an agreement to the contrary). 43 Shaw Wallace & Co. v. Gurbuxsing Beshensing, AIR 1929 Sind 58. 44 State of Maharashtra v. SM Chauhan, (1985) ILR Bom 881. 45 Raymond Ltd v. M P Electricity Board, AIR 2001 SC 238, (2001) 1 SCC 534; Harihar Cold Storage, Varanasi v. Purvanchal Vidyut Vitaran Nigam Ltd, AIR 2012 All 71. 46 Bishambar Nath Agrawal v. Kishan Chand, AIR 1998 All 195; following Nathulal v. Phoolchand, [1970] 2 SCR 854, AIR 1970 SC 546, (1969) 3 SCC 120. 47 Punita Bharti v. Kirpal Singh, AIR 2010 HP 29
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated
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Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER IV Of the Performance of Contracts/Contracts which must be performed/S. 53.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which must be performed S. 53. Liability of party preventing event on which the contract is to take effect.-When a contract contains reciprocal promises, and one party to the contract prevents the other from performing his promise, the contract becomes voidable at the option of the party so prevented; and he is entitled to compensation from the other party for any loss which he may sustain in consequence of the non-performance of the contract. Illustration A and B contract that B shall execute some work for A for a thousand rupees. B is ready and willing to execute the work accordingly, but A prevents him from doing so. The contract is voidable at the option of B; and, if he elects to rescind it, he is entitled to recover from A compensation for any loss which he has incurred by its non-performance.
Introduction This is a rule of all civilized law.48No man can complain of another's failure to do something which he has himself made impossible. The principle is not confined to act s of direct or forcible prevention, which are neither frequent nor probable, but extends to default or neglect in doing or proving anything which a party ought under the contract to do or provide, and without which the other party cannot perform his part. Section 53 is identical to the English law, that prevention by one party is constructively tantamount to fulfilment by the other. Such other may seek specific performance or compensation by rescinding, annulling or abandoning the entire contract.49 48 Mackay v. Dick, (1881) 6 App Cas 251(HL) . 49 Makineni Nagayya v. Makineni Bapamma, AIR 1958 AP 504; Roberts v. Bury Improvement Commissioners, (1870) LR 5 CPC 310; Alghussein Establishment v. Etan College, [1988] 1 WLR 587, [1991] 1 All ER 267; Cheall v. Association of Professional, Executive, Clerical and Computer Staff, [1988] 2 AC 180, [1983] I All ER 1130(HL) ; Thompson v. ASDA-MFI Group plc, [1988] Ch 241, [1988] 2 All ER 722; see also Maharashtra State Electricity Distribution Co. Ltd. v. Datar Switchgear Ltd., Appeal No. 166 of 2009 in Arbitration Petition No. 374 of 2004, decided on 19 Oct 2013 (Bom).
Prevention by Creating Impossibility No party to the contract shall prevent the other from performing the contract, and a party so preventing the other is guilty of a breach.50 A party will be considered to have prevented performance if it puts an end to the circumstances on the continuance of which the contract operates,51 or where the contract is made subject to a condition precedent, preventing the fulfillment of the condition.52 The marginal note (heading) of the section indicates that the section is applicable where one party prevents the other from performing,
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by preventing the event on which the contract is to take effect. In a case a compromise decree provided for B's promise to take A's son in adoption and A's agreeing to leave B in possession of property. By marrying off his son, A made B's performance of the contract impossible to perform. B must, therefore, be held to have performed his promise.53 50 William Cory & Sons Ltd. v. City of London Corpn., [1951] 2 KB 476, [1951] 2 All ER 85(CA) . 51 Stirling v. Maitland, (1864) 5 B & s. 840, [1861-73] All ER Rep 358 (cited in Rhodes v. Forwood, (1876) 1 App Cas 256(HL), [1874-80] All ER Rep 476; Turner v. Goldsmith, [1891] 1 QB 544(CA), [1891-94] All ER Rep 384; Ogdens Ltd. v. Nelson, [1905] AC 109(HL), [1904-07] All ER Rep Ext 1658; Warren Co. v. Agdeshman, (1922) 38 TLR 588; French & Co. Ltd. v. Leeston Shipping Co. Ltd., [1922] 1 AC 451(HL), [1922] All ER Rep 314; Southern Foundries, (1926) Ltd. v. Shirlaw, [1940] AC 701, [1940] 2 All ER 445(HL) ; Shindler v. Northern Raincoat Ltd., [1960] 2 All ER 239, [1960] 1 WLR 1038. 52 Inchbald v. Western Neilgherry Coffee, Tea and Cinchona Plantation Co. Ltd., (1864) 17 CBNS 733, [1861-73] All ER Rep 436; Mackay v. Dick, (1881) 6 App Cas 251(HL) ; Hickman and Co. v. Roberts, [1913] AC 229(HL), [1911-13] All ER Rep 1485. 53 Makineni Nagayya v. Makineni Bapamma, AIR 1958 AP 504.
'Prevents' The prevention contemplated under this section must be wrongful, either a breach of contract express or implied, or a wrongful act independent of contract.54 Thus, in William Cory & Son Ltd. v. London Corporation, 55 the plaintiff contracted with the corporation on a long-term basis to remove refuse by the barge. The corporation as Port Health Authority subsequently passed a new byelaw, enforceable in over two years' time, requiring all refuse barges to have hatches completely covering the refuse. This increased the plaintiff's expenses greatly. The Court of Appeal held that the corporation had not committed any breach of contract, for even if a term not to pass such a byelaw could be implied in the contract it would be ultra vires for the corporation to fetter itself in the use of statutory powers vested in it for public purposes. Devlin J. has also pointed out that the law can enforce co-operation only to a limited degree, to the extent necessary to make the contract workable.56 54 Mona Oil Equipment & Supply Co. Ltd. v. Rhodesia Rlys Ltd., [1949] 2 All ER 1014 per Devlin J, at 1016; Metro Meat Ltd. v. Fares Rural Co. Pty Ltd., [1985] 2 Lloyd's Rep 13. 55 [1951] 2 KB 476, [1951] 2 All ER 85(CA) ; Haslemere Estates Ltd. v. Baker, [1982] 1 WLR 1109, [1982] 3 All ER 525. 56 Mona Oil Equipment & Supply Co. Ltd. v. Rhodesia Railways Ltd., [1949] 2 All ER 1014 at 1018.
Duty to Co-operate If a party to a contract, which is under a duty to co-operate, commits a breach of that duty, such that performance of the contract cannot be effected, the other party can claim to be discharged from such performance.57 However, s. 53 was held to be not applicable to a contract with the government, where the government did not agree to supply any machinery for the execution of the contract but had merely agreed to assist in the procurement of controlled articles necessary for the execution.58 A railway contractor had ordered a steam-excavating machine which was capable of digging a certain quantity of material in one working day. It was agreed that he would be bound to accept it only if it performed so on a fair trial, at the place where it was to be used. After a partial trial, the contractor alleged that the machine had failed, and refused to accept or pay for it. The manufacturer contended that the contractor had himself failed to provide the conditions for a fair trial. The House of Lords held that the buyer had, by his own fault, prevented the application of the test agreed upon, and was liable to pay for
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the machine, as if the test had been successfully carried out. As regards the original duty of the buyer, to secure the conditions for a fair trial, Lord Blackburn stated:
Where in a written contract it appears that both parties have agreed that something shall be done which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect. What is the part of each must depend on circumstances.59
57 Metro Meat Ltd. v. Fares Rural Co. Pty Ltd., [1985] 2 Lloyd's Rep 13; Bremer Vulkan Schiffbau und Maschinenfabrik v. South India Shipping Corpn. Ltd., [1981] AC 909, [1981] 1 All ER 289(HL) (both parties in breach of duty). 58 Dhulipudi Namayya v. Union of India, AIR 1958 AP 533. 59 Mackay v. Dick, (1881) 6 App Cas 251 at 263.
Right of the Promisee If the prevention, by default, goes only to one particular term or condition of the contract, the party so prevented from fulfilling that term or condition is entitled to treat it as fulfilled, and to insist on payment or any other reciprocal performance accordingly; or if there was an agreed penalty in the contract for such non-fulfilment, or an option to rescind the contract, the other party can take advantage of it; particularly so, if this is a case with stipulations as to the time of completion. If the party be prevented, by the refusal of the other contracting party, from completing the contract within the time specified, he is not liable in law, for the default.60 The party so prevented is entitled to compensation, from the party preventing the performance of the contract. The work of lining a canal was delayed, because the government did not stop the flow of water. The loss of profits awarded by the arbitrator to the contractor were upheld, despite a clause in the agreement, which excluded claims for delays.61 In Kleinert v. Abosso Gold Mining Co Ltd, 62P contracted with D to remove waste rock, of not more than fifty thousand tons, lying in a dump at D's mine within two years, D agreeing to supply a crusher. The crusher supplied by D was inadequate, because it crushed only three tons per hour, consequently, work had to be stopped. p. recovered damages for the expense to which he had been put, in preparing for the work, and for the loss of profit he would otherwise have made, by supplying crushed stone to a third party. If the act of preventing the performance of the contract is such that it amounts to a refusal to perform, or an inability to perform the promise of the party, preventing the promise in its entirety, the party so prevented can put an end to the contract.63 60 Roberts v. Bury Improvement Commissioners, (1870) LR 5 CPC 310 at 329; Holme v. Guppy, (1838) 3 M&W 387, 49 RR 647 per Parke B at p 649. 61 Government of Andhra Pradesh v. V Satyam Rao, AIR 1996 AP 288 (case refers to s. 55). 62 (1913) 58 Sol Jo 45, on appeal from the SC of the Gold Coast--the decision was based on common law principles as laid down in Mackay v. Dick supra . 63 Florrie Edridge v. Rustomji Danjibhoy Sethna, (1933) 60 IA 368, ILR 58 Bom 101, 36 Bom LR 127, 146 IC 739, AIR 1933 PC 233; see also s. 39.
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Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER IV Of the Performance of Contracts/Contracts which must be performed/S. 54.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which must be performed S. 54. Effect of default as to that promise which should be first performed, in contract consisting of reciprocal promises.-When a contract consists of reciprocal promises, such that one of them cannot be performed, or that its performance cannot be claimed till the other has been performed, and the promisor of the promise last mentioned fails to perform it, such promisor cannot claim the performance of the reciprocal promise, and must make compensation to the other party to the contract for any loss which such other party may sustain by the non-performance of the contract. Illustrations (a)
(b)
(c)
(d)
A hires B's ship to take in and convey, from Calcutta to the Mauritius, a cargo to be provided by A, B receiving a certain freight for its conveyance. A does not provide any cargo for the ship. A cannot claim the performance of B's promise, and must make compensation to B for the loss which B sustains by the non-performance of the contract. A contracts with B to execute certain builders' work for a fixed price, B supplying the scaffolding and timber necessary for the work. B refuses to furnish any scaffolding or timber, and the work cannot be executed. A need not execute the work, and B is bound to make compensation to A for any loss caused to him by the non-performance of the contract. A contracts with to deliver to him, at a specified price, certain merchandise on board a ship which cannot arrive for a month, and B engages to pay for the merchandise within a week from the date of the contract. B does not pay within a week. A's promise to deliver and need not be performed, and B must make compensation. A promises B to sell him one hundred bales of merchandise, to be delivered next day, and B promises A to pay for them within a month. A does not deliver according to his promise. B's promise to pay need not be performed, and A must make compensation.
Introduction If the promisor, who has to perform his promise, before the performance of the other's promise fails to perform it, he cannot claim performance of the other's promise, and is also liable for compensation for his non-performance.
Rights of the Promisee Where A does not perform his promise, which must be performed before the reciprocal promise of B, A cannot claim performance of B's promise. Moreover, B is entitled to claim compensation from A. The
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section deals with failure to perform at the time of performance. If the failure, in a contract involving reciprocal promises, is such that it amounts to a refusal to perform the contract in its entirety, B may also repudiate the contract, under s. 39, so far as future obligations, if any, are concerned. If the failure is not 'substantial, going to the root of the contract', B would have the right to compensation on account of the failure.64 64 Vishram Arjun v. Irukulla Shankariah, AIR 1957 AP 784 (condition not essential); Manokji Framji v. Firm of Maniklal Pritamdas, AIR 1924 Sind 105 (1); Adam Haji Peera Mohamed Ishack v. Sakavath Hussain Akbari, AIR 1923 Mad 103 (condition essential).
Contract Consists of Reciprocal Promises Section 54 applies when the promises are reciprocal and dependent. It does not apply to 'entire contracts', where the performance of one promise is completely independent of the performance of the other.65 In Simson v. Virayya, 66 the defendant agreed to sell 5,000 bags of gingelly seed to the plaintiffs, to be delivered within a specified time, two-thirds of the price being payable in advance. It was stipulated that the defendant should give notice to the plaintiffs, since installments of 1,000 bags had become ready for delivery, and the plaintiffs had to pay the balance of the proportionate price on each installment, when the same was ready for delivery. No delivery was made within the stipulated time, and after the expiration of that period, the defendant delivered 3,000 bags to the plaintiffs. The plaintiffs did not pay the proportionate price on those bags, though required to do so, by the defendant. The defendant, thereupon, rescinded the contract, and declined to deliver the remaining bags. In a suit for damages by the plaintiffs, on account of non-delivery, the court held that the contract was an 'entire' one, and the payment by the plaintiffs, not being a condition precedent to the preparation of the remainder for delivery, the defendant was not justified in rescinding the contract. An agreement to provide finances to an industrial concern does not consist of reciprocal promises, and s. 54 cannot apply.67 Where the agreement was embodied in a compromise decree, the judgment-debtor could not say that because the decree-holder had first committed a default, he was entitled to avoid his own obligations under the terms of the decree, which contained independent obligations.68 The vendee of a part of the mortgaged property, agreed to pay off the mortgage as well as a part of the consideration left with him, for such purpose. At the time of sale, the vendor failed to put the vendee in possession of a very small portion of the property, as the mortgage was not paid off. The mortgagee obtained a decree for sale. In a suit by the vendor for damages, it was held that s. 54 was not applicable, because there was no promise by the vendor, on which the vendee's promise depended, and the vendee could not refuse to redeem the mortgage.69 A transport contractor offered to carry iron-ore, and for that purpose, requested for a loan of Rs. 50,000/in order to purchase new engines for the boats. Two separate agreements, one for the loan, and the other for the transport of goods, were entered into, with the Government. The defendant contractor stopped the work, and the Government sought to recover the outstanding dues. The defendant alleged that the two agreements were composite, and the Government, having failed to perform its part of the agreement, the amount was not recoverable. It was held that the two agreements were independent of each other, and that, there being no implied agreement that if the transport contract fails, loan would not be recoverable. Sections 53 and 54 of the Contract Act could not be invoked.70 65 Ghanashyam Rath v. Udayanath Naik, AIR 1949 Ori 14 (passing of title and payment of price in a contract for sale of land). 66 (1886) ILR 9 Mad 359. 67 Industrial Finance Corpn. of India v. Sehgal Papers Ltd., AIR 1986 P&H 21.
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68 Ramkrishna v. Laxminarain, AIR 1929 Nag 164 at 168. 69 Jado Prasad v. Jamuna Prasad Singh, AIR 1946 Pat 263. 70 State of Orissa v. Harekrishna Mahatab, AIR 1992 Ori 284 at 286.
Promise which must be first performed The provision is applicable where, one promise is such that it cannot be performed, or its performance cannot be claimed, unless the other is performed. It is, therefore, necessary to know whether the promises in the case in hand are or are not, 'such that one of them cannot to performed...'. One test expressed by English law is that if a plaintiff has himself not performed some duty under the contract, and his default is such that it goes to the whole of the consideration for the promise sued upon, it acts as a bar to his suit. However, if it amounts to only a partial failure of the consideration, it is a matter for compensation, by a cross-claim for damages.71 The definition of reciprocal promises includes a promise which forms part of the consideration of the other promise. Applying the same to this section, the promisor of the promise of first performance, will not be able to claim performance of the latter dependent promise, whatever be the nature or importance of the first promise. The promisee of the first promise, in such a case, is absolved of performance, and can claim compensation for non-performance. His right to repudiate the entire contract would be governed by the principles of s. 39. Whether the obligation of the promisor, who must first perform his promise, is a condition for the performance of the dependent promise of the other party, depends upon the intention of the parties, as drawn from the express stipulations and circumstances of the case. The court may treat it only as a warranty, thereby rendering the party which is in breach of the contract, entitled, not to avoidance of the contract, but merely to damages.72 In a contract for the purchase of timber from a forest, the purchaser promised to pay within the time specified, and thereafter, to take away the timber within further specified time. It was held that this section was applicable, and that the promise to pay should have been performed before the delivery of timber could be claimed.73 The promise of a vendor of red-oxide, to furnish an analysis report about its quality as well as geological permission, was a condition precedent for claiming the promise of the purchaser, to get the wagons for their loading.74 A contract between the owner of a ship and a charterer, provided for the charter of 'Hooper S, to arrive after completion of two voyages for London, on notice, in May or June'. The owner of the ship gave a notice, after the vessel had completed one voyage only, and the charterer refused to ship the goods. It was held, in a suit by the owner of the ship, for damages on account of breach of the contract, that the defendant was, under the circumstances, justified in refusing to perform his promise.75 Garth, CJ., refuted the decision, on the ground that, the clause 'after completion of two country voyages,' was used to indicate to the charterer, the time when the ship would be ready and that it was as an essential part of the contract, just as any other more direct stipulation as to time. Markby, J., based his judgment on the fact that this clause constituted a material part of the description of the vessel, and that the ship offered, not having completed two country voyages, but only such voyage, did not answer the description in the contract.76 Considering either of the points of view, the above clause formed a condition precedent to the performance of the contract by the owner of the ship, and the case would thus seem to fall under this section, though there is no reference to it in the judgments delivered. 71 Observations of the Privy Council in Oxford v. Provand, (1868) LR 2 PC 135; Ghanashyam Rath v. Udayanath Naik, AIR 1949 Ori 14 (this section does not apply to an executed contract). 72 Vishram Arjun v. Irukulla Shankariah, AIR 1957 AP 784. 73 Mathra Das v. Secy of State, AIR 1930 Lah 979.
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74 Venkateswara Minerals Firm v. Jugalkishore Chiranjitlal Firm, AIR 1986 Kant 14. 75 Fleming v. Koegler, (1878) 4 Cal 237, (1879-80) ILR 4-55 Cal 151. 76 From this point of view, the case was like Behn v. Burness, (1863) 3 B & S 751, 124 RR 794, where the description of a ship in a charter-party as 'now in the port of Amsterdam', was held to be 'a substantive part of the contract', amounting to a condition; Mihalis Angelo,[1971] 1 QB 164, [1970] 3 All ER 125; Compania de Naviera Nedelka SA v. Tradax International SA, [1974] QB 264, [1973] 3 All ER 967; Gill & Duffus SA v. Societe pour I'Exportation des Sucres SA, [1986] 1 Lloyd's Rep 322(CA) ; Warde v. Feedex International Inc., [1985] 2 Lloyd's Rep 289; State Trading Corporation of India Ltd. v. M Golodetz Ltd., [1989] 2 Lloyd's Rep 277.
'Fails to perform it' In a contract for the supply of goods to the Government, the Government agreed to arrange for railway wagons, without guaranteeing to do so and not arranging the wagons was not to be taken as a ground for non-performance by the government. The supplier who was ready to supply, waited for the wagons, relying upon an oral assurance by the government officers. It was held that the contractor had not failed to perform, and his security deposit was also not liable to be forfeited.77 Thus a party cannot forfeit deposit if it has not performed its own part.78 A promise of the type mentioned in this section, must be fully performed before performance of the dependent reciprocal promise can be claimed. It is not sufficient to merely show readiness and willingness to do so.79 Thus, where, according to the terms of the tender, the purchaser of timber was required to deposit the money, and to remove the timber two months after the deposit of the money, and the defendant sold part of the timber, the plaintiff could not claim damages merely by showing readiness and willingness to remove the timber. Once he had chosen to keep the contract alive, he could not claim performance from the defendant, unless he had completely performed his own promise.80 Where the promise by B, to make a continuous supply of services, is dependent upon the payment by A for the same, in installments, and B discontinues the supply, at the request of A, s. 54 would not be strictly applicable, and B will not be entitled to claim compensation for the unexpired term of the contract.81 77 Dominion of India v. Ram Rakha Mall & Sons, AIR 1957 Punj 141 at 144. 78 Jai Durga Finvest Pvt Ltd v. State of Haryana, AIR 2004 SC 1484, (2004) 3 SCC 381. 79 But see M Govinda Pillai v. Best & Co. Ltd., AIR 1917 Mad 294 at 296 (where the plaintiff had shown inability to perform his promise). 80 Mathra Das v. Secretary of State, AIR 1930 Lah 979. 81 Jabalpur Cable Networks Pvt. Ltd. v. ESPN Software India Pvt. Ltd., AIR 1999 MP 27 (supply of signals for cable transmission).
Effect of Failure to Perform Upon failure of the promisor of the 'first' promise, firstly, the promisor of the 'first' promise cannot enforce the dependent promise of the promisee,82 and, secondly, the promisee of the first promise need not perform his dependent promise.83 Thirdly, the promisee of the 'first' promise, is entitled to claim the loss caused by such non-performance.84 A party who cancels a contract without any justification, is precluded from taking any defence, which would have been open to him in an act ion for damages, by the other party.85 A dispute about the office of a mahant of a math, was resolved by an agreement, where the defendant was to be the mahant, and the plaintiff, the adhikari. If disputes arose, the defendant was to be liable to
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pay an annual amount of maintenance, to be charged on the math property. The plaintiff claimed the office of a mahant in a suit, which was dismissed. On his suit for claiming maintenance, it was held that, by instituting the earlier suit, he had broken the agreement and defeated its intention, and, therefore, could not hold the defendant liable to perform his part of the contract.86 A financial corporation did not disburse the full amount of loan sanctioned, and allowed the debtors dues to multiply to substantial amount. It was held that it could not hold the debtor liable for such entire amount.87 Although the section and the illustrations indicate that the promisee of the 'first' promise need not perform, judgments indicate that where such a promisee, having the right to repudiate the contract for non-performance, chooses to keep it alive, the promisee will not be discharged of his performance,88 and would not be entitled to avoid the contract, but, would be entitled to damages.89 In such an event, the promisee of the 'first' promise must completely perform his dependent promise, before he can claim payment,90 unless he was effectively prevented by the defendant from doing so, even though he was ready and willing to perform his part.91 It has also been held that the promisee would not be absolved from non-performance, particularly where the term constitutes not a condition, but a warranty.92 For example, non-seaworthiness of a ship, or not maintaining the vessel in a thoroughly efficient state does not, by itself, give the charterer a right to rescind the contract. In Hongkong Fir's case,93 the plaintiffs, the owners, had chartered their ship to the defendants. The ship had antiquated machinery, and an incompetent crew. Several weeks were, therefore, lost in the voyage and at Osaka, it took a considerable amount of time to make the ship seaworthy. The charterers repudiated the charter, and the plaintiffs sued for breach of the contract and succeeded on the ground that the charterers could not repudiate the contract, but that they could only sue for damages, ie, the plaintiffs were guilty of breach of a warranty, and not of a condition. However, the Court of Appeal did not uphold this dichotomy, but it did uphold the judgment, based on the conditions of the clauses of the contract. 82 Mahanth Ram Charan Das v. Gossain Ramlakhan Das, AIR 1925 Pat 496; Satya Narain Choudhury v. Mahadeo Prasad Sahu, AIR 1929 Pat 395; Sharafdin v. Allahbux, AIR 1925 Sind 220; Mathra Das v. Secretary of State, AIR 1930 Lah 979; Ram Chander v. Jagan Nath, AIR 1957 HP 70; 83 As indicated by illustrations (c) and (d); Sanwaley Parshad Kayestha v. Sheo Sarup, AIR 1927 Oudh 12, at 13-14 (promisee no longer bound by the condition of his own promise). 84 Prashant Kumar Shahi v. Ghaziabad Development Authority, (2000) 4 SCC 120 (liability to pay penal interest). 85 Rustamji A Dubash v. Haji Hussein Lari, AIR 1920 Bom 181 at 182. 86 Mahanth Ram Charan Das v. Gossain Ramlakhan Das, AIR 1925 Pat 496. 87 Suraj Kana Pharmaceutical v. Bihar State Financial Corporation, AIR 2009 Pat 91 (decree of lower amount). 88 Burn & Co. Ltd. v. His Highness Thakur Sahib Sree Lukhdhirji, AIR 1925 PC 188; Mathra Das v. Secretary of State, AIR 1930 Lah 979; Vishram Arjun v. Irukulla Shankariah, AIR 1957 AP 784. 89 Vishram Arjun v. Irukulla Shankariah, AIR 1957 AP 784 (promise was treated as a warranty, a collateral stipulation). 90 Burn & Co. Ltd. v. His Highness Thakur Sahib Sree Lukhdhirji, AIR 1925 PC 188. 91 Pudi Lazarus v. Johnson Edward, AIR 1976 AP 243, relying on Florrie Edridge v. Rustomji Danjibhoy Sethna, (1933) 60 IA 368, ILR 58 Bom 101, 36 Bom LR 127, 146 IC 739, AIR 1933 PC 233. 92 Vishram Arjun v. Irukulla Shankariah, AIR 1957 AP 784. 93 Hong Kong Fir Shipping Co. Ltd. v. Kawasaki Kissen Kaisha Ltd., [1961] 2 WLR 716 at 726, [1962] 2 QB 26, [1962]1 All ER 474; affirming, [1961] 2 All ER 257; Venkateswara Minerals Firm v. Jugalkishore Chiranjitlal Firm, AIR 1986 Kant 14 (failure to provide mandatory analysis certificate before loading chemicals).
Failure and Repudiation
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A question distinct from that of the condition precedent is, whether the failure to perform some parts of a contracted promise, deprives the party in default, of any right to remuneration for that which it has performed, and entitles the other to put an end to the contract, or, is only a partial breach, which leaves the contract as a whole, still capable of being performed. If A fails to deliver the first installment of the goods, or delivers a quantity short of what he should have delivered, the question which arises is, whether B can put an end to the contract. What has to be seen is 'whether the particular stipulation goes to the root of the matter, so that a failure to perform it would render the performance of the rest of the contract by the plaintiff, a thing different in substance from what the defendant has stipulated for or, whether it merely partially affects it and may be compensated in damages'.1Illustration (b) of this section does not raise this point. However, other provisions of this Act do settle this question.2Section 38 of the Sale of Goods Act 1930, does make a provision indicating the principle, but leaves the question to be decided 'in each case, depending on the terms of the contract and the circumstances of the case'.3 Lord Diplock LJ, has stated a test in Hong Kong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd, 4 for ascertaining whether the failure of performance, constitutes such a breach of condition as would warrant a discharge:
Does the occurrence of the event deprive the party who has further undertakings still to perform of substantially the whole benefits which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings?
Thus, if a party fails to perform a promise, which is the whole of the consideration, the other party is released from performing its part of the contract. However, if the failure of performance, is of a part of the consideration, or does not go to the 'root' of substantial consideration, a breach of the contract would entitle the other party merely, to claim damages, and not discharge, from further liability. The other party must continue to perform its part of the contract. 1 Bettini v. Gye, (1876) 1 QBD 183, [1874-80] All ER Rep 242; Federal Commerce and Navigation Ltd. v. Molena Alpha Inc., [1979] AC 757 at 779, [1979] I All ER 307. 2 For discussion see s. 39infra. 3 Section 38(2) of the Sale of Goods Act, 1930 provides:Where there is a contract for the sale of goods to be delivered by stated instalments which are to be separately paid for, and the seller no delivery, or defective delivery in respect of one or more instalments, or the buyer neglects, or refuses to take delivery of, or to pay for one or more instalments, it is a question, in each case, depending on the terms of the contract, and the circumstances of the case, whether the breach of contract is a repudiation of the whole contract, or whether it is a severable breach giving rise to a claim of compensation, but not to a right to treat the whole contract as repudiated. 4 [1961] 2 WLR 716 at 726, [1962] 2 QB 26 at 66, [1962] 1 All ER 474 at 475; affirming [1961] 2 All ER 257; Photo Production Ltd. v. Securicor Transport Ltd., [1980] AC 827 at 849, [1980] I All ER 556; Nitrate Corpn. of Chile LA v. Pansuiza Compania de Navigacion, [1980] 1 Lloyd's Rep 638; affirmed in [1982] 1 Lloyd's Rep 570; United Scientific Holdings Ltd. v. Burnley BC, [1978] AC 904 at 928, [1977] 2 WLR 806.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER IV Of the Performance of Contracts/Contracts which must be performed/S. 55.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts
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Contracts which must be performed S. 55. Effect of failure to perform at fixed time, in contract in which time is essential.-When a party to a contract promises to do a certain thing at or before a specified time, or certain things at or before a specified times, and fails to do such thing at or before the specified time, the contract, or so much of it as has not been performed, becomes voidable at the option of the promisee, if the intention of the parties was that time should be of the essence of the contract. Effect of such failure when time is not essential.--If it was not the intention of the parties that time should be of the essence of the contract, the contract does not become voidable by the failure to do such thing at or before the specified time; but the promisee is entitled to compensation from the promisor for any loss occasioned to him by such failure. Effect of acceptance of performance at time other than agreed upon.--If, in case of a contract voidable on account of the promisor's failure to perform his promise at the time agreed, the promisee accepts performance of such promise at any time other than agreed, the promisee cannot claim compensation for any loss occasioned by the non-performance of the promise at the time agreed, unless, at the time of acceptance, he gives notice to the promisor of his intention to do so.5 STATE AMENDMENT Uttar Pradesh.--In its application to the State of Uttar Pradesh, in the third paragraph, for the words 'unless at the time of such acceptance he gives notice to the promisor of his intention to do so', the words 'where at the time of such acceptance he has waived his right to do so' shall be substituted.6
Introduction Where a party, who has promised to do a certain thing at a specified time,7 fails to do it at or before that time, the contract becomes voidable at the option of the promisee, if the intention of the parties was that time should be of the essence of the contract. But if it is not the intention of the parties that time should be of the essence of the contract, the contract does not become voidable by such failure, but the promisee is entitled to damages for loss caused to him by such failure. If no time is specified, s s. 46-50 will apply, and the promise must be performed within reasonable time. Section 55 provides for a special rule in regard to the performance of a promise to do a certain thing at or before a specified time. Contracts, for the performance of which definite time is fixed, must be completed within the time limited; and it is the duty of the court to look at the pith and substance of the contract and decide whether time was of the essence of the contract or not.8 The court is not to enforce such a promise in accordance with its term (unlike other contracts generally), but is to enforce it, subject to the provisions of this section.9 The section applies to all cases of reciprocal promises, including contracts for the sale of goods, whether the property in the goods sold has or has not passed to the purchaser; and the vendor can exercise his right to put an end to the contract under this section, in addition to his right to resell the goods under s. 107 of the Sale of Goods Act, 1930.10 Whether time is of essence can be decided by the arbitral tribunal.11 5 Cf. Ss. 62 and 63, infra. 6 The Uttar Pradesh Act, (57 of 1976), s. 26.
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7 See s. 46: 'No Time is Specified'--Where no time is specified, promise must be performed within reasonable time. 8 Kamu v. Gonda Ram, AIR 1947 Lah 352 at 354; Hitkari Motors v. Attar Singh, AIR 1962 J & K 10, p. 11. 9 Pallonjee Eduljee & Sons v. Lonavala City Municipality, AIR 1937 Bom 417 at 421. 10 Buldeo Doss v. Howe, (1880) ILR 6 Cal 64. 11 N Srinivasa v. Kattukaran Machine Tools Ltd, AIR 2009 SC 2217, (2009) 5 SCC 182.
'Specified Time' The provisions of s. 55 apply when the parties have specified the time for the performance of any obligation under the contract. It cannot be said that time was originally of the essence of the agreement, when it did not specify a date for the completion, but merely provided for completion to take place as soon as reasonably practicable.12 Also parties may bind themselves to use special diligence in completion, without naming any particular date, for example, by the words 'as soon as possible', which were construed as meaning 'within a reasonable time, with an undertaking to do' the thing in the shortest practicable time.13 But similar words were interpreted to mean merely 'as soon as the seller could' with reference to his ability to furnish the article ordered, consistently with the execution of prior orders in hand.14 Time may be specified by fixing a date or time, or fixing a period of time for performance; in the latter case, a question may arise whether the performance is to be effected at the end of the period, or any time before it, or when directed by the other party within that period of time. The UNIDROIT Principles provide that if a period of time is fixed or determinable from the contract, the party must perform its obligations at any time within that period, unless the circumstances indicate that the other party is to choose a time.15 If no time is specified, the question of time being of the essence does not arise at all. It is not then open to a party to unilaterally stipulate a time and then cancel the contract on such assumed stipulation. Neither party can serve notice limiting a time at the expiration of which it would treat the contract as at an end. 12 British and Commonwealth Holdings plc v. Quadrex Holding Inc., [1989] 3 All ER 492 Ch D. 13 Hydraulic Engg Co. Ltd v. McHaffie, [1879] 4 QBD 670 at 673; Teju Kaya & Co. v. Gangji Nensey & Co., (1933) 57 Bom 292, 34 Bom LR 1629, 142 IC 381, AIR 1933 Bom 71; VR Mohankrishnan v. Chimanlal Desai & Co., AIR 1960 Mad 452 (time not of essence). 14 Attwood v. Emery, (1856) 1 CBNS 110. 15 See Art. 6.1.1 of the UNIDROIT Principles; Art. 33 of the Convention on International Sale of Goods.
Time is of the Essence of Contract The phrase 'time of essence of contract' is misleading, because a question usually arises whether time is of essence of a particular term which is breached, and not whether time is of the essence of the contract as a whole.16 For example, in a contract for sale of goods, where time is specified for delivery and for payment, time may be of the essence of delivery, but may not be so of payment. 16 Chitty on Contracts, 28th edn., p. 1102, para 22-011; Anson's Law of Contract, 29th edn., 2010, p. 442.
Intention of the Parties
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The question, whether time is of the essence of the contract, does not depend upon express stipulation to that effect made by the parties, but it depends upon the intention of the parties. Notwithstanding that a specific date is mentioned, one has not to look at the letter but at the substance of the contract. Whether time is of essence is a question of fact, and the real test is the parties' intention. It depends on the facts and circumstances of each case.17 An intention to make time of the essence of the contract must be expressed in unmistakable language,18 indicating that the parties wanted to make their rights dependent upon observation of time limits,19 The intention of the parties can be ascertained from:
(i) (ii) (iii) (iv)
the express words used in the contract; the nature of the property which forms the subject matter of the contract; the nature of the contract itself; and the surrounding circumstances.20
The question of intention of parties is a question of fact,21 or may be a mixed question of law and fact.22 That parties intend to make time of the essence may be denoted 'by the nature of the property or by surrounding circumstances,23 showing the intention of the parties that the contract was to be completed within a limited period'.24 It must be inferred from what passed between the parties before, but not after, the contract is made,25for 'commercial men must be entitled to act on reasonable commercial probabilities at the time they are called upon to make up their minds'.26 However, later conduct of parties might show that they understood that time was not of essence.27 Where time is not of the essence of the contract, it can be so made by giving a later notice.28 In comparison, the UNIDROIT Principles do not make any distinction between time as an essential or as a non-essential term.29 Where time is of essence for performance of an act, the act must be fully performed, and the promisor cannot claim specific performance--that he has substantially performed the act at the time. Where, by a compromise agreement in a suit, time was made of the essence of the contract and the plaintiff failed to perform the terms of the compromise by the stipulated date, e.g., execution and registration of the kobala and payment of the relevant amount, the plaintiff would not be allowed to get relief on the ground of equity for having substantially complied with the contract.30 Express Stipulation Mere insertion of a term in a contract that a certain act shall be done at a specified time, will not necessarily indicate that time is of the essence of the contract,31 nor would the absence of it indicate that time is not of the essence. Where time is of the essence of the contract, and it is extended, the extended date is also of the essence of the contract.32 When the contract expressly provides that time is of essence of the contract, the provision has to be read along with other provisions, which may, on construction of the contract, exclude the inference that the completion of the work by a particular date was intended to be fundamental. Clauses providing for extension of time in certain contingencies, or for the payment of fine or penalty for delay, would be construed as rendering ineffective such an express provision.33 The provision for extension must be read in context of facts of the case. Where an agreement specified a date for payment of an amount, and the date was &uot;extendable by another 10 to 20 days, if need be, with the consent of both the parties, but not more&uot;, time was nevertheless of the essence of contract.34 Mere incorporation in the written agreement of a clause, imposing penalty in case of default, does not by itself reflect an intention to make time of the essence.35 But the mere fact that the contract mentioned the right of the vendor to forfeit earnest money in case of default in payment of balance of the price and there was no mention of the cancellation of the contract, was not accepted by the court36 as an argument against time being of the essence of the contract. However, where the right of forfeiture accompanies a
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strict obligation to perform in time, and the express stipulation that time shall be of essence, it has been held in the light of other circumstances that time was of essence.37 Where the agreement provides for liquidated damages for delay in performance, the intention is of making time of essence,38 as also where parties expressly provide that in the event transaction is not completed within the specified period, the agreement shall be enforceable and inoperative;39 of that if payment is not made in time, the agreement shall stand cancelled on the next day.40 In KS Vidyanadam v. Vairavan, 41 the Supreme Court, while refusing to exercise discretion to grant specific performance where the obligation was not performed within the stipulated time, has stressed that express stipulation of time in a contract is not devoid of importance. It has observed:
If every suit for specific performance filed in the period of limitation (where agreement prescribing time but not specifying time is of the essence) were to be decreed, it would amount to saying that the time-limits prescribed by the parties in the agreement have no significance or value and they mean nothing...In this case, parties had specified a time limit of six months. Even if time were not of the essence, it has some meaning. It means that in exercising its discretion [of granting specific performance], the court should also bear in mind that when the parties prescribe certain time-limit for taking steps by one or the other party, it must have some significance and the said time limit cannot be ignored altogether on the ground that it has not been made the essence of the contract.
Circumstances and Nature of Contract The intention as to time being of the essence may either be express, or may also be implied from the circumstances of the contract, and the nature of the subject-matter;42 where they indicate that the fixed date must be exactly complied with, eg., the purchase of a leasehold house for immediate occupation; the purchase of business land or premises such as a public house as a going concern, the option for the purchase of property; mercantile contracts such as a contract for sale of goods where time for delivery is fixed or for the sale of shares liable to fluctuate in value.43 Time has been held to be of the essence of contract in shipping and commercial contracts as regards delivery of goods;44 in respect of delivery of goods handed over to the railways for carriage,45 especially in the case of perishable goods like oranges;46 in respect of payment of deposit47 and the balance of the purchase price within a specified time in an auction sale;48 for supply of sleepers in large quantity for a two million tons project the programme for which depended on timely supply of sleepers;49 where a creditor agreed to accept part of the debt in full satisfaction is paid within a certain time;50 in respect of each installment in a contract for supply of molasses to be supplied in 12 monthly installments at specified time;51 in case of contract of sale of a house, where the seller was compelled to sell the house for repayment of loan and for meeting day-to-day expenses;52 in a sale of an inn as a going concern;53 in the case of a lease of a colliery business;54 and in case of purchase of a yacht for a particular matching season.55 Time is presumed to be of the essence in contracts for re-conveyance or renewal of leases and mercantile contracts.56 Time was of the essence where the clause provided 'ten days or earlier', which showed that 10 days was the last date for performance, and the words 'or earlier' showed the urgency.57 The provisions of this section have been applied to consent decrees.58 Time was of the essence where the decree-holder agreed to accept a less amount in full satisfaction, if paid within two months, and on failure to proceed with the execution,59 and also where it is provided that if the judgment-debtor failed to pay up decretal amount within the time specified, the sale would stand confirmed.60 Where time is of the essence, the court cannot extend the time fixed for performance in the compromise decree.61 In a contract between a colliery owner and a transport operator to transport coal, the colliery owner was to make the payment on the 10th of every month and keep the road in proper repair. The non-payment of bill on presentation on the due date or within reasonable time thereafter and non-repair of the road were held to fall within s. 55, entitling the transporter to rescind the contract and sue for damages.62 Where the
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contract work was connected with another time bound project, which in turn was linked with a work undertaken by a foreign country to fabricate and erect plant and machinery within a stipulated time, time was of the essence.63 Where the buyers were to give to the sellers 15 days' notice of the readiness of the vessel, to enable the sellers to nominate the port of loading, it was held that time was of the essence, and performance of the buyer a condition precedent to the sellers' performance.64 Presumption and Burden of Proof The rule is, that except in commercial contracts, the ordinary presumption is that time is not of the essence of the contract.65 This presumption can be rebutted by showing the intention of the parties.66 Time is presumed not to be of essence in contracts relating to immovable property, but of essence in contracts of reconveyance or renewal of leases.67 It is also presumed that in construction contracts, time is not of the essence.68 However, it was held that where a purchaser in the business of construction sought to purchase land, the transaction was a commercial one, and time was of essence.69 The onus to plead and to prove that time is of the essence of the contract is on the person alleging it,70 thus giving an opportunity to the other party to adduce rebuttal evidence that time was not of the essence.71 But when the plaintiff pleads that time is not of the essence, and the defendant does not deny it, the court is bound to accept the plaintiff's plea.72 A custom alleged by a purchaser that he could take delivery after some days of the date fixed, must be proved by the purchaser.73 Making Time of Essence by Notice Where time is not of the essence, it can be made so by a subsequent notice given by the party not in default, and the contract cannot be cancelled without giving reasonable notice to the other party to complete the contract.74 Such notice can be given, even though not expressly provided in s. 55.75 It is necessary that the notice must expressly or by necessary implication, say that time is being made of essence. The mere fact that the notice gave a certain time for performance, would not necessarily lead to the conclusion that the time prescribed was of the essence of the contract. Such notice must fix a reasonable time76 requiring the other side to perform his part of the contract.77 The question whether the time prescribed in the notice is of the essence or not, would also depend on the facts and circumstances of each case. The court must look at the pith and substance of the notice itself. The real intention of the party giving notice must be clear from the notice, though in certain cases, the court may rely on surrounding circumstances.78 Such notice may be given before or after the day named in the contract.79 Time may be made of essence by notice in a like manner, where the requirement as to time has been waived by the party not in default.80 A party can give a reasonable notice and insist on performance before the time in the notice, even though he has earlier waived his right as to time under the contract. If the period of postponement is not specified in the waiver, the party forbearing is entitled, upon reasonable notice, to impose a new time-limit, which may then become of the essence of the contract.81 The parties must follow the notice procedure, if any, laid down in the contract.82 Where the contract expressly stated that time was of the essence; but provided that a party could not enforce his rights and remedies unless he gave the other a notice specifying the default, and the defaulting party failed to do so, a vendor's notice was valid, even though in addition to specifying the actual default, it asserted as a further default something that was not.83 The inclusion in the contract of an express provision for the service of notice requiring performance within a specified time (where the recipient of the notice has failed to complete performance by the due date), does not exclude the rights and remedies at law or equity, which subsist apart from this notice.84 Whether the period given by the notice is reasonable, depends upon the facts and circumstances of each case. The court may regard for that purpose,85 what remains to be done on the date of notice, whether the party giving notice has continually pressed for completion; or that it is important for him to obtain early completion.86 But no notice need be given if it is clear that the party in default does not intend to proceed.87
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The party who serves such a notice will himself be bound by it. Therefore, where the vendor, suspecting that the purchaser would not be ready, served a notice making time of the essence, but was not ready himself, the vendor had committed breach and the purchaser obtained rescission and return of his deposit.88 A vendor has no right to make time of the essence of the contract, unless the following two conditions are satisfied: first, the vendor is able, ready and willing to proceed to completion; and second, when the vendor purports to make time of the essence of the contract, the purchaser must be guilty of such default as to entitle the vendor to rescind the contract, subject to it being done by a reasonable notice. A notice to complete was invalid because it was not reasonable to expect the purchaser to find the purchase money within the time specified.89 But in a later case, this decision was doubted, and it was observed that in the absence of some contractual obligation on a seller requiring him to assist the purchaser in finding the purchase money or to stay his hand until the purchase money was found, it was solely the responsibility of the purchaser to find the purchase money, and his difficulties in regard were not relevant in considering the reasonableness of the time limited by a notice to complete.90 Where the contract for extension of time in certain contingencies provides for penalty or fine per day or per week, during which the work remains unfinished, such a clause rendered ineffective the clause that made time of the essence. The State Government could not rescind the contract without fixing a further period, making time the essence of the contract, and hence was not entitled to forfeit the security deposit.91 Once a condition is not fulfilled as contemplated by the terms of the agreement, when time is made the essence of the contract originally or subsequent thereto, the failure to perform the contract within the stipulated time gives a right to avoid the contract, which can be exercised while making time the essence of the contract, or subsequently thereto. In the notice making time the essence of contract, the party can be intimated that in default of compliance with the requisition, the contract will be treated as cancelled.92 Where, for example, in a contract for supply of albumin, the Court found that time was of the essence of the contract and also found that the seller failed to supply the entire quantity in instalments even within reasonable time of purchaser's notice, it was held that the purchaser was justified in rescinding the contract and that he was entitled to damages.93 English Law In English law, the common law regarded time fixed for performance to be of essence, so that if the condition was not fulfilled, the other party might treat the contract as broken and elect to terminate it. Equity could however, allow specific performance, notwithstanding failure to observe the time fixed, where it could do so without injustice to the parties. But this relief is not available in three cases:94
(i) (ii) (iii)
Where the parties have expressly stipulated in their contract that the time fixed for performance must be exactly complied with;95 where the circumstances of the contract or the nature of the subject matter indicate that the fixed date must be exactly complied with;96 and where time was not originally of the essence of the contract, but one party has been guilty of undue delay, the other party may give notice requiring contract to be performed within reasonable time.97
In Union Eagle Ltd. v. Golden Achievement Ltd, 98 time was expressly made of the essence of the contract, and the vendor was entitled to terminate the agreement for sale of flat, when the purchaser tendered the price 10 minutes late.99 The Privy Council also refused relief against forfeiture of deposit on the ground of the difficulty in distinguishing slightly late performance and performance too late.1 17 Mohammad Zafar Ahmad Khan v. Hamida Khatoon, AIR 1945 All 70. 18 Jamshed Khoduram Irani v. Burjorji Dhunjibhai 40 Bom 289, AIR 1915 PC 83, (1916) 43 IA 26, 32 IC 246; Burn & Co.
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Ltd v. His Highness Thakur Sahib Sree Lukhdhirji of Morvi State, (1925) 30 CWN 145, 90 IC 52, AIR 1925 PC 188; Gomathinayagam Pillai v. Palaniswami Nadar, [1967] 1 SCR 227, AIR 1967 SC 868; B Kishen Prasad v. Kunj Behari Lal 91 IC 790, AIR 1926 All 278 (terms of compromise decree); Mohammad Zafar Ahmad Khan v. Hamida Khatoon, AIR 1945 All 70; Bhalchandra Pandurang Rajandekar v. Mahadeo Laxminarayan Shraogi, AIR 1947 Nag 193; Arun Prokash Boral v. Tulsi Charan Bose, AIR 1949 Cal 510; Ram Kalpa Kundu v. Kasi Nath Dutta, AIR 1950 Cal 582; Madan Mohan v. Jawala Parshad, AIR 1950 EP 278; Zakir Sadagar v. Dolegobind Ghose, AIR 1955 Pat 201; Dhirajlal Amratlal v. Bai Ullasmati Kanhaiyalal, AIR 1952 Sau 88; Zakir Sadagar v. Dolegobind Ghose, AIR 1955 Pat 201 at 205; Hindustan Construction Company v. State of Bihar, AIR 1963 Pat 254; Sachidananda Patnaik v. GP & Co., AIR 1964 Ori 269; Pakharsingh v. Kishansingh, AIR 1974 Raj 112. 19 Pakharsingh v. Kishansingh, AIR 1974 Raj 112. 20 Bhalchandra Pandurang Rajandekar v. Mahadeo Laxminarayan Shraogi, AIR 1947 Nag 193; Ram Kalpa Kundu v. Kasi Nath Dutta, AIR 1950 Cal 582; Shamjibhai v. Jagoo Hemchand, AIR 1952 Nag 220; Kalidas Ghosh v. Mugneeram Bangur & Co., AIR 1955 Cal 298; Dominion of India v. Raj Bahadur Seth Bhikhraj Jaipuria, AIR 1957 Pat 586; Sachidananda Patnaik v. GP & Co., AIR 1964 Ori 269. 21 Beni Sah Turaha v. Sew Sah, All ER AIR 1949 Cal 661 at 662; Dominion of India v. Raj Bahadur Seth Bhikhraj Jaipuria, AIR 1957 Pat 586 at 591; Andhra Pradesh State Electricity Board v. Patel & Patel, AIR 1977 AP 172. 22 Municipal Corpn. of Delhi v. Jagan Nath Ashok Kumar, AIR 1987 SC 2316, (1987) 4 SCC 497 at 501. 23 Govind Prasad Chaturvedi v. Hari Dutt Shastri, AIR 1977 SC 1005, at 1011, [1977] 2 SCR 862, (1977) 2 SCC 539; Allibhoy Ibrahimji v. Dowlatram Valabdas, AIR 1919 Sind 68; Shankar Sakharam Jagdale v. Ratanji Premji Shet, (1923) 47 Bom 607, AIR 1923 Bom 441 at 444, 79 IC 226; Mohammad Zafar Ahmad Khan v. Hamida Khatoon, AIR 1945 All 70 at 74; Ramdayal v. Purshottam Pannalal, AIR 1959 MP 42. 24 Roberts v. Berry, (1853) 3 De GM & G 284 per Turner LJ. at 291. 25 Jamshed Khoduram Irani v. Burjorji Dhunjibhai, 40 Bom 289, AIR 1915 PC 83, (1916) 43 IA 26, 32 IC 246; Shambhulal Pannalal Vaish v. Secretary of State, AIR 1940 Sind 1, 189 IC 785; Bhalchandra Pandurang Rajandekar v. Mahadeo Laxminarayan Shraogi, AIR 1947 Nag 193; Arun Prokash Boral v. Tulsi Charan Bose, AIR 1949 Cal 510; Madan Mohan v. Jawala Parshad, AIR 1950 EP 278; Dominion of India v. Raj Bahadur Seth Bhikhraj Jaipuria, AIR 1957 Pat 586 at 593; Hindustan Construction Company v. State of Bihar, AIR 1963 Pat 254; State of Orissa v. Durga Enterprisers, AIR 1995 Ori 207; Smith v. Hamilton, [1951] Ch 174, [1950] 2 All ER 928; But see Bazpur Co-op Sugar Factory Ltd. v. Surendra Mohan Agarwal, AIR 1984 All 174. 26 Per Lord Simon in National Carriers Ltd. v. Panalpina (Northern) Ltd., [1981] AC 675 at 706, [1981] 1 All ER 161. 27 Amteshwar Anand v. Virender Mohan Singh, AIR 2006 SC 151, (2006) 1 SCC 148; P D'Souza v. Shondrilo Naidu, AIR 2004 SC 4472, (2004) 6 SCC 649 (asking for extension of time). 28 See below: 'Making Time of Essence by Notice'. 29 See Art. 6.1.1. 30 Kartik Chandra Bera v. Bhushan Chandra Guria, AIR 1977 Cal 52; Jadabendra Nath Mishra v. Monorama Debya, AIR 1970 Cal 199; referring to Kandarpa Nag v. Banwari Lal Nag, AIR 1921 Cal 356 (2). 31 Gomathinayagam Pillai v. Palaniswami Nadar, [1967] 1 SCR 227, AIR 1967 SC 868; Arosan Enterprises Ltd. v. Union of India, AIR 1999 SC 3804, reversing Food Corporation of India v. Arosan Enterprises Ltd., AIR 1996 Del 126; Raghbir Das v. Sundar Lal, AIR 1931 Lah 205; Kamu v. Gonda Ram, AIR 1947 Lah 352; Arun Prokash Boral v. Tulsi Charan Bose, AIR 1949 Cal 510; Ram Kalpa Kundu v. Kasi Nath Dutta, AIR 1950 Cal 582; Amarnath Nikkuram v. Mohan Singh Surjan Singh, AIR 1954 MB 134; AC Kunjumohammad v. Goverdhan Hathibai Co., AIR 1956 T-C 93. 32 Muhammad Habidullah v. Bird & Co., (1921) 48 IA 175, 63 IC 589, AIR 1922 PC 178; Orissa Textile Mills Ltd. v. Ganesh Das Ramkishun, AIR 1961 Pat 107; British Paints (India) Ltd. v. Union of India, AIR 1971 Cal 393. 33 Hind Construction Contractors v. State of Maharashtra, [1979] 2 SCR 1147, AIR 1979 SC 720; MD, HSIDC v. Hari Om Enterprises, AIR 2009 SC 218, (2009) 16 SCC 208; Shankarlal Bijreja v. Ashok B Ahuja, AIR 2011 Chhat 66. 34 Narinder Kumar Malik v. Surinder Kumar Malik, 2009 AIR SCW 6561, (2009) 8 SCC 743. 35 Mangal Ram Namasudra v. Premananda Namasudra, AIR 1972 Assam 8 at 10; following Gomathinayagam Pillai v. Palaniswami Nadar, [1967] 1 SCR 227, AIR 1967 SC 868; Pakharsingh v. Kishansingh, AIR 1974 Raj 112 at 114; YA Kader v. Muthulakshmi Ammal, AIR 1992 Mad 208 at 214. 36 Trailakyanath Maity v. Provabati Santra, AIR 1974 Cal 261 at 264; Pakharsingh v. Kishansingh, AIR 1974 Raj 112 at 114; Andhra Pradesh State Electricity Board v. Patel & Patel, AIR 1977 AP 172. 37 A K Lakshmipathy v. Rai Saheb Pannalal H Lahoti Charitable Trust, AIR 2010 SC 577, (2010) 1 SCC 287
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38 Haryana Telecom Ltd v. Union of India, AIR 2006 Del 339 (this was not an extension clause). 39 P Purushotham Reddy v. Pratap Steels Ltd, AIR 2003 AP 141. 40 Voleti Rangaiah v. Adapa Satyanarayana, AIR 2001 AP 251 41 AIR 1997 SC 1751, (1997) 3 SCC 1; reversing Vairavan v. KS Vidyanadam, AIR 1996 Mad 353. 42 Gomathinayagam Pillai v. Palaniswami Nadar, [1967] 1 SCR 227, AIR 1967 SC 868 at 871; Sastha Kumaraswamy v. Joseph Alasius, AIR 1950 TC 61(FB) ; A C Kunjumohammad v. Goverdhan Hathibai Co., AIR 1956 TC 93; Varadarajulu Iyer v. Arumugha Goundan, AIR 1960 Mad 203; Bal Saroop Daulat Ram v. Lakhbir Singh Kirpal Singh, AIR 1964 Punj 375. 43 Chitty on Contracts, 28th edn, para 22-013, p. 1104; United Scientific Holdings Ltd v. Burnley BC, (1978) AC 904 at 929; Bunge Corp v. Tradax SA, [1981] 1 WLR 711 at 729, [1981] 2 All ER 540(HL) ; Italmare Shipping Co. v. Ocean Tanker Co. Inc (No. 2) (The Rio Sun) [1982] 3 All ER 273, [1982] 1 WLR 158; Afovos Shipping Co. SA v. Pagnam (The Afovos), [1983] 1 WLR 195(HL), [1983] 1 All ER 449; Scandinavian Trading Tanker Co. AB v. Flota Petrolera Ecuatoriana, (The ScapTrade), [1983] 2 AC 694 at 703, [1983] 2 All ER 763, [1983] 1 All ER 301(HL) ; Metrolands Investments Ltd. v. JH Dewhurst Ltd., [1986] 3 All ER 659. 44 The Sale of Goods Act, 1930, s. 11 provides:&uot;Stipulations as to time.--Unless a different intention appears from the terms of the contract, stipulations as to time of payment are not deemed to be of the essence of a contract of sale. Whether any other stipulation as to time is of the essence of the contract or not depends on the terms of the contract.&uot; American Pipe Company v. State of Uttar Pradesh, AIR 1983 Cal 186 at 191. 45 Union of India v. Gangadhar Mimraj, AIR 1962 Pat 372; Managing Agents (Martill & Co) v. Seth Deokinandan, AIR 1959 MP 276. 46 Dominion of India v. Gaya Pershad, AIR 1957 All 193. 47 Samarenko v. Dawn Hill Ltd, [2011] EWCA Civ 1445. 48 PS Duraikannoo v. M Saravana Chettiar, AIR 1963 Mad 468; Pichai Moideen Rowther v. Chathurbuja Das Kushal Das & Sons, AIR 1933 Mad 736. 49 Tata Iron & Steel Co. Ltd v. Ramlal Kandoi, (1971) 2 Cal 493 at 501; NV Chowdary v. Hindustan Steel Works Construction Ltd., AIR 1984 AP 110. 50 Allavarapu Subbayya v. Jakka Peddayya, AIR 1937 Mad 234; B Kishen Prasad v. Kunj Behari Lal 91 IC 790, AIR 1926 All 278. 51 Firm Chunni Lal Mansa Ram v. Firm Sheo Prasad Banarsi Das, AIR 1943 All 370. 52 Suraj Singh v. Nathi Bai, AIR 1990 MP 323. 53 Lock v. Bell, [1931] 1 Ch. 35, [1930] All ER Rep 635. 54 Macbryde v. Weekes, (1856) 22 Beav 533. 55 McDougall v. Aeromarine of Emsworth Ltd., [1958] 3 All ER 431, [1958] 1 WLR 1126. 56 See below, under the heading: 'Commercial and Mercantile Contracts', 'Option to Repurchase' and 'Renewal of Leases'. 57 Colles Cranes of India Ltd. v. Speedeo Spares Corpn., AIR 1970 Cal 321. 58 Bhagvant Gopal Galapure v. Appaji Govind Galapure, AIR 1916 Bom 282, (1916) 18 Bom LR 803; Parbhu Ram Pandey v. Raghubir Sah, (1917) 2 Pat LJ 520 at 522, AIR 1917 Pat 82, 42 IC 408; Shankar Sakharam Jagdale v. Ratanji Premji Shet, (1923) 47 Bom 607, AIR 1923 Bom 441, 79 IC 226; Burjorji Shapurji Sheth v. Madhavlal Jesingbhai, (1934) 58 Bom 610, 36 Bom LR 798, 152 IC 575, AIR 1934 Bom 370; Beni Sah Turaha v. Sew Sah, AIR 1949 Cal 661. 59 Kissen Gopal Ganwariwala v. Madan Lal, AIR 1937 Pat 542 at 544; Ranjit Ram v. Karim Bakhsh, AIR 1940 Lah 46. 60 Bhagwat Narain Singh v. Srinivas, AIR 1937 Pat 113 at 116 (FB); Hansraj Sangechi v. Jogeshar Prasad, AIR 1925 Pat 691 at 692. 61 ORMMSPSV Chettyar Firm v. OVRAT Firm, AIR 1940 Rang 62 (payment of mortgage decree by instalments and promise to give additional security); Hansraj Sangechi v. Jogeshar Prasad, AIR 1925 Pat 691 (date fixed for payment of decretal amount, and sale to be cancelled on payment); Rayadurai Padayachi v. Muthuswami Padayachi, AIR 1962 Mad 489 (filing of draft sale deed within the time stipulated). 62 Mahabir Prasad Rungta v. Durga Datta, AIR 1961 SC 990, [1961] 3 SCR 639. 63 NV Chowdary v. Hindustan Steel Works Construction Ltd., AIR 1984 AP 110.
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64 Bunge Corp v. Tradax SA, [1981] 1 WLR 711, [1981] 2 All ER 540. 65 British Paints (India) Ltd. v. Union of India, AIR 1971 Cal 393. 66 Jadu Nath Gupta v. Chandra Bhusan Sur, AIR 1932 Cal 493 at 494; Lucknow Automobiles v. Replacement Parts Co., AIR 1940 Oudh 443; Bhalchandra Pandurang Rajandekar v. Mahadeo Laxminarayan Shraogi, AIR 1947 Nag 193; Lal Singh v. Tejmal, AIR 1954 Ajmer 75 at 76;. Dominion of India v. Raj Bahadur Seth Bhikhraj Jaipuria, AIR 1957 Pat 586 at 590; Nanak Builders & Investors Pvt. Ltd. v. Vinod Kumar Alag, AIR 1991 Del 315 at 321. 67 See below: 'Renewal of Leases' and 'Option to Repurchase'; but also Bibi Jaibunisha v. Jagdish Pundit, (1997) 4 SCC 481 (not always of the essence for an agreement of reconveyance). 68 Mcdermott International Inc v. Burn Standard Co. Ltd, 2006 AIR SCW 3276, (2006) 11 SCC 181. 69 Citadel Fine Pharmaceuticals v. Ramaniyam Real Estates P Ltd, AIR 2011 SC 3351, (2011) 9 SCC 147. 70 Sachidananpa Patnaik v. GP & Co., AIR 1964 'Ori 269; Bibi Jaibunisha v. Jagdish Pandit, (1997) 4 SCC 481 (defendant did not plead in suit for specific performance); Balasaheb Dayandeo Naik v. Appasaheb Dattatraya Pawar, AIR 2008 SC 1205, (2008) 4 SCC 464 (defendant did not prove that time was of essence); Chemipex v. Shlok Chemicals, Appeal No 397 / 2012 decided on 21 Jan 2013 (Bom). 71 Bibi Jaibunisha v. Jagdish Pundit, (1997) 4 SCC 481. 72 K Kallaiah v. Ningegowda, AIR 1982 Kant 93. 73 Balaram Paramsukdass Firm v. Gudiyatam Govinda Chetty, (1925) 49 Mad LJ 200, 91 IC 257, AIR 1925 Mad 1232; Kasiram Pania v. Hurnundroy Fulchand, AIR 1921 Cal 809 (seller alleging usage for giving delivery on the day next after the date fixed which fell on a holiday). 74 Mulla Badruddin v. Tufail Ahmed, AIR 1963 MP 31; Nannapaneni Subayya Chowdary v. Garikapati Veerayya, AIR 1957 AP 307. 75 Burn & Co. Ltd. v. HH Thakur Sahib Shree Lakhdhirjee, (1923) 28 CWN 104, 83 IC 260, AIR 1924 Cal 427. 76 Tandra Venkata Subrahmanayam v. Vegesana Viswanadharaju, AIR 1968 AP 190; Dipnarain Sinha v. Dinanath Singh, AIR 1981 Pat 69. 77 Graham v. Pitkin, [1992] 2 All ER 235(PC) (from Jamaica). 78 Tandra Venkata Subrahmanayam v. Vegesana Viswanadharaju, AIR 1968 AP 190. 79 Dipnarain Sinha v. Dinanath Singh, AIR 1981 Pat 69; NV Chowdary v. Hindustan Steel Works Construction Ltd., AIR 1984 AP 110. 80 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, CONTRACT, Para 935. 81 Hartley v. Hymans, [1920] 3 KB 475 at 55, [1920] All ER Rep 328; Scandinavian Trading Co. A/B v. Zodiac Petroleum SA, [1981] I Lloyd's Rep 81; Charles Rickards Ltd v. Oppenheim, [1950] 1 KB 616 at 624, [1950] 1 All ER 420; Ficom SA v. Sociedad Codex Ltd., [1980] 2 Lloyd's 118 at 131; State Trading Corporation of India Ltd. v. Compagnie Francaise d' Importation et de Distribution, [1983] 2 Lloyd's Rep 679. 82 Rightside Properties Ltd. v. Gray, [1975] Ch 72, [1974] 2 All ER 1169; County and Metropolitan Homes Surrey Ltd. v. Topclaim Ltd., [1996] Ch 307, [1997] 1 All ER 254. 83 Legione v. Hateley, (1983) 152 CLR 406; following Green v. Sommerville, (1979) 141 CLR 594 (High Court of Australia). 84 Woods v. Mackenzie Hill Ltd., [1975] 2 All ER 170, [1975] 1 WLR 613 approved by the HL in Raineri v. Miles, [1981] AC 1050 at 1085-86, [1980] 2 All ER 145. 85 Chitty on Contracts, 28th edn, para 22-014, p. 1106. 86 Charles Rickards Ltd. v. Oppenheim, [1950] 1 KB 616, [1950] 1 All ER 420. 87 Re Stone & Saville's Contract,[1963] 1 WLR 163, [1963] 1 All ER 353. 88 Finkielkraut v. Monohan, [1949] 2 All ER 234; Quadrangle Development and Construction Co. Ltd. v. Jenner, [1974] 1 WLR 68, [1974] 1 All ER 729. 89 Re Barr's Contract, Moorwell Holdings Ltd. v. Barr, [1956] Ch 551 at 556, [1956] 2 All ER 853 at 856, applying Green v. Sevin, (1879) 13 Ch D 539, [1874-80] All ER Rep 831, Smith v. Hamilton, [1951] Ch 174, [1950] 2 All ER 928 at 933. 90 British and Commonwealth Holdings plc v. Quadrex Holding lnc., [1989] 3 All ER 492 at 506 (Ch D).
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91 Hind Construction Contractors v. State of Maharashtra, [1979] 2 SCR 1147, AIR 1979 SC 720 at 726; quoting Lamprell v. Billericay Union, (1849) 3 Ex 283 at 308; Webb v. Hughes, (1870) LR 10 Eq 281; Charles Rickards Ltd v. Oppenheim, [1950] 1 KB 616, [1950] 1 All ER 420. 92 Koyana Suryanarayana Reddy v. C Chellayyamma, AIR 1989 AP 276 at 281; Gomathinayagam Pillai v. Palaniswami Nadar, [1967] 1 SCR 227, AIR 1967 SC 868 at 872; Stickney v. Keeble, [1915] AC 386, [1914-15] All ER Rep 73. 93 Andard Mount (London) Ltd. v. Curewel (India) Ltd., AIR 1985 Del 45. 94 Chitty on Contracts, 28th edn., p. 1103-05, para 22-013 to 22-014; Anson's Law of Contract, 29th edn., 2010, p. 443. 95 Hudson v. Temple, (1860) 2 Beav 536; Steedman v. Drinkle, [1916] 1 AC 275, [1914-15] All ER Rep 298(PC) ; Brickles v. Snell, [1916] 2 AC 599; Mussen v. VanDiemen's Land Co., [1938] Ch 253, [1938] 1 All ER 210; Harold Wood Brick Co. Ltd v. Ferris, [1935] 2 KB 198, [1935] All ER Rep 603(CA) ; Lombard North Central plc. v. Butterworth, [1987] QB 527, [1987] 1 All ER 267. 96 United Scientific Holdings Ltd v. Burnley BC, [1978] AC 904 at 929; Bunge Corp v. Tradax SA, [1981] 1 WLR 711 at 729, [1981] 2 All ER 540(HL) ; Italmare Shipping Co. v. Ocean Tanker Co. Inc, (No. 2) (The Rio Sun) [1982] 3 All ER 273, [1982] 1 WLR 158; Afovos Shipping Co. SA v. Pagnam (The Afovos), [1983] 1 WLR 195(HL), [1983] a All ER 449; Scandinavian Trading Tanker Co. AB v. Flota Petrolera Ecuatoriana (The ScapTrade) [1983] 2 AC 694, 703, [1983] 2 All ER 763, [1983] 1 All ER 301(HL) ; Sport International Bussum BY v. Inter-Footwear Ltd., [1984] 1 WLR 776 at 793 [1984] 2 All ER 321(HL) ; Metrolands Investments Ltd. v. JH Dewhurst Ltd., [1986] 3 All ER 659. 97 Re Stone & Saville's Contract,[1963] 1 WLR 163, [1963] 1 All ER 353; Woods v. Mackenzie Hill Ltd., [1975] 2 All ER 170, [1975] 1 WLR 613; approved by the HL in Raineri v. Miles, [1980] 2 All ER 145; Quadrangle Development and Construction Co. Ltd v. Jenner, [1974] 1 WLR 68, [1974] 1 All ER 729; followed in Oakdown Ltd v. Bernstein & Co., (1984) 49 P&CR 282. 98 [1997] AC 514, [1997] 2 All ER 215,(PC) (from Hong Kong); see also Tanwar Enterprises Pty Ltd v. Cauchi, [2003] HCA 57 (High Court of Australia). 99 Stevens,(1998) 61 MLR 255 (justified on commercial policy, and reasons of certainty that if something happens for which the contract has made express provision, the parties should know with certainty that the terms of the contract will be enforced). 1 [1997] AC 514, [1997] 2 All ER 215 Refusal to grant relief from forfeiture was inequitable, as the breach was trivial.
'Becomes Voidable' Where a party has not performed his obligations under the contract at the specified time, time being of the essence of the contract, the contract becomes voidable at the option of the other party, thus giving to the other party an option to treat the contract as at an end.2 If before the time fixed for performance, the party obliged to perform renounces his obligation or puts it out of his power to perform, the other party may, at his option, treat it as anticipatory breach without waiting for the time of the performance;3 but in a contract of payment by installments, time may continue to be the essence of the contract, despite a waiver of strict compliance with a fixed date for payment of earlier installments.4 Once time is of essence, either originally or subsequently made so by notice, and a party fails to perform at the stipulated time, the other party has a right to avoid the contract. This right can be exercised while making time of the essence, or even subsequently thereto;5 but in State of Maharashtra v. Digambar Balwant Kulkarni, 6 a contract of work provided time to be of essence and also that the contract was to continue to be in force till the completion of the work or its abandonment. It was held that the right of rescission would accrue to the other party only when the compensation due exceeded the amount of the security deposit, or the contractor abandoned the work. Till then, the contract remained in force. Where a contract is not performed at the specified time (or where no time is specified, within reasonable time), the UNIDROIT Principles enable the aggrieved party to withhold performance of its dependant promise. The Principles provide an opportunity to the non-performing party to cure the non-performance, and also entitle the aggrieved party to give more time to the non-performing party and claim damages before terminating the contract.7
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Notice of Termination Required If in a contract, the intention of the parties is that time shall be of the essence of the contract, it is voidable at the option of the promisee;8but it does not by itself come to an end after the expiry of the period. The termination has to be by proper notice under s. 66 of the Contract Act.9 It is open to the promisee not to exercise the option, or to exercise the option at any time. But he cannot, by the mere fact of not exercising the option, change or alter the date of performance fixed under the contract itself.10 In Muthaya Manigaran v Lakku Reddiar, 11A agreed to sell and deliver six candies of cotton to B on 12 July 1909, but failed to deliver them on that date. On 4 September 1909, B wrote to A stating that if A failed to deliver the cotton within a week, he would claim damages according to the market rate at the date of the letter. A took no notice of this letter. On 3 October 1909, B wrote another letter to A stating that as A failed to deliver the goods, he would claim damages on the footing of the market rate at the date of the second letter. It was held that B was not entitled to damages on that footing, but only to the difference between the contract rate and the market rate on 12 July, 1909, the latter being the date of the breach. It was held that the present section did not enable a promisee to keep alive a broken contract in the hope of being able to recover heavier damages for its breach. It was immaterial that no notice was given by A to B that the contract was at an end. 2 See also s. 64 (Consequences of rescission) and s. 75 (entitlement to compensation). 3 Chitty on Contracts, 28th edn., p. 1109, para 22-019. 4 Tropical Traders Ltd. v. Goonan, (1964) 111 CLR 41 at 52-55; Bird v. Hildage, [1948] 1 KB 91 at 94- 96, [1947] 2 All ER 7; Barclay v. Messenger, (1874) 43 LJ Ch 449 at 456, [1874-80] All ER Rep 1908. 5 Koyana Suryanarayana Reddy v. C. Chellayyamma, AIR 1989 AP 276. 6 AIR 1979 SC 1339. 7 See Art. 7.1.3 to Art. 7.1.5. 8 Kalidas Ghosh v. Mugneeram Bangur & Co., AIR 1955 Cal 298. 9 Hindustan Construetion Co. v. State of Bihar, AIR 1963 Pat 254 at 258; Tandra Venkata Subrahmanayam v. Vegesana Viswanadharaju, AIR 1968 AP 190. 10 Anandram Mangturam v. Bholaram Tanumal, (1946) ILR Bom 218, AIR 1946 Bom 1, (1945) 47 Bom LR 719. 11 (1914) 37 Mad 412, AIR 1914 Mad 573, 14 IC 255; Anandram Mangturam v. Bholaram Tanumal, (1946) ILR Bom 218, AIR 1946 Bom 1, (1945) 47 Bom LR 719; Paper Sales Ltd v. Chokhani Bros, AIR 1946 Bom 429.
Breach by Promisee Even if time is of the essence of the contract, there is no breach of contract by the purchaser if the seller has not perfected his title to the goods by the date the contract is to be completed.12 Where the buyer repudiated the contract on failure to deliver goods in time, time being of essence of the contract, the claim for damages by the seller was not maintainable.13 Where the vendee insisted on vacant possession of the premises, sold before he completed his part of the contract, although that was not a term of the contract, he was not entitled to specific performance and the question, whether time was or was not of the essence of the contract, was irrelevant.14 Where the Government gave extension of time to the contractor and defaulted in making running payment, time could not be held to be of the essence of the contract.15 Extension of Time Section 55 puts an agreement after the original date on the same footing as an agreement just before the original date. Mere forbearance from suing or giving a formal notice is not enough. Time for performance
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can be extended only by an agreement arrived at between the promisor and the promisee.16 The extension becomes binding under s. 63 of the Act .17 Where one party intimated to the other for extension of time, but the other party did not communicate any acceptance, time for performance was not extended.18 The parties can elect to extend the time for performance, even after the time stipulated has expired; and if the goods are not delivered, the buyer can claim damages as on the extended date,19 but damages on the basis of extended time cannot be claimed.20 The decisive date for fixing damages is the last date to which the contract was extended.21 Where several extensions of time have been effected, and there is an ultimate agreement specifying a particular date, the gaps between the intervening agreements are not material, and s. 55 can be applied to the final agreement.22 An agreement to postponement of performance for an unspecified time operates as extension for23 a reasonable time.23 The promisee cannot unilaterally extend the time for performance of the contract to get advantage of a favourable market. Section 55 does not enable a promisee to say that he elected to keep alive the contract to claim heavier damages. He can sue for the breach by the promisor, but not claim aggravated damages resulting from extension and caused by the promisee's action or inaction subsequent to the breach.24 Where time is of the essence of the contract, the question of there being any presumed extension or presumed acceptance of a renewed date, would not arise. Extension should be categorical, and not vague. Where there was no clear extension, and where the parties did not fix any date of performance after the specified time had elapsed, the court had no power to fix a date of performance for the contract, on its own.25 But where the Government gave several extensions of time to the contractor and the contractor defaulted in making running payment, time could not be held to be of the essence of the contract,26 so also where the time for performance was extended twice and the object of the purchase was not a commercial undertaking.27 Time could not be of essence where in a contract of import and supply of sugar, the port of discharge had not been named and the surveyor not appointed, without whose certificate the question of payment would not arise.28 However, if time was originally of the essence of the contract, it did not cease to be so, because a party agreed to grant a small extension.29 In an auction sale of plots, time was fixed for making payments and in certain circumstances, the Authority could accept payment subject to interest. The Authority accepted payments with interest after expiry of time fixed. It was not entitled to cancel the allotment of plots.30 12 Dina Nath Dutt v. Maha Vir Gupta, AIR 1958 Punj 289. 13 British Paints (India) Ltdv Union oj India,AIR 1971 Cal 393. 14 Bal Saroop Daulat Ram v. Lakhbir Singh Kirpal Singh, AIR 1964 Punj 375; Babu Bindeshri Parshad v. Mahant Jairam Gir, (1887) 14 IA 173; Narinjan v. Muhommad Yunus, AIR 1932 Lah 265 relied on. 15 Mohindar Singh and Co. v. Executive Engineer, AIR 1971 J&K 130 at 135; Jamshed Khoduram Irani v. Burjorji Dhunjibhai 40 Bom 289, AIR 1915 PC 83, (1916) 43 IA 26, 32 IC 246; Charles Rickards Ltd v. Oppenheim, [1950] 1 KB 616, [1950] 1 All ER 420; Shambhulal Pannalal Vaish v. Secretary of State, AIR 1940 Sind 1, 189 IC 785. 16 Anandram Mangturam v. Bholaram Tanumal, (1946) ILR Bom 218, AIR 1946 Bom 1, (1945) 47 Bom LR 719. 17 Aryan Mining & Trading Corporation Ltd. v. BN Elias & Co. Ltd., AIR 1959 CaI 472. 18 Venkateswara Minerals Firm v. Jugalkishore Chiranjitlal Firm, AIR 1986 Kant 14; VR Mohankrishnan v. Chimanlal Desai & Co., AIR 1960 Mad 452; Bali Ram Dhote v. Bhupendra Nath Banerjee, AIR 1978 Cal 559. 19 Muhammad Habidullah v. Bird & Co., (1921) 48 IA 175, 63 IC 589, AIR 1922 PC 178. 20 Aryan Mining & Trading Corpn. Ltd. v. BN Elias & Co. Ltd., AIR 1959 Cal 472; Muhammad Habidullah v. Bird & Co., (1921) 48 IA 175, 63 IC 589, AIR 1922 PC 178.
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21 Orissa Textile Mills Ltd. v. Ganesh Das Ramkishun, AIR 1961 Pat 107. 22 Paper Sales Ltd. v. Chokhani Bros, AIR 1946 Bom 429. 23 Muhammad Habidullah v. Bird & Co., (1921) 48 IA 175, 63 IC 589, AIR 1922 PC 178 at 180. 24 N. Sundareswaran v. Sri Krishna Refineries, AIR 1977 Mad 109 at 114; Muthayamanigaran v. Lakku Reddiar, (1912) 22 Mad LJ 413; Muthaya Manigaran v. Lakku Reddiar, (1914) 37 Mad 412, AIR 1914 Mad 573 at 576, 14 IC 255; 25 Arosan Enterprises Ltd. v. Union of India, AIR 1999 SC 3804 at 3815, reversing Food Corporation of India v. Arosan Enterprises Ltd., AIR 1996 Del 126 (where the High Court had proceeded on the basis that the buyer had impliedly fixed the new date of performance on the basis of the telex of the seller). 26 Mohindar Singh and Co. v. Executive Engineer, AIR 1971 J&K 130 at 135; Jamshed Khoduram Irani v. Burjorji Dhunjibhai 40 Bom 289, AIR 1915 PC 83, (1916) 43 IA 26, 32 IC 246; Charles Rickards Ltd v. Oppenheim, [1950] 1 KB 616, [1950] 1 All ER 420; Dominion of India v. Ram Rakha Mall & Sons., AIR 1957 Punj 141; Shambhulal Pannalal Vaish v. Secretary of State, AIR 1940 Sind 1, 189 IC 785; Swarnam Ramachandran v. Aravacode Chakungal Jayapalan, (2004) 8 SCC 689. 27 Devendra Basappa Daddannavar v. Sonubai Tuljansa Kosandal, AIR 1971 Mys 217 at 220; SP Narayanaswami Pillai v. Dhanakoti Ammal, AIR 1967 Mad 220; Sriram Cotton Pressing Factory (P) Ltd v. KE Narayanaswami Naidu, AIR 1965 Mad 352. 28 Arosan Enterprises Ltd. v. Union of India, AIR 1999 SC 3804; reversing Food Corporation of India v. Arosan Enterprises Ltd., AIR 1996 Del 126. 29 Lucknow Automobiles v. Replacement Parts Co., AIR 1940 Oudh 443 at 445; Orissa Textile Mills Ltd v. Ganesh Das Ramkrishun, AIR 1961 Pat 107 at 109; Bal Saroop Daulat Ram v. Lakhbir Singh Kirpal Singh, AIR 1964 Punj 375 at 380; Venkateswara Minerals Firm v. Jugalkishore Chiranjitlal Firm, AIR 1986 Kant 14 at 16. 30 R K Saxena v. Delhi Development Authority, AIR 2002 SC 2340, (2001) 4 SCC 137.
When Time is not of Essence Time is not of essence where the contract provides for damages for delayed completion, or for extension of time in certain circumstances,31 despite express provision making time of the essence, or provision of a default clause.32 These provisions are inconsistent with an intention to make time of the essence of the contract. Time for payment cannot be presumed to be of the essence of the contract.33 But the use of the words 'within ten days only,' indicated an intention to make time of the essence of the contract, and the plaintiff, who had not made the payment, was not entitled to specific performance.34 Time was not of the essence of the contract, where the time for performance was extended twice and the object of the purchase was not a commercial undertaking;35 where before execution of the sale deed, a mortgagee had to be paid off and the names of the vendors had to be mutated;36 or where the vendor had to obtain permission of the Government for sale in a contract for sale of a house;37 or in a contract for the supply of goods' by a contractor to Government, where the contract itself provided for extension of time;38 or in a contract between a railway and a merchant for the supply of food grains for consumption by the railway staff.39 The proposition, that a reasonable time must be allowed to see whether a prohibition against transfer under a regulation would be maintained, or a permit to transfer would be granted, has been applied to contracts which fail to be carried out within a reasonable time.40 Mere existence of a forfeiture clause without more is not indicative of time being of the essence of contract.41 31 K Abdulkhadar v. Plantation Corporation of Kerala Ltd, AIR 1983 Ker 1 at 8; Anand Construction Works v. State of Bihar, AIR 1973 Cal 550; DW Roberts v. Shaikh Hyder, AIR 1923 Nag 140; Shambhulal Pannalal Vaish v. Secretary of State, AIR 1940 Sind 1, 189 IC 785. 32 Chand Rani v. Kamal Rani, (1993) 1 SCC 519, AIR 1993 SC 1742. 33 American Pipe Company v. State of Uttar Pradesh, AIR 1983 Cal 186. 34 Chand Rani v. Kamal Rani, (1993) 1 SCC 519, AIR 1993 SC 1742.
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35 Devendra Basappa Daddannavar v. Sonubai Tuljansa Kosandal, AIR 1971 Mys 217 at 220; SP Narayanaswami Pillai v. Dhanakoti Ammal, AIR 1967 Mad 220; Sriram Cotton Pressing Factory (P) Ltd v. KE Narayanaswami Naidu, AIR 1965 Mad 352. 36 Govind Lal Chawla v. CK Sharma, AIR 1978 All 446; Govind Prasad Chaturvedi v. Hari Dutt Shastri, AIR 1977 SC 1005, [1977] 2 SCR 862, (1977) 2 SCC 539. 37 Chandnee Widya Vati Madden v. Dr CL Katial, [1964] 2 SCR 495, AIR 1964 SC 978. 38 Anand Construction Works v. State of Bihar, AIR 1973 Cal 550 at 555. 39 Dominion of India v. Raj Bahadur Seth Bhikhraj Jaipuria, AIR 1957 Pat 586; affirmed on appeal on s. 175(3) of Government of India Act inBhikraj Jaipuria v. Union of India, [1962] 2 SCR 880, AIR 1962 SC 113. 40 Andrew Millar & Co. Ltd. v. Taylor & Co., [1916] 1 KB 402. 41 Sambhunath Chakravarty v. Sushama Sinha, AIR 1980 Cal 5; but see Trailakyanath Maity v. Provabati Santra, AIR 1974 Cal 261.
Second Paragraph The application of the second paragraph was discussed in Anand Construction Works v. State of Bihar, 42 in which case time was held to be not of the essence, because the contract provided for extension of time. And time being not of essence, the Government could, without annulling the contract, claim compensation, and at the same time, allow the contract to be performed. For the same reason, the third paragraph of the section also did not apply. Compensation was therefore recoverable under the clause which provided for it in the contract. The second paragraph of s. 55 is English law, and compensation is recoverable, even in the case of sale of land where the time was not of the essence, by a purchaser, who has suffered damage because the vendor delayed possession.43 It cannot be said that time was originally of the essence of the agreement, when it did not specify a date for the completion, but merely provided for completion to take place as soon as reasonably practicable. However, in the case of a hazardous or wasting asset, where in a real commercial sense, time was of the essence, so that if a time for completion had been specified in the contract, time would have been of the essence; one party could make time of the essence by serving a reasonable notice to complete and could do so even though the other party had not been guilty of improper or undue delay.44 Performance within Reasonable Time Either party's general right to have the contract performed within a reasonable time according to the circumstances is, of course, unaffected by the fact of time not being of the essence; and in case of unnecessary delay by one party, the other may give him notice fixing a reasonable time, after the expiration of which he will treat the contract as at an end.45 Where there has been inordinate delay on both sides, it may be inferred that the contract has been abandoned,46 although no such notice has been given.47 Though time is not of the essence, the promisee cannot be expected to wait indefinitely, and the promisor must perform his promise within reasonable time.48 Damages for Delay Where the contract provided for extension of time, time was not of the essence of the contract for the supply of goods by a contractor to the Government, but default by the contractor entitled the Government to claim damages under the second paragraph of s. 55.49 42 AIR 1973 Cal 550.
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43 Phillips v. Lamdin, [1949] 2 KB 33, [1949] 1 All ER 770. 44 British and Commonwealth Holdings plc v. Quadrex Holding Inc., [1989] 3 All ER 492. 45 Stickney v. Keeble, [1915] AC 386; Shamjibhai v. Jagoo Hemchand, AIR 1952 Nag 220 at 234; Smith v. Hamilton, [1951] Ch 174, [1950] 2 All ER 928; Hanuman Prasad Pragdas v. PS Nanjappa Chetty & Sons, AIR 1949 Mad 858; Rahmath Unnissa Begum v. Shimoga Co-op Bank Ltd., AIR 1951 Mys 59 at 62. Cases of this class do not really come within the present section as observed in Burn & Co. Ltd v. HH Thakur Sahib Shree Lakhdhirjee, (1923) 28 CWN 104, 83 IC 260, AIR 1924 Cal 427, affirmed in 90 IC 52, AIR 1925 PC 188; Muhammad Habidullah v. Bird & Co., (1921) 48 IA 175, 63 IC 589, AIR 1922 PC 178; United Scientific Holding Ltd. v. Burnley BC, [1978] AC 904 at 924, 940 (the history of the law on stipulations as to time); Raineri v. Miles, [1981] AC 1050, [1980] 2 All ER 145. 46 Arosan Enterprises Ltd. v. Union of India, AIR 1999 SC 3804; reversing Food Corporation of India v. Arosan Enterprises Ltd., AIR 1996 Del 126. 47 Pearle Mill Co. Ltd v. Ivy Tannery Co., [1919] 1 KB 78, [1918-19] All ER Rep 702; Dau Alakhram v. Kulwantin Bai, (1950) Nag 386, AIR 1950 Nag 238; all the circumstances must be considered: Paal Wilson & Co. A/S v. Partenreederei Hannah Blumenthal (The Hannah Blumenthal), [1983] I AC 854 at 924, [1983] 1 All ER 34; Allied Marine Transport Ltd. v. Vale de Rio Doce Navegacao SA (The Leonidas D), [1985] 1 WLR 925, [1985] 2 All ER 796; interpreting Pearle Mill Co. Ltd v. Ivy Tannery Co., [1919] 1 KB 78, [1918-19] All ER Rep 702; Collin v. Duke of Westminster, [1985] QB 581, [1985] I All ER 463; MSC Mediterranean Shipping Co. SA v. BRE Metro Ltd., [1985] 2 Lloyd's Rep 239; Gber Van Weelde Scheepvaartkalllor BV v. Compania Naviera Sea Orient SA, [1987] Lloyd's Rep 223; Food Corp of India v. Antclizo Shipping Corporation (The Antclizo), [1988] I WLR 603, [1988] 2 All ER 513. 48 Devchand M Shah v. P. Sivapragasa Mudaliar, AIR 1998 Mad 304. 49 Anand Construction Works v. State of Bihar, AIR 1973 Cal 550 at 555.
Third Paragraph Where time is of the essence of contract, the promisee is entitled to avoid the contract, if the promisor does not perform his promise at the stipulated time. In that case, he can claim compensation for non-performance. If time is not of the essence, he must accept performance and he cannot avoid the contract, but he can claim damages for failure. But if time is of the essence, and the promisee accepts performance later, the promisee cannot claim compensation for any loss caused by the delay, unless he has given notice of such intention to the promisor when he accepted the performance. This sub-section clearly means that the promisee cannot claim damages for nonperformance at the original agreed time, not that he cannot claim damages for nonperformance at the extended time.50 Acceptance of Performance After the Specified Time and Waiver Where a party waives his right by taking benefit under a contract after the time fixed under the contract has elapsed or after a condition stipulated has not been fulfilled, he cannot rely on time being of the essence of the contract or the condition being the 'root of the matter', in order to avoid a contract.51 Where the seller repudiated the contract, but delivered the agreed goods upon criminal prosecution by the buyer, and the buyer accepted the goods from the seller, the buyer had waived his right to damages for late delivery.52 In a contract of payment by installments, time may continue to be the essence of the contract despite a waiver of strict compliance with a fixed date for payment of earlier installments.53 Where, despite the expiry of dates specified for delivery of goods, the purchaser continued to insist upon the supply being made by the seller, it was held that time was not of essence of the contract.54 A party can give a reasonable notice and make time the essence of the contract by specifying a new time limit, if the period of postponement is not specified in the waiver.55 Where the seller of immovable property accepted part payment under the terms of an agreement of sale of immovable property after the date specified for the purpose, and sought extension of time for registering the sale deed, the seller is also deemed to have waived his right.56 Notice of Intention to Claim Compensation
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A claim for compensation under this section would be barred, if the promisee accepts performance after the stipulated time, unless he had given notice to the promisor of his intention to claim compensation at the time of the delayed acceptance.57 Thus, where no such notice was given, while accepting the sites from the Government after the time agreed had lapsed, it was held that claim for compensation was barred by law.58 Where the party asserts the claim for compensation arising from delay, he is entitled to claim it.59 The Uttar Pradesh Amendment The third paragraph of this section stands modified in the State of Uttar Pradesh. The promisee, therefore, need not give notice' of the intention to claim compensation for delay, even if he accepts performance at any time other than that agreed. But he will lose the right of compensation, if he has waived this right when he accepted the performance at a time other than the stipulated time. 50 Muhammad Habidullah v. Bird & Co., (1921) 48 IA 175, 63 IC 589, AIR 1922 PC 178. 51 Vishram Arjun v. Irukulla Shankariah, AIR 1957 AP 784. 52 Chalisgoan Lakshmi Narayan Mills Co. Ltd. v. Amrit Lal Kalidas Kanji, AIR 1964 Bom 76 at 81. 53 Tropical Traders Ltd. v. Goonan, (1964) 111 CLR 41; Bird v. Hi/dage, [1948] 1 KB 91 at 94-96, [1947] 2 All ER 7; Barclay v. Messenger, (1874) 43 LJ Ch 449 at 456, [1874-80] All ER Rep 1908. 54 Bazpur Co-op Sugar Factory Ltd. v. Surendra Mohan Agarrual, AIR 1984 All 174. 55 Hartley v. Hymans, [1920] 3 KB 475 at 55, [1920] All ER Rep 328; Scandinavian Trading Co. A/B v. Zodiac Petroleum SA, [1981] 1 Lloyd's Rep 81; Charles Rickards Ltd v. Oppenheim, [1950] 1 KB 616 at 624, [1950] 1 All ER 420; Ficom SA v. Sociedad Cat/ex Ltd., [1980] Lloyd's 118 at 131; State Trading Corpn. of India Ltd. v. Compagnie Francaise d' Importation et de Distribution, [1983] 2 Lloyd's Rep 679. 56 P D'Souza v. Shondrilo Naidu, AIR 2004 SC 4472, (2004) 6 SCC 649. 57 State of Kerala v. M A Mathai, AIR 2007 SC 1537, (2007) 10 SCC 195. 58 State of Andhra Pradesh v. Associated Engg Enterprises, Hyderabad, AIR 1990 AP 294, at 301. 59 Mintoolal Brijmohandas v. State of MP, AIR 2005 MP 205.
Commercial and Mercantile Contracts In commercial or mercantile contracts, the need of certainty is of great importance. &uot;Where both parties are engaged in business and articles are purchased by one party from the other party for business purposes...the transaction falls within the term 'mercantile transaction&uot;.60 There is no place in mercantile contracts for the presumption that time is not of the essence of the contract,61 and the Supreme Court has held that stipulation as to time is ordinarily of the essence of the contract in mercantile contracts,62 and that when this important condition is broken, the aggrieved party is entitled to rescind the contract under this section. In modern business documents, men of business are taken to mean exactly what they say. 'Merchants are not in the habit of placing upon their contracts, stipulations to which they do not attach some value and importance.'63 Parties to mercantile contracts, therefore, cannot rely upon the present section to save them from the consequences of unpunctuality. Thus, whether the defendant agreed to deliver his elephant to the plaintiff for khedda operation (to capture wild elephants) on 1 October 1910, and the defendant subsequently obtained an extension of the time till 6 October, but did not deliver the elephant till 11 October, it was held that the very circumstance that the defendant asked for extension of the time, showed that time was intended to be of the essence of the contract, and that the plaintiff was therefore justified in refusing to accept the elephant on 11 October, and was entitled to damages for breach of the contract.64 Where a contract for the sale of goods provided for delivery to be taken by the buyer within a specified
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period, and reserved liberty to the seller, if delivery was not taken within the fixed period, to sell the goods on the buyer's account and at his risk, the mere fact that the contract contained a clause that after the expiry of that period, the goods shall remain at the buyer's risk, would not take the case out of the general rule that in mercantile contracts, time is of the essence of the contract.65 Time has, for example, been held to be of the essence of the contract in the sale of goods notoriously subject to rapid fluctuations of market price;66 in a contract for the purchase of shares on payment by stipulated date, which, having regard to the nature of the property, was of a highly speculative nature;67 in an agreement by an exhibitor to exhibit a newly released film on a particular date;68 and in a contract where the vehicle was purchased not for private, but for business purposes.69 60 Reuter Hufeland & Co. v. Sala & Co., (1879) 4 CPD 239 per Cotton LJ at 249, [1874-80] All ER Rep Ext 1552; Dominion of India v. Raj Bahadur Seth Bhikhraj Jaipuria, AIR 1957 Pat 586 (supply of foodgrains of the railway staff). 61 Lucknow Automobiles v. Replacement Parts Co., AIR 1940 Oudh 443; Madina Rice Mills v. Sampangirmiah, AIR 1953 Mys 66; Arthur Norrington v. James A Wright, (1885) 115 US 189 (Supreme Court of USA). 62 Mahabir Prasad Rungta v. Durga Datta, AIR 1961 SC 990, [1961] 3 SCR 369; Dominion of India v. Raj Bahadur Seth Bhikhraj Jaipuria, AIR 1957 Pat 586; affirmed on appeal in Bhikraj Jaipuria v. Union of India, [1962] 2 SCR 880, AIR 1962 SC 113; on another point; Bowes v. Shand, [1877] 2 AC 455 at 463; China Cotton Exporters v. Beharlial Ramcharan Cotton Mills Ltd., AIR 1961 SC 1295, [1961] 3 SCR 845; Venkateswara Minerals Firm v. Jugalkishore Chiranjitlal Firm, AIR 1986 Kant 14. 63 Lord Crains in Bowes v. Shand, [1877] 2 AC 455 at 463. 64 Bhudar Chandra Goswami v. CRS Betts, (1915) 22 Cal LJ 566, AIR 1916 Cal 901, 33 IC 347. 65 Delhi Cloth Mills Co. Ltd v. Kanhia, (1913) Punj Rec No. 80 p. 285. 66 Balaram Paramsukdass Firm v. Gudiyatam Govinda Chetty, (1925) 49 Mad LJ 200, 91 IC 257, AIR 1925 Mad 1232; Ramdhan Das Ram Kissan Firm v. Kishori Chand Geop Firm, AIR 1954 Ori 254. 67 Hare v. Nicoll, [1966] 2 QB 130, [1966] 1 All ER 285 at 290, [1966] 2 WLR 441. 68 Sreedhara Shenoy v. K Thanumalayan, AIR 1953 Tr & Coch 90 at 94. 69 Hitkari Motors v. Attar Singh, AIR 1962 J&K 10.
Contracts Relating to Immovable Property The Privy Council has observed in Jamshed Khoduram Irani v. Burjorji Dhunjibhai, 70 that this section does not lay down any principle as regards contracts to sell land in India, different from those under the law of England, which governs the rights of the parties in case of specific performance of contracts to sell real estate. This section looks not at the letter, but at the substance of the agreement in order to ascertain whether the parties, notwithstanding the fact that they named a specific time within which. completion was to take place, really and in substance, intended more than that it should take place within a reasonable time. Specific performance of a contract of that nature will be granted, although there has been a failure to keep the dates assigned by it, if justice can be done between the parties, and if nothing in: (a) the express stipulations of the parties; (b) the nature of the property; or (c) the surrounding circumstances make it inequitable to grant the relief. The period fixed for completion in the Privy Council case above referred to was two months. Requisitions on title were made by the purchaser and were not complied with by the vendor, who subsequently claimed to be entitled to put an end to the contract, because the purchaser had failed to complete within the stipulated time. It was held, applying the principles above, that there was no intention that time should be of the essence of the contract, and the purchaser was entitled to specific performance.71 The Supreme Court has held72 that in the case of contract for the sale of immovable property, there is a presumption against time being of the essence of the contract. The fixation of period, within which the contract has to be performed, does not by itself make time of the essence of the contract. This general
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principle is subject to the intention of the parties, who may make time of the essence, even in contracts relating to immovable property.73 Even if it is not expressed to be made of the essence of the contract, the court may infer that it is to be performed in reasonable time by ascertaining the intention of the parties from: (a) the express terms of the contract; (b) the nature of the property; and (c) surrounding circumstances, e.g., the object of making the contract.74 The intention to treat time of the essence of the contract has to be evidenced by circumstances which are sufficiently strong to displace the normal presumption,75 namely, where the seller had been compelled to sell the house to repay the loan and to meet her day-to-day living expenses,76 or the sale was arranged to meet the expenses of a marriage scheduled on a certain date.77 Time of payment was of the essence, where the vendor desired to purchase another residential accommodation with that amount.78 Using the words 'within ten days only' in connection with an installment of payment of price, showed an intention of the parties to make time of the essence of the contract.79 The mere fact that there is a term of the contract of sale imposing a penalty in case of default, does not make time of the essence of the contract.80 It has been suggested that the rule that in the case of the sale of land, there is no presumption as to time being of the essence of the contract, needs reconsideration. In KS Vidyanadam v. Vairavan, 81 the Supreme Court has observed that the rule that time was not of the essence in contracts of immovable properties, was required to be relaxed, particularly in the case of urban properties, because the rule has evolved in the times when the prices and values of the properties were stable and inflation was unknown. Besides, if the land has commercial potential, the rule should not be made applicable unless the parties choose otherwise. A contract of sale of immovable property, in which one of the terms was that the seller would apply for and obtain permission to sell within two months, can be specially enforced, even where an application was made and withdrawn by the seller. In such a case, the seller can be ordered to make the application, if the buyer is ready and willing to perform the contract and time is not of the essence of the contract.82 A provision that a contract of sale shall be deemed to be cancelled, if within two months from the date of the contract or within further period agreed to, the consent of the treasurer was not obtained as contemplated, and neither party shall be liable to the other for any damages, was held to be 'voidable' in the event of the consent not being obtained by either party.83 Time was held not of essence, where a sale deed had to be executed within six weeks, but before the sale deed was executed, a mortgage had to be paid off and the names of the vendors had to be mutated.84 The circumstance, that the prices of land were rising, cannot be a ground for holding that time was of the essence,85 though it may be an important factor for refusing specific performance.86 Even in the case of sale of land, time can be made of the essence of the contract, by giving a noticeto the other side, guilty of undue delay to perform the contract in a reasonable time.87 This can also be done in a contract, where the stipulation of time as the essence has been waived.88But time cannot be made the essence of the contract by a unilateral act ion.89 70 Jamshed Khoduram Irani v. Burjorji Dhunjibhai 40 Bom 289, AIR 1915 PC 83, (1916) 43 IA 26, 32 IC 246; Sachidananda Patnaik v. GP & Co., AIR 1964 Ori 269; Gomathinayagam Pillai v. Palaniswami Nadar, [1967] I SCR 227, AIR 1967 SC 868; Govind Prasad Chaturvedi v. Hari Dutt Shastri, AIR 1977 SC 1005 at 1008, [1977] 2 SCR 862, (1977) 2 SCC 539. 71 Jamshed Khoduram Irani v. Burjorji Dhunjibhai 40 Bom 289, AIR 1915 PC 83, (1916) 43 IA 26, 32 IC 246; followed in Mahadeo Prasad Agarwalla v. Narain Chandra Chakrabarty, (1919-20) 24 CWN 330, AIR 1920 Cal 651, 57 IC 121; Sadiq Hussain v. Anup Singh, (1923) 4 Lah 327, 76 IC 91, AIR 1924 Lah 151; Kanshi Ram v. Baij Nath, AIR 1927 Jau 197, (1926) 98 IC 890; Kalidas Ghosh v. Mugneeram Bangur & Co., AIR 1955 Cal 298; Arun Prokash Boral v. Tulsi Charan Bose, AIR 1949 Cal 510; Debendra Nath Mandal v. Sakhilal Kar, (1950) 55 CWN 320, AIR 1950 Cal 526; Madan Mohan v. Jawala Parshad, AIR 1950 EP 278; Kamu v. Gonda Ram, AIR 1947 Lah 352; Sastha Kumaraswamy v. Joseph Alasius, AIR 1950 Tr & Coch 61; Sankalchand Kuberdas v. Joitram Ranchhod, (1949) 51 Bom LR 156, AIR 1949 Bom 193; Subedar Dubey v. Madho Dubey, AIR 1953 All 529; Amarnath Nikkuram v. Mohan Singh Surjan Singh, AIR 1954 MB 134. 72 Govind Prasad Chaturvedi v. Hari Dutt Shastri, AIR 1977 SC 1005 at 1008, [1977] 2 SCR 862, (1977) 2 SCC 539; following Gomathinayagam Pillai v. Palaniswami Nadar, [1967] I SCR 227, AIR 1967 SC 868 at 871; Indira Kaur v. Shea Lal Kapoor, AIR 1988 SC 1074 at 1079; Chand Rani v. Kamal Rani, (1993) 1 SCC 519, AIR 1993 SC 1742; Suraj Singh v. Nathi, Bai, AIR 1990 MP 323 at 324; Ram Kishan Das v. Bhavi Chand Sharma, AIR 1988 Del 20 at 23; KM Jose v. D Anantha Bhat, AIR 1987 Kant 173; Narayanan Nair Ramakrishnan Nair v. Zacharia Kuriakose, AIR 1991 Ker 152; Ved
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Prakash Gupta v. Shishu Pal Singh, AIR 1984 All 288; Shankarlal Bijreja v. Ashok B Ahuja, AIR 2011 Chhat 66. 73 Nanak Builders & Investors Pvt. Ltd. v. Vinod Kumar Alag, AIR 1991 Del 315 at 321; Kamal Rani v. Chand Rani, AIR 1980 Del 188; reiterated in Chand Rani v. Kamal Rani, (1993) 1 SCC 519, AIR 1993 SC 1742. 74 Dipnarain Sinha v. Dinanath Singh, AIR 1981 Pat 69 at 73; Gomathinayagam Pillai v. Palaniswami Nadar, [1967] 1 SCR 227, AIR 1967 SC 868. 75 Govind Prasad Chaturvedi v. Had Dutt Shastri, AIR 1977 SC 1005 at 1008, [1977] 2 SCR 862, (1977) 2 SCC 539; Shakuntla Devi v. Mohanlal Amrit Raj Jain Market, AIR 1994 Raj 259. 76 Suraj Singh v. Nathi Bai, AIR 1990 MP 323. 77 His Holiness Acharya Swami Ganesh Dassji v. Situ Ram Thapar, AIR 1996 SC 2095. 78 PR Deb & Associates v. Sunanda Roy, AIR 1996 SC 1504. 79 Chand Rani v. Kamal Rani, (1993) 1 SCC 519, AIR 1993 SC 1742; see also Vivek Garg v. Y.C. Kurele, IA No. 8220/2013 in CS(OS) 933/2013, decided on 5 Sep 2013 (Del); IS Sikandar v. K. Subramani, Civil Appeal No. 7306 of 2013. 80 Mangal Ram Namasudra v. Premananda Namasudra, AIR 1972 Assam 8 at 10; following Gomathinayagam Pillai v. Palaniswami Nadal, [1967] 1 SCR 227, AIR 1967 SC 868; Pakharsingh v. Kishansingh, AIR 1974 Raj 112 at 114. 81 AIR 1997 SC 1751, (1997) 3 SCC 1; reversing airavan v. KS Vidyanadam, AIR 1996 Mad 353. 82 Chandnee Widya Vati Madden v. Dr CL Katia4 [1964] 2 SCR 495, AIR 1964 SC 978. 83 Suttor v. Gundowda Pty Ltd., (1950) 81 ILR 418 at 441-2; Hindustan Construction Company v. State of Bihar, AIR 1963 Pat 254 at 258; Chandnee Widya Vati Madden v. Dr CL Katial, [1964] 2 SCR 495, AIR 1964 SC 978. 84 Govind Lal Chawla v. CK Sharma, AIR 1978 All 446; Govind Prasad Chaturvedi v. Hari Dutt Shastri, AIR 1977 SC 1005, [1977] 2 SCR 862, (1977) 2 SCC 539. 85 Amba Lal Umrao Singh v. L Harish Chander, AIR 1955 Punj 189; but see SV Sankaralinga Nadar v. PTS Ratnaswamy Nadar, AIR 1952 Mad 389 (mere rise in prices is no ground for denying specific performance) overruled in KS Vidyanadam v. Vairavan, AIR 1997 SC 1751, (1997) 3 SCC 1. 86 KS Vidyanadam v. Vairavan, AIR 1997 SC 1751, (1997) 3 SCC 1; reversing Vairavan v. KS Vidyanadam, AIR 1996 Mad 353; overruling SV Sankaralinga Nadar v. PTS Ratnaswamy Nadar, AIR 1952 Mad 389. 87 Mulla Badruddin v. Tufail Ahmed, AIR 1963 MP 31; Tadepalli Kuttumba Rama Sastry v. Seetepalli Dahhina Murthy, AIR 1960 AP 178; Jamshed Khoduram Irani v. Burjorji Dhunjibhai 40 Bom 289, AIR 1915 PC 83, (1916) 43 IA 26, 32 IC 246; Pichai Moideen Rowther v. Chathurbuja Das Kushal Das & Sons, AIR 1933 Mad 736; Nannapaneni Subayya Chowdary v. Garikapati Veerayya, AIR 1957 AP 307. 88 Dominion of India v. Raj Bahadur Seth Bhikhraj Jaipuria, AIR 1957 Pat 586; Hartley v. Hymans, [1920] 3 KB 475 at 55, [1920] All ER Rep 328 (a case of sale of goods) and Hare v. Nicoll, [1966] 2 QB 130, [1966] 1 All ER 285, [1966] 2 WLR 441 (sale of shares). 89 Aryan Mining & Trading Corpn. Ltd. v. BN Elias & Co. Ltd., AIR 1959 Cal 472; VR Mohankrishnan v. Chimanlal Desai & Co., AIR 1960 Mad 452 at 454.
Renewal of Leases 'An option for renewal of a lease or for the purchase or repurchase of property must in all cases be exercised strictly within the time limited for the purpose, otherwise it will lapse.'90 The reason is that renewal of a lease is a privilege, and if the tenant wishes to claim the privilege, he must do so strictly within the time limited.91 At common law, stipulations as to time in a contract, giving an option for renewal of a lease, were considered to be of the essence of the contract, even if not expressed to be so and were construed as conditions precedent. Equity followed the common law rule in respect of such contracts.92 Relief cannot be had against failure to give notice in time, save under special circumstances.93 Those special circumstances which are unavoidable--accident, fraud, surprise, ignorance, and the wilful or inequitable conduct on the part of the lessor, preclude him for refusing to give the renewal.94 A unilateral contract or obligation, like an option in a lease, does not bind the promisor unless and until the conditions specified in it, whether trivial or substantial, have been fulfilled.95
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90 Hare v. Nicoll, [1966] 2 QB 130 at 145, [1966] 1 All ER 285, [1966] 2 WLR 441; Caltex (India) Ltd. v. Bhagwan Devi Marodia, AIR 1969 SC 405 at 407; Halsbury's Laws of England, Vol. 9(1), 4th edn. Reissue, 30 June 1998, CONTRACT, para 933. 91 Caltex (India) Ltd. v. Bhagwan Devi Marodia, AIR 1969 SC 405 at 407; K Simrathmull v. Nanjalingiah Gowder, AIR 1963 SC 1182, [1962] Supp 3 SCR 476; Shunmugam Pillai v. Annalakshmi Ammal, AIR 1950 FC 38, (1950) SCJ 1; Devan Man Mohan Lal v. L Piary Lal, AIR 1973 All 16 at 18; Hasam Nurani Malak v. Mohan Singh, AIR 1974 Bom 136 at 138; Samarapuri Chettiar v. A Sutharsana Chettiar 42 Mad 802, AIR 1919 Mad 544; Shriram Gangabisan Agarwal v. Rambilass Harsukhdas, (1947) Nag 127, 228 IC 499, AIR 1947 Nag 208. 92 Caltex (India) Ltd. v. Bhagwan Devi Maradia, AIR 1969 SC 405 at 407, explaining Jamshed Khoduram Irani v. Burjorji Dhunjibhai, ILR 40 Bom 289, AIR 1915 PC 83, (1916) 43 IA 26, 32 IC 246. 93 Caltex (India) Ltd v. Bhagwan Devi Marodia, AIR 1969 SC 405 at 407. 94 Ibid; Eaton v. Lyon 30 ER 1233 at 1224-25, (1798) 3 Ves 690 at 692-93; Reid v. Blagrave (1931) 9 LJ Ch 245. 95 United Dominions Trust (Commercial) Ltd. v. Eagle, Aircraft Services Ltd., [1968] 1 WLR 74 at 81, [1968] 1 All ER 104; Weston v. Collins, (1865) 12 LT 4, [1861-73] All ER Rep Ext 1398; Hare v. Nicoll, [1966] 2 QB 130, [1966] 1 All ER 285, [1966] 2 WLR 441(CA) ; West Country Cleaners (Falmouth) Ltd v. Saly, [1966] 3 All ER 210, [1966] 1 WLR 1485.
Option to Repurchase Time is always of the essence for reconveyance of the property96 where there is an express stipulation to that effect, and special circumstances in support thereof.97 An option to repurchase (being an exceptional provision for the seller's benefit), must be exercised strictly within the time limited,1 and in accordance with the conditions stipulated.2 A judgment of the Calcutta High Court, which held that even where there was a provision in an agreement for reconveyance, that in default of payment of purchase price by a particular date, the original vendor would lose his right of getting the reconveyance, the agreement did not make time to be of the essence of the contract, does not follow the earlier judgments of the Supreme Court.3 Where, the plaintiff was required under the conditions of a deed of reconveyance, to tender money during the period specified, but could not prove such tender, it was held that the terms of the reconveyance deed, including the term as to the time, had to be strictly construed and the defendants were entitled to refuse to execute the sale deed.4 A suit for specific performance of agreement to reconvey was maintainable, when it was filed one day before the expiry of eight years--the time fixed for obtaining reconveyance.5 If no time limit is fixed, an agreement to reconvey must be enforced and option exercised within reasonable time.6 Reasonable time for repurchase in the case of a wasting asset like an aircraft was three months, and a demand to repurchase within five months did not fulfill the obligation of repurchase within a reasonable time.7 But in option contracts, there is a standing offer which can be accepted at any time being reasonable time, except when it lapses by the death of the other party or by his breach by transferring the property to a third party.8 It is only then that absence of time limits becomes relevant. 96 Bismillah Begum v. Rahmatulla Khan, AIR 1998 SC 970, (1998) 2 SCC 226, following Shanmugam Pillai v. Annalakshmi Ammal, AIR 1950 FC 38, (1950) SCJ 1 and Caltex (India) Ltd. v. Bhagwan Devi Marodia, AIR 1969 SC 405; Babu Ram a/s Durga Prasad v. Indra Pal Singh, AIR 1998 SC 3021, (1998) 6 SCC 358; Raj Kishore v. Prem Singh, AIR 2011 SC 382; Raj Kishore v. Prem Singh, (2011) 1 SCC 657. 97 Bibi Jaibunisha v. Jagdish Pandit, (1997) 4 SCC 481. 1 Samarapuri Chettiar v. A Sutharsana Chettiar 42 Mad 802, AIR 1919 Mad 544; Maung Wala v. Mg Shwe Gun, (1923) 1 Rang 472, 82 IC 610, AIR 1924 Rang 57; Balasundara Mudaliar v. Muthuvenkatachala Mudaliar, AIR 1954 Mad 799; Phukan Ali v. Sahjadi, AIR 1954 Assam 54; Protap Chandra Koyal v. Kali Charan Acharjya, AIR 1952 Cal 32; following Dibbins v. Dibbins, [1896] 2 Ch 348; Shriram Gangabisan Agarwal v. Rambilass Harsukhdas, (1947) Nag 127, 228 IC 499, AIR 1947 Nag 208; Shanmugam Pillai v. Annalakshmi Ammal, AIR 1950 FC 38, 1950 SCJ 1; Krishna Chandra Sharma v.
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Ramgulam, AIR 1958 MP 295; Hare v. Nicoll, [1966] 2 QB 130, [1966] 1 All ER 285 at 289, [1966] 2 WLR 441. 2 Hare v. Nicoll, [1966] 2 QB 130, [1966] 1 All ER 285, [1966] 2 WLR 441 (case of sale of shares). 3 Shambhunath Chakravarty v. Sushama Sinha, AIR 1980 Cal 5 at 7; referring to Ardeshir H Mama v. Flora Sassoon, AIR 1928 PC 208; (unfortunately, the Supreme Court and other judgments were not brought to the Court's notice and only Govind Prasad Chaturvedi v. Hari Dutt Shastri, AIR 1977 SC 1005, (1977) 2 SCC 539 was quoted, which did not directly deal with this point). 4 Bibi Anwarunisa v. Daulat Rai, AIR 1988 Pat 229 at 233; Hasam Nurani Malak v. Mohan Singh, AIR 1974 Bom 136; Shambhunath Chakravarty v. Sushama Sinha, AIR 1980 Cal 5. 5 DS Thimmappa v. Siddaramakka, AIR 1996 SC 1960, (1996) 8 SCC 365. 6 Alamelu Ammal v. Radhakrishna Naidu, AIR 1964 Mad 304; Arjuna Mudaliar v. Lakshmi Ammal, AIR 1949 Mad 265; Rajammal v. R Gopalaswami Naidu, AIR 1951 Mad 767; United Dominions Trust (Commercial) Ltd. v. Eagle, Aircraft Services Ltd., [1968] 1 WLR 74 at 81, [1968] 1 All ER 104; Caltex (India) Ltd. v. Bhagwan Devi Maradia, AIR 1969 SC 405; Hemanta Kumari Debi v. Safatulla Biswas, AIR 1933 Cal 477; applying Ram Lal Dubey v. Secy of State, AIR 1918 Cal 59. 7 United Dominions Trust (Commercial) Ltd. v. Eagle Aircraft Services Ltd., [1968] 1 WLR 74, [1968] 1 All ER 104. 8 Alamelu Ammal v. Radhakrishna Naidu, AIR 1964 Mad 304.
Specific Performance and Limitation The principle, that time stipulated in a contract for sale of immovable property is not the essence of the contract, has nothing to do with the period of limitation within which a suit for specific performance of contract has to be filed. One touches on the right to enforce the contract and the other touches on the period within which that right has to be enforced. By ignoring the period stipulated in the contract or by holding that the time stipulated in a contract for sale of immovable property is not the essence of the contract in a given case, the period of limitation stipulated in the Act, can neither be ignored nor extended by courts.9 9 K Kallaiah v. Ningegowda, AIR 1982 Kant 93 at 98; For the effect of delay on the granting of the relief of specific performance, see commentary below on s. 20, Specific Relief Act, 1963.
'If no Time is Specified' If no time is specified for performance, the provisions of s s. 46-50 will apply, and the promise has to be performed within reasonable time. A contract of carriage by rail does not expressly or impliedly fix any time, and must be performed within reasonable time.10 10 Managing Agents (Martin & Co) v. Seth Deokinandan, AIR 1959 MP 276; discussion under ss. 46-50 above. * See s. 65,infra.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER IV Of the Performance of Contracts/Contracts which must be performed/S. 56.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV
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Of the Performance of Contracts Contracts which must be performed S. 56. Agreement to do impossible act.-An agreement to do an act impossible in itself is void. Contract to do act afterwards becoming impossible or unlawful.--A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.* Compensation for loss through non-performance of act known to be impossible or unlawful.--Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise. Illustrations (a) (b) (c) (d) (e)
A agrees with B to discover treasure by magic. The agreement is void. A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void. A contracts to marry B, being already married to C, and being forbidden by the law to which he is subject to practice polygamy. A must make compensation to B for the loss caused to her by the non-performance of his promise. A contracts to take in cargo for B at a foreign port. A's Government afterwards declares war against the country in which the port is situated. The contract becomes void when war is declared. A contracts to act at a theatre for six months in consideration of a sum paid in advance by B. On several occasions A is too ill to act. The contract to act on those occasions becomes void.
Introduction The first paragraph of s. 56 provides that an agreement to do an act impossible in itself is void. The second paragraph provides that a contract to do an act becomes unenforceable, (a) if the act becomes impossible; or (b) for reasons of some event which the promisor could not prevent. It also provides that it becomes so unenforceable when the act becomes impossible or unlawful. The third paragraph places a liability upon a promisor to compensate the promisee for non-performance of the promise, where the promisor knew, or with reasonable diligence might have known, and the promisee did not know, that the act promised by the promisor was impossible or unlawful.
English Law and this Section The first paragraph represents the same law as in England. The second paragraph has the effect of turning into a general rule, the limited exceptions under the English law. The Act lays down positive rules of law on questions which English and American Courts have, of late, increasingly tended to regard as matters of construction, depending on the true intention of the parties. It is not permissible to import the principles of English law de hors the statutory provisions.
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It has been observed that the different legal theories formulated in England do not concern Indian cases because of the statutory provisions in The Indian Contract Act, 1872, the only doctrine being that of supervening impossibility or illegality as laid down in s. 56 taking the word 'impossible' in its practical and not literal sense.11The doctrine of frustration, according to Indian law, is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done. The application of this section is not restricted to cases of physical impossibility. To the extent that the Contract Act deals with this subject, it is exhaustive. English cases would have a persuasive value and are only helpful in showing how the English Courts have decided cases under similar circumstances.12 The illustrations do not, indeed, appear to go beyond English authority, but this cannot detract from the generality of the enacting words. There is no reason to suppose that a broad simplification of the English rules was not intended, nor does it appear that any inconvenience has ensued or is to be expected. On the other hand, some of the English cases could not be decided in the same way under this section without straining the language. In Krell v. Henry, 13H agreed to hire the use of K's rooms in London on 26 and 27 June 1902, for the purpose of seeing the intended coronation processions. By reason of the King's illness, no procession took place on either of those days. It was held that K could not recover the balance of the agreed rent, as the taking place of the procession 'was regarded by both contracting parties as the foundation of the contract'.14 Here, it remained quite possible for K to lease the use of the rooms to H, and for H to use them; it was only the object of the act contracted for that had failed, and that object was not mentioned in the contract itself, though H took the rooms in consequence of seeking an announcement pasted up in them, that windows to view the coronation processions were to be let. In India, such a case would, perhaps, fall more appropriately under s. 32. One way round the difficulty of regarding the decision in Krell v. Henry, as representing the law of India, has been to take the view that s. 56 is not exhaustive. This is in accordance with the opinion of a bench of the East Punjab High Court in Parshotam Das Shankar Das v. Municipal Committee Batala 15 and in Rama Nand Vijay Parkash v. Gokal Chand Gian Chand 16where Kapur J. refers to the preamble of the Act itself. But in Satyabrata Ghose v. Mugneeram Bangur & Co. 17 the Supreme Court repelled this suggestion, so that the only way in which Krell v. Henry could be reconciled with the Act, is either to regard it as falling under s. 32, or to rely on the readiness of the Supreme Court to construe the word 'impossible' in its practical rather than its literal sense.18 The Supreme Court has in the cases decided, confined the doctrine within the boundaries of the section. 11 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310 at 322, AIR 1954 SC 44 (cases decided by HL and other English cases refd to); Naihati Jute Mills Ltd. v. Khyaliram Jagannath, [1968] 1 SCR 821, AIR 1968 SC 522 at 526; Ganga Saran v. Firm Ram Charan Ram Gopal, [1952] SCR 36, AIR 1952 SC 9 at 11. 12 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310 at 319, AIR 1954 SC 44 at 47; referring to FA Tamplin Steamship Co. Ltd. v. Anglo-Mexican Petroleum Products Co. Ltd., [1916] 2 AC 397 at 403, [1916-17] All ER Rep 104; Joseph Constantine Steamship Line Ltd. v. Imperial Smelting Corpn Ltd., [1942] AC 154 at 168, [1941] 2 All ER 165 (observations of Lord Maugham quoted); Raja Dhruv Dev Chand v. Raja Harmohinder Singh, [1968] 3 SCR 339, AIR 1968 SC 1024; overruling Parshotam Das Shankar Das v. Municipal Committee Batala, AIR 1949 EP 301 at 304, where s. 56 was held not exhaustive; contra Rama Nand Vijay Parkash v. Gokal Chand Gian Chand, AIR 1951 Pun 189(Sim) at 201, no longer good law on the extent of s. 56; Boothalinga Agencies v. VTC Poriaswami Nadar, AIR 1969 SC 110. 13 [1903] 2 KB 740, [1900-3] All ER Rep 20. 14 Krell v. Henry, [1903] 2 KB 740, [1900-3] All ER Rep 20 at 23; In Chandler v. Webster, [1904] 1 KB 493, it had been held that payments already made could be recovered back; but this case, often criticised, was finally overruled by the House of Lords in Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd., [1943] AC 32, [1942] 2 All ER 122; so far as regards cases where by reason of the frustrating event, there has been total failure of consideration; but see now Law of Reform (Frustrated Contracts) Act, 1943, and notes to s. 65 below. The rule in Chandler v. Webster, was not accepted in India; Boggiano & Co. v. Arab Steamers Ltd., (1915) 40 Bom 529, AIR 1916 Bom 265, 33 IC 536; Gandha Korliah v. Janoo Hassan, (1925) 49 Mad 200, 91 IC 780, AIR 1926 Mad 175; PKPS Sivanadian Chettiar v. Batchu Surayya, AIR 1925 Mad 727. The Fibrosa case merely brings English law into line with Indian law, although Indian law still offers a wider remedy by way of refund. 15 AIR 1949 EP 301 at 304. 16 AIR 1951 Pun (Sim) 189 at 201. 17 [1954] SCR 310, AIR 1954 SC 44 at 47; Raja Dhruv Dev Chand v. Raja Harmohinder Singh, [1968] 3 SCR 339, AIR 1968 SC 1024.
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18 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310, AIR 1954 SC 44 at 48.
Doctrine of Frustration Frustration signifies a certain set of circumstances arising after the formation of the contract, the occurrence of which is due to no fault of either party and which render performance of the contract by one or both parties physically and commercially impossible. The Court regards these sets of circumstances as releasing the parties from any further obligations.19 Where the entire performance of a contract becomes substantially impossible without any fault on either side, the contract is prima facie dissolved by the doctrine of frustration.20 The law excuses further performance under the doctrine of frustration, where the contract is silent as to the position of the parties in the event of performance becoming literally impossible or only possible in a very different way from that originally contemplated. The doctrine of frustration operates to excuse from further performance where: (a) it appears from the nature of the contract and the surrounding circumstances that the parties have contracted on the basis that some fundamental thing or state of things will continue to exist, or that some particular person will continue to be available, or that some future event, which forms the basis of the contract, will take place; and (b) before breach, an event in relation to the matter stipulated in (a) renders performance impossible or only possible in a very different way from that contemplated, but without default of either party.21 The doctrine and its operation has been summarised very succinctly as follows:22
(i) (ii) (iii) (iv) (v) (vi)
The doctrine of frustration was evolved to mitigate the rigour of the common law's insistence on literal performance of absolute promises. The object of the doctrine was to give effect to the demands of justice...as an expedient to escape from injustice where such would result from enforcement of a contract in its literal terms after a significant change in circumstances. Since the effect of frustration is to kill the contract and discharge the parties from further liability under it, the doctrine is not to be lightly invoked, must be kept within narrow limits and ought not to be extended. Frustration brings the contract to an end forthwith, without more and automatically...The essence of frustration is that it should not be due to the act or election of the party seeking to rely on it. The frustrating event must be some outside event or extraneous change of situation. A frustrating event must take place without blame or fault on the side of the party seeking to rely on it.
The doctrine of frustration is an aspect and part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done, and hence comes within the purview of this section.23 But it is also stated to perform an important function of defining the scope and extent of contractual obligations.24 Development of the Doctrine in the English Law The common law rule of contract was that a man was bound to perform the obligation, which he had undertaken, and could not claim to be excused by the mere fact that performance had subsequently become impossible;25 because the parties could expressly provide in their agreement, that upon fulfilment of a condition or occurrence of an event, either or both of them would be discharged of some or all of their obligations under the contract.
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...when the party of his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract.26
A modification of this absoluteness came in a case of supervening illegality, where a charterparty of a British ship was frustrated by the outbreak of war between Britain and a foreign country, where the cargo was to be loaded.27 Then in 1863, the decision of the Queen's Bench in Taylor v. Caldwell 28 introduced an exception to this rule by using the device of implying of a term; where the plaintiff had sued the defendant for damages for breach of a contract, and where the music hall hired by the plaintiff was destroyed by fire before the date of performance arrived, the defendant was held not liable to pay. The Court did not construe the contract as a positive contract, 'but as subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without default of the contractor'.29 In Jackson v. Union Marine Insurance Co. Ltd.,30 the plaintiff's ship ran aground and underwent repairs for a long time, during which time the charterers chartered another ship. The plaintiff claimed the freight lost under the charterparty from its insurers. The claim would succeed, if the charterers were justified in repudiating their contract with the plaintiffs. The Court held that had the charterers waited, it would have been an adventure different from that which both the parties had contemplated at the time of the contract. The contract was held frustrated, and both the parties discharged. Thus, the doctrine was extended beyond the sphere of literal impossibility. In Krell v. Henry, 31 the defendant had agreed to hire from the plaintiff, a room for two days for viewing the King's coronation processions, which were later cancelled. Performance was not physically impossible and the defendant had used the rooms on the days. It was held that frustration was not restricted to physical impossibility, it also applied to 'cases where the event which renders the contract incapable of performance is the cessation or non-existence of an express condition or state of things going to the root of the contract and essential to its performance'.32 Ultimately, in Davis Contractors Ltd. v. Fareham Urban District Council, 33 a test of frustration was stated as that which rendered performance of the contract 'a thing radically different from that which was undertaken by the contract'. There must be such a change in the significance of the obligation, that the thing undertaken, would, if performed, be a different thing from that contracted for. The doctrine of frustration has been stated to have been developed by the law as an expedient to escape from injustice, where such would result from enforcement of a contract in its literal terms after a significant change in circumstances.34'It is really a device, by which the rules as to absolute contracts are reconciled with a special exception which justice demands'.35 Theories of the Doctrine of Frustration The theories of the doctrine of frustration evolved by English Courts were discussed by the Supreme Court, but were held unimportant in view of the statutory provision in the Act .
In deciding the cases in India, the only doctrine we have to go by is that of supervening impossibility or illegality as laid down in s. 56 of the Indian Contract Act, taking the word 'impossible' in its practical and not literal sense.36
It held that this section was exhaustive and that importing the English law de hors the statutory provisions was not permissible.37 In Naihati Jute Mills Ltd. v. Khyaliram Jagannath, 38 it was stated:
These theories have been evolved...to adopt a realistic approach to the problem of performance of contract when it is found that owing to causes unforeseen and beyond the control of the parties intervening between the date of the contract and the date of its performance it would be both unreasonable and unjust to exact its performance in the
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changed circumstances...The necessity of evolving one or the other theory was due to the common law rule that Courts have no power to absolve a party to the contract from his obligation. On the other hand, they were anxious to preserve intact the sanctity of contract while on the other, the Courts could not shut their eyes to the harshness of the situation in cases where the performance became impossible by causes which could not have been foreseen and which were beyond the control of parties. Such difficulty has, however, not to be faced by Courts in this country. In Ganga Saran v. Firm Ram Charan Ram Gopal, 39this Court emphasised that so far as the Courts in this country are concerned they must look primarily to the law as embodied in Sections 32 and 56 of the Contract Act . In Satyabrata Ghose v. Mugneeram Bangur & Co., 40 also, Mukherjee J. (as he then was) stated that Section 56 laid down a rule of positive law and did not leave the matter to be determined according to the intention of parties.
It would nevertheless be useful to discuss the theories which English Courts evolved to soften the rigours of the absolute rule;41 using which, they formulated the true basis of discharge of contract when its performance is made impossible by intervening causes, over which the parties have no control.42 The theories or juristic bases43 for the doctrine of frustration were evolved for justifying the departure from the doctrine of absolute contracts.44 The main theories are:
(i) (ii) (iii) (iv)
implied term theory; basis or foundation of the contract; just and reasonable solution; and radical change in the obligation under the contract.
Implied Term The implied term test originally adopted in Taylor v. Caldwell, 45 first introduced the doctrine of frustration in the English law, and was later accepted and applied in a number of later judgments.46 This theory implies that the contract is discharged because the parties can be taken to have impliedly provided that in the events which have subsequently happened, the contract would come to an end. The following speech of Lord Loreburn in FA Tamplin Steamship Co. Ltd. v. Anglo-Mexican Petroleum Products Co. Ltd., 47 is the classic exposition of the basis of implied term theory:
A Court can and ought to examine the contract and the circumstances in which it was made, not of course to vary but only to explain it, in order to see whether or not from the nature of it the parties must have made their bargain on the footing that a particular thing or state of things would continue to exist. And if they must have done so, then a term to that effect will be implied, though it be not expressed in the contract...Sometimes, it is put that performance has become impossible and that the party concerned did not promise to perform an impossibility. Sometimes it is put that the parties contemplated a certain state of things which fell out otherwise. In most of the cases it is said that there was an implied condition in the contract which operated to release the parties from performing it, and in all of them I think that was at the bottom the principle upon which the Court proceeded. It is, in my opinion, the true principle, for no Court has an absolving power, but it can infer from the nature of the contract and the surrounding circumstances that a condition which was not expressed was a foundation on which the parties contracted.
In its subjective form, the Court would have to read the contract and give effect to the real intention of the parties. It was stated in Hirji Mulji v. Cheong Yue SS Co. Ltd., 48 that the term is to be implied by law ab initio, in order to supply what the parties would have inserted had the matter occurred to them; 'the law is only doing what the parties really (though subconsciously) meant to do for themselves'.49 The theory cannot be supported in its subjective form, because the parties cannot be taken to have provided for something which did not occur to them. Further, even if the likelihood of the event had occurred to them, they may not have agreed to share a common view about the event frustrating the contract.
It is not possible...to say that if they had thought of it, they would have said: 'Well, if that happens, all is over
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between us.' On the contrary, they would almost certainly on the one side or the other have sought to introduce reservations or qualifications or compensations.50
The implied term may be stated objectively. It may mean a term which, in the light of the events which have actually arisen, the parties as reasonable people would have imported into the contract to deal with that possibility;51 by way of a fiction added to the contract by the law. Even the test of implied term laid down by Lord Loreburn in the FA Tamplin Steamship Co. Ltd. v. Anglo-Mexican Petroleum Products Co. Ltd.,52 is not a purely subjective one. He said:
From the nature of the contract, it cannot be supposed that the parties as reasonable men intended it to be binding on them under such altered conditions. Were the altered conditions such that, had they thought of them, they would have taken their chance of them, or such that as sensible men they would have said, if it happens, of course, it is all over between us?53
Even the objective implied term test is artificial and unattractive, and has been the subject of considerable criticism. The 'reasonable person' described does not exist, and 'the spokesman of the...reasonable man...is and must be the Court itself.'54 Such an implied term is no more than a fiction, something added to the contract by the law.55 The use of implied term technique, as a means of granting excuses from performance, allows the risk that the Courts might undermine contractual relations without regard to the business practices of the parties or to the usages of businessmen engaged in similar commercial transactions.56 No term should be implied 'when it is possible to hold that reasonable men could have contemplated the circumstances as they exist and yet have entered into the bargain expressed in the contract'.57 The test also loses its impact where the Court holds the contract as frustrated despite express provisions for the event in the contract.58 In truth, discharge of the contract occurs because of an exercise of a positive function by the Court in declaring the contract as frustrated. The test applied by the Courts has been stated as:
Would any reasonable third party (in this case the Court itself) regard the aforesaid circumstances as altering the original obligations of both the parties to such an extent that that third party would consider the contract as at an end?...[The] theory of implied term...seems to mean that no reasonable person would have deemed the party who is affected by the subsequent occurrence of the stultifying events as willing to have entered into the contract, if, when he made it, he could have foreseen their occurrence in the exact shape in which they occur.59
The implied term theory was finally rejected by the House of Lords in National Carriers Ltd. v. Panalpina (Northern) Ltd .60 Section 56 has been held to lay down a positive rule relating to frustration and does not leave the matter of frustration to the Courts to be determined according to the intention of the parties.61 But in Bansilal Fomra v. Thadava Cooperative Agricultural and Industrial Society Ltd., 62 the theory of implied term was stated as a basis of frustration. Such intention can be gathered from surrounding circumstances, the conditions under which the contract was entered into, the compelling dents that the law would make in it for the general good and welfare of the community. If such an irresistible intention was at the back of mind of the parties, then a Court, taking all the circumstances into consideration, would imply a term in the contract. In Union of India v. C Damani & Co., 63 the Supreme Court has also observed that there was an implied condition in ordinary contracts that the parties shall be exonerated in case, before the breach, the performance became impossible on account of physical causes or legal prohibitions. Disappearance of the Foundation of the Contract The doctrine of frustration has also been based upon a theory of the disappearance of the 'basis or the foundation of the contract'. This theory, like all other theories, except in the cases which are founded upon
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the physical impossibility of performing a term of the contract as in Taylor v. Caldwell, 64 presents the acute form of conflict between the pacta sunt servanda65 and non haec in foedera veni.66 The theory of disappearance or destruction of the basis of a contract goes back through Nickoll & Knight v. Ashton Edridge & Co 67 to Taylor v. Caldwell, 68 reaching its full development in Krell v. Henry, 69 a case of frustration of the commercial object, where there was no physical impossibility but there 'was cessation or non-existence of an express condition or the state of things going to the root of the contract and essential to its performance'. Vaughan Williams LJ. explained that the doctrine of frustration applied:
...to cases where the event which rendered the contract incapable of performance is the cessation or non-existence of an express condition or state of things, going to the root of the contract and essential to its performance.70
The foundation of contract theory has best been stated by Lord Haldane in FA Tamplin Steamship Co. Ltd. v. Anglo-Mexican Petroleum Products Co. Ltd :71
When 'people enter into a contract which is dependent for the possibility of performance on the continued availability of a specific thing, and that availability comes to an end by reason of circumstances beyond the control of the parties, the contract is prima facie regarded as dissolved...Although the words of the stipulation may be such that the mere letter would describe what has occurred, the occurrence itself may yet be of a character and extent so sweeping that the foundation of what the parties are deemed to have had in contemplation has disappeared, and the contract itself has vanished with that foundation.
In WJ Tatem Limited v. Gamboa, 72 the foundation theory was described as the surest ground on which to rest the doctrine of frustration, and it was stated:
...that the foundation of the contract has gone by destruction of the subject-matter or by reason of long interruption or delay so that the performance is in effect that of a different contract.
This theory obviates the necessity of speculation involved in ascertaining the intention of the parties, and is stated as most appropriate where performance depends on the continued availability of a specific thing.73 But the words 'basis' or 'foundation' are imprecise. The basis or foundation may not be easily ascertainable; and doubts about what was the basis or 'foundation' may have to be resolved by construing the contract; leaving no fundamental difference between this theory and the theory of implied term. It would also be difficult to apply the theory to situations other than those where the subject matter is no longer available.74 The theory has been rejected by the House of Lords in National Carriers Ltd. v. Panalpina (Northern) Ltd. 75 Just and Reasonable Result The view, 'just and reasonable result' really abandons the theory of implied term and simply states that it is the law that in particular circumstances the contract shall come to an end. The description of circumstances is not stated except in so far as, the termination of the contract is believed by the Court to be a 'fair and just' result in all the circumstances of the case,76 i.e., in the absence of express intentions of the parties, simply determine what is fair and just, i.e., the Court exercises its power 'in order to achieve a result which is just and reasonable'77 or one which justice demands.78 The doctrine of frustration is thus dependent on the intervention of the law to impose a just and reasonable solution.79 In Ocean Tramp Tankers Corporation v. VIO Sovfracht (the Eugenia), 80 it was stated:
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...if it should happen, in the course of carrying out a contract that a fundamentally different situation arises for which the parties have made no provision--so much so that it would not be just in the new situation to hold them bound in its terms--then the contract is at an end. The theory of implied term is now discarded.
In British Movietonews Ltd. v. London and District Cinemas Ltd., 81 Denning LJ. said that the Court really exercises a qualifying power in order to do what is 'just and reasonable' in the new situation. It has an absolving power. But on appeal, the House of Lords disapproved of this statement of law:82
The principle remains the same. Particular application of it may greatly vary and theoretical lawyers may debate whether the rule should be regarded as arising from implied term or because the basis of the contract no longer exists. In any view it is a question of construction as Lord Wright pointed out in Constantine's case,83 and as has been repeatedly asserted by other masters of law.
The approach of this theory introduces an element of uncertainty and has not received the imprint of binding authority.84 Radical Change in Obligation The appropriate test now applied to determine whether the contract has been frustrated is that of 'a radical change in the obligation'. Lord Radcliffe said in Davis Contractors Ltd. v. Fareham Urban District Council: 85
...Frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract...there must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.
This formulation was expressly upheld by the House of Lords in later cases.86 In National Carriers Ltd. v. Panalpina (Northern) Ltd., 87 Lord Simon set out the same test thus:
Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and / or the obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such a case the law declares the parties to be discharged from further performance.
The words 'not commercially or fundamentally different' cannot be intended to mean that it was neither commercially or fundamentally different. It means that the performance was not fundamentally different in a commercial sense. The ultimate question is whether the new method of performance is fundamentally different, and that is a question of law--was there frustration or not.88 The term 'fundamentally altered'89 and 'radically different'90 used in connection with the doctrine of frustration, mean the same thing as perhaps do other adverbs that have been used in this context.91 In Codelfa Construction Pty Ltd. v. State Rail Authority of New South Wales, 1 a case decided by the High
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Court of Australia, a construction company had contracted with the railway authority for construction of an underground railway within a specified time. The contractor had specifically agreed to take all measures possible to avoid noise and nuisance to the public, particularly, the nearby residents. The parties had received, accepted and act ed on erroneous legal advice that the contract work would not be hindered by any injunction to restrain noise and nuisance. The work operated in three shifts for seven days of the week. After commencing work, the company was restrained pursuant to a suit by third parties from working between 10 pm to 6 am. The company compromised the matter and agreed not to carry the work above a certain noise level between those hours, and not to excavate on Sundays. The company claimed from the railway authority, the amount involved in the additional costs and profit lost because of the change in the working methods it was compelled to adopt, and in the alternative, alleged frustration of the contract. It was held that the performance of the contract was radically different from performance in the circumstances which it contemplated; and the contract had been frustrated by the grant of the injunctions. It was observed that:
...it was unlawful to complete the works in the manner contemplated and within the time required by the contract because the only manner of operation which would produce that result was prohibited by the injunction...The situation became one in which it was impossible to perform the contract in accordance with its terms, impossible because Court orders restrained the mode of performance, which has been held to constitute a nuisance, but which was critical to the completion of the works within the time allowed.2
The dissenting view was that 'the injunction limiting working hours did not more than enforce judicially a limitation by which Codelfa was already legally bound3. 19 Winfield,[1942] 58 LQR 280. 20 PS Atiyah, An Introduction to the Law of Contract, 5th edn., p. 231: 21 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, CONTRACT, para 897. 22 J Lauritzen AS v. Wijsmuller BV (The Super Servant Two), [1990] I Lloyd's Rep 1 per Bingham LJ. at 8. 23 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954) SCR 310, AIR 1954 SC 44 at 47; Naihati Jute Mills Ltd. v. Khyaliram Jagannath, [1968] 1 SCR 821, AIR 1968 SC 522 at 527; Boothalinga Agencies v. VTC Poriaswami Nadar, AIR 1969 SC 110 at 116. 24 PS Atiyah, An Introduction to the Law of Contract, 5th edn., p. 219. 25 Paradine v. Jane, (1647) Aleyn 26, [1558-1774] All ER Rep 172 (case of a tenant dispossessed by king's enemies). 26 (1647) Aleyn 26, p. 27. 27 Atkinson v. Ritchie, (1809) 10 East 530. 28 122 ER 309, [1861-73] All ER Rep 24, (1863) 3 B&S 826. 29 [1861-73] All ER Rep 24 at 27. 30 (1874) LR 10 CP 125, [1874-80] All ER Rep 317. 31 [1903] 2 KB 740, [1900-03] All ER Rep 20. 32 [1903] 2 KB 740 at 748, [1900-3] All ER Rep 20 at 23. 33 [1956] AC 696 per Lord Radcliffe at 729, [1956] 2 All ER 145 at 160, [1956] 3 WLR 37(HL), approved in National Carriers Ltd. v. Panalpina (Northern) Ltd., [1981] AC 675 at 688, 700, 702, [1981] 1 All ER 161; Pioneer Shipping Ltd. v. BPT Tioxide Ltd., (The Nema) [1982] AC 724 at 752, [1981] 2 All ER 1030. 34 National Carriers Ltd. v. Panalpina (Northern) Ltd., [1981] AC 675, [1981] 1 All ER 161 per Lord Simon at 176. 35 Hirji Mulji v. Cheong Yue SS Co. Ltd., [1926] AC 497 at 510, [1926] All ER Rep 51 at 59. 36 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310, AIR 1954 SC 44 at 48.
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37 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310, AIR 1954 SC 44; Raja Dhruv Dev Chand v. Raja Harmohinder Singh, [1968] 3 SCR 339, AIR 1968 SC 1024. 38 [1968] 1 SCR 821, AIR 1968 SC 522 per Shelat J. at 525-27. 39 [1952] SCR 36, AIR 1952 SC 9. 40 [1954] SCR 310, AIR 1954 SC 44 at 48. 41 Chitty on Contracts, 28th edn., pp 1172-77, paras 24-009 to 24-018; Treitel, The Law of Contract, 5th edn., p. 649. 42 Naihati Jute Mills Ltd. v. Khyaliram Jagannath, [1968] 1 SCR 821, AIR 1968 SC 522 at 525. 43 McNair,[1940] 56 LQR 173. 44 Treitel, The Law of Contract, 5th edn., p. 680. 45 122 ER 309, [1861-73] All ER Rep 24, (1863) 3 B&S 826. 46 The Moorcock,(1889) 14 PD 64; [1886-90] All ER Rep 530; Bank Line Ltd. v. Arthur Capel & Co., [1919] AC 435, [1918-19] All ER Rep 504 per Lord Sumner; British Movietonews Ltd. v. London and District Cinemas Ltd., [1952] AC 166, [1950] 2 All ER 390 per Viscount Simon and Lord Simonds. 47 [1916] 2 AC 397 at 403-4, [1916-17] All ER Rep 104. 48 [1926] AC 497 per Lord Sumner at 509-510, [1926] All ER Rep 51. 49 [1926] AC 497 at 504, [1926] All ER Rep 51 at 55. 50 Denny, Mott & Dickson Ltd. v. James B Fraser & Co. Ltd., [1944] AC 265 per Lord Wright at 275, [1944] 1 All ER 678 at 683 (HL). 51 Dahl v. Nelson, Donkin & Co., [1881] 6 AC 38 at 59, [1881-85] All ER Rep 572 at 582. 52 [1916] 2 AC 397, [1916-17] All ER Rep 104. 53 FA Tamplin Steamship Co. Ltd. v. Anglo-Mexican Petroleum Products Co. Ltd., [1916] 2 AC 397 at 404, [1916-17] All ER Rep 104. 54 Davis Contractors Ltd. v. Fareham Urban District Council, [1956] AC 696, [1956] 2 All ER 145 per Lord Radcliffe at 160, [1956] 3 WLR 37. 55 Anson's Law of Contract 29th edn., 2010, p. 486. 56 Trakman,(1983) 46 MLR 39. 57 Scottish Navigation Co. Ltd. v. WA Souter & Co., [1917] 1 KB 222 per Lawrence J. at 249. 58 See below: 'Frustration Despite Express Provision'. 59 See Winfield,[1942] 58 LQR 280. 60 [1981] AC 675, [1981] 1 All ER 161(HL) . 61 Satyabarata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310 at 322, AIR 1954 SC 44. 62 (1976) 1 Mad LJ 39 at 48; relying on Sannidhi Gundayya v. Illoori Subbaya, AIR 1927 Mad 89, (1926) 51 Mad LJ 633, 99 IC 459. 63 AIR 1980 SC 1149 at 1154. 64 122 ER 309, [1861-73] All ER Rep 24, (1863) 3 B&S 826 (a case of burning down the music hall let for four days); Nickoll & Knight v. Ashton, Edridge & Co., [1901] 2 KB 126, [190003] All ER Rep 928 CA; Krell v. Henry, [1903] 2 KB 740, [1900-3] All ER Rep 20; Scanlan's New Neon Ltd. v. Tooheys Ltd., (1943) 67 CLR 169 at 188; Universal Cargo Carriers Corpn. v. Citati, [1957] 2 QB 401, [1957] 2 All ER 70 (where time is not of the essence, delay of the charterer must be such as to frustrate the object of the charter party). 65 Agreements of the parties must be observed. 66 It was not this, that I promised to do. 67 [1901] 2 KB 126, [1900-03] All ER Rep 928, CA.
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68 (1863) 3 B & S. 826, 122 ER 309. 69 [1903] 2 KB 740, [1900-03] All ER Rep 20. 70 [1903] 2 KB 740, [1900-03] All ER Rep 20 at 23; Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd., [1943] AC 32, [1942] 2 All ER 122 at 129. 71 [1916] 2 AC 397 at 406, [1916-17] All ER Rep 104. 72 [1939] 1 KB 132 at 137, [1938] 3 All ER 135. 73 Treitel, The Law of Contract, 5th edn., p. 682. 74 For criticism of the theory, see Treitel, The Law of Contract, 5th edn., p. 682-83; McNair,[1919] 35 LQR 84; McNair,[1940] 56 LQR 173. 75 [1981] AC 675, [1981] 1 All ER 161 at 166 (HL). 76 Scanlan's New Neon Ltd. v. Tooheys Ltd., (1943) 67 CLR 169 at 187; Ocean Tramp Tankers Corpn. v. VIO Sovfracht (the Eugenia), [1964] 2 QB 226, [1964] 1 All ER 161, [1964] 2 WLR 114 at 121 (CA) (it would not be just in the new situation to hold the parties bound in its new terms). 77 Joseph Constantine Steamship Line Ltd. v. Imperial Smelting Corpn. Ltd., [1942] AC 154 per Lord Wright at 186, [1941] 2 All ER 165; Scanlan's New Neon Ltd. v. Tooheys Ltd., (1943) 67 CLR 169 at 188; Ocean Tramp Tankers Corpn v. V/O Sovfracht (the Eugenia) [1964] 2 QB 226, [1964] 1 All ER 161, [1964] 2 WLR 114 at 121 (CA) (it will not be just in the new situation to hold the parties bound in its new terms); British Movietonews Ltd. v. London and District Cinemas Ltd., [1951] 1 KB 190, [1950] 2 All ER 390, per Denning LJ at 395, but not accepted on appeal, [1952] AC 166, [1951] 2 All ER 617(HL) ; McNair,[1949] 56 LQR 173; Naihati Jute Mills Ltd. v. Khyaliram Jagannath, [1968] 1 SCR 821, AIR 1968 SC 522 at 526; Ram Kumar Agarwalla v. PC Roy & Co. (India) Ltd. AIR 1952 Cal 397 at 402; Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310, AIR 1954 SC 44. 78 Hirji Mulji v. Cheong Yue SS Co. Ltd., [1926] AC 497 at 510, [1926] All ER Rep 51; McNair,[1940] 56 LQR 173. 79 Denny, Mott & Dickson Ltd. v. James B Fraser & Co. Ltd., [1944] AC 265 per Lord Wright at 275, [1944] 1 All ER 678 at 683 (HL); Baxter Fell & Co. v. Galbraith and Grant Ltd., (1941) 70 LlL Rep 142 at per Atkinson J. at 157; Hirji Mulji v. Cheong Yue SS Co. Ltd., [1926] AC 497 per Lord Sumner at 509, [1926] All ER Rep 51, PC; Joseph Constantine Steamship Line Ltd. v. Imperial Smelting Corpn Ltd., [1942] AC 154 per Lord Wright at 186, 187, [1941] 2 All ER 165 at 186-87 (HL). 80 [1964] 2 QB 226, [1964] 1 All ER 161, [1964] 2 WLR 114 at 121 (CA); Scanlan's New Neon Ltd. v. Tooheys Ltd., (1943) 67 CLR 169 at 187. 81 [1951] 1 KB 190, [1950] 2 All ER 390(CA) (a case of supply of news reels to cinemas held not to be frustrated by the war coming to an end--an uncontemplated turn of events). 82 [1952] AC 166 per Viscount Simon at 184; quoted in Ganga Saran v. Firm Ram Charan Ram Gopal, [1952] SCR 36, AIR 1952 SC 9; Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310 at 322, AIR 1954 SC 44. 83 Joseph Constantine Steamship Line Ltd. v. Imperial Smelting Corpn. Ltd., [1942] AC 154, [1941] 2 All ER 165;observations of Denning LJ. were not adopted by the Supreme Court in Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793, per Shah J. at 807, AIR 1960 SC 588 at 594. 84 Scanlan's New Neon Ltd. v. Tooheys Ltd., (1943) 67 CLR 169 per Latham CJ. at 188. 85 [1956] AC 696 at 728, [1956] 2 All ER 145 at 160, [1956] 3 WLR 37. 86 Tsakiroglou & Co. Ltd. v. Noblee & Thorl GmbH, [1962] AC 93, [1961]2 All ER 179, [1961] 2 WLR 633(HL) ; Ocean Tramp Tankers Corpn. v. V/O Sovfracht (the Eugenia), [1964] 2 QB 226, [1964] 1 All ER 161, [1964] 2 WLR 114(CA) ; National Carriers Ltd. v. Panalpina (Northem) Ltd., [1981] AC 675, [1981] 1 All ER 161; Pioneer Shipping Ltd. v. BPT Tioxide Ltd. (The Nema), [1982] AC 724, [1981] 2 All ER 1030; Paal Wilson & Co. AlS v. Partenreederei Hannah Blumenthal (The Hannah Blumenthal), [1983] 1 AC 854, [1983] 1 All ER 34. 87 [1981] AC 675 at 700, [1981] 1 All ER 161 at 175 (HL). 88 Tsakiroglou & Co. Ltd. v. Noblee & Thorl GmbH, [1962] AC 93, [1961] 2 All ER 179 per Lord Reid at 187, [1961] 2 WLR 633 at 645. 89 British Movietonews Ltd. v. London and District Cinemas Ltd., [1952] AC 166 at 185, [1950] 2 All ER 390 per Viscount Simon at 624; Davis Contractors Ltd. v. Fareham Urban District Council, [1956] AC 696 at 723, [1956] 2 All ER 145 per Lord Reid at 155, [1956] 3 WLR 37. 90 Davis Contractors Ltd. v. Fareham Urban District Council, [1956] AC 696 at 729, [1956] 2 All ER 145 at 160, [1956] 3 WLR 37.
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91 Tsakiroglou & Co. Ltd. v. Noblee & Thorl GmbH, [1962] AC 93, [1961] 2 All ER 179, 184, [1961] 2 WLR 633(HL) . 1 (1982) 149 CLR 337; applying Davis Contractors Ltd. v. Fareham Urban District Council, [1956] AC 696, [1956] 2 All ER 145, [1956] 3 WLR 37. 2 (1982) 149 CLR 337 per Atckin J. at 376 and 381. 3 (1982) 149 CLR 337 per Brennan J. at 409.
Construction of Contract The 'construction of contract' test is sometimes called the 'construction' theory, as the Courts, as a matter of law, construe the contract in the light of the facts existing at its formation, i.e., its nature and the relevant surrounding circumstances when it was made. After determining the obligation undertaken by the parties, the Court must then find out whether there has been a radical change in that obligation if the performance were enforced in the changed circumstances which have subsequently arisen. On the other hand, another view is that all the theories depend, as the last resort, on the construction of the contract, that 'construing the contract and implying a term are in these cases only alternative ways of describing the same process',4 construction being necessary to ascertain the true meaning of the contract, or for construing an implied term, or for finding the 'basis' or 'foundation' of the contract when it is doubtful. Frustration depends, at least in most cases, on the true construction of terms read in the light of the contract and the relevant surrounding circumstances when the contract was made.5 True construction of the agreement must depend upon the import of the words used and not upon what the parties subsequently choose to say afterwards.6 In Alopi Parshad & Sons Ltd. v. Union of India, 7 the Supreme Court stated that when it is said that in such circumstances, the Court reaches a conclusion which is 'just and reasonable' as in Joseph Constantine Steamship Line Ltd. v. Imperial Smelting Corporation Ltd., 8 or one which justice demands, as stated by Lord Sumner in Hirji Mulji v. Cheong Yue SS Co. Ltd., 9 the result is arrived at by putting a just construction upon the contract in accordance with an implication...from the 'presumed' common intention of the parties.10 Section 56 and Rule of Construction Section 56 is exhaustive, and it is not permissible for the Courts to travel outside the provisions.11 When an event of change of circumstances occurs, which is so fundamental as to be regarded by law as striking at the root of the contract, it is the Court which can pronounce the contract to be frustrated and at an end. The Court has to examine the contract, the circumstances under which it was made, the belief, knowledge and intention of the parties, being evidence of whether the changed circumstances destroyed altogether the basis of the adventure and its underlying object.12 This, in England, is termed as rule of construction;13in India, this is really a rule of positive law and as such comes under s. 56 of the Contract Act.14 According to s. 9 of the Contract Act, the terms of contract may be expressed or implied. Therefore, where as a matter of construction, the contract itself contains, impliedly or expressly, a term according to which it would stand discharged on the happening of a certain event, the dissolution of the contract would take place under the terms of the contract itself and that would be outside the scope of s. 56. Although, in English law these are treated as cases of frustration, in Indian law, they would fall under s. 32 of the Contract Act, which deals with contingent contracts or other similar provisions contained in the Act .15 Construction and Frustration
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But changes in facts affecting performance of contract may also be treated as straightforward issues of construction without involving the doctrine of frustration.16 In Staffordshire Area Health Authority v. South Staffordshire Waterworks Co., 17 the question had arisen whether the phenomenal rise in price of water would frustrate an old contract for supply of water providing for very low rates of water. The Court construed the contract, and implied a term that the contract was terminable at a reasonable notice. In Goculdas Madhavji v. Narsu Yenkuji, 18 the defendant, a stone contractor, agreed to pay to the plaintiff R s. 329 per month for one year for permission to blast stones, and carry on the work of quarrying on the plaintiff's land, the defendant to obtain at his own expense, the necessary licence for blasting the stones. At the time of the agreement, the defendant had a licence from the authorities, but it expired during the term of the agreement and the authorities refused to renew it. The defendant declined to pay the rent for the unexpired period of agreement. In a suit by the plaintiff for rent, it was held that the question was one of construction, and that, looking at the nature of the contract, it must be taken to have been the intention of the parties that the monthly payment should only be payable so long as quarrying was permitted by the authorities. The present section was considered to have nothing to do with the case.19 In Ganga Saran v. Firm Ram Charan Ram Gopal, 20 the parties entered into five contracts, under which the defendant undertook to supply 184 bales of cloth manufactured by Victoria Cotton Mills. The contract provided that the sellers would continue sending the goods to the buyers as soon 'as they are prepared' by the mills; they would go on supplying to the buyers 'as soon as the goods are supplied to the sellers' by the mills, and goods would be supplied out of the goods which will be 'prepared by the mills'. In a suit for damages for failure to supply the goods, the defence of frustration by circumstances beyond the control of the sellers was held unsustainable. It was held that the contract was not contingent upon the happening of an uncertain future event; i.e., the goods being supplied by the mills. The words 'prepared by the mills' were only descriptive of the goods to be supplied and the words 'as soon as they are prepared' and 'as soon as they are supplied to us' by the said mills indicated the process of delivery.21 The contract did not fall within the second paragraph of s. 56. 4 Treitel, The Law of Contract, 5th edn., p. 683. 5 Davis Contractors Ltd. v. Fareham Urban District Council, [1956] AC 696 per Lord Reid at 720-21, 728-29, [1956] 2 All ER 145 at 153, [1956] 3 WLR 37; British Movietonews Ltd. v. London and District Cinemas Ltd., [1952] AC 166 per Viscount Simon at 185, [1950] 2 All ER 390 at 625; Sir Lindsay Parkinson & Co. Ltd. v. Commissioners of Works and Public Buildings, [1949] 2 KB 632 per Asquith LJ. at 667, [1950] 1 All ER 208(CA) ; Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310 at 321, AIR 1954 SC 44 at 48 referring to British Movietonews Ltd. v. London and District Cinemas Ltd., [1952] AC 166, [1950] 2 All ER 390. 6 Ganga Saran v. Firm Ram Charan Ram Gopal, [1952] SCR 36, AIR 1952 SC 9 at 11. 7 [1960] 2 SCR 793 at 806, AIR 1960 SC 588 at 594. 8 [1942] AC 154 per Lord Wright at 186, [1941] 2 All ER 165 at 186. 9 [1926] AC 497 at 510, [1926] All ER Rep 51(PC) . 10 British Movietonews Ltd. v. London and District Cinemas Ltd., [1952] AC 166 at per Lord Simon at 185-86, [1950] 2 All ER 390 at 625; Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793 per Shah J. at 806, AIR 1960 SC 588 at 594. 11 Raja Dhruv Dev Chand v. Raja Harmohinder Singh, [1968] 3 SCR 339, AIR 1968 SC 1024; Boothalinga Agencies v. VTC Poriaswami Nadar, AIR 1969 SC 110. 12 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310 at 324, AIR 1954 SC 44 at 48; referring to Morgan v. Manser, [1948] 1 KB 184, [1948] 2 All ER 666; Naihati Jute Mills Ltd. v. Khyaliram Jagannath, (1968) 1 SCR 821, AIR 1968 SC 522 at 527. 13 Morgan v. Manser, [1948] 2 All ER 666. 14 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310 at 324, AIR 1954 SC 44 at 48; Naihati Jute Mills Ltd. v. Khyaliram Jagannath, [1968] 1 SCR 821, AIR 1968 SC 522 at 527; Boothalinga Agencies v. VTC Poriaswami Nadar, AIR 1969 SC 110; Sushila Devi v. Hari Singh, AIR 1971 SC 1756 at 1759; Shyam Biri Works (P) Ltd. v. Uttar Pradesh Forest Corpn., AIR 1990 All 205. 15 Satyabrata Ghose v. Mugneerarm Bangur & Co., [1954] SCR 310 at 323, AIR 1954 SC 44 at 48; Naihati Jute Mills Ltd. v. Khyalirarn Jagannath, [1968] 1 SCR 821, AIR 1968 SC 522 at 527.
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16 PS Atiyah, An Introduction to the Law of Contract, 5th edn., p. 230. 17 [1978] 3 All ER 769, [1978] 1 WLR 1387. 18 (1889) 13 Bom 630. 19 (1889) 13 Bom 630 per Sargent CJ. at 635. 20 [1952] SCR 36, AIR 1952 SC 9 relying on Harnandrai Fulchand v. Pragdas Budhsen, (1922) 50 IA 9, 47 Bom 344, 72 IC 485, AIR 1923 PC 54 (2). 21 Ganga Saran v. Firm Ram Charan Ram Gopal, [1952] SCR 36, AIR 1952 SC 9, applying Harnandrai Fulchand v. Pragdas Budhsen, (1922) 50 IA 9, 47 Bom 344, 72 IC 485, AIR 1923 PC 54 (2); Naihati Jute Mills Ltd. v. Khyaliram Jagannath, [1968] 1 SCR 821, AIR 1968 SC 522 at 526.
The UNIDROIT Principles The Principles contain separate provisions to cover impossibility of performance (referred to in it as force majeure) and hardship. Hardship The Principles are based on the principle of pacta sunt servanda, and stress that a party, for whom its performance becomes more onerous generally, is nevertheless bound to perform,22 but they allow adaptation of the contract in cases of hardship.23 Hardship occurs where the occurrence of events fundamentally alters the equilibrium of the contract, either because the cost of the disadvantaged party's performance has increased, or because the value of what it has to receive has decreased, provided the events meet the following requirements:
(i) (ii) (iii) (iv)
the events occur or become known to it after the conclusion of the contract; the events could not reasonably have been taken into account at the time of the conclusion of the contract; the events are beyond its control; and the risk of the events were not assumed by it.
Hardship entitles the disadvantaged party to request the other party to enter into renegotiation of the original terms of the contract with a view to adapting them to the changed circumstances. It must make a request for renegotiations without undue delay, indicating the grounds on which the request is sought. Such request does not entitle the disadvantaged party to withhold performance. The request for renegotiations, as well as the conduct of both parties during the renegotiation process, are subject to the principle of good faith and the duty of co-operation. If the parties fail to reach agreement on the adaptation of the contract to changed circumstances within a reasonable time, either party may resort to the Court. The Court may, when this is reasonable, either: (a) order the termination of the contract at a date and on terms to be fixed by the Court; or may (b) adapt the contract with a view to restore its equilibrium. Invoking the provisions of hardship is relevant to executory performances, and generally in long-term contracts. Force Majeure A party is excused of non-performance, if it proves that non-performance was due to an impediment beyond its control, and it could not have reasonably been foreseen by it at the time of making of the contract, nor could it have avoided or overcome it or its consequences.24 If the impediment is temporary, the excuse will be had for the reasonable period, during which it has an effect on the performance of the
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contract. It is necessary that the party failing to perform must give notice to the other party of the impediment and its effect on its ability to perform, failing which, there may be liability for damages for non-receipt of notice. Choice of the Party Where the factual situation can be considered as hardship and of force majeure, the affected party may decide which remedy to pursue. The remedy for hardship will enable it to renegotiate the contract and keep it alive, and the remedy for the latter--to have its nonperformance excused. 22 The UNIDROIT Principles, Art. 6.2.1. 23 See, for the provisions of hardship and adaptations, Arts. 6.2.2 and 6.2.3 of the UNIDROIT Principles. 24 See for the provisions of force majeure, the UNIDROIT Principles, Art. 7.1.7.
Impossibility in General Generally, a contract which is incapable of performance at the time when it is made, will be void ab initio, but subsequent impossibility ends a valid contract from the moment it becomes incapable of performance, and further performance is excused. The latter refers not only to physical or literal impossibility, but also to events occurring, which strike at the basis of the contracts, so as to frustrate the practical purpose of the contract. The Supreme Court has in Satyabrata Ghose v. Mugneeram Bangur & Co., 25 interpreted this section thus:
The first paragraph of the section lays down the law in the same way as in England. It speaks of something which is impossible inherently or by its very nature, and no one can obviously be directed to perform such an act. The second paragraph enunciates the law relating to discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done. The wording of this paragraph is quite general, and though the illustrations attached to it are not all happy, they cannot derogate from the general words used in the enactment. This much is clear that the word 'impossible' has not been used here in the sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose which the parties had in view; and if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, it can very well be said that the promisor found it impossible to do the act which he promised to do.26
Impossibility and Risk-allocation The doctrine of frustration is mainly concerned with the incidence of risk, whether any one or both parties to the contract take the risk of the happening of the supervening event.
The question ultimately is always one of risk-allocation. The question to be answered therefore is whether one or other party has expressly assumed the risk of the events which have occurred, or, if not, whether the Court thinks that one or other party ought reasonably to be treated as having assumed the risk.27
The application of the doctrine must not cause a reallocation of risks; the object of the application is to find a satisfactory way of allocating the risk of supervening events.
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The parties to the contract are free and can expressly provide that the risk of supervening events shall be borne by one of them or by the other, or that they can apportion it or deal with it in various other ways, namely, for suspension of performance, compensation, refund, restitution, or discharge. Where the contract makes a provision, this will normally preclude a Court from holding that the contract has been discharged by supervening impossibility, because the parties have allocated the risk knowingly (see 'Express Provisions in the Contract' below). Insurance contracts or other contracts indemnifying against otherwise frustrating events, expressly assume the risks of events, and the occurrence of the events insured against does not frustrate the contract, because the happening of the event is the basis of the agreement.28 The proper construction of the contract may show that a party warrants the existence or continued existence of the subject matter, so that he undertakes to deliver or to pay in any event--in that event, the party may then not be absolved also by an initial impossibility.29 A contract would also not be frustrated by an event which was or ought to have been foreseen by the parties. This is because the parties have consciously accepted the risk. In this case, the proper course is to let the risk lie where it falls. The nature of the contract may also indicate that the parties intended that the risk of supervening events shall lie where it falls. For example, the doctrine would not apply to a speculative contract, for the basis of such contract is to distribute all risks on one side or the other and to eliminate any chance of the contract falling to the ground.30 If the contract does not expressly allocate the risks, the Court has to allocate them. The risk may not be placed on any of the parties, in which case, the contract is discharged for frustration. But if the risk is placed on either party, that party is liable to perform, or be liable for breach. PS Atiyah discusses the following factors as general guides in deciding whether the Court will place a certain risk on one or other of the parties:31
(i) (ii) (iii) (iv)
(v)
(vi)
a party takes the risk of any changes in circumstances, which affect not the common object of both the parties, but only his own purposes in contracting;32 a change in circumstances, which only affects the manner in which one of the parties is to carry out the obligations does not normally frustrate the contract;33 an abnormally large remuneration may indicate that the party receiving it has received it to cover the special risks, namely, special insurance premiums;34 a party to a contract undertakes the risk that performance of his promise may prove more difficult or onerous than expected; or even impossible as a result of normal changes in circumstances; but he may not take the risk of performance proving impossible due to abnormal or extra ordinary occurrences;35 even where a party does not normally take the risk of non-performance, in situations where it is rendered impossible due to abnormal or extraordinary circumstances, he can be considered to have taken the risk of non-performance, if the result of the impossibility is to give him a remedy over or against some other person;36 as a rough general rule, if the parties make a contract which is only to be performed at some distant future date, one or the other of them will be held to have assumed the risk of performance, whatever the future may bring; the object of such contract may be to eliminate the dangers of later events.37
Not a Device to Avoid a Bad Bargain The doctrine cannot be permitted to become a device for destroying the sanctity of the contract. The Court will also not apply the doctrine of impossibility to assist a party that does not want to fulfill its obligations under the contract.38 If the seller has no goods ready for shipment, he cannot take advantage of the circumstance that shipment was impossible for some other reason; the defence is available only to a person who, but for the impossibility of shipment by reason of circumstances beyond his control, was in fact in a position to fulfill his engagement.39
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The Objective Test The test for frustration is an objective one, since frustration is automatic on the happening of the frustrating event, and does not depend upon any repudiation or other act of volition on the part of either party.40 When an unexpected event or change of circumstance occurs, the possibility of which the parties did not contemplate, the meaning of the contract is taken to be not what the parties act ually intended, but why they, as fair reasonable men, would presumably have intended and agreed upon, if having such possibility in view, they had made express provision as to their rights and liabilities in the event of such occurrence.41 As stated in Hirji Mulji v. Cheong Yue SS Co. Ltd :42
...Its legal effect does not depend on their [i.e. of the parties] intention, or their opinions or even knowledge as to the event which has brought this about...[it] is irrespective of the individuals concerned, their temperaments and failings, their interests and circumstances.
So also, if in a given case, the supervening events have shaken the very root and foundation of the contract, and it would be impracticable to accept performance by a reasonable and prudent man, the Court will excuse performance.43 Doctrine of Narrow Limits The theory of frustration belongs to the law of contract, and it is presented by a rule, which the Courts will apply in certain limited circumstances for the purpose of deciding that contractual obligations ex facie binding are no longer enforceable against the parties. The description of the circumstances that justify the application of the rule (of frustration) and consequently the decision whether in a particular case those circumstances exist, are necessarily a question of law. The requirement that parties must have made the contract on a particular footing should be given full weight.44 Frustration is not to be lightly invoked as a dissolvent of a contract.45 It is useful within its proper limits and not lightly to be held to have occurred.46 The doctrine of frustration must be applied within very narrow limits.47 Disappointed expectations do not lead to frustration.48 No Discharge Despite Impossibility A contract would not be discharged by impossibility, even though the supervening event makes performance impossible or unlawful if:
(i) (ii) (iii) (iv) (v) (vi)
The contract is absolute in terms and can be held to cover the frustrating event;49 The contract makes full and complete provision for a given contingency; It can be reasonably supposed to be within the contemplation of the parties to the contract at the time they made the contract;50 Where the event is such that any of the parties could foresee or could have foreseen with reasonable diligence; if only a portion of the contract becomes impossible or difficult to perform;51 If despite the supervening events, the object and purpose of the contract is not rendered useless, and the contract can be performed substantially in accordance with the original intention of the parties, though not literally in accordance with the language of the agreement.52
Difficulty and Disappointed Expectations A contract is not frustrated because its performance has become more onerous or burdensome;53 namely,
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because of abnormal rise or fall in prices, a sudden depreciation of currency; or an unexpected obstacle to the execution of the contract;54 these are ordinary risks of business. A party's insolvency or inability to get finance will not discharge him, unless, of course, the parties have agreed otherwise.55 The Courts have no power of absolving from performance of the contract, merely because it has become onerous on account of unforeseen circumstances.56 Even disappointed expectations of both parties to a contract do not lead to frustrated contracts. Thus, a contractor who contracted to build in eight months and could only do so in 22 months because of scarcity of labour, cannot claim frustration and payment on the basis of quantum meruit.57 A company's agreement to pay bonus to its workmen is not frustrated by its subsequently discovering that its expectations of its state of prosperity envisaged earlier has not been fulfilled.58 An increase in expense is not a ground of frustration.59 A contract is not frustrated merely because the circumstances in which it was made are altered. The contractor, having contracted, cannot go back on the agreement simply because it does not suit him to abide by it due to abnormal rise in the market rate of material and labour.60 In Tsakiroglou & Co. Ltd. v. Noblee & Thorl GmbH, 61 the closure of the Suez did not frustrate a contract for sale of groundnuts to be delivered in Hamburg, although, both parties expected the nuts to be shipped via the Suez Canal, and although the contract did not so provide nor could any such term be implied, the route being immaterial to the buyer. It did not automatically follow that because one term of a contract, that the goods shall be carried by a particular route, becomes impossible of performance, the whole contract is thereby abrogated. A subsequent order by the Government, fixing prospectively a higher price for salt, did not frustrate a previous contract for sale of salt, wherein the price was not dependent upon variations consequent upon Government orders.62 Rights created on contracts entered into in regard to khaslands are not affected or destroyed under Bihar Land Reforms Act, 1950 in spite of extra burden saddled on the lands.63 A wholly abnormal rise or fall in price, a sudden depreciation in currency, an expected obstacle to execution or the like, do not by themselves affect the contract.64 A contract is not frustrated merely because the circumstances in which the contract is made are altered, namely, by the commencement of hostilities (the Second World War).65 So also, where a notification regulating retail prices is passed after the contract is made, it does not make the contract impossible or illegal and the contract is not discharged.66 In Alopi Parshad & Sons Ltd. v. Union of India, 67 there was a firm price contract for supply of ghee to the Union of India. The price of ghee rose abnormally due to the Second World War. The supplier's claim for a higher rate on the basis of equity was negatived by the Supreme Court. The Court found that the agents were fully aware of the altered circumstances and held that because of the mere fact that the circumstances in which the contract was made were altered, the contract was not frustrated. The Supreme Court held that if a consideration of the term of the contract in the light of circumstances when it was made shows that the parties never agreed to be bound in a fundamentally different situation which unexpectedly emerges; the contract ceases to bind at that point, not because the Court in its discretion considers it just and reasonable to qualify the terms of the contract, but because on its true construction, it does not apply in that situation.68 It further held that the Courts have no power to absolve a party from liability to perform a contract, merely because the performance became more onerous; and the express covenants in a contract could be ignored only on account of the unexpected and uncontemplated turn of events after the contract. However, a single judge of the Madras High Court, in a case where after the firm price contract for supply of transformer oil there was a phenomenal rise in price of transformer oil by 400 percent due to war conditions in the Middle East, held that the abnormal increase in price due to war conditions was an untoward event or change in circumstances, which totally upset the very foundation upon which the parties rested their bargain,69 a view not warranted in view of the decision of the Supreme Court in Alopi Parshad & Sons Ltd. v. Union of India. 70 There was no frustration of a contract where contract was merely difficult of performance and where the position was known to the parties, e.g., in case of a lease of land for plucking tendu leaves and a part of the land was under tenants who had a right to pluck leaves and sell to anyone they liked.71 A contract to supply timber was not frustrated when supply of timber from abroad was stopped due to the war, because the buyer knew the supply might have been from the stock kept in the country.72
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Commercial Impossibility The impossibility referred to in the second clause of this section does not include what is called commercial impossibility, namely, extreme or unforeseen cost or difficulty of performance.73 A contract, therefore, to supply freight cannot be said to become impossible within the meaning of that clause, merely because the freight could not be procured except at an exorbitant price.74 So, a contractor for bridge tolls has no legal claim for compensation against the District Board, if a considerable part, but not the whole of the traffic, is prohibited by a Government ordinance,75 or if floods make it impossible to use the bridge for a substantial part of the contract period.76A contracted to buy tapestry from B and stated he intended to resell it in Australia. Imports to Australia were thereafter prohibited. A repudiated the contract. In a suit by B against A for damages, it was contended that the contract was frustrated. It was held not to be the foundation of the contract that A should be in a position to sell the goods in Australia.77 Strikes A strike of workmen employed in executing work under a contract does not of itself make performance impossible for the purpose of this section.78 A contract to supply gunny bags made during the closure of a mill manufacturing the same due to a strike, is not frustrated.79 In Budgett & Co. v. Binnington & Co., 80 a bill of lading provided l0 days for unloading, demurrage being payable thereafter. A strike prevented unloading. It was held that the merchant took the risk. But in The Penelope,81 a charterparty was held to be frustrated by the general strike of 1926, although, there were express provisions in the contract dealing with difficulties a rising from strikes, on the ground that the strikes contemplated were of the ordinary variety--local withdrawal of labour. It is submitted that there is no difficulty in applying s. 56, where the agreement is expressly to be terminated in a certain state of affairs, and circumstances arise not dissimilar from those expressly contemplated. Thus, where villagers prevented the contractor from lifting sand, and could not be controlled even after criminal cases were filed against them, or after injunction orders, performance became impossible, and the contractor was entitled to refund of amount.82 Indefinitely Impossible However, where supervening events not due to default of either party, render the performance of a contract indefinitely impossible, and there is no undertaking to be bound in any event, frustration ensues, even though the parties may have expressly provided for the case of a limited interruption.83 Goods sent by rail were seized by the police in a theft case, thereupon, the contract of carriage became impossible.84 But the mere fact that a prohibition is placed on the use of the land during the period it remains in force, is not sufficient to frustrate a contract.85 A separation agreement, by which the husband agreed to pay regular maintenance to his wife, was held to have remained in force when she became an alien enemy, though during the war, payments had to be made to the custodian of enemy property.86 A restriction on transfer of urban property imposed by a statute, which restriction was relaxable and temporary, did not frustrate an agreement of sale of land.87 Impossibility Affecting Part of Contract Section 13 of the repealed Specific Relief Act, 1877 expressly provided that notwithstanding 56 of the Contract Act, a contract is not wholly impossible of performance, if a portion of the subject matter has ceased to exist. Section 12(4) and explanation to s. 12 of the Specific Relief Act, 1963, now provide that specific performance can and ought to be ordered in divisible contracts of that part, which can and ought to be specifically performed; and that for purposes of s. 12 of the Act, a party shall be deemed to be unable to perform the whole of his part, if a portion of its subject-matter has ceased to exist at the time of performance. Section 108 of the Transfer of Property Act, 1882, similarly provides that if by fire, tempest, flood, or violence of an army or of a mob or other irresistible force, any material part of the property leased be wholly destroyed or rendered substantially and permanently unfit for the purposes for which it was let, the lease shall, at the option of the lessee, be void. Initial Impossibility
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The parties who purport to agree for the doing of something obviously impossible must be deemed not to be serious, or not to understand what they are doing; also the law cannot regard a promise to do something obviously impossible as of any value, and such a promise is therefore no consideration. 'Impossible in itself' seems to mean impossible in the nature of things.88 However, a contract may show on proper construction, that a party warrants the existence or continued existence of the subject-matter or purchases an adventure, so that he undertakes to deliver or to pay in any event; in that event, such party may not be absolved by an initial impossibility.89 Illustration (a) raises a curious question. If A agrees with B to discover by magic, a treasure supposed to be buried within certain limits at a spot not exactly known, and, after performing magic rites, does by good fortune discover the treasure, and A and B both believe that the magic was efficacious, can A recover any reward from B, and if so, under the agreement by rejecting the specification of means to be employed as immaterial, or under s. 70 of the Act? The case of performance being, at the date of the agreement, impossible by reason of nonexistence of subject matter of contract has been dealt with under s. 10--'Mistake'. A matter based on mutual mistake, even though it may appear to fall within the language of the first paragraph of s. 56, is not governed by that section.90 Subsequent Impossibility Circumstances or events may frustrate or discharge the contract, either because they render the performance of the contract impossible, or they render it much more difficult, or they frustrate the purpose of the transaction.91 This example aptly illustrates the distinction:
Suppose a manufacturer of fertilizer makes a long-term contract to produce a special fertilizer for tobacco plants and deliver it to a dealer for export to places overseas where tobacco is grown. If the fertilizer factory is then nationalized or if the manufacture of fertilizer is forbidden or if a Government decree requires all fertilizers to be delivered to a state export organisation, we have a case of impossibility. It would be a case of distortion of parity1 if after the conclusion of the contract, enormous import duties were imposed on the import of the raw materials required for the manufacture of the fertilizer; finally, frustration of purpose would occur if the importation of fertilizer was forbidden in the consumer country; it remains possible for the manufacturer to produce the fertilizer and for the dealer to accept and pay for it but it is now impossible to achieve the only purpose for which, as the manufacturer knew, the dealer entered the contract, namely to deliver the fertilizer to the consumer country.2
In India, the law dealing with frustration must primarily be looked at as contained in s s. 32 and 56 of the Contract Act .3 The rule in s. 56 exhaustively deals with the doctrine of frustration of contracts and it cannot be extended by analogies borrowed from the English common law.4 The Court can give relief on the ground of subsequent impossibility when it finds that the whole purpose or the basis of the contract has been frustrated by the intrusion or occurrence of an unexpected event or change of circumstances, which was not contemplated by the parties at the date of the contract;5 or the performance of the contract becomes impracticable or useless having regard to the object and purpose the parties had in view.6 The word 'impossible' in relation to a contract between commercial people must be understood in a commercial sense;7 and the test of impossibility is whether it is practically impossible for a party to perform the contract within the specified time.8 The second paragraph has the effect of turning limited exceptions of the English law into a general rule. By the common law, a man who promises without qualification is bound by the terms of his promise, if he is bound at all. If the parties do not mean their agreement to be unconditional, it is for them to qualify it by such conditions as they think fit. But a condition need not always be expressed in words; there are conditions which may be implied from the nature of the transaction; and in certain cases, where an event making performance impossible 'is of such a character that it cannot reasonably be supposed to have been in contemplation of the contracting parties when the contract was made,'9 performance or further performance of the promise as the case may be, is excused. On this principle, a promise is discharged if, for some cause which the promisor could not prevent, performance may become impossible by:
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(i) (ii) (iii) (iv)
change in law rendering a contract unlawful or impossible of performance; destruction or non-existence of the specific subject-matter assumed by the parties to exist or continue in existence;10 the non-existence of a state of things assumed as the foundation of the contract; such circumstances intervening which render the performance within the time in the way contemplated, impossible, although performance of the contract according to its terms may be literally possible;11 the death or disability of the promisor, where the promise was to perform something in person.12
25 [1954] SCR 310, AIR 1954 SC 44. 26 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310 per Mukherjea J. at 317-18, AIR 1954 SC 44 at 46; Ahmad Khan v. Shahanshah Jehan Begum, AIR 1973 All 529 at 531; Sushila Devi v. Hari Singh, AIR 1971 SC 1756; Govindbhai Gordhanbhai Patel v. Gulam Abbas Mulla Allibhai, AIR 1977 SC 1019; see also Nirmal Lifestyle Ltd. v. Tulip Hospital Services Ltd., Arbitration Petition No. 550/2013, decided on 27 Nov 2013 (Bom) (under Section 56 of the Contract Act, the impossibility of performance is the supervening impossibility. That is the impossibility created by another's act which the parties cannot help). 27 PS Atiyah, An Introduction to the Law of Contract, 5th edn., p. 237. 28 Kesari Chand v. Governor-General in Council, (1950) Nag LJ 323. 29 McRae v. Commonwealth Disposals Commission, (1951) 84 CLR 377 (High Court of Australia) (sale of non-existent tanker on non-existent reef); Fredrick E Rose (London) Ltd. v. Wm H Pim, Junr & Co. Ltd., [1953] 2 QB 450 per Denning LJ. at 460, [1953] 2 All ER 739 at 747 (CA). 30 Larringa & Co. Ltd. v. Societe Franco-Americaine de Phosphates de Medulla, (1923) 92 LJKB 455, [1923] All ER Rep 1(HL) . 31 PS Atiyah, An Introduction to the Law of Contract, 5th edn., pp. 240-43. 32 Hirji Mulji v. Cheong Yue SS Co. Ltd., [1926] AC 497 per Lord Sumner at 507, [1926] All ER Rep 51. 33 Tsakiroglou & Co. Ltd. v. Noblee & Thorl GmbH, [1962) AC 93 [1961] 2 All ER 179, [1961] 2 WLR 633(HL) ; Blackburn Bobbin Co. Ltd. v. TW Allen & Sons Ltd., [1918] 2 KB 467(CA) ; Re Badische Co. Ltd.,[1921] 2 Ch 331. 34 WJ Tatem Ltd. v. Gamboa, [1939] 1 KB 132. [1938] 3 All ER 135 (contract to charter a ship at about three times the prevailing normal rate of freight). 35 Davis Contractors Ltd. v. Fareham Urban District Council, [1956] AC 696, [1956] 2 All ER 145, [1956] 3 WLR 37. 36 FA Tamplin Steamship Co. Ltd. v. Anglo-Mexican Petroleum Products Co. Ltd., [1916] 2 AC 397 at 403, [1916-17] All ER Rep 104. 37 Larrinaga & Co. Ltd. v. Societe Franco-Americaine des Phosphates de Medulla Paris, (1923) 92 LJKB 455, [1923] All ER Rep 1(HL) (the contract was a speculative one). 38 Ganga Singh v. Santosh Kumar, AIR 1963 All 201 at 204. 39 Ezekiel Abraham Gubray v. Ramjusroy Golabray, AIR 1921 Cal 305 at 306-08. 40 Denny, Mott & Dickson Ltd. v. James B Fraser & Co. Ltd., [1944] AC 265 per Lord Wright at 274, [1944] 1 All ER 678(HL) ; approved in Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310, AIR 1954 SC 44 at 49; see 'Automatic Discharge' below. 41 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310, at 320, AIR 1954 SC 44 at 47; Davis Contractors Ltd. v. Fareham Urban District Council, [1956] AC 696 per Lord Radcliffe at 728, [1956] 2 All ER 145 at 160, [1956] 3 WLR 37. 42 [1926] AC 497 per Lord Sumner at 510, [1926] All ER Rep 51(PC) . 43 Bansilal Fomra v. Thadava Cooperative Agricultural and Industrial Society Ltd., (1976) 1 Mad LJ 39 at 51 (restriction on release of sugar for domestic purposes). 44 Davis Contractors Ltd. v. Fareham Urban District Council, [1956] AC 696 at 716 [1956] 2 All ER 145 at 150, [1956] 3 WLR 37 at 61.
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45 Tsakiroglou & Co. Ltd. v. Noblee & Thorl GmbH, [1962] AC 93, [1961] 2 All ER 179, [1961] 2 WLR 633 at 642; on appeal from, [1960] 2 QB 318, [1959] 2 WLR 179 at 185, [1959] 1 All ER 45. 46 Supra; Twentsche Overseas Trading Co. Ltd. v. Uganda Sugar Factory Ltd., AIR 1945 PC 144. 47 Tsakiroglou & Co. Ltd. v. Noblee & Thorl GmbH, [1962] AC 93, [1961] 2 All ER 179. [1961] 2 WLR 633 at 642 (HL); Davis Contractors Ltd. v. Fareham Urban District Council, [1956] AC 696 per Viscount Simonds at 716, [1956] 2 All ER 145 at 150, [1956] 3 WLR 37 at 61. 48 Davis Contractors Ltd. v. Fareham Urban District Council supra (increase of expense and time required to complete performance of contract); Kunjukrishnan v. State of Kerala, AIR 1983 Ker 73. 49 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310, AIR 1954 SC 44 at 48; Ganga Saran v. Firm Ram Charan Ram Gopal, [1952] SCR 36, AIR 1952 SC 9; Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793, AIR 1960 SC 588. 50 Afshar MM Tacki v. Dharamsey Tricamdas, AIR 1947 Bom 98 at 104, (1946) 48 Bom LR 661; Man Singh v. Khazan Singh, AIR 1961 Raj 277; Firm Rampratap Mahadeo Prasad v. Sasansa Sugar Works, AIR 1964 Pat 250. 51 Kesari Chand v. Governor-General in Council, (1949) Nag 718 at 736; s. 13, the Specific Relief Act, 1963, s. 13. 52 Ganga Singh v. Santosh Kumar, AIR 1963 All 201; Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310, AIR 1954 SC 44. 53 Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793, AIR 1960 SC 588 at 593-94; Surpat Singh v. Sheo Prasad Gupta, (1945) 27 Pat 197, AIR 1945 Pat 300 (inundation of land by frequent change of river-course, an occurrence known to be frequent); State of Orissa v. Khan Saheb Md Khan, AIR 1961 Ori 75; Sri Mahalingaswami Devasthanam v. AT Sambanda Mudaliar, (1962) Mad 273, AIR 1962 Mad 122, (passing of statute rendering performance onerous); Pandit Janki Nath Zutshi v. Ghulam Qadir Mir, AIR 1964 J&K 26, (property agreed to be sold found in possession of tenants); Davis Contractors Ltd. v. Fareham Urban District Council, [1956] AC 696, [1956] 2 All ER 145, [1956] 3 WLR 37(HL) ; Twentsche Overseas Trading Co. Ltd. v. Uganda Sugar Factory Ltd. AIR 1945 PC 144 (outbreak of war; sources of supply other than in hostile territory); EB Aaby's Rederi As v. Lep Transport Ltd., (1948) 81 Ll L Rep 465, (goods destroyed in dockside fire, rendering voyage unprofitable for charterers, though they could have got another cargo; contract not discharged); Hangkam Kwintong Woo v. Liu Lan Fong (alias Liu Ah Lan), [1951] AC 707, [1951] 2 All ER 567, PC (mortgage debt paid off in 'Occupation Currency': subsequent ordinance declaring such payments to be of no effect). 54 Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793, AIR 1960 SC 588; British Movietonews Ltd. v. London and District Cinemas Ltd., [1952] AC 166, [1950] 2 All ER 390. 55 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, CONTRACT para 904. 56 Naihati Jute Mills Ltd. v. Khyaliram Jagannath, [1968] 1 SCR 821, AIR 1968 SC 522 at 528; Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793 at 808, AIR 1960 SC 588 at 594; Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310, AIR 1954 SC 44; Tsakiroglou & Co. Ltd. v. Noblee & Thorl GmbH, [1962] AC 93 at 116, [1961] 2 All ER 179, [1961] 2 WLR 639; Ocean Tramp Tankers Corpn. v. V/O Sovfracht (the Eugenia), [1964] 2 QB 226, [1964] 1 All ER 161[1964] 2 WLR 114(CA) ; overruling Socit Franco Tunisienne D'Armement v. Sidermar SpA (the Massalia), [1961] 2 QB 278, [1960] 2 All ER 529; State of Orissa v. Khan Saheb Md Khan, AIR 1961 Ori 75; Merla Suramma v. Kakileti Sitaramaswamy, AIR 1957 AP 71 (more burdensome or expensive); Sri Amuruvi Perumal Devasthanam v. KR Sabapathi Pillai, (1962) Mad 262, AIR 1962 Mad 132(unprofitable) . 57 Davis Contractors Ltd. v. Fareham Urban District Council, [1956] AC 696 at 715, [1956] 2 All ER 145, [1956] 3 WLR 37 HL); Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793 at 807, AIR 1960 SC 588 at 594. 58 Pearl Cycle Industries Ltd. v. AN Kaul, AIR 1964 Punj 482; Davis Contractors Ltd. v. Fareham Urban District Council, [1956] AC 696 at 715, [1956] 2 All ER 145, [1956] 3 WLR 37. 59 Larrinaga & Co. Ltd. v. Societe' Franco-Americaine des Phosphates de Medulla Paris, (1923) 92 LJKB 455, [1923] All ER Rep 1, referred to in Tsakirogou & Co. Ltd. v. Noblee Thort CmbH, [1962] AC 93, [1961] 2 All ER 179 at 184, [1961] 2 WLR 633 at 681; Premier Explosives Ltd. v. Chairman and Managing Director Singareni Colleries Co., AIR 2010 AP 107. 60 Continental Construction Co. Ltd. v. State of Madhya Pradesh, (1988) 3 SCC 82 at 88, AIR 1988 SC 1166. 61 [1962] AC 93, [1961] 2 All ER 179, [1961] 2 WLR 633(HL) . 62 Johari Lal v. Bihar State Co-operative Bank Ltd., AIR 1959 Pat 477; but see Boothalinga Agencies v. VTC Poriaswami Nadar, AIR 1969 SC 110 (case of order prohibiting sale subsequent to the contract which made it void). 63 Brijnandan Singh v. Jamuna Prasad, AIR 1958 Pat 589. 64 Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793 at 806, AIR 1960 SC 588 at 594. 65 Ibid.
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66 Firm Sarada Prasad De v. Bhut Nath Mallik, (1941) 2 Cal 78, AIR 1942 Cal 291, 45 CWN 660. 67 [1960] 2 SCR 793, AIR 1960 SC 588. 68 Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793, AIR 1960 SC 588. 69 Easun Engg Co. Ltd. v. Fertiliser and Chemicals Travancore Ltd., AIR 1991 Mad 158. 70 [1960] 2 SCR 793, AIR 1960 SC 588. 71 State of Orissa v. Khan Saheb Md Khan, AIR 1961 Ori 75; Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310, AIR 1954 SC 44. 72 Blackburn Bobbin Co. Ltd. v. TW Allen & Sons Ltd., [1918] 2 KB 467(CA) . 73 Keshavlal Brothers & Co. v. Diwan Chand & Co., AIR 1923 PC 105; Karl Ettlinger & Co. v. Chagandas & Co., (1916) 40 Bom 301, AIR 1915 Bom 232, 33 IC 205; Mill Stores Trading Co. of India Ltd. v. Seth Mathuradas, AIR 1921 Nag 42; Gurdit Singh v. Secretary of State, AIR 1931 Lah 347, 130 IC 772; Parmeshwari Das Mehra & Sons v. Firm Ram Chand Om Prakash, AIR 1952 Punj 34; Habibullah Sarwar v. General Manager Govt Distilleries, AIR 1956 Hyd 190; Suresh Narain Sinha v. Akhauri Balbhadra Prasad, AIR 1957 Pat 256. 74 Karl Ettlinger & Co. v. Chagandas & Co., (1916) 40 Bom 301 at 310-11, AIR 1915 Bom 232, 33 IC 205. 75 President of the District Board South Kanara v. G Santhappa Naik, AIR 1925 Mad 907 (1924) 86 IC 362. 76 Panakkatan Sankaran v. Dist. Board, Malabar, AIR 1934 Mad 85, 66 Mad LJ 108, 147 IC 964; cf Gurdit Singh v. Secretary of State, AIR 1931 Lah 347, 130 IC 772; Sahas Karan v. Nath Mal, AIR 1951 Ajmer 65. 77 Samuel Fitz & Co. Ltd. v. Standard Cotton & Silk Weaving Co., AIR 1945 Mad 291. 78 Hari Laxman Joshi v. Secy of State, (1927) 52 Bom 142, 180 IC 19, AIR 1928 Bom 61 (the particular strike was not unforeseen, and that other labour available at a higher rate); cf The Penelope, (1928) p. 180, and Parshotam Das Shankar Das v. Municipal Committee Batala, AIR 1949 EP 301; State of Kerala v. Paily Chandy, AIR 1984 NOC 70(Ker) . 79 Firm Rampratap Mahadeo Prasad v. Sasansa Sugar Works, AIR 1964 Pat 250, distinguishing Hamandrai Fulchand v. Pragdas Budhsen, (1922) 50 IA 9, 47 Bom 344, 72 IC 485, AIR 1923 PC 54 (2). 80 [1891] 1 QB 35, p. 41. 81 (1928) p. 180. 82 Alluri Narayana Murthy Raju v. Dist Collector, AIR 2008 AP 264. 83 Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd., [1943] AC 32, [1942] All ER 122 at 125; Kodros Shipping Corpn. v. Empresa Cubana de Fletes (The Evia), [1983] 1 AC 736, [1982] 3 All ER 350. 84 Firm Laxmi Dutt Roop Chand v. Union of India, AIR 1971 All 479. 85 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310 at 329, AIR 1954 SC 44 (contract of sale of land where a big area out of it requisitioned); Mungeeram Bangur & Co. Pvt. Ltd. v. Gurbacharan Singh, [1965] 2 SCR 630, AIR 1965 SC 1523 (also the same as above); Abdul Hashem v. Balahari Mondal, AIR 1952 Cal 380 (requisitioning of land); Tarabai Jivanlal Parekh v. Lala Padamchand, AIR 1950 Bom 89 (requisitioning of a flat). 86 Bevan v. Bevan, [1955] 2 QB 227, [1955] 2 All ER 206. 87 Ved Prakash Gupta v. Shishu Pal Singh, AIR 1984 All 288. 88 In earlier editions of Sir W Anson's book, a promise to go to Rome in a day is given as an example of an impossible promise; in later editions, the example is a promise to go round the world in a day; but future editions may have to go further still. 89 McRae v. Commonwealth Disposals Commission, (1951) 84 CLR 377 (High Court of Australia) (sale of non-existent tanker on non-existent reef); Fredrick E Rose (London) Ltd. v. W H Pim Jun & Co. Ltd., [1953] 2 QB 450 per Denning LJ. at 460, [1953] 2 All ER 739 at 747 (CA). 90 Sheikh Bros Ltd. v. Ochsner, [1957] AC 136. [1957] 2 WLR 254,(PC) . 91 See discussion of the three types in Konrad Zweigart, Introduction to Comparative Law, (translated by Tony Weir), Clarendon Press, Oxford, 1998, pp 517-18. 1 Konrad Zweigart, Introduction to Comparative Law, (translated by Tony Weir), Clarendon Press, Oxford, 1998, pp 517-18, these are cases where the circumstances do not exactly render it impossible for the debtor to perform the contract, but
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makes it more difficult, or so vastly more expensive that the two sides of the contract are quite out of proportion. 2 Konrad Zweigart, Introduction to Comparative Law, (translated by Tony Weir), Clarendon Press, Oxford, 1998, pp 517-18. 3 Ganga Saran v. Firm Ram Charan Ram Gopal, [1952] SCR 36 at 42, AIR 1952 SC 9 at IT; Naihati Jute Mills Ltd. v. Khyaliram Jagannath, [1968] 1 SCR 821. AIR 1968 SC 522 at 527. 4 Raja Dhruv Dev Chand v. Raja Harmohinder Singh, [1968] 3 SCR 339. AIR 1968 SC 1024; overruling on this point Parshotam Das Shankar Das v. Municipal Committee Batala, AIR 1949 EP 301; Rama Nand Vijay Parkash v. Gokal Chand Gian Chand, AIR 1951 Pun 189(Sim) --Observations of Kapur J. at 201 (the preamble was expressly referred to in conflict with the later Supreme Court decisions on this question); Rajendra Nath Sarma v. Ramdhin Rajbhor, AIR 1971 Assam 160 at 612. 5 Naihati Jute Mills Ltd. v. Khyaliram Jagannath, [1968] I SCR 821. AIR 1968 SC 522 at 527 (per Shelat J); Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310, AIR 1954 SC 44 at 48; Sushila Devi v. Hari Singh, AIR 1971 SC 1756 (doctrine applicable where something is not humanly possible); Sunnam Sattaih v. State of Andhra Pradesh, AIR 1980 AP 18. 6 Sushila Devi v. Hari Singh, AIR 1971 SC 1756. 7 Durga Devi Bhagat v. JB Advani & Co. Ltd., 76 CWN 528. 8 DL Sooryaprakasalingam Guru v. Shaw Trikamlal, AIR 1917 Mad 509. 9 Bailey v. De Crespigny, [1869] LR 4 QB 180; Reilly v. R, [1934] AC 176, [1933] All ER Rep 179; Cp Maritime National Fish Ltd. v. Ocean Trawlers Ltd., [1934] AC 524, [1935] All ER Rep 86. 10 Taylor v. Caldwell, 122 ER 309, [1861-73] All ER Rep 24; (1863) 3 B&S 826; Howell v. Coupland, [1876] 1 QBD 258, [1874-80] All ER Rep 878; Kunjilal Manohar Das v. Durga Prasad Debi Prasad, AIR 1920 Cal 1021, 24 CWN 703, 58 IC 761; v. L Narasu v. P S v. Iyer, (1953) Mad 831, AIR 1953 Mad 300. 11 Krell v. Henry, [1903] 2 KB 740, [1900-03] All ER Rep 20(CA) ; but failure of a condition which the parties did not know of and therefore cannot have regarded as material, will not discharge the contract; Re Satyabrata Ghose v. Mugneeraam Bangur & Co., [1954] SCR 310, AIR 1954 SC 44 at 46, 48; Parmeshwari Das Mehra & Sons v. Firm Ram Chand Om Prakash, AIR 1952 Punj 34 at 37 (FB). 12 Robinson v. Davison, (1871) LR 6 Ex 269.
Conditions for Application of the Second Paragraph of Section 56 The following conditions13 are essential before s. 56 becomes applicable:
(i) (ii) (iii)
a valid and subsisting contract between the parties; there must be some part of the contract yet to be performed; and the contract after it is entered into becomes impossible of performance.
13 Walamji Lalji v. Anil Charan Bangal, AIR 1975 Cal 92 at 97, 78 CWN 735; Re Mahadeo Prasad Shaw v. Calcutta Dyeing & Cleaning Co., AIR 1961 Cal 70.
Difference Between Sections 32 and 56 The main distinguishing feature between s s. 32 and 56 is that a contract is dissolved under its own force under s. 32, but s. 56 applies when the contract becomes impossible of performance and crumbles down due to an outside force.14A contract impossible to perform is governed by s. 56, and a contract dependent on certain contingencies by s. 32 of the Act .15 In Satyabrata Ghose v. Mugneeram Bangur & Co., 16 the Supreme Court has stated that where the Court gathers as a matter of construction that the contract itself contained impliedly or expressly a term, according to which it would stand discharged on the happening of
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certain circumstances, the dissolution of the contract would take place under the terms of the contract itself and such cases would be outside the purview of s. 56 altogether. Although in English law, these cases are treated as cases of frustration, in India, they would be dealt with under s. 32 of the Contract Act, which deals with contingent contracts or similar other provisions contained in the Act . It has been suggested that the entire field of the rule of frustration under the implied term comes within the provisions of s. 32.17 The relief is given by the Court on the ground of subsequent impossibility under s. 56, when it finds that the whole purpose or basis of the contract was frustrated by the intrusion or occurrence of an unexpected event or change of circumstances, which was beyond what was contemplated by the parties at the time when they entered into the agreement.18 Contracts requiring permission, or consent for performance of contract may become void, if the performance is made conditional upon such permission or consent,19 the refusal of permission rendering the contract void. Such cases should properly fall within the scope of s. 32, and not s. 56.20Section 32 will apply, not only when the contract expressly provides that the performance is subject to a condition that its performance will be subject to the happening of an event, but also in those cases where in the absence of express provision, such condition is implied.21 A party agreed to supply milk containers to the Union of India. Under the contract, the containers had to be coated with 'hot dip tin coating'. It was known to the parties at the time of entering into the contract, that tin ingots were required for 'hot dip tin coating' of the cans. Tin ingots were included in the canalised items list and could not be procured from the open market without a release order. In the circumstances, the condition of supply of tin ingots could be implied from the nature of the contract. The supplier repeatedly asked the Director General of Supplies and Disposals to obtain the necessary quota of tin ingots, but the Director failed to obtain the release of the necessary quota of tin ingots. It was held that the contract became impossible of performance because of the non-availability of the tin ingots and this was beyond the control of the promisor.22 A contract made in England for supply of Portuguese turpentine to a port in Eastern Germany was frustrated, as the seller's application for export, without which no export was allowed to take place, was refused.23 14 Durga Devi Bhagat v. JB Advani & Co. Ltd., 76 CWN 528 at 541, 544; Re Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310. AIR 1954 SC 44 at 48. 15 CT Xavier v. PV Joseph, AIR 1995 Ker 140. 16 [1954] SCR 310, AIR 1954 SC 44; Naihati Jute Mills Ltd. v. Khyaliram Jagannath, [1968] 1 SCR 821, AIR 1968 SC 522 at 526-27. 17 Sankhya,(1995) 37 JILI 442; Naihati Jute Mills Ltd. v. Khyaliram Jagannath, [1968] 1 SCR 821, AIR 1968 SC 522 per Shelat J. at 527. 18 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310, AIR 1954 SC 44 at 48. 19 See s. 32 above: 'Sections 32 and 56 of the Act'. 20 See for example cases purporting to apply section 56, instead of section 32: Nirmala Anand v. Advent Corporation Pvt Ltd., AIR 2002 SC 3396, (2002) 8 SCC 146; Raghuvir Singh Bhatty v. Ram Chandra Waman Subhedar, AIR 2002 All 13. 21 Nathulal v. Phoolchand, AIR 1970 SC 546 at 547; Re Motilal v. Nanhelal, AIR 1930 PC 287, p. 290 (issue of contingent contract was not argued); Chandnee Widya Vati Madden v. Dr CL Katial, [1964] 2 SCR 495, AIR 1964 SC 978 (defendant had agreed to obtain permission); Bishambhar Nath Agarwal v. Kishan Chand, AIR 1998 All 195 (whether term about permission was stipulated or implied). 22 Punj Sons Pvt. Ltd. v. Union of India, AIR 1986 Del 158 (although judgment refers to s. 56, it is s. 32, which would apply to such a case). 23 AV Pound & Co. Ltd. v. MW Hardy & Co. Inc., [1956] AC 588 at 608, [1956] I All ER 639 at 648, [1956] 2 WLR 683(HL) .
Mistake and Frustration
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The doctrine of mistake and frustration are similar, in that both are concerned with the allocation of risk of an unforeseen event, which makes performance of the contract difficult or impossible. But mistake and frustration are different juristic concepts. The former relates to formation of contract, being concerned with a common misapprehension present at the time of forming the contract. The latter deals with its discharge, being concerned with events occurring after its making.24 The operation of mistake is narrower than that of frustration. The Courts would be more reluctant to hold a contract void for mistake, because it involves implying of a condition precedent making the whole contract void or inoperative, where in the case of frustration, the contract does not become void from the beginning. Another reason for the Courts' reluctance is, that a person who contracts to do something, takes the risk of the performance becoming difficult or impossible, and 'it is not unreasonable to hold that a person should not enter into a contract unless he is able to perform it'.25 Whereas, while dealing with subsequent events, it would be unreasonable to hold a party to have impliedly undertaken to continue, being able to perform whatever the circumstances may be. Section 56 comes under Chapter IV of the Act and deals not with the formation of contracts but with performance, and 'it seems to their Lordships reasonable to construe s. 56 as applying only to agreements which apart from questions of performance are enforceable agreements'.26 Therefore, a matter based on mutual mistake, even though it may appear to fall within the language of the first paragraph of s. 56, is not governed by that section.27 24 Joseph Constantine Steamship Line Ltd. v. Imperial Smelting Corpn. Ltd., [1942] AC 154 at 186, [1941] 2 All ER 165; Sheikh Bros Ltd. v. Ochsner, [1957] AC 136, [1957] 2 WLR 254(PC) . 25 PS Atiyah, An Introduction to the Law of Contract, 5th edn., p. 224. 26 Sheikh Bros. Ltd. v. Ochsner, [1957] AC 136, [1957] 2 WLR 254 at 261 (PC). 27 Krell v. Henry, [1903] 2 KB 740, [1900-03] All ER Rep 20 (a contract frustrated because the procession was postponed); Griffith v. Brymer, (1903) 19 TLR 434 (contract held void for mistake, when the procession had been cancelled when contract was made).
'Becomes Impossible' The word 'impossible' has been used in the section not only in the sense of physical or literal impossibility of performance, but also covers cases where the performance may be impracticable and useless from the point of view of the object and purpose, which the parties had in view.28 The circumstances discharging the contract on this ground may be grouped usefully under heads.29 28 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310 per Mukherjea J. at 317-18, AIR 1954 SC 44; Ahmad Khan v. Shahanshah Jehan Begum, AIR 1973 All 529 at 531; Sushila Devi v. Hari Singh, AIR 1971 SC 1756. 29 Subsequent illegality is considered separately later; see 'Becomes Unlawful'.
Destruction of Subject Matter Performance of the contract becomes impossible by destruction of the specific thing essential to that performance, e.g., the destruction of the music hall, where performance was to be given.30 So, if factory premises in which machinery is being installed is destroyed by fire,31 or a crop of potatoes to be grown on a particular field fails,32 or a ship under charterparty is seized by the enemy,33 the contract is discharged. The contract may also be discharged because the subject matter had greatly deteriorated. A cargo of dates was sunk and affected by water and sewage. The dates were still saleable for some other purposes; but their merchantable character had been destroyed. Though the cargo was sold for 2400, the cargo owners' liability to pay freight was discharged.34
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In VL Narasu v. PSV lyer, 35D, a cinema owner, agreed to exhibit a film produced by P, as long as the weekly net collections did not fall down below a certain figure. After a few weeks, part of the rear wall of the cinema collapsed following heavy rain, and the police authorities condemned the building. D pleaded s. 56 with success. But a contract of agency to sell goods manufactured or sold by defendant was not frustrated when the factory was burnt down, because it was not restricted to goods manufactured by the defendant, much less at a particular factory.36 A contract of sale of a piece of land out of a larger area to be developed, was not frustrated by a temporary requisitioning of the land, as the fundamental basis had not gone and it had not become impossible of performance.37 In Piarey Lal v. Hori Lal 38A made an agreement to sell a plot of land to B. In consolidation proceedings commenced later, the vendor was allotted a consolidated piece of land. In the purchaser's suit for specific performance, a question arose whether he had the same right against the newly acquired plot of land as he had against the original piece of land. 'The relevant consolidation Act provided that the 'rights, title, interest and liabilities of the former title holder shall cease; and the tenure holder entering into possession...shall have in his chakthe same rights, title, interest and liabilities as he had in his original holding'. The Supreme Court dismissed the suit, because the defendant could not perform the contract, new plots having been allotted in lieu of the old plots of land he had contracted to sell; and the purchaser did not have any beneficial rights in the property agreed to be sold under s. 54 of the Transfer of Property Act, 1882, and therefore, which could not attach to the land received in substitution. It is submitted that the decision requires reconsideration, particularly when new plots were the same as those agreed to be sold. In another case, where the land in question was acquired after filing the suit for specific performance of the contract for resale, it was held that though the contract was not capable of being performed specifically, the plaintiff could still seek relief by proceeding against the amount awarded as compensation for that land. Acquisition of land did not frustrate the contract.39 Where during the pendency of a suit for specific performance, the property was sold in execution of a decree and the sale was confirmed, the sale was held to be void under the principle of lis pendens.40 To such a sale, the doctrine of frustration did not apply, as there was no change in the identity of the property.41 30 Taylor v. Caldwell, 122 ER 309, [1861-73] All ER Rep 24, (1863) 3 B&S 826. 31 Appleby v. Myers, (1867) LR 2 CP 651, [1861-73] All ER Rep 452. 32 Howell v. Coupland, [1876] 1 QBD 258, [1874-80] All ER Rep 878. 33 WJ Tatem Ltd. v. Gamboa, [1939] 1 KB 132, [1938] 3 All ER 135. 34 Asfar & Co. v. Blundell, [1896] 1 QB 123 at 128. 35 (1953) Mad 831, AIR 1953 Mad 300. 36 Turner v. Goldsmith, [1891] I QB 544, [1891-94] All ER Rep 384. 37 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310, AIR 1954 SC 44; Mungeeram Bangur and Co. v. Gurbachan Singh, [1965] 3 SCR 630, AIR 1965 SC 1523. 38 AIR 1977 SC 1226, overruling Shanti Prasad v. Akhtar, (1972) All LJ 549. 39 Nathu Singh v. Jagdish Singh, AIR 1992 All 174 at 178; distinguishing Piarey Lal v. Hori Lal, AIR 1977 SC 1226. 40 Suraj Bhan v. Gaj Raj Singh, AIR 1981 All 149 at 151. 41 Suraj Bhan v. Gaj Raj Singh, AIR 1981 All 149 at 151, supra; distinguishing Piarey Lal v. Hori Lal supra.
Non-existence of State of Things and Non-occurrence of an Expected
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Event The principle is applied because the performance of the contract depended on the existence of occurrence of a particular state of things which formed the basis of the contract. In such cases, the performance of the contract is not prevented, and is actually possible; but the common object is frustrated. The contract would be frustrated in such cases where 'the common object...has frustrated, not merely the individual advantage that one party or the other might have gained from the contract,'42 or because one party has been prevented from putting the subject matter to the use intended by him because of such an event.43 A contract is also frustrated because contractual obligation has become incapable of being performed, because the circumstances in which performance is called for, would render it a thing radically different from that which was undertaken by the contract.44 Where an expected event is the foundation of the contract, the cancellation of that event will, as a general rule, frustrate the contract.45The principle is best illustrated by the 'coronation cases' arising out of act ions brought in consequence of the postponement of coronation processions in June 1902 because of the King's illness. In Krell v. Henry, 46 it was held that the contract for use of rooms taken on rent for viewing the coronation procession of the King was frustrated when the procession got cancelled. On the other hand, in Herne Bay Steam Boat Co. v. Hutton, 47 where the defendant had agreed to hire a ship for the purpose of viewing the naval review by the King and for a day's cruise round the fleet, it was held that the contract was not frustrated by the cancellation of the naval review upon the King's illness, because the day's cruise round the fleet was still possible. In the latter case, the Court of Appeal held that the existence of the state of things (naval review by the King) was the motive or inducement for entering into the contract, as distinct from the basis on which both the parties would contract. 'It may be that the parties contracted in the expectation that a particular event would happen, each taking his chance, but that the actual happening of the event was not made the basis of contract.'48 The above two decisions are difficult to reconcile. They make a distinction between the object and motive. The principle in Krell v. Henry 49 has been criticised.50 But there was no frustration of a building lease of 99 years for erecting buildings by Government after the war restriction on building and materials making building impossible, because the main object of the lease was not destroyed. It was held that the interruption due to war did not destroy the identity of the arrangement contemplated in the lease nor made it unreasonable to carry out the terms of the lease, which had 90 years to run.51 In Amalgamated Investment and Property Co. Ltd. v. John Walker & Sons Ltd., 52 two days after the contract of sale, the property was listed for preservation on grounds of architectural or historic interest. The question whether the contract was avoided by mistake or frustration was decided by the Court of Appeal and it was held that it could not be avoided for a mutual mistake on the ground that the listing of the properties was not prior to the contract but after it. It held:
...but even so it is not a hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.
The contract was not frustrated because it could be carried to completion according to its terms, and the property was nonetheless the same, the listing merely imposing a fetter upon its use. The case, therefore, did not fall within the rule laid down by Lord Radcliffe in Davis Contractors Ltd. v. Fareham Urban District Council. 53 The completion would not render that performance a thing radically different from that which was undertaken by the contract; on the other hand, the completion would be exactly what the purchasers promised to do. 42 Hirji Mulji v. Cheong Yue SS Co. Ltd., [1926] AC 497 per Lord Sumner at 507, [1926] All ER Rep 51 at 57.
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43 CT Xavier v. PV Joseph, AIR 1995 Ker 140. 44 Davis Contractors Ltd. v. Fareham Urban District Council, [1956] AC 696 at 729, [1956] 2 All ER 145, [1956] 3 WLR 37(HL) ; see above: 'Radical Change in Obligation'. 45 Krell v. Henry, [1993] 2 KB 740, [1900-03] All ER Rep 20(CA) (hire of premises to see coronation procession, which was subsequently cancelled; contract discharged); Blakeley v. Muller & Co., [1903] 2 KB 760; Chandler v. Webster, [1904] I KB 493(CA) ; Berthoud v. Schweder & Co., (1915) 31 TLR 404 (agreement by stockbroker to pay half commission on all business introduced, subject to specified minimum; discharged by closure of stock exchange); but see Griffith v. Brymer, (1903) 19 TLR 434 and Clark v. Lindsay, (1903) 88 LT 198 (the decision to cancel had already been taken at the time of contracting); Herne Bay Steam Boat Co. v. Hutton, [1903] 2 KB 683, [1900-03] All ER Rep 627(CA) (agreement that steamship should be at disposal of defendant for purpose of viewing naval review and cruising round fleet not discharged by cancellation of review). 46 [1903] 2 KB 740, [1900-03] All ER Rep 20; Chandler v. Webster, [1904] 1 KB 493. 47 [1903] 2 KB 683, [1900-03] All ER Rep 627(CA) . 48 Larrinaga & Co. Ltd. v. Societe' Franco-Americaine des Phosphates de Medulla Paris, (1923) 92 LJKB 455, [1923] All ER Rep 1 per Lord Finlay at 6 (HL). 49 [1903] 2 KB 740, [1900-03] All ER Rep 20; Chandler v. Webster, [1904] 1 KB 493. 50 Larrinaga & Co. Ltd. v. Societe' Franco-Americaine des Phosphates de Medulla, (1923) 92 LJKB 455 per Lord Finlay, [1923] All ER Rep 1; Maritime National Fish Ltd. v. Ocean Trawlers Ltd., [1935] AC 524 per Lord Wright at 528, [1935] All ER Rep 86 at 89, (PC); WJ Tatem Ltd. v. Gamboa, [1939] 1 KB 132, [1938] 3 All ER 135; Joseph Constantine Steamship Line Ltd. v. Imperial Smelting Corpn. Ltd., [1942] AC 154 per Viscount Simon at 164, [1941] 2 All ER 165 (suggesting that Krell v. Henry, must not be placed in category of impossibility); Scanlans New Neon Ltd. v. Tooheys v. Ltd., (1943) 67 CLR 169 at 189-90 (that case is treated as one where as essential part of the contract was not performed); Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd., [1943] AC 32 per Lord Porter at 80, [1942] 2 All ER 122; Landon,[1936] 52 LQR 168; Gordon,[1936] 52 LQR 324; McNair,[1940] 56 LQR 173. 51 Cricklewood Property & Investment Trust Ltd. v. Leighton's Investment Trust Ltd., [1945] 1 All ER 252. 52 [1976] 3 All ER 509, [1977] 1 WLR 164(CA) . 53 [1956] AC 696 at 728, [1956] 2 All ER 145, [1956] 3 WLR 37; see above: 'Radical Change in Obligation'.
Unavailability Where the thing contracted for ceases to be available, the contract is discharged, e.g., detention or seizure of a ship; 'a contract of service where the party falls ill or is interned or compelled to join the armed forces'; or requisition of the very goods contracted to be sold.54 Discharge may occur by the temporary unavailability of the thing or person, if performance would be substantially different from that originally undertaken, e.g., a ship going aground and long delay in repairs--eight months.55 In bilticut contracts, where the seller has to get the goods booked and railway receipt prepared, the non-availability of wagons would frustrate the contract,56 so also where the buyer has to make the arrangement for transport,57 or where there is no express provision, but at the time of the contract, both parties had dearth of wagons in mind.58 An order by the Government restraining the railway administration from transportation of gur by rail is not an impossibility within s. 56, leading to frustration.59 But in Sannidhi Gundaya v. Illoori Subbaya, 60 a contract to deliver goods was frustrated by emergency regulations restraining transport. 54 Bank Line Ltd. v. Arthur Capel & Co., [1919] AC 435, [1918-19] All ER Rep 504 (ship requisitioned); Morgan v. Manser, [1948] 1 KB 184, [1948] 2 All ER 666 (called up for military service); See also Unger v. Preston Corpn. [1942] 1 All ER 200; Re An Arbitration between Shipton, Anderson & Co. and Harrison Brothers & Co.,[1915] 3 KB 676 (goods requisitioned). 55 Jackson v. Union Marine Insurance Co. Ltd., (1874) LR 10 CP 125, [1874-80] All ER Rep 317 (ship went aground and could not be repaired for eight months-delay frustrated contract); Bank Line Ltd. v. Arthur Capel & Co., [1919] AC 435, [1918-19] All ER Rep 504 (requisitioning of a ship before the beginning of the charterparty for a year, which made the charter a totally different thing); FA Tamplin Steamship Co. Ltd. v. Anglo-Mexican Petroleum Products Co. Ltd., [1916] 2 AC 397, [1916-17] All ER Rep 104 (a five years' charter not frustrated by requisitioning the ship, which had 19 months still to
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run); Countess of Warwick Steamship Co. v. Le Nickel Societe Anonyme, [1918] 1 KB 372 (one year's charter frustrated by requisitioning, because it was unlikely that she would be released in time, although the charter had a year to run). 56 Firm Bachhraj Amolakchand v. Firm Nand Lal Sitaram, AIR 1966 MP 145. 57 Ram Kumar Agarwala v. PC Roy & Co. (India) Ltd., AIR 1952 Cal 397 (on facts, requisition was not made during the period of performance). 58 Girija Proshad Pal v. National Coal Co. Ltd., AIR 1949 Cal 472; WJ Tatem Ltd. v. Gamboa, [1939] 1 KB 132, [1938] 3 All ER 135 (the contract is frustrated, even though the parties had the matter in mind if the foundation of contract is frustrated). 59 Seth Mohan Lal v. Grain Chambers Ltd., AIR 1968 SC 772 at 778. 60 AIR 1927 Mad 89, (1926) 51 Mad LJ 633, 99 IC 459.
Death or Disability in Contracts Requiring Personal Performance When personal considerations are the foundation of the contract, the death or incapacity of a party will generally discharge the contract, unless there is a stipulation express or implied to the contrary. Where the parties have contemplated and provided for the contingency, in such cases, the Court has only to construe the terms of their agreement.61 A contract for personal services,62 which are to be performed only by the promisor himself (see s. 40) are discharged not only on death of such promisor,63 but also if without default on the part of the promisor, he becomes physically incapable64 or incapable in a business sense65 of performing the contract. Whether the contract is discharged, is dependent upon the ratio between the length of service and probable length of installation. In Morgan v. Manser, 66 a variety artiste employed in 1938 for 10 years, was called up for military service in 1940 and de-mobilised in 1946. The contract was frustrated. But there was no frustration in Nordman v. Rayner & Sturges, 67 where there was detention for one month. A sentence for imprisonment upon an employee will frustrate his contract of employment as from the date of sentence.68 A contract to give a musical performance on a particular day may be frustrated by the performer's illness.69 A long-term employment contract may be frustrated if the illness is so serious as to make it unlikely that the performance can be resumed for a substantial part of the contract period.70 A less serious illness may give an employee an excuse for nonperformance and he is not in breach and may entitle the employer to terminate,71 but there is no automatic discharge under the doctrine of frustration.72 Except in case of serious illness and incapacity of the employee, he is bound to go back to work when illness is over.73 In Hart v. AR Marshall & Sons Bulwell Ltd., 74 the appellant was a permanent employee of the respondents and was one of the key workers as a night service fitter. In April 1974, the appellant was off work due to illness. From April until August, the employer managed to keep the night service going, but found that they could continue no longer and so they took T into their employment on a permanent basis to perform the work previously performed by the appellant. In January 1976, the appellant was declared fit by the doctor and sought for his previous employment. After some time, the employers told him that there was no work to be given to him. The industrial tribunal held on his complaint of unfair dismissal, that his dismissal was not unfair and that his contract of employment had come to an end by frustration. The employee appealed. It was held that the Court would be reluctant to declare that the employment had been frustrated when the employer himself had taken no steps to dismiss him. However, it was not conclusive. The proper test in such cases was to determine whether the period of absence was such that the employer could not reasonably be expected to wait for the employee's return any longer, and that is what had happened. Accordingly, his contract of employment had come to an end by operation of law. Similarly, a service agreement would be discharged by the employee joining the Royal Flying Corps, as, four days later he would, under the law, have been compelled to join the force.75
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In such cases, death of one of the parties does not affect a right of act ion, which vested under the contract before his death;76 so also in the case of a solicitor's retainer agreement with a gas company being frustrated on the gas company being nationalised.77 61 Elliott v. Crutchley, [1904] 1 KB 565(CA) ; affirmed in HL [1906] AC 7. 62 Stubbs v. Holywell Rly. Co., (1867) LR 2 Ex 311. 63 Farrow v. Wilson, (1869) LR 4 CP 744, [1861-73] All ER Rep 846 (death of servant); Davison v. Reeves, (1892) 8 TLR 391; Friend v. Young, [1897] 2 Ch 421 (death of agent); Hotel and General Advertising Co. v. Wickenden and Stene, (1899) 15 TLR 302(CA) (contract to hang tariff frame in hotel discharged by death of proprietor); Graves v. Cohen, (1929) 46 TLR 121 (death of jockey in a contract to ride horses); but see Culler v. Powell, (1975) 6 TR 320, [1775-1802] All ER Rep 159 (seaman dying on the voyage wages to be paid at the end of the voyage). 64 Robinson v. Davison, (1871) LR 6 Ex 269 (pianist incapacitated by illness from performing on a specified date); Horlock v. Beal, [1916] 1 AC 486, [1916-17] All ER Rep 81 (internment of a seaman); Morgan v. Manser, [1948] 1 KB 184, [1948] 2 All ER 666 (musician called up for service); Poussard v. Spiers and Pond, [1876] 1 QBD 410 (illness of opera singer); Unger v. Preston Corpn., [1942] 1 All ER 200 (employment as a medical officer frustrated by prolonged internment); Marshall v. Glanvill, [1917] 2 KB 87 (employment determined by liability to compulsory military service). 65 Jackson v. Union Marine Insurance Co. Ltd., (1874) LR 10 CP 125 at 145, [1874-80] All ER Rep 317 at 323 (delay in repairs put an end in business sense); Condor v. Barron Knights Ltd., [1966] 1 WLR 87 (contract by drummer to play seven nights a week frustrated by illness rendering him capable of playing only three or four nights a week). 66 [1948] 1 KB 184, [1948] 2 All ER 666; Cf Unger v. Preston Corpn., [1942] 1 All ER 200. 67 (1916) 33 TLR 87. 68 Hare v. Murphy Bros Ltd., [1974] ICR 603, [1974] 3 All ER 940(CA) (12 months' imprisonment); FC Shepherd & Co. Ltd. v. Jerrom, [1987] 1 QB 301, [1986] 3 All ER589 (Borstal training for an indefinite period); Chakki v. United Yeast Co. Ltd., [1982] 2 All ER 446 (imprisonment may not frustrate the contract immediately upon sentence). 69 Robinson v. Davison, (1871) LR 6 Ex 269. 70 Condor v. Barron Knights Ltd., [1966] 1 WLR 87; Marshall v. Harland & Wolff Ltd., [1972] 2 All ER 715; Hart v. AR Marshall & Sons Bulwell Ltd., [1978] 2 All ER 413. 71 Marrison v. Bell, [1939] 2 KB 187, [1939] 1 All ER 745, CA. 72 Chitty on Contracts, 28th edn., p. 1186, para 24-037; Poussard v. Spiers and Pond, (1876) 1 QBD 410. 73 Marrison v. Bell, [1939] 2 KB 187, [1939] 1 All ER 745, CA. 74 [1978] 2 All ER 413; Condor v. Barron Knights Ltd., [1966] 1 WLR 87; Marshall v. Harland & Wolff Ltd., [1972] 2 All ER 715; Notcutt v. Universal Equipment Co. (London) Ltd., [1986] 3 All ER 582, [1986] 1 WLR 641(CA) . 75 Marshall v. Glanvill, [1917] 2 KB 87. 76 Stubbs v. Holywell Rly. Co., (1867) LR 2 Ex 311. 77 Studholme v. South Western Gas Board, [1954] 1 All ER 462. [1954] 1 WLR 313.
Subsequent Legal Changes Impossibility of performance may arise through subsequent changes in the law. Where performance of the contract has been rendered impossible by an Act of Parliament passed after the contract was made, then the promisor is excused from performing his promise, unless it appears that he intended to bind himself with reference to the future state of the law.78 The presumption is that the parties intend to contract with reference to the law as existing at the time when the contract is made. The same principle applies where performance is rendered legally impossible by delegated legislation or by the exercise of powers under an Act or delegated legislation.79The impossibility may arise because the law prohibits the doing of the act undertaken under the contract, or restricts it. But the change in law must be such as to strike at the basis of the contract, and not merely to suspend performance under it.
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An agreement to convey zamindari lands became void, when the land vested in the Government under the zamindari abolition law, in respect of land, so vested.80 Where a portion of the property agreed to be reconveyed to the original vendor had been sold under the Evacuee Interest (Separation) Act, 195181, the contract of reconveyance became impossible of performance by supervening event.82 A contract under which a person holds a public office is discharged, if the office is abolished by statute.83 A contract containing monopoly was frustrated upon the commencement of the Constitution of India by the operation of Art. 19(1)(g) of the Constitution.84By an agreement between the ruler of the erstwhile State of Kota and a firm, whereby the firm in lieu of the grant of monopoly to stone quarrying in the state agreed to pay to the ruler royalty and also the firm was exempted from income tax. But when Kota became a part of the Indian Union and the Indian Finance Act became applicable to it, income tax was imposed, and the agreement between the ruler and the firm, although binding on the newly formed state under Art. 295(2) of the Constitution, became void because the income tax portion could not be separated from the rest.85 The merging of the State of Bikaner into the State of Rajasthan, and the abolition of the High Court of Bikaner, was held to be discharged by frustration.86 An agreement for sale of land became impossible, and the seller was liable to return the amounts received, when a notification under a statute relating to town planning froze the existing use of land.87 The BN Railway, sold by auction, slack coal to the plaintiff, but the coal was not allowed to be transported outside because of the order of the coal commissioner. The railway thus agreed to cancel the auction and agreed to refund the purchase price, but later refused to pay back the money claiming that the railway administration was not liable to refund. In the meanwhile, most of the coal was lost. The contract had got frustrated because of the orders of the coal commissioner, and the plaintiff was entitled to refund.88 Non-issuance of permits by the Nizam's Government for export of cotton seeds, frustrated a contract as it created a fundamentally different situation bringing about a change of circumstances, which upset the foundation of the contract; and the price paid could be recovered.89 Where the undertaking of one of the parties to the contract was acquired under the statute, which also provided for termination of all contracts, the arbitration agreement also stood discharged.90 Where the commercial or practical purpose of the contract is defeated by restrictions placed by orders of Government from exporting food grains outside the State, the contract is frustrated; although, uncertainties of future existed when the contract was made, but when they became realities, the commercial venture was frustrated.91 The question, whether an embargo by Government on import of jute from Pakistan would relieve the buyer from obtaining a licence, would depend92 on whether the buyer undertook to use his best endeavour to get a licence93 or whether the undertaking was absolute.94 In the former case, law will not imply an absolute obligation to do that which the law forbids; and in the latter case, the Courts have observed that there is nothing improper or illegal for a party to take upon himself, an absolute obligation and if he takes the risk, he is bound by it. Thus, a party agreeing to supply firewood of the specified type and girth from the plantation cannot plead impossibility of performance, on the ground that later he found that it was not available in the plantation.95 However, the taking over of the coal mines by statute, which provided inter alia that the liability of the owners of the mines (existing companies) to the creditors would remain unaffected, did not frustrate the liability of the coal company to the bank for the advances given to the company.1 A contract to reconvey had not been frustrated by acquisition of the plot agreed to be sold, and the plaintiff can proceed to recover the compensation awarded.2 78 Davis v. Cary, [1850] 15 QB 418 (condition in a bond as to rendering accounts becoming impossible owing to repeal of statute); Wynn v. Shrophshire Union Rlys and Canal Co., (1850) 5 Exch 420 (covenants in deed subsequently rendered unlawful of performance); Newington Local Board v. Cottingham Local Board, (1879) 12 Ch D 727 (agreement not to permit other sewers to discharge into a particular sewer: held overruled by provisions of a subsequent Act giving right so to discharge); Studholme v. South Western Gas Board, [1954] 1 All ER 462, [1954] 1 WLR 313 (service agreement with gas company; remuneration based on capital of company; vesting of company's property, rights and liabilities in gas board; basis for calculation of remuneration destroyed). 79 Bailey v. De Crespigny, [1869] LR 4 QB 180. 80 Ganga Singh v. Santosh Kumar, AIR 1963 All 201; Shiam Sunder Lal v. Durga, AIR 1966 All 185. 81 Repealed by the Displaced persons claims and other Laws Repeal Act, 2005 (38 of 2005).
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82 Ahmad Khan v. Shahanshah Jehan Begum, AIR. 1973 All 529 at 531. 83 Reilly v. R, [1934] AC 176, [1933] All ER Rep 179. 84 Hamara Radio & General Industries Ltd. Co. v. State of Rajasthan, AIR 1964 Raj 205. 85 State of Rajasthan v. Associated Stone Industries Kota Ltd., AIR 1971 Raj 128 at 133. 86 State of Rajasthan v. Madanswarup, AIR 1960 Raj 138. 87 Raj Kumar Gupta v. Des Raj, AIR 1995 HP 107. 88 Har Prasad Chaubey v. Union of India, AIR 1973 SC 2380 at 2384. 89 Ramayya v. Firm of Gulfarosh Mohideen Saib Shaik Saib, AIR 1958 AP 576. 90 Bharat Hydro Power Corporation Ltd. v. Assam State Electricity Board, AIR 1999 Gau 151. 91 Firm Bachhraj Amolakchand v. Firm Nand Lal Sitaram, AIR 1966 MP 145. 92 Naihati Jute Mills Ltd. v. Khyaliram Jagannath, [1968] 1 SCR 821, AIR 1968 SC 522 at 528. 93 Re An Arbitration between Anglo-Russian Merchants Traders Ltd. v. John Batt & Co. (London) Ltd., [1917] 2 KB 679; Naihati Jute Mills Ltd. v. Khyaliram Jagannath, [1968] 1 SCR 821, AIR 1968 SC 522. 94 Partabmull Rameshwar v. KC Sethia, (1944) Ltd., [1951] 2 All ER 352; Peter Cassidy Seed Co. Ltd. v. Osuustukkuk-Auppa, [1957] 1 All ER 484, [1957] 1 WLR 273; Naihati Jute Mills Ltd. v. Khyaliram Jagannath, [1968] 1 SCR 821, AIR 1968 SC 522 at 528. 95 Gwalior Rayon Silk Mfg Co. Ltd. v. Shri Andavar & Co., AIR 1991 Ker 134 at 136. 1 Katras Jherriah Coal Co. Ltd. v. Mercantile Bank, AIR 1981 Cal 418 at 421. 2 Nathu Singh v. Jagdish Singh, AIR 1992 All 174 at 178; Pillamma v. p. Rangaraju, AIR 1996 Kant 330.
Effect of War In a state of war, many contracts are affected by performance becoming wholly or in part unlawful. This may be under the general rules against intercourse with the enemy, or may be the result of express executive orders issued under powers of emergency legislation.3 The governing principle was laid down in a case arising out of the Crimean War:
As to the mode of operation of war upon contracts of affreightment made before, but which remain unexpected at, the time it is declared, and of which it makes the further execution unlawful or impossible, the authorities establish that the effect is to dissolve the contract, and to absolve both parties from further performance of it.4
One British firm contracted with another to sell goods, deliverable to the buyer or assignees in Hamburg CIF for payment at Liverpool in exchange for shipping documents. The goods were shipped in June 1914, for Hamburg in a German ship; the bill of lading provided that questions arising under it were to be decided there by German law. On 5 August, the day following the declaration of war, the ship having put in, it was stated, at a neutral port, the sellers tendered the documents and the buyer refused them. It was held that delivery according to the contract would have been against the King's proclamation, as being delivery to residents in enemy country, and therefore, the refusal was good.5 This authority has been followed in Indian cases, where the facts were varied by the goods being dispatched, or intended so to be, not to Germany but from Germany to India. In the case of a cargo shipped from Hamburg to India, where the bill of lading was tendered after the British proclamation, refusal to tender was justified, the goods having become enemy property at the outbreak of war.6 Where,
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in a consignment sold by the Madras agent of an enemy firm, the buyer accepted a draft for the price, and demanded first the documents, the goods arriving later at Madras, the agency was held to have been determined by the declaration of war, so that no contract was ever formed.7 Intercourse with the Enemy Even though no specific order is made, where, on the outbreak of war, the continued performance of the contract would involve intercourse with, or benefit to, the enemy or would be detrimental to the interests of the United Kingdom, the effect at common law is to abrogate any subsisting right to further performance of the contract (other than the right to the payment of a liquidated sum of money, which will be suspended for the duration of the war).8 A contract involving intercourse with an alien enemy is thus automatically dissolved by the outbreak of war, or if a party to the contract becomes an alien enemy,9 even though it contains a clause suspending its operation during the war; else enforcing it would be void as against public policy.10 A foreign firm in Geneva was declared an enemy firm by the former British Indian Government. It was also an enemy firm qua the Jaipur Government under the Defence of India Rules as adapted by the erstwhile Jaipur State. A contract between a Jaipur subject and the firm therefore was frustrated under s. 56 of the Contract Act, as it became void and incapable of performance. The doctrine underlying s. 56 applies to all intercourse with the enemy or what tends to assist the enemy.11 In Banghy Abdul Razack Sahib v. Khandi Rao, 12 a contract was made in August 1914, after the outbreak of war, between merchants at Ambur and importers of German dyes, whereby the latter (defendants) agreed to sell and deliver to the former (plaintiffs), certain casks of dye already shipped from Germany. As the defendants could not lawfully take up and pay for the goods, they could not lawfully agree to sell and deliver them to the plaintiffs.13 The case had another interesting aspect. The German SS Barenfels carrying the dyes in question, was captured in October 1914, and taken to Alexandria for condemnation and subsequently condemned as prize of war in September 1915.14 In the meantime, the defendants got the goods released on payment of double the invoice value, agreeing to treat it as their sale price in case of their eventual condemnation. It was held15 that the condemnation by the prize Court related back to the date of seizure and divested the ownership of the goods as from that date. The goods, therefore, came to the defendants as purchasers from the Crown and they were not bound to deliver them to the plaintiffs. An executory contract between parties of whom one becomes an alien enemy, is thereby suspended or dissolved according to the nature of the case. It is dissolved if it contemplates a continuous performance, which in the state of war, would entail intercourse with enemy, or if the continuance of duties to be performed after the war would assist the enemy's trade, or if the maintenance of the contract is otherwise against public policy, or if suspension of the current execution would substantially be imposing a new contract on the parties. On the outbreak of war, a contract between a German company and a British company was suspended and not abrogated, as it was wholly executed and involved no intercourse between subjects and alien enemies or increase of enemy resources. Payment in Germany to a German agency and in German marks from one person in Germany to another, could be allowed as it does not increase the resources of the enemy;16 but a separation agreement, under which the husband agreed to pay regular maintenance to the wife, continued in force even when she became an alien enemy, though during the war, the payments were required to be made to the custodian of enemy property.17 Other Contracts In cases where the outbreak of war does not itself render one party to the contract an alien enemy, the question whether the contract has been frustrated depends on the effect upon the contract of the act s done in furtherance of the war.18 Where a German seller's draft on the buyer at 30 days' sight was drawn, purchased by British subjects in London, and presented and accepted at Bombay before the war, the buyer was held bound to pay. The defendant contended that the acceptance was qualified by the condition that the plaintiff, when tendering the documents to the defendants, should put them in a position to get delivery of the goods, and that this
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could not be lawfully performed. The ship carrying the goods reached Bombay just before the outbreak of war, left Bombay to avoid capture and took shelter in the neutral port of Marmagoa, where she was lying at the date of the suit, and under the proclamation of December 1914, British consignees were free to take delivery of goods from enemy ships in neutral ports. Thus both branches of the defence failed; actual payment of the bill, from one British subject to another, at the due date and after declaration of war, was of course in no way unlawful.19 In Twentsche Overseas Trading Co. Ltd. v. Uganda Sugar Factory Ltd., 20T contracted to supply steel rails Krupp Sections to U. The contract did not specify the source of the goods; and on failure to supply the rails, the buyer brought a suit for damages. The defence was frustration, because to the knowledge and intention of both the parties, the goods were to come from Germany and as this had become illegal and impossible because of the War, the contract was frustrated or the contract had ceased to bind as the common basis on which by mutual understanding it was based, had failed. The Privy Council referred with approval to two English cases dealing with frustration,21 and held that the contract was not frustrated, as shipment from Germany was no part of the contract, nor the basis or foundation of the contract.22 A contract between parties in India for purchase of goods contained a condition that the contract would become void, if there was any fluctuation in the rates declared by a syndicate composed of firms of German producers. Deliveries ceased after the war with Germany, but large stocks lay in India. The syndicate became inoperative. It was held that the contract was not thereby frustrated, and the original obligation of the sellers to give deliveries remained unaffected.23 War-time Restrictions Literal possibility or otherwise of executing the agreement according to its terms is not an adequate test; it has to be considered whether performance, according to the true governing intention of the parties, remains possible.24 In principle, the question remains whether the new state of things is such as the parties provided for or contemplated, and whether further performance, so far as the prohibition is not total, or when it is removed, would really be performance of the same contract. Where goods were seized as prize and then released and trans-shipped and arrived two years late, it was held that the arrival was not such as was contemplated by the parties.25 In Firm of Hussainbhoy Karimji v. Haridas, 26 the defendants had contracted to deliver at Karachi to the plaintiff, Java sugar of the July, August and September 1917 shipment. The ships were requisitioned by the British Government, and no ships left Java for Karachi during those months. The defendants failed to supply the sugar. It was held that the real contract which the parties made was on the basis of there being a regular service of ships, and that fact was the basis of contract for both parties, and the parties did not contemplate that it may not be possible to ship sugar in the manner in which it had been shipped in the past, or in any commercially practicable manner, and therefore, the contract had become impossible, and the defendants were not liable for breach. Compulsory suspension of an engineering contract on a large scale, in order to direct the labour to producing munitions of war, has been held to discharge the contractors.27 So also, a contract to deliver goods may be frustrated by emergency regulations restricting transport.28 Where in a specific contract of sale, the property in goods had not yet passed to the buyer, and were lawfully taken for public service, the seller was excused from delivery.29 A temporary interruption (such as requisition of a ship for transport of troops), does not necessarily determine the contract,30 though it may do so if the contract is for shipment within a limited time and within that time, no other tonnage can be found at a proper port.31 A continuing contract is not discharged by a prohibitive regulation, which may be determined or varied during the war and leaves a substantial part of the contract capable of execution;32 or where a subsequent notification regulating retail prices neither makes the performance impossible nor unlawful.33 There will also be no frustration where there is an express provision in the contract that the buyer is to make the arrangements for transport,34 or where no express provision is made, but at the time of contracting, both parties had the supervening event in contemplation.35 The terms of the contract may
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also indicate that one or the other parties had taken the risk of the supervening event. In Theodor Schneider & Co. v. Burgett & Newsam, 36 the question arose:
...whether when, before the outbreak of war, goods have been sold by one English firm to another on a c.i.f. contract and shipped on a German ship to a neutral port, was the seller after the outbreak of war entitled to tender, in one case the German bill of lading, in the other case the German bill of lading and the German policy of insurance, and to claim the price?
This point also arose in a later case: 'upon whom the loss is to fall where documents which were originally valid, have become invalid before they were tendered'.37 It was decided that the documents which the buyer is bound to accept are effective shipping documents, and are not the only evidence of a contract, now dissolved by one party having become an alien enemy. Special terms might throw their risk on the buyer, but the usual terms of a CIF contract do not. This ruling has been followed in India. In Marshal & Co. v. Naginchand Fulchand, 38 goods were shipped to Bombay under a CIF contract from a German port and on board a German ship before the declaration of war; the vendor, a Glasgow firm, drew a bill of exchange upon the purchaser on 9 November 1914, which was accepted in Bombay. The bill became payable on 12 January 1915, and the vendor sued for the amount. He was held entitled to recover, as the bill of lading ceased to be an operative legal document before it was tendered and the consideration for the acceptance of the bill of exchange had, therefore, failed. Conditions of War affecting Performance In Satyabrata Ghose v. Mugneeram Bangur & Co., 39a considerable area of land was to be developed by the defendant under a development scheme, of which, he agreed to sell one plot to the plaintiff. The agreement was made after the war had already started. The sale deed was to be executed within one month after the scheme was completed. Before development began, a considerable portion of the land was requisitioned, making the entry of the owner on the land during that period illegal. The defendant company offered to return the earnest money with cancellation of the contract, else, the completion of the conveyance of the land in the condition it was; and if neither of the alternatives was acceptable, the agreement would be considered cancelled and the earnest money forfeited. In a suit by the plaintiff for the enforcement of the contract, the defendant pleaded discharge by frustration. The Supreme Court held that the doctrine was inapplicable, having regard to the nature and terms of the contract, the act ual existence of conditions at the time when it was entered into, the fact that there was no time-limit in the agreement for completion of the scheme, and that the order of requisitioning was by its nature of a temporary character, which did not affect the fundamental basis of the contract. The performance of the contract had not become impossible within the meaning of s. 56 of the Contract Act.40 Where a common carrier could not deliver the goods received by it for carriage to their destination in Silchar in Assam, because during the voyage in 1965, hostilities broke out between India and Pakistan and at that time and the vessel along with its cargo was seized by the Pakistan Government, the Court held that the contract of carriage was frustrated due to impossibility of its performance.41 The occupation of a country by enemy forces was held to frustrate a contract of purchase of machinery by a buyer in that country, the seller being in a country which also declared war on the enemy country; and the buyer was entitled to the refund of the money paid with the order.42 Where a contract is abrogated by the outbreak of war, any claim by a party, who is an alien enemy, to recover back the money paid under the contract on the principle applying to frustrated contract, must be disallowed for like reasons as prevent the performance of the contract.43 But accrued rights under the contract are not destroyed,44 the right of suing may be suspended so long as the war continues, or the claimant remains an alien enemy. 3 Trading with the Enemy (Continuance of Emergency Provisions) Act, 1947.
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4 Esposito v. Bowden, (1857) 7 E&B 763 per Willes J. at 783, [1843-60] All ER Rep 39 at 42, 110 RR 825; AF Ferguson & Co. v. Lalit Mohan Ghosh, AIR 1954 Pat 596 at 606. 5 Duncan, Fox & Co. v. Schrempft & Bonke, [1915] 1 KB 365; See also Russel J's judgment Re Badische Co. Ltd.,[1921] 2 Ch 331 at 373. 6 Nissim Issac Bekhor v. Sultanalli Shystary & Co., (1915) ILR 40 Bom 11, AIR 1915 Bom 76, 28 IC 433. 7 Soorthingjee Sakalchand v. Mahomed Nasuruddin, AIR 1918 Mad 1124, [1917] 32 Mad LJ 146, 40 IC 526. 8 Schering Ltd. v. Stockholms Enskilda Bank Aktiebolag, [1946] AC 219, [1946] 1 All ER 36(HL) ; Arab Bank Ltd. v. Barclays Bank (Dominion, Colonial and Overseas), [1954] AC 495, [1954] 2 All ER 226(HL) ; Re Helbert Wagg & Co. Ltd., [1956] Ch 323, [1956] 1 All ER 129, [1956] 2 WLR 183. 9 Esposito v. Bowden, (1857) 7 E&B 763, [1843-60] All ER Rep 39, 110 RR 825. 10 Ertel Bieber & Co. v. Rio Tinto Co. Ltd., [1918] AC 260, [1918-19] All ER Rep 127; Naylor, Benzon & Co. Ltd. v. Krainische Industrie Gesellschaft, [1918] 1 KB 331; affirmed in [1918] 2 KB 486; Zinc Corpn Limited v. Hirsch, [1914-15] All ER Rep 487; Arab Bank Ltd. v. Barclays Bank (Dominion, Colonial and Overseas), [1954] AC 495, [1954] 2 All ER 226. 11 Trilokidas v. Firm Ram Narain Damodar, AIR 1971 Raj 88 at 93; applying Pollock's Principles of Contract, 12th edn., p. 292. 12 (1918) 41 Mad 225, 40 IC 851, AIR 1918 Mad 515; Madhoram Hurdeodas v. GC Sett, (1917) 45 Cal 28, AIR 1918 Cal 830; Gouri Sankar Agarwalla v. HP Moitra, AIR 1921 Cal 509, 26 CWN 573, 70 IC 379. 13 Arnhold Karberg & Co. v. Blythe, Green, Jourdain & Co., Theodor Schneider & Co. v. Burgett and Newsam, [1916] 1 KB 495. 14 The prize court in Egypt held in the same case, that where a German firm consigned goods to a British firm at Colombo, drew on that firm for the price, and discounted the draft with a British bank, all this before the war, acceptance of draft after the war by the buyers was an act of trading with the enemy. 15 Following The Odessa,[1916] AC 153. 16 Re Helbert Wagg & Co. Ltd., [1956] Ch 323, [1956] 1 All ER 129, at 144, [1956] 2 WLR 183 at 202; Schering Ltd. v. Stockholms Enskilda Bank Aktiebolag, [1946] AC 219, [1946] 1 All ER 36(HL) . 17 Bevan v. Bevan, [1955] 2 QB 227, [1955] 2 All ER 206. 18 Finelvet AG v. Vinava Shipping Co. Ltd. (the Chrysalis), [1983] 2 All ER 658, [1983] 1 WLR 1469. 19 RK Motishaw & Co. v. Mercantile Bank of India Ltd., (1916) ILR 41 Bom 566, AIR 1916 Bom 144, 37 IC 258. 20 AIR 1945 PC 144. 21 Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd., [1943] AC 32, [1942] 2 All ER 122(HL) ; Joseph Constantine Steamship Line Ltd. v. Imperial Smelting Corpn Ltd., [1942] AC 154, [1941] 2 All ER 165. 22 Twentsche Overseas Trading Co. Ltd. v. Uganda Sugar Factory Ltd., AIR 1945 PC 144 at 146; Re Badische Co. Ltd.,[1921] 2 Ch 331. 23 Toolsidas Tejpal v. MP Venkatachalapathy, AIR 1921 PC 46. 24 Horlock v. Beal, [1916] 1 AC 486, [1916-17] All ER Rep 81; Firm of Hussainbhoy Karimji v. Haridas, (1927) 105 IC 319, AIR 1928 Sind 21. 25 Gouri Sankar Agarwalla v. HP Moitra, AIR 1921 Cal 509, 26 CWN 573, 70 IC 379. 26 (1927) 105 IC 319, AIR 1928 Sind 21. 27 Metropolitan Water Board v. Dick Kerr & Co. Ltd., [1918] AC 119, [1916-17] All ER Rep 122; Re VL Narasu v. PSV Iyer, (1953) Mad 831, AIR 1953 Mad 300. 28 Sannidhi Gundayya v. Illoori Subbaya, AIR 1927 Mad 89, (1926) 51 Mad LJ 633, 99 IC 459. 29 Re An Arbitration between Shipton, Anderson & Co. and Harrison Bros & Co.,[1915] 3 KB 676. 30 FA Tamplin Steamship Co. Ltd. v. Anglo-Mexican Petroleum Products Co. Ltd., [1916] 2 AC 397, [1916-17] All ER Rep 104. 31 Edmund Bendit v. Edgar Raphael Prudhomme, [1924] 48 Mad 538, 87 IC 681, AIR 1925 Mad 626 (really on the
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construction of an express force majeure clause); cf Firm of Hussainbhoy Karimji v. Haridas, (1927) 105 IC 319, AIR 1928 Sind 21. 32 Leiston Gas Co. Ltd. v. Leiston-cum-Sizewell Urban District Council, [1916] 2 KB 428, [1916-17] All ER Rep 329(CA) . 33 Firm Sarada Prasad De v. Bhut Nath Mallik, (1941) 2 Cal 78, AIR 1942 Cal 291, 45 CWN 660. 34 Ram Kumar Agarwalla v. PC Roy & Co. (India) Ltd., AIR 1952 Cal 397. 35 Girija Proshad Lal v. National Coal Co. Ltd., AIR 1949 Cal 472 (shortage of wagons). 36 [1915] 2 KB 379 per Scrutton J. at 385; in appeal Arnhold Karberg & Co. v. Blythe, Green, Jourdain & Co., Theodor Schneider & Co. v. Burgett and Newsam, [1916] 1 KB 495. 37 Arnhold Karberg & Co. v. Blythe, Green, Jourdain & Co., Theodor Schneider & Co. v. Burgett and Newsam, [1916] 1 KB 495 per Eady LJ. at 504. 38 (1916) ILR 42 Bom (VI) 473, 37 IC 644 (it is not clear from the report whether the bill of lading was tendered to the purchaser at the time of acceptance or subsequently, nor whether he ever got the bill of lading). 39 [1954] SCR 310, AIR 1954 SC 44. 40 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310, AIR 1954 SC 44; Mungeeram Bangur and Co. v. Gurbachan Singh, AIR 1959 Cal 576; on appeal, [1965] 2 SCR 630 at 637, AIR 1965 SC 1523 at 1526. 41 Basanti Bastralaya v. River Steam Navigation Co. Ltd., AIR 1987 Cal 271 at 275; A Akooji Jadwat Pvt. Ltd. v. Oriental Fire and General Insurance Co. Ltd., AIR 1972 Cal 228 (where the insurer was held liable, since the policy did not contain any such express exemption). 42 Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd., [1943] AC 32, [1942] 2 All ER 122; Chandler v. Webster, [1904] 1 KB 493 (regarding return of money held wrong). 43 Arab Bank Ltd. v. Barclays Bank (Dominion, Colonial and Overseas), [1953] 2 QB 527 at 560 per Singleton J. at 561, per Jenkins LJ. at 570 and per Morris LJ. at 574, [1953] 2 All ER 263 at 278, 284 and 286 respectively (CA); affirmed on other grounds, [1954] AC 495, [1954] 2 All ER 226(HL) . 44 Schering Ltd. v. Stockholms Enskilda Bank Aktiebolag, [1946] AC 219, [1946] 1 All ER 36(HL) ; Arab Bank Ltd. v. Barclays Bank (Dominion, Colonial and Overseas), [1954] AC 495, [1954] 2 All ER 226(HL) ; Re Helbert Wagg & Co. Ltd.,[1956] Ch 323, [1956] I All ER 129, [1956] 2 WLR 183.
Effect of Partition After partition, a contract for monopoly procurement operative for one year between March 1947 and March 1948, was held to have become impossible of performance under this section;45 so also an unregistered lease of land in the Pakistan portion of pre-partition Punjab.46 In Rama Nand Vijay Parkash v. Gokal Chand Gian Chand, 47 the parties, both from Amritsar, had entered into a contract to refer all disputes to two European merchants at Karachi. After partition, it became dangerous for Hindus to travel into Pakistan, nor could they do so without permits from the Pakistani authorities. It was held that the agreement to refer to arbitration was frustrated, on the ground that it was necessary for the parties to be present in Karachi. But in a subsequent case, a Full Bench of the same Court decided that if it was not necessary for the parties to be present in Karachi during the arbitration proceedings, there was no frustration of the agreement to refer to arbitration.48 45 Okara Grain Buyers Syndicate Ltd. v. United Commercial Bank Ltd., AIR 1961 Punj 66. 46 Sushila Devi v. Hari Singh, AIR 1971 SC 1756 at 1759. 47 AIR 1951 Pun (Sim) 189; Dawood Tar Mahomed Bros v. Queensland Insurance Co. Ltd., (1945) 1 Cal 638, AIR 1949 Cal 390. 48 Parmeshwari Das Mehra & Sons v. Firm Ram Chand Om Prakash, AIR 1952 Punj 34.
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Delay In Pioneer Shipping Ltd. v. BPT Tioxide Ltd. (The Nema), 49 Lord Roskill said:
...it is often necessary to wait upon events in order to see whether the delay already suffered and the prospects of further delay from that cause, will make any ultimate performance of the relevant contractual obligations 'radically different'...from that which was undertaken by the contract. But, as has often been said, businessmen must not be required to await events too long. They are entitled to know where they stand. Whether or not the delay is such as to bring about frustration must be a question to be determined by an informed judgment based upon all the evidence of what has occurred and what is likely to occur. Often it will be a question of degree whether the effect of delay suffered, and likely to be suffered, will be such as to bring about frustration of the particular adventure in question.
The proper test to apply to decide whether delay in fulfilling an agreement was so grave as to entitle the aggrieved party to rescind, is whether that delay is such as to frustrate the commercial purpose of the venture.50 Reasonable time can only be accepted as the test where the period regarded as reasonable time is the same as the period necessary to frustrate.51 Delay in the supply of cargo will not frustrate a charterparty, because the delay in loading for a variety of reasons was contemplated by its terms and because the consequences of such delay would purely be financial for one side or the other.52 To frustrate a contract, the delay must be abnormal in its cause, its effects, or its expected duration, so that it falls outside what the parties could reasonably have contemplated at the time of contracting.53 A loading threat frustrates the contract, if it subjects the ship to such delay as will frustrate the commercial object of the venture, so that the voyage when performed, will be something different from that contracted for.54Charterers cannot succeed in their defence in an act ion for damages for repudiation of a charterparty, unless the delay in making a vessel seaworthy was or appeared likely at the date of repudiation, to be so great as to frustrate the commercial purpose of the charter. For this purpose, there can be no real difference between 'reasonable time' yardstick and, the 'frustrating time' yardstick.55 If a definite time-limit is agreed between the parties for completing the performance of an act, delay of an indefinite period due to a supervening frustrating event might make performance impossible within the specified time, as this would seriously affect the object and purpose of the venture;56 but this may not be so, when no time limit is agreed between the parties, especially when the events of difficulty were anticipated by the parties.57 A sale of cotton seeds was frustrated, as the ship to carry it was stranded in January and thus was unable to carry the cotton seed in January.58 A contract may become frustrated, if its performance is prevented by an injunction of the Court,59 or a stop order notice from a local authority requiring the contractor to stop work.60 But long delay in arbitration proceedings, caused by the inactivity of both the parties, cannot frustrate the arbitration agreement.61 49 [1982] AC 724 at 752, [1981] 2 All ER 1030; GA Galia Kotwala & Co. Ltd. v. KRL Narasimhan, AIR 1954 Mad 119 at 123. 50 See for discussion on frustrating delay, Stannard,(1983) 46 MLR 738. 51 Universal Cargo Carriers Corpn. v. Citati, [1957] 2 QB 401, [1957] 2 All ER 70; Inverkip Steam Ship Ltd. v. Bunge & Co., [1917] 2 KB 193 per Scrutton LJ. at 201. 52 Trade and Transport Inc. v. Lino Kaiun Kaisha Ltd. (the Angelia), [1973] 2 All ER 144 at 152, [1973] 1 WLR 210. 53 Chitty on Contracts, 28th edn., p. 1184, para 24-034; Sir Lindsay Parkinson & Co. Ltd. v. Commissioners of Works and Public Buildings, [1949] 2 KB 632 at 665, [1950] 1 All ER 208(CA) . 54 Reardon Smith Line Ltd. v. Ministry of Agriculture, Fisheries and Food, [1961] 2 All ER 577, [1961] 3 WLR 110; affirmed in, [1963] 1 All ER 545. 55 Hongkong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd., [1961] 2 WLR 716 at 726, [1961] 2 All ER 257; Universal Cargo Carriers Corpn. v. Citati, [1957] 2 QB 401 at 434, [1957] 2 All ER 70; affirmed, [1957] 3 All ER 234, [1957] 1 WLR 979(CA) .
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56 Codelfa Construction Pty. Ltd. v. State Rail Authority of New South Wales, (1982) 149 CLR 337. 57 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310 at 328. AIR 1954 SC 44 at 49. 58 Nickoll & Knight v. Ashton, Edridge & Co., [1901] 2 KB 126, [1900-13] All ER Rep 928, CA. 59 Re HEH The Nizam's Jewellery Trust, Shanti Vijay & Co. v. Princess Fatima Fouzia, AIR 1980 SC 17 at 28; Codelfa Construction Proprietary Ltd. v. State Rail Authority of New South Wales, (1982) 149 CLR 337. 60 MD, Army Welfare Housing Organisation v. Sumangal Services Pvt Ltd., AIR 2004 SC 1344, (2004) 9 SCC 619. 61 Paal Wilson & Co. AS v. Partenreederei Hannah Blumenthal (The Hannah Bluementhal), [1983] 1 AC 854, [1983] All ER 34; Bremer Vulkan Schiffbau und Maschinenfabrik v. South Indian Shipping Corpn. Ltd., [1981] 1 All ER 289; Food Corporation of India v. Antclizo Shipping Corporation (The Antclizo), [1988] 2 All ER 513, [1988] 1 WLR 603,(HL) .
Contract of Sale of Goods There is no general rule that the doctrine of frustration does not apply to a sale of unascertained goods.62 The contract would not be frustrated in a case where the specification of goods to be supplied does not define the source of the goods, and only one of many ways of performing it has become illegal or impossible.63As regards specific goods, s. 8 of the Sale of Goods Act, 1930 provides, that where after the agreement to sell and before sale, and before the risk passes to the buyer, the goods perish or become so damaged as no longer to answer to their description without any fault of the seller or buyer, the agreement is avoided. The municipality sold a collection of pig dung to a contractor, but the pig owners themselves collected the dung and there was nothing left for the contractor. The Court held that the contract had become impossible of performance as the future unascertained goods sold did not come into existence and therefore, the contractor was not liable to pay the municipality.64 62 Re Badische Co. Ltd.,[1921] 2 Ch 331; Twentsche Overseas Trading Co. Ltd. v. Uganda Sugar Factory Ltd., AIR 1945 PC 144. 63 Twentsche Overseas Trading Co. Ltd. v. Uganda Sugar Factory Ltd., AIR 1945 PC 144; Ram Kumar v. PC Roy & Co . (India) Ltd,AIR 1952 Cal 335. 64 Markapur Municipality v. Dodda Ramireddi, AIR 1972 AP 299 at 300.
Contracts for Sale of Land Under Indian law, the doctrine of impossibility is applicable to contracts for sale of land as they create no interest in the land to be sold;65 while in English law, it does not apply to cases of contracts for the sale of land because such a contract constitutes the purchaser the beneficial owner of land, the owner having only the legal estate.66 65 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310 at 375, AIR 1954 SC 44 at 49; Mugneeram Bangore & Co. v. Satyabrata Ghosh, AIR 1951 Cal 332; Ahmad Khan v. Shahanshah Jehan Begum, AIR 1973 All 529. 66 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310 at 324-5, AIR 1954 SC 44 at 49; Hillingdon Estates Co. v. Stonefeild Estates Ltd., [1952] Ch 627, [1952] 1 All ER 853.
Marriage and Frustration An agreement to pay a separation allowance to a wife under a separation agreement is not frustrated by
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subsequent divorce obtained by the wife,67 nor by a decree of nullity on the ground of the wife's incapacity.68 67 May v. May, [1929] 2 KB 386, [1929] All ER Rep 484, CA. 68 Adams v. Adams, [1941] 1 All ER 334.
Leases In earlier English cases, it was held that an estate created by a lease was not determined because the doctrine did not apply to demise of real property.69 A lease was therefore not determined by frustration, when the military authorities requisitioned it; it was not an eviction by title paramount.70 Similarly, the destruction of a house did not by itself determine the tenancy of the land on which it stood.71 In Cricklewood Property & Investment Trust Ltd. v. Leighton's Investment Trust Ltd., 72 a building lease for 99 years for erecting shops was alleged to have been frustrated by Government war-time restriction after the war on building and materials, making building impossible. It was held that the main object of the lease was not destroyed, the interruption of the war did not destroy the identity of the arrangement, and the lease had 90 years to run, and hence, there was no frustration. But the House was divided on the application of the principle of frustration to leases; Lord Russell and Lord Goddard holding that a lease was more than a contract, it created and vested in the lessee an estate in land; and the doctrine did not apply to it. But Lord Wright, with whom Viscount Simon agreed, held that the doctrine could apply to leases and stated:73
The doctrine of frustration is modern and flexible and is not subject to being constricted by an arbitrary formula. I am not therefore prepared to state as a universal principle that it can in no circumstances be applied to a lease.
In National Carriers Ltd. v. Panalpina (Northern) Ltd., 74 a warehouse was leased to the appellant for 10 years. Later, the approach to the warehouse was closed because a building on the only approach street became dangerous and had to be demolished and rebuilt, which would take two years. The majority of the House agreed with the reasoning of Viscount Simon and Lord Wright in the Cricklewood Property & Investment Trust Ltd. v. Leighton's Investment Trust Ltd., 75 and it was held that the doctrine of frustration applied to leases, and the lease even though executed, was frustrated so as to bring the lease to an end because the lessee was deprived of substantial use of the warehouse. Furthermore, there was no class of lease of land to which the doctrine was inherently inapplicable. However, the circumstances in which the doctrine applied to a lease of land were exceedingly rare. But in the case, although, the closure of the approach would affect the lessee's business for two out of 10 years, that was no defence to payment, because they would have a further three years of use.76 A lease in Indian law is not a mere contract, but a transfer of an interest in land and creates a right in rem.77 The Supreme Court has held that the doctrine of frustration is not applicable to leases;78 it applied to executory contracts and not to transactions which have created a demise in praesenti.79Section 108(e) of the Transfer of Property Act, 1882 applies, which makes a special provision giving an option to the lessee to determine the lease, if by fire, tempest or flood, or other specified causes, any material part of the property gets wholly destroyed or rendered substantially and permanently unfit for the purpose for which it was let. If a lease were to be treated as a contract, it would contradict the result as stated in s. 108(e), because in one case, the contract stands automatically discharged, and in the other, only discharged at the option of the lessee.80 In Raja Dhruv Dev Chand v. Raja Harmohinder Singh, 81the appellants, who had taken on lease an area of land in Mountgomery district, had to migrate after partition. It was held that the rights of the parties no
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longer rested on contract after the lease was granted. Section 4 of the Transfer of Property Act, 1882,82did not indicate that the provisions of the Contract Act were to be read into the Transfer of Property Act, 1882. There was a clear distinction between a completed conveyance and an executory contract; and events which discharged a contract, do not invalidate a concluded transfer. It was stated:
By its express terms, s. 56 of the Contract Act does not apply to cases in which there is a completed transfer. The second paragraph of s. 56...has a limited application to covenants under a lease. A covenant under a lease to do an act, which after the contract is made becomes impossible or by reason of some event which the promisor could not prevent unlawful, becomes void when the act becomes impossible or unlawful. But on that account the transfer of property resulting from the lease granted by the lessor to the lessee is not declared void.83
Earlier, the Calcutta High Court in Inder Pershad Singh v. Campbell, 84 and in Kshitish Chandra Mondal v. Shiba Rani Debi, 85 had applied the doctrine of frustration to leases. In the former case, a lease for a number of years of agricultural land for cultivation of indigo was concluded and lessee ejected because the superior landlord resumed possession for non-payment of rent. But there was no relationship of landlord and tenant between the parties to the litigation, and hence the case does not support the applicability of frustration to leases.86 In the latter case, a thatched hut let out to the lessee as a monthly tenant was burnt down and the lessee raised another structure in spite of the objection of the landlord. The lessee did not suspend payment of rent nor did he give up possession. Earlier Indian cases have also applied the doctrine to agricultural leases.87 In Sachindra Nath Basu v. Gopal Chandra Ghose, 88P. let premises to D for a restaurant at a rather high rent, the agreement was to remain in force as long as British troops remained in town. British troops did remain in town, but the locality was declared out of bounds for them. The contract was held not to be frustrated. The decision, it is submitted, can be supported on the ground that frustration is inapplicable to leases, or on the ground that a contract is not frustrated on the ground of disappointed expectations. The doctrine was inapplicable to the lease of a shandy tope, which was hit by two cyclones, depriving the lessee from any income for some periods. There was no supervening event making the contract impossible of performance or illegal.89 69 Leighton's Investment Trust Ltd. v. Cricklewood Property & Investment Limited, [1943] 2 All ER 97 per Mackinon LJ. at 98, on appeal Cricklewood Property Trust & Investment Trust Ltd. v. Leighton's Investment Trust Ltd., [1945] AC 221, [1945] I All ER 252 (the court was divided); Denman v. Brise, [1949] 1 KB 22, (1948] 2 All ER 141; Eyre v. Johnson, [1946] KB 481, [1946] 1 All ER 719. 70 Whitehall Courts Ltd. v. Ettlinger, [1920] 1 KB 680, [1918-19] All ER Rep 229; followed in Abdul Hashem v. v. Balahari Mondal, AIR 1952 Cal 380 (a case of requisitioning of land); Tarabai Jivanlal Parekh v. Lala Padamchand, AIR 1950 Bom 89 (a case of requisitioning of flat). 71 V Kalpakam Amma v. Muthurama Iyer Muthukrishna Iyer, AIR 1995 Ker 99 (building collapsed); Karuna Ram Medhi v. Kamakhya Prasad Baruah, (1997) 5 SCC 530 (building destroyed by fire); Simper v. Combs, [1948] 1 All ER 306 (destruction by a bomb). 72 [1945] AC 221 at 232, [1945] 1 All ER 252; London & Northern Estates Co. v. Schlesinger, [1914-15] All ER Rep 593; Whitehall Courts Ltd. v. Ettlinger, [1920] 1 KB 680 at 687, [1918-19] All ER Rep 229; Matthey v. Curling, [1922] 2 AC 180 at 237, [1922] All ER Rep 1(HL) . 73 Cricklewood Property & Investment Trust Ltd. v. Leighton's Investment Trust Ltd., [1945] AC 221 at 241, [1945] 1 All ER 252. 74 [1981] AC 675 at 692, 697, [1981] 1 All ER 161. 75 [1945] AC 221, [1945] 1 All ER 252. 76 National Carriers Ltd. v. Panalpina (Northern) Ltd., [1981] AC 675, [1981] 1 All ER 161 at 169-70. 77 Section 105, Transfer of Property Act, 1882;Ragoonathdas Gopaldas v. Morarji Jutha, (1892) 16 Bom 568; Kandaswami Pillai v. Ramasami Mannadi, (1919) 42 Mad 203, AIR 1919 Mad 168; Girdhari Singh v. Megh Lal Pandey, (1918) 44 IA 246
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at 250, (1917) 45 Cal 87 at 93, AIR 1917 PC 163; Sushila Devi v. Hari Singh, AIR 1971 SC 1756 at 1758; HV Rajan v. CN Gopal, AIR 1975 SC 261 at 265. 78 Raja Dhruv Dev Chand v. Raja Harmohinder Singh, [1968] 3 SCR 339, AIR 1968 SC 1024; at 1027 overruling Gurdarshan Singh v. Bishan Singh, (1962) Punj 5, AIR 1963 Punj 49(FB), and affirming Courts of Wards Dada Siba Estate v. Raja Dharan Dev Chand, AIR 1961 Punj 143 and approving Abdul Hashem v. v. Balahari Mondal, AIR 1952 Cal 380 (requisitioning of land), Tarabai Jivanlal Parekh v. Lala Padamchand, AIR 1950 Bom 89 (requisitioning of a flat); Surpat Singh v. Sheo Prasad Gupta, (1945) 27 Pat 197, AIR 1945 Pat 300 (patni lease); Sushila Devi v. Hari Singh, AIR 1971 SC 1756; and Rajendra Nath Sarma v. Ramdhin Rajbhor, AIR 1971 Assam 160 at 162; and; Rahim Bux v. Mohammad Shaft, AIR 1971 All 16 (demolition under municipal order, lease not impossible); Shyam Kumari v. Ejaz Ahmad Ansari, AIR 1977 All 376; Thomas v. Moram Mar Baselious Ougen, AIR 1979 Ker 156; Amir Chand v. Chuni Lal, AIR 1990 P&H 345 at 347. 79 HV Rajan v. CN Gopal, AIR 1975 SC 261 at 265. 80 Mahadeo Prosad Shaw v. Calcutta Dyeing & Cleaning Co. AIR 1961 Cal 70; Thomas v. Moram Mar Baselious Ougen, AIR 1979 Ker 156 (but not if the leased building on the land is destroyed through the lessee's negligence). 81 [1968] 3 SCR 339, AIR 1968 SC 1024; overruling Gurdarshan Singh v. Bishan Singh, (1962) 2 Punj 5, AIR 1963 Punj 49(FB) ; affirming Courts of Wards Dada Siba Estate v. Raja Dharan Dev Chand, AIR 1961 Punj 143; approving Abdul Hashem v. v. Balahari Mondal, AIR 1952 Cal 380; Tarabai Jivanlal Parekh v. Lala Padamchand, AIR 1950 Bom 89; Alanduraiappar Koil Chiithakkadu v. TSA Hamid, AIR 1963 Mad 94; Sri Amuruvi Perumal Devasthanam v. KR Sabapathi Pillai, (1962) Mad 262, AIR 1962 Mad 132; Inder Pershad Singh v. Campbell, (1881) 7 Cal 474. 82 The Transfer of Property Act, 1882, s. 4 provides: &uot;The Chapters and sections of this Act which relate to contracts shall be taken as part of the Indian Contract Act, 1872 (9 of 1872) and Section 54, paragraphs 2 and 3, and sections 59, 107 and 123 shall be read as supplemental to the Indian Registration Act, 1908 (16 of 1908).&uot; 83 Raja Dhruv Dev Chand v. Raja Harmohinder Singh, [1968] 3 SCR 339, AIR 1968 SC 1024. 84 (1881) ILR 7 Cal 474; held in Raja Dhruv Dev Chand v. Raja Harmohinder Singh, [1968] 3 SCR 339, AIR 1968 SC 1024 by the Supreme Court not to be a case of frustration of a lease as no relationship between the parties of landlord and tenant. 85 AIR 1950 Cal 441. 86 So distinguished in Raja Dhruv Dev Chand v. Raja Harmohinder Singh, [1968] 3 SCR 339, per Shah J. at 343, AIR 1968 SC 1024. 87 Gurdarshan Singh v. Bishan Singh, (1962) 2 Punj 5, AIR 1963 Punj 49(FB) ; by a majority overruling Courts of Wards Dada Siba Estate v. Raja Dharan Dev Chand, AIR 1961 Punj 143; but the former not approved and the latter affirmed on appeal by Supreme Court in Raja Dhruv Dev Chand v. Raja Harmohinder Singh, [1968] 3 SCR 339, AIR 1968 SC 1024. 88 (1945) 2 Cal 90, AIR 1949 Cal 240. 89 Alanduraiappar Koil Chiithakkadu v. TSA Hamid, AIR 1963 Mad 94.
Statutory Contracts Under a contract under the Abkari Act, the lessee or licencee undertakes to abide by the terms and conditions contained in the lease or licence prescribed by the Government. The rights of parties are governed by the provisions of the Abkari Act and Rules. The 'lessee' or licencee cannot invoke the doctrine of frustration under s. 56 to matters falling under the Abkari Act.90 90 Sunnam Sattaih v. State of Andhra Pradesh, AIR 1980 AP 18 at 24; see further Mary v. State of Kerala, 2013 (13) SCALE 151 (in a contract under the Abkari Act, the licensee undertakes to abide by the terms and conditions of the Act and in such a situation, the licensee cannot invoke the doctrine of fairness or reasonableness).
'Becomes Unlawful' A contract may be discharged, if legislation is passed making further performance illegal; and if it is the common intention of the parties to perform it in a manner so illegal, it would be frustrated, even if the contract does not provide for such manner of performance.91
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91 Re Badische Co. Ltd.,[1921] 2 Ch 331.
Subsequent Legal Changes Any subsequent change in the law rendering the performance of a contract unlawful would frustrate the contract automatically.92 A contract for cutting trees becomes frustrated by a subsequent law prohibiting the cutting of trees, except under a licence which was refused to the party. Each party is then bound to restore the benefit received from the contract.93 A contract between the executive of a temple and devadasis to dance before the deity becomes frustrated because of subsequent legislation making it illegal and an offence.94 Thus, where a Sugar Control Order restricted release of sugar for domestic purposes, the contract to supply contracted sugar became impossible of performance.95 In Boothalinga Agencies v. VTC Poriaswami Nadar, 96 a contract was made for the sale of imported chicory, when such sales were allowed under the law. Later; a change in the relevant Import Control Order prohibited and rendered illegal and punishable the sale of that imported article. The contract was held to have become impossible of performance and hence, void. Similarly, a contract for export of goods was frustrated, when the Government later imposed a ban on exports.1 Where the basis of the contract was that the defendant would export diesel to Finland, but the export was prohibited by the Government and therefore, the very foundation of the contract was destroyed, it was held2 that such a contract was automatically dissolved under s. 56 of the Contract Act. Where the truck owner agreed to carry bales of cotton, but both of owner's trucks were requisitioned by the military authorities, and use thereafter would have been punishable, the contract was held to have been frustrated from the time of notice of requisition.3 A contract to supply beef became impossible of performance after enactment of the law banning cow slaughter.4 In Seth Mohan Lal v. Grain Chambers Ltd., 5a Government order under the relevant essential supplies Act prohibited any fresh transaction in 'gur and sugar' and options from an appointed day, save with the permission of the Central Government, and expressly rendered void and unenforceable an option in sugar or gur entered into before the appointed day and remaining to be performed whether wholly or in part. Another order restrained the railway administration from accepting and other persons from offering for transportation by rail any gur. It was held that only fresh contracts were prohibited, but settlements of the outstanding contracts by payment of differences were not prohibited, nor was delivery of goods in pursuance of contracts by the due date, because on its construction, the provision was held to be prospective. Nor did the difficulty arising out of the prohibition against transportation of gur, create any impossibility within s. 56 of the Contract Act, leading to frustration of the contract. R agreed to sell a piece of agricultural land with a bungalow on it to A and an application for permission was made to the proper revenue officer, who refused it for the want of a certificate from the Collector. The requisite certificate was obtained from the Collector, and the revenue officer sanctioned the sale, but the seller tried to repudiate the contract on the ground that it had become impossible of performance on the first refusal of the revenue officer and the certificate of the Collector was not legal. The Supreme Court held that the contract had not become impossible on the order of refusal of the revenue officer, as it was neither conclusive nor passed on merits, but only on a technical point nor did it put a fetter on A's right to apply to the Collector. Therefore, no change of circumstances intervened to make the agreement impossible of performance factually or legally.6 Illegality Affecting Part of the Contract Illegality affecting only part of the contract gives rise to two problems. First, does it frustrate the contract? This would depend on whether it affects the main object of the contract or only some subsidiary provision, e.g., an option of purchase of timber yard was frustrated by the order prohibiting further dealings in timber, since its main object, namely, trading in timber had become illegal.7 Secondly, the second question is whether illegality, which does not frustrate the contract, but affects subsidiary obligation, excuses
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nonperformance of that obligation. On principle it should. An example of this is not calling at one of the 10 ports, which becomes an enemy port.8 Unless a subsequent change in law renders the entire contract illegal, the question of frustration does not arise at all .9 'Not Unlawful' In Bombay and Persia Steam Navigation Company Ltd. v. Rubattino Company Limited, 10the defendants agreed to carry from Bombay to Jedda, in their steamer, 500 pilgrims to arrive in Bombay from Singapore in the plaintiff's ship. The pilgrims arrived in Bombay, but the defendants refused to receive them to board their steamer, on the ground that during the voyage of the plaintiffs' ship to Bombay, there had been an outbreak of small-pox on board, and that the pilgrims had been in close contact with those who had been suffering from the disease, and that the performance of the contract had been under the circumstances become unlawful, having regard to the provisions of s. 269 of the Indian Penal Code , 1860.11It was held that the carrying of the pilgrims in the defendants' steamer would not have been in contravention of any law or regulation having the force of law, nor would it have been a negligent act on their part to do so, and that s. 269 therefore did not apply, and that the defendants were bound to perform the contract. In another case, the Government imposed a ban on use of rapeseed oil in the making of vanaspati. It was held that this did not affect a contract for supply of rape seed oil.12 'Which the Promisor Could not Prevent' Under the section, a contract would be frustrated on the ground of subsequent unlawfulness, if the event was such that the person alleging frustration could not prevent from happening (see below-'self-induced frustration'). Paragraph 2 makes this distinction between the two types of impediments; in the latter class alone, it is provided that the impediments must not have arisen (namely, the doing of the act promised must not have become unlawful) by reason of some event which the promisor could prevent. This distinction may have been made either:
(i)
(ii)
because it is elsewhere provided in the Act, that if the promisor has disabled himself from performing his contract in its entirety, the promisee may put an end to the contract and become entitled to compensation for any damage which he has sustained through the non-fulfillment of the contract; or this distinction may be taken as an indication that s. 56 does not contemplate that any act can become impossible within its terms by reason of some event which the promisor could prevent--that no act can be considered to be impossible (as the word is used in the section), whose possibility or impossibility depends upon some impediment, which the promisor could prevent or control.13
92 Dominion of India v. Raja Bahadur Seth Bhikhraj Jaipuria, AIR 1957 Pat 586 at 597 (subsequent change in the law); affirmed on appeal Bhikraj Jaipuria v. Union of India, [1962] 2 SCR 880, AIR 1962 SC 113 on another ground; referring to Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310, AIR 1954 SC 44. 93 Man Singh v. Khazan Singh, AIR 1961 Raj 277; following VR Lakshmanan Chettiar v. SK Kamrajendara Kadir Veluswami Pandian, AIR 1955 Mad 606. 94 Sri Madana Gopalaswamy Temple v. Saride Manikyam, AIR 1957 AP 643. 95 Bansilal Fomra v. Thadava Cooperative Agricultural and Industrial Society Ltd., (1976) 1 Mad LJ 39 at 51. 96 AIR 1969 SC 110 referring to Metropolitan Water Board v. Dick Kerr & Co. Ltd., [1918] AC 119, [1916-17] All ER Rep 122, Denny, Mott & Dickson Ltd. v. James B Fraser & Co. Ltd., [1944] AC 265, [1944] 1 All ER 678(HL) ; British Movietonews Ltd. v. London and District Cinemas Ltd., [1951] 1 KB 190, [1950] 2 All ER 390(CA) . 1 C. Czarnikov Ltd. v. Centrala Handlu Zagranicznego Rolimpex, [1978] 2 All ER 1043 at 1048, 1050, 1051, 1052 (HL); affirming, [1978] 1 All ER 81; KC Sethia, (1944) Ltd. v. Partabmull Rameshwar, [1950] 1 All ER 51(CA) ; on appeal, [1951] 2
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All ER 352; AV Pound & Co. Ltd. v. MW Hardy & Co. Inc., [1956] AC 588, [1956] 1 All ER 639, [1956] 2 WLR 683(HL) ; Dalmia Dairy Industries Ltd. v. National Bank of Pakistan, [1978] 2 Lloyd's Rep 223; Firm Bachhraj Amolakchand v. Firm Nand Lal Sitaram, AIR 1966 MP 145 (export of rice banned under Essential Commodities Act, 1955). 2 Durga Devi Bhagat JB Advani & Co. Ltd., 76 Cal WN 528. 3 Noorbux Mohmoodbux Musalman v. Kalyandas Jugaldas Gujrathi Mode, Mode, (1945) Nag 475, AIR 1945 Nag 192; Kisanlal Nandlal v. Vithal Nagayya Kondawar, AIR 1951 Nag 320 (forward contracts forbidden under the Forward Contracts Prohibition Order, 1943). 4 Syed Khursed Ali v. State of Orissa, AIR 2007 Ori 56. 5 AIR 1968 SC 772 at 779. 6 Govindbhai Gordhanbhai Patel v. Gulam Abbas Mulla Allibhai, AIR 1977 SC 1019 at 1025, 1026; But see Rojasara Ramjibhai Dahyabhai v. Jani Narottamdas Lallubhai, AIR 1986 SC 1912 at 1917. 7 Denny, Mott & Dickson Ltd. v. James B Fraser & Co. Ltd., [1944] AC 265, [1944] 1 All ER 678(HL) ; but see Cricklewood PropertyTrust & Investment Trust Ltd. v. Leighton's Investment Trust Ltd., [1945] AC 221, [1945] 1 All ER 252 (where a 99 years' building lease was not frustrated as the main object of the lease was riot destroyed by war time restrictions). 8 Treitel, The Law of Contracts, 5th edn., pp. 652-53. 9 Dominion of India v. Raja Bahadur Seth Bhikhraj Jaipuria, AIR 1957 Pat 586. 10 (1889-90) ILR 13-14 Bom (VI) 555. 11 The section provides that whoever unlawfully and negligently does any act which is, or which he knows or has reason to believe to be, likely to spread the infection of any disease dangerous to life, shall be punished. 12 Markfed Vanaspati & Allied Industries v. Union of India, (2007) 7 SCC 679. 13 Firm of Hussainbhoy Karimji v. Haridas, (1927) 105 IC 319, AIR 1928 Sind 21 at 23.
No Frustration A contract should not be frustrated by an event arising from an act or election of the promisor, nor by an event which was14 or could be foreseen by the parties,15 or was one that was expressly provided for in the contract.16 14 Thiriveedhi Channaiah v. Gudipudi Venkata Subba Rao, AIR 2007 SC 2439, (2009) 17 SCC 341 (notice of acquisition known to both parties) 15 Krell v. Henry, [1903] 2 KB 740 at 762, [1900-03] All ER Rep 20; Naihati Jute Mills Ltd. v. Khyaliram Jagannath, [1968] 1 SCR 821, AIR 1968 SC 522 at 527; Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310 at 323, AIR 1954 SC 44 at 48; Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793, AIR 1960 SC 588. 16 Joseph Constantine Steamship Line Ltd. v. imperial Smelting Corpn. Ltd., [1942] AC 154 at 163, [1941] 2 All ER 165; but see WJ Tatem Limited v. Gamboa, [1939] 1 KB 132 at 138, [1938] 3 All ER 135.
Self-induced Frustration It is the essence of frustration, that the event which causes frustration must have occurred without the fault of either party.17 A state of facts brought about by the act of a party cannot be used as an excuse for failure to perform a contractual obligation.18 This section has also been held not to apply to cases of impossibility due to the default of the contracting party himself,19i.e., to cases of 'self induced frustration', where the alleged frustrating event arises from the act or election of a party.20 This the basic limitation of the doctrine of frustration, that the frustrating circumstances must arise without the fault of either party. This fault may occur because of deliberate choice not to perform, or by putting the performance out of one's power. It has
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been observed that: 'it is not accurate to say that impossibility excuses breach, without further qualification. It would be more correct to say that precisely opposite is the rule'.21 In Maritime National Fish Ltd. v. Ocean Trawlers Ltd., 22 the appellants had chartered a trawler from the respondents. It was fitted with an otter trawl and both parties knew that under the Canadian Fisheries Act, it was forbidden to use otter trawl without a licence, which the appellants could not get because they had five trawlers in all. They obtained licence for only three, leaving to the appellants to choose the three trawlers. The appellants did not include the trawler of the respondents and claimed that the contract had been frustrated. The Privy Council held that they could not rely on frustration, since it was their own voluntary election which prevented the respondents' trawler from being used. Frustration has been held to be 'self-induced', where the event was caused by a breach or anticipatory breach of contract by the party alleging frustration.23 It has been suggested that this doctrine should apply to all deliberate24as well as negligent acts, whether they are act ual breaches of contract or not, e.g., if a prima donna loses her voice by negligently catching a cold and pleads frustration and makes the innocent party bear loss.25 But a sentence of imprisonment on an employee is not self-induced, so as to prevent frustration of his contract of employment.26 In Joseph Constantine Steamship Line Ltd v. Imperial Smelting Corporation Ltd., 27 there was an explosion on the ship, disabling it from performing her obligation. The owners pleaded frustration, which was upheld in spite of the cause of explosion never being found out. The degree of fault, whether deliberate or merely due to negligence, was not decided in that case.28 But Lord Wright suggested that mere negligence will not suffice. Lord Russell stated:
I wish to guard against the supposition that every destruction of corpus for which a contractor can be said to some extent or in some cases to be responsible, necessarily involves that the resultant frustration is self-induced within the meaning of the phrase.
Thus, the House of Lords in Joseph Constantine Steamship Line Ltd v. Imperial Smelting Corporation Ltd., 29 has thought that an accidental injury to a party, even if due to his own negligence, could not be treated as caused by default so as to preclude frustration. In Hare v. Murphy Bros Ltd., 30 Lord Denning MR assumed that negligence would not amount to fault for the purpose of being self-induced. Section 56 was held not to be attracted in a case where the vendor in an agreement to sell the suit property, stipulated to give vacant possession of the premises by amicably evicting the tenant, but made no bona fide and effective attempt to evict the tenant; and then set up the defence of frustration, and the Court granted a decree of specific performance, entitling the vendee to get possession of the premises with tenant therein.31 Where the restriction on transfer of urban property was temporary and even during that period, the transfer could be made with permission of competent authority, and the defendant, despite repeated requests from the plaintiff to obtain the permission, never took any steps for the purpose, the contract was not discharged by frustration.32 Where parties entered into a contract in the unsettled conditions created by the Second World War, the agreement for the purpose of re-shipment of goods should have foreseen the consequences of delay in reshipment of goods. The delay in reshipment cannot be covered up by the plea of frustration; the events were self-induced.33 There is no frustration of a contract for similar reasons, where a control order merely prohibited removal of the article controlled from the stockyard without permission and no permission is applied for.34 17 Sri Amuruvi Perumal Devasthanam v. KR Sabapathi Pillai, (1962) Mad 262, AIR 1962 Mad 132; Mertens v. Home Freeholds Co. Ltd., [1921] 2 KB 526 at 528, [1921] All ER Rep 372, CA; Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310 at 318, AIR 1954 SC 44.
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18 Maritime National Fish Ltd. v. Ocean Trawlers Ltd., [1935] AC 524 at 530, [1935] All ER Rep 86 (no objecten taken, though fact was known to both parties); Scanlan's New Neon Ltd. v. Tooheys Ltd., (1943) 67 CLR 169 at 186 (case of agreement to illuminate on a building); Bank Line Ltd. v. Arthur Capel & Co., [1919] AC 435 at 452, [1918-19] All ER Rep 504; Universal Cargo Carriers Corpn v. Citati, [1957] 2 QB 401, [1957] 2 All ER 70, affirmed in, [1957] 3 All ER 234, [1957] 1 WLR 979(CA) ; National Carriers Ltd. v. Panalpina (Northern) Ltd., [1981] AC 675 at 700, [1981] All ER 61; Paal Wilson & Co. AlS v. Partenreederei Hannah Blumenthal (The Hannah Blumenthal), [1983] 1 AC 854 at 909, 919, [1983] All ER 34; FC Shepherd & Co. Ltd. v. Jerrom, [1987] 1 QB 301 at 316, 325, 332, [1986] 3 All ER 589; Alghussein Establishment v. Eton College, [1988] 1 WLR 587 at 595, [1991] 1 All ER 267(HL) ; Ocean Tramp Tankers Corpn. v. V/O Sovfracht (the Eugenia), [1964] 1 All ER ]61 (CA) (where ship was taken into prohibited waters--no frustration). 19 Boothalinga Agencies v. VTC Poriaswami Nadar, AIR 1969 SC 110; Banarasi Prashad v. Mohiuddin Ahmad 3 Pat 581 at 590, AIR 1924 Pat 586; Gambhirmull Mahabirprasad v. Indian Bank Ltd. AIR 1963 Cal 163. 20 Naihati Jute Mills Ltd. v. Khyaliram Jagannath, [1968] 1 SCR 821, AIR 1968 SC 522 (contract of purchase of jute from Pakistan, purchaser aware of requiring a certificate); Maritime National Fish Ltd. v. Ocean Trawlers Ltd., AIR 1935 PC 128; Banarasi Prashad v. Mohiuddin Ahmad 3 Pat 581 at 590, AIR 1924 Pat 586; Firm Ishwar Sahu and Puran Sahu v. Mohammad Abdul Ghafoor, AIR 1948 Pat 311; Ram Kumar Agarwalla v. PC Roy & Co. (India) Ltd. AIR 1952 Cal 397; VL Narasu v. PSV Iyer, (1953) Mad 831, AIR 1953 Mad 300; Lal Mohan Ghosh v. Ramanath Shaha, AIR 1954 Tripura 17; Jwala Prasad v. Jwala Bank Ltd. AIR 1957 All 143 at 146; Gambhirmull Mahabirprasad v. Indian Bank Ltd. AIR 1963 Cal 163; DR Mehta v. Tin Plate Dealers Assn Ltd., AIR 1965 Mad 400. 21 Grant Smith and Company and McDonell Ltd. v. Settle Construction and Dry Dock Co., AIR 1919 PC 85. 22 [1935] AC 524, [1935] All ER Rep 86. 23 Ocean Tramp Tankers Corpn. v. V/O Sovfracht (the Eugenia), [1964] 2 QB 226 at 239, [1964] 1 All ER 161[1964] 2 WLR 114(CA) ; Paal Wilson & Co. AlS v. Partenreederei (The Hannah Blumenthal), [1983] 1 AC 854, [1983] 1 All ER 34; New Zealand Shipping Co. Ltd. v. Societe des Ateliers et Chantiers de France, [1919] AC 1, [1918-19] All ER Rep 552. 24 Hare v. Murphy Bros Ltd., [1974] ICR 603, [1974] 3 All ER 940(CA) . 25 Treitel, The Law of Contract, 5th edn., pp. 666-68. 26 Hare v. Murphy Bros Ltd., [1974] ICR 603, [1974] 3 All ER 940(CA) . 27 [1942] AC 154, [1941] 2 All ER 165. 28 Joseph Constantine Steamship Line Ltd. v. Imperial Smelting Corpn Ltd., [1942] AC 154 at 195, [1941] 2 All ER 165. 29 [1942] AC 154 at 179, [1941] 2 All ER 165. 30 Hare v. Murphy Bros Ltd., [1974] ICR 603, [1974] 3 All ER 940(CA) . 31 Purnima Rani Dutta v. Laxmi Bala Dasi, AIR 1988 Cal 148. 32 Ved Prakash Gupta v. Shishu Pal Singh, AIR 1984 All 288; Ram Swarup Gaur v. Ratiram, AIR 1984 All 369. 33 Gambhirmull Mahabirprasad v. Indian Bank Ltd., AIR 1963 Cal 163, referring to Monarch Steamship Co. v. A.B. Karishamns Oljefabriker, [1949] AC 196, [1949] 1 All ER 1. 34 DR Mehta v. Tin Plate Dealers Assn Ltd., AIR 1965 Mad 400.
Event Reasonably Foreseeable Before invoking the doctrine, it must be shown that the event, which has produced the frustration, was one which the parties to the contract did not foresee and could not with reasonable diligence have foreseen.35 The degree of foreseeability to exclude the doctrine is a high one.
Foreseeability will support the assumption of risk-assumption only where the supervening event is one which any person or ordinary intelligence would regard as likely to occur, or...the contingency must be 'one which the parties could reasonably be thought to have foreseen as a real possibility'.36
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The fact that the parties have foreseen the event, but did not provide for it in the contract, indicates that the parties, or either of them, have assumed the risk of the event, and it will usually prevent the application of the doctrine of frustration, but this may not necessarily be so.37 In each case, it is a question of construction, whether the failure of the parties to make specific provision for a foreseen event means that each party should take the risk of that event rendering performance impossible or whether, in the absence of any such intention, the doctrine of frustration should apply to discharge the contract.38Walton Harvey Ltd. v. Walker and Homfrays Ltd., 39 involved the right of displaying advertising signs on the roof of a hotel, which was compulsorily acquired and demolished. The contract was not frustrated because the defendants knew of the compulsory acquisition and the plaintiffs did not, and no provision was made for the event. The defendant was held liable for damages. Contracts made in the summer of 1939 could be frustrated because of the war with Germany, an event which was foreseeable.40 But a contract may be discharged by frustration in certain circumstances, even though the parties foresaw or ought to have foreseen the frustrating event. In WJ Tatem Limited v. Gamboa, 41 a ship chartered for evacuation of civil population was captured by Spanish Nationalists and was detained till 11 September. The owners had been paid up to the end of July and they claimed for the rest of the period. Goddard J. remarked (obiter), that even though the risk could have been foreseen, the contract would be frustrated; this could have been prevented by an express provision to the contrary. Similarly, there are observations of Lord Denning MR in Ocean Tramp Tankers Corporation v. V/O Sovfracht (the Eugenia), 42 which also suggests frustration. He said:
It has often been said that the doctrine of frustration only applies where the law situation is 'unforeseen', 'unexpected', or 'uncontemplated', as if that were an essential feature, but that is not so. The only thing that is essential is that the parties should have no provision for it in the contract.
However, in Bank Line Ltd. v. Arthur Capel & Co., 43 the charterparty was frustrated, although the parties foresaw that the ship might be requisitioned and actually provided for the event. Where, in a contract for sale of goods, the parties were aware of restrictions imposed by the Government on supply of wagons, but expected normal conditions by date of performance, but the wagon restriction continued thereafter, the contract was held impossible of performance, and the parties relieved of their liability.44 35 Ramayya v. Firm of Gulfarosh Mohideen Saib Shaik Saib, AIR 1958 AP 576; Union of India v. Chanan Shah Mahesh Dass, AIR 1955 Pepsu 51; Gujarat Housing Board v. Vipul Corporation, AIR 2004 Guj 319 (obstruction of water-proofing work by occupiers of houses). 36 Treitel, Frustration and Force Majeure, 1994, 13-09; quoting Mishara Construction Co. Inc v. Transit-Mixed Concrete Corpn., 310 N r. 2d 363 (Mass 1974). 37 Maritime National Fish Ltd. v. Ocean Trawlers Ltd., [1935] AC 524, [1935] All ER Rep 86; WJ Tatem Ltd. v. Gamboa, [1939] 1 KB 132, [1938] 3 All ER 135; Ocean Tramp Tankers Corpn. v. V/O Sovfracht (the Eugenia), [1964] 2 QB 226, [1964] 1 All ER 161; [1964] 2 WLR 114. For situations where the promisor could foresee or have foreseen the event, and the promisee did not, see below--'Act known to be Impossible or Unlawful'. 38 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, CONTRACT, para 905. 39 [1931] 1 Ch 274 at 282, [1930] All ER Rep 465; Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793, AIR 1960 SC 588 at 593-94; Muhammad Hashim v. Misri, AIR 1922 All 6. 40 Treitel, The Law of Contract, 5th edn., pp. 663-64. 41 [1939] 1 KB 132 at 135, [1938] 3 All ER 132. 42 [1964] 2 QB 226 at 239, [1964] 1 All ER 161, [1964] 2 WLR 114(CA) . 43 [1919] AC 435, [1918-19] All ER Rep 504 per Lord Sumner at 512.
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44 Kunjilal Manohar Das v. Durga Prasad Debi Prasad, AIR 1920 Cal 1021, 24 CWN 703, 58 IC 761; Ram Kumar v. PC Roy & Co. (India) Ltd., AIR 1952 Cal 335.
Express Provisions in the Contract A change of circumstances 'completely outside the contemplation of parties' at the time when the contract was made will not justify the Court in departing from the express terms thereof.45 Frustration is concerned with unforeseen, supervening events, not events which have been anticipated and provided for in the contract itself. The parties may make provision for a supervening event foreseen by them, in which case, the doctrine of frustration will have no application, except in cases of frustration by supervening illegality. The parties may expressly provide that the risk of the supervening events shall be borne by one of them or by the other, or they may apportion the risks, provide for refund or for compensation, or total discharge, or in various other ways. Section 56 also cannot be applied where the parties have in terms provided what was to happen in case of impossibility of performance.46 Express covenants cannot be lightly brushed aside, especially when the Court finds that it was well within the promisor's knowledge that it might not be possible for him to perform the agreement.47 But where an express provision is made against a supervening event frustrating the contract, there can still be circumstances which will bring about frustration, e.g., supervening illegality, true construction of the contract and incompleteness of the provisions.48 In Naihati Jute Mills Ltd. v. Khyaliram Jagannath, 49A, in India, agreed in July 1958 with B for purchase of jute from Pakistan; and despite being aware of the restrictions on the issue of licences, undertook to obtain the licence. It was expressly provided that the delay in obtaining a licence in November would be excused, but the contract was to be settled at the market rate on 2 January 1959, in case of failure to deliver the licence in December 1958. This contract was held to contain an undertaking to pay damages on default, and the defence of frustration was not available. In such a case,50 said Shelat J.:
...the doctrine of discharge of frustration is not available nor that of an implied term that the existing state of affairs would continue at the date of performance. The reason is that where there is an express term, the Court cannot find on construction of the contract an implied term inconsistent with such express term.
If the parties do contemplate the possibility of an intervening circumstance which might affect the performance of the contract, but expressly stipulate that the contract would stand despite such circumstances, there can be no case of frustration because the basis of the contract being to demand performance despite the happening of a particular event, it cannot disappear when that event happens.51 Parties in some contracts expressly assume the risks of events, namely, insurance contracts or other contracts indemnifying against otherwise frustrating events; the occurrence of the events insured against does not frustrate the contract, because the happening of the event is the basis of the agreement.52 The doctrine has been held not to apply, for example, where the contract expressly provided for repayment of money in case of supervening impossibility of performance of a major obligation.53 Where the contract makes provision (i.e., full and complete provision, so intended) for a given contingency, it is not for the Court to import into the contract some other different provisions for the same contingency, called by a different name.54 Where the lease deed provided that the rent was unconditional and was to be unaffected by any act of state or God and under no circumstances was there to be remission in the rent, it is not open to the lessee to plead for relief on the ground of cyclone or the presence of a cultivating tenant.55 An agreement to construct and instal illumination on a building on a monthly rental for five years, payable
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whether the sign was used or not, was not frustrated by an order prohibiting illumination during the day or night due to the war, and the lessor could recover payment due under the contract.56 In Leiston Gas Co. Ltd. v. Leiston-cum-Sizewell Urban District Council, 57 illumination was interfered with by a military order prohibiting lighting, but the contract was not frustrated. A continuing contract is not discharged by a prohibitive regulation, which may be determined or varied during the war, leaving a substantial part of the contract capable of execution. A consumer who has agreed to pay guaranteed minimum charges for electricity, irrespective of the amount of electricity he actually consumes, is bound to pay it, and cannot avoid liability on the ground of impossibility.58 Even if the parties make a provision in their contract for the event which has frustrated it, the law would still imply for them, a term, that they would have agreed had they contemplated the unforeseen contingency at hand at the time they entered into the contract. But a term would not be implied, if it is inconsistent with the express terms of the contract. Further, even if such term is implied, it would have to be proved that the common intention of both the parties was that in the event of non-fulfilment of the implied term, the defendant would be excused from performance of his obligations under the contract.59 Absolute Obligation A party who makes an absolute promise accepts the risk of performance being or becoming impossible. He may not avoid liability if he fails to perform, even though this is not due to any fault on his part.60A person is not excused for non-performance, even though prevented by an act of God, or the King's enemies or vis major, if he has contracted absolutely to do a thing not naturally impossible.61 A party agreeing to supply firewood of the specified type and girth from the plantation could plead impossibility of performance on the ground that later he found that it not available in the plantation.62 But the High Court of Australia has held that an undertaking, absolute in form, should be construed according to its words and not as being subject to any general principle, that it is to be limited by an express condition, relating to events, which may unexpectedly happen in future.63 Frustration Despite Express Provision A supervening illegality will frustrate a contract in spite of a provision to the contrary in certain cases. A contract to deliver copper to a German company from 1911 to 1919 was frustrated in spite of specific provision for suspension during the war, on the ground of public policy.64 An agreement of sale of urban land became impossible of performance on account of s. 4 of the Andhra Pradesh Prohibition of Alienation of Urban Lands Act, 1972, which prohibited alienation of such lands.65An amendment to the Thika Tenancy Act after the suit for specific performance of an agreement to sell such tenancy rights prohibited transfer of thika tenancy to anyone except heirs and co-sharers, and that such transfer shall be void. It was held that the contract became void.66 In certain cases, despite the express provision, the supervening event may discharge the contract where the parties may not be taken to have envisaged the extent of the circumstances which in fact interfered with performance. The parties may have provided for the unforeseen events, but the provision may be incomplete. In Bank Line Ltd. v. Arthur Capel & Co., 67 an owner pleaded frustration of the charterparty because the ship was commandeered. The House of Lords held the contract frustrated. Lord Sumner observed that there would be no frustration in case of 'full and complete' provision but not so where 'a contingency may be provided for...only for the purpose of dealing with one of its effects and not with all'. On a true construction, a clause wide enough to cover the event may still frustrate a contract. In Metropolitan Water Board v. Dick Kerr & Co. Ltd., 68 the contractors agreed to complete the construction work in six years, and extension of time was provided for in the event of delays 'however occasioned'. The contractors were required to stop work during the war, and to sell the plant. The contract was held to have been frustrated, because the interruption was of a vital character and could not have been in the contemplation of parties when made. 45 Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793 per Shah J. at 807; AIR 1960 SC 588 at 594, distinguishing Sir Lindsay Parkinson & Co. Ltd. v. Commissioner of Works and Public Buildings, [1949] 2 KB 632, [1950] 1 All ER 208(CA), and British Movietonews Ltd. v. London and District Cinemas Ltd., [1951] 1 KB 190, [1950] 2 All ER 390.
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46 Afshar MM Tacki v. Dharamsey Tricamdas, AIR 1947 Bom 98, (1946) 48 Bom LR 661. 47 Gwalior Rayon Silk Mfg Co. Ltd. v. Shri Andavar & Co., AIR 1991 Ker 134. 48 Treitel, The Law of Contract, 5th edn., pp. 660-61. 49 [1968] 1 SCR 821, AIR 1968 SC 522. 50 AIR 1968 SC 522 at 528; relying on Bank Line Ltd. v. Arthur Capel & Co., [1919] AC 435, [1918-19] All ER Rep 504. 51 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310 at 324, AIR 1954 SC 44 at 48. 52 Kesari Chand v. Governor-General in Council, (1949) ILR Nag 718. 53 Afshar MM Tacki v. Dharamsey Tricamdas, AIR 1947 Bom 98, (1946) 48 Bom LR 661; Man Singh v. Khazan Singh, AIR 1961 Raj 277; Firm Rampratap Mahadeo Prasad v. Sasansa Sugar Works, AIR 1964 Pat 250. 54 Bank Line Ltd. v. Arthur Capel & Co., [1919] AC 435 per Lord Sumner at 455, [1918-19] All ER Rep 504; quoted in Naihati Jute Mills Ltd. v. Khyaliram Jagannath, [1968] I SCR 821, AIR 1968 SC 522, at 528; FA Tamplin Steamship Co. Ltd. v. Anglo-Mexican Petroleum Products Co. Ltd., [1916] 2 AC 397, [1916-17] All ER Rep 104; Re an Arbitration between Comptoir Commercial Anversois and Power, Son & Co., [1920] 1 KB 868 at 878-9, [1918-19] All ER Rep 661. 55 Gopalkrishna Mudaliar v. Rajan Kattalai of Sri Thiyagarajaswami Devastanam, [1974] 1 Mad LJ 184 at 187; Velur Devasthanam v. S Sundaram Nainar, [1959] 1 Mad LJ 244; Sri Mahalingaswami Devasthanam v. AT Sambanda Mudaliar, [1962] Mad 273, AIR 1962 Mad 122; Sri Amuruvi Perumal Devasthanam v. K R Sabapathi Pillai, [1962] Mad 262, AIR 1962 Mad 132. 56 Scanlan's New Neon Ltd. v. Tooheys Ltd., (1943) 67 CLR 169; Re Badische Co. Ltd.,[1921] 2 Ch 331. 57 [1916] 2 KB 428, [1916-17] All ER Rep 329(CA) ; Egham & Staines Electricity Co. Ltd. v. Egham Urban District Council, [1942] 2 All ER 154; Walton Harvey Ltd. v. Walker and Homfrays Ltd., [1931] 1 Ch 274, [1930] All ER Rep 465(CA) ; Scanlan's New Neon Ltd. v. Tooheys Ltd., (1943) 67 CLR 169; applying Re Badische Co. Ltd.,[1921] 2 Ch 331. 58 Raymond Ltd. v. MP Electricity Board, (2001) 1 SCC 534. 59 Ram Kumar Agarwalla v. PC Roy & Co. (India) Ltd., AIR 1952 Cal 397. 60 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310. AIR 1954 SC 44; Ganga Saran v. Firm Ram Charan Ram Gopal, [1952] SCR 36. AIR 1952 SC 9 at 11; Thawardas Pherumal Union of India,AIR 1955 SC 468; Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793, AIR 1960 SC 588. 61 Kesari Chand v. Governor-General in Council, (1949) ILR Nag 718. 62 Gwalior Rayon Silk Mfg Co. Ltd. v. Shri Andavar & Co., AIR 1991 Ker 134 at 136. 63 Scanlan's New Neon Ltd. v. Tooheys Ltd., (1943) 67 CLR 169 per Latham CJ. at 198. 64 Ertel Bieber & Co. v. Rio Tinto Co. Ltd., [1918] AC 260 per Lord Sumner at 286, [1918-19] All ER Rep 127. 65 C Ramaniah v. Mohammad-unnisa Begum, AIR 1981 AP 38. 66 Rozan Mian v. Tahera Begum, AIR 2007 SC 2883. 67 [1918-19] All ER Rep 504; Jackson v. Union Marine Insurance Co. Ltd., [1874-80] All ER Rep 317 (the ship was damaged and was not ready for service for eight months). 68 [1916-17] All ER Rep 122.
Force Majeure and Similar Clauses Many contracts expressly provide for performance to be excused, if rendered impossible by unavoidable cause such as force majeure, vis major, acts of God, or the enemy. Such a stipulation is ineffective, if uncertain. But in Dhanrajamal Gobindram v. Shamji Kalidas & Co., 69 the contract contained a clause 'the usual force majeure clause'. It was held that the contract was capable of being made certain and definite by proof between the parties or in dealing with parties in British East Africa, a clause of a particular kind was invariably included, and evidence could be given to make the clause certain. The word 'usual' referred to something which was invariably to be found in contracts of a particular type.
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Where reference is made to force majeure, the intention is to save the performing party from the consequences of anything over which he has no control.70 A force majeure clause, as such a stipulation is usually called, must be construed in each case with due regard to the nature and general terms of the contract, and, in particular, with regard to the precise words of the clause.71 Where reference is made to force majeure, the intention is to save the performing party from the consequences of anything of the nature stated above or over which he has no control.72 A force majeure clause should be construed with close attention towards events which precede or follow it and with due regard to the nature and general terms of the contract. Therefore the words 'any other happening' in such a contract must be given a construction ejusdem generis, so as to engulf within its fold only such happenings and eventualities which are of the nature and type illustrated in the same clause with close attention to the nature of terms of the contract and would not reasonably be within the power and control of the party.73 The term 'force majeure' is used with reference to all circumstances independent of the will of man, and which, it is not in his power to control, and such force majeure is sufficient to justify the non-execution of a contract. Thus, war, inundation and epidemics are cases of force majeure.74 The expression 'force majeure' has been held to have a more extensive meaning than act of God and to include things which are not normally included in the expression 'vis major' like strikes and break down of machinery,75 shortage of supply owing to war,76 war-time difficulty with shipping,77 refusal of export licence.78 But inability owing to export restrictions to obtain goods at contract price was not a condition of force majeure,79 nor was failure of crop when other supplies were available,80 or the fact that the usual route was not open to shipping when an alternative route was available.81 An express clause of this type, on its proper construction, may also allow the Court to take account of the promisor's obligations under other contracts (namely, seller's commitment to other buyers) despite the fact that as a rule, it is no excuse that contracts with third parties prevent the fulfillment of the contract in question.82 A clause that excused the promisor if supply was disrupted by weather and other stated causes, it was held that the words 'hinder' and 'disrupt', unlike the word 'prevent', did not require that the performance should be impossible, but indicated a lower level of difficulty, that of commercial impracticality.83 When such a clause excuses a party from delays due to unavoidable hindrances, he may be outside the protection of that provision, if he fails, before making the contract, to inquire whether such unavoidable causes exist and inform the other party.84 Act of God In the legal sense of the term, an act of God may be defined as an extraordinary occurrence or circumstance, which could not have been foreseen and which could not have been guarded against; or, more accurately, as an accident: (a) due to natural causes, directly and exclusively without human intervention; and (b) which could not by any amount of ability have been foreseen, or, if foreseen, could not by amount of human care and skill have been resisted. The occurrence need not be unique, nor need it be one that happens for the first time; it is enough that it is extraordinary, and such as could not reasonably have been anticipated.85 A contract may provide that performance would be excused or rendered impossible by an act of God. The event may be an act of God, even though it has happened once, if there is no probability of recurrence.86 It must be something overwhelming, and not merely an ordinary accidental circumstance.87 The following have been said to be act s of God: a violent storm at sea,88 an extraordinarily high tide,89 an unprecedented rainfall,90 an extraordinary flood,91 an earthquake.92 But gnawing by rats of a hole in a pipe of a ship, through which the sea water came in and damaged the cargo,93 a fog,94 and an ordinary snow fall95were not acts of God. The party who claims discharge under a clause that excused performance in the event of act of God, viz. unprecedented floods, must show that such circumstances have arisen.96 69 [1961] 3 SCR 1020 at 1035, AIR 1961 SC 1285 but see British Electrical and Associated Indus (Cardiff) Ltd. v. Patley Pressings Ltd., [1953] 1 All ER 94, [1953] 1 WLR 280 (contract subject to 'usual force majeure clauses to apply' was held void for uncertainty).
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70 MMTC of India Ltd v. Interore Fertichem Resources SA, AIR 2012 Del 123. 71 Podar Trading Co. Ltd., Bombay v. Francois Tagher, Barcelona, [1949] 2 KB 227, [1949] 2 All ER 62(DC) . 72 Serajuddin v. State of Orissa, AIR 1969 Ori 152; overruled on another point in Raisahab Chandanmull Indrakumar Pvt. Ltd. v. State of Orissa, AIR 1972 Ori 40(FB) ; MMTC of India Ltd v. Interore Fertichem Resources SA, AIR 2012 Del 123. 73 Ibid. 74 Lebeaupin v. Richard Crispin & Co., [1920] 2 KB 714 at 718-21, [1920] All ER Rep 353; Matsoukis v. Priestman & Co., [1914-15] All ER Rep 1077. 75 Ibid. 76 Tenants (Lancashire) Ltd. v. CS Wilson & Co. Ltd., [1917] AC 495(HL) . 77 Peter Dixon & Sons Ltd. v. Henderson, Craig & Co. Ltd., [1919] 2 KB 778(CA) . 78 Walton (Grain and Shipping) Ltd. v. British Italian Trading Co. Ltd., [1959] 1 Lloyd's Rep 223. 79 Brauer & Co. (Great Britain) Ltd. v. James Clark (Brush Materials) Ltd., [1952] 1 All ER 981; reversed on other grounds, [1952] 2 All ER 497(CA) . 80 Bunten and Lancaster Ltd. v. Wilts Quality Products (London) Ltd., [1951] 2 Lloyd's Rep 30. 81 Tsakiroglou & Co. Ltd. v. Noblee & Thorl GmbH, [1962] AC 93, [1961] 2 All ER 179[1961] 2 WLR 633(HL) . 82 Pool Shipping Co. Ltd. v. London Coal Co. of Gibraltar Ltd., [1939] 2 All ER 432; referred in Hong Guan & Co. Ltd. v. r. Jumabhoy & Sons Ltd., [1960] AC 684, [1960] 2 All ER 100(PC) . 83 Holcim (Singapore) Pte Ltd v. Precise Development Pte Ltd, [2011] SGCA 1 (Singapore Court of Appeal), [2011] 2 SLR 106. 84 Trade and Transport Inc. v. Lino Kaiun Kaisha Ltd. (The Angelia), [1973] 2 All ER 144 at 159, [1973] 1 WLR 210 at 227, obiter per Kerr J. 85 See Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, CONTRACT para 907. 86 Oakley v. Portsmouth and Ryde Steam Packet Co., (1856) 11 Exch 618 at 623. 87 Ibid. 88 Nugent v. Smith, (1876) 1 CPD 423 at 434 (CA); River Wear Comms v. Adamson, (1877) 2 App Cas 743, [1874-80] All ER Rep I (HL). 89 Nichols v. Marsland, (1876) 2 Ex D 1, [1874-80] All ER Rep 40(CA) . 90 [1874-80] All ER Rep 40 (CA); Thomas v. Birmingham Canal Co., (1879) 49 LJQB 851; Dixon v. Metropolitan Board of Works, [1881] 7 QBD 418 (such a rainfall as could not reasonable have been anticipated, and not merely an unusual rainfall such as ihe defendant ought to have been prepared for). 91 [1874-80] All ER Rep 40 (CA); R v. Essex Sewer Comrs, [1885] 14 QBD 561 at 581 (CA) (such as no reasonable person would anticipate); affirmed sub nom Fobbing Sewers Comrs v. R., (1886) 11 App Cas 4449(HL) . 92 Nichols v. Marsland, (1876) 2 Ex D 1 at 5, [1974-80] All ER Rep 40(CA) . 93 Pandorf v. Hamilton, (1886) 17 QBD 670 at 675, 684 (CA); but on appeal sub nom Hamilton, Fraser & Co. Pandorf & Co.,[1887] 12 AC 518, [1886-90] All ER Rep 220 (the House of Lords reversed the court of appeal on the ground that the injury arose from the 'dangers and accidents of the sea', the point as to act of God being was not raised in the appeal). 94 Liver Alkali Co. v. Johnson, (1874) LR 9 Exch 338. 95 Fenwick v. Schmalz, (1868) LR 3 CP 313 at 316. 96 State of UP v. Allied Constructions, AIR 2004 SC 586, (2003) 7 SCC 396.
No Frustration: Illustrative Cases By the Bombay Labour Welfare Fund Act, 1953, all unpaid accumulations (arrears of wages of employees
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included) in the custody of the employers, were to be paid into a fund constituted thereunder free from the bar of limitation. The Supreme Court held that that was not a supervening impossibility under s. 56, which rendered the performance of the contract of service void and hence, the debt due to the employees from the employer would not stand discharged. Even if s. 56 is applied, the liability of the employer would arise under s. 65 of the Contract Act and he would be bound to restore it or make compensation to the employees.97 In a suit for damages against a Hindu father for breach of a contract to give his minor daughter in marriage to the plaintiff, it was held that the performance of the contract had not become impossible, simply because the girl had declared her unwillingness to marry the plaintiff, and the defendant had declared that he could not compel her to change her mind.98 In the course of the judgment, the Court said:
The act is neither impossible in itself, nor impracticable in the ordinary sense of the term... Though physical force cannot for one moment be thought of, it is no doubt the duty of defendant according to the terms of his contract to use to the utmost his persuasive powers and his position as parent in order to induce his daughter to be married.
Where the parties to a suit agreed that the plaintiff and his younger brother were to execute a sale deed within a week conveying the property in dispute in the suit to the defendant for a certain sum, and, in default, the suit was to be dismissed, it was held that the younger brother's refusal to join in executing the deed did not make the performance of the agreement by the plaintiff impossible within the meaning of this section.99 An agreement to sell a specified quantity of dhotis to be manufactured at a particular mill 'to be taken delivery of as and when the same may be received from the mills', cannot be read as meaning 'if and when', specially when a time is named for the completion of delivery; the failure of the mills to produce the goods was no excuse. The doctrine of frustration does not extend to the case of a third person, on whose work the defendant relied, preferring to work for someone else during the material time.1 But where the defendant sold two trucks to the plaintiff on priority basis but failed to deliver them because the manufacturer did not deliver them to the defendant during the relevant period because of the prohibitory orders of the Government, there was no breach of contract entitling the plaintiff to damages.2 Inability to pay purchase price on the due date does not make the contract impossible of performance.3 The enactment of Bihar Land Reforms Act, 1950 did not frustrate the contracts under theghatwali tenures, because notwithstanding the acquisition of the tenures by the state, both the grant and the office of the ghatwals subsisted, though, in an altered form, and the performance of obligations under the contract could not be said to have become impossible.4 A surety bond for appearance in a criminal case does not get discharged by the transfer of the case from one Court to another.5 On a company going into liquidation, a contract appointing a managing director, does not become frustrated and 'void'; but he must be deemed to have been dismissed, and hence entitled to compensation in absence of misconduct.6 The provisions of s. 56 ought not to apply where the cause of frustration of the contract is not a supervening event, namely, a cause existing from its inception, like want of authority of the person transacting the contract.7 97 Bombay Dyeing & Mfg Co. Ltd. v. State of Bombay, [1958] SCR 1122 at 1144, AIR 1958 SC 328 at 338; applying Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310 at 323, AIR 1954 SC 44. 98 Purshotamdas Tribhovandas v. Purshotamdas Mangaldas Nathubhoy, (1896) 21 Bom 23; Ramalinga Mudali v. Natesa
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Mudali, AIR 1989 Ker 304. 99 Rangaswami Kavundan v. Trisa Maistry, (1907) 17 Mad LJ 37. 1 Harnandrai Fulchand v. Pragdas Budhsen, (1922) 50 IA 9, 47 Bom 344, 72 IC 485, AIR 1923 PC 54 (2); Bhailal Chaturbhai Patel v. Kalyanrai Varajrai Deasi, (1921) 45 Bom 1222, AIR 1921 Bom 49, (1921) 23 Bom LR 547, 63 IC 952; Ganga Saran v. Firm Ram Charan Ram Gopal, [1952] SCR 36, AIR 1952 SC 9 (apart from the construction of the contract. it was found that in fact, the defendant could have delivered the goods; F Ranchoddas v. Nathmal Hirachand & Co. AIR 1949 Bom 356, (1949) 51 Bom LR 491; distinguished on facts in Bisseswarlal Brijlal v. Jaidayal Udairam, (1945) 1 Cal 391, AIR 1949 Cal 407. 2 Utkal Automibiles (P) Ltd. v. Biraja Prasad Roy, (1975) Cutt. 440, AIR 1976 Ori 15 at 18. 3 Universal Corpn. v. Five Ways Properties Ltd., [1 9791 1 All ER 552. 4 Badri Narain Singh v. Kamdeo Prasad Singh, AIR 1961 Pat 41 (case under the Representation of People's Act, 1951). 5 Inder Singh v. State, AIR 1960 All 419. 6 Jwala Prasad v. Jwala Bank Ltd., AIR 1957 All 143 (by majority). 7 But see Ayissa v. Prabhakaran, AIR 1971 Ker 239 at 241 (contract of sale of property of minor by person without authority).
Conflict of Laws Where the contract governed by English law as the applicable law is to be performed in a foreign country, and that performance becomes illegal by the law of that country (lex loci solutionis) by any change in that law after the contract is made but before performance, the contract will not be enforced in England.8 A contract governed by English law for payment of freight in Spain under a charterparty exceeding the maximum amount fixed by Spanish law after the contract was made, was not enforced.9 But a contract governed by English law is not frustrated where the lex loci solutionis does not make the performance illegal, but merely excuses the party from performing it in full.10 A contract is not frustrated, if a party convenes the law of the place where he is residing or of which he is a national, if that law is neither the lex loci solutionis nor the proper law. It is for the party relying on frustration to show that the illegality covered the whole of the period during which performance was to be made. If the performance was illegal during a part of the period of the contract, the exporter would be liable for failure to perform during that period.11 It is submitted that this will also be the position of law in India. 8 Ralli Bros v. Campania Naviera Sota Y Aznar, [1920] 2 KB 287, [1920] All ER Rep 427; Nile Co. for Export of Agricultural Crops v. H & JN Bennett (Commodities) Ltd., [1986] 1 Lloyd's Rep 555 at 581-82. 9 Ralli Bros v. Compania Naviera Sota Y Aznar, [1920] 2 KB 287, [1920] All ER Rep 427. 10 Chitty on Contracts, 28th edn., p. 1180-81, para 24-026; Jacobs, Marcus & Co. v. Credit Lyonnais, (1884) 12 QBD 589; Ralli Bros v. Compania Naviera Sota Y Aznar, [1920] 2 KB 287, [1920] All ER Rep 427; Blackburn Bobbin Co. Ltd. v. TW Allen & Sons Ltd., [1918] 2 KB 467(CA) . 11 Ross T Smyth & Co. Ltd. (Liverpool) v. WN Lindsay Ltd. (Leith), [1953] 2 All ER 1064, [1953] 1 WLR 1280.
Effect of Impossibility An agreement to do an impossible act is void in itself. An agreement becomes impossible of performance because of a supervening impossibility discussed above 'becomes void' and hence ceases to be enforceable.12 Discharge of all the Parties
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Supervening impossibility discharges both the parties from further performance for the future.13 Automatic Discharge Frustration puts an end to a contract independently of the volition of the parties at the time of the frustrating event, and it may occur without either party being conscious that what has happened has snapped their contractual bonds;14 it requires neither any act nor election by the parties.15'The legal effect of frustration does not depend on their intention or their opinions, or even knowledge, as to the event.16 The aggrieved party cannot keep it alive,17 nor can discharge be waived.18It does not depend, as does rescission of a contract, on the ground of repudiation or breach or on the choice or election of either party. It depends on the effect of what has act ually happened on the possibility of performing the contract. The issue has to be decided by the Court ex post facto on the actual circumstances of the case.19
The belief, knowledge and intention of the parties are evidence, but evidence only, on which the Court has to form its conclusion whether the changed circumstances destroyed altogether the basis of the adventure and its underlying objective.20
Nor does the Court have the power to adjust the terms to new circumstances and allow the contract to continue.21 Once the contract has been discharged, it cannot be revived when the circumstances discharging it have changed.22 It will always be for the defendant to affirmatively establish that the contract had either been frustrated or performed. If the defendant succeeds in doing that, he would certainly be entitled to relief for the obtaining of which, such a plea was raised.23 Effect on Arbitration Clauses In the case of frustration of contracts, their performance comes to an end, but the contracts would still be in existence for purpose of resolution of disputes arising under or in connection with them. The question of frustration or impossibility of performance will still have to be decided under them. Therefore, the arbitration clause does not perish on frustration of the contract.24 But an agreement to refer to arbitration of two European merchants at Karachi stood dissolved when Karachi became a part of a foreign dominion, a contingency never contemplated by the parties.25 An arbitration agreement was also discharged, when the undertaking of one of the parties to it was taken over under a statute, which also provided for automatic termination of all contracts.26 Time of Discharge The contract is discharged by frustration at the time of the frustrating event. For this purpose, the Court must look at the matter on the basis of the facts known to the parties at the time of the event interfering with the contract and the probabilities as they then appeared, and not in the light of later events, which may show that the contract might, in fact, have been performed.27 Where a contract requires its performance to be carried out in a customary manner, the performance must be carried out in a manner which is customary at the time when the performance is called for;28 it is not the date of the contract but the date of performance that would determine what is customary and usual.29 When the relevant alleged event happens, i.e., upon probabilities and not upon a certainty arrived at after the event,30 in most cases, the time when the new situation emerges is clear. Frustration may be the result of a gradual change, and if so, it will have to be determined when the frustration occurred or contract came to an end.31 In Mungeeram Bangur and Co. v. Gurbachan Singh, 32 where the facts were similar to Satyabrata Ghose
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v. Mugneeram Bangur & Co., 33 the Supreme Court held, that if time was of the essence of the contract or if time for performance was set out in the contract, the contract might stand discharged, even though its performance may have been rendered unlawful for an indeterminate period, provided that the unlawfulness attached to the performance of the contract at the time it ought to have been performed. Thus, if the performance of the contract is rendered unlawful by reason of some subsequent event, the contract would stand discharged; but the discharge will not necessarily take place from the date on which the further performance was rendered unlawful, unless it is for all time. Where the performance of the contract is rendered unlawful either for a determinate period of time or for an indeterminate period of time, the contract would not stand discharged, unless the ban on its performance existed on the day or during the time in which it had to be performed. Impossibility After Decree of Specific Performance A Court which passed the decree for specific performance can and should declare its own decree void, if the act becomes impossible of performance or by reason of some event, which neither party could prevent.34 Relief Under Section 65 It must not be assumed that the consequences of a contract being discharged for any of the above-mentioned reasons, will be the same in India, as they would have been in England. Where a contract is 'discovered to be void' for impossibility under the first paragraph of this section, or 'becomes void' because of an event occurring after it is made, rendering it impossible or unlawful, the party who has received any advantage under it is bound to restore it or make compensation for it to the other party under s. 65.35A buys freight from B for 2,500 bales of cotton on a ship belonging to B to be carried from Bombay to Genoa. The freight is paid in advance and the goods are put on board the ship. While the ship is still lying in the harbour, the export of cotton to Genoa is prohibited by orders of the Government, and the voyage is abandoned. A is entitled under s. 65 to recover from B the freight paid in advance. This right is not affected even if B is a common carrier.36 Similarly, where a contract becomes unlawful, either party is entitled under s. 65 to recover from the other, any deposit made by him as a security for the due performance of the contract.37 The rule in Chandler v. Webster, 38 that money already paid as rent under the contract which was frustrated, was not recoverable and the balance due could also be recovered in spite of frustration because the rent was payable a day in advance, was remedied in Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd., 39 which held that amount already paid could on frustration be recovered, where the consideration had wholly failed. Consequently, the amount yet due would cease to be recoverable. It was also held that the money paid was recoverable in quasi-contract. Lord Simon distinguished the meaning of consideration as used in quasi-contractual sense from that given in contract. He said:
The money was paid to secure performance and if performance fails, the inducement which brought about the payment is not fulfilled40.
Lord Wright was of the opinion that:
(i)
the claim to repayment did not arise under the contract and was not a claim for further performance of the contract or damages but was a claim outside the contract for money had and received.41 But this rule is inadequate as it would not apply to cases where there is partial failure of consideration, e.g., where an apprentice had paid 25 as premium for a 5 years' apprenticeship to a watchmaker who died after one year;42
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(ii)
the right to recover advance payment may cause injustice to the other side, who may have expended the advance to finance the initial stages of the contract.43
In Common Law, rights not yet accrued remained unenforceable.44 In Appleby v. Myers, 45 a contract to erect machinery in defendant's premises and to keep it in repairs for two years, was held frustrated because both the premises and the machinery were destroyed by accidental fire, neither side being at fault, the plaintiff's claim for payment for work done was rejected on the construction of the contract as payment was to be made at the completion of the work, although, contract was frustrated. In severable contracts, where payments are to be made from time to time after a particular portion of the contract is performed, the rule was that whatever was due or had accrued for payment at the time of frustration was not recoverable.46English Common Law, before it was altered by the Law Reform (Frustrated Contracts) Act, 1943,47 required a total failure of consideration before a refund was possible.48 Indian law is not so restricted.49 12 See s. 2, clause (j) above. 13 Blakeley v. Muller & Co., [1903] 2 KB 760; Chandler v. Webster, [1904] 1 KB 493(CA) ; Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd., [1943] AC 32 per Lord Atkin at 50 and Lord Wright at 70, [1942] 2 All ER 122 at 130 and 140 (HL); Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310, AIR 1954 SC 44. 14 Tsakiroglou & Co. Ltd. v. Noblee & Thorl GmbH, [1960] 2 QB 318, [1959] 1 All ER 45, [1959] 2 WLR 179 at 185; affirmed in, [1962] AC 93, [1961] 2 All ER 179[1961] 2 WLR 633(HL) ; Hirji Mulji v. Cheong Yue SS Co. Ltd., [1926] AC 497 at 510, [1926] All ER Rep 51. 15 Hirji Mulji v. Cheong Yue SS Co. Ltd., [1926] AC 497, [1926] All ER Rep 51,(PC) ; Joseph Constantine Steamship Line Ltd. v. Imperial Smelting Corpn. Ltd., [1942] AC 154, [1941] 2 All ER 165(HL) ; Heyman v. Darwins Ltd., [1942] AC 356 at 365, [1942] 1 All ER 337 at 343 (HL) obiter per Viscount Simon LC. 16 Dahl v. Nelson, Donkin & Co., [1881] 6 AC 38, [1881-85] All ER Rep 572 per Lord Watson; cited in Davis Contractors Ltd. v. Fareham Urban District Council, [1956] AC 696, [1956] 2 All ER 145, [1956] 3 WLR 37. 17 Hirji Mulji v. Cheong Yue SS Co. Ltd., [1926] AC 497, [1926] All ER Rep 51(PC) ; Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310 at 323, AIR 1954 SC 44 at 48; Naihati Jute Mills Ltd. v. Khyaliram Jagannath, [1968] I SCR 821, AIR 1968 SC 522 at 527; Durga Devi Bhagat v. JB Advani & Co. Ltd. 76 CWN 528 at 541, 544; Ahmad Khan v. Shahanshah Jehan Begum, AIR 1973 All 529 at 531. 18 Hirji Mulji v. Cheong Yue SS Co. Ltd., [1926] AC 497, [1926] All ER Rep 51(PC) ; but see Goldberg,[1972] 88 LQR 464 (the possibility of waiver is also not foreclosed by English authority); Dahl v. Nelson, Donkin & Co., [1881] 6 AC 38 per Lord Blackburn at 53, [1881-85] All ER Rep 572 at 580. 19 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310 at 325, AIR 1954 SC 44 at 49; Denny, Mott & Dickson Ltd. v. James B Fraser & Co. Ltd., [1944] AC 265 at 274, [1944] 1 All ER 678(HL) ; Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793 at 806, AIR 1960 SC 588 at 594 (abnormal change in prices, or currency rates no ground). 20 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310, AIR 1954 SC 44 per Mukherjee J. at 48; Morgan v. Manser, [1948] 1 KB 184, [1948] 2 All ER 666. 21 Compare with UNIDROIT Principles, Art. 6.2.3 (see above 'the UNIDROIT Principles'). 22 K Narendra v. Riviera Apartments (P)Ltd., AIR 1999 SC 2309, (1999) 5 SCC 77 (no revival of contract on repeal of the Urban Land Ceiling Act, but this being limited to a small portion of the land that was in excess, the court refused specific performance with respect of the remaining land, and granted damages ). See contra:Raghuvir Singh Bhatty v. Ram Chandra Waman Subhedar, AIR 2002 All 13. 23 Mahant Manadeo v. Mahant Yaduvansh Deo Gopinath, AIR 1969 All 571. 24 Union of India v. Kishorilal Gupta & Bros, [1960] 1 SCR 493. AIR 1959 SC 1362 at 1371; Naihati Jute Mills Ltd. v. Khyaliram Jagannath, [1968] I SCR 821, AIR 1968 SC 522, Khardah Co. Ltd. v. Raymon & Co. (India) Pvt. Ltd.,[1963] 3 SCR 183, AIR 1962 SC 1810; ; Government of Gibraltar v. Kenney, [1956] 3 WLR 466, [1956] 3 All ER 22. 25 Rama Nand Vijay Parkash v. Gokal Chand Gian Chand, AIR 1951 Pun 189(Sim) . 26 Bharat Hydro Power Corporation Ltd. v. Assam State Electricity Board, AIR 1999 Gau 151. 27 Bank Line Ltd. v. Arthur Capel & Co., [1919] AC 435 per Lord Sumner at 454, [1918-19] All ER Rep 504(HL) ; Court Line Ltd. v. Dant and Russel Inc., [1939] 3 All ER 314 (ship delayed by boom placed across river during hosilities; fair inference from facts then known that delay would be indefinite, though boom was in fact removed soon after ship left area); Atlantic
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Maritime Co. Inc. v. Gibbon, [1954] 1 QB 88 at 105, [1953] 2 All ER 1086(CA) . 28 Carapanayoti & Co. Ltd. v. ET Green Ltd., [1958] 3 WLR 390, [1958] 3 All ER 115 at 119, [1959] 1 QB 131 at 145; Tsakiroglou & Co. Ltd. v. Noblee & Thorl GmbH, [1962] AC 93, [1961] 2 All ER 179 at 184, [1961] 2 WLR 633 at 641; Upjohn v. Hitchens, [1918] 1 KB 171 at 179, affirmed in, [1918] 2 KB 48(CA) . 29 Tsakiroglou & Co. Ltd. v. Noblee & Thorl GmbH, [1962] AC 93, [1961] 2 All ER 179 per Viscount Simons at 184, [1961] 2 WLR 633 at 641; Reardon Smith Lines Ltd. v. Black Sea & Baltic General Insurance Co. Ltd. (The Indian City), [1939] AC 562, [1939] 3 All ER 444 (marine insurance). 30 Court Line Ltd. v. Dant and Russell Inc., [1939] 3 All ER 314; Scanlan's New Neon Ltd. v. Tooheys Ltd., (1943) 67 CLR 169 at 184. 31 Davis Contractors Ltd. v. Fareham Urban District Council, [1956] AC 696, [1956] 2 All ER 145, [1956] 3 WLR 37 at 56. 32 [1965] 2 SCR 630, p. 637, AIR 1965 SC 1523, p. 1526. 33 [1954] SCR 310, AIR 1954 SC 44. 34 CVRM Ramaswami Chettiar v. AKRMCT Chidambaram Chettiar, AIR 1954 Mad 1040. 35 Muhammad Hashim v. Misri, AIR 1922 All 6; but see K Narendra v. Riviera Apartments Pvt. Ltd., AIR 1999 SC 2309, (1999) 5 SCC 77, where the court, after finding that the contract had been frustrated, proceeded to award damages in lieu of specific performance. 36 C. Boggiano & Co. v. Arab Steamers Ltd., (1915) ILR 40 Bom 529, AIR 1916 Bom 265, 33 IC 536 followed; Gandha Korliah v. Janoo Hassan, (1925) 49 Mad 200, 91 IC 780, AIR 1926 Mad 175. 37 Textile Mfg Co. Ltd. v. Salomon Brothers, (1915) ILR 40 Bom 570, AIR 1916 Bom 251, 33 IC 353 (outbreak of war); Babulal Agarwala v. Vijaya Stores, AIR 1955 Ori 49; Orissa State Electricity Board v. Indian Metals & Ferro Alloys Ltd., AIR 1991 Ori 59 at 63. 38 [1904] 1 KB 493 not accepted in India; C. Boggiano & Co. v. Arab Steamers Ltd., (1915) 40 Bom 529, AIR 1916 Bom 265, 33 IC 536; Gandha Korliah v. Janoo Hassan, (1925) 49 Mad 200, 91 IC 780, AIR 1926 Mad 175; PKPS Sivanadian Chettiar v. Batchu Surayya, AIR 1925 Mad 727. 39 [1943] AC 32, 69, [1942] 2 All ER 122; the Indian law is wider than English law on the question of remedy by way of refund--see s. 65 below. 40 Fibrosa Spolka Akcyjna v. Fairbarn Lawson Combe Barbour Ltd., [1943] AC 32, 69, [1942] 2 All ER 122 at 129. 41 Ibid. 42 Whincup v. Hughes, (1871) LR 6 CP 78. 43 Treitel, The Law of Contract, 5th edn., p 674; Cheshire, Fifoot & Furmston's Law of Contract, 12th edn., p 586; Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd., [1943] AC 32 at 49, [1942], 2 All ER 122 at 129; see now s. 1(2), (English) Law Reform (Frustrated Contracts) Act, 1943. 44 Cutter v. Powell, (1975) 6 TR 320, [1775-1802] All ER Rep 159 (seaman's wages who died on sea not recoverable); Appleby v. Myers, (1867) LR 2 CP 651, [1861-73] All ER Rep 452 (contract for erection of machinery, which when only part had been erected caught fire. Nothing was recoverable). 45 (1867) LR 2 CP 651 at 661, [1861-73] All ER Rep 452 at 454; Taylor v. Caldwell 122 ER 309, [1861-73] All ER Rep 24, (1863) 3 B&S 826; Cutter v. Powell, (1975) 6 TR 320, [1775-1802] All ER Rep 159 (a seaman who was to be paid at the end of the voyage died during it; his executrix recovered nothing for service rendered); Jesse v. Roy, [1834] 1 C & R 316, 149 ER 1101; Parsons Bros Ltd. v. Shea, (1966) 53 DLR (2d) 86; in English law; these cases have been remedied by s. 1(3), Law Reform (Frustrated Contracts) Act of 1943. 46 Stubbs v. Holywell Rly. Co., (1867) LR 2 Ex 311. 47 See s. 65 below, under the heading: 'The (English) Law Reform (Frustrated Contracts) Act, 1943'. 48 Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd., [1943] AC 32, [1 9421 2 All ER 122; See s. 65 below, under the heading: 'Total Failure of Consideration'. 49 Manasseh Film Co. v. Gemini Picture Circuit, (1944) Mad 124, AIR 1944 Mad 239 (there was a total failure of consideration); Parshotam Das Shankar Das v. Municipal Committee Batala, AIR 1949 EP 301.
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Third Paragraph 'Act Known to be Impossible or Unlawful' The third paragraph is an exception to the doctrine of frustration, where instead of declaring the contract discharged, the promisor is saddled with the liability to pay compensation to the promisee for the non-performance of the promise.50 There is a view that in a suit, except where the contract is specifically enforced, where the question is whether s. 56 is applicable, is not whether the contract was or became void, but whether the promisor has to make compensation for non-performance.51 There is authority under the English law, that where, by reason of special knowledge, one party foresees the possibility of the event and conceals this from the other, the party with the special knowledge will not be discharged.52 But this section contemplates that a contract may be void under its provisions and yet compensation may be payable by the person who is unable to perform it, whether the impediment is impossibility or unlawfulness, and whether the impediment existed at the time of the contract or supervened; and the question whether compensation was excused would apply only when there was no contract to the contrary.53 In Seth Jaidayal v. Ram Sahae, 54A advanced money to B, the repayment to be secured by executing a usufructuary mortgage, the lender being given possession. B was fully aware that the property, covered by the mortgage, was already attached under the decree, and had been taken under the collector's management under s. 326 of the CPC . It was held that the performance of the contract for delivery of possession of the mortgaged land was rendered impossible, and the lender A was entitled to compensation under this section. The damages were the amount of advance with interest from the date when the contract became impossible. The third paragraph of s. 56 provides a just solution for the situation like McRae v. Commonwealth Disposals Commission, 55 where the High Court of Australia held the defendants liable to the plaintiff for damages being the agreed purchase price with the expenditure wasted in reliance, on the promise being his expenses in preparing to salvage a vessel, which the defendants had sold to the plaintiff with the knowledge that it did not exist. A solicitor was engaged to complete a sale and remuneration was to be paid on completion of the transaction. He procured a purchaser, but the sale could not be completed due to breach by the purchaser. The solicitor was held not entitled to get the lump-sum fee payable on completion of the sale. Section 56 was inapplicable as parties could have foreseen the event and there was no supervening impossibility.56 Where the vendor had, under a contract of sale, agreed to give vacant possession of the portion occupied by a tenant, but did not take any steps to evict the tenant and was unable to give vacant possession, it was held that the vendee was entitled to ask for executing the sale deed without vacant possession, and the doctrine of frustration of contract in s. 56 was not attracted.57 50 Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310, AIR 1954 SC 44 at 46. 51 Firm of Hussainbhoy Karimji v. Haridas, (1927) 105 IC 319, AIR 1928 Sind 21. 52 Walton Harvey Ltd. v. Walker and Homfrays Ltd., [1931] 1 Ch 274, [1930] All ER Rep 465(CA) . 53 Firm of Hussainbhoy Karimji v. Haridas, (1927) 105 IC 319, AIR 1928 Sind 21. 54 (1889-90) ILR 16-17 Cal (VI) 827 (PC). 55 (1951) 84 CLR 377. 56 Bisadendu Biswas v. Sakina Begum, AIR 1973 Cal 135 at 138. 57 Ramani Ammal v. Susilammal, AIR 1991 Mad 163 (vendor could not take advantage of his own wrong).
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Frustration and Compensation Paragraph 3 provides for compensation only in regard to pre-existing impediment, but it must be taken to govern supervening unlawfulness also, though, it does not do so in terms, as also to supervening impossibility. The principles of compensation have been stated thus:58
(1)
(2) (3)
(4)
section 56 contemplates that a contract may be void under its provisions and yet compensation may be payable by the person who is unable to perform it, whether the impediment is impossibility or unlawfulness, and whether the impediment existed at the time of the contract or supervened; the question whether compensation is payable or not depends not merely on: the real question that must be considered, when it has to be determined whether s. 56 is applicable or not, in any suit, except where the contract is sought to be specifically enforced, is not whether the contract was or became void, but whether the promisor has to make compensation for non-performance; anticipating the result of what I am about to say, I might add a fourth conclusion: that the substance of s. 56 (namely the payment of compensation being excused) can only apply when there is no contract to the contrary, and that is but stating in other words that s. 56 must be read (when possible) as an implied term in contracts.59
58 Firm of Hussainbhoy Karimji v. Haridas, (1927) 105 IC 319, AIR 1928 Sind 21 at 24-25. 59 Ibid.
Evidence and Burden of Proof The person alleging that the contract has become impossible.60 or that force majeure conditions exist and for how long,61 must prove it. Moreover, the burden of establishing that the frustration is self-induced,62 or the neglect or default63 of the party pleading frustration, lies on the other party.64 60 Harischandra Dwarkadas Cloth Market v. Firm Murlidhar Chironjilal, AIR 1957 MB 53. 61 National Hydroelectric Power Corporation Ltd v. General Electric Company Ltd, FAO (OS) 554/2010 decided on 29 April 2013 (Del). 62 VL Narasu v. PSV Iyer, (1953) Mad 831, AIR 1953 Mad 300; Joseph Constantine Sleamship Line Ltd. v. Imperial Smelting Corpn. Ltd., [1942] AC 154, [1941] 2 All ER 165; Union of India v. Chanan Shah Mahesh Dass, AIR 1955 Pepsu 51; FC Shepherd & Co. Ltd. v. Jerrom, [1987] 1 QB 301, [1986] 3 All ER 589(CA) ; but see Slone,[1944] 60 LQR 262. 63 Union of India v. Chanan Shah Mahesh Dass, AIR 1955 Pepsu 51. 64 But see Gwalior Rayon Silk Mfg Co. Ltd. v. Shri Andavar & Co., AIR 1991 Ker 134.
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The Indian Contract Act, 1872 (Act 9 of 1872)
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CHAPTER IV Of the Performance of Contracts Contracts which must be performed S. 57. Reciprocal promise to do things legal, and also other things illegal.-Where persons reciprocally promise, firstly to do certain things which are legal, and secondly, under specified circumstances, to do certain other things which are illegal, the first set of promises is a contract, but the second is a void agreement. Illustration A and B agree that A shall sell B a house for 10,000 rupees, but that if B uses it as a gambling house, he shall pay A 50,000 rupees for it. The first set of reciprocal promises, namely, to sell the house and pay 10,000 rupees for it, is a contract. The second set is for an unlawful object, namely, that B may use the house as a gambling house, and is a void agreement.
Introduction Section 57 provides that the set of promises to do legal act s is valid, and the set of promises to do things illegal is void, where the parties have agreed to do certain things legal, and under specified circumstances, other things illegal. This and the next section follow the principle laid down in s. 24.
Reciprocal Promises to do Things Legal and Illegal Section 57 applies to cases where the two sets of promises are distinct.65 When the void part of an agreement can be properly separated from the rest, the latter does not become invalid; but when the parties themselves treat transactions, void as well as valid, as an integral whole, the court also will regard them as inseparable, and wholly void.66 In BOI Finance Ltd. v. Custodian, 67 ready-forward or buy-back transactions of purchase or sale of unlisted securities consisting of two inter-connected legs were effected by banks with some share brokers, the first or the ready leg consisted of purchase or sale of securities at a specified price, and the second or the forward leg consisted of same or similar securities on a later date at a price determined on the first date. The ready leg was completed, the banks paid the agreed price and received delivery of shares. Before the forward leg, the Special Court (Trial of Offences relating to Transactions in Securities) Ordinance, 199268was issued on 6th June 1992, which provided inter alia for attaching properties of certain notified persons, in this case, some sharebrokers. The Custodian, under that Act, had the power to order cancellation of any contract entered into between 1st April 1991 and 6th June 1992, which had been entered fraudulently or for defeating the provisions under the Act, after which cancellation, the properties of the offenders stood attached under the Act. The Custodian applied before the special court for the return of securities delivered to the banks contending that the ready-forward transactions were illegal under the Securities Contracts (Regulation) Act, 1956,69 and therefore, the securities sold in the ready leg continued to be the properties of the offenders, who had sold them to the banks. The banks contended, inter alia, that the two parts of the transaction were severable, and the illegality attached to the forward leg, and not the ready leg. The special court held that the contracts were not severable. On appeal by the
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banks, the Supreme Court held that it was a contract consisting of reciprocal promises to which s. 57 applied--the first set of promises consisting of the ready leg and the second set of promises consisting of the forward leg. Neither the object nor the consideration of the ready leg was illegal or prohibited. The forward leg was neither the consideration nor the object for entering into the ready leg. The forward leg was at best the motive for entering into the contract. The two legs of the transactions are sevarable, and the banks were free to deal with the securities in any manner. It is submitted, that the two legs of the transaction cannot be termed as one consisting of reciprocal promises. Reciprocal promises are defined under s. 2(f), as those promises which form consideration for one another. Even as held by the Supreme Court in the above case, the forward leg was not the consideration for the ready leg. Further, this section speaks of promises first to do certain things legal, and then in specified circumstances to do certain things illegal. No such promises are found in this case and this section could not have applied. The decision of the case does in fact rest and ought to rest, first, on the doctrine of severability, and secondly, on the ground that the forward contract could not affect the transfer of shares which had already taken place and the banks could base their claims on title to shares acquired by purchase without having to rely on the ready-forward transaction.70 65 Ma Kyin Hone v. Ong Boon Hock, AIR 1937 Rang 47. 66 Davlatsing v. Pandu, (1884) 9 Bom 176; Meherally Mooraj v. Sakerkhanoobai, (1905) 7 Bom LR 602 at 606; see s. 23 above. 67 AIR 1997 SC 1952, (1997) 10 SCC 488; see also Canbank Financial Services Ltd. v. Custodian, AIR 2004 SC 5123, (2004) 8 SCC 355. 68 Now see the Special Court (Trial of Offender Relating to Transactions in Securities) Act, 1992 (27 of 1992). 69 Being declared as illegal under a notification issued by the Central Government under s. 16,Securities Contracts (Regulation) Act, 1956. 70 AIR 1997 SC 1952, (1997) 10 SCC 488; Re Sajan Singh v. Sardara Ali, [1960] AC 167, [1960] 1 All ER 269. Also see and compare the Specific Relief Act, 1963, s. 12(4), which declares the application of a similar but more extensive principle to specific performance.
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The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which must be performed S. 58. Alternative promise, one branch being illegal.-In the case of an alternative promise, one branch of which is legal and the other illegal, the legal branch alone can be enforced. Illustration
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A and B agree that A shall pay B 1,000 rupees, for which B shall afterwards deliver to A either rice or smuggled opium. This is a valid contract to deliver rice, and a void agreement as to the opium.
Introduction If the promises are to be performed in the alternative, and one branch of the promises is illegal, the legal branch alone can be enforced.
Alternative Promises A question arises whether, under the terms of this section and its illustration, if B has offered and A has accepted smuggled opium in performance of an agreement, A can still have an action against B for failure to deliver rice. It would seem that A, being in pari delicto, cannot sue; for he could not make out his case without showing an illegal transaction to which he was a party.71 A promisee, who had paid good consideration, can enforce the legal promise where the contract contains also another distinct promise which is illegal.72 Where an option was given to the executant, to either transfer the inheritance or to transfer his share in a certain property, the case was directly covered by the illustration to s. 58.73 Appropriation of Payments 71 Taylor v. Chester, (1869) LR 4 QB 309 at 314, [1861-73] All ER Rep 154 (a case for supply of wine and food to a brothel). 72 Lal Bhagwat Singh v. Hari Kishen Das, (1942) 197 IC 167, AIR 1942 Oudh 1. 73 Mahadeo Prasad Singh v. Mathura Chaudhari, AIR 1931 All 589 (2).
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The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which must be performed S. 59. Application of payment where debt to be discharged is indicated.-Where a debtor, owing several distinct debts to one person, makes a payment to him, either with express intimation, or under circumstances implying, that the payment is to be applied to the discharge of some particular debt, the payment, if accepted, must be applied accordingly.
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Illustrations (a) (b)
A owes B, among other debts, 1,000 rupees upon a promissory note, which falls due on the first June. He owes B no other debt of that amount. On the first June A pays to B 1,000 rupees. The payment is to be applied to the discharge of the promissory note. A owes to B, among other debts, the sum of 567 rupees. B writes to A and demands payment of this sum. A sends to B 567 rupees. This payment is to be applied to the discharge of the debt of which B had demanded payment.
Introduction The underlying principle of s. 59 is that where there are several debts owing to one person, any payment made by the debtor either with an express intimation, or under circumstances from which an intimation may be implied, must be applied to the discharge of the debt in the manner intimated or which can be implied from the circumstances.
Clayton's Case In England, 'it has been considered a general rule since Clayton's case74 that when a debtor makes a payment he may appropriate it to any debt he pleases, and the creditor must apply it accordingly'.75 Where several distinct debts are owing by a debtor to his creditor, the debtor has the right, when he makes a payment, to appropriate the money to any of the debts that he pleases, and the creditor is bound, if he takes the money, to apply it in the manner directed by the debtor. If the debtor does not make any appropriation at the time when he makes the payment, the right of appropriation devolves on the creditor. 74 Devaynes v. Noble (Clayton's case) (1816) 1 Mer 572 at 608, 15 RR 161 at 166, [1814-23] All ER Rep 1. 75 City Discount Co. v. McLean, (1874) LR 9 CP 692 per Blackburn J, at 700.
Application of the Rules in Sections 59 to 61 Appropriation is a matter which arises when the payment is made by the debtor voluntarily,76 and accepted by the creditor. If the creditor has not accepted the payment, the court cannot force him to accept the payment in respect of a particular debt.77The rules would apply whether the payment is act ual, or by adjustment or other means agreed between the debtor and the creditor.78 76 Jia Ram v. Sulakhan Mal, ILR (1941) Lah 740, 196 IC 625, AIR 1941 Lah 386(FB) ; Chaganlal Shrilal v. Gopilal Choturam, AIR 1954 MB 151 at 152. 77 Govindrao v. Narayan, ILR (1945) Nag 885, 222 IC 350, AIR 1945 Nag 277 at 280. 78 Life Insurance Corporation of India v. T Subramanyam, AIR 1963 Mys 64.
Express Agreement and Statutory Provisions The debtor and creditor are bound by the order of payment expressly provided in the agreement between them.79 If the parties have determined the method of appropriation by express agreement, no specific appropriation needs to be made with each payment.80 The rights under these sections are also subject to the provisions of the statute,81 and will not apply where the statute provides a mode of adjustment of
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payment.82 79 Dharam Deo Pandey v. Ramanuj Pandey, AIR 1938 Pat 8 at 10; In the matter of Gopiram Gobindram,AIR 1938 Cal 20 (single debt on mortgage with provision in the mortgage deed). 80 B Raja Mohan Manucha v. B Nisar Ahmad Khan, AIR 1937 Oudh 87 following Gopal v. Govind (1913) 19 IC 849. 81 MN Roy Choudhary v. Nand Kishore Kakkar, AIR 1981 Pat 328 (no adjustment by tenant of costs of repairs against rent payable to the landlord); Kancherla Purshotham v. Kadimcherla Nageswara Rao, AIR 1979 AP 48(FB) ; Garimella Suryanarayana v. Gada Venkataramana Rao, AIR 1953 Mad 458(FB) (repayment towards agricultural debt under Agriculturists Relief Act). 82 Karnataka Electricity Board v. Sandur Manganese and Iron Ores Limited, AIR 1997 Kant 62 (adjustment of payment of electricity charges according to Regulations towards the tax arrears, the interest on tax arrears, the interest on revenue arrears, and the current power supply charges).
Several Distinct Debts Any pecuniary liability, which has been quantified or is capable of being quantified, on the basis of a contract or on the principles of law, is a debt.83 It must be an ascertained amount.84 The rules in these sections have been applied to the payment of government revenue,85 the road cess payable under the Public Demands Recovery Act,86the rent under the Bengal Tenancy Act, 1885,87 export duty,88 arrears of rent,89 and to the monthly salary payable to a servant.90 These sections deal only with the case of several distinct debts,91 and do not apply where there is only one debt,92 even though the same is payable by instalments. The test to determine whether the dues to the plaintiff are one debt or several distinct debts is whether he can sue for such dues separately93without attracting the bar of O. 2, r. 2 of the Civil Procedure Code, 1908.94 The payments made from time to time against deliveries are to be appropriated according to these provisions.95 Monthly salary payable to a servant is a distinct debt arising every month, and payments made can be appropriated by the servant to his past salary.96 The judgment of the Supreme Court in Industrial Credit and Development Syndicate v. Smithaben H. Patel, 97now settles the position that the provisions of s s. 59-61 do not apply to the payment of principal and interest on a single debt or decretal debt. Earlier judgments, holding to the contrary, are no longer good law to the extent that they consider these sections applicable to such debts. However, the act ual principles of appropriation laid down in these judgments under the assumption that the sections applied are significant, and ought not to lose their weight for that reason. 83 Paras Nath Hira Lal v. Kishan Lal Chuni Lal, AIR 1965 All 189. 84 Gajram Singh v. Lala Kalyan Mal, [1935] 58 ER 791, 166 IC 423, AIR 1937 All 1(FB) . 85 Mahomed Jan v. Ganga Bishun Singh (1910) 38 IA 80, (1910) 38 Cal 537(PC) ; reversing Ganga Bishun Singh v. Mahomed Jan, (1906) ILR 33 Cal 1193; Dasharathi Ghosh v. Khondkar Abdul Hannan, (1927) 55 Cal 624, 105 IC 15, AIR 1928 Cal 68; Wasudeo Ramchandra v. Namdeo Ganpatrao, AIR 1951 Nag 155. 86 Bengal Act 1 of 1895; Bengal Act 3 of 1913; Bengal Act 1 of 1895; Bengal Act 3 of 1913; Nandan Missir v. Lala Harakh Narain, (1910) 14 CWN 607. 87 Maharaja Prabirendra Mohan Tagore v. Anit Kumar Chattopadhya, AIR 1956 Cal 570. 88 Union of India v. Bhagwan Industries Ltd., AIR 1957 All 799. 89 Paras Nath Hira Lal v. Kishan Lal Chuni Lal, AIR 1965 All 189. 90 Banambar Das v. Udayanath Pattanaik, AIR 1961 Ori 148. 91 Gurpreet Singh v. Union of India, (2006) 8 SCC 457, 2006 AIR SCW 5813; Jia Ram v. Sulakhan Mal, ILR (1941) Lah 740, 196 IC 625, AIR 1941 Lah 386 at 388 (FB); Bansi Lal Ballaki Ram v. Sant Ram Chopra, AIR 1965 Punj 375;
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Harkisondas Lakhmidas Pyarathi v. Nariman Dadabhoy Parsi, (1927) 104 IC 673, AIR 1927 Bom 479. 92 Industrial Credit and Development Syndicate v. Smithaben H Patel, AIR 1999 SC 1036, (1999) 3 SCC 80; Karnataka Electricity Board v. Sandur Manganese and Iron Ores Limited, AIR 1997 Kant 62; see below 'Principal and Interest on a Single Debt' and 'Decretal Debt'. 93 Banambar Das v. Udayanath Pattanaik, AIR 1961 Ori 148. 94 The Code of Civil Procedure, 1908, O. 2, r. 2, provides that the suit of a plaintiff must include the whole of the claim in respect of a cause of action, that the plaintiff shall afterwards be entitled to sue for any portion of a claim which he has omitted to sue, and that he must sue for all reliefs in respect of the same cause of act ion. 95 AKS Muhammad Sultan Rowther er Co. v. Manickam Chettiar, AIR 1961 Mad 388. 96 Banambar Das v. Udayanath Patanaik, AIR 1961 Ori 148. 97 AIR 1999 SC 1036, (1999) 3 SCC 80; see also Gurpreet Singh v. Union of India, (2006) 8 SCC 457, 2006 AIR SCW 5813.
Intimation by the Debtor Section 59 provides that the debtor has, at the time of making the payment, a right to intimate that the payment is to be applied towards the liquidation of a particular debt, and the creditor must appropriate it accordingly.1 The creditor is not bound to accept payment on the conditions proposed by the debtor. He has the option to refuse the payment;2 but once the payment is accepted, the direction of the debtor must be carried out.3 Once the appropriation made by the debtor is accepted, the creditor cannot vary the effect of the transaction or alter the appropriation without the assent of the debtor. If he accepts a payment so made with a direction as to its application, he must follow the direction at once. Such creditor is not free to suspend action and then vary the application by an agreement with that joint debtor alone. This right of the debtor is irrespective of the fact that security has been given by the debtor for a particular liability.4 The appropriation by the debtor should be communicated to the creditor either expressly or impliedly so that the creditor knows that his right of appropriation does not arise.5 The debtor may specify his appropriation impliedly by showing other circumstances indicating that his intention at the time of payment was to appropriate to a specific debt or account. Where by a mortgage bond, the debtor agreed to repay the loan made to him by the creditor in kind by delivery of certain types of grain or at his option, in cash at a specified rate of interest, and the creditor applied several payments in grain made by the debtor to other antecedent debts, it was held that the creditor was not entitled to do so. This was because the stipulation to repay the loan by delivery of grain, combined with the absence of evidence to show that the previous debts were to be liquidated by payments of grain, was a circumstance indicating that the payment was to be applied to the debt secured by the mortgage bond only.6 Where crops were charged with a debt, the sale proceeds of the crops paid by the buyer to the creditor have to be appropriated to the hypothecation debt. It was held that appropriation to other bonds can only be made with the consent of the debtor.7 The words of the section have been held to imply that the debtor must intimate the appropriation of payment at the time of payment,8 unless it is reserved for exercise at a subsequent point of time,9 and that a payment made after the creditor has demanded the dues is not such an intimation.10 The reason is that the creditor should have an opportunity of considering the offer of payment made by the debtor, subject to the appropriation suggested by him, and of deciding himself whether to accept the payment or not upon such conditions. The creditor cannot be deprived of his normal right, which he possesses of making an appropriation which is to his best advantage.11 In the absence of any stipulation regarding appropriation, it is the duty of the court to see whether there was any intention of any of the parties to appropriate the payment to any particular debt.12 The court may have regard not only to the debtor's express intimation, but also to the circumstances implying that the payment is to be applied to the discharge of some particular debt. The debtor's intimation may be indicated by the entries in the books of the creditor.13 The payments made after a balance has been
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struck in a running account have to be applied towards the balance accounts.14 The circumstances which may be held to indicate a special intention cannot be defined.15 Where the earlier in the date of two debts is of a different kind and specially secured, it will not be presumed that a payment made without express directions was intended to be on an account of the earlier one.16 1 Rai Bahadur Seth Nemichand v. Seth Radha Kishen, AIR 1922 PC 26, p. 27; Yacoob Juma Khan v. Emperor, AIR 1931 Sind 73 (implied from the amount paid). 2 Life Insurance Corporation of India v. Samarendra Nath Roy, AIR 1979 Cal 243 (single debt). 3 Rai Bahadur Seth Nemichand v. Seth Radha Kishen, AIR 1922 PC 26 at 27; TD Foster v. RMAL Chetty, (1924) 2 Rang 204, 82 IC 658, AIR 1925 Rang 4; Domingo John Picardo v. Gregory Pinto, AIR 1962 Mys 190. 4 Sankararama Iyer v. TM Ponnuswami Pillai, AIR 1919 Mad 471; Kuckreja Ltd. v. Said Alam, (1941) Lah 323, 193 IC 206, AIR 1941 Lah 16. 5 Leeson v. Leeson, [1936] 2 KB 156 at 161, [1936] 2 All ER 133 at 135 (CA); Stepney Corpn. v. Osofsky, [1937] 3 All ER 289(CA) . 6 Sungut Lal v. Baijnath Roy, (1886) ILR 13 Cal 164. 7 Ouseph Lukka v. Ananthanarayana Iyer Ramakrishna Iyer, AIR 1959 Ker 233. 8 Relu Mal v. Ahmad, (1926) 7 Lah 17, AIR 1926 Lah 183, 92 IC 947; MC Chegganmull Sowcar v. Desur Manicka Mudaliar, AIR 1926 Mad 792; Ram Nath v. Chiranji Lal., AIR 1935 All 221 at 227 (FB); but see Domingo John Picardo v. Gregory Pinto, AIR 1962 Mys 190; Durgamma v. Kechamayya, AIR 1925 Mad 792. 9 Maharaja Prabirendra Mohan Tagore v. Anil Kumar Chattopadhya, AIR 1956 Cal 570 at 573. 10 Relu Mal v. Ahmad, (1926) 7 Lah 17, AIR 1926 Lah 183, 92 IC 947. 11 Domingo John Picardo v. Gregory Pinto, AIR 1962 Mys 190; Rama Shah v. Lal Chand, (1940) 67 IA 160 at 174, ILR (1940) Lah 470, 187 IC 233, AIR 1940 PC 63. 12 Shyam Lal v. Raghunath Marwari, AIR 1937 Pat 432, 170 IC 480. 13 Rai Bahadar Seth Nemichand v. Seth Radha Kishen, AIR 1922 PC 26 at 27. 14 Sarab Dial v. Nanda Mal Wazir Chand, AIR 1936 Pesh 143. 15 Bansi Dhar v. Akhya Ram, (1890) All WN 62, where the terms of the mortgage bond, the circumstances 16 City Discount Co. v. McLean, (1874) LR 9 CP 692 at 700.
Proof Intention about appropriation of a payment towards a particular debt can be proved by circumstantial evidence.17 Where the debtor alleges an appropriation in a particular manner, the debtor must prove it,18 and the creditor must prove his discretion to appropriate the sum to any dues due to him.19 Entries in the books of the creditor may be taken as indicative of an agreement to a proposed appropriation by the debtor.20 Where the tenant, who had to pay arrears of rent and other amounts, paid two sums to the landlord and gave evidence that they were paid as rent, and when there was no evidence by landlord that they were appropriated towards the other amounts, the tenant was held not to have been in the arrears of rent so as to incur ejection.21 17 M. Raghava Reddiar v. Odur Devarajulu Reddiar, AIR 1943 Mad 236. 18 Radha Kishun v. Hira Lal Shah, AIR 1927 PC 50 at 51; Khialia Shah v. Hansari Mal-Nathu Mal, AIR 1915 Lah 248; Mohi-ud-Din Kausa v. Chandra Mohan, AIR 1966 J&K 64 at 66-67. 19 Gangtok Auto Works Pvt. Ltd. v. Tobgyal Wangchuk Tenzing Namgyal, AIR 1985 Sikkim 23. 20 Rai Bahadur Seth Nemichand v. Seth Radha Kishen, AIR 1922 PC 26 (inference from facts that parties agreed that payment towards capital was to be made first, and then towards interest, if the interest was reduced).
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21 Gangtok Auto Works Pvt. Ltd. v. Tobgyal Wangchuk Tenzing Namgyal, AIR 1985 Sikkim 23.
Principal and Interest on a Single Debt There was a divergence of opinion among the High Courts, as to whether the rules in these sections do or do not apply to the payment of principal amount and interest on a single debt.22 In Industrial Credit and Development Syndicate v. Smithaben H. Patel, 23 the Supreme Court approved the judgment of the High Court of Lahore24 and settled this controversy, holding that the principal and interest due on a single debt cannot be held to be several distinct debts for the application of s s. 59-61 of the Contract Act . As under the common law, the 'old and well settled rule' applies25 that where principal and interest has accrued on a debt, sums paid where interest has accrued must be applied first to the interest The earlier cases applied this rule in default of an intimation of appropriation by the debtor.26 The rule is said to be based on 'common justice', else it would 'deprive the creditor of the benefit to which he is entitled under his contract, and would be most unreasonable as against him.'27 22 See below 'Decretal Debt'. 23 AIR 1999 SC 1036, (1999) 3 SCC 80 at 86. 24 Jia Ram v. Sulakhan Mal, ILR (1941) Lah 740, 196 IC 625, AIR 1941 Lah 386 at 388 (FB). 25 Meghraj v. Bayabai, AIR 1970 SC 161, (1970) 1 SCR 523, (1969) 2 SCC 274 (amount under mortgage deposited in court, normal rule that amount deposited in court must first be applied towards interest, then costs, and then the principal amount); Commissioner of Income tax v. Kameswar Singh of Darbhanga, (1933) 60 IA 146, AIR 1933 PC 108 at 115 (presumption that payment to be first applied towards outstanding interest); Meka Venkatadri Appa Rao Bahadur Zamindar Garu v. Raja Parthasarathy Appa Rao Bahadur Zamindar Garu, AIR 1922 PC 233, (1921) LR 48 IA 150 at 153, ILR 44 Mad 570 at 573, 61 IC 31 (stated as an old settled rule); Jia Ram v. Sulakhan Mal, ILR (1941) Lah 740, 196 IC 625, AIR 1941 Lah 386(FB) ; Shanmugam Pillai v. Annalakhsmi Ammal, (1949) FCR 537, AIR 1950 FC 38; PC Lal Chaudhury v. State of Bihar, AIR 1952 Pat 453 (rule applies as a presumption of law); Kharavela Industries Pvt. Ltd. v. Orissa State Financial Corpn. AIR 1985 Ori 153. 26 Meghraj v. Bayabai, AIR 1970 SC 161, [1970] 1 SCR 523, (1969) 2 SCC 274; Meka Venkatadri Appa Rao Bahadur Zamindar Garu v. Raja Parthasarathy Appa Rao Bahadur Zamindar Garu, AIR 1922 PC 233, (1921) LR 48 IA 150 at 153, ILR 44 Mad 570 at 573, 61 IC 31; Munno Bibi v. Commr of Income-tax, AIR 1952 All 514; A Ramavel v. Pandyan Automobiles Pvt. Ltd. AIR 1973 Mad 359; Harishchandra v. Kailashchandra, AIR 1975 Raj 14 at 20;Life Insurance Corpn. of India v. Gadadhar De, AIR 1978 Cal 419; Syndicate Bank v. West Bengal Cements Ltd., AIR 1989 Del 107. 27 Parr's Banking Co. v. Yates, [1898] 2 QBD 460, [1895-99] All ER Rep Ext 1592; quoted with approval in Industrial Credit and Development Syndicate v. Smithaben H. Patel, AIR 1999 SC 1036, (1999) 3 SCC 80.
Decretal Debt The question whether the rules in these sections apply to a single decretal debt consisting of heads of principal, interest and costs, has now been settled by the Supreme Court in Industrial Credit and Development Syndicate v. Smithaben H Patel. 28 In this case, I had a decree against S for the amount of finances made available to S. The decree consisted of multiple heads: principal, interest and costs, and specified an instalment of Rs 20000 p.a. S paid some instalments accompanied by letters stating that the instalments were to be adjusted first towards the principal, and later towards the interest. I adjusted the amount first towards the interest, then towards the costs, and the balance towards the principal according to a standard banking practice, and sought to file execution proceedings for the balance. S contended that s. 59 of the Contract Act applied, and that the debtor had the option to indicate the heads of amounts towards which she made the payment; and that I had the option to refuse the amounts paid and pursue execution proceedings if it did not accept the appropriation. The High Court of Karnataka29 held that s. 59 applied to the decretal debts and the decrees for payment of amount under multiple heads, and that I accepted the payments without any objection. In appeal, the Supreme Court held:
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(i) (ii) (iii) (iv)
the rules of appropriation in s s. 59-61 applied to several distinct debts and not towards various heads of one debt; and applied only in the pre-decretal stage; section 60 could not be read independently of s. 59; the payment towards the decretal debt must be appropriated strictly, according to the directions in the decree, and in the absence of such direction, firstly, towards the interest and costs and thereafter, in payment of principal amount;30 this was subject to one exception, i.e., the parties may agree to the adjustment of payment in any other manner despite the decree. The onus of proving such an agreement would be on the person pleading agreement contrary to the general rule above or terms of the decree.
Earlier, it was held that the general rule was that if money is paid by the debtor to the decree-holder towards the decretal debt, without specifying whether it is towards interest or principal, the decree-holder was entitled to credit it, first, to the interest, and then, to the principal.31 However, there was divergence of views between the High Courts in a situation where the decree was silent about appropriation, and the judgment-debtor indicated the appropriation. On one hand it was held that, s s. 59-60 applied to such an appropriation,32 and, on the other hand, it was also held that these sections did not apply.33 The Supreme Court judgment, mentioned above, now settles this question. Payments made towards an instalment decree are to be presumed to be payments made towards the instalments, as they fall due.34 Where the amount of a decree was, by consent, made payable by five annual instalments, it was held that it was the duty of the court, when instalments were paid, to appropriate them to the earliest instalments paid.35 Where an award clearly distinguished between the amount due and interest, the creditor could appropriate decretal payments received by him first towards interest and then towards principal amount.36 The components of compensation, for land acquisition, solatium and interest on compensation are, by the express language and the scheme of the Land Acquisition Act, 1894, distinct and separate; and, the debtor can exercise the right of appropriation under the general principles of s s. 59 and 60.37 28 AIR 1999 SC 1036, (1999) 3 SCC 80; approving impliedly Meghraj v. Bayabai, AIR 1970 SC 161, [1970] 1 SCR 523, (1969) 2 SCC 274; reversing AIR 1997 Kant 188; overruling Central Warehousing Corpn. v. Govinda Choudhury & Sons, AIR 1989 Ori 90; see also Gurpreet Singh v. Union of India, (2006) 8 SCC 457, 2006 AIR SCW 5813. 29 Smithaben H. Patel v. Industrial Credit and Development Syndicate,AIR 1997 Kant 188. 30 Parr's Banking Co. v. Yates, [1898] 2 QBD 460, [1895-99] All ER Rep Ext 1592; referred to in Rulia Devi v. Raghunath Prasad, AIR 1979 Pat 115 at 177. 31 Life Insurance Corpn. of India v. Gadadhar De, AIR 1978 Cal 419; relying on Meghraj v. Bayabai, AIR 1970 SC 161, [1970] 1 SCR 523, (1969) 2 SCC 274; Rulia Devi v. Raghunath Prasad, AIR 1979 Pat 115; Harishchandra v. Kailashchandra, AIR 1975 Raj 14 at 20; Kharavela Industries Pvt. Ltd. v. Orissa State Financial Corpn., AIR 1985 Ori 153; PNB Dharamshala v. Prem Sagar Chaudhary, AIR 1996 HP 86 (applying s. 60). 32 Badri Narayan Singh v. Kalyan Prasad Shroff, A IR 1956 Pat 522; Life Insurance Corpn. of India v. Gadadhar De, AIR 1978 Cal 419; Kedar Nath Jai Prakash v. Chajju Mal Sumerchand, AIR 1962 All 586 (instalment decree with default clause). 33 Meka Venkatadri Appa Rao Bahadur Zamindar Garu v. Raja Parthasarathy Appa Rao Bahadur Zamindar Garu, AIR 1922 PC 233; (1921) LR 48 IA 150 at 153, ILR 44 Mad 570 at 573, 61 IC 31; Banarsi Das v. Collector of Saharanpur, AIR 1936 All 712; Jia Ram v. Sulakhan Mal, ILR (1941) Lah 740, 196 IC 625, AIR 1941 Lah 386(FB) ; Wasudeo Ramchandra v. Namdeo Ganpatrao, AIR 1951 Nag 155; KG Jacob v. Ittyavira George, AIR 1951 Tr & Coch 80; Meghraj v. Bayabai, AIR 1970 SC 161, [1970] 1 SCR 523, (1969) 2 SCC 274; Punjab National Bank v. Prem Sagar Choudhary, AIR 1988 HP 33 at 35. 34 Badri Narayan Singh v. Kalyan Prasad Shroff, A IR 1956 Pat 522. 35 Harkisondas Lakhmidas Pyarathi v. Nariman Dadabhoy Parsi, (1927) 104 IC 673, AIR 1927 Bom 479; Govindrao v. Narayan, ILR (1945) Nag 885, 222 IC 350, AIR 1945 Nag 277 (the court cannot appropriate the amount towards any particular instalment); Munno Bibi v. Commr of Income-tax, AIR 1952 All 514. 36 BHEL v. R S Avtar Singh, (2013) 1 SCC 243.
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37 Prem Nath Kapur v. National Fertilizers Corpn. of India, (1996) 2 SCC 71; overruling Mathunni Mathai v. Hindustan Organic Chemicals Ltd., AIR 1995 SC 1572, (1995) 4 SCC 26.
Revenue to the Government Where there was no appropriation by consent, the question arose whether these provisions applied to arrears of revenue payable to the government. Maclean CJ. expressed the opinion that s s. 59-61 did apply to transactions in relation to the realisation of land revenue.38 The issue was not decided by the Privy Council, as the case was one of an appropriation by mutual consent. However, it was observed that the sections might have been applicable to the case, if the parties had not, by their own actions, placed the matter beyond doubt.39 The intention of an assessee must be presumed to be in favour of an appropriation, and, in the least, disadvantageous to himself.40 38 Jogendra Mohan Sen v. Uma Nath Guha, (1908) ILR 35 Cal 636. 39 Mahomed Jan v. Ganga Bishun Singh, (1910) 38 IA 80, (1908) 38 Cal 537 at 541 (PC); Dasharathi Ghosh v. Khondkar Abdul Hannan, (1927) 55 Cal 624, 105 IC 15, AIR 1928 Cal 68, decided on another point. 40 Chidambaram Chettiar v. Commr of Income-tax, (1966) 2 Mad LJ 452; following Commissioner of Income-tax v. Kamestoar Singh of Darbhanga, (1933) 60 IA 146, AIR 1933 PC 108 at 115.
Contract of Guarantee The right to appropriate, is available to the principal debtor, and not to the surety.41 A surety is also bound by the creditor's appropriation.42 Where, one of the debts is guaranteed by a surety, and another is not, the mere fact that there exists a surety does not deprive the debtor or the creditor of the power of appropriation.43 Also, the surety has no right to insist on the appropriation of any payment to the guaranteed debt, unless the circumstances of the case are such that, they show that this was intended.44 41 AKA Khan Ghuznavi v. National Bank of India Ltd., AIR 1917 Cal 537 at 544. 42 Kuckreja Ltd. v. Said Alam, ILR (1941) Lah 323, 193 IC 206, AIR 1941 Lah 16. 43 Kirby v. Duke of Marlborough, (1813) 2 M&S 18, [1803-13] All ER Rep 502; Williams v. Rawlinson, (1825) 3 Bing 71, [1824-34] All ER Rep 155; Sherry, re London and County Banking Co. v. Terry, (1884) 25 Ch D 692(CA) . 44 Pearl v. Deacon, (1857) 1 De G&J 461; Kinnaird v. Webster, (1878) 10 Ch D 139; Plomer v. Long, (1816) 1 Stark 153; Sherry, re London and County Banking Co. v. Terry, (1884) 25 Ch D 692(CA) .
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER IV Of the Performance of Contracts/Contracts which must be performed/S. 60.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which must be performed
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S. 60. Application of payment where debt to be discharged is not indicated.-Where the debtor has omitted to intimate and there are no other circumstances indicating to which debt the payment is to be applied, the creditor may apply it at his discretion to any lawful debt act ually due and payable to him from the debtor, whether its recovery is or is not barred by the law in force for the time being as to limitation of suits.
Introduction Where, the debtor has neither intimated the application of a payment to a particular debt, nor are there any circumstances from which, an intimation may be implied, the creditor has an option, under s. 60, to make an appropriation, according to his discretion.44 44 Central Warehousing Corpn. v. Govinda Choudhary & Sons, AIR 1989 Ori 90 at 95; Rai Bahadur Seth Nemichand v. Seth Radha Kishen, AIR 1922 PC 26.
Creditor's Right to Appropriate If the debtor does not make any appropriation, at the time when he makes the payment, the right of application devolves upon the creditor, and the creditor has the right to appropriate it to any debt actually due, and payable to him, by the debtor.45 The creditor cannot appropriate the payment by the debtor, to any debt he wishes, unless the debtor has failed to indicate any appropriation. When a debtor passed two mortgage bonds to his creditor, one of which carried an interest payable with rests, and the other carried a simple interest, and the creditor appropriated the payments made by the debtor, towards the interest on the bond carrying simple interest, it was held that the creditor was entitled to apply the payments to either of the debts, and that the mere reluctance of the debtor to pay a compound interest before he executed the mortgage bond at such an interest, was not an indication of the debtor's intention that his payments should be applied to that bond.46 The right of appropriation may be exercised by the creditor, at any time up to the very last moment, even when he is being examined at the trial of the case,47 or even up to the pronouncement of the judgment;48 or, until he has finally exercised the right, or something has happened, which would render it inequitable for him to exercise it.49 In Rama Shah v. Lal Chand, 50 the Privy Council observed:
This is the same rule as that laid down as English law by the House of Lords in Cory Bros. & Co. Ltd. v. Turkish Steamship (the Mecca), 51 and under it the creditor has a right to appropriate a payment by the debtor to the principal or to the interest of the same debt. There is no obligation upon the creditor to make the appropriation at once, though when once he has made an appropriation and communicated it to the debtor he would have no right to appropriate it otherwise (cf per Lord Herschell in Cory'scase). Lord Macnaghten's language in that case is equally applicable under ss. 60 and 61 of the Indian Contract Act : 'Where the election is with the creditor, it is always his intention express or implied or presumed, and not any rigid rule of law that governs the application of the money'.
A creditor who is making the appropriation need not declare his intention to do so, in express terms.52 He has considerable latitude to make the appropriation of payments,53 and is entitled to place himself in the most advantageous position.54 He is entitled to appropriate the payment towards debts, in a chronological order,55 or even contrary to any intermediate direction from the debtor, given after the payment,56 irrespective of any prejudice that may be caused to third persons having claims against the debtor.57 Where the debtor has given a security for a particular liability, the creditor is not prevented from
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appropriating the payment in order to clear off a prior debt, before giving credit, in reduction of the liability, for which the security has been given.58 A secured creditor may, thus, appropriate payments towards a non-preferential part of his claim.59 As long as a notice has not been given, as regards the appropriation of any amount, to any particular account, the creditor can alter it, and make a re-appropriation.60 45 State of Gujarat v. Bank of Baroda, AIR 1997 Guj 130 (debtor having a number of accounts with a Bank). 46 Rameswar Koer v. Mohomed Mehdi Hossein Khan, (1898) 26 Cal 39, (1898-99) ILR 25-26 Cal 629. 47 Seymour v. Pickett, [1905] 1 KB 715; Smith v. Betty, [1903] 2 KB 317; Commissioner of Income-tax v. Kameswar Singh of Darbhanga, (1933) 60 IA 146, AIR 1933 PC 108 at 115. 48 Commissioner of Income-tax v. Kameswar Singh of Darbhanga, (1933) 60 IA 146, AIR 1933 PC 108 at 115; Gajram Singh v. Lala Kalyan Mal, (1935) 58 ER 791, 166 IC 423, AIR 1937 All 1(FB) (but not thereafter, even if the case goes to appeal); Uthup v. Kurian Kathanar, AIR 1960 Ker 90; Syndicate Bank v. West Bengal Cements Ltd., AIR 1989 Del 107 at 115 (cheque handed over to the counsel in court, but without instructions as to its appropriation--adjustment towards dues other than the principal upheld); S Amerchand & Co. v. Ramdas Vithaldas Durbar, (1914) 38 Bom 255 at 264-65, 21 IC 343, AIR 1914 Bom 290 (judgment not challenged on this point in appeal in the Privy Council Ram Das Vithaldas Durbar v. S Amerchand & Co. 43 IA 164, ILR 40 Bom 630, 35 IC 954) (1916); Manamathi Munusawmi Mudali v. Perumal Mudaly, (1919) 37 Mad LJ 367, 52 IC 950, AIR 1919 Mad 534; Relu Mal v. Ahmad, (1926) 7 Lah 17, AIR 1926 Lah 183, 92 IC 947; Kunjamohan Shaha Poddar v. Karunakanta Sen Chaudhuri, (1933) 60 Cal 1265, 149 IC 262, AIR 1934 Cal 40. 49 Cory Brothers & Co. v. Turkish Steamship (Owners) the Mecca, [1897] AC 286, [1895-99] All ER Rep 933(HL) ; Smith v. Betty, [1903] 2 KB 317(CA) ; Seymour v. Pickett, [1905] 1 KB 715(CA) . 50 (1940) 67 IA 160 at 174, ILR (1940) Lah 470, 187 IC 233, AIR 1940 PC 63; Commissioner of Income- tax v. Kameswar Singh of Darbhanga, (1933) 60 IA 157, AIR 1933 PC 108 at 115; M Raghava Reddiar v. Odur Devarajulu Reddiar, AIR 1943 Mad 236; Central Warehousing Corpn. v. Govinda Choudhary & Sons, AIR 1989 Ori 90 at 95. 51 [1897] AC 286, [1895-99] All ER Rep 933. 52 MC Chegganmull Sowcar v. Desur Manicka Mudaliar, AIR 1926 Mad 792; Kunjamohan Shaha Poddar v. Karunakanta Sen Chaudhari, (1933) 60 Cal 1265, 149 IC 262, AIR 1934 Cal 40 at 42; Firm Raghunathji Piroolal v. Kisanlal Tulsiram, AIR 1937 Nag 94 at 95; Cory Brothers & Co. v. Owners of Turkish Steamship (the Mecca) [1897] AC 286 per Lord Macnaghten at 293, [1895-99] All ER Rep 933(HL) ; followed in FH Manisty v. JV Jameson, (1925) 5 Pat 326, 94 IC 273, AIR 1926 Pat 330. 53 KG Jacob v. Ittyavira George, AIR 1951 Tr & Coch 80 at 81. 54 Manamathi Munusawmi v. Mudali v. Perumal Mudaly, (1919) 37 Mad LJ 367, 52 IC 950, AIR 1919 Mad 534. 55 Abdul Aziz v. Munna Lal, AIR 1921 All 325; FH Manisty v. JV Jameson, (1925) 5 Pat 326, 94 IC 273, AIR 1926 Pat 330; Badri Narayan Singh v. Kalyan Prasad Shroff, AIR 1956 Pat 522. 56 Maharaja Prabirendra Mohan Tagore v. Anil Kumar Chattopadhya, AIR 1956 Cal 570. 57 Manamathi Munusawmi Mudali v. Perumal Mudaly, (1919) 37 Mad LJ 367, 52 IC 950, AIR 1919 Mad 534. 58 Sankararama Iyer v. TM Ponnuswami Pillai, AIR 1919 Mad 471; Kuckreja Ltd. v. Said Alam, ILR (1941) Lah 323, 193 IC 206, AIR 1941 Lah 16. 59 Re William Hall (Contractors) Ltd.,[1967] 2 All ER 1150, [1967] 1 WLR 948. 60 MC Chegganmull Sowcar v. Desur Manicka Mudaliar, AIR 1926 Mad 792 (even after entry has been made in the creditor's books); FH Manisty v. JV Jameson, (1925) 5 Pat 326, 94 IC 273, AIR 1926 Pat 330; Imperial Bank of India v. VP Avanasi Chettiar, AIR 1930 Mad 874.
Appropriation Towards Lawful Debt A creditor can appropriate a payment towards any lawful debt, including one barred by the lapse of time, or which is unenforceable on account of some formal defect in the contract, upon which it arises.61 The creditor invoking this section, must establish the existence of a lawful debt actually due, towards which the appropriation was made.62 An appropriation, under s. 60, cannot be made towards an illegal debt; therefore, payments made by an unlicensed dealer to a licensed dealer (licensed under the Bihar Cotton, Cloth and Yarn Dealers (Licensing and Control) Order, 1944, could not be appropriated by the licensed
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dealer, towards the price of a standard cloth sold by him, to the unlicensed dealer, the sale being contrary to law.63 61 Cruickshanks v. Rose, (1831) 1 Mod Rep 100 (debt due for liquor supplied in quantities contravening statute); Mills v. Fowkes, (1839) 5 Bing NC 455 (statute-barred debt); Seymour v. Pickett, [1905] 1 KB 715(CA) (unqualified dentist help entitled to appropriate payment towards charges which he was not legally entitled to enforce owing to his not being qualified); Arnold v. Poole Corpn., (1842) 4 M & G 860, [1835-42] All ER Rep 188 (appropriation to fees of a solicitor which were not recoverable for want of a retainer under seal); Stepney Corpn. v. Osofsky, [1937] 3 All ER 289(CA) (charges by local authority for services which were irrecoverable by lapse of time). 62 Zahiruddin Muhommed v. M Subba Rao, AIR 1954 Ori 130; Brindarani Dassya v. Narendra Nath Mitra, AIR 1928 Cal 229. 63 Sewsagar Avasty v. Satyanarain Sah, AIR 1960 Pat 145.
Appropriation towards time-barred Debt When a debtor makes a payment, without any direction as to its appropriation, the creditor has the right to appropriate it towards a time-barred debt.64 This frequently happens where there is a running account, extending over several years. The creditor may, in such a case, appropriate the payments to the earliest items, which were barred by limitation, and may sue for the balance, which was not so barred.65 However, whether he can appropriate it to the entire of the balance till date, so as to save limitation in respect of all the items of the debt, is a question on which various High Courts differ; some holding that he can,66 while others holding that he cannot save limitation by doing so.67 A payment cannot be appropriated to a statute-barred debt, after an act ion has been brought, and judgment given, directing an account to be taken, of the amount due, excluding the statute barred items.68 Where a creditor made an appropriation in part-payment of a debt, barred by a lapse of time, such a part-payment did not operate to defeat the operation of the statutory bar, with regard to the unpaid portion of the debt.69 64 Bombay Dyeing and Mfg Co. Ltd. v. State of Bombay, [1958] SCR 1122 at 1134; Maurice Mayahas v. W Morley, AIR 1925 Cal 937; Firm Jiban Ram Ramchander v. Sagarmal Khemka, AIR 1933 Pat 267, 145 IC 611; Punjab National Bank Ltd. v. Official Receiver, AIR 1940 Lah 166; Krishnasami Iyer v. Natesa Iyer, AIR 1930 Mad 594. 65 Bishun Perkash Narain Singh v. Muhammad Sadique, AIR 1916 Pat 326, (1916) 1 Pat LJ 474; Firm Jiban Ram Ramchander v. Sagarmal Khemka, AIR 1933 Pat 267, 145 IC 611; Kamaleshwari Prasad v. GangadharMal, AIR 1940 Pat 52, 186 IC 855; Har Sahay Mull v. Gokul Chand, AIR 1947 Pat 273, 227 IC 36; A Ramavel v. Pandyan Automobiles Pvt. Ltd. AIR 1973 Mad 359. 66 Sukhdeo Prasad Baldeo Prasad v. J Michael Christian, AIR 1938 Nag 266; Chandra Nath v. Pahlad Narain, AIR 1961 Raj 154; Najan Ahmed Haji Ali v. Salemahomed Peermahomed, AIR 1923 Bom 113 (by course of dealings, the demands were united and formed one cause of action). 67 Abdul Aziz v. Munna Lal, AIR 1921 All 325; Firm Puttu Lal Kunji Lal v. Firm B Jagannath, AIR 1935 All 53; Atmaram Vinayak Kirtikar v. Lalji Lakhamsi, AIR 1940 Bom 158; Firm Gulabrai Narain Das v. Firm Ilahi Bux Muhammed Ayub, AIR 1945 All 185; AKS Muhammad Sultan Rowther & Co. v. Manickam Chettiar, AIR 1961 Mad 388. 68 Smith v. Betty, [1903] 2 KB 317(CA) . 69 Friend v. Young, [1897] 2 Ch 421.
Compositions Where a payment is made by way of a dividend, or composition, for the benefit of the creditors, in general, the payments must, by the nature of the transaction, be rateably apportioned among the several debts; and, in any question arising with regard to the third parties, as, for example, sureties for any portion of the
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debts, every payment is deemed to be specifically appropriated, 'as so much in each and every pound of the whole amount of the debt'.70 70 Bardwell v. Lydall, (1831) 7 Bing 489, p. 494, 33 RR 540 at 545.
Current Account In the case of a current account, 'there is no room for any other appropriation than that which arises from the order in which the receipts and the payments take place, and are carried into the account. Presumably it is the sum first paid in, that is first drawn out. It is the first item on the debit side of the account, that is discharged, or reduced, by the first item on the credit side. The appropriation is made by the very act of setting the two items against each other.71 The right of appropriation, by the creditor, does not arise in the case of a current account. The presumption may be rebutted, if a different intention appears from the circumstances, or by a stipulation, between the parties.72 71 Devaynes v. Noble (Clayton's case) (1816) 1 Mer 572 at 608, 15 RR 161, [1814-23] All ER Rep 1; Deeley v. Lloyd's Bank Ltd., [1912] AC 756, [1911-13] All ER Rep Ext 1149(HL) ; Re Primrose (Builders) Ltd., [1950] Ch 561, [1950] 2 All ER 334; Re Yeovil Glove Co. Ltd. [1965] Ch 148, [1964] 2 All ER 849; Re James R Rutherford & Sons Ltd.,[1964] 1 WLR 1211, [1964] 3 All ER 137; Firm Jiban Ram Ramchander v. Sagarmal Khemka, AIR 1933 Pat 267, 145 IC 611; Sarab Dial v. Nanda Mal Wazir Chand, AIR 1936 Pesh 143. 72 Cory Bros & Co. v. Owners of Turkish Steamship (the Mecca), (1897] AC 286, [1895-99] All ER Rep 933(HL) .
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER IV Of the Performance of Contracts/Contracts which must be performed/S. 61.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which must be performed S. 61. Application of payment where neither party appropriates.-Where neither party makes any appropriation the payment shall be applied in discharge of the debts in order of time, whether they are or are not barred by the law in force for time being as to the limitation of suits. If the debts are of equal standing, the payment shall be applied in discharge of each proportionately.
Introduction Section 61 will be applicable only when the parties have indicated no intention which is inconsistent with its application.73 In the absence of any appropriation by the debtor or the creditor, the court74 would direct
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that the payment should be applied in discharge of the debts in the order of time, and, if the debts are of the same date, in the discharge of each of them, proportionately.75 This section must be read in continuation with s. 60. It does not lay down a strict rule of law, only lays down a rule to be applied in the absence of anything else to show the intention of the parties. Not only any express agreement, but also the mode of dealing of the parties, must be looked into. On the other hand, the circumstances may show that the accounts, which, it was at a party's option to treat as separate, were, in fact, treated as continuous, and then payment would be appropriated to the earliest unpaid item in the combined account.76 73 S Amerchand & Co. v. RamDas Withaldas Durbar, (1914) 38 Bom 255, 21 IC 343, AIR 1914 Bom 290. 74 Commissioner of Income-tax v. Kameswar Singh of Darbhanga, (1933) 60 IA 146, AIR 1933 PC 108 (Income-tax officer can treat amount received as first applicable to outstanding interest); but see Munno Bibi v. Commr of Income-tax, AIR 1952 All 514 (Income-tax officer is not a court, and cannot apply s. 61). 75 Bishun Perkash Narain Singh v. Muhammad Sadique, AIR 1916 Pat 326, (1916) 1 Pat LJ 474; Ram Nath v. Chiranji Lal, AIR 1935 All 221(FB) ; Gajram Singh v. Lala Kalyan Mal, (1935) 58 ER 791, 166 IC 423, AIR 1937 All 1(FB) ; Uthup v. Kurian Kathanar, AIR 1960 Ker 90. 76 Hooper v. Keay, [1875] 1 QBD 178 (current account with continuing partner after dissolution of firm); Sha Manmall Misrimall v. K Radhakrishnan, AIR 1972 Mad 108.
Rateable Distribution In Gajram Singh v. Kalyan Mal, 77 the court had to consider 'whether it is open to a mortgagee of a joint family property, under a mortgage deed executed by the manager of the joint family when a portion of the mortgage debt was not raised for legal necessity, to appropriate during the pendency of the suit payments made by the mortgagor, towards the discharge of such portion of the debt as was not raised for legal necessity, when no appropriation was made either by the mortgagor or the mortgagee till the date of the suit.' The creditor had not appropriated the debt in the trial court. It was held that the payment should be rateably distributed between the two portions of the debt. 77 Gajram Singh v. Lala Kalyan Mal, [1935] 58 ER 791, 166 IC 423, AIR 1937 All 1(FB) .
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER IV Of the Performance of Contracts/Contracts which need not be performed/S. 62.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which need not be performed S. 62. Effect of novation, rescission and alteration of contract.-If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original
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contract need not be performed. Illustrations (a) (b) (c)
A owes money to B under a contract. It is agreed between A, B and C, that B shall thenceforth accept C as his debtor instead of A . The old debt of A to B is at an end, and a new debt from C to B has been contracted. A owes B 10,000 rupees. A enters into an arrangement with B, and gives B a mortgage of his (A's) estate for 5,000 rupees in place of the debt of 10,000 rupees. This is a new contract and extinguishes the old. A owes B 1,000 rupees under a contract. B owes C l,000 rupees. B orders A to credit C with 1,000 rupees in his books, but C does not assent to the arrangement. B still owes C 1,000 rupees, and no new contract has been entered into.
Introduction The section provides for discharge of contractual obligations where the contract is substituted with a new contract, or altered or rescinded by all the parties to it.
Discharge by Agreement The parties to a contract are free to substitute or rescind the entire contract, or to modify, alter, vary or rescind some of its terms. Novation or modification of a contract can take place in the same manner as the conclusion of a contract. If one party proposes a novation, and the other party accepts this proposal in a qualified manner, there is no novation.78 Where, after the contract, one party made a suggestion to the promisee that in view of certain difficulties he should cancel his contract at par and receive back his advance, and that suggestion was accepted by the other party, a new contract was made.79 A mutual abandonment, cancellation or rescission must be clearly expressed; and in the absence of express or implied terms, can be deduced from the conduct of parties.80 A novation, modification or revocation (rescission) of the contract cannot be effected unilaterally by one party;81 it requires the consent of all the parties.82 There may not be any rescission where one party accepts 'under protest' return of price from the other party.83 The substituted contract must be a valid and enforceable contract to be effective as a novation;84 as also the original contract, if the new contract is to be enforceable.85 But if by reason of any want of formality, such as registration, the document containing the new contract is inadmissible in evidence, the original contract might still be operative.86 For example, an unregistered mortgage did not operate as a novation, so as to rescind a previous contract based on an account stated.87 This section requires an agreement, which necessarily implies consideration;88 it does not require any further consideration for validity of the substituted contract than putting an end to the mutual obligations under the original contract.89 A release from an existing obligation is good consideration for a promise to undertake a fresh obligation,90 whether the obligation is 'to do something in futuro, or is an obligation to pay a debt already due, or is an obligation to pay compensation for the breach of a contract'.91 Where the original contract is otherwise discharged, viz. as fully performed, any attempted substitution will be without consideration and unenforceable.92 Although obligations in futuro may be sufficiently repudiated by one party with the assent of the other party, this principle is not applicable to rights in property.93 The UNIDROIT Principles provide that a contract can be modified or terminated:94
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(i) (ii) (iii)
in accordance with its terms; or by agreement; or as otherwise provided in the Principles.95
Apart from these provisions, a mistaken party to the contract may be prevented from avoiding the contract if the other party declares itself willing to perform or act ually performs the contract as it was understood by the mistaken party. The mistaken party then loses the right of avoiding the contract, and the contract stands adapted.96 78 Narendra Bahadur Singh v. Oudh Commercial Bank Ltd., AIR 1915 Oudh 31 (qualified acceptance). 79 Shimoga Oil Mills v. Radhakrishna Oil Mills, AIR 1952 Mys 111. 80 Firm Sohan Lal Arjan Dass v. Firm Banwari Lal Vishwa Nath, AIR 1960 Punj 549. 81 Sunder Lal Vasudeva v. Siale of Punjab, AIR 1957 Punj 140(alteration) ; Hajee M Ahamed Koya v. E Murugesa, AIR 1958 Ker 195(cancellation) ; DCW Ltd. v. State of Tamil Nadu, AIR 2005 Mad 264 (renewal of lease); Hardesh Ores (P) Ltd. v. Hede and Co, (2007) 5 SCC 614 (renewal of lease); Allahabad Jal Sansthan v. State of Uttar Pradesh, AIR 2004 All 366 (increase in insurance premium); Citibank NA v. Standard Chartered Bank, AIR 2003 SC 4630, (2004) 1 SCC 12. 82 YAJ Noorbhai v. SPLKR Karuppan Chetty, AIR 1925 PC 232; Debendra Nath Ghosh v. New Thethurya Coal Co. Ltd. AIR 1920 PC 136(lease) ; Gobind v. Chhajjan, AIR 1961 Punj 202; K Appukuttan Panicker v. SKRAKR Athapa Chettiar, AIR 1966 Ker 303; DCW Ltd. v. State of Tamil Nadu, AIR 2005 Mad 264; Citibank NA v. Standard Chartered Bank, AIR 2003 SC 4630, (2004) 1 SCC 12; Delhi Development Authority N D v. Joint Action Committee, Allottee of SFS Flats, AIR 2008 SC 1343, (2008) 2 SCC 672; see also Zoom-Toshali Sands Consortium v. Indian Railway Catering & Tourism Corporation Ltd., 200 (2013) DLT 790. 83 Rattan Lal v. S N Bhalla, AIR 2012 SC 3094, 2012 (8) SCC 659. 84 Har Chandi Lal v. Sheoraj Singh, (1917) LR 44 IA 60, 39 All 178, 39 IC 343, AIR 1916 PC 68; V Venkataramiah Pantulu v. PV Subramaniam Pillai, AIR 1915 Mad 137; Abdul Kayam Amadajibhai v. Bahadur Vithoba, (1911) 14 Bom LR 26; Ganpat v. Mahadeo, AIR 1925 Nag 26, 85 IC 264; SA Rajamier v. MRMA Subramaniam Chettiar, AIR 1928 Mad 1201; Angan Lal v. Saran Behari Lal, (1929) All LJ 127, 121 IC 221, AIR 1929 All 503; Davinder Singh v. Lachhmi Devi, AIR 1930 Lah 985; AR Dower v. Sohan Lal Anand, AIR 1937 Lah 816; Thadi Murali Mohana Reddi v. Medapati Gangaraju, AIR 1941 Mad 772(FB) ; Shankarlal Damodhar v. Ambalal Ajaipal, ILR (1946) Nag 500, AIR 1946 Nag 260; Laxman Waman Halde v. Balmukund Jainarain, AIR 1954 Nag 142; Pannalal v. Labhchand, AIR 1955 MB 49; Dammulal Babulal Jain v. Mohammad Bhai Haji Suleman Kacchi, AIR 1955 Nag 306; Vishram Arjun v. Irukulla Shankariah, AIR 1957 AP 784; Purangir v. Bhawanigir, AIR 1957 HP 11; Mahabir Prasad Mawandia v. Satyanarain Kotriwala, AIR 1963 Pat 131. 85 Ratanlal v. Firm Mangilal Mathuralal, AIR 1963 MP 323; Abdul Kayam Amadajibhai v. Bahadur Vithoba, (1911) 14 Bom LR 26. 86 Nundo Kishore Lall v. Ramsookhee Kooer, (1879) 5 Cal 215; Raja Ram v. Meher Khan, (1882) Punj Rec No 66; Udho Shah v. Hira Shah, (1897) Punj Rec No 71; Abdul Kayam Amadajibhai v. Bahadur Vithoba, (1911) 14 Bom LR 26; Mathura Mohan Saha v. Ramkumar Saha, AIR 1916 Cal 136 at 147, 35 IC 305 at 317; Gharati Hiracharan Kalar v. Kehar Mansaram, AIR 1937 Nag 104; Hakim Kanhaiya Prasad v. Hamidan, (1938) All 714, AIR 1938 All 418(FB) ; Shankarlal Damodhar v. Ambalal Ajaipal, ILR (1946) Nag 500, AIR 1946 Nag 260; Chhogalal v. Kanayalal, AIR 1958 Raj 303. 87 Chhogalal v. Kanayalal, AIR 1958 Raj 303. 88 Union of India v. Kishorilal Gupta & Bros, AIR 1953 Cal 642. 89 Gouri Dutt Ganesh Lall Firm v. Madho Prasad, AIR 1943 PC 147; Vasudeva Mudaliar v. MA Velappa Nadar, AIR 1918 Mad 297; Seenia Pillai v. Taluk Board of Shermadevi, AIR 1931 Mad 200; New Standard Bank Ltd. v. Probodh Chandra Chakravarty, (1941) 2 Cal 237, AIR 1942 Cal 87; Todarmal Tejmal v. Chironjilal Gopilal, AIR 1956 MB 25; Kedarnath Lal v. Sheonarain Ram, AIR 1957 Pat 408. 90 Brijmohan v. Mahabeer, (1935) ILR 63 Cal 194. 91 (1935) ILR 63 Cal 194, per Pankridge J, at 202. 92 Food Corpn. of India v. Surana Commercial Co, (2003) 8 SCC 636. 93 V Venkataramiah Pantulu v. PV Subramaniam Pillai, AIR 1915 Mad 137. 94 UNIDROIT Principles, Art. 1.3.
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95 See below, 'Variation or Rescission by Court'. 96 UNIDROIT Principles, Art. 3.13.
Novation The word 'novation' is used in the marginal note to the section, and is the accepted catchword for its subject matter. It has been thus defined: 'that, there being a contract in existence, some new contract is substituted for it either between the same parties (for that might be) or between different parties, the consideration mutually being the discharge of the old contract. Novation of a contract comprises two elements: the discharge of one debt or debtor and the substitution of a new debt or debtor.'97 It is well settled that the parties to an original contract can, by mutual agreement, enter into a new contract in substitution of the old one.98 Novation is a substitution of the contract and not mere variation of some of its terms. It should rescind or extinguish the previous contract.99 Novation under s. 62 is brought about by:
(a) (b)
introduction of new parties; or by alteration between the same parties by introduction of new terms.
It is not consistent with the original debtors remaining liable on the old contract. Substitution of a new contract is the core of novation. Its essential feature is that a right under the original contract is relinquished or replaced by a new contract. Where these essentials are missing there is no novation.1 Under Indian law, one of the requisites of such novation is the agreement of all the parties to the new contract.2 The consent of the parties may be established by circumstances showing such assent as well as by express words.3 Novation would occur when the substituted contract should rescind or extinguish the previous contract, such that the terms of the two contracts should be so inconsistent that they cannot stand together or render impossible the performance of the former.4 Whether in any particular case there was a complete novation of a contract in the sense that the new contract replaced or substituted the old contract would depend upon the facts and circumstances of the case.5 The essence of novation lies not in the dissimilarity of terms between the two contracts, but in the intention of the parties to supersede the old by the new one.6 97 Scarf v. Jardine, (1882) 7 App Cas 345 at 351, [1881-85] All ER Rep 651; State of Bihar v. Ram Ballabh Das Jalan, AIR 1960 Pat 400. 98 Union of India v. Kishorilal Gupta & Bros, [1960] 1 SCR 493, AIR 1959 SC 1362; Payana Reena Saminathan v. Pana Lana Palaniappa, (1914) 41 IA 142, [1914] AC 618(PC) ; Morris v. Baron & Co. [1918] AC 1; British Russian Gazette & Trade Outlook Ltd. v. Associated Newspapers Ltd., [1933] 2 KB 616, [1933] All ER Rep 320; Srinivasa Pillai v. Muthayya Pillai, AIR 1956 Mad 364; Gyarsilal Jagannathprasad Mor v. Pandit Sitacharan Dubey, AIR 1963 MP 164. 99 Kshetra Nath Sikdar v. Harasukdas Balkissen Das, 102 IC 871, AIR 1927 Cal 538; Vishram Arjun v. Irukulla Shankariah, AIR 1957 AP 784; Indian Bank v. S. Krishnaswamy, AIR 1990 Mad 115. 1 State of Bihar v. Ram Ballabh Das Jalan, AIR 1960 Pat 400; State Bank of India v. TR Seethavarma, AIR 1995 Ker 31. 2 Gyarsilal Jagannathprasad Mor v. Pandit Sitacharan Dubey, AIR 1963 MP 164. 3 Ibid. 4 Vishram Arjun v. Irukulla Shankariah, AIR 1957 AP 784; Lata Construction v. Dr. Rameshchandra Ramniklal Shah, AIR 2000 SC 380. 5 RN Kumar v. RK Soral, (1988) 2 SCC 508 at 511; New Standard Bank Ltd. v. Probodh Chandra Chakravarty, (1941) 2 Cal 237, AIR 1942 Cal 87; Kedar Nath Pandey v. Kripal, AIR 1944 Oudh 63.
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6 ALARRM Arunachallam Chetti v. B Raja Rajeswara Sethupathi, AIR 1925 Mad 1260; Bhabhuti Prasad v. Parbati Kuar, AIR 1935 Oudh 366, 155 IC 534; Kodusao Onkarlal Firm Seoni v. Surajmal Narayanji, AIR 1936 Nag 37; Lal Surendra Bahadur Singh v. Sarda Singh, AIR 1945 Oudh 29; Canara Industrial and Banking Syndicate Co. Ltd. v. Narayan Venkatesh Shenoy, AIR 1942 Bom 15; Vishram Arjun v. Irukulla Shankariah, AIR 1957 AP 784.
Formalities A subsequent contract substituting the original contract, or rescinding it or altering it, may be oral or in writing, or may be implied from the conduct of the parties. Section 92 of the Indian Evidence Act, 1872, which excludes oral evidence for the purpose of varying, adding to or subtracting from the terms of a contract, or any matter required by law to be in writing. However, proviso 4 of the section provides that the existence of any distinct subsequent oral agreement to rescind or modify such contract, grant or disposition of property may be proved. But where the original contract is of such a nature as that the law requires to be in writing or where its execution has been followed by registration, the only manner of proving the rescission or modification of the original contract will be by proof of an agreement with a like formality. However, parties will be bound by the amendment clause they agree which requires that any alteration shall be in writing.7 7 Videocon Industries Ltd v. Union of India, AIR 2011 SC 2040, 2011 (6) SCC 161.
Effect of Novation, Alteration or Rescission After a novation, if the subsequent contract is enforceable, that will govern the relationship of the parties and the obligor will stand relieved of his prior obligations.8 The substituted agreement gives a new cause of action and obliterates the earlier ones;9 and limitation will be counted on the basis of the new promise.10 Where two parties settle accounts and release each other from mutual obligations, the point of time at which such settlement and release take place would be the time at which the contract terminates.11 Upon a mortgage finally merging into a sale, the earlier contract becomes unenforceable and sale deed alone can be challenged.12 An agreement of sale by a landlord agreeing to sell the premises to the tenant, can end the landlord tenant relationship.13 8 Babu Manmohan Das v. Baldeo Narain Tamlon, AIR 1938 PC 66; Gharabharan v. Sri Radha Kishan, AIR 1958 All 313; Godhu Mal v. Ganga Hasso Mal Idnani, AIR 1958 All 26; Century Spg & Mfg Co. Ltd. v. Motilal Dhariwal, AIR 1966 MP 313. 9 Union of India v. Kishorilal Gupta & Bros, AIR 1959 SC 1362, [1960] 1 SCR 493. 10 Mendi Lal v. Ram Chandu, AIR 1925 Oudh 632. 11 G Narayana Gowda v. BL Narayanaswami, AIR 1960 Mys 150(DB) . 12 Catholic Church v. Vishal Kumar, AIR 1990 NOC 96(J&K) . 13 R Kanthimathi v. Beatrice Xavier, AIR 2003 SC 4149, (2000) 9 SCC 339.
Intention of novation Whether or not there is a novation of a contract, is in each case a question of fact, which this section does not in any way prejudge.14 Whether there is novation or not depends on the intention of the parties, as seen from the substance of the agreement and not merely the form.15 If there is no intention to rescind the prior contract altogether, there is no substitution, and the original contract is still enforceable.16 An original cause of act ion can be discharged even by an executory agreement if the intention to that
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effect is clear. Therefore, if a creditor accepts in satisfaction merely his debtor's promise to give consideration and not the performance of that promise, the original cause of action is discharged from that date when the agreement is made.17 The ascertainment of intention is essentially a question of fact.18 An attempted novation which fails to produce a new enforceable contract may also put an end to the original contract, if it was the intention of the parties to rescind it in any event. Such intention is a fact to be clearly proved.19 In Lala Bunseedhur v. Government of Bengal, 20 the Government of Bengal filed a suit against the defendant as surety for the treasurer of a Collectorate on four surety bonds executed by the defendant. The collector had examined the accounts at the end of each year and struck the balance and certified it to be correct, and on each occasion the defendant executed a new bond without the old bonds being cancelled or given up. The Privy Council held that the mere fact that new bonds were executed did not constitute a novation of the laid bonds so as to preclude the government from suing the defendant on the laid bonds on subsequent discovery of embezzlement of moneys by the treasurer during each year. But the court further held that even assuming that there was a novation, or unilateral alteration, the bank guarantee, worded as it was to cover every eventuality, would not be discharged. In Ram Singh v. Shop Tek Chand Niamat Rai, 21A executed a bond for a debt due by B. Subsequently, it was agreed by B to pay a part of the debt in certain installments and execute a mortgage for the balance. B paid some installments but failed to carry out the agreement. It was held that A was absolved from liability by the subsequent agreement and that the breach of the subsequent agreement did not revive A's liability. But in Debnarayan Dutt v. Chunilal Ghosh, 22A owed B Rs. 330/-. A transferred the whole of this property by a registered instrument to C . The consideration for the transfer was R s. 2000/-, of which C agreed to pay Rs. 330/- to B. Here there was no novation, for there was no contract between A, B and C that B shall accept C as his debtor instead of A. B was therefore entitled to recover the debt from A, though he may also be entitled to recover the amount from C under the registered document on the principle23 that where a contract between A and C is intended to secure a benefit to B, B may sue to enforce it. A change in the rate of payment and the subject matter of the contract are material, and bring about a new agreement.24 In Central Bank of India v. Guruviah Naidu & Sons (Leather) Pvt. Ltd, 25 a creditor agreed to withdraw a money suit if the debtor paid certain amount within a stipulated period. The debtor paid the amount accordingly. It was held that the suit claim stood discharged, and the creditor could not claim overdue interest for late payment under the original contract. A novation takes place when after setting off the cross entries in an account the parties arrive at an agreed figure, and agree to be bound by it. It makes no difference if some of the items are statute barred.26 Mere non-performance of the new contract may not itself revive the earlier one; but where a party to the contract instead of performing the new contract falls back on the earlier one, and the other party accepts the same, the earlier contract would revive, and become binding, including the arbitration clause in it.27 Renewal of debt does not by itself extinguish the security, unless such renewal is accompanied by a fresh contract giving fresh security.28 There is no novation where the original contract stands and is reinforced by a subsequent agreement. A subsequent hand note for the money already advanced does not operate as novation for an agreement to execute a permanent lease for the same consideration.29 Where a contract for purchase of flat was substituted by a new one for repayment, with an express provision in the later agreement that the earlier agreement would stand till the entire amount was repaid and that if the amount was not repaid, the rights under the earlier agreement would continue, the earlier agreement could be invoked by the purchaser if the amount was not repaid.30 In Gujarat Bottling Co. Ltd. v. Coca Cola Co, 31 a franchisee agreement between the parties was executed in 1993 authorising G to bottle, sell and distribute the beverages under the trade-marks of C, the agreement containing a term that either party was entitled to terminate the contract with one year's notice. Another agreement between the parties in 1994 referred to the 1993 agreement, and granted G the exclusive licence to use the trade-marks of C, which was registered under the Trade and Merchandise Marks Act, 1958 [now Trade Marks Act, 1999 (47 of 1999)], and entitled either party to terminate the
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agreement by giving notice of 90 days. Unlike the 1993 agreement, the 1994 agreement did not contain any clause superseding all prior agreements.C purported to terminate the agreement by giving notice of less than one year, alleging that the 1994 agreement has replaced the 1993 agreement, and filed a suit seeking to restrain G from manufacturing and bottling the beverages. It was held that the nature and scope of both the agreements were different, and the 1994 agreement did not reduce the notice period to one year. Where there are two contracts, one for sale and the other for purchase for the same amount of the same class of goods for settlement on the same day, the obvious intention of the parties is that the contracts should not be carried out according to their terms, but should be treated as balancing one another. In such cases, generally, the parties can be taken to have intended that the existing contracts shall be cancelled, and that in lieu of the original existing contracts, there shall be a fresh contract under which one party has to pay and the other party to receive on the due date the difference, and that neither party is to insist on the original contracts being carried out according to their terms. The court may readily infer such a fresh contract, either from the terms of instructions, or from the manner in which the contracts have been dealt with in the books, or by other sufficient evidence. But liability under it would arise, in the absence of agreement to the contrary, only on the date fixed for the performance of the original contracts.32 In such 'cross contracts', the second contract may not operate to extinguish the first one completely. The two contracts are distinct and separate, and the intention of the parties only to pay differences does not extinguish them.33'When a settlement is made, reselling the goods back again from the original buyer, the intention is not that after the settlement contract the first contract should be gone. The intention is that the two contracts should stand together. That being so, there can be a set-off as regards delivery, and there can be a set-off as regards price for everything except the difference. It seems to me to be abusing, s. 62 of the Contract Act to say that after the settlement contract the original contract is utterly discharged'.34 A debtor who had pledged precious stones with a bank later authorised it to sell the stones and appropriate the amount towards the debt, and the bank agreed to waive certain future interest. It was held that this arrangement did not extinguish the debt, but the bank could not recover the future interest waived.35 Different Parties To supersede a contract by another contract, all the parties to the first contract must be parties to the second contract.36 A novation cannot be forced on a person intended to be the substituted party without his agreement. Thus, if there is a contract for the sale and purchase of a ship under which it is agreed that the act ual purchaser of the ship will be a company to be nominated by and substituted for the buyer by novation, such substitution must be accepted by the company.37 Employees of one undertaking cannot be transferred to another without their consent.38 This is because in a novation a creditor may be vitally prejudiced, whereas it is immaterial to a debtor to whom he pays his debt provided he gets a good discharge for it. Thus, a motor-car insurance policy could not be assigned so as to make of what is a contract of personal indemnity to A, a contract of personal indemnity to B, on the ground that a new insured could not be thrust upon an insurer against his will. But it could be done by novation, by release of the assured and the acceptance of a new assured, and not merely by handing over the policy on the sale of the car to the buyer.39 In the absence of a term in an insurance policy and where there was no prohibition, an insurance company might agree to transfer the risk of the policy in favour of the transferee of the car. In such a case a novation takes place. The assent of the insurance company is essential,40 and it might be implied.41But now under s. 157 of the Motor Vehicles Act, 1988, the insurance policy gets automatically transferred to the transferee of the vehicle, where the vehicle has been transferred with the benefit of the policy; informing the insurer is a formality which can be complied within the prescribed period. It has to be considered, in every case, not only whether a new debtor has consented to assume liability, but whether the creditor has agreed to accept his liability in substitution of the original debtor's.42 In some circumstances the creditor may be entitled to sue the retiring or the incoming partner in a firm as an option; mere continuation to deal with the firm as reconstituted will not preclude him from suing his original debtor.43 Novation is not consistent with the original debtor remaining liable in any form;44 it requires as
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an essential element that the right against the original contractor shall be relinquished, and the liability of the new contracting party accepted in his place.45 Thus, where A owed money to B under a contract, B, at the instance of A, agreed to and did realise part of the debt from C and D . This is not novation as there was no debt contracted by C and D in favour of A in substitution of the debt due from A.46 If the promisor, being requested by the promisee, agrees to pay the debt to a third party, the original contract is replaced by a new one, and the original promisee cannot enforce his claim against the promisor. The substituted contract is supported on this consideration, namely the original promisee's forbearance to demand the payment from the promisor.47 Election to accept the liability of new debtor, or of the new or surviving partners in a firm does not need very strong proof, but merely ambiguous act s will not do. One of the two bankers in partnership died. A customer, knowing of this, drew out part of a sum standing in his name on a deposit account, and took, according to the usual course, a fresh deposit note signed by a cashier on behalf of the firm for the balance amount. This was no proof of novation.48 But when another customer, also with the knowledge of the former partner's debt, transferred a sum of money from the current to a deposit account (after consulting the surviving partner about investing it) and took a receipt signed by the surviving partner on behalf of the firm, there was a new contract with the surviving partner alone.49 Where, in consideration of the creditor not suing the debtor, the debt was taken over for payment by A and B and the creditor later brought a suit for recovery of the debt against the original debtor and also against A and B, it was held that the creditor could not change the efficacy of substituted liability and revive the original debt.50 Where A advanced Rs. 50,000/- to a firm consisting of three partners. The sum of Rs. 50,000/- was made up partly of securities handed over by A to the firm and partly of cash. The firm passed a note to A promising to return the securities and repay the cash with interest at six percent per annum payable every six months. On death of one of the partners, A accepted from the surviving partners a promissory note in the firm's name for Rs. 50,000/- to be paid in cash with interest at the same rate, but not payable within six months. This was a new contract with the surviving partners alone.51 If a debt due to an employee from his employer is discharged and in its place a debt in favour of a Government Board is substituted, there is a valid substitution of creditors.52 The discharge of the original debtor must precede, and is distinct from, the acceptance by or imposition upon the creditor of a substituted debtor. It follows from this that although the elements of a statutory novation may, and usually will, be comprised in one statute or decree and, for practical purposes, operate simultaneously, each has nevertheless a separate and distinct legal identity.53 Capacity to Make Novation Trustees, and others administering money of which they are not the beneficial owners, are not entitled to make a novation (which is to accept one security or liability instead of another) except so far as they are authorised by the trusts under which they act.54 The executor of a deceased partner may agree with the surviving partners to convert the partnership into a limited company and to accept fully paid up shares in the company in lieu of the testator's share. Such an agreement is valid and binding on the estate of the testator.55 A broker has no authority in law to substitute a contract without the authority of the principal.56 Change in the Constitution of Partnership A common instance of novation in partnership cases is whereupon the dissolution of a partnership, the persons who are going to continue in business agree and undertake as between themselves and the retiring partner, that they will assume and discharge the who liabilities of the business, usually taking over the assets. In that case, if they give notice of that arrangement to a creditor, and ask for his accession to it, there becomes a contract between the creditor who accedes and the new firm to the effect that he will
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accept their liability instead of the old liability, and on the other hand, that they promise to pay him for that consideration.'57A question of novation may arise where a partner has been admitted into the partnership, or retires from the partnership. A person who is introduced as a partner into a firm does not thereby become liable for any act of the firm done before he becomes a partner. To determine whether an incoming partner becomes liable to an existing creditor of the firm, two questions arise. First, whether the new firm has assumed the liability to pay the debt, and secondly, whether the creditor has agreed to accept the new firm as his debtor and to discharge the old partnership from its liability.58 Arrangements are usually made for transferring the debts from the members of an old firm to a new firm, and if assented to by the creditors of the old firm, constitute a complete novation. Where the business is carried on continuously, the creditors knowing of the change, both the assumption of the existing debts by the new partners and the assent of the creditors to accept them as debtors and to discharge the retiring partners will be readily inferred.59 A creditor cannot rely merely on an agreement between partners inter se such as that the new partner would be liable for antecedent debts.60 No Novation after Breach This section contemplates that the original contract subsists and that the parties have agreed to replace it by a new contract. It does not apply where the agreement to substitute a new contract for the original one is made after the breach of the original contract,61 but there is a difference of opinion among the High Courts on this issue. In Manohur Koyal v. Thakur Das Naskar, 62 the plaintiff sued the defendant to recover Rs 1100 due on a bond. After the due date of the bond the plaintiff agreed to accept from the defendant, in satisfaction of the bond, Rs. 400/- in cash and a fresh bond for Rs. 700/-, and not the mere promise to pay the Rs. 400/- and to give a bond for Rs. 700/-. The defendant failed to pay the Rs 400 and to give the bond. In a suit by the plaintiff to recover the amount of original bond, the defendant contended that the subsequent agreement was a novation. It was held that s. 62 did not apply, as the subsequent agreement was made after the breach of the original contract, and that the defendant, having failed to perform satisfactorily which he had promised to give, remained liable on the original, contract. However, it has also been held in other cases that the section applied even though the new agreement was made after breach of the original agreement.63 Thus, an agreement, though made after breach, to accept whatever damages may be allowed by the arbitrators appointed by the parties, is not within this section, and it is binding on the parties,64 and so is an agreement to pay according to the decision of a court in another case;65 or an agreement to settle the amount of damages suffered in the breach of the old contract.66 It has been held that an agreement made between the parties after the breach of contract may be enforced under s. 63, whether supported by consideration or not.67 The Law Commission of India approved the view of Kumaraswami Sastri J, in KMPRNM Firm v. P. Theperumal Chetty Merchant, 68 that it was very common in India for mediators to intervene after a breach of contract took place and to effect a compromise between the parties, and that the principles of Foakes v. Beer 69 were not applicable. It recommended that a new agreement may take place either before or after the breach of the original contract.70 No Novation The question of novation does not arise where the contract itself contains a provision for payment by one party of enhanced rates dependent upon a contingency.71 An acknowledgement of an existing debt does not change the nature of the debt or operate to create a new contract.72 There is no novation where payment of existing debt is secured by a deed intended to operate only as a mortgage and not to replace the pre-existing personal liability;73 or where the mortgagor agrees to accept part of the mortgage money by a certain period;74 or the mortgagee releases a part of the mortgaged property.75 Loans given by a bank to a sick mill and continued by the Controller under the Bombay Relief Undertaking (Special Provisions) Act, 1958 did not make a fresh agreement. Remedies of the Bank remained unaffected.76
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Where an agreement made after disputes concerning lease deeds provided a procedure to be followed on termination, the lease deeds continued to remain effective, and the arbitration clause applied.77 Arbitration Clause If the parties to a contract agree to substitute a new contract or to rescind or alter it, the original contract need not be performed. Hence where a contract, containing an arbitration clause, is discharged by a substituted agreement, the parties are governed by the substituted contract and the arbitration agreement in the earlier contract perishes with it.78 Any dispute whether the contract itself does not subsist, as being substituted by a new contract or by rescission or alteration, cannot be referred to the arbitration;79 nor can the arbitration clause in the abrogated contract be invoked for determining questions under the new agreement.80 The appellants purchased some goods from the respondents but the bills were not honoured. Thereafter a fresh agreement was made between the parties. The appellants agreed to pay an ascertained sum of monies by installments with interest, a surety guaranteed the payment and certain shares and debentures were pledged. The respondents brought a money suit against the surety and the original buyers. It was held that the second contract was a novation of the previous contract by which the prior rights of the parties were extinguished and with that arbitration clause in the prior agreement perished. The subsequent arrangement was not a modification of the old agreement, but was altogether a new contract.81 Where a contract for the sale of goods containing an arbitration clause provided for delivery being given within a specified period, the mere extension of the time for giving delivery did not make it a new contract so as to put an end to the arbitration clause,82 but a new term for inspection of goods and acceptance of part delivery beyond the time specified indicated a new agreement.83Section 62 applies to arbitration agreements so that one agreement can be substituted for another.84 Assignment and Novation The assignment of a debt which operates as an effective transfer of a debt without the consent or the collaboration of the debtor is distinguishable from novation. A novation is effective if the debtor is a party. In an assignment, there is a transfer of property and in a novation there is annulment of one debt and then the creation of a substituted debt in its place.85 A party to a contract cannot transfer his liability under it without the consent of the other party, which can be transferred only by a tripartite contract, amounting to novation.86 A contract to reconvey cannot be defeated by the vendee transferring the property to a third party.87 Negotiable Instrument for a Pre-existing Debt A bill, note, or a cheque in discharge of payment of a debt is presumed to be a conditional payment,88 and may be accepted as a complete discharge, or merely as a conditional payment; in the latter case suspending the remedy for the duration of instrument.89 It does not extinguish the debt, but only suspends the payment.90 In the absence of any declared intention to that effect the mere execution and delivery of a negotiable instrument, e.g., hundi, does not operate as novation.91 The creditor can fall back upon his original debt on the instrument being dishonoured,92 or if the rights are not enforceable or the instrument fails for any reason,93viz., where a promissory note is found to be inadmissible on an evidence for want of proper stamp.94 If a promissory note is found to be defective, a suit on original consideration lies if the two can stand apart and have separate existence.95 But if the promissory note has been endorsed to a third party, a suit on the original debt would not be maintainable.96 Where the contract is considered as contained wholly in the promissory note or bill of exchange, if the plaintiff cannot sue on the promissory note, he cannot sue at all; secondly, if the promissory note is a
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conditional payment of an amount of loan, and the note is insufficiently stamped, it is only a worthless piece of paper and the plaintiff can sue on the loan; and thirdly, the promissory note may be passed as security for the loan, it is not necessary for the plaintiff to sue on the promissory note at all, and whether it is properly stamped or not, he can bring a suit on the loan.1 The question, whether the instrument was given only as a collateral security or as a conditional payment, depends on the facts and circumstances in each case. If the obligation is proved to exist independently of the instrument, the plaintiff can sue the defendant on the original cause of act ion.2The fact that the pronote is taken as a conditional payment may be embodied as a term in the document; if not so mentioned, extrinsic evidence of the fact can still be given. Section 91 of the Indian Evidence Act, 1872 does not apply, because the document does not then contain all the terms of the contract.3 Where a person lends money or sells goods to another, and the debtor or buyer gives a promissory note for payment of the loan or price at a future time, the cause of act ion for money is once complete in itself, whether for goods sold or for money lent or for any other claim, and the debtor then gives a note to the creditor for payment of the money at a future time. If the note is not paid at maturity the creditor may sue for the original consideration; and then, inadmissibility in evidence of the bill or note will not affect the original cause of action. The loan advanced to the debtor is not discharged by the debtor issuing a cheque or giving a promissory note, or even by the non-presentation of the negotiable instrument. The creditor can sue on original cause of act ion ignoring the cheque and the promissory note.4 When the loan transaction and the promissory note constituted one and the same transaction and were actually contemporaneous, there is no cause of act ion independent of the negotiable instrument itself, and if that is inadmissible, the suit fails.5 Thus, where the original cause of action is on the note itself, and there is no cause of act ion independent of it, as, for instance, when, in consideration of A depositing money with B, B contracts by a promissory note to repay it with interest at six months date, there is no cause of action for money lent or otherwise than upon the note itself, because the deposit is made upon the terms contained in the note, and no other. In such a case the note is the only contract between the parties, and if, for want of a proper stamp or some other reason, the note is not admissible in evidence, the creditor must lose his money.6 Where a promissory note was given for the total amount of two earlier pronotes, but was insufficiently stamped. The endorsements on two earlier promissory notes amounted to acknowledgement of liability for the amount, and a suit on the earlier two promissory notes was maintainable.7 Mere debit entry in a banker's account book after a draft is issued does not necessarily amount to payment.8 When a cheque from a customer was received by a banker's and the amount of the cheque credited to the customer's account, it was conditional payment; and if the cheque was dishonoured the bank is entitled to reverse the entry.9 14 Union of India v. Kishorilal Gupta & Bros, AIR 1959 SC 1362, [I960] 1 SCR 493. 15 Kshetra Nath Sikdar v. Harasukdas Balkissen Das, AIR 1927 Cal 538; Vishram Arjun v. lrukulla Shankariah, AIR 1957 AP 784; Gyarsilal Jagannatthprasad Mor v. Pandit Sitacharan Dubey, AIR 1963 MP 164; Gulabbai Damodar Tapse v. Peter K Sunder, (1974) 76 Bom LR 38. 16 Chedambara Chetty v. Renga Krishna Muthu Vira Puchaiya Naickar, (1874) 1 IA 241 at 263 (PC); Uttam Chand Saligram v. Mahmood Jewa Mamooji, (1919) 46 Cal 534, AIR 1920 Cal 143, 54 IC 285; Narayan v. Venkatrao, AIR 1923 Nag 213; SA Rajamier v. MRMA Subramaniam Chettiar, AIR 1928 Mad 1201; Babulal Marwari v. Tulsi Singh, AIR 1940 Pat 121; Eusoof Karwa v. Niemeyer, AIR 1941 Rang 37; Babu Kameshwar Prasad Singh v. Shahamat Mian, AIR 1958 Pat 162; State of Bihar v. Ram Ballabh Das Jalan, AIR 1960 Pat 400. 17 See s. 63, under the heading: 'Accord and Satisfaction'. 18 Union of India v. Kishorilal Gupta & Bros, [1960] 1 SCR 493 at 503-04, AIR 1959 SC 1362 at 1366 quoting Cheshire & Fifoot's Law of Contract third edn., p 453; Morris v. Baron & Co. [1918] AC 1; British Russian Gazette & Trade Outlook Ltd. v. Associated Newspapers Ltd., [1933] 2 KB 616 at 643-44, [1933] All ER Rep 320. 19 Morris v. Baron & Co. [1918] AC 1; British & Beningtons Ltd. v. North Western Cachar Tea Co. Ltd., [1923] AC 48 at 68,
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[1922] All ER Rep 224; cf Ganpat v. Mahadeo, AIR 1925 Nag 26, 85 IC 264. 20 (1872) 14 MIA 86, (1872) 9 BLR 364(PC) . 21 AIR 1933 Lah 464, 146 IC 562. 22 (1913) ILR 41 Cal 137 at 141, AIR 1914 Cal 129, 144, 20 IC 630. 23 See s. 2(d): 'Doctrine of Privity'. 24 Andheri Bridge View Co-op Hsg Society Ltd. v. Krishnakant Anandrao Deo, AIR 1991 Bom 129. 25 AIR 1992 Mad 139. 26 Gharabharan v. Sri Radha Kishan, AIR 1958 All 313, Sheo Gobind v. Jai Sri Singh, AIR 1931 Oudh 97; Badku Lal v. Bhaiya Lal, AIR 1952 VP 58. 27 RN Kumar v. RK Soral, (1988) 2 SCC 508 at 511. 28 V Venkataramiah Pantulu v. PV Subramaniam Pillai, AIR 1915 Mad 137. 29 Babu Kameshwar Prasad Singh v. Shahamat Mian, AIR 1958 Pat 162. 30 Lata Construction v. Rameshchandra Ramniklal Shah (Dr.), AIR 2000 SC 380, (2000) 1 SCC 586; TP George v. State of Kerala, AIR 2001 SC 816, (2000) 2 SCC 758 (supplementary agreement executed always intended by one of the parties as without prejudice to earlier claims submitted to the other party). 31 AIR 1995 SC 2372, (1995) 5 SCC 545. 32 Ramgopal Chunilal v. Ramsarup Baldevdas, AIR 1934 Bom 91 at 92. 33 Kishindas Pursumal v. Menghraj Khialdas, AIR 1925 Sind 144 at 148. 34 Uttam Chand Saligram v. Mahmood Jewa Mamooji, (1919) 46 Cal 534 per Rankin at 542, AIR 1920 Cal 143, 54 IC 285; Kanruppaswami Moopnar v. Chottabhai Janerbhai & Co. AIR 1945 Mad 59. 35 Bank of Rajasthan Ltd. v. Hajarimal Milap C Surana, (2005) 10 SCC 238. 36 P Ramaswami v. Chandra Kottayya, AIR 1925 Mad 261; Kanraj v. Vilai Singh, AIR 1951 Raj 74. 37 Damon Cia Naviera SA v. Hapag-Lloyd International SA, [1985] 1 All ER 475, [1985] 1 WLR 435; See also Aktion Maritime Corporation of Liberia v. S Kasmas & Brothers (The Aktion), [1987] 1 Lloyd's Rep 283 at 311. 38 BCPP Mazdoor Sangh v. NTPC, AIR 2008 SC 336, (2007) 14 SCC 234. 39 Peters v. General Accident & Life Assurance Corpn. Ltd., [1937] 4 All ER 628 at 633; Gyarsilal Jagannathprasad More v. Pandit Sitacharan Dubey, AIR 1963 MP 164; but see s. 157 of the Motor Vehicles Act, 1988. 40 Gulabbai Damodar Tapse v. Peter K Sunder, (1974) 76 Bom LR 38; Gyarsilal Jagannathprasad More v. Pandit Sitacharan Dubey, AIR 1963 MP 164; Peters v. General Accident & Life Assurance Corpn. Ltd., [1937] 4 All ER 628. 41 Ibid; M Bhoopathy v. MS Vijayalakshmi, ILR (1966) 2 Mad 65, AIR 1966 Mad 244; overruling Madras Motor Insurance Co. Ltd. v. Mohamed Mustafa Badsha, AIR 1961 Mad 208. 42 New Standard Bank Ltd. v. Probodh Chandra Chakravarty, (1941) 2 Cal 237, AIR 1942 Cal 87; Hukumatmal Firm v. Jethanand Holaram, AIR 1944 Sind 205; State Bank of India v. TR Seethavarma, AIR 1995 Ker 31. 43 Scarf v. Jardine, (1882) 7 App Cas 345 at 351, [1881-85] All ER Rep 651. He cannot, however, sue both, and his choice when made, is final. 44 Commercial Bank of Tasmania v. Jones, [1893] AC 313, [1891-94] All ER Rep 1652, PC; cf Perry v. National Provincial Bank of England, [1910] 1 Ch 464 especially per Buckley LJ; State of Bihar v. Ram Ballabh Das Jalan, AIR 1960 Pat 400; Madho Prasad v. Gouri Dutt Ganesh Lal, AIR 1939 Pat 323. 45 Nadimulla Valad Rajasaheb v. Channappa bin Kotrappa, (1903) 5 Bom LR 617; cf Liladhar Nemchand v. Rawji Jugjiwan, AIR 1935 PC 93, 154 IC 1090, 68 Mad LJ 530 (a formal instrument is not annulled by a mere agreement to substitute something else for it at a future date); Angan Lal v. Saran Behari Lal, (1929) All LJ 127, 121 IC 221, AIR 1929 All 503; Firm Guranditta Mal--Sant Ram v. Firm Labhu Ram--Lachman Das, AIR 1936 Lah 476, 163 IC 123; Hukumatmal Firm v. Jethanand Holaram, AIR 1944 Sind 205. 46 State of Bihar v. Ram Ballabh Das Jalan, AIR 1960 Pat 400. 47 Ganpati v. Jairam, AIR 1925 Nag 66.
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48 Re Head, (No. 2)[1894] 2 Ch 236(CA) . 49 Ibid. 50 Jethmal v. Hiralal, AIR 1972 Raj 220 at 224. 51 Markandrai Kalyanrai Mehta v. Virendrarai Chandra Prasad Desai, AIR 1917 Bom 262, (1917) 19 Bom LR 837 at 843-844, 42 IC 815. 52 Bombay Dyeing & Mfg Co. Ltd. v. State of Bombay, AIR 1958 SC 328, [1958] SCR 1122 (if the liability to the employees continues in addition, the law providing for such substitution will be unconstitutional as infringing (now deleted) Art. 19(1)(f) of the Constitution of India ). 53 Re United Rlys of Havana & Regla Warehouses Ltd., [1960] Ch 52, [1959] 1 All ER 214 at 229, [1959] 2 WLR 251 at 266-67; affirmed on appeal in, [1961] AC 1007, [1960] 2 All ER 332, [1960] 2 WLR 969(HL) . 54 Indian Trusts Act, 1882, ss. 40, 43;Smith v. Patrick, [1901] AC 282. 55 Jamsetji Nassanvanji Ginwala v. Hirjibhai Naoroji Anklesaria, (1912) ILR 37 Bom 158 at 167-69. 56 Lalchand Dharamchand v. Alliance Jute Mills Co. Ltd., AIR 1973 Cal 243 at 246. 57 Scarf v. Jardine, (1882) 7 App Cas 345 Lord Selborne at 351, [1881-85] All ER Rep 651. 58 Meenakshi Achi v. PSM Subramanian Chettiar, AIR 1957 Mad 8. 59 Rolfe and the Bank of Australia v. Flower, Salting & Co. (1865) LR 1 PC 27; Bilborough v. Holmes, [1876] 5 Ch D 255. 60 Meenakshi Achi v. PSM Subramanian Chetliar, AIR 1957 Mad 8 at 12. 61 Manohur Koyal v. Thakur Das Naskar, (1888) 15 Cal 319; Ramjah Bagavathar v. Somasi Ambalam, AIR 1916 Mad 823; Brijmohan v. Mahabeer, (1935) 63 Cal 194; Dwarika v. Bagawati, AIR 1939 Rang 413; New Standard Bank Ltd. v. Probodh Chandra Chakravarty, (1941) 2 Cal 237, AIR 1942 Cal 87; Union of India v. Kishorilal Gupta & Bros, AIR 1953 Cal 642. 62 (1888) 15 Cal 319; Sakarchand Shamji v. Ismail Hoosain, AIR 1931 Rang 189, 131 IC 510; New Standard Bank Ltd. v. Probodh Chandra Chakravarty, (1941) 2 Cal 237, AIR 1942 Cal 87; distinguished in Union of India v. Kishorilal Gupta & Bros, AIR 1953 Cal 642. 63 KMPRNM Firm v. P Theperumal Chetty Merchant, (1922) 45 Mad 180, AIR 1922 Mad 314, 67 IC 905; following the view of Kumaraswami Sastri J, in Ramiah Bagavathar v. Somasi Ambalan, (1915) 29 Mad LJ 125, AIR 1916 Mad 823, 29 IC 449; cf the view of Seshagiri Iyer J, in Ramaiah's case; Jamnubai v. Murlidhar Sawatram, ILR (1946) Nag 36, 225 IC 379, AIR 1946 Nag 148; Vishram Arjun v. Irukulla Shankariah, AIR 1957 AP 784 at 788 (question could not be decided). 64 Ram Nath v. Mannu Lal, [1923] 45 ER 472, 73 IC 615, AIR 1923 All 518. 65 Jamnubai v. Murlidhar Sawatram, ILR (1946) Nag 36, 225 IC 379, AIR 1946 Nag 148. 66 Ram Nath v. Mannu Lal, [1923] 45 ER 472, 73 IC 615, AIR 1923 All 518; Kamal Narayan v. Baniram, AIR 1923 Nag 332. 67 Kalumal Devandas v. Kessumal Naraindas, AIR 1929 Sind 153, relying upon Firm Chhunna Mal Ram Nath v. Firm Mool Chand Ram Bhagat 55 IA 154, ILR 9 Lah 510, AIR 1928 PC 99; Jamnabai v. Murlidhar Sawatram, ILR (1946) Nag 36, 225 IC 379, AIR 1946 Nag 148; New Standard Bank Ltd. v. Probodh Chandra Chakravarty, (1941) 2 Cal 237, AIR 1942 Cal 87. 68 (1922) 45 Mad 180, AIR 1922 Mad 314, 67 IC 905. 69 9 AC 605, [1881-85] All ER Rep 106. 70 The Law Commission of India, 13th Report, 1958, para 77. It recommended adding an Explanation to s. 62 as follows:Explanation--An agreement may be made under this section notwithstanding that there has been a breach of the original contract by any party thereto. 71 Savita Dey v. Nageswar Majumdar, (1995) 6 SCC 274 (liability of a tenant to pay a proportionate increase in the municipal taxes, when they are increased). 72 Tanjore Ramchendra Rau v. Vellayanandan Ponnusami, (1891) 14 Mad 258 at 262 (PC); Jethmal v. Saroo, AIR 1920 Nag 244; Janaka v. Sheo Charan, AIR 1932 Oudh 49; Badri Das v. Besu, AIR 1933 Lah 174; Madho Prasad v. Gouri Dutt Ganesh Lal, AIR 1939 Pat 323; Ramdin Singh v. Ramparichan Singh, AIR 1942 Pat 170. 73 Ramlal Murlidhar v. Jogendra Krishna Ray, AIR 1926 Cal 318. 74 Bibi Hafizunnisa v. Maulvi Imamuddin Khan, AIR 1924 Pat 825.
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75 Gobind v. Chhajjan, AIR 1961 Punj 202. 76 National Textile Corporation (Gujarat) Ltd. v. State Bank of India, AIR 2006 SC 2927, (2006) 7 SCC 542. 77 WSP Engineering Services Ltd v. R C Panwar, Arb Pet 407/2012 decided on 10 May 2013 (Del). 78 Union of India v. Kishorilal Gupta & Bros, [1960] 1 SCR 493 at 513,AIR 1959 SC 1362 at 1370, 1373; but see Sarkar J, at 522 of, [1960] 1 SCR 493, 1374 of, AIR 1959 SC 1362; Heyman v. Darwins Ltd., [1942] AC 356 Lord MacMillan at 371, [1942] 1 All ER 337; Godhu Mal v. Ganga Hasso Mal Idnani, AIR 1958 All 26; Century Spg & Mfg Co. Ltd. v. Motilal Dhariwal, AIR 1966 MP 313. 79 Damodar Valley Corpn. v. KK Kar, AIR 1974 SC 158 at 163; followed in Vipinbhai r. Parekh v. General Manager Western Rly, AIR 1984 Guj 41 (contractor sought to invoke arbitration clause after giving the 'no claim certificate). 80 Heyman v. Darwins Ltd., [1942] AC 356, [1942] I All ER 337 at 346; considered in Union of India v. Kishorilal Gupta & Bros., [1960] I SCR 493, AIR 1959 SC 1362. 81 Dadri Cement Co. v. Bird & Co. (Pvt.) Ltd. AIR 1974 Del 223; applying Payana Reena Saminathan v. Pana Lana Palaniappa, (1914) 41 IA 142, [1914] AC 618(PC) ; and relying on Union of India v. Kishorilal Gupta & Bros, [1960] 1 SCR 493, AIR 1959 SC 1362. 82 Luchmi Narain Bhariodan v. Hoare Miller & Co., (1913) 41 Cal 35, AIR 1914 Cal 294, 21 IC 217. 83 Ibid. 84 Shari Lal v. Sardari Lal, AIR 1963 Punj 165 at 166. 85 Re United Railways of the Havana & Regla Warehouses Ltd., [1960] Ch 52 at 84, [1959] 1 All ER 214, [1959] 2 WLR 251; affirmed in, [1961] AC 1007, [1960] 2 All ER 332, [1960] 2 WLR 969(HL) . 86 Turner Morrison & Co. Ltd. v. Hungerford Investment Trust Ltd., AIR 1969 Cal 238; following Khardah Company Ltd. v. Raymon & Co. (India) Private Ltd., AIR 1962 SC 1810, [1963] 3 SCR 183; State Bank of India v. TR Seethavarma, AIR 1995 Ker 31. 87 Devan Man Mohan Lal v. L Piary Lal, AIR 1973 All 16 at 20; See s. 37, under the heading: 'Assignment of contract'. 88 Dargavarapu Sarrapu v. Rampratapu, (1901) 25 Mad 580; Maung Chit v. Roshan NMA Kareem Oomer & Co. (1934) 12 Rang 500, 152 IC 1038, AIR 1934 Rang 389(FB) ; Abdul Majid v. Ganesh Das Kalooram Ltd., AIR 1954 Ori 124; Ramdayal v. Maji Devdiji, AIR 1956 Raj 12; Kandaswamy Gounder v. KP Sivasubramania Iyer, AIR 1963 Mad 16. 89 Ramdayal v. Maji Devdiji, AIR 1956 Raj 12. 90 Ananda Namdeo Kharde v. Pundalik Tukaram Chaudhary, AIR 1936 Nag 225. 91 Ramdayal v. Maji Devdiji, AIR 1956 Raj 12; distinguishing Firm Harjas Mal-Mehr Chand v. Firm Bhagat Ram-Anand Ram, AIR 1934 Lah 128. 92 SMS Subramanian Chetty v. VKA Muthia Chetty, (1911) 35 Mad 639; Mohanlal Jogani Rice & Atta Mills v. Ramlal Onkarmal Firm, AIR 1957 Assam 133; Kandaswamy Gounder v. KP Sivasubramania Iyer, AIR 1963 Mad 16 (rent paid by pro-note); Maung Chit v. Roshan NMA Kareem Oomer & Co. (1934) 12 Rang 500, 152 IC 1038, AIR 1934 Rang 389(FB) ; AR Dower v. Sohan Lal Anand, AIR 1937 Lah 816; Abdul Majid v. Ganesh Das Kalooram Ltd., AIR 1954 Ori 124. 93 Domoo Khan v. Agha Arshad Khan, AIR 1933 Pat 575(FB) ; MLM Ramanadan Chettiar v. Gundu Ayyar, AIR 1928 Mad 1238; Mohan v. Ramji, AIR 1931 Nag 113; Palakurthi Appalaraju v. Tyla Yedukondalu, AIR 1958 AP 713; Lingam Narayan Das v. Punia Das, AIR 1959 Ori 176; Kailash Chandra Mandal v. Devendranath Mandal, AIR 1969 Pat 110. 94 Sundar Das v. Puran Singh, AIR 1922 Lah 56; Kashi Prasad v. Panna Lal, AIR 1923 All 529; Firm Harjas Mal-Mehr Chand v. Firm Bhagat Ram-Anand Ram, AIR 1934 Lah 128; Mohammad Jamal Saheb v. Munwar Begum, AIR 1964 AP 188; Nathu Ram v. Dogar Male, (1923) 4 Lah 198, AIR 1924 Lah 144; Krishnaji Narayan Parkhi v. Rajmal Manikchand Marwadi, (1899) 24 Bom 360. 95 Yarlagadda Veera Ragavayya v. Gorantla Ramayya, (1905) 29 Mad 111; Brijbushan Pande v. Ramjanam Kuer, AIR 1932 Pat 324 (defect-payee's name not mentioned); Mohanlal Jogani Rice & Atta Mills v. Ramlal Onkarmal Firm, AIR 1957 Assam 133; Palakurthi Appalaraju v. Tyla Yedukondalu, AIR 1958 AP 713; Lingam Narayan Das v. Punia Das, AIR 1959 Ori 176 (plaint must be amended). 96 Yarlagadda Veera Ragavayya v. Gorantla Ramayya, (1905) 29 Mad 111; SMS Subramanian Chetty v. VKA Muthia Chetty, (1911) 35 Mad 639. 1 Jacob & Co. v. AP Vicumsey, AIR 1927 Bom 437. 2 Ram Narain Sahu v. Lachmi Prasad Sahu, AIR 1921 Pat 317; Naraindas v. Jassomal, AIR 1921 Sind 80; Kashi Prasad v.
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Panna Lal, AIR 1923 All 529; Jacob & Co. v. AP Vicumsey, AIR 1927 Bom 437; Re s. 25, Paper Currency Act, (10 of 1923)AIR 1928 All 371; Kundan Lal v. Sahu Bhikhari Das-Ishwar Das, AIR 1929 All 254; Ananda Namdeo Kharde v. Pundalik Tukaram Chaudhury, AIR 1936 Nag 225; Ramaswami Pillai v. Murugiah Padayachi, (1935) 59 Mad 268, 161 IC 273, AIR 1936 Mad 179. 3 Maung Chit v. Roshan NMA Kareem Oomer & Co. (1934) 12 Rang 500, 152 IC 1038, AIR 1934 Rang 389(FB) . 4 Harish Chander v. Ganga Singh and Sons, AIR 1974 Punj 156 at 158. 5 Chota Lal Sahu v. Gumani Chaudhury, AIR 1926 Pat 432; Ram Jas v. Shahab-ud-din, AIR 1927 Lah 89; At NAT Chockalingam Chettiar v. Rama Mu Rama Palaniappa Chettiar, AIR 1935 Mad 23; Palakurthi Appalaraju v. Tyla Yedukondalu, AIR 1958 AP 713. 6 Sheikh Akbar v. Sheikh Khan, (1881) 7 Cal 256; Dargavarapu Sarrapu v. Rampratapu, (1901) 25 Mad 580; Yarlagadda Veera Ragavayya v. Gorantla Ramayya, (1905) 29 Mad 111; Pramatha Nath Sandal v. Dwarka Nath Dey, (1896) 23 Cal 851; SMS Subramanian Chetty v. VKA Muthia Chetty, (1911) 35 Mad 639 at 641; Pandit Salig Ram v. Radhay Shiam, AIR 1931 All 560, 134 IC 254 (second of two pro-notes invalid, plaintiff can rely on the first note); Gulabgir v. Nathmal, AIR 1932 Nag 23, 137 IC 33; Kunwar Bahadur v. Suraj Bakhsh, AIR 1932 Oudh 235, 139 IC 298(FB) ; Maung Chit v. Roshan NMA Kareem Oomer & Co. (1934) 12 Rang 500, 152 IC 1038, AIR 1934 Rang 389(FB) ; Ramaswami Pillai v. Murugiah Padayachi, (1935) 59 Mad 268, 161 IC 273, AIR 1936 Mad 179; Ananda Namdeo Kharde v. Pundalik Tukaram Chaudhury, AIR 1936 Nag 225; State of Bihar v. Ram Ballabh Das Jalan, AIR 1960 Pat 400. 7 PLCTSP Subramaniam Chettiar v. Muthiah Chettiar, AIR 1984 Mad 215; Rahmat Ali-Muhammad Faizi v. Dewa Singh-Man Singh, AIR 1923 Lah 396. 8 Mohanlal Jogani Rice & Atta Mills v. Ramlal Onkarmal Firm, AIR 1957 Assam 133; Lachhmi Narain Beriwala v. Bharat Bank Ltd., AIR 1951 Pat 621. 9 Kesarichand Jaisukhlal v. Shillong Banking Corpn. Ltd. AIR 1959 Assam 162; Re Alliance Bank of Simla in liquidation,AIR 1925 Cal 54.
Rescission Just as the parties to an agreement may vary some of its terms by a subsequent agreement, they may also rescind, either expressly or by implication, the earlier agreement altogether, so that it shall be no longer be binding on them. The determining factor is intention of the parties.10 The consideration for the promise of releasing the other party from obligations is the abandonment of one's own rights under the contract. A contract cannot be cancelled or terminated unilaterally.11 Where, after successive notices of termination under the provisions of the contract by one party to the other, the termination was not accepted by the other party, and the parties executed a supplementary agreement fixing the date from which the original agreement would stand terminated, it was held that this latter agreement was binding, and that it was supported by consideration if at all required, in that both the parties agreed to give up their respective rights and benefits under the original agreement and released each other from the mutual burdens and obligations under it. The discharge of one party from its obligation to perform further was a sufficient consideration for discharge of the other party from performing its obligations under the contract.12 Rescission may be total or partial, i.e., of only some of the terms. Partial rescission does not completely destroy the contractual relation between the parties. It merely modifies that relation by cutting out part of the rights and obligations involved therein with or without the substitution of new rights and obligations in their place. Hence a contract may be varied:
(i) (ii) (iii)
by way of partial rescission, without the substitution of new terms in place of those rescinded; or by way of partial rescission, with the substitution of new terms for those rescinded; or by the addition of new terms without any partial rescission at all.13
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There is an implied rescission of the contract when some new and independent terms, inconsistent with the first contract, are agreed upon regarding the same subject matter between the parties.14 There is no novation where the mortgagee releases a part of the mortgaged property.15 A contract can also be rescinded under this section after breach. Such a rescission may be express or implied. It is a question of construction whether or not this rescinds the original contract totally, in which case the arbitration clause also stands rescinded.16 Where parties agree that on breach of a specified promise, the agreement 'will become void', such breach automatically rendered the contract void.17 Rescission and Variation Whether there has been a variation of terms or abandonment depends on the intention of the parties in each case, and is often not easy to determine. It has been stated: The difference between variation and rescission is a real one, and is tested, to my thinking by this: In the first case there are no such executory clauses in the second arrangement as would enable you to sue upon that alone if the first did not exist; in the second you could sue on the second arrangement alone, and the first contract is got rid of either by express words to that effect, or because, the second dealing with the same subject matter as the first but in a different way, it is impossible that the two should be both performed. When I say you could sue on the second alone, that does not exclude cases where the first is used for mere reference, in the same way as you may fix a price by a price list, but where the contractual force in the second by itself.18 Abandonment If neither party attempts to perform or to call upon the other to perform the contract, and an inordinate length of time elapses, it may be inferred that the contract has been abandoned- 'the matter is off altogether'.19 Inordinate delay on both sides is evidence of the contract being abandoned, and, if that inference is drawn, the contract is enforceable by neither party.20 For abandonment, it must be shown that the conduct of one party was such that the other party would reasonably assume that it was agreed that the contract was abandoned.21 This is true in cases of executory contracts. But where the contract has been partly performed and where the purchaser has paid more than half the purchase price, acquired an equitable interest in the property and registered the contract, a discharge of the contract might not be inferred.22 10 Morris v. Baron & Co. [1918] AC 1; British and Beningtons Ltd. v. North Western Cachar Tea Co. Ltd., [1923] AC 48, [1922] All ER Rep 224; Goss v. Lord Nugent 110 ER 713, (1833) 5 B&Ad 58, [1824- 34] All ER Rep 305; Tallerman & Co. Pvt. Ltd. v. Nathan's Merchandise (Victoria) Pvt. Ltd., (1957) 98 CLR 93 at 112, 143. 11 Narayan Mahadeo Durve v. Moti Pannaji, AIR 1935 Bom 225 at 227; Hajee M Ahamed Koya v. E Murugesa, AIR 1958 Ker 195; Jainarain Ram Lundia v. Surajmull Sagarmull, AIR 1949 FC 211 at 216. 12 Unikol Bottlers Ltd. v. Dhillon Kool Drinks, AIR 1995 Del 25. 13 Tallerman & Co. Pvt. Ltd. v. Nathan's Merchandise (Victoria) Pvt. Ltd., (1957) 98 CLR 93 at 143. 14 Raghumull v. Luchmondas, AIR 1917 Cal 52 at 62 (FB); Juggilal Kamlapat v. NV Imernational Credit-En-Handels Vereeninging 'Rotterdam', AIR 1955 Cal 65; Vishram Arjun v. Irukulla. Shankariah, AIR 1957 AP 784. 15 Gobind v. Chhajjan, AIR 1961 Punj 202. 16 Union of India v. Kshorilal Gupta & Bros, AIR 1953 Cal 642. 17 Khela Banerjee v. City Montessori School, (2012) 7 SCC 261. 18 Morris v. Baron & Co., [1918] AC 1 per Lord Dunedin at 25-27; Bengal Nagur Rly Co. Ltd. v. Ruttanji Ramji, AIR 1935 Cal 347 at 353-54. 19 Pearl Mill Co. Ltd. v. Ivy Tannery Co. Ltd. [1919] 1 KB 78, [1918-19] All ER Rep 702; GW Fisher Ltd. v. Eastwoods Ltd., [1936] 1 All ER 421 at 426 (these were executory contracts); distinguished in Fitzgerald v. Masters, (1956) 95 CLR 420 at
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432. 20 Pearl Mill Co. Ltd. v. Ivy Tannery Co. Ltd., [1919] 1 KB 78, [1918-19] All ER Rep 702. 21 Paal Wilson & Co. A/S v. Partenreederei Hannah Blumenthal (The Hannah Blumenthal), [1983] 1 AC 854 at 865, [1983] 1 All ER 34 at 47. 22 Fitzgerald v. Masters, (1956) 95 CLR 420 at 432.
Alteration or Variation Parties to an agreement may vary some of its terms by a subsequent agreement. Mere alteration or modification of the terms of the contract are not enough, the modification must be read into and become a part of the original contract. The original terms continue to be part of the contract and are not rescinded or superseded except in so far as they are inconsistent with the modifications.23 The consideration for the variation, if it has to be found, lies in the mutual abandonment of existing rights or conferring new benefits by each party on the other; or in the assumption of additional obligations or incurring additional liabilities or increased detriment. The courts have also recognised a 'practical benefit' arising to a party undertaking an additional detriment, as sufficient consideration.24 The Indian Evidence Act, 1872 forbids the admission of oral evidence to contradict or vary written agreements,25 but this does not bar oral evidence to prove a subsequent variation or modification, unless such variation is required by law to be in writing or seeks to vary an instrument which has been registered.26 It must be shown, especially where it is sought to prove a variation not by an express agreement, but by a course of conduct, that the variation was intended and understood by both parties.27 Where the written contract mentioned a mode of calculation for payment to the contractor, he could not claim that the mode had been varied merely on the basis that officers of the government had paid some bills by another mode of calculation.28 In Grogan v. Robin Meredith Plant Hire, 29 a question arose whether, in a contract for laying pipes, the signature of an employee on a time-sheet recording working hours and containing new conditions, varied the original contract so as to incorporate the new conditions. The court distinguished between documents of contractual effect in the formation of a contract and documents of contractual effect in the performance of the contract (viz., time-sheet, invoice, statement of account), and held that generally variations would not occur through the presentation of documents of performance, and that the time-sheet in the instant case did not vary the contract. The question was whether the time sheet in the present case comes within the class of document which the party receiving it knew contained, or which a reasonable man would expect to contain, relevant contractual conditions. In Travancore Devaswom Board v. Thanath International, 30 the supplier's request for increase in price necessitated by increase in price of raw material arising from agitations and war, was referred by the purchaser Board to legal experts. The Board allowed time to the supplier, and changed the specification. It was held that the fact that the Board sought legal opinion or gave time did not mean that the contract was altered. In Sirdar Kuar v. Chandrawati, 31 accounts were stated between a creditor and his debtor, and the latter passed the former a bond for the balance found due payable by installments, in which he hypothecated certain immovable property as collateral security. The creditor received payment of three of the installments under bond, and then brought a suit against the debtor for the balance of the debt, basing his claim on the accounts stated. It was held that the suit would not lie, as by the execution of the bond the debt due on the account stated had come to an end. The report of the case indicates that the bond was impounded by the revenue authorities, as it was insufficiently stamped, and this seems to be the reason for bringing the suit on the original debt instead of on the bond. This decision has been held32 not to apply if the execution of the hypothecation bond is denied by the defendant and the bond remains on that ground unregistered. In such a case the plaintiff could not sue on the unregistered bond33 and he would
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therefore be entitled to recover upon the account stated:
We cannot allow the defendant to take advantage of her own fraudulent conduct in preventing registration of the bond and to say that in that bond was represented the contract which superseded that which is to be inferred from the statement of accounts.34
Similarly where a mortgagee accepts a new security in lieu of the old, and the new security is held to be invalid under a rule of Hindu law pleaded by the mortgagor, the mortgagee is entitled to fall back upon the old security. It would not be consistent with equity or good conscience that the mortgagor, having successfully maintained that the new security is invalid should be allowed to claim the benefit of the transaction by which the new security was created as a release of the old security.35 There was a separation deed between a husband and wife by which the husband covenanted to pay a certain sum of money per annum for his wife's support. They agreed to vary the financial arrangements as his income was insufficient to meet his obligations. This variation was held valid and enforceable and could be set up as a defence against an action on the original deed.36 But in another case, under a financial agreement the husband was to pay GBP 2,400 per annum to the wife, to be reduced to half in certain events, during their joint lives or until the wife remarried or until further orders. This was in settlement of all claims, and the wife was not to apply for increase. This was made a part of the court's order. When the wife applied for increase it was held that the agreement being for indefinite payments until further orders, the wife could apply despite the provision for a final and once for all order.37 There was no alteration to the seat of arbitration, where parties agreed for emergent causes to hold arbitration hearings in another country.38 Unilateral Variation A unilateral declaration by one party to another in the absence of agreement cannot constitute a variation,39 and the promisor is not bound by such unilateral change.40 But a contract may give one of the parties the power to unilaterally vary the obligations under the contract, for example, clauses of variation in quantity of supply,41 of price variation,42 of variation in the building works, etc. There is nothing repugnant to the law of contract to have as one of the express terms of the contract itself that it will be alterable at the instance of one party alone.43 The extent of the power to vary is a matter of construction.44 It will not be construed to entitle the party to vary matters other than those specifically provided in the contract.45 Thus, where a variation clause allowed an employer to vary the extent of contract work both upwards and downwards up to 25 percent, the contractor is not bound to carry out such variation;46 and where such a provision entitled the contractor to a revised rate for any variation beyond that limit, the clause was applicable where the sum total of additions and deletions exceeded 25 percent of the contract price and not on the basis of net difference between the increase and decrease.47 Prices can also be revised where these have been agreed as provisional.48 The power of variation is restricted by the term granting that power.49 Where the General Terms and Conditions applicable to government contracts were amended, and made expressly operative prospectively, the changes in the conditions did not affect a contract made earlier.50 The government agreed with a contractor to supply him with machinery at the inception of the contract at a fixed rate, and, it could not enhance the rates for the machinery unilaterally unless there was a specific provision in some rule or code which applied to the contract.51 When one party varies the scope of the work under an express term of the contract entitling him to do so, there is neither novation nor alteration, the bank guarantee given in pursuance of the contract is not discharged.52 The lessees would be bound to pay the rent increased by the government in the exercise of an express power in the contract empowering it to revise the rent.53 However, a notification of the government requiring lessees to pay additional amount for renewal of leases could not entitle the government to demand such payment for renewal of a lease that provided for renewal on same terms.54 Unilateral variation, unless permitted by the contract, or by rules, may amount to breach of contract, and entitle the other party to damages or repudiate the
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contract as the case may be. So would variation beyond the terms of the contract. Where, after an auction sale of a forest area for cutting of trees the department changed the area by reservation of trees, the auction purchaser was held entitled to repudiate the contract and get back the amount of the first installment deposited by him.55 A promise not to change price after seven years from the date of allotment disabled that party from revising rates after seven years.56 23 Juggilal Kamlapat v. NV International Credit-En-Handels, Vereeninging 'Rotterdam', AIR 1955 Cal 65. 24 Williams v. Roffey Bros & Nicholls (Contractors) Ltd., [1991] 1 QB 1, [1990] 1 All ER 512; see s. 2(d): 'Performance of Existing Contractual Duty Owed to Third Party' above. 25 The Indian Evidence Act, 1872, s. 92; the Specific Relief Act, 1963, s. 18(c), as to the effect of subsequent variation on the right to seek specific performance. 26 See the Indian Evidence Act, 1882, s. 92, proviso 4. 27 Earl of Darnley v. London Chdhan and Dover Rly. Co. (1867), LR 2 HL 43 at 60. 28 Tamil Nadu Electricity Board v. N Raju Reddiar, AIR 1996 SC 2025, (1996) 4 SCC 551. 29 53 Con LR 371; Cambridge Law Journal, p. 427, MacMillan, 1996. 30 (2004) 13 SCC 44. 31 (1882) ILR 4 All 330. 32 Kiam-ud-din v. Rajjo, (1888) 11 All 13, (1888-90) ILR 10-12 All 436. 33 The Registration Act, 1908, s. 49. 34 Kiam-ud-din v. Rajjo, (1888) 11 All 13, (1888-90) ILR 10-12 All 436. 35 Har Chandi Lal v. Sheoraj Singh, (1917) LR 44 IA 60, ILR 39 All 178, 39 IC 343, AIR 1916 PC 68; Shankarlal Damodhar v. Ambalal Ajaipal, ILR (1946) Nag 500, AIR 1946 Nag 260 (award and decree not registered, mortgagee can sue on original mortgage); Kannalal Damrulal v. Bhagwandas Tek Chand Pande, (1948) Nag 913, AIR 1949 Nag 5; Pannalal v. Labhchand, AIR 1955 MB 49 at 56; cf Ganpat v. Mahadeo, AIR 1925 Nag 26, 85 IC 264 (where a substituted mortgage is unenforceable for want of attestation or registration, the mortgagor may still be liable on his personal covenant); Subbaraya Pillai v. Pichaipillai Udayan, AIR 1937 Mad 148, 170 IC 840 (analogy of invalid promissory note cannot apply to an invalid mortgage). 36 Berry v. Berry, [1929] 2 KB 316, [1929] All ER Rep 281. 37 Jessel v. Jessel, [1979] 3 All ER 645, distinguishing Minton v. Minton, [1979] 1 All ER 79. 38 Videocon Industries Ltd v. Union of India, AIR 2011 SC 2040, 2011 (6) SCC 161 (amendment clause in the contract). 39 Cowey v. Liberiall Operation Ltd., [1966] 2 Lloyd's Rep 45. 40 Jayant Shantilal Sanghvi v Vadodara Municipal Corpn, AIR 2011 Guj 122. 41 J Sons Co Ltd v. Unin of India, AIR 2011 Pat 181. 42 May and Butcher v. R., [1934] 2 KB 17, [1929] All ER Rep 679 (a clause entitling the buyer to settle the price of goods). 43 Benode Behary Roy v. General Assurance Society Ltd., AIR 1950 Cal 232. 44 National Fertilizers v. Puran Chand Nangia, AIR 2001 SC 53, (2000) 8 SCC 343. 45 Pawan Alloys and Castings Pvt. Ltd. v. Uttar Pradesh State Electricity Board, AIR 1997 SC 3910, (1997) 7 SCC 251 (power in the agreement to revise rates did not entitle the Board to withdraw the rebate granted to new industries--a question of promissory estoppel). 46 Union of India v. Tantia Construction (P) Ltd, (2011) 5 SCC 697. 47 National Fertilizers v. Puran Chand Nangia, AIR 2001 SC 53, (2000) 8 SCC 343 48 JCL International Ltd v Bharat Petroleum Corporation Ltd, AIR 2013 Bom 23 49 Kanpur Development Authority v. Sheela Devi, AIR 2004 SC 400, (2003) 12 SCC 497 (authority cannot claim escalated price beyond the limit given in the contract).
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50 Build India Construction System v. Union of India, AIR 2002 SC 2437, (2002) 5 SCC 433. 51 State of Andhra Pradesh v. Pioneer Construction Co., AIR 1978 AP 281; Magnum Films v. Golcha Properties Pvt. Ltd., AIR 1984 Del 162. 52 Lloyd's Steel Industries Ltd. v. Indian Oil Corpn. Ltd., AIR 1999 Del 248 (also held that the bank guarantee being a wide one, and an independent contract, it would not be discharged by novation or variation). 53 Santosh Kumar Roy v. State of West Bengal, AIR 1997 Cal 168. 54 Rajat Nath Roy v. State of Jharkhand, AIR 2009 Jhar 67. 55 Syed Israr Masood v. State of Madhya Pradesh, AIR 1981 SC 2010 at 2014. 56 Ishwar Dass Nassa v. State of Haryana, AIR 2012 SC 852, 2012 (1) SCC 753.
Pleadings, Evidence and Burden of Proof It is for the party alleging novation to plead the necessary facts on which novation is founded, and to state what the original contract was, and in what way it has been replaced by a new contract.57 An issue to that effect must be raised.58 The plea cannot be allowed to be raised in appeal.59 The new agreement must be a complete legal contract, and its effect must be to vary or add to the terms of the contract. Such agreements are viewed with suspicion and must be proved strictly. The terms of the agreement and also the animus contrahendi on the part of all the parties must be established clearly.60 The burden of proving a departure from the terms of the original contract is on the person asserting it.61 57 S Nazeer Ahmed v. State Bank of Mysore, AIR 2007 SC 989, (2007) 11 SCC 75; Raja Shiba Prasad Singh v. Tincouri Bannerjee, AIR 1939 Pat 477; Shivjiram Dhannalal Marwari v. Gulabchand Kalooram Marwari, AIR 1941 Nag 100 at 102. 58 Babu Ram alias Durga Prasad v. Indra Pal Singh, AIR 1998 SC 3021, (1998) 6 SCC 358 at 370. 59 Mahabir Prasad Mawandia v. Satyanarain Kotriwala, AIR 1963 Pat 131; Babu Ram alias Durga Prasad v. Indra Pal Singh, AIR 1998 SC 3021, (1998) 6 SCC 358 at 370. 60 Twentsche Overseas Trading Co. Ltd. v. Uganda Sugar Factory Ltd., AIR 1945 PC 144 at 145. 61 Bengal Nagur Rly Co. Ltd. v. Ruttanji Ramji, AIR 1935 Cal 347.
Variation or Rescission by Court Where it has the power to do so under a statute, a court has the power to vary or rescind any of the terms of a contract. The court has, for example, power under the Usurious Loans Act to revise the transaction between the parties, reopen any account taken previously, to set aside or alter any security given for a loan, if the interest is excessive, and the transaction of loan is substantially unfair. Matrimonial courts exercise supervisory jurisdiction over maintenance or married persons, and would have the power to vary any agreement for maintenance between them.62 The UNIDROIT Principles also give to the court the power to modify or adapt the contract in certain circumstances:
(i)
(ii)
The court may adapt the contract to make it accord with reasonable commercial standards of fair dealing, upon the request of the party entitled to avoid the contract on the ground that the contract unjustifiably gave the other party an excessive advantage, or the request of the other party.63 The court may adapt the contract with a view to restore its equilibrium after the parties have
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failed to renegotiate the contract in case of hardship.
62 The Hindu Marriage Act, 1955, s. 25; the Special Marriage Act, 1954, s. 37; the Indian Divorce Act, 1869, s s. 37, 40. 63 The UNIDROIT Principles, Art. 3.10.
Novation, Variation and Termination under the Statutes Statutes may provide for novation by substitution of parties, especially upon transfer, acquisition or take-over of undertakings, of certain contracts like employment,64 or of all contractual rights and liabilities of the former undertakings.65 There may be a provision that upon acquisition and transfer, the contracts of the former undertaking shall cease to have effect unless ratified by the Central Government or the new undertaking,66 or may provide that every contract entered into by the former undertaking and in force shall be in full force and effect against or in favour of the Central Government or new undertaking, with a power to the government or the new undertaking to terminate, alter, modify them if unduly onerous, made in bad faith or detrimental to its interests.67 The power to vary may be given to a tribunal instead of the government or new undertaking.68 Statutes may provide for in certain cases for termination of contracts69upon certain contingencies. The custodian can cancel any contract or agreement entered into between 1 April 1991 to 6 June 1992, in relation to any property of a person notified (in connection of share transactions), if it has been entered into fraudulently or to defeat the provisions of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.70 A managing officer or the managing corporation can cancel an allotment or terminate a lease where evacuee property is held or occupied by any person.71 A statute may also provide that certain types of contracts cannot be terminated, viz., where a tenant is declared to be evacuee, or where tenancy rights are vested in the custodian on declaration of the tenant as evacuee, the occupancy or tenancy rights cannot be terminated.72 Rent legislation in various states provides that notwithstanding any contract, tenancy can be terminated only in the manner set out in those act s. A patentee, lessee or licensee of a patent can determine a contract of patent after the term of the patent on giving three months notice, notwithstanding any provision in the contract.73 The services of a permanent employee of a government instrumentality being a state under Art. 12 of the Constitution of India , could not be terminated notwithstanding a stipulation to that effect in the contract of service or the standing orders governing him.74 64 The Air Corporations Act, 1953, s. 20; the Airports Authority of India Act, 1994, s. 18; the Industrial Finance Corporation (Transfer of Undertakings) Act, s. 8, and other similar statutes. 65 The Atomic Energy Act, 1962, s. 13 (upon service of notice on parties to that effect). 66 The Auroville Foundation Act, 1988, s. 28; the Coal Mines (Nationalisation) Act, 1973, s. 29; the Tea Companies (Acquisition and Transfer of Sick Tea Units) Act, 1985, s. 26. 67 Burmah Shell (Acquisition of Undertakings in India) Act, 1976, s. 13; the Indian Copper Corporation (Acquisition of Undertaking) Act, 1972, s. 17; the Indian Iron and Steel Company (Taking over of Management) Act, 1972, s. 14, [repealed by the Iron and Steel Companies (Amalgamation and take over laws) Repeal Act, 2000 (26 of 2000)]; the Lalit Kala Academy (Taking Over of Management) Act, 1997, s. 13. 68 The Air Corporations Act, 1953, s. 24. [repealed by the Air Corporations (Transfer of undertakings and Repeal) Act, 1994 (13 of 1994)]. 69 For statutory determination of contracts, see s. 56. 70 See s. 4(1) of the Act. 71 The Displaced Persons (Compensation and Rehabilitation) Act, 1954, s. 19 [repealed by the Displaced Persons Claims and Other Laws Repeal Act, 2005 (38 of 2005)].
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72 The Administration of Evacuee Property Act, 1950, s. 18 [repealed by the Displaced Persons Claims and Other Laws Repeal Act, 2005 (38 of 2005)]. 73 The Patents Act, 1970, s. 141. 74 Uptron India Ltd. v. Shammi Bhan, AIR 1998 SC 1681, (1998) 6 SCC 538.
Unauthorised Alteration of Documents It is a broad principle of law that any change in a written instrument which causes it to speak a different language in legal effect from that which it originally spoke, i.e., which changes the legal identity or business character of the instrument, either in its terms or in the legal relation of the parties to it, is a material change or an alteration, and such a change invalidates the instrument against the persons not consenting to the change.75 This principle of law is essential to the integrity and sanctity of contracts, and is calculated to prevent fraud and deter men from tampering with written securities, and it would be directly repugnant to the policy of such law to permit the person holding the instrument to attempt a fraud of this kind with impunity, which would be the case if, after being detected in the attempt, he was not in a worse position than he was before.76 The Contract Act does not deal with the subject of alteration in a document, without the consent of both the parties. The rule of English law, that a material alteration of a document by a party to it after its execution without the consent of the other party renders it void, has been held to be in force in India.77 Barring one solitary opinion to the contrary,78 Indian decisions have followed the principles of common law. The rule is that any material alteration in an instrument made by a party, or by anyone while it is in the party's custody or in that of his agent, without the consent of the party or parties liable thereunder, disables him from relying on it either as plaintiff or as defendant.79 The principle behind this rule is that 'no man shall be permitted to take the chance of committing a fraud, without running any risk of losing by the event, when it is detected.'80 In its earliest form it was connected with the old manner of pleading and producing deeds, but in modern times it was deliberately extended on grounds of policy, 'A party who has the custody of an instrument made for his benefit is bound to preserve it in its original state.'81 The principle is said to be 'founded on great good sense, because it tends to prevent the party in whose favour (an instrument) is made from attempting to make any alteration in it'.82 And it is 'as applicable to one kind of instrument as to another.'83 The alternation may have been made by the party to the contract or by a stranger,84 while the document was in the custody of the promisee or his agent,85 or even, for example, by an employee or agent of the financial institution which gave the loan.86 The promisor is not discharged if the alteration is made by accident87 or by mistake; but the contract is not avoided where the alteration is intentional, even if made under a mistake of law as to the legal effect of the document.88 75 Gour Chandra Das v. Prasanna Kumar Chandra, (1906) ILR 33 Cal 812; Mohesh Chunder Chatterjee v. Kamini Kumari Dabia, (1885) 12 Cal 313. 76 Master v. Miller, (1791) 4 TR 320, 2 RR 399, 1 Sm LC 780; Nathu Lal v. Gomti Kuar, 67 IA 318, AIR 1940 PC 160. 77 Atmaram v. Umedram, (1901) 25 Bom 616; Gogun Chunder Ghose v. Dhuronidhar Mundul, (1881) ILR 7 Cal 616; Nathu Lal v. Gomti Kuar, 67 IA 318, AIR 1940 PC 160. 78 Ede v. Kanlo Nath Shaw, (1877) ILR 3 Cal 220, where it deems that s. 37 of the Contract Act has abolished all defences to act ions on contracts not expressly mentioned in the Act; MS Anirudhan v. Thomco's Bank Ltd. (1963) Supp 1 SCR 63, AIR 1963 SC 746 (alteration to a guarantee by the principal debtor while the guarantee was in the custody of the principal debtor--guarantor could not escape liability for different reasons given by the judges). 79 MS Anirudhan v. Thomco's Bank Ltd., AIR 1963 SC 746, (1963) Supp 1 SCR 63; Gogun Chunder Ghose v. Dhuronidhar Mundul, (1881) 7 Cal 616; Nathu Lal v. Gomti Kuar 67 IA 318, AIR 1940 PC 160 at 163; Gomti v. Meghraj Singh, AIR 1933 All 443, 145 IC 147; Pachkodi Gulab Badhai v. Krishnaji, AIR 1947 Nag 145; Vishram Arjun v. Irukulla Shankariah, AIR 1957 AP 784; Pattinson v. Luckley, (1875) LR 10 Ex 330; Suffell v. Governor and Company of the Bank of England, [1882] 9 QBD 555, [1881-85] All ER Rep 1633.
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80 Master v. Miller, (1791) 4 TR 320 at 329, 2 RR 399, 1 Sm LC 780; Gour Chandra Das v. Prasanna Kumar Chandra, (1906) 33 Cal 812; Rangaswami Reddi v. K Doraiswami Reddy, AIR 1957 Mad 715. 81 Davidson v. Cooper, (1884) 13 M & W 343 at 352, 67 RR 638, [1844] 153 ER 142 at 146. 82 Ramlagan Jamadar v. Akleshwar Prasad, AIR 1958 Pat 211; Nathu Lal v. Gomti Kuar, 67 IA 318, AIR 1940 PC 160. 83 Master v. Miller, (1791) 4 TR 320 per Grose J, at 345, 2 RR 399 at 406, 1 Sm LC 780 at 809. 84 Chitty on Contracts, 28th edn., p. 1263, para 26-019. 85 MS Anirudhan v. Thomco's Bank Ltd., AIR 1963 SC 746, (1963) Supp 1 SCR 63. 86 Goss v. Chilcott, [1996] AC 788, [1997] 2 All ER 110(PC) (from New Zealand) (material alteration made by one of the directors of a finance company in the mortgage given to it); Co-op Bank plc v. Tipper, [1996] 4 All ER 366. 87 Hong Kong and Shanghai Banking Corpn. v. Lo Lee Shi, [1928] AC 181. 88 Henfree v. Bromley, (1805) 6 East 309 [1803-13] All ER Rep 383; Wilkinson v. Johnson, (1824) 3 B&C 428 [1824-34] All ER Rep 321.
Material Alteration Any alteration is material which affects either the substance of a contract expressed in the document,89 or which alters the legal effect of the document,90 or imposes greater liability on the promisor, or which affects the identification of the document itself, at all events where identification may be important in the ordinary course of business. The alteration need not be obviously to the disadvantage of the party whose position is altered.91 The fact that a person takes the trouble of altering a number may indicate that in his opinion, at any rate, it is material for some purpose.92 A material alteration is one which varies the rights, liabilities or legal position of the parties ascertained by the deed in its original state, or otherwise varies the legal effect of the instrument as originally expressed or reduces to certainty some provision which was originally unascertained and as such void, or may otherwise prejudice the party bound by the deed as originally executed.93 The effect of material alteration will be the same although the original words of that instrument are still legible, oral though it be not made in respect of the breach of contract on which the plaintiff is suing.94 But where a document consists of print, type and ink writing, any amendment in pencil may be in the nature of a note or a proposed or tentative drafting amendment, and the most natural inference is that it is not intended to be operative and a final alteration, and could not preclude the plaintiff from suing upon it.95 The term 'material alteration' is different from variation of material terms by both parties that alters the contract.96 Alterations are not material if they merely express what was already implied in the document or add particulars consistent with the document as it stands, though superfluous,97 or are innocent attempts to correct clerical errors.98 An alteration made in good faith to carry out the intention of the parties does not vitiate the deed.99 But a scoring out of a term of contract for sale of immovable property is a material alteration.100 Alteration of the date of execution of the deed and certain other words by making holes in the document without the consent of the obligee by the party in whose favour it was executed, was held in the particular circumstances of the case not to be material alteration.101 An alteration in the description of the survey numbers, which were in figures as which were the only ones intended by the parties to be included, was held not to be a material alteration affecting the validity of the deed.102 Taking signatures of additional witnesses after the execution of documents (these being examined for proving the document) was a material alteration, because by doing so the person altering could achieve acceptability by the courts, although they did not affect the legal effect of the agreement of sale.103 An alteration made by one of the joint promisors which reduces their liability equally was not a material alteration.104 In M S Anirudhan v. Thomco's Bank Ltd, 105 the principal debtor altered the guarantee entrusted to him by the surety, the effect of which was to alter the liability from Rs. 25,000/- to R s. 20,000/-. He was held to have act ed as the agent of the surety. This alteration was held not to discharge the surety.106 The judges differed in the reasons in holding the surety liable. Kapur J, held that the surety was liable because it was
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due to his act that the letter of guarantee remained with the principal debtor, and what the principal debtor did estopped the surety from pleading want of authority; besides the document was not altered while in the possession of the promisee.1 Hidayatulla J. held that it was an unsubstantial alteration which did not change the nature of the document and hence could not discharge the surety.2 Nature of Document Besides the alteration being material, it must have been made in a document which is the foundation of the plaintiff's claim. An acknowledgment of debt merely being evidence of a pre-existing liability, any material alteration in it does not render it inoperative;3 but this was where the suit was on the original loan, and the acknowledgment was relied on for saving limitation. On the other hand, where a creditor had based his suit, not on the original loan, but on a bond passed by the defendant which was altered, the plaintiff could not fall back upon the original consideration, and rely on the altered bond as proof of the acknowledgment.4 In Paramma v. Ramachandra, 5 a purchaser for value of a piece of land from a person empowered to sell under a Will was not precluded from relying upon the Will to prove the validity of the sale, though forged attestations were added to the Will after the sale. The decision must be justified because the purchaser never had the custody of the Will, nor is Will a document to which anyone, properly speaking, is party or privy, moreover, the plaintiff's title was complete before the forged attestations were made. Effect of Material Alteration The effect of making such an alteration without consent of the other party is exactly the same as that of cancelling the deed, and no person can maintain an act ion upon it.6 A person who alters the deed can neither get specific performance nor damages in the alternative.7 But the avoidance is not retrospective and does not revest the property or reconvey any estate or interest passed under it. The deed may be put in evidence to prove that such estate or interest is so passed or for any other purpose than to maintain an action to enforce some agreement contained in it.8 Where the document is materially altered, the plaint cannot be amended, and the plaintiff cannot fall back on the original cause of act ion;9 and no decree can be awarded even if the defendant admits the claim.10 But it appears that the person who has altered the document without the consent of the other may sue for restitution under s. 65.11 An alteration made with the consent of the other party would operate as a new agreement. In Goss v. Chilcott, 12 a mortgage was altered to extend the date of payment and interest. The mortgagee finance company sought claim on the debt and the oral agreement to repay the loan preceding the mortgage, and it was held that the oral agreement to repay the advance merged had merged in and was wholly superseded by the mortgage so as to discharge the liability under it. No oral agreement survived the discharge, nor could any debt have done so since its existence was contingent on the continued existence of the mortgage. Indian decisions on the subject may be divided into two classes--the first about suits on documents which by the very execution thereof effect a transfer of interest in specific immovable property, and the second about suits brought for bond debts on the basis of altered documents. Material alteration in documents creating an interest in properties A material alteration, though fraudulent, made in a mortgage or hypothecation bond does not render it void for all purposes from the beginning. It ceases to have any new operation. The altered document can still be given in evidence to prove the right, title or interest created by, or resulting from the execution of the document, provided that the suit is based on such right, and not on the altered document. This rule, professedly founded by the Indian courts on English decisions,13 is based on the principle that the right title or interest created by, or resulting from, the very fact of the execution of the document does not rest on a contract or covenant, but arises by operation of law, and a subsequent alteration, therefore, does not
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divest the vested right and revest the property in the transferor.14 One view is that the rule as to material alteration has no application as the case of mortgages would place a premium on dishonesty, and would enable a mortgagee to try the experiment of claiming a fraudulently enhanced amount of mortgage money without the risk of losing when the fraud is discovered.15 In Ramaswamy Kon's case,16 the earliest of these cases, the plaintiff held a hypothecation bond from the defendants, and altered the date of the bond so as to bring the personal remedy, then barred, within limitation. He sued to recover the balance of the bond debt from the defendants personally, and also by sale of the hypothecated property. The court passed a decree for the amount due against the property, holding that the altered document might be used as proof of the right created by or resulting from its having been executed. According to later cases, the decision could only by upheld if the suit was not based on the altered document.17 But in Ganga Ram v. Chandan Singh, 18 a case similar to the above, a hypothecation bond was fraudulently altered by the plaintiff so as to comprise a larger area of land than was actually hypothecated. The suit was brought on the altered bond, and the dismissal of the suit was upheld; but this judgment was disapproved in later cases.19 In a Madras case the plaintiff sued to recover the principal and interest due on a mortgage bond, raudulently altered by him by doubling the rate of interest and inserting a condition making the whole sum payable upon default of payment of anyone installment. In a suit brought on the altered bond, the dismissal of plaintiff's entire claim was confirmed.20 But in Subrahmania Ayyan v. Krishna Ayyan, 21 where the mortgage bond was similarly altered in a material respect, the suit was not based on the altered bond,22 and the court allowed the bond to be used as proof or the mortgagee's right to sell the property. In the last of the series of cases Mangal Sen v. Shankar Sahai, 23 a puisne mortgagee brought a suit for sale against his mortgagors, and impleaded a prior mortgagee as a defendant, offering to redeem the prior mortgage. The prior mortgage, when tendered in evidence by the prior mortgagee, was found to have been tampered with, and altered in a particular material, the extent of the share mortgaged having been increased. It was held that such alteration did not render the instrument void in toto, so as to justify the court in ignoring its existence and passing a decree in favour of the plaintiff for sale of the property, comprised in it without payment, of the amount due under it to the prior mortgagee. It will be seen that in this case there was no suit brought upon the altered document, nor was the prior mortgagee a plaintiff; but the decision of the majority of the Full Bench did not rest upon these narrow grounds.24 It was stated 'It is one thing for the court to refuse its aid to a fraudulent plaintiff, and another thing to direct the sale of property in which a defendant (prior mortgagee) has an interest without compensating him for such interest, because on production of his title-deed it is found to have been tampered with.' In these classes of cases it is held that where a suit is brought by a plaintiff on a document fraudulently altered by him he will not be allowed subsequently to amend the plaint so as to base his claim on the document as executed by the defendant.25The courts do not appear to have decided in these cases that the defendant is not liable in some form of proceeding to repay money which he has act ually received.26 Negotiable Instruments The principle applies to negotiable instruments on the ground that the rule stands as a broad ground of public policy, and if any difference is to be made at all between negotiable instruments and deeds, it should rather be to enforce the rule with greater strictness as to the former. Any material alteration of a negotiable renders the same void as against anyone who is a party thereto at the time of instrument making such alteration and does not consent thereto, unless it was made in order to carry out the common intention of the original parties; and any such alteration, if made by an endorsee, discharges his endorser from all liability to him in respect of the consideration thereof.27The Negotiable Instruments Act, 1881 allows filling up of blanks (s. 20), conversion of indorsement in blank to indorsement in full (s. 49) and crossing of cheques (s. 125). An acceptor or indorser of a negotiable instrument is bound by this acceptance or indorsement notwithstanding any previous alteration of the instrument.28The Act also protects payment made according to the apparent enor of the instrument and in due course of an instrument which is materially altered, but does not appear to be altered.29
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Where the passing of consideration and the execution of a promissory note which was subsequently altered, were simultaneous acts, s. 65 of the Contract Act did not apply because the instrument was unenforceable under s. 87 of the Negotiable Instruments Act, 1881, and the contract had not 'become void', nor was it 'discovered to be void'. But if there was a debt, which existed before the execution of the promissory note, a suit would lie for its recovery.30 Material alteration in other documents In these classes of documents, the Indian courts have followed the principles of English law, the point for decision in each case being whether the alteration was, or not, material. Thus, where one of three brothers passed a bond to the plaintiff, and the plaintiff forged the signature of the other two brothers on the bond and brought a suit upon it in its altered form against all the three brothers, the alteration avoided the bond,31 and the plaintiff, in such a case, could not get a decree even against the real executant.32 Similarly, alteration was held material and disentitled the plaintiff to sue on the document where the date of a bond was altered from 11 September to 25 September as it extended the time within which the plaintiff was entitled to sue, even though limitation according to the original date had not expired;33 or where the plaintiff altered a bill of exchange from DP, that is, documents to be delivered against payment, into DA, that is, documents to be delivered against acceptance;34 or where the alteration in a document had the effect of enabling the payee to sue on the documents in a court in which he could not have sued, but for the alteration.35 In the last case, the fact that the payee eventually filed the suit in a court different from the one intended by the alteration, and that it was not necessary for him to rely on the altered state of the document to enable him to succeed in the suit, did not make the alteration any less material.36 Alteration not affecting the contract The fact that the signature of an attesting witness had been affixed after execution to a bond that does not require to be attested was not a material alteration, and did not make the bond void;37 nor an alteration to add in document a description of immovable property which was not within the scope of the document;38 nor an insertion in a document of sale of a clause excepting a claim on a former account, which could not therefore defeat the claim for the price.39 Where a document was altered in good faith to make the real intention of the parties clear, the document is valid.40 Thus, where the interest was provided in a mortgage bond in terms 'one rupee per mensem', in which the mortgagee had inserted the words 'per cent' after the words 'one rupee', it was held that anybody reading the document could not fail to read it in the sense that interest was to be paid at the rate of one rupee per mensem, and that the mortgagee was entitled to interest at that rate.41 Adding witnesses to the instrument after its execution did not render that agreement unenforceable.42 Burden of proof The burden of proving that the promisee has made alteration in the document without the consent of the promisor, lies on the promisor who contests the document on that ground.43 But once it is proved or is obvious from the instrument that it has been altered, the burden shifts to the promisee to show that the alteration was not improperly made,44i.e., it was made in circumstances insufficient to discharge him of liability, viz., that it was made before the signatures, or that it was made bonafide, accident, mistake, etc. In the case of deeds, any alteration or interpolation appearing on the face of the document is presumed, in absence of evidence to the contrary, to have been made before the execution of the deed.45 Recommendations of the Law Commission The Law Commission of India has recommended that the principles governing material alteration be
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incorporated as a new section in the Contract Act .46 89 Gardner v. Walsh, (1855) 5 E & B 83, 103 RR 377. 90 Pachkodi Gulab Badhai v. Krishnaji, AIR 1947 Nag 145. 91 Gardner v. Walsh, (1855) 5 E & B 83, 103 RR 377; Pachkodi Gulab Badhai v. Krishnaji, AIR 1947 Nag 145. 92 Suffell v. Governor and Company of the Bank of England, [1882] 9 QBD 555, [1881-85] All ER Rep 1633 (a Bank of England note with a number altered). 93 Nathu Lal v. Gomti Kuar, 67 IA 318, AIR 1940 PC 160 at 163; Kalianna Gounder v. Palani Gounder, AIR 1970 SC 1942; Ramlagan Jamadar v. Akleshwar Prasad, AIR 1958 Pat 211 at 216; Sivarama Konar v. Thiruvadinatha Pillai, AIR 1957 Tr & Coch 189. 94 Chitty on Contracts, 28th edn., p. 1263, para 26-019. 95 Co-op Bank plc v. Tipper, [1996] 4 All ER 366. 96 See Subhash Chand Jain v. Haryana Financial Corporation, AIR 2008 P&H 99 (that fails to make this distinction). 97 Lowe v. Fox,(1887) 12 App Cas 206, where the document was in the form of a statement required by the Lunacy Act, then in force; MS Anirudhan v. Thomco's Bank Ltd., AIR 1963 SC 746, (1963) Supp 1SCR 63. 98 Howgate and Osborn's Contract,[1902] 1 Ch 451. 99 L Ram Sukh Das v. Hafiz-ul-Rahman, AIR 1945 Lah 177. 100 V Kameswararao v. M Hemalathammarao, AIR 1959 AP 596. 101 Nathu Lal v. Gomti Kuar, AIR 1940 PC 160. 102 Sivarama Konar v. Thiruvadinatha Pillai, AIR 1957 Tr & Coch 189. 103 Sardar v. Ram Khilauna, AIR 1997 All 268 at 274. 104 MS Anirudhan v. Thomco's Bank Ltd., AIR 1963 SC 746, (1963) Supp 1 SCR 63 (Hidayatullah J). 105 (1963) Supp 1 SCR 63, AIR 1963 SC 746. 106 AIR 1963 SC 746 per majority, Sarkar J dissenting. 1 1963 Supp (1) SCR 63 at 66, AIR 1963 SC 746 at 748. 2 1963 Supp (1) SCR 63 at 82, AIR 1963 SC 746 at 754. 3 Atmaram v. Umedram, (1901) ILR 25 Bom 616 (alteration in the date of acknowledgement); Harendra Lal Roy v. Uma Charon Ghosh, (1905) 9 Cal WN 695 (interpolation in the entry of interest in an acknowledgment). 4 Gour Chandra Das v. Prasanna Kumar Chandra, (1906) ILR 33 Cal 812 (names of parties were added). 5 (1882-84) ILR 5-7 Mad 794. 6 Hardwar Singh v. Hari Prasad Rai, AIR 1943 All 24; Probadha Gaolini v. Banka Behari Mondal, AIR 1933 Cal 196; Chaudhuri Janardan Parida v. Prandhan Das, AIR 1940 Pat 245; Nathu Lal v. Gomti Kuar, 67 IA 318, AIR 1940 PC 160; Pachkodi Gulab Badhai v. Krishnaji, AIR 1947 Nag 145; Mahila Bai Kokila Bai v. Ram Singh, AIR 1954 MB 31; V Kameswararao v. M Hemalathammrao, AIR 1959 AP 596. 7 V Kameswararao v. M Hemalathammarao, AIR 1959 AP 596; Kandregula Anantha Rao Pantulu v. Kandikonda Surayya, (1919) 43 Mad 703, AIR 1920 Mad 64, 55 IC 697. 8 Nathu Lal v. Gomti Kuar, 67 IA 318, AIR 1940 PC 160; Sivarama Konar v. Thiruvadinatha Pillai, AIR 1957 Tr & Coch 189; Ramlagan Jamadar v. Akleshwar Prasad, AIR 1958 Pat 211; Gogun Chunder Ghose v. Dhuronidhar Mundul, (1881) 7 Cal 616. 9 Ravjibhai Nathabhai Patel v. Ranchhod Raghunath Patel, AIR 1930 Bom 66 (but the court found that the alteration was not fraudulent, and allowed an amendment to claim the original cause of action). 10 Laduram Marwari v. Bansidhar Marwari, AIR 1937 Pat 572. 11 Kandregula Anantha Rao Pantulu v. Kandikonda Surayya, (1919) 43 Mad 703, AIR 1920 Mad 64, 55 IC 697 (repayment
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of advance); Rangaswami Reddi v. K Doraiswami Reddy, AIR 1957 Mad 715 (s. 65 does not apply, but suit can lie for recovery of original debt). 12 Goss v. Chilcott, [1996] AC 788, [1997] 2 All ER 110(PC) (from New Zealand) (but claim allowed on the basis of restitution for total failure of consideration). 13 Mangal Sen v. Shankar Sahai, (1903) ILR 25 All 580 (cases discussed); Davidson v. Cooper, (1884) 13 M & W 343, 67 RR 638, [1844] 153 ER 142; Doe d Beanland v. Hirst, (1821) 3 Stark 60, 23 RR 756; Hutchins v. Scott, (1837) 2 M & W 809, 46 RR 770, [1835-42] All ER Rep 181; West v. Steward, (1845) 14 M & W 47; Agricultural Cattle Insurance Co. v. Fitzgerald, [1851] 16 QB 432. 14 Christacharlu v. Karibasayya, (1885) 9 Mad 399 at 412; Subrahmania Ayyan v. Krishna Ayyan, (1899) 23 Mad 137 at 143. 15 Mangal Sen v. Shankar Sahai, (1903) ILR 25 All 580 per Aikman J, at 611-12. 16 (1866-68) 3 MHCR 247. 17 Christacharlu v. Karibasayya, (1885) 9 Mad 399 at 410, 420. (1885-87) ILR 8-10 Mad 673. 18 (1881) 4 All 62, (1880-82) ILR 3-4 All 631. 19 Christacharlu v. Karibasayya, (1885) 9 Mad 399 at 412; Mangal Sen v. Shankar Sahai, (1903) 25 All 580 at 604, (1885-87) ILR 8-10 Mad 673. 20 Christacharlu v. Karibasayya, (1885) 9 Mad 399 at 412. 21 (1899-1900) ILR 22-23 Mad 493. 22 See dissenting judgment of O'Farrell J. holding at p 149, that the suit was based upon the altered document. 23 (1903) ILR 25 All 580. 24 Ibid per Stanley CJ, at 601, while distinguishing this case from Ganga Ram v. Chandan Singh, (1881) 4 All 62 supra. 25 Gogun Chunder Ghose v. Dhuronidhar Mundul, (1881) ILR 7 Cal 616; Ganga Ram v. Chandan Singh supra; Christacharlu v. Karibasayya, (1885) 9 Mad 399.. 26 Mangal Sen v. Shankar Sahai, (1903) ILR 25 All 580 per Stanley CJ, at 599. 27 The Negotiable Instruments Act, 1881, s. 87. 28 The Negotiable Instruments Act, 1881, s. 88. 29 Ibid. 30 Rangaswami Reddi v. K Doraiswami Reddy, AIR 1957 Mad 715. 31 Gogun Chunder Ghose v. Dhuronidhar Mundul, (1881) ILR 7 Cal 616; Gour Chandra Das v. Prasanna Kumar Chandra, (1906) 33 Cal 812; Karamali v. Norain Sing, (1900) Punj Rec No 91; Chaudhary Rajdhar v. Mohan, AIR 1931 All 325, [1931] ER LJ 223, 131 IC 593. 32 Mahila Bai Kokila Bai v. Ram Singh, AIR 1954 MB 31. 33 Govindasami Pillai v. Kuppasami Pillai, (1889) ILR 12 Mad 239; Gomti v. Meghraj Singh, AIR 1933 All 443, 145 IC 147; Hardwar Singh v. Hari Prasad Rai, AIR 1943 All 24; but see Nathu Lal v. Gomti Kuar, 67 IA 318, AIR 1940 PC 160. 34 Mesha Ahronel v. National Bank of India Limited, (1903) 5 Bom LR 524 (the drawer not liable upon the altered bill). 35 Lakshmammal v. Narasimharaghava Iyengar, (1915) ILR 38 Mad 746, AIR 1916 Mad 284, 21 IC 445. 36 Ibid. 37 Mohesh Chunder Chatterjee v. Kamini Kumari Dabia, (1885) 12 Cal 313; Venkatesh Prabhu v. Baba Subraya, (1890) 15 Bom 44; Ramayyar v. Shanmugam Pillai, (1891) 15 Mad 70, (1892) 2 Mad LJ 39; Sitaram Krishna v. Daji Devaji, (1883) 7 Bom 418; (1886) ILR 12-13 Cal 213; But see Sardar v. Ram Khilauna, AIR 1997 All 268. 38 Abdool Hoosein Mulla v. Goolam Hoosein Ally, (1905) ILR 30 Bom 304 at 318. 39 Vena Mana Govindasami Naidu v. Kuppusami Pillai, (1893) 3 Mad LJ 266. 40 Kalianna Gounder v. Palani Gounder, AIR 1970 SC 1942; Nandi Ram Alias Agrani v. Jogendra Chandra Dutta, AIR 1923 Cal 53; L Ram Sukh Das v. Hafiz-ul-Rahman, AIR 1945 Lah 177; Bijay Krishna Paramanya v. Kali Charan Mondal, AIR
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1978 Cal 153; Ananda Mohan Saha v. Ananda Chandra Saha, (1917) 44 Cal 154, AIR 1917 Cal 811, 35 IC 182; MS Anirudhan v. Thomco's Bank Ltd., (1963) Supp 1 SCR 63, AIR 1963 SC 746. 41 Ananda Mohan Saha v. Ananda Chandra Saha, (1917) 44 Cal 154, AIR 1917 Cal 811, 35 IC 182. 42 Ram Khilona v. Sardar, AIR 2002 SC 2548, (2002) 6 SCC 375. 43 L Ram Sukh Das v. Hafiz-ul-Rahman, AIR 1945 Lah 177. 44 Firm Sri Chand Sheo Parshad v. Lajjia Ram, AIR 1939 Lah 31. 45 Halsbury's Laws of England, Vol. 12, 5th edn., 1 March 2009, CIVIL PROCEDURE, para 1103. 46 See the 13th Report of the Law Commission of India, 1958, paras 78-79 recommending adding s. 67A as follows:&uot;67 A. Material alterations in an instrument containing the contract.--(1) Any material alteration of any instrument in which a contract is expressed renders the contract void as against anyone who is a party thereto at the time of making such alteration and does not consent thereto, unless it was made in order to carry out the common intention of the parties to the contract.(2) A party to a contract expressed in an instrument, who asserts his rights thereunder, is bound by the instrument, notwithstanding any previous alteration of the instrument known to him. (3) For the purposes of this section, a material alteration is one which varies the rights, liabilities or legal position of the parties as ascertained by the instrument in its original state, or otherwise affects the substance of the contract expressed in the instrument or prejudices any party bound by the contract. (4) An alteration which merely expresses what was already implied in the instrument, or adds particulars which, though superfluous, are consistent with the instrument as it stands, is not a material alteration within the meaning of this section. (5) The provisions of this section shall not apply where the alteration was made by a stranger without the consent of, or any negligence or fraud on the part of, a party to the contract.&uot;
Discharge under provisions of the Contract A contract may itself contain a provision for its own discharge of its termination or determination. The parties may provide that on the happening of an event or on its not appening, the contract shall determine by itself, or that on such event, anyone or either of the parties shall have an option to terminate the contract. The contract may not contain any provision about its determination, or may have been expressly made for an indefinite period of time. Under the Common Law, since the parties are free to incorporate whatever terms they wish for the termination of their agreement, no question arises whether the provision is reasonable or whether it is reasonable for a party to enforce it, unless the situation is one in which equity would grant relief against forfeiture.47Since there is a complete and act ive obligation under the contract subject to being defeated by matter subsequent, the contract is not a contingent contract. Contract indefinite as to time It was earlier held that every contract not expressly limited as to duration was prima facie permanent and irrevocable, and that the burden lay on the party asserting that the contract was not perpetual to prove so, showing either such a provision in the contract itself, or something in the nature of the contract, from which it could reasonably be implied that the contract was subject to determination.48 Contracts involving trust and confidence, delegation of authority, or personal relations between the parties are determinable by their nature, like contracts of partnership,49 of agency50 and service. There is no presumption of permanence of duration in any type of contract, and the question whether the contract is determinable depends upon the proper construction of the contract in every case,51 and a contract for a fixed price,52 or a commercial contract53 have been held to be so determinable. In Staffordshire Area Health Authority v. South Staffordshire Waterworks Co, 54 a water company agreed, in 1929, to supply at all times a certain quantity of water free and the extra quantity taken at 7d (or 2.9p decimal currency) per 1000 gallons. In 1975 the normal rate charged by the company was 45p (new currency). The company wrote to the hospital saying that they would give 5000 gallons of water free and would charge normal rate for extra water supplied. It was held that in the circumstances and in view of all o f money value, the water company was entitled to terminate the agreement after reasonable notice.55 In Martin-Baker Aircraft Co. Ltd. v. Canadian Flight Equipment Ltd, 56 a Canadian company was authorised by a licence agreement to manufacture, sell or exploit all the products of an English company. The English company was to supply
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the 'know-how', the exchange of information with regard to improvements and training of technicians, and inspection of processes of the Canadian company. The agreement did not contain provision for determination. It was held unilaterally revocable by the English company on giving reasonable notice, the question of reasonable period of notice to depend on the facts existing at the time when the notice was to be given. In the circumstances 12 months notice was found reasonable. Whether a contract like this is permanent or revocable does not depend upon an implied term, but upon the true construction of the language used.57 The UNIDROIT Principles provide that where the duration of a contract is neither determined or determinable, or where the parties have stipulated that their contract has been concluded for an indefinite period, either party may end the contract by giving reasonable notice in advance.58 The principle behind this provision is that contracts may not bind the parties eternally and that they may always opt out of such contracts provided they give notice for a reasonable time in advance. Contracts for a Fixed Period If the contract stipulates that it shall continue for a definite period, it cannot be terminated before the expiration of that period,59 unless the parties have the power to do so under the terms of the contract.60 The parties may mutually rescind or cancel it or abandon it. If the contract provides that it is to continue for a fixed period and thereafter until determined by notice, the contract cannot be terminated until the expiry of the fixed period. But whether the contract is one that can be terminated at the end of the period by a notice given during that period, or is one which can only be determined after the expiry of the definite term by notice given after the end of the term, is a matter of construction of the terms in the contract.61 Provision of Termination in the Contract It is usual for parties to a contract to stipulate expressly or impliedly that the contract shall be determinable in certain circumstances, such as:
(i) (ii) (iii)
notice at the option of anyone or of either party;62 with or without reasons,63 forthwith or after a specified period of time,64 or on the happening of a particular event, viz., in shipping contracts, in the event of war, blockade or prohibition on loading; or in a lease, on insolvency of the lessee; or non-performance or breach of a term of the contract, viz., right of re-entry in leases for non-payment of rent or breach of conditions.65
The burden of proving the facts entitling the right of termination lies on the party seeking to terminate the contract.66 47 Chitty on Contracts, 28th edn., p. 1162 para 23-046; China National Foreign Trade Transportation Corpn. v. Evlogia Shipping Co. SA, [1979] 1 WLR 1018, [1979] 2 All ER 1044(HL) ; Mardorf Peach & Co. Ltd. v. Attica Sea Carriers Corpn. of Liberia, [1977] AC 850, [1977] 1 All ER 545(HL) ; Afovos Shipping Co. SA v. Pagnan (The Afovos), [1983] 1 All ER 449, [1983] 1 WLR 195(HL) ; Scandinavian Trading Tanker Co. AB v. Flota Petrolera Ecuatoriana (The Scaptrade), [1983] 2 AC 694, [1983] 1 All ER 301(CA), affirmed in, [1983] 2 All ER 763(HL) . 48 Llanelly Rail and Dock Co. v. L & NW Rly., (1873) 8 Ch App 942 per James LJ, at 949-950, on appea (1875) LR 7 HL 550 per Lord Selborne at 567 (agreement between railway companies for running powers); Crediton Gas Company v. Crediton Urban District Council, [1928] All ER Rep 775 [1928] Ch 447(CA) (agreement in fact held revocable). 49 The Indian Partnership Act, 1932, ss. 40, 41. 50 Section 203 below. 51 Martin-Baker Aircraft Co. Ltd. v. Canadian Flight Equipment Ltd., [1955] 2 QB 556, [1955] 2 All ER 722; Re Spenborough Urban District Council's Agreement, Spenborough Corporation v. Cooke Sons & Co. Ltd., [1968] Ch 139, [1967] 1 All ER
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959; Beverley Corpn. v. Richard Hodgson & Sons Ltd., (1972) 225 Estates Gazette 799 (agreements regulating discharge of effluent into public sewer). 52 Staffordshire Area Health Authority v. South Staffordshire Waterworks Co., [1978] 3 All ER 769, [1978] 1 WLR 1387. 53 Martin-Baker Aircraft Co. Ltd. v. Canadian Flight Equipment Ltd., [1955] 2 QB 556, [1955] 2 All ER 722. 54 [1978] 3 All ER 769 at 774, 776-8, [1978] 1 WLR 1387. 55 Reordon-Smith Line Ltd. v. Hansen-Tangen, [1976] 3 All ER 570 at 574-75; Utica City National Bank v. Gunn, (1918) 222 NY 204 at 208; Multiservice Bookbinding Ltd. v. Marden, [1978] 2 All ER 489; Crediton Gas Co. v. Crediton Urban District Council, [1928] Ch 447; Re Spenborough Urban District Council's Agreement, Spenborough Corporation v. Cooke Sons & Co. Ltd. [1968] Ch 139, [1967] 1 All ER 959. 56 Martin-Baker Aircraft Co. Ltd. v. Canadian Flight Equipment Ltd., [1955] 2 QB 556, [1955] 2 All ER 722; Llanelly Rail and Dock Co. v. L & NW Rly. (1875) LR 7 HL 550; Crediton Gas Co. v. Crediton Urban District Council, [1928] Ch 447; Winter Garden Theatre (London) Ltd. v. Millenium Productions Ltd., [1948] AC 173, [1947] 2 All ER 331(HL) . 57 Martin-Baker Aircraft Co. Ltd. v. Canadian Flight Equipment Ltd., [1955] 2 QB 556 at 578, [1955] 2 All ER 722 at 733; Winter Garden Theatre (London) Ltd. v. Millenium Productions Ltd., [1948] AC 173, [1947] 2 All ER 331(HL) . 58 The UNIDROIT Principles, Art. 5.8. 59 Ogdens Ltd. v. Nelson, [1905] AC 109(HL), [1904-07] All ER Rep Ext 1658 (promise by defendants to pay share of profits to dealer not excused by defendants going into liquidation). 60 Nelson v. James Nelson & Sons Ltd., [1914] 2 KB 770, [1914-15] All ER Rep 433(CA) ; Diggle v. Ogston Motor Co. (1915) 84 LJKB 2165. 61 William Jacks & Co. v. Palmer's Shipbuilding and Iron Co., (1928) 98 LJKB 366. 62 Central Bank of India Ltd. v. Hartford Fire Insurance Co. Ltd., AIR 1965 SC 1288. 63 Oil and Natural Gas Corporation Ltd. v. Streamline Shipping Co. Pvt. Ltd, AIR 2002 Bom 420; Her Highness Maharani Shantidevi P Gaikwad v. Savjibhai Haribhai Patel, AIR 2001 SC 1462, (2001) 5 SCC 101. 64 U P Purva Sainik Kalyan Nigam Ltd. Lucknow v. State of Uttaranchal, AIR 2005 Uttaranchal 33. 65 See the Transfer of Property Act, 1882, s. 111(g). 66 Chandris v. Isbrandtsen Moller Co. Inc., [1951] 1 KB 240 at 245-46; reversed on other grounds in, [1950] 2 All ER 618; PJ Van der Zijden Wildhandel NV v. Tucker & Cross Ltd., [1976] 1 Lloyd's Rep 341.
Termination by Notice If a contract contains a provision that one of the parties thereto may determine the contract by notice at the option of one of the parties or either of the parties, and may be made exercisable upon breach of contract by one of the parties (whether the breach amounts to repudiation or not), or on occurrence of any other specified event, or without requiring any reason simply at the will of such party entitled, such provisions may be express, or may be implied in the contract,67 or incorporated by usage or custom of trade. Such notice must be given in accordance with the terms of the contract,68 but the right to notice may be waived.69 The notice must be clear and unambiguous in its terms.70 The form and the conditions in the contract, viz., writing, mode of giving notice, period of notice, time at which it can be given, etc, must be strictly complied with, else the notice may not be of any effect.71 If the contract requires that notice of a specified length of time be given, notice of that length of time must be given;72 and if the contract requires that the notice can be given on performance of a condition precedent, the party seeking to determine the contract by notice must show that the condition has been fulfilled.73 Notice of termination validly given cannot thereafter be withdrawn without an agreement.74 Such a stipulation is to be construed according to its natural meaning subject to the principle that a party shall not take advantage of his own wrong.75 There is a presumption that parties do not intend to rely on their own breach to avoid the contract, but it is subject to clear provision to the contrary in the contract.76 Where any restriction on the power of
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termination applies only to termination under one clause, the restriction may not apply to the power to terminate under other clauses.77 If the contract confers power on any party to terminate by notice, and does not prescribe any length of the notice, the notice must be reasonable.78 In a concessionaire agreement terminable by reasonable notice on either side, 12 months' notice was reasonable to terminate the agreement, in view of the expenditure and work put into carrying out the agreement.79There is no requirement that a party must act reasonably when deciding to exercise a contractual power to terminate, but restrictions may be placed on the power by statute.80 A clause entitling a party to a contract to terminate a contract without assiging any reasons is not unconscionable or opposed to public policy,81 such power given to the government under the contract is also valid.82 Where the contract gives the power to either party to terminate the contract without assigning any reason, and the notice of termination by one party also mentions a reason justifying the termination, the termination is nevertheless valid.83 67 See s. 9 above, under the heading: 'Termination of Contract'. 68 Re Viola's Leas, Humphery v. Stenbury, [1909] 1 Ch 244, [1908-10] All ER Rep 483; William Jacks & Co. v. Palmer's Shipbuilding and Iron Co. [1928] 98 LJKB 366(CA) ; Re Berker Sportcraft Ltd's Agreements, Re Hartnell v. Berker Sportcraft Ltd., (1947) 177 LT 420. 69 Friary Holroyd and Healey's Breweries Ltd. v. Singleton, [1899] 2 Ch 261(CA) ; Laycock v. Bulmer, (1844) 13 LJ Ex 156; Macnaghten v. Paterson, [1907] AC 483(PC) . 70 May v. Borup, [1915] 1 KB 830; Addis v. Burrows, [1948] 1 KB 444, [1948] 1 All ER 177. 71 Afovos Shipping Co. SA v. Pagnan (The Afovos), [1983] 1 All ER 449, [1983] 1 WLR 195(HL) ; Mannai Investment Co. Ltd. v. Eagle Star Life Assurance Co. Ltd., [1997] 3 All ER 352, [1997] 2 WLR 945 (minor discrepancy does not affect validity of notice). 72 H Boot & Sons (London) Ltd. v. Uttoxeter UDC, (1924) 88 JP 118(CA) . 73 Simons v. Associated Furnishers Ltd., [1931] 1 Ch 379, [1930] All ER Rep 427. 74 Riordan v. War Office, [1959] 3 All ER 552, [1959] 1 WLR 1046, affirmed in, [1960] 3 All ER 774, [1961] 1 WLR 210(CA) ; Decro-Wall International SA v. Practitioners in Marketing Ltd., [1971] 2 All ER 216 at 235, [1971] 1 WLR 361 per Buckley LJ, at 382 (CA); Harris and Russell Ltd. v. Slingsby, [1973] 3 All ER 31. 75 Chotelal Lallubhai v. Champsey Umersey & Sons, AIR 1923 Bom 75, (1922) 24 Bom LR 877. 76 BDW Trading Ltd (T/A Barratt North London) v. JM Rowe (Investments) Ltd, [2011] EWCA Civ 548. 77 BDW Trading Ltd (T/A Barratt North London) v. JM Rowe (Investments) Ltd, [2011] EWCA Civ 548. 78 Hillis Oil & Sales v. Wynn's Canada, [1986] 1 SCR 57 (Supreme Court of Canada) (distributorship greement). 79 Decro-Wall International SA v. Practitioners in Marketing Ltd., [1971] 2 All ER 216 at 224, 230, 234, [1971] 1 WLR 361(CA) . 80 The (English) Unfair Contract Terms Act, 1977. 81 Oil and Natural Gas Corporation Ltd. v. Streamline Shipping Co. Pvt. Ltd, AIR 2002 Bom 420. 82 Hajee SVM Mohamed Jamaludeeen Bros & Co. v. Government of Tamil Nadu, AIR 1997 SC 1368, (1997) 3 SCC 466; Rajasthan Breweries Ltd. v. Stroh Brewery Co., AIR 2000 Del 450. 83 Food Corpn. of India v. Jagannath Dutta, AIR 1993 SC 1494, (1993) Supp 3 SCC 635 (the reason being change of policy).
Termination on Happening of an Event The parties may stipulate that the contract shall be determined or shall be 'void' on the happening of a
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certain event.84 If the event is such over which the parties have no control, the contract will cease to bind on the happening of the event.85If such an event is within the control of any of the parties, such party cannot insist upon the stipulation who, by his own wrongful act or omission brings about that event, nor can he compel to other party to insist upon it, since it is a universal principle of law that a party may never take advantage of his own wrong.86 Thus, a contract, the duration of which is conditional on the approval of one of the parties, cannot be terminated by a disapproval that is capricious and not genuine. It has also been said that where an event which under the contract renders the contract 'void' may occur naturally or by the act of a party; void will be read as 'voidable' however the event occurs.87 Termination of contract which has been performed A condition in a contract in which liability has been incurred, giving a party discretion to cancel the contract at any time without assigning any reason is void and cannot be enforced to the extent any liability has been incurred.88 A clause in a contract of supply of goods to the railway administration conferring on the railway administration the right to cancel the contract 'at any stage during the tenure of the contract without calling upon the outstandings on the unexpired portion of the contract,' was held to be a clause under which it was open to one of the parties, without assigning any reason, valid or otherwise, to say that it was not enforceable. It gave an absolute power to one of the parties to cancel the contract.89 On appeal the Supreme Court90 held that the clause authorising cancellation applied only where a formal order had not been placed for supply of the goods contracted for, and did not apply to the orders which were already placed. In Central Bank of India Ltd. v. Hartford Fire Insurance Co. Ltd, 91 the Supreme Court upheld the clause in an insurance policy authorising both the parties to cancel the policy at will, stating that the clause gave a right to put an end to the contract only as to the future, and did not affect the liability incurred. This right could not be read as a right to terminate only for a reasonable cause. It held that where the language of a clause in a contract was clear, it must be interpreted according to its language.92 It is submitted that the two Supreme Court judgments show that such clauses are valid and enforceable except where, as in the Madras Railway case, the contract is an executed contract in that a formal order of supply had already been made. In the case of a continuing contract, e.g., partnership or service, a provision making the contract determinable at the option of one of the parties would be valid.93 But where an agreement with retailers appointed by the collector for the distribution of levy sugar contained a clause authorising the collector to terminate the distributorship of the retailer, it was held that the termination under the clause enabling it was valid and did not violate Art. 14 of the Constitution of India .94 Termination of contracts by the Government For the validity and effect of termination by the government or its agencies of contracts with them see s. 10 above, under the heading: 'Unilateral termination under powers conferred by contract'. 84 Jay's Furnishing Co. Ltd. v. Brand & Co., [1915] 1 KB 458, [1914-15] All ER Rep 811. 85 New Zealand Shipping Co. Ltd. v. Socit des Ateliers et Chantiers de France, [1919] AC 1, [1918-19] All ER Rep 552(HL) ; see s. 56 above. 86 New Zealand Shipping Co. Ltd. v. Socit des Ateliers et Chantiers de France supra; Suttor v. Gundowda Pvt. Ltd., (1950) 81 CLR 418 (High Court of Australia). 87 Suttor v. Gundowda Pvt. Ltd. (1950) 81 CLR 418 at 442 (High Court of Australia). 88 Maddala Thathiah v. Union of India, ILR (1957) Mad 315, AIR 1957 Mad 82; but on appeal in Union of India v. Maddala Thathaiah, [1964] 3 SCR 774, AIR 1966 SC 1724, the question of the validity of such a term was left open. 89 Maddala Thathaiah v. Union of India, ILR (1957) Mad 315, AIR 1957 Mad 82. 90 Union of India v. Maddala Thathaiah, AIR 1966 SC 1724, [1964] 3 SCR 774. 91 AIR 1965 SC 1288. 92 Central Bank of India Ltd. v. Hartford Fire Insurance Co. Ltd. AIR 1965 SC 1288 at 1290.
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93 Maddala Thathiah v. Union of India, ILR (1957) Mad 315, AIR 1957 Mad 82. 94 S Chandra Sekharan v. Govt of Tamil Nadu, AIR 1974 SC 1543; Shitla Prasad v. M Saidullah, AIR 1975 All 344(FB) ; Jagat Bahadur v. District Supply Officer, AIR 1990 All 113 (dealer appointed for distribution of foodgrains).
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER IV Of the Performance of Contracts/Contracts which need not be performed/S. 63.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which need not be performed S. 63. Promisee may dispense with or remit performance of promise.-Every promisee may dispense with or may remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit. Illustrations (a) (b) (c) (d) (e)
A promises to paint a picture for B. B afterwards forbids him to do so. A is no longer bound to perform the promise. A owes B 5,000 rupees. A pays to B, and B accepts, in satisfaction of the whole debt, 2,000 rupees paid at the time and place at which the 5,000 rupees were payable. The whole debt is discharged. A owes B 5,000 rupees. C pays to B 1,000 rupees and B accepts them, in satisfaction of his claim on A . This payment is a discharge of the whole claim.95 A owes B, under a contract, a sum of money, the amount of which has not been ascertained. A, without ascertaining the amount, gives to B, and B, in satisfaction thereof, accepts, the sum of 2,000 rupees. This is a discharge of the whole debt, whatever may be its amount. A owes B, 2,000 rupees, and is also indebted to other creditors. A makes an arrangement with his creditors, including B, to pay them a [composition]96 of eight annas in the rupee upon their respective demands. Payment to B of 1,000 rupees is a discharge of B's demand.
Introduction The party who has the right to demand the performance may:
(i) (ii) (iii)
dispense with or remit the performance; or extend the time for performance; or accept any other satisfaction instead of performance.
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95 See s. 41 above. 96 Subs. by the Amending Act, 1891 (12 of 1891), s. 2 and Schedule II, for 'compensation'.
Sections 63 and 62 The present section and s. 62 must be construed so as not to overlap with each other. This would be done by holding that agreements referred to in s. 62 are agreements which more or less affect the rights of both parties under the contract discharged by such agreements; whilst those referred to in s. 63 are such as to affect the right of only one of the parties. The former case necessarily implies consideration,97 which may be either the mutual renunciation of right, or, in addition to this, the mutual undertaking of fresh obligations, or the renunciation of some right on the one side and the undertaking of some obligation on the other. It is only when the agreement to discharge affects the right of only one party that consideration might be found wanting. There alone the Indian law departs from the English law by making provision for every such possible case in s. 63.98 The result is that the agreement set up by the defendant which falls under s. 63 is binding, though without consideration. This section enables the defendant in a suit filed by the promisee, dispensing or remitting performance or accepting satisfaction and subsequently trying to enforce, the promise made to him, to plead that he was relieved from performing that which the plaintiff told he need not do.1 It has been held that an agreement made between the parties after the breach of contract may be enforced under this section.2 97 Union of India v. Kishorilal Gupta & Bros, AIR 1953 Cal 642. 98 Per curiam in Davis v. Cundammi Mudali, (1896) ILR 19 Mad 398. 1 Todarmal Tejmal v. Chironjilal Gopilal, AIR 1956 MB 25. 2 Kalumal Devandas v. Kessumal Naraindas, AIR 1929 Sind 153, 114 IC 97; Jamnubai v. Murlidhar Sawatram, ILR (1946) Nag 36, 225 IC 379, AIR 1946 Nag 148; New Standard Bank Ltd. v. Probodh Chandra Chakravarty, (1941) 2 Cal 237, AIR 1942 Cal 87.
Departure from the English Law Under the English law, it is competent for both parties to an executory contract by mutual agreement, without any satisfaction, to discharge the obligation of that contract; in other words, reciprocal promises are a sufficient consideration for each other, so are reciprocal discharges. A contract rescinded by an agreement, stands completely discharged and cannot be revived.3 But an executed contract cannot be discharged except by release under seal, or by performance of the obligation, as by payment where the obligation is to be performed by payment.4 Subject to that exception, 'the new agreement in rescission or alteration of the prior contract must in general satisfy all the requirements of an independent contract',5 and so must an agreement to accept satisfaction for a right of action which has arisen by breach of a contract. If the creditor has accepted in satisfaction merely the debtor's promise to give consideration, and not the performance of that promise, the original cause of act ion is discharged from the date when the agreement is made,6 and breach of the substituted agreement does not enable the creditor to plead that the original agreement has been revived.7 Although the rule that the court does not inquire into the adequacy of the consideration is applicable, and therefore anything different in kind from what is due may be a good satisfaction without regard to its apparent value, yet the court cannot help knowing that 19 pounds are not worth 20 pounds, and accordingly, a less sum of money cannot be good satisfaction for a greater sum already due. This last rule was confirmed with great reluctance by the House of Lords.8 This section makes a wide departure from the English law, and the principles of that law cannot be relied
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upon to interpret the section.9 The intention of the present section to alter the rule of the common law is clear; and this has been recognised in several Indian cases.10 Neither consideration nor an agreement is necessary for enabling a promisee to dispense with or remit the performance of a promisee, or accept any satisfaction instead of the promise,11 and no consideration is necessary for extension of time. 3 Andre & Cie SA v. Marine Transocean Ltd. (the Splendid Sun), [1981] 1 QB 694, [1981] 2 All ER 993(CA) . 4 Foster v. Dawber, (1851) 6 Ex 839 (1861). 5 King v. Gillett, (1840) 7 M&W 55, 56 RR 616. 6 Morris v. Baron & Co., [1918] AC 1 at 35; British Russian Gazette & Trade Outlook Ltd. v. Associated Newspapers Ltd., [1933] 2 KB 616, [1933] All ER Rep 320(CA) ; Jamnubai v. Murlidhar Sawatram, ILR (1946) Nag 36, 225 IC 379, AIR 1946 Nag 148 (this is also the rule in India); Lachhmi Narain Beriwala v. Bharat Bank Ltd., AIR 1951 Pat 621; Union of India v. Kishorilal Gupta & Bros, AIR 1953 Cal 642; affirmed on appeal, [1960] 1 SCR 493 at 503-4, AIR 1959 SC 1362 at 1366. 7 Union of India v. Kishorilal Gupta & Bros, AIR 1953 Cal 642 at 645, affirmed on appeal, AIR 1959 SC 1362 at 1366, [1960] 1 SCR 493 at 503-04. 8 Foakes v. Beer, [1884] 9 App Cas 605, [1881-85] All ER Rep 106; Hirachand Punamchand v. Temple, [1911-13] All ER Rep 1597. 9 New Standard Bank Ltd. v. Probodh Chandra Chakravarty, (1941) 2 Cal 237, AIR 1942 Cal 87; Anandram Mangturam v. Bholaram Tanumal, ILR (1946) Bom 218, AIR 1946 Bom 1, 222 IC 337, (1945) 47 Bom LR 719. 10 Manohar Koyal v. Thakur Das Naskar, (1888) ILR 15 Cal 319 at 326; Davis v. Cundasami Mudali, (1896) ILR 19 Mad 398 at 402; Naoroji Nusserwanji Thoonthi v. Kazi Sidick Mirza, (1896) ILR 20 Bom 636 at 644. 11 Firm Chhunna Mal Ram Nath v. Finn Mool Chand-Ram Bhagat, (1928) 55 IA 154, AIR 1928 PC 99, ILR 9 Lah 510; Phoenix Mills Ltd. v. MH Dinshaw & Co., AIR 1946 Bom 469, (1946) 48 Bom LR 313.
Necessity of Consideration In 1903, the High Court of Bombay had held12 that a dispensation or remission under this section involved a promise as defined by s. 2(b) or an agreement within s. 2(e), so that 'there must be a proposal of the dispensation or remission, which is accepted': in technical terms, that the effect of the section is only to allow an accord to be good without satisfaction. The authors of this work had continuously protested against this ruling and suggested that the words of the section ought to be construed according to their natural meaning, and a promisee could discharge the promise not only without consideration but without a new agreement. There was nothing in the words of the section (they said) about promise, proposal, or acceptance, and it was difficult to see why any such matter should be imported, except on the assumption that the intention was to alter the English law of accord and satisfaction only by abrogating the requirement of consideration. But if consideration was no longer required, why should any agreement be necessary? The Privy Council overruled this opinion of the Bombay High Court in few and decisive words:
The language of the section does not refer to any such agreement and ought not to be enlarged by any implication of English doctrines.13 A mortgagee could thus unilaterally relinquish a part of the security without the consent of the mortgagor even after the mortgage debt becomes due. Such remission under s. 63 is not an agreement between two parties.14 For a release under s. 63 no consideration was at all necessary. It was a unilateral act of the promisee discharging at his will the obligation of another.15
Thus no fresh consideration is necessary for any of the act s of the promisee described in this section.16 12 Abaji Sitaram Modak v. Trimbak Municipality, (1903) 28 Bom 66. (1903-04) ILR 27-28 Bom 472.
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13 Firm Chhunna Mal Ram Nath v. Firm Mool Chand-Ram Bhagat, (1928) 55 IA 154, AIR 1928 PC 99, ILR 9 Lah 510; affirming the judgment of the High Court of Lahore followed in Kalumal Devandas v. Kessumal Naraindas, AIR 1929 Sind 153, 114 IC 97; Maung Pu v. Maung Po Thant, (1928) 6 Rang 191, AIR 1928 Rang 144, 110 IC 612; Jitendra Chandra Roy Chowdhary v. SN Banerjee, AIR 1943 Cal 181; V Venkatasami Chetty v. D Panchakshara Reddy, AIR 1947 Mad 414; Sabaldas Janjimal v. Sobhokhan, AIR 1948 Sind 91; Hari Krishna Agarwala v. KC Gupta, AIR 1949 All 440. 14 Firm Chhunna Mal Ram Nath v. Firm Mool Chand-Ram Bhagat, (1928) 55 IA 154, AIR 1928 PC 99, ILR 9 Lah 510; followed in Kedarnath Lal v. Sheonarain Ram, AIR 1957 Pat 408 (reversed on another point in Kedarnath Lal v. Sheonarain, AIR 1970 SC 1717). 15 Ibid. 16 Sakarchand Shamji v. Ismail Hoosein, AIR 1931 Rang 189, 131 IC 510; Mahadeo Prasad Singh v. Mathura Chaudhari, AIR 1931 All 589 (2), 132 IC 321; Jwala Prasad v. Jwala Bank Ltd., AIR 1957 All 143.
Promise to dispense with, remit or to extend time for performance in the future This section does not apply to cases where the whole contract has been supplanted by a new one, but to cases where the old contract subsists, and there is a voluntary remission of performance of some promise in it, for example, the remission of part of the debt at the time it becomes payable. It does not cover a case of a binding promise to dispense with or remit performance in the future unless that waiver is made the subject of a fresh contract.17Section 63 applies whether there is actual remission, i.e., in praesenti and not in futuro, i.e., not a mere promise to remit, an agreement to remit in futuro clearly requires consideration, if it is to be a binding contract.18 This must be distinguished from a remission or dispensation which is made contingent on the happening of a future event. In such a case the remission is in praesenti, though it is suspended until the event occurs. The holder of a promissory note from the officers of a masonic lodge agreed in writing to make no claim 'if the... lodge building which has been burnt down is resuscitated.' He could not sue on his note after the lodge was rebuilt.19 It would be monstrous if he could.20 However, a conditional remission is not enforceable under the section,21 as when conditional, it is not an absolute remission and the plaintiff is not estopped from enforcing his rights in full. Where the promisee wishes his rights to continue in the event of some conditions simultaneously imposed on the promisor, he must see that the release is made dependent on the performance by the promisor of his part of the agreement.22 This section also enables the promisee to remit in part the performance of a promise made to him, whether it has or has not fallen due, and whether or not such remission ends the subsisting contractual relation altogether. A promisee may therefore remit a portion of the obligation on the part of the promisor, and yet performance of the unremitted part still continues. This would be an act ual remission. A future liability can be remitted in praesenti and a remission of such liability does not necessarily require an agreement to remit.23 Whether the promise to release operates to extinguish rights and claims which were or could not have been contemplation of parties depends on the intention of parties to be gathered from the release. In the absence of clear language to that effect, Courts should be slow to make such an inference.24 The Law Commission of India recommended in its thirteenth report that a promise to dispense with or remit the performance of a promise or to extend time for its performance should be enforceable even without consideration.25 'Promise' A claim, which does not arise out of any promise, cannot be claimed to have been remitted or dispensed with.26 This section does not apply between a decree holder and a judgment-debtor.27 'Dispense with'
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To dispense with means to manage without; to get rid of. The section enables the promisee to give up or forsake the promise owing to him. A claim foregone by a promisee under this section cannot be claimed even though the act of foregoing was without any consideration.28 In United Provinces v. Lower Ganges Jumna Electricity Distributing Co. Ltd, 29 an agreement for supply of electricity between the government and a company contained a guarantee clause. During the winding up proceedings of the company, the government gave an assurance to the provisional liquidator that the guarantee clause would not be enforced. It was held that the government could not make a claim under the guarantee clause. In Life Insurance Corporation of India v. Ramdas Agarwal, 30 a policy of life insurance had lapsed. The assured paid the premia for its revival, but did not tender interest for the delayed payment, as it was not demanded by the Life Insurance Corporation. It was held that it had abandoned its right to claim interest because interest was not demanded, and premia paid later were accepted. It is open to a buyer to waive the performance of the contract under s. 63 of the Contract Act, and he is not confined to the exercise of powers conferred by s. 60 of the Sale of Goods Act, 1930.31In the case of a corporation a dispensation from performance must satisfy the conditions required for its corporate act s in general. It does not seem that a formal obligation need be formally remitted. Conceivable but not probable cases in which a promisor would be prejudiced by not being allowed to complete the performance of his promise, though he had received the consideration in full, may be left aside until they arise. It seems that, if they can be treated as exceptional it must be by virtue of some special term implied in the particular contract. Waiver In the law of contract, however, the term waiver is used to describe the process whereby one party voluntarily grants a concession to the other party by not insisting upon the precise mode of performance for in the contract, whether before or after any breach of the term waived.32 Waiver is the abandonment of a right. A waiver is nothing unless it amounts to a release. It is nothing more than an intention not to insist upon the right.33 Waiver must be an intentional act with knowledge.34First, some distinct act ought to be done to constitute a waiver; next it must be intentional, and lastly it must be with knowledge.35 A waiver is distinguishable from the variation of a contract in that there is no consideration for the concession or forbearance moving from the party to whom it is shown.36 Under Indian law the general principle of waiver is to be found in s. 63, where it is open to a promisee to dispense with or remit wholly or in part the performance of the promise made to him or he can accept any promise which he thinks fit. Under Indian law, neither a consideration nor an agreement will be necessary. Where one party voluntarily accedes to the request of the other party that he should not insist on the precise mode of performance fixed by the contract, the court will hold that he has waived his right to insist that the contract be performed in this respect according to its original tenor.37 Waiver may be oral or in writing or inferred from conduct.38 A tenant governed by the Bihar Buildings (Lease Rent and Eviction) Control Act, 1947, gave notice to the landlord of his intention to adjust excess rent paid by him in case the same was not refunded to him but went on paying the rent without adjustment. He would be deemed to have waived his right of getting the excess rent adjusted. Therefore, when he stopped paying rent and a suit for arrears of rent was brought against him, he would not be entitled to raise the defence of adjustment in the suit without anything more. Even though a tenant has the right to have the rent of future months adjusted to the last, the intention to adjust had to be communicated to the landlord or it should be capable of being inferred from surrounding circumstances before the tenant becomes defaulter.39Under the Kerala Land Acquisition Act, 1961, the state, on acquiring land on which a portion of a building stands--the rest standing on the owner's unacquired portion of the land, if asked by the owner, is required to acquire the entire building and then have it demolished and have the two portions of the land acquired and unacquired--cleared of the building material. But where the owner after getting compensation for the building agrees that only the building on acquired portion should be demolished, he is entitled to have the obligation discharged by the state in a manner other than the obligation of demolishing the whole of the building and clearing the site of the building on the analogy of s. 63 of the Contract Act, although the matter is one of land acquisition. The
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minority held that s. 63 had no application and the owner could neither insist on demolishing nor on clearing the whole land acquired and unacquired.40 A buyer who has accepted delivery of goods cannot later avoid the contract or withhold payment on the ground that the goods were defective.41 Past incidents of waiver do not give a right to demand waiver.42There is no waiver of breach as to disentitle termination of an earlier contract, where act ions after breach are done throughout maintaining &uot;without prejudice&uot;, and the subsequent agreement had a &uot;without prejudice clause&uot;.43 Waiver under English Law Under English law, a concession granted by one party to the contract, before breach, must be supported by consideration or be in the form of a deed. Subject to any requirement in writing, it constitutes an effective variation, a similar concession after breach constitutes an accord and satisfaction or release.44 Where the concession lacks the support of consideration or a deed, it may still have an effect as a waiver of the obligations under the contract only in the following circumstances:
(i)
(ii)
The party for whose benefit the waiver was made cannot refuse to accept the performance agreed to in the waiver. Thus, if a buyer of goods requests the seller to extend the time for acceptance the former cannot, when the goods are delivered at the later date, refuse to accept them on the ground that they were not delivered in accordance with the strict terms of the contract.45 The party granting the concession may be bound, (a) if he has led the other party to believe that he will accept performance at a later date than that originally provided for in the contract he will not be able to refuse that performance at when tendered;46(b) if he has led the other party to believe that he will accept performance in a different manner from that provided for in the contract. In the former case the party granting the concession may at any time, upon giving reasonable notice, reimpose the original time limit.47 In the latter case, he may reject the altered performance, if he has given then other party a reasonable time in which to comply with the strict terms of the contract.48
The party who has waived compliance with a particular requirement may withdraw his waiver by giving reasonable notice.49 A waiver may have a permanent, not suspensory, effect upon the rights of the parties when the original performance becomes impossible.50 Waiver may be express or implied from the conduct, but in either case it must amount to an unambiguous51 representation arising as a result of a positive and intentional act done by the party granting the concession with knowledge of all the material circumstances.52Furthermore, it seems that for a waiver to operate effectively the party to whom the concession is granted must act in reliance of the concession.53 A party making a request for concession cannot repudiate waiver and set up the original contract.54 Thus, where the defendant agreed with the plaintiff to buy goods worth 10 pounds to be delivered within a specified period and then made a request to the plaintiff to hold those goods for that period and on the latter's doing so, refused to accept the goods contending that the plaintiff was a waiver and not a variation.55 But if a seller withholds goods at the purchaser's request and waives the obligation of the purchaser to take delivery of the goods within a certain time, he will still be under an obligation to give delivery within reasonable time if so requested by the purchaser.56 If a party makes a concession as to the date or as to the manner of a performance other than that provided in the contract, he will be bound to perform when tendered. But he is entitled, on giving reasonable notice, to fix a new time limit or to require the other party to perform in accordance with the original contract.57 Where an owner accepted an underpayment of hire by a charterer who paid the hire after deductions, but payment was in time and then the owner withdrew the vessel, it was held58 that this was not an unequivocal act of election of remedy against withdrawal which he could employ after
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reasonable time of underpayment. In a time-charterparty there was a term in the agreement whereby the hire was to be paid in advance, semi-monthly. On the last occasion the charterers paid the installment of hire a day late but the bank on behalf of the owners received it. The owners withdrew the vessel for non-payment. The court of appeal held that by receiving the money by the bank the owners had waived their right of withdrawal. On appeal, the House of Lords held59 that on a true construction of the charterparty, the owners right to withdraw arose on the failure of the charterers to comply with the obligation of paying punctually the semi-monthly installment in advance. The default could not be cured by a late payment or tender, since the payment was not made in advance in accordance with the obligation, and further the breach had not been waived as it had to be shown clearly that the owners had accepted the late payment as if it had been made punctually. The bank, although agents of the owners under the terms of the charter, had no authority to accept late payment and their acceptance was provisional depending only on the owners decision. In a contract for the sale of leasehold there was a condition that there should be no adverse entry. The plaintiffs came to know of an adverse entry, but still proceeded with negotiations with the freeholders for the purchase of the freehold. When that failed, they repudiated the contract and brought an act ion for declaration that they were entitled to do so because of the breach of the condition. It was held that the plaintiffs had waived the right to repudiate and were not entitled to do so when the negotiations with the freeholders fell through.60 Promissory Estoppel Similar to waiver is the doctrine of promissory61 or equitable estoppel, whereby a party who has represented that he will not insist upon his strict rights under the contract will not be allowed to resile from that position, or will be allowed to do so only upon giving reasonable notice. This principle differs from estoppel properly so called in that:
(i) (ii) (iii)
it applies to promises, not representations of fact; it is generally only suspensory in operation; and it is not clear to what extent the representee need have changed his position on his detriment in reliance on the representation.
Under the English law, the principle of Foakes v. Beer, 62 that an agreement to receive a smaller sum in payment of a judgment-debtor, was not binding on the creditor in the absence of any consideration remained unaffected, until it was suggested by Denning J. in Central London Property Trust Ltd. v. High Trees House Ltd :63
A logical consequence no doubt is that a promise to accept a smaller sum in discharge of a larger sum, if acted upon, is binding notwithstanding the absence of consideration.
The creditor's promise may wholly extinguish his rights where subsequent events make it impossible to perform the original obligation, i.e., the promisee cannot resume his position.64 Thus, the principle of quasi-estoppel or 'promissory estoppel' more aptly called is that when one party to a contract in the absence of a fresh consideration agrees not to enforce his rights, an equity will be raised in favour of the other party, but subject to the qualifications that:
(i) (ii)
the other party has changed his position. the promisor can resile from his promise on giving reasonable notice--may not be
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(iii)
formal--giving the promisee a reasonable opportunity of resuming his position; and the promise only becomes final and irrevocable if the promisee cannot resume his position.65
It has been held that the doctrine of quasi-estoppel evolved in England goes no further than the provisions of this section, and it is not necessary to borrow that principle.66 'Remit' A promisee can remit a promise in part. It is not necessary that this remission should be supported by consideration.67Where a promisee remits a part of the debt, and gives a discharge for the whole debt on receiving the reduced amount, such discharge is valid, even though the remission was in pursuance of an oral agreement inadmissible under s. 92(4) of the Indian Evidence Act, 1872. Thus, where a lessor, to whom rent is due under a registered lease, accepts a smaller amount of rent from the lessee in pursuance of subsequent oral agreement to reduce the rent, and passes a receipt in full discharge of the rent due, the discharge will take effect independently of the prior oral agreement, which certainly is not illegal, though it cannot be proved under the Indian Evidence Act, 1872.68 A payment of rent minus certain deductions, made by a tenant in full satisfaction of the landlord's claim for rent, if accepted by the landlord, is full payment of rent, disentitling the landlord from treating the tenant as a defaulter.69 Where the Government of East Punjab had decided to recover only 40 percent of dues owed by erstwhile agents selling grain in undivided Punjab and no more, the government must be taken to have decided to remit the rest under s. 63. Where any sum has become payable under a mortgage deed, payment may be partly remitted by the mortgagee,70 even after the mortgage-money has become due.71 Under the English law payment or promise of payment of part of a debt does not amount to satisfaction in respect of the rest of the debt,72 unless there is some satisfaction of different kind, or of a named definite sum for an uncertain or unliquidated amount, or an agreed amount paid in satisfaction of a claim which has been disputed in good faith, it is a receipt of a smaller sum before due date or at a place different from that specified in the contract, or a receipt of a smaller sum from a third party. 17 Vaidyanatha Rao v. Kandappa Chetti, (1931) 54 Mad 889, 132 IC 292, AIR 1931 Mad 636; TK Shanmugasundara Mudaliar v. SC Sivalinga Mudaliar, AIR 1952 Mad 675, (1951) 1 Mad LJ 292. 18 Ramaswami v. Gurukar Rudrappa, AIR 1939 Mad 688; following Balasundara Naicker v. Ranganatha Ayyar, (1929) 53 Mad 127, 122 IC 641, AIR 1929 Mad 794; Mirriyala China Subbaraidu v. Kallarsu Mahadeva Rao, AIR 1965 AP 171. 19 Mathew Henry Abraham v. The Lodge 'Good will' (1910) 34 Mad 156; New Standard Bank Ltd. v. Probodh Chandra Chakravarty, (1941) 2 Cal 237, AIR 1942 Cal 87. 20 TK Shanmugasundara Mudaliar v. SC Sivalinga Mudaliar, AIR 1952 Mad 675, 677, (1951) 1 Mad LJ 292. 21 Subbaraya Aiyar v. Kolandavelu Mudali, AIR 1915 Mad 1144. 22 Kedarnath Lal v. Sheonarain, AIR 1970 SC 1717. 23 Jitendra Chandra Roy Chowdhury v. SN Banerjee, AIR 1943 Cal 181. 24 Bank of Credit and Commerce International SA (in liq) v. Ali, [2001] 1 All ER 961, [2001] 2 WLR 735. 25 The 13th Report of the Law Commission of India, 1958, recommended the addition of a sub-section to s. 25, providing that if 'it is a promise to dispense with or remit the performance of a promise or to extend the time for its performance,' it would be enforceable even without consideration. 26 Western India Life Insurance Co. Ltd. v. Sitabai, AIR 1944 Nag 122. 27 Debendra Narain Sinha v. Sourindra Mohan Sinha, AIR 1914 Cal 697, 24 IC 391; Narayan Mahadeo Durve v. Moti Pannaji, AIR 1935 Bom 225. 28 Jwala Prasad v. Jwala Bank Ltd., AIR 1957 All 143.
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29 AIR 1948 PC 159. 30 Life Insurance Corpn. of India v. Ramdas Agarwal, AIR 1979 Pat 124. 31 BN Kataruka and Sons v. Chaulhai Nayak, AIR 1960 Pat 259; Firm Chhunna Mal Ram Nath v. Firm Mool Chand-Ram Bhagat, (1928) 55 IA 154, AIR 1928 PC 99, ILR 9 Lah 510. 32 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, CONTRACT, para 1025. 33 Waman Shrinivas Kini v. Ratilal Bhagwandas & Co., AIR 1959 SC 689, [1959] Supp 2 SCR 217 at 226. 34 Earl of Darnley v. London, Chatham and Dover Rly Co., (1867) LR 2 HL 43 at 57. 35 Craine v. Colonial Mutual Fire Insurance Co. Ltd., (1920) 28 CLR 305 at 325, see n 24. 36 WJ Alan & Co. Ltd. v. EL Nasr Export & Import Co., [1972] 2 QB 189 at 213, [1972] 2 All ER 127, [1972] 2 WLR 800. 37 Chitty on Contracts, 28th edn., p. 1158, para 23-039; Electronic Enterprises v. Union of India, AIR 2000 Del 55. 38 Bruner v. Moore, [1904] 1 Ch 305. 39 Bishwanath Balkrishna v. Rampeyari Devi, AIR 1979 Pat 159 at 163. 40 Rajalakshmy v. Asst. Engineer, AIR 1980 Ker 68. 41 Bhagawati Oxygen Ltd. v. Hindustan Copper Ltd, AIR 2005 SC 2071, (2005) 6 SCC 462 42 Sikkim Subba Associates v. State of Sikkim, AIR 2001 SC 2062, (2001) 5 SCC 629. 43 Tata Industries Ltd. v. Grasim Industries Ltd., AIR 2008 SC 2970, (2008) 10 SCC 187. 44 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, CONTRACT, para 1027. 45 Hickman v. Haynes, (1875) 10 CP 598[1874-80] All ER Rep 2182; Levey & Co. v. Goldberg, [1922] 1 KB 688, [1922] All ER Rep 842; Ogle v. Earl Vane, [1868] 3 QB 272 (buyer granting concession at seller's request; seller failing to fulfill terms of concession; buyer entitled to buy elsewhere and have his damages assessed at the end of the concession period). 46 Tyers v. Rosedale & Ferryhill Iron Co. (1875) 10 Ex 105; Bruner v. Moore, [1904] 1 Ch 305; Hartley v. Hymans, [1920] 3 KB 475, [1920] All ER Rep 328. 47 Charles Rickards Ltd. v. Oppenheim, [1950] 1 KB 616, [1950] 1 All ER 420(CA) ; Kirby v. Cosindi Societa per Azioni, [1969] I Lloyd's Rep 75. 48 Panoutsos v. Raymond Hadley Corpn. of New York, [1917] 2 KB 473, [1916-17] All ER Rep 448(CA) ; A/S Tankexpress v. Compagnie Financiere Belge des Petroles SA, [1949] AC 76, [1948] 2 All ER 939(HL) ; Plasticmoda Societa per Azioni v. Davidsons (Manchester) Ltd., [1952] 1 Lloyd's Rep 527(CA) ; Enrico Furst & Co. v. WE Fischer Ltd., [1960] 2 Lloyd's Rep 340. 49 Charles Rickards Ltd. v. Oppenheim, [1950] 1 KB 616, [1950] 1 All ER 420(CA) . 50 Leather-Cloth Co. v. Hierohimus, [1875] LB 10 QB 140 (goods to be shipped via Ostend; buyer agreed to shipment via Rotterdam; goods lost but buyer held liable for the price); Lickiss v. Milestone Motor Policies at Lloyd's, [1966] 2 All ER 972, [1966] 1 WLR 1334(CA) (insurer leading insured to believe that he need not give certain information within time limited by the policy, held unable to rely on original time limit). 51 See also Woodhouse AC Israel Cocoa Ltd. SA v. Nigerian Produce Mktg Co. Ltd., [1972] AC 741, [1972] 2 All ER 271(HL) (case of variation or promissory estoppel). 52 Watson v. Healy Lands Ltd., [1965] NZLR 511 per Woodhouse J, at 534; Earl of Darnley v. London, Chatham and Dover Rly Co., (1867) LR 2 HL 43 per Lord Chelmsford LC at 57; Panchaud Freres SA v. Etablissments General Grain Co., [1970] 1 Lloyd's Rep 53 per Winn LJ, at 60 (CA) (there must be act ual knowledge; constructive notice is not enough to establish waiver in the eyes of the commercial law). 53 Charles Rickards Ltd. v. Oppenheim, [1950] 1 KB 616 per Denning LJ, at 623, [1950] 1 All ER 420 at 423 (CA); Enrico Furst & Co. v. WE Fischer Ltd., [1960] 2 Lloyd's Rep 340 per Diplock J, at 350. 54 Ogle v. Earl Vane, [1868] 3 QB 272; Hickman v. Haynes, (1875) 10 CP 598, [1874-80] All ER Rep 2182; Chitty on Contracts, 28th edn., p. 1160, para 23-042. 55 Levey & Co. v. Goldberg, [1922] 1 KB 688, [1922] All ER Rep 842. 56 Tyers v. Rosedale & Ferryhill Iron Co., (1875) 10 Ex 105.
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57 Chitty on Contracts, 28th edn., p. 1159, para 23-041; Charles Rickards Ltd. v. Oppenheim, [1950] 1 KB 616, [1950] 1 All ER 420(CA) ; Kirby v. Cosindi Societa per Azioni, [1969] 1 Lloyd's Rep 75. 58 China National Foreign Trade Transportation Corpn. v. Evlogia Shipping Co. SA, [1979] 2 All ER I044; reversing, [1979] 1 All ER 657. 59 Mardorf Peach er Co. Ltd. v. Attica Sea Carriers Corp of Liberia (The Laconia), [1977] AC 850, [1977] 1 All ER 545 at 561-62 (HL); [1976] 2 All ER 249; Afovos Shipping Co. SA v. Pagnan (The Afovos), [1983] 1 All ER 449, [1983] 1 WLR 195(HL) ; Scandinavian Trading Tanker Co. AB v. Flota Petrolera Ecuatoriana (The Scaptrade), [1983] 2 AC 694, [1983] 1 All ER 301(CA), affirmed in, [1983] 2 All ER 763(HL) ; Motor Oil Hellas (Corinth) Refineries SA v. Shipping Corpn. of India, [1989] 1 Lloyd's Rep 354 at 356, affirmed in, [1990] 1 Lloyd's Rep 391. 60 Aquis Estates Ltd. v. Minton, [1975] 3 All ER 1043. 61 See s. 10 above 'Promissory Estoppel'. 62 [1884] 9 App Cas 605, [1881-85] All ER Rep 106; reaffirming Pinnel's case (1602) 5 Co. Rep 117a, [1558-1774] All ER Rep 612. 63 [1947] KB 130, [1956] 1 All ER 256. 64 Emmanuel Ayodeji Ajayi v. RT Briscoe (Nigeria) Ltd., [1964] 1 WLR 1326, PC 1330, [1964] 3 All ER 556(PC) . 65 Emmanuel Ayodeji Ajayi v. RT Briscoe (Nigeria) Ltd., [1964] 1 WLR 1326, PC 1330; Birmingham and District Land Co. v. London and North Western Rail Co. (1888) 40 Ch D 268 per Bowen LJ, at 286, [1886-90] All ER Rep 620; affirmed by the House of Lords in Tool Metal Mfg Co. Ltd. v. Tungsten Electric Co. Ltd., [1955] 2 All ER 657, [1955] 1 WLR 761(HL), where authorities were reviewed, and no encouragement was given to the view that the principle was capable of extension so as to create rights in the promisee for which he had given no consideration. 66 Joseph Valamangalam v. State of Kerala, AIR 1958 Ker 290 at 297. 67 Hari Chand Madan Gopal and Co. v. State of Punjab, [1973] 2 SCR 582, AIR 1973 SC 381 at 389; see also 'Acceptance of Less Sum' below. 68 Karampalli Unni Kurup v. Thekku Vittil Muthorakutti, (1902) 26 Mad 195. (1903-05) ILR 26-28 Mad 136. 69 Sunder Lal v. Ram Krishan, AIR 1960 All 544. 70 Vaidyanatha Rao v. Kandappa Chetti, (1931) 54 Mad 889, 132 IC 292, AIR 1931 Mad 636. 71 Kedarnath Lal v. Sheonarain Ram, AIR 1957 Pat 408; reversed in Kedarnath Lal v. Sheonarain, AIR 1970 SC 1717 on another point. 72 Pinnel's case, (1602) 5 Co. Rep 117, [1558-1774] All ER Rep 612.
Release at the Instance of a Third Party The section is intended not only to enable a promisee to release a debt at the instance of a third party, but, also to enable the promisor whose debt has been released at the instance of a third party, to take advantage of the release.73 A prince owed a large sum of money to a jeweller. The Accountant-General of the state paid a lesser sum in full satisfaction of the claim which was accepted by the creditor, who thereafter sued the prince for the balance. The claim was disallowed under s. 41, as also under s. 63 of the Contract Act.74 73 Re Industrial Bank of Western India Ltd.,AIR 1931 Bom 123, 32 Bom LR 1656, 129 IC 890. 74 Lala Kapurchand Godha v. Mir Nawab HimayataliKhan Azamjah, AIR 1963 SC 250, [1963] 2 SCR 168.
Composition with Creditors A composition between a debtor and his creditors operates as satisfaction of the debts and affords an answer to an act ion by the creditors upon the original liability.75 A creditor who has agreed to the
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composition with the debtor cannot resile from the composition.76 75 Teoomal Rochaldas v. Dharamdas, AIR 1929 Sind 49. 76 Dargahi Lal v. Sant Lal Sri Kishan, AIR 1933 Oudh 361; Nathu Mal v. Gokal Chand, AIR 1938 Lah 769; Syed Ahmad Syed Shahazada v. Ram Gopal Bhagwandeen Trivedi, AIR 1939 Nag 224.
Discharge from Liability on a Negotiable Instrument Discharge from liability on negotiable instruments is specially dealt with in ss. 82-90 of the Negotiable Instruments Act, 1881.
Voluntary Act of the Promisee A promisee can only dispense with the performance of the promise by a voluntary conscious act. It must be an affirmative act . A mere omission to assert his rights or insist upon his rights cannot amount to dispensation; even negligence to assert his rights cannot amount to dispensation, though in certain cases it might result in estoppel.77 77 Phoenix Mills Ltd. v. MH Dinshaw & Co., AIR 1946 Bom 469, (1946) 48 Bom LR 313.
Extension of Time Every promisee may extend the time for performance of the contract. Extension of time can be made by mutual consent, arrived at by agreement between the promisor and the promisee.78 Thus, where time was of the essence of the contract, and one party intimated to the other the extension of time but the other party did not communicate its acceptance, the time for performance did not stand extended.79 The promisee cannot, by his unilateral act, extend the time for performance of his own accord for his own benefit, without the consent of the promisor.80 Such an agreement need not necessarily be reduced into writing. It may be proved by oral evidence, and also by evidence of conduct. No consideration is necessary to support such an agreement, just as none is required for the total or partial remission of performance.81 If a proposal for extension of time for performance is subject to two conditions and one of them is not accepted by the other party, there is no valid or binding agreement for extension under s. 63 of the Contract Act .82 In Keshav Lal Lallubhai Patel v. Lalbhai Trikumlal Mills Ltd, 83 two conditions proposed for extension were:
(i) (ii)
'for the period the working of mills was stopped'; and 'till the normal state of affairs recurred'.
The former was accepted but not the latter, which was later stated by the buyer to be vague and uncertain. As a result, it was held that unless both the conditions were agreed upon between the parties, there was no valid agreement for extension. The mere fact that the second condition was vague and uncertain did not make it a mere surplusage. Mere forbearance to sue or to give a formal notice of rescission may not amount to an extension of time for performance, nor negligence of the promisee.84
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Forbearance on the part of the buyer to make a demand for the delivery of goods on the due date as fixed in the original contract may be relevant on the question of the intention of the buyer to accept the seller's proposal to extend time.85 The promisee may extend the time even after the time fixed for payment has expired.86 But an agreement by a mortgagee, about to exercise his power of sale, to postpone the sale for four days is not within the section; for it is not an extension of the time for performing the mortgagor's promise to pay the debt, which time is already past. Redemption, when the mortgagor is entitled to redeem, is not a performance of the original contract to pay the debt; and the exercise of the power of sale is not an exercise of a right of action on that contract.87 The time for performance of the contract must not be confounded with the time within which, notwithstanding default in performance, the mortgagor in default might still be allowed to redeem.88 The buyer cannot unilaterally extend time of his own accord and for his own benefit.89 This section deals only with concessions on the part of the promisee advantageous to the promisor.90 Thus, where a date is fixed for delivery of goods under a contract and the seller fails to deliver the goods, the buyer may not, of his own accord, give further time to the seller for giving delivery, so as to claim heavier damages on the footing of the rate on the later date fixed by him; he is entitled to damages on the basis only of the rate prevailing on the date fixed for performance in the contract.91 A party may forbear from insistence on the performance of the contract by the due date but he cannot fix a date for performance on his own which will benefit him or injure the other party, e.g., to undo the effect of waiver on his part or render the other party liable for damages for breach on the extended date.92 Where time has been extended, the damages for breach of contract are to be calculated from the extended date and not the original date fixed for performance.93 Where an agreement provided for payment of double earnest money in case of default of the buyer, and the seller extended the time for payment, the above default clause became ineffectual.94 Limitation period will be calculated with reference to the extended date.95 Evidence Although an agreement to extend time cannot be proved by oral evidence, where the mortgage is in writing, the satisfaction on part of the debt by payment and balance of remission can be proved by oral evidence.96This section is not relevant for the interpretation of s. 92 of the Indian Evidence Act, 1872.97 78 Muthaya Manigaran v. Lakku Reddiar, (1914) 37 Mad 412, AIR 1914 Mad 573, 14 IC 255; Asmat Ullah v. Bihari Lal and Sons, AIR 1923 Lah 117; Anandram Mangturam v. Bholaram Tanumai ILR (1946) Bom 218, AIR 1946 Bom 1, 222 IC 337, (1945) 47 Bom LR 719; Sunder Lal Vasudeva v. State of Punjab, AIR 1957 Punj 140. 79 Venkateswara Minerals Firm v. Jugalkishore Chiranjitlal Firm, AIR 1986 Kant 14. 80 Keshav Lal Lallubhai Patel v. Lalbhai Trikumlal Mills Ltd., AIR 1958 SC 512, [1959] SCR 213; Muthaya Manigaran v. Lakku Reddiar, (1914) 37 Mad 412, AIR 1914 Mad 573, 14 IC 255, 14 IC 81 Mahadeo Prasad Singh v. Mathura Chaudhari, AIR 1931 All 589 (2), 132 IC 321; Davis v. Cundasami Mudali, (1896) 19 Mad 398 at 402; Jugal Kishore v. Chari & Co. 101 IC 643, AIR 1927 All 451; Maung Pu v. Maung Po Thant, (1928) 6 Rang 191, AIR 1928 Rang 144, 110 IC 612 contra, is not law as reported. 82 Keshav Lal Lallubhai Patel v. Lalbhai Trikumlal Mills Ltd., AIR 1958 SC 512, [1959] SCR 213; Venkateswara Minerals Firm v. Jugalkishore Chiranjitlal Firm, AIR 1986 Kant 14. 83 Keshav Lal Lallubhai Patel v. Lalbhai Trikumlal Mills Ltd., AIR 1958 SC 512 at 517: [1959] SCR 213 at 222. 84 Anandram Mangturam v. Bholaram Tanumai ILR (1946) Bom 218, LR,AIR 1946 Bom 1, 222 IC 337, (1945) 47 Bom LR 719; see also Maharashtra State Electricity Distribution Co. Ltd. v. Datar Switchgear Ltd., Appeal No. 166/2009 in Arbitration Petition No. 374/2004, decided on 19 Oct 2013 (Bom). 85 Keshav Lal Lallubhai Patell vLalbhai Trikumlal Mills Ltd.,. AIR 1958 SC 512, [1959] SCR 213. 86 Mahadeo Prasad Singh v. Mathura Chaudhari, AIR 1931 All 589 (2), 132 IC 321; Central Bank of India v. Guruviah Naidu & Sons (Leather) Pvt. Ltd., AIR 1992 Mad 139; but see Trimbak Gangadhar Ranade v. Bhagwandas Mulchand, (1898) 23 Bom 348. 87 Trimbak Gangadhar Ranade v. Bhagwandas Mulchand, (1899-1900) ILR 23-24 Bom 223.
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88 Ibid. 89 Keshav Lal Lallubhai Patel v. Lalhhai Trikumlal Mills Ltd., AIR 1958 SC 512, [1959] SCR 213. 90 N Sundareswaran v. Sri Krishna Refineries, AIR 1977 Mad 109. 91 Muthaya Manigaran v. Lakku Reddiar, (1914) 37 Mad 412 at 413, 417, AIR 1914 Mad 573, 14 IC 255; Anandram Mangturam v. Bholaram Tanumal, ILR (1946) Bom 218, AIR 1946 Bom 1, 222 IC 337, (1945) 47 Bom LR 719; N Sundareswaran v. Sri Krishna Refineries, AIR 1977 Mad 109. 92 Dominion of India v. Raj Bahadur Seth Bhikhraj Jaipuria, AIR 1957 Pat 586; on appeal Bhikraj Jaipuria v. Union of India, AIR 1962 SC 113, [1962] 2 SCR 880 on another point. 93 Muhammad Habidullah v. Bird & Co., (1921) 48 IA 175, 63 IC 589, AIR 1922 PC 178; Ratilal M Parikh v. Dalmia Cement & Paper Marketing Co. Ltd. AIR 1943 Bom 229; Paper Sales Ltd,. v. Chokhani Bros, (1946) 48 Bom LR 274, AIR 1946 Bom 429; Aryan Mining & Trading Corpn. Ltd. v. BN Elias & Co. Ltd., AIR 1959 Cal 472. 94 Naurjala v. Mahesh Kumar, AIR 2011 HP 47. 95 S Brahmanand v. K R Muthugopal, AIR 2006 SC 40, (2005) 12 SCC 764. 96 Collector of Etah v. Kishori Lal, AIR 1930 All 721(FB) ; Balasundara Naicker v. Ranganatha Ayyar, (1929) 53 Mad 127, 122 IC 641, AIR 1929 Mad 794. 97 AIR 1930 All 721 (FB).
Accept any Satisfaction The promisee may accept, instead of performance of the promise, such satisfaction as he thinks fit,98but until the satisfaction agreed upon remains executory, the original cause of action is not discharged. But where the promisee accepts the promise itself in satisfaction, the original cause of act ion is immediately discharged.99 Where a promisee accepts another satisfaction in place of the original promise, such unilateral act is covered by section 63.1 Acceptance and retaining possession of one bank receipt in consideration of discharge of another bank receipt amounts to unconditional discharge of obligation under the bank receipt so discharged.2 A contract between a debtor and a creditor that the debtor should sell and the creditor should accept any property in satisfaction of the debt, may operate, in one of three ways, namely:
(i) (ii) (iii)
the contract by itself may operate as an absolute discharge of the debt, giving the creditor thereafter only the remedy by way of the specific performance of the contract; or it may operate only as a conditional discharge of the debt giving the creditor in case of the debtor's default a right to claim either performance of the contract or, if he elects to put an end to it, the payment of the debt; or the contract may be an independent transaction in the sense that it does not affect the rights of the creditors or the obligations of the debtor till the sale is act ually completed.
In which of these ways the contract is to have operation will depend upon the intention of the parties to be gathered in the absence of any e Tress stipulation, from their conduct and the surrounding circumstances in the particular case.3 Where on breach of contract for sale, the buyer accepted a promissory note to reimburse loss on breach, and the receipt for one of the payments stated that the whole amount was recoverable if the amount was not paid within a particular time, there was no agreement to revive the original cause of action.4 Before a party can be said to accept something other than the performance stipulated for in satisfaction of the contract, it should be open to him to refuse such satisfaction and to insist on performance of the
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contract in accordance with its terms.5 A mere retaining of money sent by the promisor does not imply satisfaction,6 and whether or not the money is taken in satisfaction is a question of fact to be determined keeping in view all the circumstances of the case.7 An award of damages for breach of a contract is not the same thing as a party to the contract accepting satisfaction of the contract other than in accordance with the original terms thereof.8 98 Union of India v. Kishorilal Gupta & Bros, AIR 1953 Cal 642 affirmed on appeal, AIR 1959 SC 1362 at 1366: [1960] 1 SCR 493 at 503-4. 99 Manohur Koyal v. Thakur Das Naskar, (1888) ILR 15 Cal 319; ; Jamnubai v. Murlidhar Sawatram, ILR (1946) Nag 36, 225 IC 379, AIR 1946 Nag 148; Mohanlal Jogani Rice & Atta Mills v. Ramlal Onkarmal Firm, AIR 1957 Assam 133; BN Kataruka and Sons v. Chaulhai Nayak, AIR 1960 Pat 259. 1 Citibank NA v. Standard Chartered Bank, AIR 2003 SC 4630, (2004) 1 SCC 12. 2 Citibank NA v. Standard Chartered Bank, (2004) 6 SCC 1. 3 Todarmal Tejmal v. Chironjilal Gopilal, AIR 1956 MB 25; V Krishnaswami Rao v. R Srinivasa Desikan, AIR 1937 Mad 261; Union of India v. Kishorilal Gupta & Bros, AIR 1953 Cal 642. 4 Sakarchand Shamji v. Ismail Hoosein, AIR 1931 Rang 189, 131 IC 510. 5 Ram Swaroop Mam Chand v. Chaju Ram & Sons, (1937) 1 Cal 757 at 763. 6 Firm Basdeo Ram Sarup v. Firm Dilsukharai Sewak Ram, (1922) 44 All 718, AIR 1922 All 461, 68 IC 783; Union of India v. Babulal Uttamchand Bhundari, AIR 1968 Bom 294; Shyamnagar Tin Factory Pvt. Ltd. v. Snow White Food Products Co. Ltd., AIR 1965 Cal 541; Union of India v. Narayan Lal, AIR 1963 Pat 152. 7 Tata Locomotive & Engg Co. Ltd. v. Sardar Kartar Singh, AIR 1961 Pat 37; Dipchand Golencha v. M Abhechand and Co., AIR 1962 Cal 166. 8 Commr of Income-tax v. Shantilal Pvt. Ltd., AIR 1983 SC 952, (1983) 3 SCC 561.
Accord and Satisfaction Accord and satisfaction is the purchase of a release from an obligation, whether arising under contract or tort by means of any valuable consideration not being the act ual performance of the obligation itself. The accord is the agreement by which the obligation is discharged. The satisfaction is the consideration which makes the agreement operative.9 The consideration may be executory.10 Under the English law, an accord without satisfaction is of no effect, and it has been doubted whether the principle of promissory estoppel can be relied upon to obviate the necessity of consideration.11 As accord is an agreement there must be two minds ad idem; its validity liable to be judged by the general law of contract quite apart from the provisions of s s. 62 and 63.12 The principle of accord and satisfaction has been stated by the Privy Council as a principle of substituted agreement thus:13
The 'receipt' given by the appellants and accepted by the respondent, and acted on by both parties proves conclusively that all the parties agreed to a settlement of all their existing disputes by the arrangement formulated in the 'receipt'. It is a clear example of what used to be well-known in common law pleading as 'accord and satisfaction by a substituted agreement'. No matter what were their respective rights of the parties inter se they are abandoned in consideration of acceptance by all of a new agreement. The consequence is that when such an accord or satisfaction takes place, the prior rights of the parties are extinguished.
A liability arising out of breach of contract may be discharged by accord and satisfaction. An accord is an agreement made after breach whereby some consideration other than the legal remedy is to be accepted by the party not in fault, followed by the performance of the substituted consideration.14 The principle of accord and satisfaction has also been described as only a method of discharge of a
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contract, as not annihilating the contract, but only making the obligation arising from it unenforceable.15The principle of accord and satisfaction is seen as a defence to an act ion. 'It is a good defence to an action for the breach of any contract that the cause of act ion has been discharged by accord and satisfaction, that is to say, by an agreement after breach whereby some consideration other than his legal remedy is to be accepted by the party not in fault'.16An accord and satisfaction which secures a release from such an obligation is really based on the existence of the contract instead of treating it as non-existent. When an action is brought for non-performance an accord and satisfaction furnishes a good defense. The defense is not that the contract has come to an end, but that its breach has been satisfied by an accord and satisfaction, and therefore the plaintiff in the act ion is not entitled to the usual remedy for breach.17 The question whether liability under the contract has been satisfied or not is arbitrable.18 In National Insurance Co. Ltd. v. Boghara Polyfab Pvt. Ltd, 19 the Supreme Court illustrates situations of discharge of contract by accord and satisfaction and claims arising therefrom, and the extent to which these are arbitrable. Acceptance of a lesser sum Where there has been a true accord under which the creditor voluntarily agrees to accept a lesser sum in satisfaction and the debtor acts upon that accord by paying the lesser sum and the creditor accepts it, then it is inequitable for the creditor afterwards to insist on the balance.20 The real emphasis is not on the acceptance of a smaller sum, but on the debtor's condition that if the tendered money be at all accepted, it must be in discharge of the entire debt. A creditor accepting payment on a condition cannot accept the payment and repudiate the condition.21 Such accord and satisfaction are a question of fact, implying an agreement to take the money in satisfaction of the claim in respect of which it is sent;22 and preclude the creditor promisee from claiming the amount under the original contract.23 Where in a mutual agreement pending suit, the contractor agreed to receive on account of his claim, labour escalation charges, an amount calculated according to specified principles and to withdraw the suit, there was accord and satisfaction after he had received the amount and had withdrawn the suit.24 Where the creditor accepted the final measurements of the work completed and issued a receipt stating that the amount had been received in full and final settlement, there was accord and satisfaction, and the creditor could not claim the balance.25 Where a contractor accepted an amount in final settlement without protest, acknowledged receipt in writing, received the security amount returned, accord and satisfaction was complete.26 Once the dispute is settled in this manner, no arbitral dispute remains, and the arbitration clause cannot be invoked.27 In respect of certain work, disputes arose over the way the work was done. After paying GBP 125 out of GBP 259--the agreed amount, the defendant sent a cheque for GBP 75, and wrote a letter protesting against the non-compliance with his complaints and stating 'I am therefore further enclosing my further cheque for GBP 275 in respect of this work'. On the back of the cheque he typed the words 'in full and final settlement of account. Signed... dated...' and sent it to the plaintiff company's London head office, although the contract was with the Birmingham office. The cheque was signed and dated by the plaintiff company's secretary. In claim for the balance, defendant pleaded accord and satisfaction which was not accepted on the ground that there appeared no intention on the part of the defendant to accept the cheque in full satisfaction; the printed words put forward for signature, being inconsistent with the main object and intention of the transaction as disclosed by terms specially agreed, they would be limited or rejected so as to ensure that the main object of the transaction is achieved.28 Performance tendered in full satisfaction does not operate as accord where the acceptance of performance is under protest;29 or made &uot;without prejudice&uot;,30 or under a mistaken belief;31 or where acceptance was made and 'no claims certificates' given under undue influence or coercion,32 or under pressure of circumstances;33 or where the debtor asserted his right to increased cost while seeking extension of time,34 as also where a creditor accepts a smaller sum, showing no accord, or the creditor was in need which the debtor knew, or where the settlement was procured by intimidation.35 Where the refund of earnest money was accepted under protest, there was no bilateral intention to reconvey the
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property, then the rights under the contract could be exercised on repayment of such money,36 because acceptance under protest of payment in full satisfaction of amount due under the contract was no accord and satisfaction. Any protest must be made before accepting the payment.37 The railway sent a cheque for a smaller sum than the claim of the plaintiff in court in full and final settlement of the claim. The plaintiff encashed the cheque but continued his suit for the balance. The court held that the plaintiff had not accepted the cheque in full and final settlement as he continued the suit.38 The position has been summarized as follows:39
(i) (ii)
(iii)
Merely because the contractor has issued &uot;No Due Certificate&uot;, if there is acceptable claim, the court cannot reject the same on the ground of issuance of &uot;No Due Certificate&uot;. Inasmuch as it is common that unless a discharge certificate is given in advance by the contractor, payment of bills are generally delayed, hence such a clause in the contract would not be an absolute bar to a contractor raising claims which are genuine at a later date even after submission of such &uot;No-claim Certificate&uot;. Even after execution of full and final discharge voucher/receipt by one of the parties, if the said party able to establish that he is entitled to further amount for which he is having adequate materials, is not barred from claiming such amount merely because of acceptance of the final bill by mentioning &uot;without prejudice&uot; or by issuing &uot;No Due Certificate&uot;.
If a cheque for a smaller amount than the debt due is sent to the creditor in full satisfaction, it does not discharge the debt if the latter does not accept it as such. It depends upon the intention of the parties as expressed in the correspondence and the character of the transaction.40 If a claimant for a larger amount as damages accepts and cashes a cheque for a lesser sum which was sent on the express condition that it would be in satisfaction of the claim, it can only be evidence of 'accord' and whether it is taken in satisfaction or not depends upon the circumstances of the case.41 In such cases, there is no accord and satisfaction by the mere receiving of the cheque for the amount or the amount itself by the creditor,42 or its encashment;43 or where the cheque is accepted in payment of his dues, but has not been realised.44 A cheque for a smaller sum than due was sent to the creditor with the request that it be accepted in full payment, accompanied with a receipt to be signed by the creditor in full satisfaction. The cheque was cashed but no receipt was sent. On the contrary, before cashing the cheque a demand for the rest was made. This payment was held not to be in discharge of the whole debt.45 Merely by accepting the final bill of a works contract, the contractor is not precluded from demanding the full amount of his claim, unless he has accepted the bill unequivocally stating that he would not have further claim.46 It has been stated:47
Mere payment and acceptance of a lesser sum without the accord that it will be in extinction of the balance liability, will not be a full satisfaction of the debt. Otherwise, as a standard practice every debtor would send to the creditor a lesser sum by way of a cheque with appropriate covering documents taking the chance that the cheque might be encashed. If encashed the debtor can then get away without paying the balance sum. The law cannot permit this.
However, where the creditor receives for his claim the cheque for a smaller amount with a condition that if the amount is not acceptable, it must be returned, retaining the cheque or encashing it amounts to satisfaction in full and final settlement. Later protest is of no avail.48 Nor is a contractor entitled to payment where he submits bills for disputed items after the final bill has been settled and received by him unconditionally.49 9 British Russian Gazette & Trade Outlook Ltd. v. Associated Newspapers Ltd., [1933] 2 KB 616 per Scrutton LJ, at 643-4, [1933] All ER Rep 320. 10 [1933] All ER Rep 320, quoted in Union of India v. Kishorilal Gupta & Bros, AIR 1959 SC 1362 at 1366, 1373, [1960] 1 SCR 493 at 503, 520; Elton Crop Dyeing Co. Ltd. v. Robert Broadbent & Son Ltd., (1919) 89 LJ KB 186, [1916-18] All ER
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Rep 1030(CA) ; cf Cartwright v. Cooke, (1832) 3B & Ad 701; Crowther v. Farrer, [1850] 15 QB 677. 11 Anson' s. Law of Contract, 29th edn., 2010, p. 461. 12 Union of India v. Kishorilal Gupta & Bros, AIR 1953 Cal 642 per Bachawat J, at 644; quoting Chitty on Contracts, 20th edn., p. 286; but see on appeal: Union of India v. Kishorilal Gupta & Bros, AIR 1959 SC 1362, [1960] 1 SCR 493 (the contract was substituted, and it was not necessary to consider application of s s. 62 or 63). 13 Payana Reena Saminathan v. Puna Lana Palaniappa, (1914) 41 IA 142 at 145-46; quoted in Union of India v. Kishorilal Gupta & Bros, AIR 1959 SC 1362 per Subba Rao J at 1366, [1960] 1 SCR 493. 14 Union of India v. Kishorilal Gupta & Bros, AIR 1953 Cal 642 per Bachavat J, at 644 quoting Chitty on Contracts, 21st edn., p. 286. 15 Union of India v. Kishorilal Gupta & Bros, [1960] 1 SCR 493 per Sarkar J (dissenting), at 520, AIR 1959 SC 1362 at 1373; British Russian Gazette & Trade Outlook Ltd. v. Associated Newspapers Ltd., [1933] 2 KB 616, pp. 643-44, [1933] All ER Rep 320. 16 Chitty on Contracts, 21st edn., p. 286 quoted in Union of India v. Kishorilal Gupta & Bros, [1960] 1 SCR 493, AIR 1959 SC 1362 per Sarkar J (dissenting), at 1373. 17 Union of India v. Kishorilal Gupta & Bros, [1960] 1 SCR 493, AIR 1959 SC 1362, p. 1373 per Sarkar J. (dissenting). 18 Asian Techs v. Union of India, AIR 2009 SC 2593(Supp), (2009) 10 SCC 354; Chairman and MD, NTPC Ltd. v. Reshmi Constructions, Builders & Contractors, AIR 2004 SC 1330, (2004) 2 SCC 663. 19 AIR 2009 SC 170 at 184-185, (2009) 1 SCC 267. 20 D & C Builders Ltd. v. Rees, [1956] 2 WLR 288, [1965] 3 All ER 837(CA) ; the proposition set out above has been adopted in Central Bank of India v. Guruviah Naidu & Sons (Leather) Pvt. Ltd., AIR 1992 Mad 139 at p. 147. 21 Lala Kapurchand Godha v. Mir Nawab HimayataliKhan Azamjah, AIR 1963 SC 250, [1963] 2 SCR 168 at 179; Union of India v. Narayan Lall, AIR 1963 Pat 152 (a case of cashing a cheque by the claimant: court held satisfaction will depend on circumstances) ; Day v. McLea, [1889] 22 QBD 610 referred to. 22 Day v. McLea, [1889] 22 QBD 610 per Bowen LJ, at 613; Neuchatel Asphalte Co. Ltd. v. Barnett, [1957] 1 All ER 362 per Morris LJ, at 368, [1957] 1 WLR 356 at 362. 23 Dipchand Golencha v. M Abhechand and Co., AIR 1962 Cal 166 at 167, referring to British Russian Gazette & Trade Outlook Ltd. v. Associated Newspapers Ltd., [1933] 2 KB 616, [1933] All ER Rep 320; Digambar Narain v. Harendra 14 CWN 617 at 625; relying on Bowen v. Owen, [1847] 11 QB 130, 75 RR 306; and referring to Beharilal Biswas v. Nasimannessa Bibi, AIR 1923 Cal 527; p. 167; Salima Jabeen v. National Insurance Company Ltd., AIR 1999 J&K 110. 24 State of Maharashtra v. Nav Bharat Builders, (1994) Supp 3 SCC 83. 25 P.K. Ramaiah & Co. v. Chairman & Managing Director, National Thermal Power Corpn., (1994) Supp 3 SCC 126; Offshore Infrastructires Ltd v. Engineering Projects (India) Ltd, AIR 2011 Cal 104. 26 A K Construction v. UP Power Corporation Limited, AIR 2008 All 117. 27 PK Ramaiah & Co. v. Chairman & Managing Director, National Thermal Power Corpn. 1994 Supp (3) SCC 126; State of Maharashtra v. Nav Bharat Builders, (1994) Supp 3 SCC 83; Vipinbhai r. Parekh v. General Manager Western Railway, AIR 1984 Guj 41 (contractor sought to invoke arbitration clause after giving the 'no claim' certificate). 28 Neuchatel Asphalte Co. Ltd. v. Barnett, [1957] 1 All ER 362, [1957] 1 WLR 356, particularly the observation of Denning LJ at 365 of, [1957] 1 All ER 362. 29 Amar Nath Chand Prakash v. Bharat Heavy Electricals Limited, AIR 1972 All 176; distinguished Lala Kapurchand Godha v. Mir Nawab HimayataliKhan Azamjah, AIR 1963 SC 250, [1963] 2 SCR 168; see also State of Orissa v. Larsen and Toubro Ltd., AIR 2005 Ori 183. 30 R L Kalathia & Co. v. State of Gujarat, AIR 2011 SC 754, (2011) 2 SCC 400. 31 Bharat Electronis Ltd. v. American Export Isbrandsen Lines Inco, AIR 1979 Mad 267, (1979) 2 Mad LJ 304. 32 K Ramchandra Rao v. Union of India, (1994) Supp 2 SCC 545. 33 United India Insurance v. Ajmer Singh Cotton and General Mills, AIR 1999 SC 3027, (1999) 6 SCC 400; (on facts held that the discharge voucher was executed voluntarily); National Insurance Co. Ltd. v. Boghara Polyfab Pvt. Ltd, AIR 2009 SC 170, (2009) 1 SCC 267; Associated Construction v. Pawanhans Helicopters Pvt. Ltd, AIR 2008 SC 2911, (2008) 16 SCC 128 (exchange of voluminous correspondence demanding full claim); South Eastern Coalfields Ltd v. Niranjan Sarkar Contractors, AIR 2011 Chhat 188.
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34 Mintoolal Brijmohandas v. State of MP, AIR 2005 MP 205. 35 D&C Builders Ltd. v. Rees, [1956] 2 WLR 288, [1965] 3 All ER 837(CA) (settlement under intimidation); Rookes v. Barnard, [1964] AC 1129, [1964] 2 WLR 269, [1964] 1 All ER 367(HL) (a threat to break a contract); JT Stratford & Son Ltd. v. Lindley, [1964] 2 All ER 209, [1964] 2 WLR 1002 at 1015; Ishaq Abdul Karim v. Madan Lal, AIR 1965 All 34; Behari Lal v. Radhye Shyam, AIR 1953 All 745; Shyamnagar Tin Factory Pvt. Ltd. v. Snow White Food Products Co. Ltd., AIR 1965 Cal 541 (a cheque for a smaller amount accepted, but no discharge as it was not accepted as such); Ram Saran Dass v. Shri Kishan Das, AIR 1961 All 91 (agreement to receive a smaller sum than decretal amount which was paid and withdrawn by the decree-holder. The debt was discharged). 36 Mohd. Usman v. Union of India, AIR 1984 Raj 156 at 166. 37 Bhagwati Prasad Pawan Kumar v. Union of India, AIR 2006 SC 2331, (2006) 5 SCC 311. 38 Union of India v. Gangaram Bhagwandas, AIR 1977 MP 215. 39 R L Kalathia v. State of Gujarat, AIR 2011 SC 754, reversing Govt of Gujarat v. R L Kalathia and Co. AIR 2003 Guj 185; see also Ambica Construction v. Union of India, (2006) 13 SCC 475. 40 Shyamnagar Tin Factory Pvt. Ltd. v. Snow White Food Products Co. Ltd. AIR 1965 Cal 541; Neuchatel Asphalte Co. Ltd. v. Barnett, [1957] 1 All ER 362, [1957] 1 WLR 356; Day v. McLea, [1889] 22 QBD 610; Firm Basdeo Ram Sarup v. Firm Dilsukharai Sewak Ram, (1922) 44 All 718, AIR 1922 All 461, 68 IC 783. 41 Union of India v. Narayan Lall, AIR 1963 Pat 152; Day v. McLea, [1889] 22 QBD 610; Union of India v. Babulal Uttamchand Bhundari, AIR 1968 Bom 294; Shyamnagar Tin Factory Pvt. Ltd. v. Snow White Food Products Co. Ltd., AIR 1965 Cal 541. 42 Damodar Valley Corpn. v. KK Kar, AIR 1974 SC 158, (1974) 1 SCC 141 (the creditor had issued no receipt). 43 Firm Basdeo Ram Sarup v. Firm Dilsukharai Sewak Ram, (1922) 44 All 718, AIR 1922 All 461, 68 IC 783; Union of India v. Jethabhai Jesinbhai Patel & Co., AIR 1960 Pat 30; Union of India v. Gangaram Bhagwandas, AIR 1977 MP 215; Union of India v. Navilakha & Sons, AIR 1997 Bom 209. 44 Abdul Majid v. Ganesh Das Kalooram Ltd., AIR 1954 Ori 124; Mohanlal Jogani Rice and Atta Mills v. Ramlal Onkarmal Firm, AIR 1957 Assam 133. 45 Tata Lacomotive & Engg Co. Ltd. v. Sardar Kartar Singh, AIR 1961 Pat 37; following Firm Basdeo Ram Sarup v. Firm Dilsukharai Sewak Ram, (1922) 44 All 718, AIR 1922 All 461, 68 IC 783; Union of India v. Jethabhai Jesinbhai Patel & Co. AIR 1960 Pat 30. 46 Bharat Coking Coal Ltd. v. Annapurna Construction, AIR 2003 SC 3660, (2003) 8 SCC 154. 47 Saraswat Trading Agency v. Union of India, AIR 2002 Cal 51. 48 Bhagwati Prasad Pawan Kumar v. Union of India, AIR 2006 SC 2331, (2006) 5 SCC 311. 49 Offshore Infrastructures Ltd. v. Engineering Projects (India) Ltd, AIR 2011 Cal 104.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER IV Of the Performance of Contracts/Contracts which need not be performed/S. 64.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which need not be performed S. 64. Consequences of rescission of voidable contract.--
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When a person at whose option a contract is voidable rescinds it, the other party thereto need not perform any promise therein contained in which he is promisor. The party rescinding a voidable contract shall, if he had received any benefit thereunder from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received.50
Introduction This section gives the effect of rescission of a voidable contract. First, the person rescinding the contract is liable to restore the benefit to the person from whom it was received. Secondly, the other party need not perform his part of the contract. 50 See s. 75, infra.
Basis of the Provision In rescinding a contract, the courts act on the principle that, as the transaction ought never to have been made, the parties are to be placed, as far as possible, in a situation in which they would have stood, if there had never been any such transaction. The broad principle on which this and the following section rest, has been stated:
No man can at once treat the contract as avoided by him, so as to resume the property which he parted with under it, and at the same time keep the money or other advantages which he has obtained under it.51
The same rule appears under ss. 30 and 43 of the Specific Relief Act, 1963. Voidable Whenever one party to a contract has the option of annulling it, the contract is voidable, whether the word 'voidable' has or has not been used. Contracts declared voidable by s. 2(i) under the Contract Act may be divided into two groups: contracts voidable in their inception under ss. 19 and 19A on the ground of fraud or the like52 and contracts becoming voidable by one party on account of subsequent default of the other party, as mentioned in s s. 39, 53 and 55. It had been suggested that the present section applied only to the first-named class of contracts, which were voidable for want of free consent;53 but later has been decided by the Privy Council that the section applies to cases of rescission under s. 39 as well.54 The claim of the party rescinding a contract for misrepresentation is liable to refund the benefit, and is entitled to set off damages suffered by reason of the misrepresentation.55 Fraud in the performance of a contract, apart from its making, is not a ground for rescission, and hence restoration of the parties under s. 64 to the position in which they were before the contract was made.56 'Voidable' under Other Laws The direct application of this section, according to recognised canons of interpretation, is only to contracts declared voidable by the Contract Act; but its principle is one of general jurisdiction and equity and is applicable in various other cases. In Sinaya Pillai v. Munisami Ayyan, 57a mortgage was executed by the guardian of a minor appointed under the Guardians and Wards Act 1890, without obtaining the sanction of the court as required by s. 29 of the Act. Such a mortgage is voidable under s. 30 of that Act . It was held that the mortgage could not be avoided on behalf of the minor, except on restoring to the mortgagee the
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benefit received by the minor's estate under the mortgage. It based its decision on the principle which, as the court said, 'is acknowledged in s. 64 of the Indian Contract Act, in s. 35 of the Transfer of Property Act, and generally by the Indian courts as courts of equity and good conscience.' So is a transfer of property by a natural guardian in contravention of s. 8(2) and (3) of the Hindu Minority and Guardianship Act, and the minor can avoid it only upon restoration of the benefits received under such transfer.58 Neither this section nor s. 65 apply to agreements by minors, and there is no liability under these upon the minor to make compensation.59 Order of Restoration The court, before making an order for rescission of the contract on the ground of fraud must make an order that the party seeking rescission should restore the benefit received under the contract. The principle is that there must be restitutio in integrum as a condition of rescission of the contract. The defendant cannot be asked to bring a separate suit for the purpose. In a suit for rescission, the claim of the defendant for restoration is in the nature of defence and not set-off, and no court-fees are payable for the claim.60 'Restore as far as may be' A seller rescinded the contract of sale of land and the buyer demanded, inter alia, the return of money of the advance paid as part of the purchase price. It was held that equity demands that if a rescission is granted, both parties should be restored to status quo ante. In other words if the seller has retained his land or sold it to a third party at no loss, he must refund the money paid to him by the purchaser.61 This section does not empower the court to impose a charge on property.62 In Halpern v. Halpern (No 2), 63 a dispute over inheritance was settled in a compromise agreement. Certain documents were destroyed as part of this compromise. The plaintiffs sought damages for breach, and the defendants pleaded that the compromise was made under duress. The question was whether the right to rescind was lost to the defendants because they were not in a position to restore these documents. It was held that the court could consider a suitable remedy, viz. monetary compensation, as a substitute for counter-restitution. Benefit Received under the Contract Sections 64 and 65 do not refer by the words 'benefit' and 'advantage' to any question of 'profit' or 'clear profit', nor does it matter what the party receiving the money may have done with it.64 Where a guardian sells his ward's property for purposes not binding on the ward, and the sale price is utilised for the purchase of lands for the ward not contemplated at the time of the sale, the lands so purchased for the ward do not constitute 'benefit' received by the ward under the contract so as to entitle the vendee to have it conveyed to him on repudiation by the ward of the sale by the guardian.65 A duly appointed guardian of a minor executed a usufructuary mortgage of the minor's property without the permission of the district judge. The mortgage was for Rs. 1400/- at interest of 2 percent per month, out of which Rs. 1200/- were paid in discharge of a debt due from the minor's father. The mortgagee constructed new buildings on the property. On attaining majority, the minor rescinded the mortgage and filed a suit for recovery of possession of his property. It was held that the mortgagee was entitled only to Rs. 1200/which had been paid to discharge the minor's father's debt and a sum of Rs. 237/- spent by the mortgagee on necessary repairs to the mortgaged bungalow. The mortgagee was not entitled to the value of the newly erected buildings, but was entitled to remove the materials composing them.66 In setting aside a mortgage by the guardian of a Mohammedan minor, the court has discretion to make it a condition that the amount by which the minor had benefited must be refunded.67 A party misled by a statement amounting to misrepresentation is entitled to receive refund of amount paid by it to the other party under the contract.68 In Murlidhar Chatterjee v. International Film Co. Ltd, 69 the Privy Council decided that where a person has elected to put an end to the contract under s. 39, he is bound to return any benefit that he has received under the contract, but he is entitled to set-off the damages for the defaulting party's breach. The Contract Act requires that a party must give back the benefit which he has received under the contract. A agrees to
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sell land to B for Rs. 40000/-. B pays to A Rs. 4000/- as a deposit at the time of the contract, the amount to be forfeited to A if B does not complete the sale within a specified period. B fails to complete the sale within the specified period, nor is he ready and willing to complete the sale within a reasonable time after the expiry of that period. A is entitled to rescind the contract and to retain the deposit. The deposit is not a benefit received under the contract it is a security that the purchaser would fulfill his contract, and is ancillary to the contract for the sale of the land.70 But where an insurance policy is vitiated because of the fraud of the insured, the money paid by the insured belong to the insurer. Further, where there is a breach of warranty by one of the parties to the contract and there is a stipulation that as a consequence the other party will be discharged from performance, neither s. 64 nor s. 65 applies.71 A policy was taken by the deceased on misstatement of material facts but the premiums were being paid regularly and amounted to Rs. 12,000/-. The policy having been avoided, the money paid could not be claimed under s. 64 or s. 65 as money had and received because of the contract being fraudulent.72 A person breaking a contract cannot claim what he had paid under the contract to the other party who is ready and willing to perform his part of it.73 Where both parties are in default neither is entitled to damages, but the liability to return the benefit under this section remains.74 51 Clough v. London & North Western Rail Co., (1871) LR 7 Ex 26 at 37, [1861-73] All ER Rep 646; followed in Mundakath Nathu v. Chalora Illath Sankaran Nambudripad, AIR 1932 Mad 303, 136 IC 350 (the principle is applied as a rule of equity and good conscience); O'Sullivan v. Management Agency and Music Ltd., [1985] QB 428, [1985] 3 All ER 351(CA) . 52 Pramada Prasad Mukherjee v. Sagarlal Agarwalla, AIR 1954 Pat 439; Sita Devi v. Bihar State Financial Corpn., AIR 2003 Pat 92. 53 Brohmo Dutt v. Dharma Das Ghose, (1898) 26 Cal 381, per Maclean CJ, expressly without giving a final opinion; Natesa Aiyar v. Appavu Padayachi, (1915) 38 Mad 178 per White CJ, at 185, 19 IC 462, AIR 1915 Mad 896(FB), (1898-99) ILR 25-26 Cal 846. 54 Muralidhar Chatterjee v. International Film Co. Ltd., (1943) 70 IA 35, AIR 1943 PC 34, (1943) 2 Mad LJ 369 (s. 39 uses the words 'may put an end to the contract'). 55 Chhanga Lal v. M C D, AIR 2008 Del 146. 56 Jamsetji Nassarwanji Ginwala v. Hirjibhai Naoroji Anklesaria, (1912) 37 Bom 158 at 169; Fazal D Allana v. Mangaldas M Pakvasa, (1921) ILR 46 Bom (VI) 489 at 508, AIR 1922 Bom 303, 66 IC 726. 57 (1898) 22 Mad 289; Tejpal v. Ganga, (1902) 25 All 59; Kuvarji v. Moti Haridas, (1878) 3 Bom 234, (1898-1900) ILR 22-23 Mad 205. 58 Surta Singh v. Pritam Singh, AIR 1983 P&H 114 at 121 (FB). 59 Mohori Bibee v. Dharmodas Ghose, (1903) 30 IA 114, (1902) ILR 30 Cal 539; Kamta Prasad v. Sheo Gopal Lal, (1904) 26 All 342; Motilal Mansukhram v. Maneklal Dayabhai, (1920) 45 Bom 225, AIR 1921 Bom 147(1); see also s. 11, under the heading: 'Restitution and the Specific Relief Act, 1963', and ss. 30 and 33 of the Specific Relief Act, 1963. 60 Pramada Prasad Mukherjee v. Sagarmal Agarwalla, AIR 1954 Pat 439. 61 Surendranath Talukdar v. Lohit Chandra Talukdar, AIR 1975 Gau 58 at 61. 62 Ponnammal v. Pichai Thevan, AIR 1927 Mad 204, 52 Mad LJ 33. 63 [2007] EWCA Civ 291, [2007] 3 All ER 478(CA) . 64 Muralidhar Chatterjee v. International Film Co. Ltd., (1943) 70 IA 35 at 49, AIR 1943 PC 34, (1943) 2 Mad LJ 369. 65 Chinnaswami Reddi v. Krishnaswami Reddi, (1918) 35 Mad LJ 652, AIR 1919 Mad 650, 48 IC 856. 66 Bechu v. Bhabuti Prasad, [1930] 52 ER 831, 124 IC 731, AIR 1931 All 201. 67 VST Kadir Meeral Beevi v. SPK Muhammad Koya, AIR 1956 Mad 368; following Rang Ilahi v. Mahbub Ilahi, ILR 7 Lah 35, AIR 1926 Lah 170; Abdul Majid Saib v. Ramiza Bibi Sahiba, AIR 1931 Mad 468. 68 Sita Devi v. Bihar State Financial Corpn, AIR 2003 Pat 92.
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69 (1943) 70 IA 35, AIR 1943 PC 34, (1943) 2 Mad LJ 369; followed in Gurizala Vuddandam v. Juluri Venkatakameswara, AIR 1951 Mad 470, and Union of India v. Bungo Steel Furniture (Pr.) Ltd., AIR 1963 Cal 70. 70 Natesa Aiyar v. Appavu Padayachi, (1915) 38 Mad 178, 19 IC 462, AIR 1915 Mad 896; Naresh Chandra Guha v. Ram Chandra Samanta, AIR 1952 Cal 93; Mathradas Valabhdas v. Punathil Aboobacker, AIR 1951 Mad 752; T Ranganayakamma v. SR Subudhi, AIR 1955 Ori 20. 71 Mithoolal Nayak v. Life Insurance Corpn. of India, AIR 1962 SC 814, [1962] Supp 2 SCR 571 (a case of fraud by the insured by giving false particulars); Life Insurance Corpn. of India v. Canara Bank Ltd., AIR 1974 Mys 51 at 59. 72 Life Insurance Corpn. of India v. Canara Bank Ltd., following Mithoolal Nayak v. Life Insurance Corpn. of India, supra., AIR 1974 Mys 51. 73 SV Hari Hara Iyer v. Mathew George, AIR 1965 Ker 187 (the right of rescission is of the other party). 74 G. Gopala Chettiar v. N Giriappa Gowder, AIR 1972 Mad 36 (refund of advance money paid).
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER IV Of the Performance of Contracts/Contracts which need not be performed/S. 65.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which need not be performed S. 65. Obligation of person who has received advantage under void agreement, or contract that becomes void.-When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it to the person from whom he received it. Illustrations (a) (b) (c)
(d)
A pays B 1,000 rupees in consideration of B's promising to marry C, A's daughter. C is dead at the time of the promise. The agreement is void, but B must repay A the 1,000 rupees. A contracts with B to deliver to him 250 maunds of rice before the 1st of May. A delivers 130 maunds only before that day and none after. B retains the 130 maunds after the 1st of May. He is bound to pay A for them. A, a singer, contracts with B, the manager of a theatre to sing at his theatre for two nights in every week during the next two months, and B engages to pay her a hundred rupees for each night's performance. On the sixth night, A willfully absents herself from the theatre, and B, in consequence, rescinds the contract. B must pay A for the five nights on which she had sung. A contracts to sing for B at a concert for 1,000 rupees, which are paid in advance. A is too ill to sing. A is not bound to make compensation to B for the loss of the profits which B would have made if A had been able to sing, but must refund to B the 1,000 rupees paid in advance.
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Introduction Section 65 contains the principle of restitution, where, after a benefit has been received, and the agreement is later discovered to be void,75 or when the contract becomes void, viz, as provided under s. 32 or 56 of the Contract Act. 75 Dominion of India v. Preety Kumar Ghosh, AIR 1958 Pat 203 at 207; Harnath Kuar v. Indar Bahadur Singh, ILR 45 All 179, AIR 1922 PC 403, (1923) 50 IA 69, 71 IC 629; Hansraj Gupta v. Dehra Dun Mussoorie Electric Tramway Co. Ltd., (1933) 60 IA 13, ILR 54 All 1067, AIR 1933 PC 63; Babu Raja Mohan Manucha v. Babu Manzoor Ahmad Khan, (1943) 70 IA 1, AIR 1943 PC 29, ILR 18 Luck 130, (1943) 1 Mad LJ 508, 206 IC 457; Craven-Ellis v. Canons Ltd., [1936] 2 KB 403, [1936] 2 All ER 1066(CA) (a claim in quantum meruit).
Nature of the Remedy The section aims at preventing unjust enrichment. The intention of the section is to prevent a party from avoiding an agreement and retaining the benefits received under it.76 In Ram Nagina Singh v. Governor-General in Council, 77 the Calcutta High Court held s. 65 as 'compensatory in principle' and 'for prevention of unjust enrichment'. The basis of the section is the doctrine of restitutio in integrum. It does not make a new contract between the parties, but only provides for restitution of the advantage taken by a party under the contract.78 Unless the court can, having regard to circumstances of the case, restore the parties to their original position, s. 65 would not be applicable.79 The remedy is also stated to be quasi-contractual.80 The obligation to pay compensation under s. 65 is quite different from a claim under the contract itself and the two cannot co-exist. As a quasi-contractual and restitutionary remedy, it arises where the original contract is put to an end or contracts become ineffective due to mistake or impossibility or lack of writing or lack of capacity, or like reasons.81 This section is also said to embody the principles of quantum meruit.82 The section is not wider in scope than the prevalent English doctrine of restitution.83 The courts in India are, however, governed by the provisions of s. 65 and not by any principles enunciated by the English courts;84 and if the plaintiff can bring his case within the four corners of this section, he will be entitled to the remedies, viz, compensation, notwithstanding any principle of the English law to the contrary.85 The illustrations to this section are rather miscellaneous. Illustration (a) is a simple case of money paid under a mistake.86 In (b) it does not seem that the contract has become void at all, but, on the contrary, that B has elected to affirm it in part, and dispense with the residue; that is no new contract under which he is bound to pay for the 130 maunds of rice, but for what he does accept he is undoubtedly bound to pay for at the contract price. In (c), it is not clear whether the contract is to be treated as divisible, so that A is entitled to R s. 100/- for each night on which she did sing, or the court is to estimate what, on the whole, the partial performance was worth. Illustration (d) is simpler; what English lawyers would refer to under the head of money paid on a consideration which fails. 76 N. Purkayastha v. Union of India, AIR 1955 Assam 33. 77 AIR 1952 Cal 306 per Sinha J., at 310. 78 Sundara Gounder v. Balachandran, AIR 1990 Ker 324. 79 Alapati Ramamurthi Gelli Krishnamurthi & Co. v. Maddi Sitharamayya, AIR 1958 AP 427; Jharia Coalfield Electric Supply Co. Ltd. v. Kaluram Agarwala, AIR 1951 Pat 463; Lakshmanprasad & Sons v. A Achutan Nair, ILR (1956) Mad 712, AIR 1955 Mad 662; Tavva Venkata Gurunadha Rao v. Badam Rosaiah, AIR 1959 AP 277. 80 Town Area Committee v. Rajendra Kumar, AIR 1978 All 103. 81 New Churulia Coal Co. Ltd. v. Union of India, AIR 1956 Cal 138 (claim on ground of failure of consideration for the price
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of a boiler supplied by the government and found to be useless, not sustained); Bassu Kuar v. Dhum Singh, (1888) 11 All 47, 50 IA 211(PC) . 82 Indu Mehta v. State of Uttar Pradesh, AIR 1987 All 309 at 313. 83 Alapati Ramamurthi Gelli Krishllamurthi & Co. v. Maddi Sitharamayya, AIR 1958 AP 427 at 436. 84 Muralidhar Chatterjee v. International Film Co. Ltd., AIR 1943 PC 34, (1943) Mad LJ 369; Appana Radha Sri Krishna Rao v. VKM Kodandarama Chetti, AIR 1960 AP 190. 85 Dharmeswar Kalita v. Union of India, AIR 1955 Assam 86. 86 See s. 72 below.
Agreement and Contract In Kuju Collieries Ltd. v. Jharkhand Mines Ltd, 87 the Supreme Court has explained the scope of s. 65 thus:
The section distinguishes between an agreement and a contract. An agreement which is enforceable by law is a contract and an agreement which is not enforceable by law is said to be void. Therefore, the phrase in the section 'discovered to be void' means that the agreement is not enforceable and is therefore not a contract. It may be that the parties or one of them had no knowledge when they entered into the agreement that the agreement was in law not enforceable. They might have come to know later that the agreement was not unenforceable later. The second part of the section refers to a contract becoming void. That refers to an agreement which was enforceable and was, therefore, a contract becoming void due to subsequent happenings. In both these cases any person who has received any advantage under the agreement is bound to restore the same or make compensation for it to the person from whom he received it. But where at the time when the agreement is entered into, both the parties knew that it was not lawful, and therefore, void, there was no contract but only an agreement and it is not a case where it is discovered to be void subsequently. Nor is it a case of the contract becoming void due to a subsequent happenings. Therefore, s. 65 of the Contract Act did not apply.
However, s. 65 starts on the basis of there being some agreement or contract between competent parties. It has no application to a case in which there never was, and never could have been, any contract.88Section 65 applies only where an agreement at a subsequent stage is discovered to be void or when a contract becomes void later on by one reason or other.89 It does not apply where it cannot be said that the agreement was discovered to be void or becomes void after it had been entered into.90Section 65 applies to cases of transfer of property, as also to mere agreements or contracts.91A transfer liable to be set aside under s. 54 of the Provincial Insolvency Act, 1920 can neither be said to be discovered to be void, nor to have become void.92 It is not necessary for application of this section that the agreement be executory; it applies even if the agreement has been performed.93 Where the debtor had settled the debt of the creditor during the pendency of the creditor's application under a debt relief law, the debtor having no knowledge of the application, the settlement was void, and the amount liable to be refunded.94But a cause of act ion under this section cannot exist side by side with the original cause of action under the contract; before the new right under this section could arise, the old right must have ended.95 87 [1975] 1 SCR 703, AIR 1974 SC 1892 at 1894; relying on Harnath Kuar v. Indar Bahadur Singh, ILR 45 All 179, AIR 1922 PC 403, (1923) 50 IA 69 at 75-76, 71 IC 629; Ramagya Prasad Gupta v. Murli Prasad, AIR 1974 SC 1320, approving Budhulal v. Deccan Banking Co. Ltd., AIR 1955 Hyd 69; Kanuri Sivaramakrishnaiah v. Vemuri Venkata Narahari Rao, AIR 1960 AP 186; Malik Abdul Ahad Shah Jalil Ahmed Akhtar v. State of Jammu and Kashmir, AIR 1982 J&K 16 at 19. 88 Mohori Bibee v. Dharmodas Ghose, (1903) 30 IA 114, (1902) 30 Cal 539 at 548 (PC); Kamta Prasad v. Sheo Gopal Lal, (1904) 26 All 342 at 343; Motilal Mansukhram v. Maneklal Dayabhai, (1920) 45 Bom 225, 59 IC 245, AIR 1921 Bom 147(1); Punjabai Bhilasa v. Bhagvandas Kisandas, (1928) 53 Bom 309, AIR 1929 Bom 89, 117 IC 518; Tavva Venkata Gurunadha Rao v. Badam Rosaiah, AIR 1959 AP 277; Manoharlal Radhakrishna v. Union of India, AIR 1974 Pat 56 at 62.
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89 Manoharlal Radhakrishna v. Union of India, AIR 1974 Pat 56 at 62. 90 C Boggiano & Co. v. Arab Steamers Ltd., (1916) 40 Bom 529, AIR 1916 Bom 265, 33 IC 536; Parshottam Veribhai v. Chhatrasangji Madhavsangji Thakor, (1916) 41 Bom 546 at 548, AIR 1916 Bom 65; Abdur Razak Kewal v. Mahomed Husein Dalvi, (1916) 42 Bom 499, AIR 1917 Bom 61 (transfer of property); Shambhoo Shukul v. Dhaneshwar Singh, AIR 1927 Oudh 177, 101 IC 265; Sadia v. Ambhiria, AIR 1929 Nag 241; District Council Wardha v. Anna Daulatrao Kunbi, AIR 1941 Nag 273, 197 IC 76; Sana Ullah v. Jai Narain Singh, ILR (1942) All 817, AIl 1942 All 409; Santimmappa Venkappa Konnur v. Balbhim Co-op Credit Society, AIR 1950 Bom 313; State of Orissa v. Khan Saheb Md Khan, AIR 1961 Ori 75. 91 Babu Raja Mohan Manucha v. Babu Manzoor Ahmad Khan, (1943) 70 IA 1, AIR 1943 PC 29, ILR 18 Luck 130, (1943) 1 Mad LJ 508, 206 IC 457; but see Gauri Shanker Pandey v. Chandari Girja Prasad Singh, AIR 1967 All 262. 92 Bhiku Appa Kura v. Dattatraya Chandrayya, ILR (1947) Bom 156, (1947) 49 Bom LR 87, AIR 1947 Bom 392. 93 Transport Company Ltd. v. Tirunelveli Motor Bus Co. Ltd., ILR (1955) Mad 528 at 547; Mohanlal Khushalbhai v. Yakubkhan Pirkhan, AIR 1967 Guj 46. 94 Mohanlal Khushalbhai v. Yakubkhan Pirkhan, AIR 1967 Guj 46. 95 New Churulia Coal Co. Ltd. v. Union of India, AIR 1956 Cal 138 at 144.
Classification of the Remedy A question of classifying a claim of the type under this section arose in Kleinwort Benson Ltd. v. Glasgow City Council, 96 where the bank had brought an act ion in England to recover in restitution payments from the local authority under interest rate swap agreements, which were later found by the House of Lords in another case to be ultra vires the local authorities. A question arose whether these claims were 'a matter relating to contract' under Art. 5(3) of the Convention on Jurisdiction and Enforcement of Judgments in Civil Matters enumerated in the Schedule to the Civil Jurisdiction and Judgments Act, 1982, thus giving jurisdiction to the courts in England. The Court of Appeal had held that a claim to recover money paid under a contract which was a nullified because of the recipient's lack of capacity to enter into the transaction, was a matter relating to contract. 'A contract was a consensual arrangement intended to create legal relations and to be legally enforceable and therefore included a void contract'.1 Reversing this judgment, the House of Lords held that the plaintiff's claim being under a supposed contract which in law never existed, was not therefore based on a contractual obligation, but a claim on restitution based on principle of unjust enrichment, and hence not covered by the article. 96 [1997] 4 All ER 641, [1997] 4 All ER 641,(HL) . 1 Kleinwort Benson Ltd. v. Glasgow City Council, [1996] 2 All ER 257 per Millett LJ. at 273 (CA).
'Discovered to be Void' This section applies to agreements that are void ab initio.2 The words 'discovered to be void' refer to' an agreement which was void ab initio but was not known to be so by the parties;3 and to be so it must have been void ab initio as distinguished from one which subsequently becomes void.4 It can be invoked in a case where the contract is void from its inception, but the parties' or at least the plaintiff laboured under a bona fide mistake and the contract is later discovered to be void.5 This has no application to transactions which are valid contracts under the Contract Act .6 In Harnath Kuar v. Indar Bahadur Singh, 7 it was stated:
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The section deals with: (a) agreements; and (b) contracts. The distinction between them is apparent by s. 2; by clause (e), every promise and every set of promises forming the consideration for each other is an agreement and, by clause (h) an agreement enforceable by law is a contract. Section 65, therefore, deals with: (a) agreements enforceable by law; and (b) with agreements not so enforceable. By clause (g), an agreement not enforceable by law is said to be void. An agreement, therefore, discovered to be void is one discovered to be not enforceable by law, and, on the language of the section, would include an agreement that was void in that sense from its inception as distinct from a contract becomes void.
A contract would be 'discovered to be void' in situations where the parties have contracted on the basis of mutual mistake as to a fact essential to the agreement, or where the meaning of the agreement is not capable of being made certain,8 or where the court has declared the agreement to be champertous,9 and also to cases where the parties have discovered later that the supposed contract was unlawful or contravening some statutory provision. This section cannot be invoked where a person deliberately enters into a contract which he knows cannot be valid,10 but does apply where the parties were unaware of the void nature of the agreement until the date of discovery of its being void; i.e., when the agreement was void when it was made, but was discovered to be so at a later date.11 The word 'discover' indicates that the section would apply where the discovery is made by an outside agency other than the parties to the agreement, or it is made by the parties where they could not have made even if they had shown all diligence which could have been expected from anyone; but it is not restricted to such discoveries only.12 Z contracts with A to sell him land which, in fact, is already sold to B. A is entitled, notwithstanding a clause exempting Z from liability for defects in the title, to avoid the contract on the ground of fraud and recover his purchase money from Z under this section.13The plaintiff discovered at a late stage the effect of non-registration of the deed of purchase of standing trees and the effect of their vesting in the state under the West Bengal Estates Acquisition Act. That gave him the right to protection provided under s. 65 and claim to get restitution on the basis of agreement subsequently found to be void.14 A transferee of the property which by its very nature is inalienable is entitled to recover back his purchase money from the transferor, if the transfer is declared illegal and void.15 So also the purchaser of an expectancy.16 2 Harnath Kuar v. Indar Bahadur Singh, AIR 1922 PC 403, (1923) 50 IA 69, 71 IC 629; Madura Municipality v. Raman Servai, AIR 1936 Mad 98; Govind Keshav Dandavate v. Yeshwant Pandharinath Shete, AIR 1941 Bom 378 at 380. 3 PR Srinivasa Aiyar v. A Sesha Iyer, AIR 1918 Mad 444; Hussain Kasam Dada v. Vijayanagram Commercial Assn, AIR 1954 Mad 528; Budhulal v. Deccan Banking Co. Ltd., AIR 1955 Hyd 69; Sundara Gounder v. Gounder, AIR 1990 Ker 324. 4 Abhi Singh v. Daso Bhogta, AIR 1952 Pat 455; Malik Abdul Ahad Shah Jalil Ahmed Akhtar v. State of Jammu and Kashmir, AIR 1982 J&K 16; Nihal Singh v. Ram Bai, AIR 1987 MP 126; Sundara Gounder v. Balachandran, AIR 1990 Ker 324. 5 Sundara Gounder v. Balachandran, AIR 1990 Ker 324. 6 Wolf & Sons v. Dadiba, Khimji & Co., (1920) 44 Bom 631, AIR 1920 Bom 192, 58 IC 465. 7 ILR 45 All 179, AIR 1922 PC 403 at 405, (1923) 50 IA 69 at 75-76, 71 IC 629; District Council Wardha v. Anna Daulatrao Kunbi, AIR 1941 Nag 273, 197 IC 76; Abhi Singh v. Daso Bhogta, AIR 1952 Pat 455; Kuju Collieries Ltd. v. Jharkhand Mines Ltd., AIR 1974 SC 1892, [1975] 1 SCR 703; Fakir Chand Seth v. Dambarudhar Bania, AIR 1987 Ori 50 at 53. 8 Udit Narain Misr v. Muhammad Minnat-Ullah, (1903) ILR 25 All 618. 9 Suganchand v. Balchand, AIR 1957 Raj 89. 10 Bava C Gopalaswami Mudaliar v. Annadana Kattalai of Sri Tyagarajaswami Temple Tiruvarur, (1940) 1 Mad LJ 547, AIR 1940 Mad 719; Joginder Singh v. Assistant Registrar Co-op Societies, AIR 1965 J&K 39. 11 Dyaviah v. Shivamma, AIR 1959 Mys 188; Maung Kyi Oh v. Maung Kyaw Zan, AIR 1926 Rang 7. 12 National Chamber of Commerce Ltd. v. Nitya Nandan Deoki Nandan, AIR 1963 All 294. 13 Akhtar Jahan Begam v. Hazari Lal, (1927) 25 All LJ 708, 103 IC 310, AIR 1927 All 693. 14 Walamji Lalji v. Anil Charan Bangal, AIR 1975 Cal 92 at 97.
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15 Krishnan v. Sankara Varma, (1886) 9 Mad 441; Jijibhai Laldas v. Nagji Gulab, (1909) 11 Bom LR 693; Haribhai Hansji v. Nathubhai Ratnaji, (1913) 38 Bom 249, AIR 1914 Bom 102, 23 IC 602; Javerbhai Jorabhai v. Gordhan Narsi, (1914) 39 Bom 358, AIR 1915 Bom 102, 28 IC 442; Bai Diwali v. Umedbhai Bhulabhai Patel, (1916) ILR 40 Bom 614, AIR 1916 Bom 318, 36 IC 564 (the earlier editors opine that the transfers in the four cases being cases under the Bombay Bhagdari Act 5 of 1862 were a nullity, and not illegal); Dyaviah v. Shivamma, AIR 1959 Mys 188. 16 Harnath Kuar v. Indar Bahadur Singh, ILR 45 All 179, AIR 1922 PC 403, (1923) 50 IA 69, 71 IC 629; Annada Mohan Roy v. Gour Mohan Mullick, (1923) 50 Cal 929, AIR 1923 PC 189, (1923) 50 IA 239, 74 IC 499.
Date of Discovery Parties being presumed to know the law, the date of discovery is taken, so far as material, to have been the date of the agreement unless the court is satisfied that it was later.17The time at which an agreement for the sale of an expectancy was 'discovered to be void,' so that a cause of act ion to recover the consideration arose under this section, in the absence of special circumstances, was the date of the agreement.18 In Ramagya Prasad Gupta v. Murti Prasad, 19 there was a partnership by an oral agreement to purchase an electrical undertaking in the name of one of the partners, M. It was also agreed that the licence should be obtained in the name of M, only and the partners had to contribute for the purchase money proportionate to their respective shares. The electrical undertaking was sold by the official liquidator to M alone. The oral agreement of partnership was incorporated into a partnership deed. There was a subsequent change in the partners and a new partnership deed was executed and registered. Some time later the electrical inspector intimated Mthat the partnership was illegal and void as it contravened the provisions of the Electricity Act. Thereupon one of the partners brought a suit for declaration that the partnership had been dissolved and for rendition of accounts. The state thereafter took over the undertaking and paid a certain amount of money as compensation. It was held thatM was not lawfully entitled to the whole of the compensation money, but all partners were entitled to share in it as there was nothing to suggest that the partners were aware of the illegality of the partnership. The illegality, if any, was discovered only after the Government issued a notification revoking the licence and relief to the partners claiming their shares of the compensation was not dependent upon the validity of the partnership and the agreement because it did not contravene the provisions of the Contract Act. In Budhulal v. Deccan Banking Co. Ltd, 20a promissory note had been executed for consideration, but it was found that the promissory note was made payable to bearer on demand and hence hit by the provisions of s. 31 of the Reserve Bank of India Act, 1934 and ss. 15 and 16 of the Hyderabad Paper Currency Act, 1923. It was held that s. 65 made knowledge of the agreement being void as one of the pre-requisites for restitution, and if knowledge is an essential requisite even an agreementab initiovoid can be discovered to be void subsequently. There may be cases where parties enter into an agreement honestly thinking that it is a lawful agreement and where one of them sues the other or wants the other to act on it, it is then that he may discover it to be void. There is nothing in s. 65 to make it inapplicable to such cases. Thus, where a contract with a non-resident Indian was subsequently discovered by the parties to be in contravention of the provisions of the Foreign Exchange Regulation Act, 197321 and void, it was held that the plaintiff was entitled to claim compensation with interest.22 17 Shambhoo Shukul v. Dhaneshwar Singh, AIR 1927 Oudh 177, 101 IC 265; Gopilal Bhawaniram v. Pandurang, AIR 1926 Nag 241, 92 IC 640; Babu Raja Mohan Manucha v. Babu Manzoor Ahmad Khan, (1943) 70 IA 1 at 11-12, AIR 1943 PC 29, ILR 18 Luck 130, (1943) 1 Mad LJ 508, 206 IC 457; Ram Samujh Singh v. Mainath Kuer, AIR 1925 Oudh 737. 18 Annada Mohan Roy v. Gaur Mohan Mullick, (1923) 50 Cal 929, AIR 1923 PC 189, (1923) 50 IA 239, 74 IC 499; Hansraj Gupta v. Dehra Dun Mussoorie Electric Tramway Co. Ltd., (1933) 60 IA 13, ILR 54 All 1067, AIR 1933 PC 63; Suja v. Padam Chand, AIR 1955 Ajm 54 (special circumstances). 19 AIR 1974 SC 1320, reversing Murli Prasad v. Parasnath Prasad, AIR 1967 Pat 191. 20 AIR 1955 Hyd 69. 21 Now Foreign Exchange Management Act, 1999.
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22 Shaukat Ali Khan v. Babu Khan, AIR 1991 Del 190.
Mistake The section applies to supposed contracts made by parties under a mutual mistake, later discovered by them to be so. The defendants obtained, as the highest bidder in an auction, the collection of a tax which they collected, and paid a part to the Town Area Committee. They then ceased to auction the right to realise weighing dues and started realising them. Initially, they paid a part of it to the but then they ceased to pay it, but continued collecting the same for the full term of the contract. A large sum of money was owed to the Town Area Committee by them. The transaction took place under the belief that it was valid, but subsequently it was discovered to be invalid. The Town Area Committee was entitled to recover its dues, equity stepping in to stop unjust enrichment.23A purchased pipes which were subsequently found to be stolen property and were taken away by the police. Section 65 applied and the buyer was entitled to the return of the price paid.24 An intending vendor who had received part of the consideration was found to have no title over the land; he was bound to repay money to the vendee.25 Mistake of Law The operation of this section is not restricted to agreements void on facts, but also extends to those agreements which are void on grounds of law, and this fact was discovered after the date it was made because the parties did not correctly appreciate the implications of law which made the agreement void,26 but not if one party was not mistaken.27 In Kleinwort Benson Ltd. v. Lincoln City Council, 28 banks had paid to local authorities amounts under interest rate swap agreements, which were later declared ultra vires and void by the House of Lords in another case; and later claimed recovery of the payments in an action in restitution for mistake. The questions before the House were:
(a) (b)
whether the mistake of law rule29 generally precluding a restitutionary remedy for money paid under mistake of law should be maintained?; if the rule was abrogated, whether recovery should still be precluded if either: (i) money was paid under a settled understanding of the law which was subsequently changed by judicial authority; or (ii) the money had been the subject of honest receipt by the defendant?; (iii) whether recovery was precluded by the fact that the transactions had been fully performed?
The House of Lords held that the payments could be recovered back by act ion in restitution for mistake, thus abrogating the rule that a mistake of law was not actionable. It held that the law should now recognise that there was a general right to recover money paid under a mistake, whether of fact or law, subject to the defence of change of position, which had to be proved in fact if the payee was to justify the retention of money which would otherwise be repayable on the ground that the payee had been unjustly enriched. It further held that when money was paid under a view of the law later proved to be erroneous, the money was paid under a mistake of law, since the payer believed when he made payment that he was bound to do so, and if subsequently it appeared on the law held to be applicable at the date of payment that he was not bound to do so he was entitled to recover the amount paid.30 It was no defence to a claim for restitution of money paid or property transferred under a mistake of law that the defendant honestly believed, when he learnt of the payment or transfer, that he was entitled to retain the money or property. It has been suggested that the same principle ought to apply to a mutual mistake of law rendering a contract void.31
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23 Town Area Committee v. Rajendra Kumar, AIR 1978 All 103 at 104; applying Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd., [1943] AC 32, [1942] 2 All ER 122. 24 Chiranji Lal v. Hans Raj, AIR 1961 Punj 437. 25 Orissa State Electricity Board v. Indian Metal and Ferro Alloys Ltd., AIR 1991 Ori 59. 26 Uttamchand v. Mohandas, AIR 1964 Raj 50. 27 Ganga Retreat & Towers Ltd. v. State of Rajasthan, (2003) 12 SCC 91. 28 [1998] 4 All ER 513 (HL); David Securities Pvt. Ltd. v. Commonwealth Bank of Australia, (1992) 175 CLR 353. 29 Bilbie v. Lumley, [1775-1802] All ER Rep 425; Brisbane v. Dacres, (1813) 5 Taunt 143; Kelly v. Solari, [1835-42] All ER Rep 320--all overruled in Kleinwort Benson Ltd. v. Lincoln City Council, [1998] 4 All ER 513(HL) . 30 Kleinwort Benson Ltd. v. Lincoln City Council, [1998] 4 All ER 513. 31 Chitty on Contracts, 28th edn., p. 303, para 5-018.
Void for Illegality The expression 'discovered to be void' presents some difficulty as regards agreements which are void for unlawful consideration (s s. 23 and 24). One view is that that the words 'agreement discovered to be void' apply to all agreements which are void ab initio, including agreements based upon an unlawful consideration.32 If this view be correct, the person who has paid money or transferred property to another for an illegal purpose should recover it back from the transferee under this section, even if the illegal purpose is carried into execution, and both the transferor and transferee are in pari delicto. It is difficult to suppose that such a result was contemplated by the legislature. Moreover, it would not be correct to say that, where a person gives money for unlawful purpose, the agreement under which the payment is made can be, on his part, discovered to be void. The other view is that the present section does not apply where the object or the consideration of the agreement is unlawful,33 and still less to those which are tainted with fraud or other moral turpitude.34If this view be correct, a person who has paid money or transferred property to another for an unlawful purpose cannot recover it back even if the illegal purpose is not carried into execution, or the transferor is not as guilty as the transferee. This is clearly against the provisions of s. 84 of the Indian Trusts Act, 1882.35 The earlier editors of this book opined that the present section did not apply to agreements which were void under s. 24 by reason of an unlawful consideration or object, and there being no other section in the Contract Act under which money paid for an unlawful purpose may be recovered back, the analogy of English law will be the best guide. This view expressed in the earlier editions was criticised,36 and it was held that where the parties honestly thought the agreement was legally valid, restitution was permitted under s. 65, even where the agreement had been executed; and therefore s. 84 of the Trusts Act did not apply. It was so held in Kuju Collieries Ltd. v. Jharkhand Mines Ltd .37 By using the words 'when an agreement is discovered to be void' the section means nothing more nor less than 'when the plaintiff comes to know or finds out that the agreement is void'. The word 'discovery' would imply the pre-existence of something which is subsequently found out.38Section 65 makes the knowledge of the agreement being void as one of the pre-requisites for restitution and is used in the sense of an agreement being discovered to be void. If knowledge is an essential requisite, even an agreement ab initiovoid can be discovered to be void subsequently. There may be cases where parties enter into an agreement with an honest belief that it is a perfectly legal agreement and where one of them sues the other or wants the other to act on it, it is then that he may discover it to be void. There is nothing specific in s. 65 to make it inapplicable to such cases. But where a person knowingly gives money for an unlawful purpose, the agreement under which
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the payment is made cannot on his part be said to be discovered to be void. The criticism that if the aforesaid view is right then a person who has paid money or transferred property to another for illegal purpose can recover it back from the transferee under this section even if the illegal purpose is carried into execution, notwithstanding the fact that both the transferor and transferee are in pari delicto, overlooks the fact that the courts do not assist a person who comes with unclean hands. In such cases, the defendant possesses an advantage over the plaintiff in pari delicto potior est conditio defendetio. The specific provision under s. 84 of the Indian Trust Act cannot be taken advantage of in derogation of the principle that s. 65 is inapplicable where the object of the agreement was illegal to the knowledge of both the parties at the time it was made. In such a case the agreement would be void ab initio and there would be no room for the subsequent discovery of that fact.39 An agent knowing that goods he was purchasing for the principal were to be exported in contravention of the control order, could not recover anything under the contract as the object of the contract of agency was illegal.40 A loan given by a bank to partnership firm for its abkari business (that did not have a licence) was void, and the bank could not recover the loan under the principles of this section.41 Section 65 is not in derogation of the common law maxims ex dolo malo non oritur actio and in pari delicto potior est conditio possidentis; and only those cases as are not covered by these maxims can attract application of the provision of s. 65 on the footing that when an agreement in its inception was not void and it was not hit by the maxims but is discovered to be void subsequently, right to restitution of the advantage received under such agreement is secured on equitable consideration.42 The section has been held not to apply where both parties knew of the illegality at the time the agreement was made, and were in pari delicto.43 Where parties were not in pari delicto, the section applied in favour of the party having no knowledge of the illegality.44Section 65 has been held inapplicable to wagers;45 as also for recovery of subscriptions paid under a prize kuri.46 In a pre-emption case, A agreed that B should file an appeal at his own expense and if successful, B would pay him half the expense and half the purchase price, and share the property half and half. This agreement was held champertous and the circumstances showed that the agreement was for gambling, opposed to public policy, and would not be enforceable. But where in a champertous agreement a party had received the advantage of financing of litigation from another party, he is bound to restore it to the latter under s. 65, but is not liable to pay any additional compensation.47 According to the English rule, money paid in consideration of an executory contract or purpose which is illegal may be recovered back upon repudiation of the transaction, as upon a failure of consideration.48 This rule has been followed in a large number of cases in India,49and is reproduced as regards the transfer of property in s. 84 of The Indian Trusts Act, 1882. It has thus been held that though an agreement for payment of money to the parent or guardian of a minor in consideration of his giving his son or daughter in marriage is void under s s. 23 and 24 as being against public policy, yet if the marriage is not performed, as where the son or daughter to be given in marriage died before the marriage could take place or the parent or guardian refuses to give the boy or girl in marriage, a party who has paid money under the agreement is entitled to recover it back.50 But if the marriage is performed, money paid under the agreement cannot be recovered back. Similarly a man, marrying a second time during the lifetime of his first wife representing himself as a bachelor, and thus committing bigamy, cannot claim restitution under s. 65 by recovery of jewels given at the time of the marriage because after consummation of marriage which was ab initio void there can be no restitutio in integrum,51but this rule does not apply to a contract of marriage of minors against the Hindu Marriage Act, 1955 where the marriage did not take place.52 If the illegal purpose or any material part of it has been performed, the money paid cannot be recovered back, for then the parties are equally in fault, and in pari delicto melior est conditio possidentis.53 Prohibited by Statute If a contract is in contravention of a provision of law, e.g., the Iron and Steel Control Order, but is not
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executed, then a party who is not in pari delicto or is more innocent or is not suing to enforce the contract but repudiating it, is entitled to recover back the money paid by him. The law allows a locus paenitentiae and permits the recovery of money paid under the contract.54 If parties are not in pari delicto, the purchaser who advances money under a contract is not precluded from recovering the money on the contract being discovered to be void; because of the contravention of a control order.55 A transaction of a loan of grain being prohibited under a statute, the suit to recover the same was not maintainable. The transaction did not fall under s. 65, because of the knowledge of illegality which flowed from the fact that the operation of law imputes knowledge to a party and ignorance of a statutory provision of law cannot be set up as a defence and the court will not assist a party perpetrating an illegality.56 The Orissa High Court has, however, dissented from this decision of the Bombay High Court by holding that it is not consistent with the view expressed by the Supreme Court in Kuju Collieries Ltd. v. Jharkhand Mines Ltd .57 Thus, where the plaintiff who had advanced money to the defendant for supply of paddy was not aware that the agreement was in violation of the Orissa Rice and Paddy Contract Order, 1965, it was held that since the plaintiff had subsequently discovered the agreement to be void, he was entitled to get the refund of money.58 The view of the Orissa High Court appears to be more in consonance with the principle of restitution underlying s. 65. Where, a sub-tenancy was held to be void being prohibited by law, a suit was decreed against a sub-tenant for arrears of rent.59 But where one of the parties is not in pari delicto, he can claim restoration even where the contract would result in penal consequences, viz., for recovery of price of food grains supplied to an unlicensed dealer in contravention of the Food Control Order, where supply was effected and the seller was ignorant of the buyer not being licenced.60 Courts will not assist persons inducing innocent parties to enter into contracts which are void.61 If the plaintiff was unaware of the void character of the contract and discovered it later, he can get the benefit of s. 65.62It was held that where a mining lease in favour of the plaintiff was in contravention of the Mines and Minerals (Regulation and Development) Act, 194863 and the Rules, and there was proof that the plaintiff, having had the advantage of consulting lawyers and solicitors, could not be ignorant of the legal position; s. 65 did not apply and the plaintiff was not entitled to claim refund of the sum paid.64 The money paid as salami was neither paid lawfully nor under a mistake nor under coercion. It is well settled that s. 65 cannot be invoked when the agreement or the contract was known to the parties to be void ab initio. Where both parties were aware that the contract was prohibited by law, s. 65 will not be applicable. Therefore, an insurance agent who procured insurance business before getting a licence, was not entitled to commission even though it was promised.65 In a partnership to run a travelling cinema, the licence was in the name of one of the defendants. The plaintiff left the partnership, and the defendants gave a promissory note for the amount due to the plaintiff, but did not pay as promised. The partners were ignorant of the illegality of the partnership. The plaintiff came to know about it when the defendant alleged illegality in reply to the notice of demand. In these circumstances the plaintiff was entitled to recover his share of the partnership capital.66 Money paid under an agreement of sub-letting a telephone could not be recovered, the agreement being forbidden by law.67 Where a higher price was paid in contravention of a control order, the buyer could not sue under s. 65 for the return of the excess price.68If a partnership agreement, in contravention of s. 59 of the Motor Vehicles Act, 193969 allowed a partner to share in the permit for a vehicle in the name of another partner without the permission for the Transport Authority, it was void and there could be no restitution, as the agreement was void to the knowledge of the parties.70 Where a person ineligible under the provisions of a statutory rule to participate in the auction of Abkari shops, entered into a contract with another person to transfer some of the shops out of the shops bid by that person, and paid consideration for the purpose, it was held that the agreement was void and any action to get back the amount paid under such void agreement could not be entertained by the court.71 A contract made illegal being altogether prohibited by a statutory order cannot be enforced even when its illegality is raised by the guilty party and even when the other party honestly believed the representation of the guilty party that no breach was being committed. The contract is unlawful as being prohibited and the court must enforce the
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prohibition even though the person breaking it relies upon it.72 32 Kuju Collieries Ltd. v. Jharkhand Mines Ltd., AIR 1974 SC 1892, [1975] 1 SCR 703; Jijibhai Laljibhai v. Nagji Gulab, (1909) 11 Bom LR 693 at 697-98; Gulabchand Paramchand v. Fulbai, (1909) 33 Bom 411 at 416-17. 33 Dayabhai Tribhovandas v. Lakhmichand Panachand, (1885) 9 Bom 358 at 362 (case of a wagering contract under s. 30 of the Act); followed in Chhanga Mal v. Sheo Prasad, (1920) 42 All 449, 55 IC 965; Ledu Coachman v. Hiralal Bose, (1916) 43 Cal 115, 29 IC 625; Hira v. Jowala Das, AIR 1915 Lah 480, 27 IC 1008; Khushal v. Labhan Rao, AIR 1928 Nag 232, 110 IC 351 at 356; Firm Prabhu Mal- Guha Mal v. Firm Babu Ram-Basheshar Das, AIR 1926 Lah 159, 89 IC 684; Rudragowda Peshvantgowda v. Gangowda Basagavda Patil, AIR 1938 Bom 54, 39 Bom LR 112, 173 IC 553; Gendsingh Tularamsingh Chatri v. Gowardhan Tukaram Marar, AIR 1938 Nag 451; Brahmdeo Narayan v. Brajballabh Prasad, AIR 1940 Pat 573; R Chennayya v. T Janikamma, AIR 1944 Mad 415; Bhiku Appa Kura v. Dattatraya Chandrayya, ILR (1947) Bom 156, (1947) 49 Bom LR 87, AIR 1947 Bom 392; Firm Sagarmal Har Saran Das v. L Bishambar Satwi, AIR 1947 All 14, 230 IC 23; Karamchand Mulji v. Firm Parekh Lavji Govardhan, AIR 1951 Kutch 50; Ranjeetsingh Murlisingh v. Ramlal Shivlal, AIR 1951 MB 113; Jharia Coalfield Electric Supply Co. Ltd. v. Kaluram Agarwala, AIR 1951 Pat 463; N Purkayastha v. Union of India, AIR 1955 Assam 33; Jagannath Tewar v. Gopal Prasad, AIR 1983 Pat 50; Universal Plast Ltd. v. Santosh Kumar Gupta, AIR 1985 Del 383; but see Asaram v. Ludheshwar, AIR 1938 Nag 335(FB) ; Dalip Singh v. Jagat Singh, AIR 1938 Lah 721; but see Srikakolapu Venkataraju v. Gudivada Ramanujan, (1918) 34 Mad LJ 561, 44 IC 319 (wager: s. 65 does not apply, but recovery because claimant's hands not tainted); Sadhusingh Fatehsing v. Jhamnadas Valiram, AIR 1937 Sind 211, 171 IC 1005 (s. 65 does apply to agreements void ab initio because of an unlawful object or purpose); Gulabchand Paramchand v. Fulbai, (1909) 33 Bom 411 at 417. 34 Bhiku Appa Kura v. Dattatraya Chandrayya, (1947) Bom 156, (1947) 49 Bom LR 87, AIR 1947 Bom 392. 35 Section 84 of the Indian Trusts Act, 1882 provides: 'Where the owner of property transfers it to another for an illegal purpose, and such purpose is not carried into excution or the transferor is not as guilty as the transferee, or the effect of permitting the transferee to retain the property might be to defeat the provisions of any law, the transferee must hold the property for the benefit of the transferor.'Firm Prabhu Mal- Guha Mal v. Firm Babu Ram-Basheshar Das, AIR 1926 Lah 159, 89 IC 684. 36 Budhulal v. Deccan Banking Co. Ltd., AIR 1955 Hyd 69, p. 74 (FB); and the criticism approved in Kuju Collieries Ltd. v. Jharkhand Mines Ltd., AIR 1974 SC 1892 at 1895, [1975] 1 SCR 703. 37 AIR 1974 SC 1892, [1975] 1 SCR 703; approving Budhulal v. Deccan Banking Co. Ltd., AIR 1955 Hyd 69. 38 Jagdish Prosad Pannalal v. Produce Exchange Corpn. Ltd., AIR 1946 Cal 245. 39 Budhulal v. Deccan Banking Co. Ltd., AIR 1955 Hyd 69(FB), approved in Kuju Collieries Ltd. v. Jharkhand Mines Ltd., [1975] 1 SCR 703, AIR 1974 SC 1892 at 1894. 40 Appana Radha Sri Krishna Rao v. VKM Kodandarama Chetti, AIR 1960 AP 190. 41 Andhra Bank v. Vattikuti Sreemannarayana, AIR 2005 AP 108. 42 Nihal Singh v. Ram Bai, AIR 1987 MP 126 at 128; dissenting from PR Srinivasa Aiyar v. A Sesha Iyer, AIR 1918 Mad 444; Alsidas v. Puranchand, ILR (1944) Nag 535, AIR 1944 Nag 159, 214 IC 168. 43 Hira v. Jowala Das, AIR 1915 Lah 480; Annjadennessa Bibi v. Rahim Buksh Shikdar, AIR 1916 Cal 74; Bhure v. Sheogopal, AIR 1920 Nag 157; Abdul Majid Khan v. Beni Din, AIR 1938 Oudh 24; Bava C Gopalaswami Mudaliar v. Annadana Kattalai of Sri Tyagarajaswami Temple Tiruvarur, (1940) 1 Mad LJ 547, AIR 1940 Mad 719; Tavva Venkata Gurunadha Rao v. Badam Rosaiah, AIR 1959 AP 277; National Chamber of Commerce Ltd. v. Nitya Nandan Deoki Nandan, AIR 1963 All 294; Ram Singh v. Jethanand Wadhumal & Co., AIR 1964 Raj 232; Joginder Singh v. Assistant Registrar Co-op Societies, AIR 1965 J&K 39; lnderjit Singh v. Sunder Singh, AIR 1969 Raj 155; Lakhiram Agarwalla v. Brajlal Agarwala, AIR 1974 Ori. 49 (illegality not known to one of the parties); Jagannath Tewar v. Gopal Prasad, AIR 1983 Pat 50; Universal Plast Ltd. v. Santosh Kumar Gupta, AIR 1985 Del 383. 44 Jahed Shaikh v. Kamalesh Chandra Das, AIR 1959 Cal 165; Kanuri Sivaramakrishnaiah v. Vemuri Venkata Narahari Rao, AIR 1960 AP 186. 45 Dayabhai Tribhovandas v. Lakhmichand Panachand, (1885) 9 Bom 358; Vappakandu Marakayar v. Annamala Chetti, (1902) 25 Mad 561; PC Veerannan Ambalam v. Ayyachi Ambalam, AIR 1926 Mad 168 (chit fund); Firm Sagarmal Har Saran Das v. L Bishambar Sahai, AIR 1947 All 14, 230 IC 23; but see Nagappa Pillai v. Arunachalam Chetty, (1924) 85 IC 1016, AIR 1925 Mad 281 (court divided). 46 Sesha Ayyar v. Krishna Ayyar, AIR 1936 Mad 225(FB) (but may recover under s. 84 of the Indian Trusts Act, 1882, being not inpari delicto with the promoters). 47 Suganchand v. Balchand, AIR 1957 Raj 89. 48 Taylor v. Bowers, [1876] I QBD 291.
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49 Sham Lall Mitra v. Amarendro Nath Bose, (1895) 23 Cal 460; Dharnidhar v. Kanhji Sahay, (1949) 27 Pat 287, AIR 1949 Pat 250; Gopi Krishna Prasad v. Janak Prashad, AIR 1951 Pat 519; Alsidas v. Puranchand, ILR (1944) Nag 535, AIR 1944 Nag 159, 214 IC 168; Jahed Shaikh v. Kamalesh Chandra Das, AIR 1959 Cal 165. 50 Gulabchand Paramchand v. Fulbai, (1909) ILR 33 Bom 411; Ram Chand Sen v. Audaito Sen & Srinath Sen, (1884) 10 Cal 1054; Sadhusing Fatehsing v. Jhamnadas Valiram, AIR 1937 Sind 211, 171 IC 1005; Sonphula Kuer v. Gansuri, AIR 1937 Pat 330, 169 IC 901; but see PR Srinivasa Ayyar v. A Sesha Ayyar, (1918) 41 Mad 197, 41 IC 783 (not under s. 65, but if the claimant's hands not tainted); Hermann v. Charlesworth, [1905] 2 KB 123. 51 Tavva Venkata Gurunadha Rao v. Badam Rosaiah, AIR 1959 AP 277. 52 Rayudu Pallamsetti v. Dommeti Sriramulu, AIR 1968 AP 375. 53 Herman v. Jeuchner, [1885] 15 QBD 561; Kearley v. Thompson, [1890] 24 QBD 742; TP Petherpermal Chetty v. r. Muniadi Servai, (1908) 35 Cal 551, (1908) 35 IA 98 at 103 (PC); Ranjeetsingh Murlisingh v. Ramlal Shivlal, AIR 1951 MB 113; Jharia Coalfield Electric Supply Co. Ltd. v. Kaluram Agarwala, AIR 1951 Pat 463. 54 Jahed Shaikh v. Kamalesh Chandra Das, AIR 1959 Cal 165; but see Bigos v. Bousted, [1951] 1 All ER 92 (Exchange Control Law contravened). 55 Ram Singh v. Jethanand Wadhumal & Co., AIR 1964 Raj 232. 56 Bhaskarrao Jageshwarrao Buty v. Saru Jadhaorao Tumble, AIR 1978 Bom 322; Jagannath Tewar v. Gopal Prasad, AIR 1983 Pat 50 at 53. 57 AIR 1974 SC 1892, [1975] 1 SCR 703. 58 Fakir Chand Seth v. Dambarudhar Bania, AIR 1987 Ori 50. 59 Firm Durga Prasad Magniram v. Ganesh Prasad, AIR 1982 MP 219. 60 Kanuri Sivaramakrishnaiah v. Vemuri Venkata Narahari Rao, AIR 1960 AP 186. 61 Ibid; Appana Radha Sri Krishna Rao v. VKM Kodandarama Chetti, AIR 1960 AP 190. 62 Lakhiram Agarwalla v. Brajlal Agarwala, AIR 1974 Ori 49 at 50; Harnath Kuar v. Indar Bahadur Singh, ILR 45 All 179, AIR 1922 PC 403, (1923) 50 IA 69, 71 IC 629; Kanuri Sivaramakrishnaiah v. Vemuri Venkata Narahari Rao, AIR 1960 AP 186; Fakir Chand Seth v. Dambarudhar Bania, AIR 1987 Ori 50, p. 53. 63 Now Oil Fields (Regulation and Development) Act, 1948 (53 of 1948). 64 Kuju Collieries Ltd. v. Jharkhalll J. Mines Ltd., AIR 1974 SC 1892 at 1896, [1975] 1 SCR 703 (nor did s s. 70 or 72 apply). 65 Life Insurance Corpn. of India v. KA Madhava Rao, AIR 1972 Mad 112 at 116. 66 PN Dorairaj v. NG Rajan, AIR 1977 Mad 243 at 246; Ramagya Prasad Gupta v. Murli Prasad, AIR 1974 SC 1320; Kuju Collieries Ltd. v. Jharkhand Mines Ltd., [1975] 1 SCR 703, AIR 1974 SC 1892; K Viswanathan v. Namakchand Gupta, AIR 1955 Mad 536; SM Kanniappa Nadar v. KK Karuppiah Nadar, AIR 1962 Mad 240(FB) . 67 Malladi Seetharama Sastry v. Naganath Kawlwar, AIR 1968 AP 315. 68 Alapati Ramamurthi Gelli Krishnamurthi & Co. v. Maddi Sitharamayya, AIR 1958 AP 427; Lakshmanprasad & Sons v. A Achutan Nair, ILR (1956) Mad 712, AIR 1955 Mad 662; cf Somraj v. Jethmal, AIR 1957 Raj 392 (excess rent over controlled rent recoverable, adjustments made). 69 Now Motor Vehicles Act, 1988 (59 of 1988). 70 Inderjit Singh v. Sunder Singh, AIR 1969 Raj 155. 71 Sundara Gounder v. Balachandran, AIR 1990 Ker 324. 72 Re an arbitration between Mahmoud and Ispahani, [1921] 2 KB 716, [1921] All ER Rep 217; relied on in Kanuri Sivaramakrishnaiah v. Vemuri Venkata Narahari Rao, AIR 1960 AP 186.
Uncertain Agreements Where the terms of an agreement is found by the court to be uncertain,73 the liability under s. 65 would arise. For example, where specific performance was refused on the ground that the terms of the contract
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were uncertain, the plaintiff was held entitled to refund of purchase money paid. In such cases, the contract being declared void by the very judgment, the question of limitation does not arise.74 73 See s. 29 above. 74 Udit Narain Misr v. Muhammad Minnat-Ullah, (1903) ILR 25 All 618.
Contracts with Incompetent Persons This section cannot be invoked where one of the parties to the contract--such as a minor, known at the time to be75 wholly incompetent to contract, there not only never was but there never could have been any contract;76viz. contract entered into by a minor (or one effected on behalf of the minor by a person not competent to do so) or by a lunatic or person of unsound mind, or a Government ward. But where the incapacity to contract is in relation to the property, and not a general incapacity, then, even if the contract is void ab initio,s. 65 comes into operation.77 Minors This section does not apply where the contract has been made by a minor.78 Therefore, a promissory note executed by a minor is void and the creditor is not entitled to the return of his money in cases where there is no misrepresentation of age by the minor.79 But it has been held that this section applied in the case of a minor when the minor had sold the property to another and received benefit under the transaction. In declaring the contract void and directing the property to be restored, the court cannot allow the minor to retain the benefit he has secured under the very contract he seeks to set aside. To do so would be to give him a double advantage to which he is not entitled.80 A minor seeking cancellation of sale under the Specific Relief Act, 1963 and recovery of property, may be required to restore the benefit.81 So would the minor be liable to make restitution where the other party has been induced to contract by the minor fraudulently misrepresenting his age.82 The vendee will be disentitled to claim relief from the minor in the absence of fraud or misrepresentation on the part of the minor,83 or where the vendee knew of his minority.84 A minor who has received the benefit under a transaction entered into on his behalf is compellable to restore the benefit when the transaction is set aside;85 but not where the person effecting the contract on behalf of the minor is not authorised to do so.86 In the last case, the person acting on behalf of the minor would be bound under this section to repay the earnest money received by him.87 Even where the sale effected by the legal guardian is set aside, the guardian was bound to return the consideration under this section.88 The minor may be entitled to recover under this section; viz.a minor was held entitled to recover his contribution to a partnership which was found to be void under ss. 4 and 30 of the Partnership Act, 1932;89 or entitled to recover consideration paid where he is dispossessed of the property purchased.90 Under the English Law, common law restitutionary remedies are prescribed by s. 3(2) of the Minor's Contracts Act, 1987. In common law, where money is paid to a minor, the adult will not be permitted to recover in restitution on the ground of a total failure of consideration if, that would in a round about way contravene the policy of law and indirectly enforce an unenforceable contract.91 75 But see Gokuldas v. Gulab Rao, (1925) 89 IC 143, AIR 1926 Nag 108 (section applies where the fact of minority was unknown at the time of making the contract to the party dealing with the minor, and discovered later); distinguishing Mohori Bibee v. Dharmodas Ghose, (1903) 30 IA 114, (1902) 30 Cal 539.
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76 Mohori Bibee v. Dharmodas Ghose, (1903) 30 IA 114, (1902) 30 Cal 539; Motilal Mansukhram v. Maneklal Dayabhai, (1920) 45 Bom 225, 59 IC 245, AIR 1921 Bom 147(1); Punjabai Bhilasa v. Bhagvandas Kisandas, (1928) 53 Bom 309, AIR 1929 Bom 89, 117 IC 518. 77 See below: 'General incompetence and relative incompetence.' 78 Mohori Bibee v. Dharmodas Ghose, (1903) 30 IA 114, (1902) 30 Cal 539; Motilal Mansukhram v. Maneklal Dayabhai, (1920) 45 Bom 225, 59 IC 245, AIR 1921 Bom 147(1); Muliabai v. Garud, AIR 1919 Nag 76; Bishen Singh v. Bishna, AIR 1924 Lah 294; Janardhan v. Vishwanath, AIR 1927 Nag 116; Gulabchand v. Seth Chunnilal, AIR 1929 Nag 156; Lal Chandradwaj Deo v. Lal Atmaram Deo, AIR 1936 Nag 15; Ajudhia Prasad v. Chandan Lal, AIR 1937 All 610(FB) ; Tikki Lal Jaithu Teli v. Komalchand, AIR 1940 Nag 327; Kalipada Koer v. Purnabala Dassi, AIR 1948 Cal 269; Abhi Singh v. Daso Bhogta, AIR 1952 Pat 455; Shah Jethalal Lalchand v. Darbar Shri Amarwala Laxmanwala, AIR 1953 Sau 177; Gokeda Latcharao v. Viswanadham Bhimayya, AIR 1956 AP 182. 79 Batchu Veeraiah v. Chepuri Sarraju, AIR 1959 AP 100; Vaikuntarama Pillai v. Athimoolam Chettiar, ILR 38 Mad 1071, AIR 1914 Mad 641(2); distinguishing Bhattiprole Hanumantha Rao v. Kondrakota Sitharamayya, ILR (1939) Mad 203, AIR 1939 Mad 106. 80 Dyaviah v. Shivamma, AIR 1959 Mys 188. 81 The Specific Relief Act, 1963, s. 31;Ajudhia Prasad v. Chandan Lal, AIR 1937 All 610; Gurushiddswami v. Parawa Dunadya Narendra, (1919) 44 Bom 175, AIR 1920 Bom 269; Motilal Mansukhram v. Maneklal Dayabhai, (1920) 45 Bom 225, 59 IC 245, AIR 1921 Bom 147(1); Bhattiprole Hanumantha Rao v. Kondrakota Sitharamayya, ILR (1939) Mad 203, AIR 1939 Mad 106. 82 Dadasaheb Dasrathrao v. Bai Nahani, AIR 1917 Bom 221 (restitution of specific object or property, but not money lent to him); TR Appasami Ayyangar v. Narayanaswami Iyer, AIR 1930 Mad 945; Hamidan Bibi v. Nanhe Mal, AIR 1933 All 371; but see Radhey Shiam v. Bihari Lal, AIR 1919 All 453; M Guruswamy Pantulu v. Budhkaran Lall Khajanchee, AIR 1919 Mad 224; Raghunath Singh v. Dhonde Singh, AIR 1922 Oudh 30; Ajudhia Prasad v. Chandan Lal, AIR 1937 All 610(FB) ; B Kala Ram S Bhag Singh v. Fazal Bari Khan, AIR 1941 Pesh 38. 83 Harimohan v. Dulu Miya, AIR 1935 Cal 198; Bachai v. Hayat Mohammad, AIR 1940 Oudh 119; Batchu Veeraiah v. Chepuri Sarraju, AIR 1959 AP 100. 84 Mohori Bibee v. Dharmodas Ghose, (1903) 30 IA 114, (1902) 30 Cal 539; Bachai v. Hayat Mohammad, AIR 1940 Oudh 119; B Kala Ram S Bhag Singh v. Fazal Bari Khan, AIR 1941 Pesh 38. 85 Padinhare Veetil Madhavi v. Pachikaran Veetil Balakrishnan, AIR 2010 Ker 111. 86 Nizam-ud-din Shah v. Anandi Prasad, (1896) 18 All 373; Gulam Jafar v. Ramdhan, AIR 1927 Nag 290 (disqualification under personal law); but see Limbaji Ravji Hajare v. Rahi Ravji Hajare, (1925) 49 Bom 576, AIR 1925 Bom 499 (refund not under this section, but under the Specific Relief Act). 87 Ayissa v. Prabhakaran, AIR 1971 Ker 239. 88 Raja of Venkatagiri v. Sobhanadri Appa Rao, AIR 1944 Mad 211. 89 AA Khan v. Ameer Khan, AIR 1952 Mys 131. 90 Walidad Khan v. Janak Singh, (1913) ILR 35 All 370. 91 Thavorn v. Bank of Credit & Commerce SA, [1985] 1 Lloyd's Rep 259; R Leslie Ltd. v. Shiell, [1914] 3 KB 607 at 613, [1914-15] All ER Rep 511.
Recommendation of the Law Commission Accepting the view of the editors of this book, the Law Commission expressed an opinion that the Judicial Committee in the Mohori Bibee's case92 did not properly interpret the applicability of s. 65 to a minor's agreement, and recommended that the section be made applicable to agreements with minors where the minor had made a false representation of his age.93 Thus, the application of the section as proposed would be excluded in cases made with minors with full knowledge of their minority. Unsound Mind A contract made by a minor or a lunatic is void and neither s. 64 nor s. 65 can be applied.94Where the
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sale deed of a lunatic's property was executed by his wife without obtaining any permission of the court under the Lunacy Act, 1912 and was held to be void, it was held that s. 65 of the Contract Act did not apply because the parties to the contract already knew that the sale was not enforceable by law and was void as the land could not have been transferred by sale because of the protection given by law to a lunatic.95 Other Incompetent Persons Section 65 does not apply to contracts entered into by persons disqualified from contracting by law. It did not enable recovery in respect of a promissory note executed by a person whose estate was under the superintendence of the Court of Wards, executed by him for repayment for advances made to him.96 General Incompetence and Relative Incompetence The operation of this section is excluded when the contract is void ab initio on account of the general incompetence of the party to the contract, and not where the incompetence is in respect of a particular type of contract or in relation to the property or subject matter involved.1 Where a person is not disqualified from entering into contract, but the contract is void and unenforceable because it has failed to comply with the conditions laid down by a statute, recovery under s. 65 is not barred.2 The section has, however, been held not to apply where the statute denies the capacity to the statutory body of making a contract.3 Thus, this section has been held to operate in the case of a sale prohibited under a tenancy law prohibiting sale except to persons belonging to a specified class of persons;4 or where a guardian agreed to sell property of his minor sisters without a certificate authorising him to do so.5 Illegal Associations A contract by an illegal association, not registered under the Companies Act, is not enforceable as the association cannot maintain a suit. To such a case, s s. 65 and 70 are inapplicable because the association had no legal competence and the infirmity was not attached to the form of the contract.6 92 Mohori Bibee v. Dharmodas Ghose, (1903) 30 IA 114, (1902) 30 Cal 539. 93 See the Law Commission of India, 13th Report, 1958, para 37, recommending adding an explanation to the section:&uot;Explanation 1: An agreement which is void by reason of the minority of any party thereto is governed by the provisions of this section, if the agreement is entered into by the minor falsely representing that he is major.&uot; 94 Mohori Bibee v. Dharmodas Ghose, (1903) 30 IA 114, (1902) 30 Cal 539; Doulatuddin v. Dhaniram Chhutia, AIR 1917 Cal 566. 95 Johri v. Mahila Draupati, AIR 1991 MP 340 at 345. 96 Lal Chandradwaj Deo v. Lal Atmaram Deo, AIR 1936 Nag 15. 1 Narayan v. Motisa, AIR 1924 Nag 132 (incompetence of the defendant to alienate the land under para 2 of Sch 3 of the Civil Procedure Code );Aumanchi Auryaprabhakara Rau v. Gummudu Sanyasi, AIR 1925 Mad 885 (transfer of karnam service inam); Abhi Singh v. Daso Bhogta, AIR 1952 Pat 455 (vendee disqualified under statute to acquire property under tenancy law); SK Umar v. Shivdansingh, AIR 1958 MP 88 (lessor prohibited by statute from granting the lease); State of Bihar v. Dukhulal Das, AIR 1962 Pat 140 (incapacity to transfer under the Land Reforms Act); reversed on facts in State of Bihar v. Dukhulal Das, AIR 1968 SC 90. 2 Corpn. of Madras v. M Kothandapani Naidu, AIR 1955 Mad 82(FB) ; AKTKM Sankaran Namboodiripad v. State of Kerala, AIR 1963 Ker 278(FB) ; Madura Municipality v. Raman Servai, AIR 1936 Mad 98; Mohamed Ebrahim Molla v. Commrs for the Port of Chittagong, (1926) 54 Cal 189, AIR 1927 Cal 465, 103 IC 2 (recovery by way of quantum meruit); Madura Municipality v. K Alagirisami Naidu, ILR (1939) Mad 928, AIR 1939 Mad 957; Kovvuri Subba Rao v. Venkatapuram Panchayat Board, AIR 1942 Mad 111; Dharmeswar Kalita v. Union of India, AIR 1955 Assam 86; Dominion of India v. Preety Kumar Ghosh, AIR 1958 Pat 203; Mohammed Jamal Saheb v. Munwar Begum, AIR 1964 AP 188; BD Naithani v. State of Uttar Pradesh, AIR 1966 All 507; Municipal Board Lucknow v. SC Deb, AIR 1932 Oudh 193(FB) ; Srivilliputtur
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Municipal Council v. KGA Arunachala Nadar, AIR 1933 Mad 332; State of Madras v. K Periaswami Gounder, AIR 1963 Mad 154; Hindustan Construction Co. v. State of Bihar, AIR 1963 Pat 254; State of Orissa v. Rajballav Misra, AIR 1976 Ori 19; but see Anath Bandhu Deb v. Dominion of India, AIR 1955 Cal 626; Bapulal v. Laxmi Bharat Trading Co., AIR 1966 Raj 14. 3 Municipal Board Gonda v. Bachchu, (1952) 1 All 825, AIR 1951 All 736(FB) . 4 Abhi Singh v. Daso Bhogta, AIR 1952 Pat 455 (declaration and recovery of possession subject to refund of consideration received). 5 Ayissa v. Prabhakaran, AIR 1971 Ker 239 (liable to refund earnest money); but see Kalipada Koer v. Purnabala Dassi, AIR 1948 Cal 269. 6 Bapulal v. Laxmi Bharat Trading Co., AIR 1966 Raj 14; but see U Sein Po v. U Phyu, AIR 1930 Rang 21 (members are entitled to return of subscription after conversion of the association property into cash).
Contracts with Statutory Bodies Contracts with a statutory corporation are often required by the Act creating it to be executed in a particular form, as, for instance, under seal. The question in such cases is whether the Act is imperative and not subject to any implied exception, when the consideration has been executed in favour of the corporation. If the Act is imperative and the contract is not under seal, the fact that the consideration has been executed on either side does not entitle the party who has performed his part to sue the other on an implied contract for compensation. This may work hardship, but the provision of the Act being imperative and not merely directory, it must be complied with. The present section, accordingly, does not apply to cases where person agrees to supply goods to, or do some work for a municipal corporation, and goods are supplied or the work done in pursuance of the contract, but the contract is required by the Act under which the corporation is constituted to be executed in a particular form and it is not so executed. In such cases, the corporation cannot be charged at law upon the contract, though the consideration has been executed for the benefit of the corporation. There can be no estoppel against a corporation in a case where it enters into a contract which is not in accordance with the requirements of a statute providing for formalities for making contracts.7 Where a contract which fails to comply with the statutory formalities and is only executory, neither party can enforce performance against the other.8 In H Young & Co. v. Mayor & Corporation of Lamington Spa, 9 it was held that sub-section (1) of s. 174 of the Public Health Act which enacts that 'every contract made by an urban authority, whereof the value or amount exceeds 50, shall be in writing and sealed with the common seal of such authority' was obligatory and not directory and applies to executed contract of which the urban authority have had full benefit and enjoyment and which has been effected by their agent duly appointed under their common seal. In that case10 Lord Blackburn quoted with approval the observations of Lindley LJ. in the court of appeal: 'It may be said that this is a hard and narrow view of the law; but...Parliament has thought expedient to require this view to be taken, and it is not for this or any other court not to give effect to a clearly expressed statute because it may lead to apparent hardship'. Lord Bramwell said:
The legislature has made provisions for the protection of ratepayers, shareholders and others who must act through the agency of a representative body by requiring the observance of certain solemnities and formalities which involve deliberation and reflection. That is the importance of the seal. It is idle to say there is no magic in a wafer. The decision may be hard in this case for the plaintiffs, who may not have known, the law. They and others must be taught it, which can only be done by its enforcement.'11
The decision in H Young & Co. v. Mayor & Corpn. of Lamington Spa, 12 has been followed by the High Courts of Allahabad13 and Calcutta.14 It was quoted with approval by the Supreme Court where it was held that a contract of letting of premises by the municipality cannot, in the absence of formalities required by the statute for formation of contracts,
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be created by a rent receipt to the tenant.15 A full bench ofthe Madras High Court mentioned this case and interpreted it by saying the ratio of the decision is the negation of the contract when the formalities have not been complied with. Such a contract cannot be enforced by either party.16 In Bhikraj Jaipuria v. Union of India, 17 it has been stated: '... but a person who seeks to contract with the Government must be deemed to be fully aware of statutory requirements as to the form...inadvertence of an officer...the other contracting party acquiescing in such isolation...will not justify the court not giving effect to the intention of the legislature, the provision having been made in the interest of the public. A municipal committee borrowed money from the plaintiff and agreed to pay interest thereon, but no document in conformity with the requirements of law was executed. To this agreement, which was void ab initio,s. 65 was held applicable.18Section 65 was applicable to a contract which was void ab initio because of the non-compliance of requirement as to registration under the municipal law, and did not prevent the municipal committee from recovering from a contractor collecting teh bazari dues on behalf of the municipality, to restitute the benefit of collections made under the contract.19 As the municipality cannot be sued upon a contract which is required to be, but which is not under seal, though the consideration has been executed for its benefit, so it cannot sue upon the contract, though it has performed its own part of the contract so that the other party has had the benefit of it.20 7 HS Rikhy v. New Delhi Municipal Committee, AIR 1962 SC 554 at 561, [1962] 3 SCR 604 at 621; Mulamchand v. State of Madhya Pradesh, AIR 1968 SC 1218. 8 Ahmedabad Municipality v. Sulemanji Ismalji, (1903) ILR 27 Bom 618. 9 (1883) 8 App Cas 517 (was said to be now obsolete in State of West Bengal v. BK Mandal & Sons, [1972] 1 Supp SCR 872, AIR 1962 SC 779 at 784 on the ground of change in statute in England). 10 (1883) 8 App Cas 517 at 522; Shah J. in Bhikraj Jaipuria v. Union of India, [1962] 2 SCR 880 at 903, AIR 1962 SC 113 at 119, case under s. 175(3) Govt of India Act. 11 (1883) 8 App Cas 517 at p. 528. The wafer is the common modern substitute for a waxen seal. 12 (1883) 8 App Cas 517. 13 Radha Krishna Das v. Municipal Board of Benares, (1905) 27 All 592. 14 Mathura Mohan Saha v. Ramkumar Saha, (1916) 43 Cal 790 at 814 seq, AIR 1916 Cal 136, 35 IC 305; Mohamed Ebrahim Molla v. Commrs for the Port of Chittagong, (1926) 54 Cal 189, AIR 1927 Cal 465, 103 IC 2; Sitaram Gupta v. Corpn. of Calcutta, AIR 1956 Cal 18 (inspite of part performance). 15 HS Rikhy v. New Delhi Municipal Committee, [1962] 3 SCR 604, AIR 1962 SC 554; on appeal from New Delhi Municipal Committee v. HS Rikhy, AIR 1956 Punj 181. See earlier cases Abaji Sitaram Modak v. Trimbak Municipality, (1903) 28 Bom 66; Radha Krishna Das v. Municipal Board of Benares, (1905) 27 All 592; Mohamed Ebrahim Molla v. Commissioners for the Port of Chittagong, AIR 1927 Cal 465; KCA Arunachala Nadar v. Srivilliputtur Municipal Council, AIR 1934 Mad 480; Municipal Board Agra v. Babu Ram Lal, AIR 1936 All 723; Pollonjee Eduljee & Sons v. Lonavala City Municipality, AIR 1937 Bom 417; Mohamed Rowther v. Tinnevelly Municipal Council, AIR 1938 Mad 746; Madura Municipality v. K Alagirisami Naidu, AIR 1939 Mad 957; Akshay Kumar Bannerjee v. Municipal Commrs of Tollygunge Municipality, (1942) 46 CWN 393; Municipal Board Gonda v. Bachchu, AIR 1951 All 736(FB) ; Ram Nagina Singh v. Governor-General in Council, AIR 1952 Cal 306; Dharmeswar Kalita v. Union of India, AIR 1955 Assam 86; Anath Bandhu Deb v. Dominion of India, AIR 1955 Cal 626; Corpn. of Madras v. M Kothandapani Naidu, AIR 1955 Mad 82; Ranendra Nath Pal v. Commrs of Dhuliyan Municipal Office, AIR 1956 Cal 203. 16 Corpn. of Madras v. M Kothandapani Naidu, AIR 1955 Mad 82 at 87. 17 [1962] 2 SCR 880 per Shah J., at 903, AIR 1962 SC 113 at 122 (a case under s. 175(3) of Government of India Act, 1935). 18 Municipal Committee Kishangarh v. Maharaja Kishangarh Mills Ltd., AIR 1961 Raj 6. 19 lshwar Dayal Hingwasia v. Municipal Board Rath, AIR 1980 All 143; Re BC Mohindra v. Municipal Board, AIR 1970 SC 729. 20 Raman Chetti v. Municipal Council of Kumbakonam, (1907) 30 Mad 290; Mohammed Ebrahim Molla v. Commrs for the Port of Chitiagong, (1926) 54 Cal 189 at 210 et seq,AIR 1927 Cal 465, 103 IC 2.
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Ultra Vires Agreements Where a corporation receives money or property under an agreement which turns out to be ultra vires, it must return it or make compensation.21 21 Mathura Mohan Saha v. Ramkumar Saha, (1916) 43 Cal 790, AIR 1916 Cal 136, 35 IC 305.
Unenforceable Agreements At an auction sale the defendant gave the highest bid to collect market fees but no registered deed was executed. The transaction was an agreement which was discovered to be void, i.e. unenforceable and s. 65 became applicable.22 22 Village Panchayat of Jangareddigudem v. Kommireddy Narasayya, AIR 1965 AP 191; Town Area Committee v. Rajendra Kumar, AIR 1978 All 103 at 104; Ishwar Dayal Hingwasia v. Municipal Board Rath, AIR 1980 All 143 at 145.
Contracts with the Government and Government Bodies During the period of an agreement between the State and a certain firm for distribution of salt, which was then a controlled commodity, the government decontrolled it, and the firm thereby suffered a loss. In a suit for recovery of damages for breach of contract by the firm, it was held that a contract could not control the statutory powers of the Government to control or decontrol, nor could the matter fall within s. 65 of the Contract Act as the Government derived no benefit from the agreement, assuming it was a contract.23 A contract with the Government to construct a godown was not in conformity with Art. 299 of the Constitution of India , and was therefore void from its inception. The Government in such a case would be entitled to recover the amounts advanced under the contract.24 The Government was liable to pay the price for the goods being used for its purposes under a contract of supply on the basis of an order placed by an officer without authority.25 23 Barada Kanta Das v. State of Assam, AIR 1956 Assam 23; Antonio Buttigieg v. Captain Stephen H Cross, AIR 1947 PC 29; & Rederiaktiebolaget Amphitrite v. R, [1921] 3 KB 500; held to be too wide in Union of India v. Anglo Afghan Agencies, [1968] 2 SCR 366, AIR 1968 SC 718 at 722. 24 State of Orissa y Rajballav Misra,AIR 1976 Ori 19; following Harnath Kuar v. Indar Bahadur Singh, ILR 45 All 179, AIR 1922 PC 403, (1923) 50 IA 69, 71 IC 629; distinguishing Anath Bandhu Deb v. Dominion of India, AIR 1955 Cal 626; PC Wadhwa v. State of Punjab, AIR 1987 P&H 117 at 121 holding that the view in Ananth Bandhu (supra) stands impliedly overruled in State of West Bengal v. BK Mondal & Sons, [1962] Supp 1 SCR 876, AIR 1962 SC 779 and Mulamchand v. State of Madhya Pradesh, AIR 1968 SC 1218; see s. 10: 'Contracts with the government.' 25 State of Orissa v. Pratibha Prakash Bhavan, AIR 1995 Ori 62.
Recommendation of the Law Commission In view of the divergent views about whether s. 65 applied to contracts with municipalities and Government which did not comply with the requirements of law prescribing form for their execution, the Commission recommended that s. 65 be amended to clarify that the section applied to an agreement which was void by reason of non-compliance of statutory requirements.26 26 In its 13th Report 1958, the Law Commission of India recommended adding of an Explanation to the section:
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The English Law Where the plaintiff pays money to the defendant under an ineffective contract, he may be able to recover that money in quasi contract; viz. in respect of contracts which are void or ineffective ab initio, because the parties never reached agreement, or by reason of initial impossibility of performance or mistake.27 Recovery is also possible in cases of valid contracts which are later avoided by reason of subsequent impossibility or frustration. The party who has paid the money may recover it where there has been a total failure of consideration.28 The requirement, failure of total consideration has been reformed to some extent in the Law Reform (Frustrated Contracts) Act, 1943, under which, where a contract is frustrated, money paid can be recovered despite only partial failure of consideration. Time and again, the demand for reform of the total consideration requirement has been made.29 27 Bell v. Lever Bros Ltd., [1932] AC 161, [1931] All ER Rep 1 (it was assumed that money paid by the plaintiffs was recoverable, had those agreements been void for mistake); Branwhite v. Worcester Works Finance Ltd., [1969] 1 AC 552, [1968] 3 All ER 104(HL) . 28 Halsbury's Laws of England, Vol. 9(1), 4th edn., Reissue, 30 June 1998, CONTRACT, para 992; Chitty on Contracts, 28th edn., p. 1489, para 30-048. 29 Westdeutsche Landesbank Girozentrale v. Islington London Borough Council, [1996] AC 669 at 682-83, [1996] 2 All ER 961 per Lord Goff at 967-68; Burrows, (1984) 47 MLR 762.
'Becomes Void' The expression 'becomes void' includes cases of the kind contemplated by the second clause of s. 56. This presupposes that the contract was enforceable before it became void.30 A contingent contract to do or not to do anything if an event happens, becomes void when the event becomes impossible. The Privy Council has held that s. 65 is applicable where a voidable contract has been avoided;31 and the section has been applied even where a party has put an end to the contract upon wrongful repudiation by the other party.32
When a contract to sell is rescinded, the seller must restore the benefit he has received under s. 64 if he rescinds it himself; and under s. 65 if the purchaser rescinds it, that is, he must refund the earnest money. But when he rescinds it himself, if he has suffered any act ual damage, he is entitled to get compensation for it under s. 73, and even if he has suffered none, he can be awarded a reasonable amount as compensation not exceeding the earnest money, if there is the usual agreement of forfeiture in the contract under s. 74.33
The Law Commission of India recommended suitable changes in the section to make it applicable to contracts avoided by a party entitled to do so.34 The principal difference between a voidable instrument and one void ab initio is that restoration cannot be claimed in the case of the former unless avoided, whereas this relief can be claimed independently of the instrument in the latter case.35 But the section has no application to cases of forfeiture of earnest money paid under the contract.36 The section has been applied where the vendor failed to obtain permissions or sanction to the transfer, when so required by law;37 also where the court found the purchaser ineligible having belonged to such class of persons as would require permission for such transfer.38 The Privy Council has applied the section to a case where a mortgage was avoided on the ground that the mortgagee failed to obtain the sanction of the Deputy Collector to the mortgage.39 It also applied where after the suit of specific performance, the rights in the property sold came to an end and vested in the state under the law relating to abolition of zamindari.40 Frustrated Contracts
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If a contract stands frustrated, having become impossible of performance, the party who has received benefit under the contract is liable to return it to the other.41 In England, where a contract becomes impossible of performance by the destruction of the subject matter or the failure of an event or state of things contemplated as the foundation of the contract to happen or exist, the rule, as laid down by the Court of Appeal in 1904, was that not only were the parties excused from further performance,42 but that they acquired no rights of action, so that each must bear any loss or expense already incurred, and could not recover back any payment in advance.43 This was not the law in India. The present section appears to include such cases so far as they fall within s. 56, and not to lay down any special rule with regard to them. It would seem, therefore, that the general rule of this section applies to such cases, and that each party is bound to return any payment received.44 Where the voyage was abandoned because of Government prohibitory orders, a suit to recover freight paid in advance was held governed by s. 65.45 Even in England, the House of Lords in the Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd, 46 overruled the Court of Appeal decision in Chandler v. Webster, 47 and held that advance payments were recoverable, provided there had been a total failure of consideration.48 The learned authors of this book expressed the view that justice could most nearly be done by treating such payments as returnable, but allowing to either party compensation for anything reasonably done by him towards performance, whether the other party act ually derived any advantage from it or not, but considered that the Indian rule would not yield this result unless the courts were prepared to take the bold step of applying s. 70 to acts done under an express contract at the time subsisting. The English Law Reform (Frustrated Contracts) Act, 1943, has modified the rule laid down in the Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd., 49 in many respects, and achieved a solution similar to that advocated by the learned authors, but certain types of contract are expressly excluded from its operation. Leases The section applied to the case of a lease which was terminated by the lessee under the provisions of the Transfer of Property Act, 1882 on the destruction of the property by fire. InDhuramsey Soonderdas v. Ahmedbhai Habeebbhoy, 50the plaintiff had hired a godown from the defendant for a period of 12 months and paid the whole rent to him in advance. After about seven months the godown was destroyed by fire, and the plaintiff claimed a refund from the defendant of a proportionate amount of the rent, and subsequently brought a suit for the same. The court held that the provisions of s. 108(e) of the Transfer of Property Act, 1882 applied to the case, and that the plaintiff was entitled under this section to recover the rent for the unexpired part of the term. The demand for a refund was treated by the court as a notice to the defendant avoiding the lease.51It was also stated in the judgment that the right to compensation under this section does not depend on the possibility of apportionment. Section 108(e) of the Transfer of Property Act, 1882 provides that, in the event of the property let being destroyed by fire, 'the lease shall, at the option of the lessee be void.' Section 65 would apply in such cases.52 It has been applied in the case of leases which were terminated because of their being void or having become void53 and in the case of a mortgage of occupancy tenancy which was avoided at the instance of the landlord.54 Sales The seller is bound to return the price received by him when the sale-deed is found to be void,55viz, for want of title in him;56 and such order can be passed in a suit of specific performance where the agreement of sale is found ineffectual,57 for example, on the ground that the terms of the contract were uncertain.58 If the vendee had knowledge of the seller's want of title, he can claim only return of earnest money, but not interest or damages.59 Other Instances of Contracts Becoming Void A contract also 'becomes void' when a party disables himself from suing upon it, making an unauthorised alteration.60Section 65 was held applicable where rent had been paid in excess of fair rent in contravention of statute, even in absence of a provision for refund of excess under a Rent Act .61 Where an occupancy tenancy created by a lambardar becomes void under a subsequent statute, the consideration paid to the lambardar is recoverable, but for breach of covenant for quiet enjoyment no
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damages were recoverable as the property was taken back under a statute.62 A grant of a lease of a forest area by a third class jagirdar in breach of the order of the ruler of the State was void but not illegal under s. 23, as the jagirdar had no authority to enter into that contract. The premium was therefore recoverable.63 After a notification vesting the estate in the State, but before possession was taken by the State, a landlord gave to A the right to collect Biri leaves and received a premium and security. A was held entitled to recover the premiums paid and the security given from the landowner as he discovered the void nature of the transaction when he received a notice from the Collector calling upon him to pay premium.64 The High Court based the decision on the ground of incapacity of the landowner, not in respect of his person but in respect of property.65 A contract to cut and remove Babul trees subsequently became impossible of performance by the coming into effect of an ordinance. Section 65 was held applicable to this contract and benefits received under the contract were held returnable.66Section 65 was also applied where the buyer of jungle fuel could not cut and remove the trees because the jungle was vested in the State Government under statute.67 Similarly, if a plaintiff has done work for the defendant under the belief that contract exists but the contract is a nullity, he may obtain reasonable compensation in a quasi contract.68 Contract of which Enforcement is Barred A contract, the enforcement of which, alone is barred by the operation of law cannot be said to have 'become void' because in such a case, the right under the contract is not discharged, only the right to sue or enforce the contract is barred;69 an agreement is void when its terms, being ascertained, have no legal effect.70 Thus a mere failure to sue within the time specified by a statute of limitations does not cause a contract to become void.71 It has been held that under the Bihar Moneylenders' Act, an unregistered moneylender cannot recover a loan advanced as there is a contract, only the right to sue upon it being barred.72 Effect of contract provisions A contract may automatically become void where it expressly provides that on the happening of a condition it shall become void.73 The (English) Law Reforms (Frustrated Contracts) Act, 1943 This Act applies to contracts governed by the English law which have become impossible of performance or been otherwise frustrated. The Act entitles a party to the contract to recover money paid to the other contracting party prior to the frustrating event, and relieves the parties of the obligations to pay any monies payable or remaining unpaid at the time of that event. Money paid is recoverable even upon partial failure of consideration, thus going beyond the rule in Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd, 74 which required total failure of consideration as a ground of recovery. Further, the payee is entitled to set off against a claim by the payer the amount of expenses incurred before the time of discharge in or for the purposes of performance of the contract, whether the money has been paid under the contract before the frustrating event, or has remained payable; the payee cannot recover where no money has been paid or remains payable under the contract before the event. A party who has obtained a valuable benefit other than payment of money, before the frustrating event occurred because of anything done by the other party in or for the purpose of performance of the contract, that other party is entitled to recover 'a just sum' not exceeding the value of the said benefit to the party obtaining it. While arriving at the just sum, the court may take into account the expenses incurred by the benefited party before the event, any sums paid or payable under the contract, and the effect of the event in relation to the benefit. What constitutes a 'benefit' has been a subject of controversy under the Act . 30 Kandregula Anantha Rao Pantulu v. Kandikonda Surayya, (1920) 43 Mad 703, AIR 1920 Mad 64, 55 IC 697; Bhojraj v. Dukala, AIR 1920 Nag 183. 31 Satgur Prasad v. Har Narain Das, (1932) 59 IA 147, AIR 1932 PC 89, ILR 7 Luck 64, 136 IC 108; Badlu v. Sheo Chand, AIR 1921 Lah 299; Babu Raja Mohan Manucha v. Babu Manzoor Ahmad Khan, (1943) 70 IA 1, AIR 1943 PC 29, ILR 18
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Luck 130, (1943) 1 Mad LJ 508, 206 IC 457; Labh Singh v. Jamnun, (1934) 15 Lah 751, 151 IC 1, AIR 1934 Lah 853(FB) (mortgage by occupancy tenant set aside at the instance of the landlord); Dyaviah v. Shivamma, AIR 1959 Mys 188; Orissa State Electricity Board v. Indian Metals & Ferro Alloys Ltd., AIR 1991 Ori 59 at 63. 32 Bajirao v. Shivaram, AIR 1927 Nag 168 (seller rescinding, must restore under s. 64, and the purchaser, under s. 65); Kizhakot Parathat Marizamma v. Nandanasseri Illath Ganapathi Mussad, AIR 1915 Mad 1059 (1). 33 Bajirao v. Shivaram, AIR 1927 Nag 168. 34 See the 13th Report of the Law Commission of India 1958, para 87. 35 Asaram v. Ludheshwar, AIR 1938 Nag 335(FB) . 36 Naresh Chandra Guha v. Ram Chandra Samanta, AIR 1952 Cal 93; Jagdishpur Metal Industries v. Vijoy Oil Industries Ltd., AIR 1959 Pat 176; Habib Ali v. Rafikuddin, AIR 1968 Assam 26; See also ss. 19 and 19 A above. 37 Kishanlal Onkardas Gajanka v. Suryadatta Govindlal, AIR 1958 MP 239. 38 Bahadur v. Mohammad Din, AIR 1934 Lah 979. 39 Babu Nisar Ahmad Khan v. Babu Raja Mohan Manueha, AIR 1940 PC 204, (1941) All LJ 316 (the disability affects the right to deal with immovable property. but does not take away personal liability to repay the loan); Babu Raja Mohan Manueha v. Babu Manzoor Ahmad Khan, (1943) 70 IA 1, AIR 1943 PC 29, ILR 18 Luck 130, (1943) 1 Mad LJ 508, 206 IC 457; Saraswatibai v. Madhukar, ILR (1950) Nag 467, AIR 1950 Nag 229 (sale of village); Sunderlal Ramdiyal v. SS Laxmanprasad, ILR (1949) Nag 52, AIR 1949 Nag 292; B Audhesh Singh v. B Rajeshwari Singh, AIR 1951 All 630; cf Ghulam Dastgir v. Nur Ali, AIR 1935 Lah 401; Lala Babu Ram v. Ganga Devi, AIR 1959 All 788 (mortgage for previous money bonds). 40 Munshi Lal v. Vishnu Das, AIR 1954 All 450. 41 Fakira Mal v. Nabbu, AIR 1915 Lah 310; Shrawan v. Sheoratan, AIR 1935 Nag 208; Manasseh Film Co. v. Gemini Picture Circuit, ILR (1944) Mad 124, AIR 1944 Mad 239; Rajendra Bahadur Singh v. Roshan Singh, AIR 1950 All 592; Man Singh v. Khazan Singh, AIR 1961 Raj 277; State of Rajasthan v. Bundi Electric Supply Co. Ltd., AIR 1970 Raj 36; Industrial Finance Corpn. of India v. Sehgal Papers Ltd., AIR 1986 P&H 21 (on facts--no frustration). 42 Appleby v. Myers, (1867) LR 2 CP 651, [1861-73] All ER Rep 452; Civil Service Co-op Society General Steam Navigation Co.,[1903] 2 KB 756(CA) . 43 Chandler v. Webster, [1904] 1 KB 493. 44 Gandha Korliah v. Janoo Hassan, (1925) 49 Mad 200; Munshi Lal v. Vishnu Das, AIR 1954 All 450. 45 C Boggiano & Co. v. Arab Steamers Ltd. C Boggiano & Co. v. Arab Steamers Ltd., (1916) 40 Bom 529, AIR 1916 Bom 265, 33 IC 536; Gandha Korliah v. Janoo Hassan, AIR 1926 Mad 175; PKPS Sivanadian Chettiar v. Batchu Surayya, AIR 1925 Mad 727 (ship having stranded on her way to the port of landing). 46 [1943] AC 32; Branwhite v. Worcester Works Finance Ltd., [1969] 1 AC 552, [1968] 3 All ER 104(HL) ; Rover International Ltd. v. Cannon Film Sales (No 3) Ltd., (1988) 2 FTLR 536, [1989] 3 All ER 423. 47 [1904] 1 KB 493. 48 Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd., [1943] AC 32, [1942] 2 All ER 122, followed in Manasseh Film Co. v. Gemini Picture Circuit, ILR (1944) Mad 124, AIR 1944 Mad 239; Parshottam Das Shankar Das v. Municipal Committee Batala, AIR 1949 EP 301; Lakshmanan v. Kamarajendara, AIR 1955 Mad 606 (on facts, s. 65 cannot be invoked). 49 [1943] AC 32, [1942] 2 All ER 122. 50 (1898) 23 Bom 15; followed in Muhammad Hashim v. Misri, (1922) 44 All 229, 65 IC 253; Shrawan v. Sheoratan, AIR 1935 Nag 208 (lessee entitled to lease money paid in advance). 51 See s. 66 post. 52 Gurdarshan Singh v. Bishan Singh, ILR (1962) Punj 5, AIR 1963 Punj 49(FB) ; overruled in Raja Dhruv Dev Chand v. Raja Harmohinder Singh, AIR 1968 SC 1024 on the question of frustration of leases. 53 Dhuramsey Soonderdas v. Ahmedbhai Habeebbhoy, (1899) 23 Bom 15. 54 Labh Singh v. Jamnun, (1934) 15 Lah 751, 151 IC 1, AIR 1934 Lah 853(FB) . 55 Amri Devi v. Ridimal, AIR 1998 Raj 25.
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56 Orissa State Electrictiy Board v. Indian Metals & Ferro Alloys Ltd., AIR 1991 Ori 59. 57 Bassu Kuar v. Dhum Singh, (1888) 11 All 47 at 56, 50 IA 211 (PC); Balubhai Jethabhai Shah v. Chhaganbhai Bamanbhai, AIR 1991 Guj 85. 58 Udit Narain Misr v. Muhammad Minnat-Ullah, (1903) ILR 25 All 618. 59 Lachhman Das v. Jowahir Singh, AIR 1924 Lah 476; Varkey Mathai v. Commen Oommen, AIR 1963 Ker. 148 (cannot claim interest unless he proves fraud); Gwasha Lal v. Kartar Singh, AIR 1961 J&K 66. 60 Kandregula Anantha Rao Pantulu v. Kandikonda Surayya, (1920) ILR 43 Mad 703, AIR 1920 Mad 64, 55 IC 697; Hemchand v. Govinda, AIR 1925 Nag 243, 86 IC 185. 61 Somraj v. Jethmal, AIR 1957 Raj 392; cf Alapati Ramamurthi Gelli Krishnamurthi & Co. v. Maddi Sitharamayya, AIR 1958 AP 427 (control price). 62 Singhai Shrinanandanlal v. Laxman Singh, AIR 1959 MP 315. 63 SK Umar v. Shivdansingh, AIR 1958 MP 88. 64 State of Bihar v. Dukuhlal Das, AIR 1962 Pat 140; overruling Dhanna Munda v. Kosila Banian, AIR 1941 Pat 510, 193 IC 851. 65 Ibid. 66 Man Singh v. Khazan Singh, AIR 1961 Raj 277. 67 Walamji Lalji v. Anil Charan Bangal, AIR 1975 Cal 92. 68 Craven-Ellis v. Canons Ltd., [1936] 2 KB 403, [1936] 2 All ER 1066(CA) ; But see Denning: Re Quantum Meruit,[1941] 55 LQR 54. 69 Jugal Prasad Misser v. Bhadai Das, ILR (1952) Pat 963, AIR 1953 Pat 259. 70 Udit Narain Misr v. Muhammad Minnat-Ullah, (1903) ILR 25 All 618. 71 Mahanth Singh v. U Ba Yi, (1939) 66 IA 198 at 207, AIR 1939 PC 110; Vishwanath Narayan v. Deokabai, ILR (1958) Nag 50, AIR 1948 Nag 382; Pulingundla Venkatappa Naidu v. Geddam Chennappa Naidu, AIR 1945 Mad 171, (1945) 1 Mad LJ 158. 72 Jugal Prasad Misser v. Bhadai Das, ILR (1952) Pat 963, AIR 1953 Pat 259; but see Desai Bhao v. Karviram Gonda, AIR 1952 Hyd 142. 73 Khela Banerjee v. City Montessori School, (2012) 7 SCC 261. 74 [1943] AC 32.
'Received an Advantage' In contrast with s. 64, which uses the word 'benefit', this section uses the word 'advantage'. 'Advantage' appears to suggest not the benefit derived by each party, but the relative benefit. The word 'advantage' is stated to be narrower in scope than benefit, since it suggests more strictly either a material benefit, or things won in competition against an opponent.75 The word 'benefit' means profit, gain, future good, whereas the word advantage means a condition or circumstance that gives one superiority or success (especially when competing with others).76 In Firm Govindram Seksaria v. Edward Radbone, 77 the defendant had contracted to purchase machinery from Germany, and the German firm had agreed to send a technician to India to set up the machinery. The greater part of the machinery had arrived in India, and rather more than half the purchase price had been paid, when the contract was frustrated by the declaration of war. The custodian of enemy property sued the defendant for the value of the machinery received, but failed to establish that the advantage received exceeded the sum of Rs. 96,010/-, the amount the defendant had already paid to the German firm. Their Lordships said:
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In estimating that value, a court would have to take into account the fact that the balance of the machinery contracted to be supplied could not be supplied from Germany, and the fact that the (purchasers) appellants could no longer have the services of a qualified erector sent from Germany and of the sellers' Chief Chemist. Further, the court would have to consider the question whether or not the (purchasers) appellants were able to procure from other sources the balance of the machinery contracted to be sent from Germany, and if so, at what price and within what period of time, and what quantity and quality of products could be produced by the plant so assembled.
The word 'advantage' does not refer to any question of 'profit' or 'clear profit', nor is it material what the party receiving the money may have done with it.78 Where the purchaser of occupancy rights redeemed the mortgage of those rights from the landlord-mortgagee, who subsequently evicted the purchaser by obtaining a cancellation of the sale, the purchaser was entitled to the refund of the money which he had so paid.79 In a pre-emption case A agreed that B should file an appeal at his own expense and if successful, B would pay him half the expense and half the purchase price and share the property half and half. This agreement was held champertous and the circumstances showed that the agreement was for gambling, opposed to public policy and would not be enforceable. But where in a champertous agreement a party had received the advantage of financing of litigation from another party, he is bound to restore it to the latter under s. 65. But the latter is not entitled to compensation over and above the return of the advantage.80 Where on the instructions of a principal, an agent entered into a transaction with a third party and paid money to a third party, it was held that the agent did not become liable to restore the money to the principal on the agreement being discovered to be void, since it could not be said that the agent had received any advantage.81 If under a contract of agency, goods purchased by the agent for the principal for the purpose of export in contravention of an order were not exported and were not delivered to the principal, the principal cannot be said to have received any benefit under the contract and s. 65 does not apply.82 'Benefit' under the (English) Law Reform (Frustrated Contracts) Act, 1943 Under the above Act, if a party to a frustrated contract has derived a benefit under it other than payment of money, the other party becomes entitled to a just sum not exceeding the value of the benefit. Controversy has arisen around the meaning of the word 'benefit' because the word may indicate the 'end product' of the services rendered as much as it refers to the services themselves. The nature of services rendered (rather than the end product) assumes importance where the service does not result in an end product, viz. carriage of goods and in cases where the services result in an end product which may not have any objective value.83 Rendering of a service is treated as beneficial where it results in an uncontroverted benefit to the defendant.84 Moreover, the valuation of the benefit is a difficult task, because the values of the end product and the services themselves may not be related to one another; the value of the end product may be disproportionately larger than the value of services rendered. Ultimately, the court arrives at a just sum which is calculated to prevent 'the unjust enrichment of the defendant at the plaintiff's expense'.85 Compensation for Expenses Incurred Section 65 does, however, seem to allow the defendant to set off any expenses he has legitimately incurred out of money advanced by the plaintiff in furtherance of the agreement, before it has become void. In Rajendra Bahadur Singh v. Roshan Singh, 86P deposited cash, ornaments and clothes with D for the marriage of P's daughter with D's son. The daughter died before the marriage could take place. P was held entitled to the return of the money and articles, subject to a deduction for legitimate expenses ( P did not deny that D was entitled to make such deductions). Under the (English) Law Reform (Frustrated Contracts) Act, 1943, the payee of a payment made under a frustrated contract is entitled to set off against a claim of the payer the amount of expenses incurred
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before the time of discharge in or for the purposes of performance of the contract. He may do so whether the payer has paid the amounts due under the contract before the frustrating event, or such amounts though payable till then, have remained unpaid; the payee cannot recover where no money has been paid or remains payable under the contract before the event. Even where benefit other than the payment of money is derived under a frustrated contract, the court has to consider the expenses incurred in the performance of the contract, while arriving at the 'just sum' payable by the party deriving the benefit, to the other party. 75 The Reader's Digest's 'Use the Right Word': A Modern Guide to Synonyms, 1979, p. 45. 76 Oxford Advanced Learner's Dictionary of Current English, pp. 100, 118. 77 (1947) 74 IA 295, AIR 1948 PC 56, ILR (1947) Bom 860, 50 Bom LR 561. 78 Firm Govindram Seksaria v. Edward Radbone, (1947) 74 IA 295, AIR 1948 PC 56, ILR (1947) Bom 860, 50 Bom LR 561. 79 Badlu v. Sheo Chand, AIR 1921 Lah 299. 80 Suganchand v. Balchand, AIR 1957 Raj 89. 81 Firm Harjivanlal Balkison v. Fiml Radhakison Gopikison, AIR 1938 PC 4, (1938) All LJ 77, 172 IC 330. 82 Appana Radha Sri Krishna Rao v. VKM Kodandarama Chetti, AIR 1960 AP 190. 83 Chitty on Contracts, 28th edn., p. 1212, para 24-082. 84 Craven-Ellis v. Canons Ltd., [1936] 2 KB 403, [1936] 2 All ER 1066(CA) ; Procter & Gamble Phillipine Manufacturing Corpn. v. Peter Cremer GMbH & Co., [1988] 3 All ER 843 per Hirst J at 855-56. 85 BP Exploration Co. (Libya) Ltd. v. Hunt, (No 2), [1982] 1 All ER 925, [1982] 2 WLR 253 affirming, [1981] 1 WLR 232 and, [1979] 1 WLR 783. 86 AIR 1950 All 592.
'Under the Contract' The advantage sought to be recovered must have been received under the contract; and received before the contract ceased to be enforceable on becoming void.87Section 65 does not apply where the advantage is received after the agreement ceases to be enforceable.88 Liability to Restore the Advantage This section gives the right to claim restoration of the advantage, and is not in the nature of enforcement of the contract.89'In a suit on the basis of a contract, a party is trying to enforce its terms, while in a suit under s. 65 a party merely asks for restoration or compensation as the agreement has not matured into a contract and he wants to be placed in the position in which he would have been if no agreement had been entered into.'90Thus where a car was sold in excess of controlled price, both the parties being under a mistake as to this price, the remedy of the purchaser was to return the car and claim the price, and not to sue for the difference between the act ual price and the controlled price. The case was whether the contract was treated as voidable on the ground of mutual mistake or as void on the ground of violation of Control Orders.91 The word 'restore' is significant; and the section does not contemplate reparation for any loss sustained by one party. Unless it can be said that the defendants came into possession of something tangible from the plaintiff, the plaintiff is not entitled to any relief under this section.92 Where the sale or transfer of property is discovered to be void, the liability to refund consideration arises, irrespective of whether the contract provides for the refund or not; the existence of such clause will actually strengthen the position of the vendor.93 The question of refund for failure of a contract must be decided with reference to the provisions
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of the Contract Act and not the English law.94 Relief can be claimed either under this section or on the principle of quantum meruit.95 Where two properties were sold the consideration being one and unseverable, the purchaser will not be entitled to proportionate refund if it is discovered that the vendor had no interest in one of the properties sold.1 Liability of Both Parties Section 65 does not work in one direction only. Where both the parties have derived benefits under the void agreement, each party is obliged to restore the benefit to the other,2 or to compensate the other to the extent of the benefit received.3 A mortgagor, seeking to recover possession of property from the mortgagee under a void mortgage, can do so only on payment of mortgage money.4 Where one party to the contract is asked to reinstate the advantage received by him under a void contract, the other party to the void contract may ask him to restore the advantage received by him. The restoration of advantage and payment of compensation necessarily has to be mutual,5 but only in circumstances when the proposition applies to the facts.6 The liability for restoration may be set off by the party rescinding the contract under s. 39, against the cross claim for damages for breach of contract.7Where usufructuary mortgage was discovered to be void by virtue of s. 165 of the Madhya Pradesh Land Revenue Code, 1965, the court held that the parties were liable to restore the respective benefits which they derived under the contract.8 Liability of Legal Representatives Where a sale deed is discovered to be void or becomes void, the legal representatives of the deceased vendor can be sued for compensation under s. 65 of the Act;9 so is a Hindu son bound to discharge the liability of his father to make restitution;10 and a receiver in possession of trust properties is liable to return the consideration when a transfer made by the trustee is set aside as being ultra vires the powers of the trustee.11 Where an agent, as a result of a bribe, induces the principal to enter into a contract with the party who bribed the agent, the principal may elect either to recover bribe or damages for fraud, in respect of any loss he has sustained through the contract, from the agent.12 Where, however, the principal rescinds the transaction tainted by a bribe he does not give credit for the amount of the bribe as part of his duty to make restitution of benefits received under the contract, even where he has already recovered the bribe from the agent.13 Refund of Earnest Money Where a contract of sale of property is frustrated, the vendee is entitled to refund of earnest money.14 But where one party validly rescinds the contract, s. 65 does not affect the right of forfeiture of earnest money, and does not entitle the other party to refund of earnest money forfeited under the terms of the contract.15 87 Wolf & Sons v. Dadiba, Khimji & Co., (1920) 44 Bom 631, AIR 1920 Bom 192, 58 IC 465; Hemchand v. Govinda, AIR 1925 Nag 243, 86 IC 185; Jagdish Prosad Pannalal v. Produce Exchange Corpn. Ltd., (1945) 2 Cal 41, AIR 1946 Cal 245; N Purkayastha v. Union of India, AIR 1955 Assam 33; Dyaviah v. Shivamma, AIR 1959 Mys 188. 88 Jagdish Prasad Pannalal v. Produce Exchange Corpn. Ltd., (1945) 2 Cal 41, AIR 1946 Cal 245; Ram Nagina Singh v. Governor-General in Council, AIR 1952 Cal 306. 89 Dharmeswar Kalita v. Union of India, AIR 1955 Assam 86. 90 Madura Municipality v. K Alagirisami Naidu, ILR (1939) Mad 928, AIR 1939 Mad 957 per Abdur Rahman J. at 962.
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91 Lakshmana Prasad & Sons v. A Achutan Nair, ILR (1956) Mad 712, AIR 1955 Mad 662 reversing Lakshmana Prasad & Sons v. A Achutan Nair, AIR 1952 Mad 779. 92 Appana Radha Sri Krishna Rao v. VKM Kodandarama Chetti, AIR 1960 AP 190; Bhumbho Metharam v. District Local Board, AIR 1940 Sind 199. 93 Sunderlal Ramdiyal v. ss. Laxmanprasad, ILR (1949) Nag 52, AIR 1949 Nag 292 at 295. 94 Lachhmi Narayan v. Damodardas, AIR 1925 Nag 109; Appana Radha Sri Krishna Rao v. VKM Kodandarama Chetti, AIR 1960 AP 199. 95 Palaniswami Goundar v. English & Scottish Co-op Wholesale Societies Ltd., AIR 1933 Mad 145. 1 Khuma v. Jin Rai, AIR 1974 Raj 28 at 29; Bappu Rawther Abdul Kassim Rawther v. State of Kerala, AIR 1964 Ker 109; Nagalinga Chettiar v. Guruswami Ayyar, AIR 1930 Mad 856; Firm Narasingi Vannechand v. Suryadevara Narasayya, ILR (1945) Mad 789, AIR 1945 Mad 363. 2 State of Rajasthan v. Bundi Electric Supply Co. Ltd., AIR 1970 Raj 36. 3 State of Rajasthan v. Associated Stone Industries Kota Ltd., AIR 1971 Raj 128. 4 Ganga Prasad v. Ram Samujh, AIR 1918 Oudh 22 (mortgage found void for want of proper attestation); Ghulam Dastgir v. Nur Ali, AIR 1935 Lah 401 (mortgage without requisite sanction); Babu Nisar Ahmad Khan v. Babu Raja Mohan Manucha, AIR 1940 PC 204, (1941) All LJ 316 (mortgage without Collector's permission); Gauri Shankar v. Nathu Lal, AIR 1951 All 589 (mortgage executed in fraud of registration law); Kaushal Singh v. Ghanshiam Singh, AIR 1956 All 639 (mortgage of occupancy tenancy prohibited); Thaker Ganpat v. Sukhram, AIR 1955 J&K 20; Haji Fatma Bee v. Prahlad Singh, AIR 1985 MP 1. 5 State of Rajasthan v. Associated Stone Industries Kotah Ltd., AIR 1985 SC 466 at 469, (1985) 1 SCC 575. 6 DLF United Private Ltd. v. Prem Raj, AIR 1981 SC 805, (1981) 1 SCC 575. 7 Harishchandra Dwarkadas Cloth Market v. Firm Murlidhar Chironjilal, AIR 1957 MB 53. 8 Haji Fatma Bee v. Prahlad Singh, AIR 1985 MP I at 4; Thaker Ganpat v. Sukhram, AIR 1955 J&K 20. 9 Mathurabai Nilkanth Deshpande v. Ramkrishna Bhaskar Barve, AJR 1961 Bom 97. 10 Shambhoo Shukul v. Dhaneshwar Singh, AIR 1927 Oudh 177, 101 IC 265. 11 Debi Prasad Agarwala v. Haji Syed Mehdi Hasan, (1939) 18 Pat 654, 186 IC 674, AIR 1940 Pat 81. 12 Mahesan v. Malaysia Government Officers' Co-op Housing Society Ltd., [1979] AC 374, [1978] 2 All ER 405. 13 Logicrose Ltd. v. Southland United FC Ltd., [1988] 1 WLR 1256. 14 Habib Ali v. Rafikuddin, AIR 1968 Assam 26; Tarsem Singh v. Sukhminder Singh, AIR 1998 SC 1400, (1998) 3 SCC 471 (see comment about the case in s. 20 above); see also Venturbay Consultants Private Limited v. Their Respective Shareholders and Creditors, Co Petition Nos. 123/2012 & 192/2012 and Co Application Nos. 862/2012 & 1097/2012, decided on 11 June 2013 (AP). 15 Naresh Chandra Guha v. Ram Chandra Sal11anta, AIR 1952 Cal 93; Jagdishpur Metal Industries v. Vijoy Oil Industries Ltd., AIR 1959 Pat 176; Habib Ali v. Rafikuddin, AIR 1968 Assam 26; but see Karala Valley Tea Co. Ltd. v. Lachmi Narayan Agarwalla, AIR 1939 Cal 14 (refund of earnest money can be ordered). Also see below, s. 74: 'Earnest Money and Security Deposit'.
Liability to Compensate for the Advantage The advantage received can either be restored in the form in which it was received, or its equivalent can be awarded to the other party by way of compensation. It therefore contemplates only refund of what has been received, and not the payment of damages to make up for the loss which the party not at fault has suffered on account of the other's committing breach of the contract.16 There is no liability to pay interest on the compensation granted under this section.17 Thus where a sale was void because the parties were under a mutual mistake, the purchaser could recover the consideration paid, but not any damages or interest.18 The compensation can be awarded only in the alternative, when the advantage received by a person cannot be restored to the person from whom it has been received.19 There is no obligation to
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make compensation in respect of that of which he has not enjoyed the benefit.20 Where the appointment of an advocate as Assistant District Government Counsel made by the district magistrate was cancelled by the Governor after a period of two and a half years on the ground of lack of power to the District Magistrate on this, it was held that on the principle of quantum meruit embodied in s. 65, the Government was bound to compensate the petitioner for her services rendered in this capacity. The State Government, having enjoyed the benefit and advantage of her services as Assistant District Government Counsel which were lawfully rendered by her and were not intended to be gratuitous, was liable to pay her fees at the rate admissible to the holder of such post even on the principle of 'restitution and prevention of unjust enrichment' incorporated in s. 70.21 Where the grant of lease by the State for excavation of stone was subsequently found to be void, compensation was payable to the State for the stone already excavated in the amount of a reasonable royalty for the excavated stone, and compensation for exclusive rights that had been granted. The net profits earned by the grantee after marketing the excavated stone could not be said to be an advantage received by him under the agreement; the net profit resulted from the processing of stone done by him and from his business act ivities.22 Where the contractor having the right to take sand from the river bed by the Gaon Sabha had deposited the theka money, but his contract was subsequently discovered to be void, he was liable to restore the sand excavated or to compensate for it.23 The plaintiff who was required to pay the freight and a deposit for sending the consignment was entitled to recover the freight and deposit paid to the ship owner with interest, but subject to deduction of reasonable expense for unloading, after the performance of the contract was prohibited by the Government.24 The liability may also arise to compensate for services rendered or work done for the Government under a contract which does not comply with the formalities.25 16 Firm Govindram Seksaria v. Edward Radbone, (1947) 74 IA 295, AIR 1948 PC 56, ILR (1947) Bom 860, 50 Bom LR 561; Sheo Ku mar v. Gyan Nath Raina, AIR 1955 All 408; Appana Radha Sri Krishna Rao v. VKM Kodandarama Chetti, AIR 1960 AP 190. 17 Madura Municipality v. K Alagirisami Naidu, ILR (1939) Mad 928, AIR 1939 Mad 957. 18 Rani Kunwar v. Mahbub Baksh, AIR 1930 All 252. 19 Firm Govindram Seksaria v. Edward Radbone, (1947) 74 IA 295, AIR 1948 PC 56, ILR (1947) Bom 860, 50 Bom LR 561; District Board Ferozepore v. Balwant Rai, AIR 1939 Lah 564; Madura Municipality v. K Alagirisami Naidu, ILR (1939) Mad 928, AIR 1939 Mad 957 (vendee unable to restore goods); Suganchand v. Balchand, AIR 1957 Raj 89. 20 Radha Krishna Das v. Municipal Board of Benares, (1905) 27 All 592; Municipal Board Etah v. L Moradhuj, AIR 1940 All 340. 21 Indu Mehta v. State of Uttar Pradesh, AIR 1987 All 309 at 313. 22 State of Rajasthan v. Associated Stone Industries Kotah Ltd., AIR 1985 SC 466, (1985) 1 SCC 575. 23 Gaon Subha v. Kushal Pal Singh, AIR 1981 All 176. 24 C Boggiano & Co. v. Arab Steamers Ltd., (1916) 40 Bom 529, AIR 1916 Bom 265, 33 IC 536. 25 N Purkayastha v. Union of India, AIR 1955 Assam 33 (contract not complying with s. 175(3) of the Government of India Act, 1930); but seeAnath Sandhu Deb v. Dominion of India, AIR 1955 Cal 626; Union of India v. AK Gilkan & Co., AIR 1962 Punj 423.
Person who has Received the Advantage Only a party who is clearly shown to have received an advantage under the contract can be ordered under the section to return the same.26 The obligation under this section to restore the advantage received under an agreement is not confined to
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parties to the agreement, but extends to any person that may have received the advantage.27 A sajadanishin leased the property of a khankah and received nazarana for the same. Thereafter a receiver was appointed, who avoided the lease. The lessee was held entitled to recover the nazarana from the receiver on the ground that the khankah had benefited from the nazarana and the person in charge of the khankah estate was bound to restore the advantage received.28 But where under an agreement between the defendant and the plaintiffs, the latter was to deliver rice to the defendant or his nominees, and the rice was delivered to the nominees, the nominees cannot be said to have received any advantage under the agreement because the plaintiffs had milled the paddy supplied to them by the defendant, purchased by the latter from the money supplied by the Government of India.29 Where the entire agreement becomes void and cannot be separated, then each party deriving benefit under it was liable to make compensation to the other party to the extent of the benefit derived by that party.30 The restoration for the advantage under this section takes the form of compensation for goods delivered in pursuance of the contract.31 26 Jagannath Prasad v. Munno Lal, AIR 1937 Oudh 10. 27 Girraj Bakhsh v. Kazi Hamid Ali, (1886) 9 All 340 at 347, (1886-87) 8-9 All 702. 28 Debi Prasad Agarwala v. Haji Syed Mehdi Hasan, (1939) 18 Pat 654, 186 IC 674, AIR 1940 Pat 81. 29 Government of India v. Jamunadhar Rungta, AIR 1960 Pat 19. 30 State of Rajasthan v. Associated Stone Industries Kotah Ltd., AIR 1971 Raj 128 at 134. 31 Hindustan Construction Co. v. State of Bihar, AIR 1963 Pal 254.
Recovery of Claims under Section 65 The claim for restoration can be made by claiming it as a relief in a suit. A person rescinding a contract under s. 39 may set off his liability to restore against his cross claim for breach of contract.32The stipulations in a contract for liquidated damages or mode of recovery or indication of the source from which losses may be recovered, continue to be valid and act ionable, even apart from the basis of s. 65, where the conveyance containing a clause of indemnity fails for want of title.33 32 Harishchandra Dwarkadas Cloth Market v. Firm Murlidhar Chironjilal, AIR 1957 MB 53. 33 Chief Controlling Revenue Authority v. BP Eswaran, AIR 1970 Mad 349.
Application of Section 65: Illustrative Cases Section 65 has been held to apply where the contract with the Government has been effected without complying with the provisions of Art. 299 of the Constitution;34 where the transfer has been effected without the permissions required for such transfers under the statute, viz. transfers without permission of the Collector under para 11 of Schedule 3 of the CPC;35 where the brother alienated the rights of his minor sisters without certificate required for the purpose;36 and where a transaction not void but voidable was repudiated by the person entitled to repudiate, as in the case of a sale of Hindu joint family property by the father on behalf of himself and a minor son.37 The section does not apply to a mortgage which becomes unenforceable for the want of legal necessity and benefit to the family.38Nor could any claim be made under this section between partners where the partnership was not registered under the Indian Partnership Act, 1932.39 34 BD Naithani v. State of Uttar Pradesh, AIR 1966 All 507; ; Hindustan Construction Co. v. State of Bihar, AIR 1963 Pat 254; N Purkayastha v. Union of India, AIR 1955 Assam 33; Dharmeswar Kalita v. Union of India, AIR 1955 Assam 86; but
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see Union of India v. AK Gilkan & Co., AIR 1962 Punj 423; State of Madras v. K Periaswami Gounder, AIR 1963 Mad 154; AKTKM Sankaran Namboodiripad v. State of Kerala, AIR 1963 Ker 278(FB) . 35 Babu Raja Mohan Manucha v. Babu Manzoor Ahmad Khan, (1943) 70 IA 1, AIR 1943 PC 29, ILR 18 Luck 130, (1943) 1 Mad LJ 508, 206 IC 457(mortgage) ; Thaker Ganpat v. Sukhram, AIR 1955 J&K 20; B Audhesh Singh v. B Rajeshwari Singh, AIR 1951 All 630; Lala Babu Ram v. Ganga Devi, AIR 1959 All 788. 36 Ayissa v. Prabhakaran, AIR 1971 Ker 239. 37 Lachmi Prasad v. Lachmi Narain, AIR 1928 All 41, 107 IC 36, (1927) 25 All LJ 926(but the case is mainly governed by The Transfer of Property Act, 1882). 38 Ram Bilas Singh v. Ramyad Singh, AIR 1920 Pat 441, 58 IC 303; Banwari Barhi v. Ram Ratan Pandey, AIR 1929 All 387 (lease by father, recovery possible by separate suit). 39 Bijendra Prasad v. Duleshwari Devi, AIR 1998 Pat 122.
Breach of Warranty This section applies only to cases where an agreement is discovered to be void, or when a contract becomes void. It does not, therefore, apply to cases where there is a stipulation that by reason of a breach of warranty by one of the parties to the contract, the other party shall be discharged from the performance of his part of the contract.40 An insurance company is not, therefore, bound under the provisions of this section to refund to the heirs of the assured the premiums paid on the policy of life assurance where the assured had committed a breach of the warranty by making an untrue statement as to his age,41 or where the assured had made a false statement about his health by stating that he had not suffered from, nor been treated by a doctor for a serious illness.42 But where a policy of insurance is avoided on the ground that the risk insured against did not exist, and the fact was not known to the parties, the premium paid may be recovered.43 Material Alteration Where money was advanced on a promissory note and not independently, and it was found that such promissory note has become void under s. 87 of the Negotiable Instruments Act, 1881 by reason of material alteration made without consent of the defendant, the plaintiff could not invoke s. 65 of the Contract Act or the original contract.44 Sale in Court Auctions If the property in which the judgment-debtor has no interest is sold, the auction purchaser can sue for return of the purchase price if he can show that it is unconscionable that the decree-holder should retain the money.45 But if more than one property is sold and the judgment-debtor has interest in one or some of them, there cannot be proportionate refund unless the consideration is severable.46 In execution of his decree the decree-holder purchased property purporting to belong to the judgment-debtor. But before the suit, the property had been transferred to the judgment-debtor's wife, and the judgment-debtor was found to have no saleable interest in the property. The decree-holder auction purchaser filed a suit against the judgment-debtor to refund the auction price on the basis of total failure of consideration in the matter of the court sale. The suit was held not maintainable.47Similarly an auction purchaser buying property at a court auction sale cannot sue for recovery of his purchase price from the decree-holder on discovering that the judgment-debtor had no saleable interest in the property. Neither the principles underlying s. 65 nor the principles of money had and received under s. 72 of the Contract Act apply48 to such a suit. 40 Mithoolal Naik v. Life Insurance Corpn. of India, AIR 1962 SC 814 at 821; EM Muthappa Chettiar v. Venus Assurance Co. Ltd., AIR 1944 Mad 281. 41 Oriental Government Security Life Assurance Co. Ltd. v. Narasimha Chari, (1901) 25 Mad 183 at 214. (1901-02) ILR 24-25 Mad 615.
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42 Mithoolal Naik v. Life Insurance Corpn. of India, AIR 1962 SC 814; VK Srinivass Setty v. Premier Life and General Insurance Co. Ltd., AIR 1958 Mys 53; Life Insurance Corpn. of India v. Canara Bank Ltd., AIR 1974 Mys 51 at 59. 43 Chitty on Contracts, 28th edn., p. 1499, para 30-067. 44 Suresh Chandra v. Satish Chandra, AIR 1983 All 81 at 83; Jayantilal Goel v. Jubeda Khannum, AIR 1986 Pat 120; V. Kameswararao v. M Hemalathammarao, AIR 1959 AP 596 (sale deed); but see Kandregula Anantha Rao Pantulu v. Kandikonda Surayya, (1920) 43 Mad 703, AIR 1920 Mad 64, 55 IC 697; Hemchand v. Govinda, AIR 1925 Nag 243, 86 IC 185. 45 State v. Padmanabhan Pillai Kunjan Pillai, AIR 1956 Tr & Coch 216; Raja Risheecase Law v. Manik Molla, ILR 53 Cal 758, AIR 1926 Cal 971 (O 21, r 93 of the Civil Procedure Code );Thakar Lal v. Nathulal, AIR 1964 Raj 140; Varkey Mathai v. Commen Oommen, AIR 1963 Ker 148; Bappu Rawther Abdul Kassim Rawther v. State of Kerala, AIR 1964 Ker 109 (sale under the Revenue Recovery Act). 46 Bappu Rawther Abdul Kassim Rawther v. State of Kerala, supra; Firm Narasingi Vannechand v. Suryadevara Narasayya, ILR (1945) Mad 789, AIR 1945 Mad 363; Nagalinga Chettiar v. Guruswami Ayyar, AIR 1930 Mad 856, AIR 1964 Ker 109. 47 Annamma v. Ouseph Tressiamma, AIR 1975 Ker 185 (unjust enrichment); Yadavalli Suryakanthamma v. Maddipatla Dorayya, AIR 1965 AP 239(FB) . 48 Vishwanath Maharudra Matkari v. Jan Mohammed, AIR 1982 Bom 30, following Santimmappa Venkappa Konnur v. Balbhim Co-op Credit Society, AIR 1950 Bom 313; Yadavalli Suryakanthamma v. Maddipatla Dorayya, AIR 1965 AP 239(FB) ; Annamma v. Ouseph Tressiamma, AIR 1975 Ker 185.
Sections 65 and 70 Section 65 proceeds on the basis of there having been a contract. Section 70, on the other hand, does not require a contract to exist for its application.49 49 Pollonjee Eduljee & Sons v. Lonavala City Municipality, AIR 1937 Bom 417.
Failure of Consideration Illustration (d) appears to allow what English lawyers call a claim for money paid on a consideration, which fails. This is in India, a ground of claim which may be used in cases to which s. 65 does not apply, in which case it must be framed as a suit for money had and received and not merely as a suit for refund of money, to give the defendant an opportunity to establish that some consideration has in fact been received by the plaintiff. In Santimmappa Venkappa Konnur v. Balbhim Cooperative Credit Society, 50 the society obtained a decree against B, and in execution, the property was sold to S . It then transpired that the property belonged not to E, but to his adopted son. S sued the society for a refund of the purchase-money. It was held that s. 65 did not apply, as the transfer to S was not void. Neither could S rely on a plea of total failure of consideration since he had not framed his action as one for money had and received. 50 Santimmappa Venkappa Konnur v. Balbhim Co-op Credit Society, AIR 1950 Bom 313.
Pleadings, Evidence and Procedure A claim under this section involves a mixed question of law and fact; the claimant must specifically plead, and prove that there was an agreement which was discovered to be void, and that advantages were received by a party which it must restore or compensate.51 The relief under this section must be claimed, as a substantive relief or in the alternative, and court-fee paid.52 The plaintiff seeking this remedy on the ground of discovery of the void nature of the transaction after the making of the contract, must specifically
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allege so in the pleadings.53 Where the defendant sets up a plea that the contract is void, the plaintiff must be allowed to amend the suit to include the relief under s. 65.54 A party claiming the restoration, after a contract has become void, of any advantage received, must prove the value of that advantage.55 Even though the plaintiff comes to the court seeking relief on the basis of the void agreement and treating the agreement as a valid one, relief can be given to him under this section if it is shown that the agreement was discovered to be void during the proceedings; despite the presumption that the parties must know the law, such plaintiff may rebut the presumption by establishing circumstances to prove that by lack of knowledge, appreciation or misapprehension as to his rights, he did not know, in fact, that the agreement was void.56 51 New Churulia Coal Co. Ltd. v. Union of India, AIR 1956 Cal 138; Ramkripal Sheoprasad v. Municipal Committee Bilaspur, AIR 1963 MP 240; but see Municipal Committee Kishangarh v. Maharaja Kishangarh Mills Ltd., AIR 1961 Raj 6 (need not refuse on such technicality if facts are clear). 52 Kalka Singh v. Badri Singh, AIR 1947 Oudh 33. 53 New Churulia Coal Co. Ltd. v. Union of India, AIR 1956 Cal 138. 54 Kovvuri Subba Rao v. Venkatapuram Panchayat Board, AIR 1942 Mad 111; R Krishnaswami Konar v. Executive Officer, (1965) 2 Mad 325; but see New Churulia Coal Co. Ltd. Union of India,AIR 1959 Cal 585 (court divided). 55 Firm Govindram Seksaria v. Edward Radbone, (1947) 74 IA 295, AIR 1948 PC 56, ILR (1947) Bom 860, 50 Bom LR 561. 56 Uttamchand v. Mohandas, AIR 1964 Raj 50; Harnath Kuar v. Indar Bahadur Singh, ILR 45 All 179, AIR 1922 PC 403, (1923) 50 IA 69, 71 IC 629; Babu Nisar Ahmad Khan v. Babu Raja Mohan Manucha, AIR 1940 PC 204, (1941) All LJ 316; Babu Raja Mohan Manucha v. Babu Manzoor Ahmad Khan, (1943) 70 IA 1, AIR 1943 PC 29, ILR 18 Luck 130, (1943) 1 Mad LJ 508, 206 IC 457.
Limitation In two cases57 the Privy Council held that in the absence of special circumstances, the time at which the agreement is discovered to be void within s. 65 is the date of the agreement. The reason is that the parties must be deemed to have had information of the provisions of the statute and must be assumed that they knew that the agreement was void when they entered into it.58 But in Mt Basso Kuar v. Lala Dhum Singh, 59it was held that where an agreement is discovered to be void, the period of limitation for a suit for restoration of 'advantage' under s. 65 runs from the date of such discovery. The respondent in that case in debt to the appellant, agreed to convey certain property to him, setting off the debt against part of the price. No money was paid. Disputes arose about the terms of the agreement. The respondent unsuccessfully sued to enforce it. Being afterwards sued for his debt, he pleaded limitation. The Privy Council held that the agreement became wholly ineffectual and was discovered to be so when the respondent failed in the High Court. The advantage which was received by the respondent under the agreement was the retention of the debt. Therefore, by s. 65 of the Contract Act, he became bound to pay his debt on the date the decree was given in his favour and against the appellant. Where the contract is alleged to have become void, limitation starts from the date it becomes void, i.e., the date the impossibility has arisen.60 But no question of limitation arises when the restitution is granted by the same decree which has declared the contract void.61 57 Hansraj Gupta v. Dehra Dun Mussoorie Electric Tramway Co. Ltd., (1933) 60 IA 13, ILR 54 All 1067, AIR 1933 PC 63; Annada Mohan Roy v. Gour Mohan Mullick, (1923) 50 Cal 929, AIR 1923 PC 189, (1923) 50 IA 239, 74 IC 499. 58 Sana Ullah v. Jai Narain Singh, ILR (1942) All 817, AIR 1942 All 409. 59 Bassu Kuar v. Dhum Singh, (1888) 11 All 47, 50 IA 211 at 219 (PC); Harnath Kuar v. Indar Bahadur Singh, AIR 1922 PC
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403, (1923) 50 IA 69 at 76, 71 IC 629 (where limitation began when the right or true nature of the rights was discovered, when demand for possession was made); Aumanchi Auryaprabhakara Rau v. Gummudu Sanyasi, AIR 1925 Mad 885. 60 Bavachi v. VK Kunhi Kannan, AIR 1926 Jour 166(3) (Mad), (1926) 96 IC 909; Anant Bharthi v. Sarup Singh, AIR 1928 All 360. 61 Udit Narain Misr v. Muhammad Minnat-Ullah, (1903) ILR 25 All 618.
Quantum Meruit A quantum meruit is only available if the original contract has been discharged. If the contract is still 'open' the remedy of quantum meruit cannot be used, but only damages can be claimed.62 It is unavailable to the plaintiff if there is a contract, though unenforceable under the statute of frauds.63 But a claim must be brought by a party not in default.64 Types of Claims under the Doctrine The terms 'quantum meruit'65 or 'quantum valebat'66 are used in three distinct senses at common law, namely as denoting:67
(i) (ii) (iii)
a claim by one party to a contract, for example on breach of the contract by the other party, or under an enforceable, void or illegal agreement, for reasonable remuneration for what he has done; a mode of redress on a new contract which has replaced a previous one,68 also to enable recovery of a reasonable sum as additional remuneration for extra work under an existing contract;69 a reasonable price or remuneration which will be implied in a contract where no price or remuneration has been fixed for goods sold or work done.70
The last two are based in contract, while the first is not. Claims for a quantum meruit in respect of work voluntarily done under a contract terminated for breach,71 or under an unenforceable, void or illegal contract are quasi-contractual. A Quasi-contractual Claim A claim under quantum meruit or quantum valebat arises where work is done or goods are supplied, not in pursuance of an express or tacit contract, but under circumstances which would import in law an obligation today for services or goods.72Quantum meruit is reasonable compensation awarded on implication of a contract to remunerate, and an express stipulation under a contract cannot be displaced by assuming that stipulation is not reasonable. Compensation quantum meruit is awarded for work done or service rendered when price thereof is not fixed by contract. For work done or services rendered pursuant to the terms of a contract, compensation quantum meruit cannot be awarded when the contract provides for the consideration payable in that behalf.73 In the Indian law of contract there is nothing which justifies the view that a change in circumstances outside the contemplation of parties at the time of making the contract, while holding the parties bound by the terms of the contract, will justify the parties in departing from the express terms thereof, Nor can a party claim rates different from stipulated rates on the basis of quantum meruit that is just and reasonable. The Contract Act does not allow a party to ignore the express terms of a contract and claim on the vague plea of equity.74 The Patna High Court75 has held that the principle of quantum meruit is based on a quasi-contract which arises in a sense of implied contract and not express contract. When a party has wholly or partially
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performed his obligation, he may sue upon quantum meruit neglecting the contract; but without neglecting the contract or repudiating it, the principle of quantum meruit cannot be invoked. But where the rate for the finished goods is expressly included in the contract and the parties expressed their extra claim on the contract, the principle of quantum meruit does not apply. In Alopi Parshad & Sons Ltd. v. Union of India, 76 the Supreme Court observed:
Compensation quantum meruit is awarded for work done or services rendered when the price thereof is not fixed by a contract. For work done or services rendered pursuant to the terms of a contract, compensation quantum meruit cannot be awarded where the contract provides for consideration payable in that behalf.
The principle of quantum meruit is often applied when for some technical reason, a contract is held to be invalid. Under such circumstances an implied contract is assumed, by which the person for whom the work is to be done contracts to pay the person who does the work reasonably for the work done.77 Quantum meruit is a remedy alternative to, rather than a form of, damages. It is a right de hors a contract, a quasi contractual right and not a contractual one. It is an incident of, and not a remedy for, the breach of a contract. Quantum meruit is a quasi-contract and arises in a sense on an implied contract, although in some cases it may arise out of contract. It is not a remedy for a breach nor does it arise on frustration, but it is an incident, which does arise as a consequence of the contract or 'arising out of' it.78 For example, the fact that a person does the work under an agreement which was in fact, void, does not disentitle him from recovering on a quantum meruit. If a party to contract renders service to the other not intending to do so gratuitously and the other party has obtained benefit thereof, he is entitled to compensation for the value of service rendered by him. If the former fails to prove an oral agreement, compensation quantum meruit can be awarded.79 In the case of repudiation of the contract, where the injured party sues upon the contract, he refers to its terms at least in order to ascertain the damages. In the case of quantum meruit, he is not proceeding under the contract, but upon quasi-contract. The obligation he incurs and the sum he recovers may differ from those provided in the contract and are not dependent upon its terms.80 Quantum Meruit Claims and Section 65 The relief under quantum meruit is granted under this section on the principles of restitution in contracts found invalid. The principle of restitution embodied in this section in case of contract found to be invalid is that of giving relief on quantum meruit.81 Where the contract is invalid under a statute, the refund of benefit can be claimed either under s. 65 or on the principle of quantum meruit.82 Quantum Meruit Claims in Agreements Unenforceable for Want of Formality or Authority Where a contract is unenforceable, as a general rule, a defendant is not precluded by the fact of performance by the plaintiff from pleading the unenforceability. If, however, the contract has been performed by the plaintiff, and anything has been done by the defendant upon the doing of which the law would imply a promise to pay, the plaintiff can recover on the implied promise notwithstanding the unenforceability of the contract.83 In Mohamed Ebrahim Molla v. Commissioners for the Port of Chittagong, 84 the Commissioners for the Port of Chittagong sued the defendant for the recovery of money due as hire of a tug lent to the defendant under a contract with him. The contract was not under seal as required by s. 29 of the Chittagong Port Act, 1914. It was held that the Act was imperative in its terms and that the plaintiffs could not sue on the contract. It was held at the same time that the plaintiffs were entitled to be paid upon a quantum meruit.85 Two of the English cases cited86
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in this case lay down that where the provision of a statute as to the form of a contract is not imperative--but there only--either party may sue the other on an implied contract to pay for work done. It appears from the report that the counsel for the appellant himself had conceded that the plaintiffs were entitled to some compensation for the use of the tug. The earlier editors have opined that both counsel and the court were in error in thinking that the plaintiffs were entitled to recover quantum meruit; and that no question of payment upon a quantum meruitcould arise where an Act is imperative. This principle of quantum meruit applied where a contract was invalid not being executed according to the statutory rules under which the local authority was constituted.87 In Craven-Ellis v. Canons Ltd, 88 the plaintiff, without the requisite qualifications, purported to act under an agreement with the company as its managing director on terms therein defined; and then sued for remuneration. The agreement was held not binding on either party; but it was held that the plaintiff was entitled to recover on a quantum meruit since the company, through qualified directors or through the shareholders, had accepted the benefit of the plaintiff's services. Greer LJ. said: 'the obligation to pay reasonable remuneration for the work done when there is no binding contract between the parties is imposed by rule of law and not by an inference of fact from the acceptance of services of goods', thus showing that the obligation is merely quasi-contractual. In a later case, Rover International Ltd. v. Cannon Film Sales (No 3) Ltd, 89 the Court of Appeal appears to support the view taken in Craven-Ellis v. Canons Ltd, 90(above) in so far as it did not consider whether anything in the nature of an express or implied request was necessary for a claim for quantum meruit by a company for services rendered after its incorporation but under a pre-incorporation contract. Kerr LJ. said that the task of the court was to carry out a process of equitable restitution, and held that the quantum meruit was not to be limited by reference to the plaintiff's entitlement under the purported contract, primarily because it was irrelevant to a remedy, which arose only due to invalidity of the contract, but also by analogy with the position of a valid contract which had been discharged without breach.91 Where the appointment of an advocate as Assistant District Government Counsel made by the District Magistrate was cancelled by the Governor after a period of two and a half years on the ground of lack of power, in the District Magistrate, it was held that on the principle of 'quantum meruit embodied in s. 65, the Government was bound to compensate to the petitioner for her services rendered in the capacity of Assistant District Government Counsel.1 Quantum Meruit Claims for Void Agreements Where a contract is void as being made without authority, a plaintiff who has rendered services under it may be entitled to recover on a quantum meruit.2 For example, where a contract purporting to appoint a person as managing director of a company was found to be a nullity, that person was allowed to recover on a quantum meruit for services rendered and accepted after the date of his purported appointment.3 Quantum Meruit Claims for Illegal Agreements Although when an innocent party learns that the object of the contract is illegal, he must refuse to continue the performance of the contract; he may sue on a quantum meruit for the lawful work already done.4 Where a contract is apparently legal, but the plaintiff subsequently learns that the defendant intends to perform it in an illegal manner, the plaintiff cannot thereafter enforce the contract, nor recover in respect of the period after his discovery of the defendant's intention, but he may bring a quasi-contractual claim to recover on a quantum meruit in respect of lawful work already done. Quantum Meruit and Damages A quantum meruit is only available if the original contract has been discharged. If the contract is still 'open' the remedy of quantum meruit cannot be used but only damages can be claimed.5 It has been laid down: Damages are compensatory and quantum meruit is restitutionary. The amount which any injured party is entitled to recover may differ according as it is assessed on one the other of these two principles.6
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In State of Madras v. Gannon Dunkerley & Co. Ltd, 7 a case of a building contract, the Supreme Court stated that a claim for quantum meruitis a claim for damages for breach of contract and the value of materials used in a building contract is a factor relevant only as furnishing a basis for assessing the amount of compensation. The claim is not for price of goods sold and delivered but for damages. What it stated was also the position under s. 65 of the Indian Contract Act . This, it is submitted goes counter to the accepted view of this doctrine.8 Later in Puran Lal Sah v. State of Uttar Pradesh, 9 the Supreme Court said that where work is done under a contract pursuant to the terms thereof, no amount can be claimed by way of quantum meruit. The principle was explained thus:
The principle of quantum meruit is rooted in English Law under which there were certain procedural advantages in framing the action for compensation for work done. In order to avail of the remedy under quantum meruit the original contract must have been discharged by the defendant in such a way as to entitle the plaintiff to regard himself as discharged from any further performance and he may have elected to do so. The remedy, it may be noticed, is not available to the party who partially performed part of his obligation. This remedy by way of quantum meruit is restitutionary, that is, it is recompense for the value of the work done by the plaintiff in order to restore him to the position which he would have been in if the contract had never been entered into. In this regard it is different to a claim for damages which is compensatory remedy aimed at placing the injured party as near as may be the position he would have been in had the other party performed the contract.
Amount Recoverable The amount awarded may be calculated on the basis of price agreed,10 or at the prevailing market rate if no price is agreed.11 The amount claimed by the claimant was awarded where there was no other way of ascertaining reasonable remuneration.12 It has been held that only when a contract is frustrated, i.e., a subsequent change in the circumstances resulting in the material change outside the contemplation of the contracting parties, can the express terms of the contract be ignored or the party can claim payment of consideration at rates different from the stipulated one, on the basis of quantum meruit.13 Where a contract for supply of goods is found to be void, and s. 65 applicable, it is the doctrine of quantum valebat which applied and not quantum meruit, and where the act ual goods cannot be returned, restitution must be fixed at the price at which they are sold.14 When assessing a quantum meruit arising out of the invalidity of a supposedly valid contract, there need not be any ceiling on the quantum meruit as in the cases of void agreements; the proper basis for assessment is equitable restitution as between the parties regardless of what their position would have been had the contract been valid.15 It is wrong to place a ceiling on the amount claimed on quantum meruit.16 A partner employed his sons in the business of the partnership and credited certain sums of money to them as compensation for services rendered. At the time of the dissolution he claimed more sums of money for their services. It was held that the sons were eligible for reasonable remuneration on the principle of quantum meruit even though there was no agreement or order of the partnership available.17 Pleadings Ordinarily, the relief of quantum meruit will not be granted without pleading, but the court may allow relief if justified by sufficient reasons, viz., relief would be granted to the plaintiff where the defendant pleads that the contract was void.18 62 Planche v. Colburn, (1831) 5 C & P 58, (1831) 8 Bing 14 at 16, [1824-34] All ER Rep 94 (stoppage of a publication after the plaintiff had completed a part of the work undertaken by him); De Bernardy v. Harding, (1853) 8 Ex 822 (an agent appointed to sell tickets for seats to see a funeral, and the agency was wrongfully terminated); Craven-Ellis v. Canons Ltd., [1936] 2 KB 403, [1936] 2 All ER 1066 (appointment of P as an estate agent was defective, as both, P and the appointing directors were not qualified, though P's appointment was otherwise intra vires of the company); D Vanjeeswara Ayyar v. District Board South Arcot, AIR 1941 Mad 887; Bhikraj Jaipuria v. State of Bihar, AIR 1964 Pat 555 at 559.
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63 James v. Thomas H Kent & Co., [1951] 1 KB 551, [1950] 2 All ER 1099. 64 Puran Lal Sah v. State of Uttar Pradesh, [1971] 3 SCR 469, AIR 1971 SC 712, at 715 (1971) 1 SCC 424; Joseph Constantine Steamship Line Ltd. v. Imperial Smelting Corpn. Ltd., [1942] AC 154, [1941] 2 All ER 165(HL) . 65 As much as he deserved. 66 As much as it was worth. 67 Halsbury's Laws of England, Vol. 40(1), 4th edn., Reissue, 1 October 2007, RESTITUTION, para 8. 68 See s. 62 above. 69 See s. 70 below. 70 See s. 9 above, under the heading: 'Payment of Price'; Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793, AIR 1960 SC 588. 71 See s. 39 above; Planche v. Colburn, (1831) 5 C & p. 58, (1831) 8 Bing 14, [1824-34] All ER Rep 94 (plaintiff author entitled to reasonable remuneration for work done without tendering the completed work, when the defendant abandoned the whole project); Prickett v. Badger, (1856) 1 CBNS 296 (agent for sale having found a purchaser, was entitled to reasonable remuneration for work done after the owner refused to sell, and had revoked the agent's authority). 72 Village Panchayat ofjangareddigudem v. Kommireddy Narasayya, AIR 1965 AP 191. 73 Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793 per Shah J, at 809, AIR 1960 SC 588 at 593; BN Elias & Co. Ltd. v. State of West Bengal, AIR 1959 Cal 247; Puran Lal Sah v. State of Uttar Pradesh, [1971] 3 SCR 469, AIR 1971 SC 712 at 716, (1971) 1 SCC 424. 74 State of Rajasthan v. Motiram, AIR 1973 Raj 223 at 231; explaining Sir Lindsay Parkinson & Co. Ltd. v. Commissioners of Works and Public Buildings, [1950] 1 All ER 208; relying on Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793, AIR 1960 SC 588; Madura Municipality v. K Alagirisami Naidu, (1939) Mad 928, AIR 1939 Mad 957. 75 Patel Engg Co. Ltd. v. Indian Oil Corpn. Ltd., AIR 1975 Pat 212 at 219; applying Heyman v. Darwins Ltd., [1942] AC 356 at 399, [1942] 1 All ER 337 at 360; relying on Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793, AIR 1960 SC 588. 76 [1960] 2 SCR 793; AIR 1960 SC 588 at 595. 77 D Vanjeeswara Ayyar v. District Board South Arcot, AIR 1941 Mad 887. 78 Government of Gibraltar v. Kenney, [1956] 3 All ER 22 at 26, [1956] 3 WLR 466 (case of arbitration where the claim by the plaintiff, a surveyor, was for a quantum meruit, the agreement having ceased to be applicable to the plaintiff's services); cf Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793 at 809, AIR 1960 SC 588 at 593. 79 VR Subramanyam v. B Thayappa, [1961] 3 SCR 663, AIR 1966 SC 1034, (1961) 1 Mad LJ 30 (s. 70); R Gangapathi Pillai v. PA Irudayasamy Nadar, AIR 1962 Mad 345 (ss. 65 and 70); Pollonjee Eduljee & Sons v. Lonavala City Municipality, AIR 1937 Bom 417 (s.70); Madura Municipality v. K Alagirisami Naidu, (1939) Mad 928, AIR 1939 Mad 957. 80 Heyman v. Darwins, [1942] AC 356 at 398, [1942] 1 All ER 337 at 360. 81 Municipal Board Lucknow v. SC Deb, AIR 1932 Oudh 193(FB) ; but see Municipal Committee Gujranwala v. Fazal Din, AIR 1929 Lah 742; Srivilliputtur Municipal Council v. KGA Arunachala Nadar, AIR 1933 Mad 332 (quantum valebat); Bhumbho Metharam v. District Local Board, AIR 1940 Sind 199. 82 Palaniswami Goundar v. English & Scottish Co-op Wholesale Societies Ltd., AIR 1933 Mad 145; Re H Young & Co. v. Mayor and Corpn. of Lamington Spa, (1883) 8 App Cas 517. 83 Sanderson v. Graves, (1875) LR 10 Exch 234 per Bramwell B at 238; Knowles v. Michel, (1811) 13 East 249; Pinchon v. Chilcott, (1827) 3 C&P 236; Re Laycock v. Pickles, (1863) 4 B&S 497 (recovery on an account stated). 84 (1926) 54 Cal 189, AIR 1927 Cal. 465, 103 IC 2. 85 See s. 70. 86 Lawford v. Billericay Rural District Council, [1903] I KB 772; Douglas v. Rhyle Urban District Council, [1913] 2 Ch. 407. 87 KCA Arunachala Nadar v. Srivilliputtur Municipal Council, AIR 1934 Mad 480; Mohamed Rowther v. Tinnevelly Municipal Council, AIR 1938 Mad 746; Madura Municipality v. K Alagirisami Naidu, (1939) Mad 928, AIR 1939 Mad 957. 88 [1936] 2 KB 403, [1936] 2 All ER 1066; Corpn. of Madras v. M Kothandapani Naidu, AIR 1955 Mad 82(FB) ; Municipal Council Tiruvarur v. PR Kannuswami Pillai, AIR 1930 Mad 600 at 605, ILR 53 Mad 352 (Obiter).
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89 (1988) 2 FTLR 536, [1989] 3 All ER 423. 90 [1936] 2 KB 403, [1936] 2 All ER 1066(CA) . 91 Chitty on Contracts, 28th edn., p. 1562, para 30-182. 1 Indu Mehta v. State of Uttar Pradesh, AIR 1987 All 309 at 313 (and also under s. 70 of this Act). 2 Craven-Ellis v. Canons Ltd., [1936] 2 KB 403 at 412, [1936] 2 All ER 1066 per Greer LJ, at 1073 (CA). 3 [1936] 2 All ER 1066; distinguished Re Richmond Gate Property Co. Ltd.,[1964] 3 All ER 936, [1965] 1 WLR 335 (on facts, claim excluded by contract). 4 Clay v. Yates, (1856) 1 H & N 73, 108 RR 461. 5 Planche v. Colburn, (1831) 5 C & p. 58, (1831) 8 Bing 14 at 16, [1824-34] All ER Rep 94 (stoppage of a publication after the plaintiff had completed a part of the work undertaken by him); De Bemardy v. Harding, (1853) 8 Ex 822 (an agent appointed to sell tickets for seats to see a funeral, and the agency was wrongfully terminated); Craven-Ellis v. Canons Ltd., [1936] 2 KB 403, [1936] 2 All ER 1066, (appointment of P as estate agent was defective, as both P and the appointing directors were not qualified, though P's appointment was otherwise intra vires of the company); State of Madras v. Madras Electric Tramways, (1904) Ltd.,AIR 1957 Mad 169; D Vanjeeswara Ayyar v. District Board South Arcot, AIR 1941 Mad 887; Bhikraj Jaipuria v. State of Bihar, AIR 1964 Pat 555 at 559. 6 Heyman v. Darwins Ltd., [1942] AC 356 at 398, [1942] 1 All ER 337; Anson's Law of Contract, 29th edn., 2010, p. 594-5; Puran Lal Sah v. State of Uttar Pradesh, [1971] 3 SCR 469, AIR 1971 SC 712, (1971) 1 SCC 424; Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793 at 809, AIR 1960 SC 588. 7 State of Madras v. Gannon Dunkerley & Co. Ltd., [1959] SCR 379 at 423, AIR 1958 SC 560 at 577 (case relating to sales tax). 8 Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793 at 809, AIR 1960 SC 588 at 593; Puran Lal Sah v. State of Uttar Pradesh, [1971] 3 SCR 469, AIR 1971 SC 712 at 715-16, (1971) 1 SCC 424; Heyman v. Darwins Ltd., [1942] AC 356 at 398, [1942] 1 All ER 337. 9 [1971] 3 SCR 469, AIR 1971 SC 712 per Jaganmohan Reddy J., at 715, (1971) 1 SCC 424; referring to Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793 at 809, AIR 1960 SC 588 at 595. 10 Indu Mehta v. State of Uttar Pradesh, AIR 1987 All 309; Ramkrishna Shankarrao v. Rangoobai, AIR 1959 Bom 519. 11 VR Subramanyam v. B Thayappa, [1961] 3 SCR 663, AIR 1966 SC 1034, (1961) 1 Mad LJ 30 (for additional work). 12 Shelat Brothers v. Nanalal Harilal Shelat, AIR 1973 Mad 78. 13 State of Rajasthan v. Motiram, AIR 1973 Raj 223 at 231; explaining Sir Lindsay Parkinson & Co. Ltd. v. Commissioners of Works and Public Buildings, [1950] 1 All ER 208; Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793, AIR 1960 SC 588. 14 Srivillipullur Municipal Council v. KGA Arunachala Nadar, AIR 1933 Mad 332. 15 Rover International Ltd. v. Cannon Film Sales (No 3) Ltd., (1988) 2 FTLR 536, [1989] 3 All ER 423 at 435-436 (CA); Greenmast Shipping Co. SA v. Jean Lion et Cie SA, (The Saronikos), [1986] 2 Lloyd's Rep 277; Lodder v. Slowey, [1904] AC 442(PC) (from New Zealand). 16 Rover International Ltd. v. Cannon Film Sales (No 3) Ltd., (1988) 2 FTLR 536, [1989] 3 All ER 423. 17 Shelat Brothers v. Nanalal Harilal Shelat, AIR 1973 Mad 78. 18 Babu Raja Mohan Manucha v. Babu Manzoor Ahmad Khan, (1943) 70 IA 1, AIR 1943 PC 29 at 34, ILR 18 Luck 130, (1943) 1 Mad LJ 508, 206 IC 457; followed in Village Panchayat of Jangareddigudem v. Kommireddy Narasayya, AIR 1965 AP 191.
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The Indian Contract Act, 1872 (Act 9 of 1872)
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CHAPTER IV Of the Performance of Contracts Contracts which need not be performed S. 66. Mode of communicating or revoking rescission of voidable contract.-The rescission of a voidable contract may be communicated or revoked in the same manner, and subject to the same rules, as apply to the communication or revocation of a proposal.19
Introduction The section requires that rescission or its revocation must be communicated in the same manner as a proposal. 19 See sections 3 and 5, supra.
'Communicated' The rescission of a voidable contract must be communicated 'by any act or omission....by which he intends to communicate it' or 'which has the effect of communicating it', as mentioned by s. 3 above. Although a rescission must be communicated to the other party, the question of communication may arise in peculiar circumstances, where the other party cannot be traced. In Car and Universal Finance Co. Ltd. v. Caldwell, 20 the owner of a car sold it to a rogue against a cheque. The purchaser absconded. The cheque was dishonoured. The owner informed the police and the Automobile Association. After thus avoiding the sale, the subsequent purchaser from the rogue had acquired no title to the car. Thus an innocent party to a contract of sale of a car was held to have effectively exercised his right of rescission otherwise than by communication or repossession, although the other party to the contract by deliberately absconding, put it out of the power of the innocent party to communicate his intention to rescind. The party rescinding or terminating the contract must prove that notice to that effect has been sent, and received by the other party.21 20 [1964] 1 All ER 290, p. 296, [1964] 2 WLR 600, 613. 21 Madhumita Sarkar v. Oriental Insurance Company Limited, AIR 2007 Cal 234.
Revocation of Rescission A rescission is essentially a unilateral act, and requires to be unequivocal in order to be effective. It ought not to depend for its effect upon its acceptance by the other party. But it may be revoked and a contract can be saved from rescission if the revocation of rescission is communicated to the other party before decision of rescission reaches him and he changes his position.
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The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER IV Of the Performance of Contracts Contracts which need not be performed S. 67 Effect of neglect of promisee to afford promisor reasonable facilities for performance.-If any promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his promise, the promisor is excused by such neglect or refusal as to any non-performance caused thereby. Illustration A contracts with B to repair B's house. B neglects or refuses to point out to A the places in which his house requires repair. A is excused for the non-performance of the contract if it is caused by such neglect or refusal.
Introduction If the promisee neglects or refuses to afford the promisor reasonable facilities for the performance of the promise, the promisor is absolved from the liability of non-performance.
Refusal or Neglect by Promisee The illustration is apparently founded on Makin v. Watkinson, 22 decided by the Court of Exchequer in 1870. There the question was, in effect, whether a covenant by the lessor of a building with the lessee to repair the main walls, main timbers, and roofs was to be taken as absolute, or as implying that the lessor was entitled to have notice from the lessee of any want of repair. The majority of the court held that it must be read as a covenant to repair on notice, as the lessor had no sufficient and reasonable means of ascertaining for himself what repairs were necessary.23 Notice requiring performance is necessary even in the absence of a clause in the contract requiring such notice where the event is a matter which lies within the peculiar knowledge of the promisee. The general rule is that a party is not entitled to notice unless he has stipulated for it; but there are certain cases where, from the very nature of the transaction, the law requires notice to be given, though not expressly stipulated for.24 Perhaps a case more exactly in point is that of an apprentice, whom a master workman has undertaken to teach his trade, refusing to let the master teach him. It is evident that the master cannot be liable for not teaching the apprentice if the apprentice will not be taught.25 Conversely, if a master undertakes to teach several trades, and gives up one of them, the apprentice need not stay with him. If the master is not ready to teach in the very trade which he has stipulated to teach, the apprentice is not bound to serve.26 Where
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the buyer of goods agreed to secure the priority certificate for transport of goods to Mumbai by the railway, but failed to do so, the defendant was excused from non-delivery at Mumbai.27 Where goods are to be delivered on board a ship, the buyer must name the ship and notify its readiness to receive the goods, and on his failure, the seller is discharged.28 A Government as party to a works contract was held liable to maintain law and order on the work site, and to indicate a dumping place to deposit the rubble, and therefore liable for escalated costs arising from the consequent delay.29 22 LR 6 Ex 25, [1861-73] All ER Rep 281. 23 See s. 108(m) of the Transfer of Property Act, 1882; it is the liability of the tenant to keep the property in a good condition. The lessor is under no liability to repair, in the absence of a contract making him liable. Section 108(f) states that where the lessor is so liable, the lessee would have to give a notice to the lessor to carry out the repairs, and, on the lessor's failing to do so, carry out the repairs himself, and deduct the expenses of repairs from rent. 24 Vyse v. Wakefield, (1840) 6 M&W 442 at 453; affirmed 7 M&W 126, [1835-42] All ER Rep 294; Davies v. McLean, (1873) 21 WR 264. 25 Raymond v. Minton, (1866) LR 1 Ex 244; Waterman v. Fryer, [1922] 1 KB 499, [1921] All ER Rep 582. 26 Ellen v. Topp, (1851) 6 Ex 424, 86 RR 353. 27 Basanta Mal Devi Dayal v. Uma Datt Hans Raj, (1928) 10 Lah LJ 211, AIR 1928 Notes 5d, 110 IC 835. 28 Stanton v. Austin, (1872) LR 7 CP 651. 29 K N Sathyapalan v. State of Kerala, (2007) 13 SCC 43.
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The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER V Of Certain Relations Resembling those Created by Contract
Any civilised system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, i.e., to prevent a man from retaining the money of, or some benefit derived from, another which it is against conscience that he should keep.1Such remedies are found in this chapter of the Indian Contract Act, 1872 (Contract Act). These are different from remedies in contract or in tort. Under English law, they now fall within a distinct third category of restitution.2 Chapter V of the Contract Act does not deal with the rights or liabilities accruing from the contract, but those accruing from relations resembling those created by the contract.3 The chapter avoids the term 'quasi-contract'. While the provisions of the sections in the chapter are framed to state a law wider than the prevalent English law,4 and have been framed in the form to avoid the niceties of the English law on the subject,5 it is the language of the Act which would determine the scope of the provisions, uninfluenced by the manner in which the analogous provisions have been construed in English law.6 However, at the same time the benefit of ss. 68 to 72 cannot be availed of unless the conditions of the sections are satisfied.7 1 Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd., (1943) AC 32, [1942] 2 All ER 122 at 135(HL) per Lord Wright.
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2 Ibid. 3 State of West Bengal v. B.K. Mondal & Sons, (1962) 1 Supp SCR 876 at 892, AIR 1962 SC 779 at 786; Great Eastern Shipping Co. Ltd. v. Union of India, AIR 1971 Cal 150 at 151. 4 See s. 69, s. 70 under the head 'Principle', and s. 72. 5 State of West Bengal v. B.K. Mondal & Sons, (1962) 1 Supp SCR 876, AIR 1962 SC 779. 6 Ibid; State of Punjab v. Hindustan Development Board Ltd. (1960) 2 Punj 676, AIR 1960 Punj 585 at 588 (s. 70). 7 See for discussion, s. 70 below under the head 'Conditions for Application of the Section'; s. 72 below under the head 'Statutory Right Under this Section'.
Quasi-contracts A quasi-contract belongs to an entirely different legal category, having nothing to do with genuine contracts, express or implied. These are a heterogeneous collection of cases having little in common than the fact that one person is entitled to recover money or property from the other in order that a just result should be reached. Such a right does not depend upon agreement or promise. A contract implied in law or a quasi-contract is not a real contract or as it is called, a consensual contract. A quasi-contractual cause of act ion involves an alleged promise to pay, which is purely fictitious. This promise is imposed by implication of law, apart from and without regard to the probable intention of the parties, and sometimes even against the clear expression of dissent. Strictly these 'constructive contracts' are not true contracts at all, since the essential element of consent is absent. The expression quasi-contract is truly a misnomer; for it has little or no affinity with contract. The Roman lawyers explained these as misfits. Justinian refers to 'those obligations which do not originate, properly speaking, in contract but, which as they do not arise from a delict, seem to be quasi-contractual'. Contract Act has avoided the expression, and simply calls these relations 'certain relations resembling those created by contract.' Such 'constructive contracts' do not have any real similarity to terms implied into contract by law;8 the latter are only implied into an act ual contract brought into existence by the ordinary principles for formation of agreements. In such cases the liability is said to exist independent of the agreement, and rests upon the equitable doctrine of unjust enrichment. Quasi-contracts give rise to a situation where an obligation or duty is cast upon the parties by law, but not by the terms of the contract to which they have given assent.9 Quasi-contracts or restitution has been placed as a third category of law not founded upon contract or tort.10 Although the situations giving rise to claims in quasi-contract are diverse:
Their common framework is that they involve a special relationship between two persons where the law imposes a duty on one to pay a sum of money or (exceptionally) to deliver specific property to another. The relationship is based either upon the involuntariness of the payment or transfer, its qualified nature, or the conduct of the transferee. The underlying aim...seems to be an obligation upon the defendant to make restitution of a benefit which he ought not in justice to retain at the expense of the claimant.11
The two main theoretical bases of quasi-contractual liability are: (i) implied contract; and (ii) unjust enrichment. 8 See s. 9 above.
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9 State of Punjab v. Hindustan Development Board Ltd., (1960) 2 Punj 676, AIR 1960 Punj 585. 10 Mulamchand v. State of Madhya Pradesh, (1968) 3 SCR 214, AIR 1968 SC 1218 at 1222 per Shah J. 11 Chitty on Contracts, 28th edn., para 30-002 at 1462.
Theory of Implied Contract These causes of action being based on the common remedy of indebitatus assumpsit, the courts treated the alleged promise to pay as purely fictitious. The promise was imposed by law. As was stated:
...it was necessary to create a fictitious contract: for there was no act ion possible other than debt or assumpsit on the one side and action for damages for tort on the other. The fiction was so obvious that in some cases the judge created a fanciful relation between the plaintiff and the defendant...The law, in order to do justice, imputed to the wrongdoer a promise which alone as forms of an act ion then existed could give the injured person a reasonable remedy. These fantastic resemblances of contracts invented in order to meet requirements of the law as to forms of action which have now disappeared should not in these days be allowed to affect act ual rights.12
The implied contract theory found judicial support,13 but was also criticised,14 until it was finally rejected in Westdeutsche Landesbank Girozentrale v. Islington London Borough Council. 15 12 United Australia Ltd. v. Barclays Bank Ltd., (1941) I AC 1 at 27-29, [1940] 4 All ER 20 at 36-37. 13 Holt v. Markham, [1923] 1 KB 504, [1922] All ER Rep 134, per Scrutton LJ at 513 (CA); Sinclair v. Brougham, [1914] AC 398, [1914-15] All ER Rep 622; Morgan v. Ashcroft, [1938] 1 KB 49, [1937] 3 All ER 92 per Lord Greene MR, 96 (CA); Transvaal & Delagoa Bay Investment Co. Ltd. v. Atkinson, [1944] 1 All ER 579 per Atkinson J, 584; Re Diplock's Estate, Diplock v. Wintle, [1947] Ch 716, [1947] 1 All ER 522 per Wynn-Parry J, 527. 14 Re Rhodes, Rhodes v. Rhodes, [1890] 44 Ch D 94, 105, per Cotton LJ., [1886-90] All ER Rep 871, 872; State of Punjab v. Hindustan Development Board Ltd. (1960) 2 Punj 676, AIR 1960 Punj 585; United Australia Ltd. v. Barclays Bank Ltd. [1941] 1 AC 1, 27-29, per Lord Atkin, [1940] 4 All ER 20 at 35-37. 15 (1996) AC 669, [1996] 2 All ER 961 at 993 per Lord Browne-Wilkinson; Kleinwort Benson Ltd. v. C.C. Glasgow, [1997] 3 WLR 923, [1997] 4 All ER 641.
Theory of Unjust Enrichment The view that quasi-contractual claims are based on unjust enrichment also found sound support.16 It is now also recognised as the basis of restitutionary obligations under the English law. Principle of Unjust Enrichment The principle of unjust enrichment is stated simply:
A person who has been unjustly enriched at the expense of another is required to make restitution to the other.17
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Sections 68 to 72 of the Contract Act embody the principles of unjust enrichment.18 This proceeds on the basis that it would be unjust to allow one person to retain a benefit received at the expense of another person. Nemo debet locupletari ex aliena jactura, i.e., no man should grow rich out of another person's loss. Under English law, unjust enrichment as a foundation of claim in restitution was recognised in Lipkin Gorman v. Karpnale Ltd., 19 and a four-stage test20 adopted for claims in restitution:
(1) (2) (3) (4)
Has [the defendant] benefited or been enriched? Is this enrichment at the expense of the plaintiff? Is the enrichment unjust? Are there any defences, i.e., is there nevertheless reason of policy for denying the remedy?
In Indian law the principle of unjust enrichment finds recognition in the Contract Act .21However, even apart from cases falling within ss. 68-72 of the Contract Act, relief against unjust enrichment has been granted in other forms of act ion also, viz. action for money had and received;22 suits for contribution;23 and also in situations where the contract was invalid for want of proper form or authority;24 these being granted at times by stretching the principles of ss. 68-72. Benefits gained by a person taking advantage of interim orders of a court were liable to be returned under the principle of unjust enrichment.25 The principle of unjust enrichment has been pressed into service to enable the Government to collect entertainment duty collected by multiplexes from cinema-goers despite exemption.26 In Nagpur Golden Transport Co v. Nath Traders, 27 goods were damaged in transit. Consignees refused to take the delivery, and the carrier returned them to the consignor. The consignees sued and recovered the price of goods from the carrier. The consignor had already received the price. The consignor was liable to hand over the goods or pay their value to the carrier. The principle of unjust enrichment has been stated to presuppose three things:
(i) (ii) (iii)
that the defendant has been enriched by the receipt of benefit; he must have been so enriched at the plaintiff's expense; and it would be unjust to allow him to keep the benefit.28
The Law Commission of India considered that the provisions made in ss. 68-72 were inadequate. It recognised that the situations attracting application of the law of restitution would be so numerous that it would be difficult to state the principles exhaustively in a legislative enactment, but recommended that a residuary section be provided for to cover situations not specifically provided for in the chapter.29 16 Brooks Wharf and Bull Wharf Ltd. v. Goodman Brothers, [1937] 1 KB 534, [1936] 3 All ER 696, 707 (CA); Fibrosa S l a Akcyjna v. Fairbairn Lawson Combe Barbour Ltd. [1943] AC 32, 61-64, [1942] 2 All ER 122, 13537 (HL); United Australian Ltd. v. Barcla s Bank Ltd. [1941] 1 AC 1, 27-29, [1940] 4 All ER 20 per Lord Atkin, 35-37 (HL); Nelson v. Larholt, [1948] 1 KB 339, 343, [1947] 2 All ER 751, 752, per Lord Denning; Kiriri Cotton Co. Ltd. v. Dewani, [1960] AC 192, [1960] 1 All ER 177, 181 (PC) per Lord Denning ; Greenwood v. Bennett, [1973] QB 195 at 202, [1972] 3 All ER 586, 589 (CA). 17 American Restatement of the Law of Restitution, Quasi-Contracts and Constructive Trusts, 1937, I. 18 Nallaya Goundar v. Ramaswami Gounder, (1958) 2 Mad LJ 86; Muppudathi Pillai v. Krishnaswami Pillai, AIR 1960 Mad 1; Mafatlal Industries Ltd. v. Union of India, (1997) 5 SCC 536 at 612, 633 (referring to claims for refund of taxes and levies paid under mistake, as claims in restitution). 19 (1991) 2 AC 548, [1992] 4 All ER 512. 20 Banque Financiere de la Cite v. Parc (Ballersea) Ltd., (1999) 1 AC 221, [1998] 1 All ER 737.
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21 Renusagar Power Co. Ltd. v. General Electric Co., AIR 1994 SC 860 at 899. 22 Thomas Abraham v. National Tyre and Rubber Co. of India Ltd., AIR 1974 SC 602; Annamma v. Ouseph Tressiamma, AIR 1975 Ker 185 at 188; see s. 72 below under the heading 'Doctrine of Money Had and Received'. 23 See s. 69 below under the heading 'Contribution'. 24 See s. 79 below under the heading 'Applicable when contract is invalid'. 25 KT Venkatagiri v. State of Karnataka, AIR 2003 SC 1819, (2003) 9 SCC 1. 26 State of Maharashtra v. Swanstone Multiplex Cinema (P) Ltd, AIR 2009 SC 2750, (2009) 8 SCC 235. 27 AIR 2012 SC 357, 2012 (1) SCC 555. 28 Mahabir Kishore v. State of Madhya Pradesh, AIR 1990 SC 313 at 317. 29 The 13th Report of the Law Commission of India 1958, paras 17-19 recommended adding a section as follows: '72B: Restitution by person unjustly benefited in cases not expressly provided for: In any case not coming within the scope of sections 68 to 72A, where there is no contract, but a person is unjustly benefited at the expense of another person, the former is bound to restore the benefit to the latter or to make compensation therefor.'
Claim for Compensation If a person who is under an obligation under the provisions of this chapter fails to discharge the obligation after it has been incurred, he is liable to compensate the person injured by his failure to the same extent as if he had contracted to discharge it, and had broken the contract.30 30 See para 3 of s. 73.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER V Of Certain Relations Resembling those Created by Contract/S. 68.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER V Of Certain Relations Resembling those Created by Contract S. 68. Claim for necessaries supplied to person incapable of contracting, or on his account.-If a person, incapable of entering into a contract, or any one whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person.31 Illustrations (a) (b)
A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be reimbursed from B's property. A supplies the wife and children of B, a lunatic, with necessaries suitable to their condition in life. A is entitled to be reimbursed from B's property.
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Introduction Where a minor or other person whom he is legally bound to support is supplied with necessaries, the supplier is entitled to be reimbursed. The liability is not to pay the agreed price, but to reimburse. The minor is not personally liable, but the minor's property is liable for the amount. 31 The property of a Government ward in the CP is not liable under this section; see the CP Court of Wards Act, 1899, s. 31(1).
Contracts for Necessaries Under English law, contracts for necessaries were the only class of contracts which were not voidable at the option of the minor,32 though the minor may not necessarily be liable for the price stipulated. Under this section, liability of the minor arises not ex contractu, but out of quasi-contract or restitutionary principles. 32 Anson's Law of Contract, 29th edn, 2010, p. 233.
Incapable of Entering into Contract Since the decision of the Privy Council in Mohori Bibee v. Dharmodas Ghose, 33 it is clear that this section applies to minors as well as to persons of unsound mind (see the illustrations) and others, if any, disqualified from contracting by any law to which they are subject. It is, therefore, needless to consider the doubts expressed in earlier Indian cases. This section will not apply where necessaries have been supplied to someone, who a person competent to contract is bound to support.34 A minor falls within the class of persons referred to in this section, and though he is not liable even for necessaries, and no demand in respect thereof is enforceable as against him by law. A statutory claim is created by this section against his property, enforceable by the person who has furnished such supplies.35 This section provides for liability in respect of necessaries supplied to a person incapable of entering into a contract. A minor is a person incapable of contracting within the meaning of that section,36 and therefore, the provisions of that section apply to his case. This section applies to necessaries supplied to a ward of the court.37 33 30 IA 114, (1903) ILR 30 Cal 539. 34 Kanhayalal Bisandayal Bhiwapurkar v. Indarchandji Hamirmalji Sisodia, AIR 1947 Nag 84. 35 Mohori Bibee v. Dhurmodas Ghose, (1903) 30 IA 114, (1903) ILR 30 Cal 539 at 540, 541. 36 Watkins v. Dhunnoo Baboo, (1881) ILR 7 Cal 140 at 143; Ibid. 37 Umrao Singh v. Firm Banarsi Das-Dip Chand, AIR 1927 Lah 414, 101 IC 702; Vishwa Nath Khanna v. Shiam Krishna, AIR 1936 All 819, (1936) All LJ 1120, 166 IC 47; Deputy Commissioner, Barabanki v. L Madan Gopal, AIR 1943 Oudh 119.
'Whom he is Legally Bound to Support' What are necessaries for a minor's wife and child are necessaries to him; and though he is not responsible for his wife's debt unless she has his authority to pledge his credit, yet the minor husband of a minor wife will be liable for household necessaries purchased by the wife.38 A minor being bound
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to support his sister, money advanced to a minor for marriage of his sister has been held to be necessaries under this section,39 and also recoverable from the joint family property, because of the duty imposed by Hindu law on such a manager to provide for the marriage expenses of the female members of the family.40 38 Chitty on Contracts, 28th edn., para 9-019 at 468. 39 Jai Indra Bahadur Singh v. Dilraj Kaur, AIR 1921 Oudh 14 at 17; Shriniwasarao v. Baba Ram, AIR 1933 Nag 285, 287, 145 IC 350; Tikki Lal Jaithu Teli v. Komalchand, (1940) Nag 632, AIR 1940 Nag 327, 329-30. 40 Nardan Prasad v. Ajudhia Prasad, (1910) ILR 32 All 325.
Necessaries The term 'necessaries' includes everything necessary to maintain an incompetent person in the state, station, or degree of life in which he is, and what is 'necessary' is a relative fact to be determined with reference to the fortune and circumstances of a particular infant.41 The meaning of the word is not confined to 'necessities'.42 In43a tailor supplied a minor (a Cambridge undergraduate) with eleven fancy waistcoats. In an action to recover the charges, it was proved that the minor already had a sufficient supply of clothing according to his position in life. It was held that the tailor was not entitled to succeed as he failed to prove that the clothing was act ually required by the minor at the time of sale and delivery. Necessaries must be things which the minor actually needs; therefore it is not enough that they be of a kind which a person of his condition may reasonably want for ordinary use, they will not be necessary if he is already sufficiently supplied with things of that kind, and it is immaterial whether the other party knows this.44 The court should take into consideration the character of the goods supplied, the act ual circumstances of the minor, and the extent to which the minor was already supplied with them. Things may be useful to the minor, but the quality or quantity supplied may render them not necessary. Objects of mere luxury cannot be necessaries, nor can objects which, though of real use, are excessively costly.45 The fact that buttons are a normal part of many usual kinds of clothing, for instance, will not make pearl or diamond buttons necessaries.46 Medical or legal services are necessaries,47 so are costs incurred in successfully defending a suit on behalf of a minor in which his property was in jeopardy,48 and costs incurred in defending him in a prosecution for dacoity.49 An agreement by a minor widow to pay for her husband's funeral is binding as being for necessaries.50 A creditor can recover monies advanced to a minor for necessaries.51 Necessaries have included money urgently needed for the requirement of the minor to save his property from being sold for arrears of revenue,52 monies advanced for effecting necessary repairs in his house,53 or for saving the minor's property from being sold for arrears of revenue,54 or in certain circumstances, loans given for agricultural operations, and payment to creditors.55 It has been held that money borrowed to pay a debt for necessaries was recoverable only if the debt was actually paid with the money.56 The term necessaries is not confined to goods. It includes other things such as good teaching and instruction, and money enabling an incompetent person to procure these,57 or lease of premises to a minor for living and continuing his studies.58 A minor may enter into a contract of employment so as to earn a living. Under the English law, if such a contract is for the benefit of the minor, the court will not allow the infant to repudiate it,59 but not so if the contract is more onerous than beneficial to the minor.60
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41 Jagon Ram Marwari v. Mahadeo Prosad Sahu, (1909) ILR 36 Cal 768; Sadhu Laxmi Sundaramma v. Sadhu Suryanarayana, AIR 1950 Mad 274. 42 Chitty on Contracts, 28th edn., para 8-007, p. 464; Anson's Law of Contract, 29th edn, 2010, p. 234. 43 [1908] 2 KB 1, [1908-10] All ER Rep 317. 44 Johnstone v. Marks, [1887] 19 QBD 509; followed in Jagon Ram Marwari v. Mahadeo Prosad Sahu, (1909) 36 Cal 768; Daw Nyun v. Maung Nyi Pi, AIR 1938 Rang 359, 178 IC 680. 45 Jagon Ram Marwari v. Mahadeo Prosad Sahu, (1909) ILR 36 Cal 768. 46 The classical English authority is Ryder v. Wombwell, (1868) LR 3 Ex 90, affirmed (1869) LR 4 Ex 32, the minuteness of the English cases on this point seems due, as matter of fact, to the general bias of juries in favour of tradesmen, and their opinion that it is shabby to plead infancy. 47 Huggins v. Wiseman, (1690) Carth 110; De Stacpoole v. De Stacpoole, (1887) 37 Ch D 139. 48 Watkins v. Dhunnoo Baboo, (1881) 7 Cal 140 (suit by attorney appointed by the guardian ad litem of the minor); but see Branson v. Appasami, (1894) 17 Mad 257 (the suit would not lie in similar circumstances); Venkata Vijaya Gopalaraju v. Timmayya Pantulu, (1898) 22 Mad 314; Phalram v. Aiyub Khan, (1926) 49 All 52, 98 IC 657, AIR 1927 All 55. 49 Sham Charan Mal v. Chowdhry Debya Singh Pahraj, (1894) 21 Cal 872 (the minor's liberty being in jeopardy); but see Sundararaja Ayyangar v. Pattanathusami Tevar, (1894) 17 Mad 306 (breach of trust and patta transfer case against a zamindar). 50 Chapple v. Cooper, (1844) 13 M&W 252. 51 Benares Bank Ltd. v. Dip Chand, AIR 1936 All 172. 52 Mahmood Ali v. Chinki Shah, AIR 1930 All 128. 53 Ramchandra v. Hari, AIR 1936 Nag 12. 54 Lachmiram v. Pahlad Singh, AIR 1925 Nag 33; Mahmood Ali v. Chinki Shah, AIR 1930 All 128. 55 Karim Khan Mahtab Khan v. Jaikiran Gadadmal Marwadi, AIR 1937 Nag 390. 56 Marlow v. Pitfield, (1719) 1 Wms 558; Jai Indra Bahadur Singh v. Dilraj Kaur, AIR 1921 Oudh 14; Shriniwasarao v. Baba Ram, AIR 1933 Nag 285, 145 IC 350. 57 Sadasheo Balaji v. Firm Hiralal Ramgopal, AIR 1938 Nag 65 at 68, 175 IC 149. 58 Kunwarlal Daryavsingh v. Surajmal Makhanlal, AIR 1963 MP 58. 59 Clements v. London and North Western Rly. Co., (1894) 2 QB 482, [1891-94] All ER Rep Ext 1461. 60 De Francesco v. Barnum, (1890) 45 Ch D 430, [1886-90] All ER Rep 414.
Not Necessaries Money spent on obsequies of the father of a minor are not spent on 'necessaries' for the minor within the meaning of this section; but a debt incurred for the purpose by the minor's guardian may be a debt binding on the minor and his estate under Hindu law, and, therefore, enforceable against the minor if, after attaining his majority, he undertakes to pay it.61 Money advanced for Diwali expenses were not spent for necessaries.62 Money paid to a minor for the discharge of his father's decretal dues, for the recovery of which nothing was done, were not necessaries,63 nor were moneys borrowed by a person during the lifetime of his father for the sradh of his mother.64 61 Bechu Singh v. Baldeo Prasad, AIR 1933 Oudh 132, 145 IC 180; Gramlal v. Tukaram, (1941) ILR Nag 255, AIR 1939 Nag 33. 62 Sadasheo Balaji v. Firm Hiralal Ramgopal, AIR 1938 Nag 65 at 68, 175 IC 149. 63 Nilkanth v. Chandrabhan, AIR 1922 Nag 247.
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64 Gopinath Bhagat v. Lakshminarain Singh, AIR 1917 Cal 485.
Expenses for Marriage There are a number of cases in which the question of the liability of a Hindu minor for money advanced to him to meet his marriage expenses has been considered,65 but a distinction has been drawn, it would seem rightly, between the case of male and female minors, on the ground that the Hindu texts enjoin the marriage of the latter but not of the former;66 this distinction also has been doubted.67 Money advanced to a minor for marriage of his sister are recoverable under this section as necessaries,68 apart from the liability of the joint family property for such expenses.69 Expenses for the marriage of a Muslim minor girl are recoverable as necessaries, if the payment was not gratuitous.70It is submitted that the enactment of the Child Marriage Restraint Act, 1929 (now repealed by the Prohibition of Child Marriage Act, 2006.) has also affected the law, since as pointed out in the Nagpur High Court, a court of justice can scarcely regard expenditure on a purpose forbidden by law as expenditure on 'necessaries'.71 Liability The minor's property is liable for necessaries,72 and no personal liability is incurred by him, as it may be under English law. Section 70 cannot be read so as to create any personal liability in such a case. Under s. 68, a claim lies only against the estate of the minor, and a Hindu mother who has incurred expenses in getting her minor daughter married cannot sue the father.73 Expenses Incurred by the Guardian for Necessaries There is a distinction between a minor's liability for necessaries, and cases where a guardian as a manager of an estate alienates a minor's property for the benefit of the minor.74 The test of what is 'fair and proper' can be applied in both cases, but the standard must necessarily differ, for what is fair and proper in the shape of benefits conferred or comforts supplied, may not be fair and proper in the case of alienation. The distinction between the two lies first, in that in the case of an alienation where necessity is alleged, inquiries made in good faith protect the transferee, whereas in the case of necessaries, such considerations are irrelevant.75 Secondly, an alienation by a minor himself would be void whatever the purpose for which it was made, but in the case of necessaries supplied to him, it is immaterial whether the order came from him, or from his guardian.76 Liability under the section would arise for repayment of a loan taken by the guardian of the minor for the minor's necessaries,77 to the extent the sums are spent for procuring necessaries,78 and it is entirely immaterial whether the bond for repayment has been executed by the minor or by his guardian or whether any bond has been executed by the minor at all; for the liability arises not ex contractu, but because money borrowed has been expended on necessaries.79 65 Pathak Kali Charan v. Ram Deni Ram, AIR 1917 Pat 332, (1917) 2 Pat LJ 627, 42 IC 693; Shriniwasarao v. Baba Ram, AIR 1933 Nag 285, 145 IC 350; Yadorao v. Chandudas, (1927) 101 IC 255, AIR 1927 Nag 196. 66 Tikki Lal Jaithu Teli v. Komalchand, (1940) Nag 632, AIR 1940 Nag 327 (money advanced for marriage of minor himself); T Sundaram Pillai v. Kandaswami Pillai, AIR 1941 Mad 387, (1941) 1 Mad LJ 140. 67 Rahima Bibi v. A.K. Sherfuddin, (1947) ILR Mad 541, AIR 1947 Mad 155. 68 Jai Indra Bahadur Singh v. Dilraj Kaur, AIR 1921 Oudh 14 at 17; Shriniwasarao v. Baba Ram, AIR 1933 Nag 285, 287, 145 IC 350; Tikki Lal Jaithu Teli v. Komalchand, (1940) Nag 632, AIR 1940 Nag 327, 329-30. 69 Nardan Prasad v. Ajudhia Prasad, (1910) ILR 32 All 325. 70 Rahima Bibi v. A.K. Sherfuddin, (1947) ILR Mad 541, AIR 1947 Mad 155; but see Tikki Lal Jaithu Teli v.
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Komalchand, (1940)ILR Nag 632, AIR 1940 Nag 327. 71 Tikki Lal Jaithu Teli v. Komalchand, (1940) ILR Nag 632, AIR 1940 Nag 327. 72 Benares Bank Ltd. v. Dip Chand, AIR 1936 All 172; Nilkanth v. Chandrabhan, AIR 1922 Nag 247. 73 Sadhu Laxmi Sundaramma v. Sadhu Suryanarayana, AIR 1950 Mad 274. 74 Sadasheo Balaji v. Firm Hiralal Ramgopal, AIR 1938 Nag 65, 175 IC 149. 75 AIR 1938 Nag 65 at 66, per Vivien Bose J. 76 Ibid. 77 Watkins v. Dhunnoo Baboo, (1881) ILR 7 Cal 140 at 143-44; Jodhi Singh v. Chhotu Mahto, AIR 1926 Pat 399 (for household expenses of the family); Phalram v. Aiyub Khan, (1926) 49 All 52, 98 IC 657, AIR 1927 All 55 (loan taken by mother for litigation); Shriniwasarao v. Baba Ram, AIR 1933 Nag 285, 145 IC 350 (loan taken by a de facto guardian for marriage of a minor's sister); Sadasheo Balaji v. Firm Hiralal Ramgopal, AIR 1938 Nag 65 at 67, 175 IC 149 (for payment of rent, purchase of seeds for agriculture and for marriage). 78 Yadorao v. Chandudas, 101 IC 255, AIR 1927 Nag 196; Shriniwasasarao v. Baba Ram, AIR 1933 Nag 285, 145 IC 350. 79 Shriniwasarao v. Baba Ram, AIR 1933 Nag 285, 145 IC 350.
Reimbursement The incompetent person who is supplied with necessaries is not liable to pay the agreed price. The supplier is only entitled to a reimbursement for the supplies. Where a claim does not arise out of contract, but under the special provisions of s. 68, the plaintiff is only entitled to reimbursement out of the minor's estate and nothing more, and cannot claim any interest on the amount claimed.80 A promissory note executed by a ward of the court for his necessaries is not enforceable.81 The English law, Sale of Goods Act, 1979, now provides that necessaries sold and delivered to a minor or to a person who by reason of mental incapacity or drunkenness is incompetent to contract, he must pay a reasonable price for them. The term 'necessaries' has now been defined for the purposes of this Act as goods suitable to the condition in life of the minor or other person concerned, and to his act ual requirements at the time of the sale and delivery. This liability to pay reasonable price applies to those goods which are sold and delivered. To the supply of other necessaries, and to the contracts of goods sold but not delivered, the common law would apply.82 80 Umrao Singh v. Firm Banarsi Das-Dip Chand, AIR 1927 Lah 414, 101 IC 702; Manmatha Kumar Saha v. Exchange Loan Co. Ltd. AIR 1936 Cal 567; Ramchandra v. Hari, AIR 1936 Nag 12; but see RV Rajarathna Chettiar v. Shari Shaick Mahboob Sahib, AIR 1940 Mad 106, 110 (interest awarded on equitable grounds @ 6 per cent). 81 Firm Girdhari Lal & Bros v. Baldeo Singh, AIR 1935 Lah 764; overruling Umrao Singh v. Firm Banarsi Das-Dip Chand, AIR 1927 Lah 414, 101 IC 702; Re Soltykoff, ex p Margrett,[1891] 1 QB 413. 82 Chitty on Contracts, 28th edn., para 8-011, p. 465.
Burden of Proof It is for the creditor to prove that money was advanced or goods supplied, and that these were suitable to the condition in life of the minor, and that they were suitable to his actual requirements at the time, i.e., the minor had no supply from other sources.83 Mere inquiries on the part of the creditor into the existence of necessity will not suffice, but at the same time the creditor need not prove the act ual application of money. He is required to prove the circumstances of the minor's estate, and the absence of any other source from which the necessity having regard to the social status and the
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condition in life of the minor. If these are established and the creditor has advanced money for meeting such necessaries after satisfying himself about the same, he will be entitled to the decree against the estate of the minor, unless it is proved by the other side that the guardian did not actually apply the money for necessary purposes.84 Mere mention in the bond that the amount was for necessary expenses of the minor is not enough.85 83 Sadasheo Balaji v. Firm Hiralal Ramgopal, AIR 1938 Nag 65, 175 IC 149. 84 AIR 1938 Nag 65 at 71-72; Daw Nyun v. Maung Nyi Pi, AIR 1938 Rang 359, 178 IC 680; Umrao Singh v. Firm Banarsi Das-Dip Chand, AIR 1927 Lah 414, 101 IC 702. 85 Hira Singh v. Sunder Singh, AIR 1930 Oudh 299.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER V Of Certain Relations Resembling those Created by Contract/S. 69.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER V Of Certain Relations Resembling those Created by Contract S. 69. Reimbursement of person paying money due by another, in payment of which he is interested.-A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other. Illustration B holds land in Bengal, on a lease granted by A, the zamindar. The revenue payable by A to the Government being in arrear, his land is advertised for sale by the Government. Under the revenue law, the consequence of such sale will be annulment of B's lease. B, to prevent the sale and the consequent annulment of his own lease, pays to the Government the sum due from A . A is bound to make good to B the amount so paid.
Introduction The section provides that a person, being interested in the payment of money, which another is bound by law to pay, is entitled to be reimbursed by the latter if he has paid it.
Principle The section embodies the doctrine of unjust enrichment.86 The general purport of the section is to afford to a person who pays money in furtherance of some existing interest, an indemnity in respect of the payment against any other person who, rather than he, could have been made liable by law to make the payment.87 The section converts the natural obligation into a legal obligation to pay on the
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part of the person who has received benefit of the payment by another person of what he was bound to pay.88 If there is a direct contractual relation between the parties, there is no occasion to rely upon this section.89 This section lays down a wider rule than once required by the English authority. The words 'interested in the payment of money which another is bound by law to pay' might include the apprehension of any kind of loss or inconvenience, and not merely the act ual detriment capable of being assessed in money.90 It was not enough, in the common law, to find a claim to reimbursement by the person interested, if he made the payment himself. It was stated for example:
If A is compellable to pay B damages which C is also compellable to pay B, then A, having been compelled to pay B, can maintain an action against C for money so paid, for the circumstances raise an implied request by C to A to make such payment in this case. In other words A can call upon C to indemnify him.91
The obligation here had thus to be stated as a fictitious contract in order to find a place for it within the rules of the common law pleading. The meaning was that C, who did not in fact ask A to pay, was treated as if he had done so. Such a right to indemnity arose, for instance, where one man's goods were lawfully seized for another's debt, e.g. as being liable to distress, and were redeemed by the owner; the owner would be entitled to indemnity from the debtor, though he may have exposed his goods to the risk of distress by a voluntary act done at the debtor's request or for his benefit.92 Such claims would now fall in the English law under the head of restitution or unjust enrichment.93 However, under this section, the fiction is superfluous, and the duty may be expressed, as in this section, in plain and direct terms without any talk of an implied request.94 It has been stated authoritatively with judicial approval:
Where the plaintiff has been compelled by law to pay, or, being compellable by law, has paid money which the defendant was ultimately liable to pay, so that the latter obtains the benefit of the payment by the discharge of his liability, under such circumstances the defendant is held indebted to the amount.95
The requirements for the application of the provisions of this section are:1
(i) (ii) (iii)
the plaintiff must have made an act ual or virtual payment of money; the plaintiff must have been compelled to pay this money to a third party; and the defendant must have been legally liable to pay the third party. Though the plaintiff would usually stand in some kind of relationship to the person for whom he paid, no relationship of privity is necessary to give a right of action.2
86 Nallaya Goundar v. Ramaswami Gounder, (1958) 2 Mad LJ 86; Muppudathi Pillai v. Krishnaswami Pillai, AIR 1960 Mad 1. 87 Govindram Gordhandas Seksaria v. State of Gondal, (1950) 77 IA 156, AIR 1950 PC 99 at 104, 52 Bom LR 450. 88 Nath Prasad v. Baij Nath, (1880) 3 All 66 at 72 (FB). 89 Subbakke Shettithi v. Anthamma Shettithi, AIR 1934 Mad 628. 90 The view propounded in the text was adopted in Tulsa Kunwar v. Jageshar Prasad, (1906) 28 All 563; Subramania Iyer v. Rungappa Reddy, (1909) 33 Mad 232; Pankhabati Chaudhurani v. Nonihal Singh, AIR 1914 Cal 338, (1914) 18
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CWN 778, 781, 21 IC 207; Eastern Mortgage and Agency Co. Ltd. v. Mahommad Fazlul Karim, (1925) 52 Cal 914, AIR 1926 Cal 385, 90 IC 851; Satya Bhushan Bandopadhyapa v. Krishnakali Bandopadhyaya, AIR 1915 Cal 278, (1914) 18 CWN 1308, 1310-11, 24 IC 259; Nagendra Nath Roy v. Jugal Kishore Roy, AIR 1925 Cal 1097, (1925) 29 CWN 1052, 1053, 90 IC 281; Siti Fakir v. Chand Bewa, AIR 1928 Cal 389, (1928) 32 CWN 1087, (1928) 108 IC 46; Muthurakku Maniagaran v. Rakappa Maniagaran, AIR 1914 Mad 26, (1914) 26 Mad LJ 66, 70-71, 22 IC 9; SRMAR Ramanathan Chettyar v. RMP Chettyar, AIR 1937 Rang 350; Jagarnath Prasad v. Chunni Lal, (1940) All 580, AIR 1940 All 416, 191 IC 647, 20 IA 160. 91 Bonner v. Tottenham and Edmonton Permanent Investment Building Society, [1898] 1 QB 161 per Smith LJ., 167, [1895-99] All ER Rep 549, 552; Owen v. Tate, [1976] QB 402, 412, [1975] 2 All ER 129(CA) ; 'Zuhal K' [1987] 1 Lloyd's Rep 151. 92 Edmunds v. Wallingford, (1885) 14 QBD 811; disapproving England v. Marsden, (1866) LR 1 CP 529. 93 Chitty on Contracts, 28th edn., para 30-001 et seq, especially para 30-068, p. 1500. 94 However, see Eastern Mortgage and Agency Co. Ltd. v. Mahommad Fazlul Karim, (1925) ILR 52 Cal 914 at 928 per Mukerji J.,AIR 1926 Cal 385, 90 IC 85. 95 Leake on Contracts, 1867 edn, p. 4; cited with approval in Moule v. Garrett, (1872) LR 7 Ex 101 per Cockburn CJ, 104, [1861-73] All ER Rep 135; Bonner v. Tottenham and Edmonton Permanent Investment Building Society, [1898] 1 QB 161 per Vaughan Williams LJ., 173, [1895-99] All ER Rep 549; Brooks Wharf and Bull Wharf Ltd. v. Goodman Brothers, [1937] 1 KB 534 per Wright MR, 543-44, [1936] 3 All ER 696(CA) ; approved in Harichand v. Gyaniram, (1944) Nag 638, AIR 1944 Nag 282. 1 Halsbury's Laws of England, Vol. 40(1), 4th edn. Reissue, 1 October 2007, RESTITUTION, para 63. 2 Edmunds v. Wallingford, (1885) 14 QBD 811 at 815 per Lindley LJ. (CA); Roberts v. Crowe, (1872) LR 7 CP 629 at 637 per Willes J.
Plaintiff must be Interested in Payment This section only applies to payments made for the protection of one's own interest. A person may be interested in the payment, but if in making of the payment he is not act uated by the motive of protecting his own interest, he cannot recover under this section.3 A Railway Executive Engineer had no interest in the payment of freight on goods under a contract made in his name on behalf of the Railway administration, and hence could not claim under this section. Proper remedy for him was to refuse delivery.4 Further, s. 69 applies to cases in which the person who makes the payment of money is himself not liable to pay.5 3 Desai Himatsingji Joravarsingji v. Bhavabhai Kayabhai, (1880) ILR 4 Bom 643 at 652. 4 Secretary of State v. S. Rangaswami & Co., AIR 1928 Mad 198, (1927), 106 IC 657, (1927) Mad WN 872 (nor does s. 70 apply). 5 Naipal v. Bans Gopal Singh, AIR 1927 All 713; Sinthamani Chetti v. Arunachalam, AIR 1927 Mad 1060; Vithaldas Bhagwandas Darbar v. Tukaram Vithoba Kshatri, AIR 1941 Bom 153, (1941) 43 Bom LR 225; but see Muthurakku Maniagaran v. Rakappa Maniagaran, AIR 1914 Mad 26, (1914) 26 Mad LJ 66, 70-71, 22 IC 9; Suraj Din v. Wajid Ali, AIR 1916 Oudh 151, 34 IC 367; Gaya Prasad v. Sada Sukh, AIR 1918 Oudh 286, 48 IC 69; Jhanku Lal v. Rewati, AIR 1921 Jour 11, 61 IC 892; Umed Singh v. Bihari Lal, AIR 1922 Nag 50, 62 IC 881; Mitchell v. McNeill & Co. AIR 1927 Cal 518; Abid Husain v. Ganga Sahai, AIR 1928 All 353, (1928) 113 IC 441, 26 All LJ 435; Joy Krishna Hazra v. Kali Krishna Hazra, AIR 1938 Cal 413 (plaintiff bound by his agreement to pay the whole rent, cannot claim contribution from co-sharers).
Interest in Payment of Money The interest in the payment of money may arise out of compulsion arising out of statute. It is not necessary, however, that there should be legal compulsion; it is sufficient that there is compulsion in fact;6 or that the liability was undertaken by agreement between the plaintiff and the defendant,7 or in
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circumstances where the defendant is estopped from denying such an agreement. On the other hand, it is fatal to such a claim that payment was made voluntarily, or in consequence of the plaintiff's own wrongdoing. Nature of Interest The interest of the plaintiff must be for averting some loss or protecting some interest, which would otherwise be lost to him.8 It is not necessarily such compulsion as admits of no alternative.9 Further, the interest can be a pecuniary interest.10 The words 'interested in the payment of money which another is bound by law to pay' would include the apprehension of any kind of loss or inconvenience, and not merely the actual detriment capable of being assessed in money.11 It should not merely be an interest based on grounds of mere sentiment or moral or social obligation.12 Mere apprehension founded upon an impression that one's interest will be adversely affected is sufficient.13 It is sufficient if the claimant honestly believes that his own interest requires that the payment be made.14 The interest must be lawful.15 It may arise in the course of law, or through mistake or by virtue of existing relation with person on whose behalf payment is made.16 The section does not require that a person to be interested in a payment should at the same time have a legal proprietary interest in the property in respect of which the payment is made.17 Thus, where a debtor had mortgaged property to the Government to secure a debt, the Government undertaking not to enforce the mortgage so long as the debtor permitted it to deduct certain sums from his political pensions and jagirs towards the payment of the debt, and the Court of Wards which had assumed charge of his estate was allowed by the Government to make the deductions and to continue to payoff the debt therefrom, it was held that the debtor's heirs were bound to recoup the Court of Wards, and it was immaterial that the pensions and the jagirs did not belong to the Court of Wards.18 The section contemplates only an existing interest, which the payment is intended to protect, and not an interest created by the payment itself, or forming part of the same transaction as the payment itself, nor only a security for the payment.19 A putnidar who makes payments on account of the Government revenue due by his superior landlord who had failed to pay the same, is entitled to recover under this section, even though the risk to his putni may be remote, provided he had some interest in making the payment.20 The mortgagee whose tenant has raised the crop on the mortgaged land is interested in paying the instalment of revenue, which the mortgagor defaults in paying. Merely because the Revenue Recovery Act entitles a mortgagee to take on the instalment paid to his mortgage, does not disentitle him from recovering the money paid by him on the default of the mortgagor.21 A mortgagee has sufficient interest in the mortgaged property even after a decree for sale, and is entitled to pay the revenue due to save the property from destruction or sale. He is entitled to recover the amount of revenue paid by him before the advertisement for sale.22 A chargeholder is a person interested in the property on which the charge exists, and is entitled to recover payments made by him to save it.23 One of the sub-lessees has been held to have an interest in the payment of rent due by the lessee to the original lessor for saving the leasehold rights from sale in execution of a decree;24 so also a Hindu mother in the expenses incurred by her for her daughter's marriage in recovering the amount from her husband's coparceners.25 A person in wrongful possession of land making payment of the Government revenue26 does not have an interest in payment for the purposes of applying this section; nor a mortgagee in the payment of amount in the execution of a decree against the mortgagor to prevent sale of the property, where the mortgage was prior to the execution proceedings;27 a stranger without any interest in mortgaged property who has paid off the mortgage debt and taken possession, but is dispossessed by the owner
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of equity of redemption by a suit;28 a purchaser of a share of a partner in a firm in the payment of a debt of the partnership;29 a person who has ceased to have any interest in the property consequent upon a valid transfer.30 A agrees to sell land to B. Subsequently, A, in breach of the agreement, agrees to sell land to C . B sues A and C for specific performance. Pending the suit the land is sold in execution of decree obtained by A's creditor against A. B deposits in court the amount required to be deposited under O. 21, r. 89 of the Code of the Civil Procedure, and the sale is thereupon set aside. B, having no title in the property and no possession of it at the time of the payment, was not interested in the payment, and he is not entitled to recover it from A or C. Nand Kishore Jha v. Paraoo Mian, 31 Payment for Protection of Interest This section applies to cases where the plaintiff is not only interested in the payment, but is also act uated by the motive of protecting his own interest.32 This is suggested by the word 'therefore' in the section. Voluntary Payment If the plaintiff, as mere volunteer, chooses to pay a sum of money not for the defendants, but for himself, he cannot claim benefit of this section.33 In Ram Tuhul Singh v. Biseswar Lall Sahoo, 34 the Privy Council, in dealing with the rights of parties making payments, observed:
It is not in every case in which a man has benefited by the money of another that an obligation to repay that money arises. The question is not to be concluded by nice consideration of what may be fair and proper according to the highest morality. To support such a suit there must be an obligation express or implied to repay. It is well-settled that there is no such obligation in the case of voluntary payment by A of B's debt.
Thus, a mortgagor who voluntarily pays the assessment on land mortgaged by him, forestalling the mortgagee in possession, who, it is found, was willing to pay the assessment as he had done for past years, is not entitled to recover from the mortgagee the amount so paid by him.35 In Stimpson v. Smith, 36 the plaintiff and defendant were directors of a company, and had guaranteed its liabilities with a bank. The company ran into financial difficulties, but the bank never made any demand in writing as required under the terms of the guarantee. The plaintiff, to resolve the situation, and without referring to the defendant, had an oral arrangement with the bank, under which he paid the bank an amount, and the guarantee was cancelled. In the suit against the defendant from contribution, the defendant pleaded that there was no liability, there being no written demand by the bank. It was held that the plaintiff had not acted officiously, nor voluntarily, he was entitled to contribution from the defendant. The requirement relating to written demand was held to be a procedural or evidentiary requirement, which could be waived by the bank. Bona FidePayment To support a claim under this section, the claimant must have made the payment in good faith believing in his title to the property.37'A person interested in making the payment' does not mean that the interest should be such as would stand the test of judicial trial; it is sufficient if the person who makes the payment honestly believes that his own interest requires that it should be made.38 It is submitted that this is the correct view, at any rate if there are reasonable grounds for the belief, even though the belief itself may be unfounded. Thus, where a person puts forward a bona fide claim and makes a payment in respect of the disputed property, he is entitled to the benefit and protection afforded by s. 69, even though it ultimately transpires that he had not such an interest.39 Similarly
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money paid by a mortgagee of a putni tenure to save the tenure from sale for arrears of rent pending bona fide litigation between him and his mortgagor relating to the amount of the mortgage debt may be recovered back under the provisions of this section, even though it may be eventually found by the court that the whole of the mortgage debt was, as a matter of fact satisfied before the payment.40 In Govindram Gordhandas Seksaria v. State of Gondal, 41 the plaintiff had agreed to purchase certain mills, and paid arrears of municipal dues to save the mills from sale. In allowing them to recover this sum from the vendors, the Privy Council stated:
The view [of the appellate Court] that [the plaintiff] was not 'interested' was based on the fact that at the date of the payment the company had no proprietary interest in the mills in respect of which the taxes were claimed. And...the company's payment was described...as a voluntary payment...The company had contracted to buy these mills, and they were imminently threatened with a forced sale which would, of course, defeat its purchase. Money had to be found for the taxes if the mills were to be saved. Neither the Maharaja nor the trustees showed any sign of paying the Municipality. So the appellant company paid. In any ordinary use of language the company was interested in the taxes being paid at the time when they were paid since only through the payment could it realize the fruit of the contract that it had entered into. The words themselves do not require that a person to be interested in a payment should at the same time have a legal proprietary interest in the property in respect of which the payment is made. It is no doubt true that there have been decisions which have tested whether a person was interested in payment by ascertaining whether he had such a proprietary interest. It may be a good test in appropriate circumstances. But it would be a sad fallacy to deduce from the circumstance that a person may be interested in a payment because he has an interest in the property to which it relates the conclusion that no one who has not an interest in a property can be interested in a payment made in respect of that property. In truth, section 69 invites no such judicial limitation. The section is part of a chapter of the Contract Act devoted to 'Quasi-Contract'. The phrase itself is no doubt taken from a familiar branch of the English common law, although there is no reason to suppose that the Indian Contract Act was intended to do more than to reproduce in compendious phrases the precise doctrines of the English law of contract. But the general purport of the section is reasonably clear: to afford to a person who pays money in furtherance of some existing interest an indemnity in respect of the payment against any other person who, rather than he, could have been made liable at law to make the payment. So interpreted, section 69 appears to their Lordships to apply aptly to the payment made by the appellant company in this case.
This section only applies to payments made bona fide for the protection of one's own interest. Thus, where A purchases property from B, but the sale is fictitious, A cannot recover from B money paid by him to save the property from being sold in execution of a decree against B .42 It is otherwise, however, if the sale is bona fide.43 A person in wrongful possession of property paying rent to the Government cannot recover it from the true owner who dispossessed him subsequently.44 Time-factor It is enough for a person claiming under the provisions of this section to show that he had an interest in paying the money claimed by him 'at the time of payment'. In Dakshina Mohun Roy v. Saroda Mohun Roy Chowdhry, 45 it was held that money paid by a person while in possession of an estate under a decree of a court for preventing the sale of the estate for arrears of Government revenue may be recovered by him under this section, even though the decree were subsequently reversed and he were to be deprived of possession. It was stated:
It seems...to be common justice that when a proprietor in good faith, pending litigation makes the necessary payment for the preservation of the estate in dispute, and the estate is afterwards adjudged to his opponent, he should be recouped what he has so paid by the person who ultimately benefits by the payment if he has failed through no fault of his to reimburse himself out of the rents.46
In Radha Madhub Somonta v. Sasti Ram Sen, 47 the plaintiff purchased a putni taluk at a sale held under Regulation VII of 1819, at the instance of the zamindar for non-payment of rent by putnidars.
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The sale was set aside in May 1894, in a suit brought by the putnidars for the purpose against the zamindar, and the plaintiff. The zamindar alone appealed against the decision, and pending the appeal the zamindar called upon the plaintiff to pay rent that had accrued from April to November 1894. The plaintiff thereupon paid the rent. In a suit by him against the putnidars it was held that he was entitled to be reimbursed for the amount by them. The fact that the decision of the first court was in favour of the defaulting putnidars did not affect the plaintiff's right to pay the rent, as it was quite possible that decision might have been reversed on appeal. Conversely, payment of kist,48 to the Government, made by a person who had obtained a decree for possession of certain lands, was recovered back by him, though the payment may have been made when he was not yet put into possession, and pending an appeal and a second appeal.49 Payment under Compulsion The compulsion applied to make the plaintiff pay the defendant's debt need not be a legal compulsion which admits of no alternative. There may be a practical compulsion without an act ual legal compulsion.50 Thus, a payment made under coercion exercised by a person in a position to dictate terms, when there is no legal obligation to accept, is deemed to be made under compulsion.51 It is not necessary, in order to render a payment compulsory, that the plaintiff should have waited till legal proceedings were actually taken against him;52 nor, on the other hand, is he disentitled to recover because he may have been given time for payment.53 Saving Property from Sale A decree-holder who has attached property of his debtor and pays to save it from sale in distraint proceedings is a person interested in the payment of money.54 A usufructuary mortgagee paying off to have the execution sale of the mortgaged property set aside, is entitled to reimbursement by the mortgagor.55 Payment of Revenue and Taxes A mortgagee is entitled under this section to be reimbursed by the mortgagor for money paid by him in respect of revenue and land taxes to save property from sale;56 so is a lessee paying land revenue that had fallen in arrears which the lessor was bound to pay;57 or an owner who has paid the consolidated rate payable under a municipal Act entitled to recover half share from the occupier.58 Where A made a gift of a portion of land to B himself undertaking to pay the judi or special assessment in respect of it, and then made a gift of the rest of the land to C subject to the condition that C shall pay the judi in respect of the whole land, B was entitled, on failure of C to pay the judi, to make the payment and to recover it from C .59 Payment of Debt A person, holding adversely to the true owner, paid out of the sale of the property claimed by him, a debt due by the true owner. He was entitled to be reimbursed under s. 69 of the Contract Act because this was not a case where benefit was conferred officiously, and if not reimbursed it would be a case of unjust enrichment.60 Where a person bona fide believing himself to have a claim to a property, pays off the charges on the property, he is entitled to recover the amount.61 Where a mortgagee of property charged with maintenance, and impleaded in the decree, paid off the decree, he was entitled to reimbursement from the defendants who were bound to pay decretal amount.62 However, where the purchaser of an equity of redemption pays off at the time of redemption the amount of a bond not charged on the property, he cannot recover it from the mortgagor under this section.63 Release of Property Where a person's goods are lawfully seized for another's debt, the owner of the goods is entitled to redeem them, and to be reimbursed by the debtor against the money paid to redeem them.64
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Compulsion arises where a person incurs expense in order to recover his own goods, which have been lawfully seized or detained for another's debt.65 For instance, where one person's goods have been lawfully distrained for rent due to another person's landlord, the owner of the goods may redeem them and recover the expense from the person distrained upon.66 Such a right of indemnity will not, however, be implied where the goods are left on the premises distrained upon for the convenience of their owner,67 or where as between the owner of the goods and the tenant the owner is liable for the rent;68 nor can a person who, without being requested to do so, pays money to prevent distraint upon another person's goods recover in respect of such payment.69 Similarly, a plaintiff having paid off a lien incurred by the defendant in order to obtain his own goods, may recover the sum so paid from the defendant.70 Saving an Attachment Where A's goods are wrongly attached in order to realise arrears of Government revenue due by B, and A pays the amount to save the goods from sale, he is entitled to recover the amount from B. Tulsa Kunwar v. Jageshar Prasad, 71 Where property sold to the plaintiff by the defendant is attached before judgment in a suit by the latter's creditor, and the plaintiff pays the amount and gets it released, he can recover from the defendant the amount so paid.72 The right is available even if the attachment is illegal.73 Actual Payment by Plaintiff The section clearly provides that the reimbursement can be had only after the claimant has act ually paid such amount.74 Further, the plaintiff must have made an actual or virtual payment of money, neither the incurring of a liability, nor the loss of goods can be treated as money paid. Thus, where one of the makers of a joint and several promissory note gave a bond to the holder when the note was due, but paid no money on the bond, it was held that he could not recover contribution against other makers of the promissory note.75 In such a case, the plaintiff has merely given the creditor another promise to pay, and parted with nothing; and has done nothing more than undertake a fresh obligation.76Where a plaintiff's goods are distrained on the defendant's premises for rent due to the defendant's landlord and purchased by a stranger, the plaintiff cannot maintain an act ion for money paid to the use of the defendant, the money paid never having been the plaintiff's money.77 Where, however, the plaintiff's goods are seized by a stranger under a writ for a debt which (as between plaintiff and defendant) the defendant should have paid, the plaintiff may recover their value from the defendant as 'money paid', because the levy of the sheriff has converted the plaintiff's goods into money.78 Payment to a Third Party This section applies only where one person pays to 'another' money which a third party is bound to pay. In Secretary of State for India in Council v. Fernandes, 79 there was certain land in south Canara, which was held by the Government at a certain rent as mulgaindar (permanent tenant) under a mulgar (landlord). Arrears of revenue were due from the mulgar to the Government. To prevent the land from being sold for arrears, the Government paid as mulgaindar or rather retained the arrears due to itself. It was held that, having made the payment to itself, the Government could not recover the sum from the mulgar under this section. Liability of the Defendant It is essential that the payment should have been strictly for the use of the defendant; it must in the case of a payment under compulsion have discharged a legal liability of the defendant. Obviously a plaintiff's claim under this section fails if the court concludes that he was really the person bound to pay;80 or where the plaintiff was required to pay on account of a primary obligation imposed upon him by statute.81 Defendant Bound by Law to Pay
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An action to recover money paid is not maintainable under this section, unless the person from whom it is sought to be recovered was bound by law to pay it.82 Where the defendant is under no legal liability to pay the money, the plaintiff cannot claim reimbursement, even though the payment may have indirectly benefited the defendant.83 Further, the section cannot apply unless the obligation of the other to pay was in existence at the date when the payment in respect of which the suit is laid, was made.84 'Bound by law' does not mean 'bound by law to the plaintiff', but that the defendant, at the suit of any person, might be compelled to pay.85 In Govindram Gordhandas Seksaria v. State of Gondal, 86 the Privy Council expressed the view that the words extend to any obligation which is an effective bond in law, just as the common law gives a right of indemnity to one who has paid 'under compulsion of law' against the true obligor without limiting the circumstances in which the latter's liability had arisen. The words cover obligations of contract and tort; and they do not exclude obligations of law which arise inter partes, whether by contract or by tort, and are not limited to those public duties which are imposed by statute or general law. The English authorities do not cover a case where the plaintiff has made a payment operating for the defendant's benefit, but was not under any direct legal duty to do so, nor where the defendant was not bound to pay, though the payment was to his advantage. In Bonner v. Tottenham and Edmonton Permanent Investment Building Society, 87 the assignee of a term mortgaged the premises by sub-lease. The original lessees, who remained liable to the lessors, had to pay the rent, and sued the mortgagees to recover indemnity. It was held that the act ion did not lie, for there was no obligation common to the plaintiff and the defendant. It was to the mortgagees' interest that the rent should be paid, but no one could call on them to pay it. Such a case would be decided in the same way under the present section. The words 'bound by law to pay,' as they fix the limit of the law in India, mark the point beyond which the Court of Appeal refused to extend it in England. The case of a second or later mortgagee paying off a prior mortgage to avoid a sale is different. He had his remedy under this section,88and the special rights conferred on him by s. 74 of the Transfer of Property Act, 1882 did not exclude that remedy.89 In Mothooranath Chattopadhya v. KristoKumar Ghose, 90 it was contended that this section applied only to cases where the person who is called 'the other' was personally liable for the debt, and that it did not apply where, as in that case, the liability attached to the land. Overruling this contention, the Court stated:
It is clear from the illustration that this is not the intention of the Legislature. The illustration gives the case of a lessee paying off revenue due to Government; but the liability to pay revenue due to Government is not a personal liability to the zamindar, but a liability which is imposed upon the zamindar's land. It is therefore clear that that section was intended to include the cases not only of personal liability, but all liabilities to payments for which owners of lands are indirectly liable, those liabilities being imposed upon the lands held by them.
The defendant may be primarily liable to the third party, or even ultimately liable. Further, the reason for the liability of the defendant need not be the same as the one which induced the plaintiff to pay the third party. Thus, in Brooks Wharf and Bull Wharf Ltd. v. Goodman Brothers, 91 the defendants had stored imported goods with the plaintiffs--bonded warehousemen. The defendant importers were ultimately liable to pay customs dues; but the plaintiffs as bonded warehouse-keepers were required to pay them being primarily liable under statute, else the plaintiff would have committed an offence under that statute. The defendants were held bound to reimburse the amount to the plaintiffs. Bound by Statute There is another class of case, in which the defendant, though not primarily liable as regards third
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persons, is required by statute to discharge a liability which would otherwise fall on the plaintiff, and by reason of his default the plaintiff has been compelled to pay. For instance, a tenant may be required to pay the rates and taxes or expenses which a landlord is required to bear under statute. Where, however, the statute itself provides the plaintiff's remedy, as by allowing an employer to deduct the tax from the employee's emoluments, that as a general rule, is his only remedy and an employer who omits to make the deduction cannot treat his payment as having been made to his employee's use.92 This section would apply to all liabilities for which the owners of land are under the revenue law liable, irrespective of whether the liability is personal.93 Bound by Agreement The liability for which payment may be made under this section need not be statutory. In Mothooranath Chattopadhya v. KristoKumar Ghose, 94 it was argued that the words 'bound by law' restricted the section to liabilities created by some statute, such as liabilities to pay revenue, but excluded liabilities which arose out of contract by parties. The court declined to uphold this contention, and observed:
That would be putting off the section of too narrow a construction, because it was no doubt intended to include such a case as a lessee paying rent to the superior landlord for which the intermediate lessee was liable under a covenant.
The money may have been paid on behalf of another, which that other was bound under an agreement with the person making the payment, or a third party.95 6 See: 'Nature of Interest' below. 7 See: 'Bound by Agreement' below. 8 Ganga Sahai v. Shiam Sunder Lal, AIR 1930 Oudh 266; Banwarilal v. Rajkishore Guru, (1945) ILR Nag 820, AIR 1946 Nag 21. 9 North v. Walthamstow UDC, (1898) 62 JP 836; Ellis v. Bromley RDC, (1899) 81 LT 224. 10 A. Ranganaiki Ammal v. A. Ramanuja Aiyangar, (1912) ILR 35 Mad 728. 11 The view propounded in the text was adopted in Tulsa Kunwar v. Jageshar Prasad, (1906) 28 All 563; Subramania Iyer v. Vengappa Reddi, (1909) 19 Mad LJ 750; Subramania Iyer v. Rungappa Reddy, (1909) 33 Mad 232; Pankhabati Chaudhurani v. Nonihal Singh, AIR 1914 Cal 338, (1914) 18 CWN 778, 781, 21 IC 207; Eastern Mortgage and Agency Co. Ltd. v. Mahommad Fazlul Karim, (1925) 52 Cal 914, AIR 1926 Cal 385, 90 IC 851; Satya Bhushan Bandopadhyapa v. Krishnakali Bandopadhyaya, AIR 1915 Cal 278, (1914) 18 CWN 1308, 1310-11, 24 IC 259; Nagendra Nath Roy v. Jugal Kishore Roy, AIR 1925 Cal 1097, (1925) 29 CWN 1052, 1053, 90 IC 281; Siti Fakir v. Chand Bewa, AIR 1928 Cal 389, (1928) 32 CWN 1087, (1928) 108 IC 46; Muthurakku Maniagaran v. Rakappa Maniagaran, AIR 1914 Mad 26, (1914) 26 Mad LJ 66, 70-71, 22 IC 9; SRMAR Ramanathan Chettyar v. R MP Chettyar, AIR 1937 Rang 350; Jagarnath Prasad v. Chunni Lal, (1940) All 580, AIR 1940 All 416,191 IC 647, 20 IA 160; Govindram Gordhandas Seksaria v. State of Gondal, (1950) 77 IA 156, AIR 1950 PC 99, 52 Bom LR 450. 12 Sadhu Laxmi Sundaramma v. Sadhu Suryanarayana, AIR 1950 Mad 274. 13 Suradhani Debi v. Hari Charan Mahton, AIR 1922 Pat 337, 64 IC 226; Eastern Mortgage and Agency Co. Ltd. v. Mahommad Fazlul Karim, (1925) 52 Cal 914, AIR 1926 Cal 385, 90 IC 851; Siti Fakir v. Chand Bewa, AIR 1928 Cal 389, (1928) 32 CWN 1087, (1928) 108 IC 46; SRMAR Ramanathan Chettyar v. RMP Chettyar, AIR 1937 Rang 350; Jagarnath Prasad v. Chunni Lal, (1940) All 580, AIR 1940 All 416,191 IC 647, 20 IA 160. 14 Govindram Gordhandas Seksaria v. State of Gondal, (1950) 77 IA 156, AIR 1950 PC 99, 52 Bom LR 450; Bhagirathibai v. Digamber Ambadas Subnis, (1945) Nag 247, AIR 1945 Nag 179; Chaturbhujilal Kanhayalal v. Girdharilal Kanhayalal, (1948) Nag 80, AIR 1948 Nag 390; see: 'bona fide payment'. 15 Serafat Ali v. Issar Ali, (1918) 45 Cal 691, AIR 1918 Cal 446, (1917) 22 CWN 347, 42 IC 30 (s. 70 applied); Bhagirathibai v. Digamber Ambadas Subnis supra ; Subbiah Mooppanar v. Venkatarama Ayyangar, AIR 1955 Mad 265.
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16 Panchkori Ghosh v. Hari Das Jati, AIR 1916 Cal 497, 499, (1916) 21 CWN 394, 399, 34 IC 341 (claim not enforceable under this section); Muthu Raman Chetty v. Chinna Vellayan Chetty, AIR 1917 Mad 83, 85; Jai Indra Bahadur Singh v. Dilraj Kuar, AIR 1921 Oudh 14, 19. 17 Govindram Gordhandas Seksaria v. State of Gandal, 77 IA 156, AIR 1950 PC 99; Muppudathi Pillai v. Krishnaswami Pillai, AIR 1960 Mad 1 at 6; Chentilnathan Chettiar v. Peri VSP Manickam, AIR 1966 Mad 426; Baijnath Thakur v. Bijadhar Kamkar, AIR 1961 Pat 103. 18 Qaisar Jahan Begam v. Court of Wards, (1941) ILR Lah 88, AIR 1941 Lah 88, 193 IC 829. 19 Veeraraghava lyer v. K. Lakshmana lyer, (1913) 25 Mad LJ 312 at 314. 20 Smith v. Dinonath Mookerjee, (1885) 12 Cal 213; Rama Sundari Dasi v. Adhar Chunder Sarkar, (1894) 22 Cal 28; Desayi Chelapathi Reddi v. Provincial Government of Madras, AIR 1951 Mad 650; Puliyanat Kunhiraman Vydier v. Puthan Purayil Nadukutty Govindan Vaidier, AIR 1954 Mad 641; Subbiah Mooppanar v. Venkatarama Ayyangar, AIR 1955 Mad 265; Nath Prasad v. Baij Nath, (1880) 3 All 66; Krishno Kamini Chowdhrani v. Gopi Mohun Ghose Hazra, (1888) 15 Cal 652 (jurisdiction of the Court of Small Causes in the Mufasal); Cf Ajudhia Prasad v. Bakar Sajjad, (1883) 5 All 400; L Ram Rattan Lal v. Gaura, AIR 1930 All 516, 122 IC 765. 21 Sami Pillai v. Ramulu Naidu, AIR 1972 Mad 4 at 5; distinguishing Rajkumar Lal v. Jaikaran Das, AIR 1920 Pat 521. 22 Bhuneshwari Devi v. Sheogovindlall Missir, AIR 1963 Pat 185. 23 Bhagirathibai v. Digamber Ambadas Subnis, (1945) ILR Nag 247, AIR 1945 Nag 179. 24 Rajani Kanta Mondal v. Lal Muhammad Sardar, AIR 1918 Cal 636, (1971) 21 Cal WN 628, 41 IC 242. 25 Vaikuntam Ammangar v. Kallipiram Ayyangar, (1900) 23 Mad 512; in appeal supra(1902) 26 Mad 497 (liability of coparceners arises under Hindu law, and also under this section); A Ranganaiki Ammal v. A Ramanuja Aiyangar, (1912) 35 Mad 728, 737, (1913) 25 Mad LJ 600; but see Sadhu Laxmi Sundaramma v. Sadhu Suryanarayana, AIR 1950 Mad 274 (obligation only upon father if there is any joint family). 26 Binda Kuar v. Bhonda Das, (1885) ILR 7 All 660. 27 Ram Prasad v. Salik Ram, (1882) All WN 210. 28 Sarjug Devi v. Dulhin Kishori Kuer, AIR 1960 Pat 474; following Ram Tuhul Singh v. Biseswar Lall Sahoo, (1875) 2 IA 131. 29 Ram Prasad Singh v. Shivanandan Misra, AIR 1963 Pat 149. 30 Challa Appayya v. Desetti Chandra Ayya, AIR 1950 Mad 817 at 819. 31 AIR 1917 Pat 159, (1917) 2 Pat LJ 676, 42 IC 839; though this decision must be deemed to be overruled by Govindram Gordhandas Seksaria v. State of Gondal, (1950) 77 IA 156, AIR 1950 PC 99, 52 Bom LR 450; Arulanandam Vethakannu Nadar v. Bhagavathi Pillai Thankachi, AIR 1972 Mad 207 (was interested in the payment). 32 Desai Himatsingji Joravarsingji v. Bhavabhai Kayabhai, (1880) ILR 4 Bom 643 at 652. 33 Chedi Lal v. Bhagwan Das, (1888) 11 All 234, (1889) ILR 10-12 All 577; Suraj Din v. Wajid Ali, AIR 1916 Oudh 151, 34 IC 367; Ramachandra Atmaram Salvi v. Damodar Ramchandra Limaye, (1899) 1 Bom LR 371. 34 (1875) 2 IA 131; Panchkori Ghosh v. Hari Das Jati, AIR 1916 Cal 497, (1916) 21 Cal WN 394 at 399, 34 IC 341; Banwarilal v. Rajkishore Guru, (1945) ILR Nag 820, AIR 1946 Nag 21 (a case of officious interference); Gobind Ram Sanchaiti v. Ram Kishore Choudhari, (1952) ILR 31 Pat 303, AIR 1953 Pat 145. 35 Ramachandra Atmaram Salvi v. Damodar Ramchandra Limaye, (1899) 1 Bom LR 371. 36 [1999] 2 All ER 833. 37 Serafat Ali v. Issar Ali, (1918) 45 Cal 691, AIR 1918 Cal 446, (1917) 22 CWN 347, 42 IC 30; Thakursa v. Behari, AIR 1923 Nag 301; Nagendra Nath Roy v. Jugal Kishore Roy, AIR 1925 Cal 1097, (1925) 29 CWN 1052, 90 IC 281; Duljin Sona Kuer v. Bibi Ale Fatima, AIR 1925 Pat 201; H Bemasena Rao v. H Narayana Rao, AIR 1927 Mad 459, 99 IC 845; Munni Bibi v. Trilokinath, (1931) 54 All 140, AIR 1932 All 332; Chaturbhujilal Kanhayalal v. Girdharilal Kanhayalal, (1948) Nag 80, AIR 1948 Nag 390; Gaviya v. Lingiah, AIR 1957 Mys 65. 38 Munni Bibi v. Trilokinath, (1931) 54 All 140, AIR 1932 All 332; Tulsa Kunwar v. Jageshar Prasad, (1906) 28 All 563; H Bemasena Rao v. H Narayana Rao, AIR 1927 Mad 459, 99 IC 845; Joy Chand Seraogi v. Dole Gobinda Das, AIR 1944 Cal 272; Harichand v. Gyaniram, (1944) Nag 638, AIR 1944 Nag 282; Bhagirathibai v. Digamber Ambadas Subnis, (1945) Nag 247, AIR 1945 Nag 179; Chaturbhujilal Kanhayalal v. Girdharilal Kanhayalal, (1948) Nag 80, AIR 1948 Nag 390; Subbegowda v. HL Keshava Murthy, AIR 1950 Mys 6; Gaviya v. Lingiah, AIR 1957 Mys 65; Chentilnathan Chettiar v. Peri VSP Manickam, AIR 1966 Mad 426.
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39 Subbegowda v. H.L. Keshava Murthy, AIR 1950 Mys 6. 40 Bindubashini Dassi v. Harendra Lal Roy, (1897) 25 Cal 305; Serafat Ali v. Issar Ali, (1918) 45 Cal 691, AIR 1918 Cal 446, (1917) 22 CWN 347, 42 IC 30; Ma Mya May v. Ma Lon, AIR 1933 Rang 112, 144 IC 392; Madangopal Raghunathdas v. Shrinarayan, (1946) Nag 297, AIR 1946 Nag 226. 41 Govindram Gordhandas Seksaria v. State of Gondal, (1950) 77 IA 156, 176-77, AIR 1950 PC 99, 52 Bom LR 450; Bhagirathibai v. Digamber Ambadas Subnis, (1945) Nag 247, AIR 1945 Nag 179; Thirumalasabbu Chettiar v. Rajammal, AIR 1961 Mad 170. 42 Janki Prasad Singh v. Baldeo Prasad, (1908) ILR 30 All 167; referring to Chedi Lal v. Bhagwan Das, (1888) 11 All 234, (1889) ILR 10-12 All 577. 43 Subramania lyer v. Rungappa Reddy, (1909) ILR 32-34 Mad 518. 44 Binda Kuar v. Bhonda Das, (1885) ILR 7 All 660. 45 (1893) 20 IA 160, (1893) 21 Cal 142; Nagendra Nath Roy v. Jugal Kishore Roy, AIR 1925 Cal 1097, (1925) 29 CWN 1052, 90 IC 281; Siti Fakir v. Chand Bewa, AIR 1928 Cal 389, (1928) 32 CWN 1087, (1928) 108 IC 46; Bohra Hazari Lal v. Bhora Naurangalai AIR 1930 All 517, 123 IC 335; Jagarnath Prasad v. Chunni Lai (1940) All 580, AIR 1940 All 416,191 IC 647, 20 IA 160; Subbegowda v. HL Keshava Murthy, AIR 1950 Mys 6; Sami Pillai v. Ramulu Naidu, AIR 1972 Mad 4, 5; but see Hriday Narain v. Haricharan Tiwari, AIR 1952 Pat 81 (claimant had no interest in the property before he paid the money). 46 Dakshina Mohun Roy v. Saroda Mohun Roy Chowdhry, 20 IA 160, (1893-94) ILR 20-21 Cal 727. 47 (1899) ILR 26 Cal 826. 48 The word means a portion of the annual assessment of revenue to be paid at specified periods in the course of the year. 49 Chinnasamy Ayyar v. Rathnasabapathy Pillay, (1903) 27 Made 338, (1903-05) ILR 28 Mad 799. 50 North v. Walthamstow UDC, (1898) 62 JP 836; Ellis v. Bromley RDC, (1899) 81 LT 224. 51 Walker v. Duncombe, (1824) 2 LJOSKB 80; Atkinson v. Denby, (1862) 7 H&N 934, Ex Ch; Smith v. Cuff, (1817) 6 M&S 160; Horton v. Riley, (1843) 11 M&W 492 (money paid under pressure to induce consent to a composition). 52 Maydew v. Forrester, (1814) 5 Taunton 615; Cordron v. Lord Masserene, (1792) Peake 194; Hales v. Freeman, (1819) 4 Moore CP 21 at 32 per Burrough J; Heather Bell, (1901) p. 143, 17 TLR 384; affirmed (1901) at 272(CA), 17 TLR 541. 53 Carter v. Carter, (1829) 5 Bing 406, [1824-34] All ER Rep 271. 54 Chuni LaI v. Manik Chand, AIR 1926 All 745, (1926) 97 IC 319. 55 Beni Madho v. Sanwar Dat, AIR 1923 All 127. 56 A Murray v. MSM Firm, AIR 1936 Rang 47; Madangopal Raghunathdas v. Shrinarayan, (1946) Nag 297, AIR 1946 Nag 226 (towards liability of purchaser from mortgagor); Amrit Waman Dalal v. Mahadeo Laxminarayanan Shraogi, AIR 1940 Nag 285, 190 IC 594; L Ram Rattan Lal v. Gaura, AIR 1930 All 516, 122 IC 765 (mortgagee of one co-sharer paying entire revenue, entitled to reimbursement from all co-sharers). 57 Faiyazunnisa v. Bajrang Bahadur Singh, AIR 1927 Oudh 609, 104 IC 358; Iswara Shetty v. Ramappa Shetty, AIR 1934 Mad 658. 58 Bhudar Mal-Ram Chandra Marwari v. Sew Narayan Marwari, AIR 1918 Cal 75. 59 Somashastri Vishwanath Shastri Kashikar v. Swamirao Kashinath Nadgir, (1918) 42 Bom 93, AIR 1917 Bom 55, 43 IC 482; but see Sri Sri Sri Gajapathi Krisnna Chandra Deo Garu v. P Srinivasa Charlu Chetty, AIR 1915 Mad 95 (under s. 70). 60 Muppudathi Pillai v. Krishnaswami Pillai, AIR 1960 Mad 1(FB) ; following Govindram Gordhandas Seksaria v. State of Gondal, (1950) 77 IA 156, AIR 1950 PC 99, 52 Bom LR 450. 61 Thakursa v. Behari, AIR 1923 Nag 301; Amrit Waman DalaI v. Mahadeo Laxminarayanan Shraogi, AIR 1940 Nag 285, 190 IC 594. 62 Savitribai v. Nanhelal, AIR 1934 Nag 84. 63 Palaniappa Chetty v. Rangachariar, AIR 1915 Mad 870.
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64 Edmunds v. Wallingford, (1885) 14 QBD 811 at 814-15 (CA). 65 Ibid; Orchis,(1890) 15 PD 38(CA) . 66 Exall v. Partridge, (1799) 8 Term Rep 308, [1775-1802] All ER Rep 341; Edmunds v. Wallingford, (1885) 14 QBD 811(CA) ; but see Re Button, ex p. Haviside,(1907) 2 KB 180 at 188, 190, [1904-7] All ER Rep 957(CA) ; Taylor v. Zamira, (1816) 6 Taunt 524. 67 Griffinhoofe v. Daubuz, (1855) 5 E&B 746; but doubted in Edmunds v. Wallingford, (1885) 14 QBD 811(CA) . 68 Edmunds v. Wallingford, (1885) 14 QBD 811(CA) . 69 Jones v. Simmons, (1881) 45 JP 666. 70 Bevan v. Waters, (1828) 3 C&P 520, [1824-34] All ER Rep 304; Johnson v. Royal Mail Steam Packet Co., (1867) LR 3 CP 38 at 46. 71 (1906) ILR 28 All 563; Abid Husain v. Ganga Sahai, AIR 1928 All 353, 113 IC 441, 26 All LJ 435. 72 Subramania Iyer v. Rungappa Reddy, (1909) 33 Mad 232, (1909) ILR 32-34 Mad 518; Mahatha Harsankar Sahai v. Bandhu Sahu, AIR 1914 Cal 529 (recovery under s. 70 and not 69); Rajani Kanta Mondal v. Lal Mahammad Sardar, AIR 1918 Cal 636, (1971) 21 CWN 628, 41 IC 242. 73 Lakshmi Amma v. Venkappa Ullura, AIR 1916 Mad 1167. 74 Bhikham Singh v. Sant Bakhsh Singh, AIR 1933 Oudh 478. 75 Maxwell v. Jameson, (1818) 2 B&Ald 51; but see Putti Narayanamurthi Ayyar v. Marimuthu Pillai, (1903-05) ILR 26-28 Mad 224, (1902) 26 Mad 322; Bhabhuti v. Gur Dass, AIR 1926 Jour 181, 99 IC 271; Sannasi Chetti v. Arunachala Chetti, AIR 1927 Mad 1137, 99 IC 438 (mere execution of promissory note); Raghubar Dayal v. Shaikh Abdul Ghaffar, AIR 1936 Oudh 253 (mere execution of mortgage not enough). 76 Raghubar Dayal v. Shaikh Abdul Ghaffar, AIR 1936 Oudh 253. 77 Moore v. Pyrke, (l809) 11 East 52. 78 Rodgers v. Maw, (1846) 15 M & W 444; distinguishing Moore v. Pyrke, on this ground. 79 (1906) 30 Mad 375, (1906-08) ILR 29-31 Mad 649. 80 Habibul Rahman v. Sheonandan Singh, AIR 1928 Pat 552, 111 IC 243. 81 Trustees of the Port of Madras v. Bombay Co. Pvt Ltd. (1967) 3 Mad 749, AIR 1967 Mad 318, (1966) 2 Mad LJ 226; Monmouthshire County Council v. Smith, [1956] 2 All ER 800. 82 Suradhani Debi v. Hari Charan Mahton, AIR 1922 Pat 337, 64 IC 226; Kedar Nath Mistri v. Narayan Chandra Safui, AIR 1930 Cal 344. 83 Receiver for the Metropolitan Police District v. Croydon Corpn., (1957) 2 QB 154, [1957] 1 All ER 78; applying the dictum of Lord Wright in Brooks Wharf and Bull Wharf Ltd. v. Goodman Brothers, (1937) 1 KB 534, [1936] 3 All ER 696(CA) . 84 Banwarilal v. Rajkishore Guru, (1945) ILR Nag 820, AIR 1946 Nag 21. 85 Rasappa Pillai v. Mitta Zemindar Doraiswami Reddiar, AIR 1925 Mad 1041, IC 545, 49 Mad LJ 88; Somashastri Vishwanath Shastri Kashikar v. Swamirao Kashinath Nadgir, (1918) 42 Bom 93, AIR 1917 Bom 55, 43 IC 482; Naipal v. Bans Gopal Singh, AIR 1927 All 713; Joy Krishna Hazra v. Kali Krishna Hazra, AIR 1938 Cal 413 (plaintiff was not bound by law to pay); Mariam v. Narayanan Thrathar Nambooripad, AIR 1965 Ker 55. 86 Govindram Gordhandas Seksaria v. State of Gondal, (1950) 77 IA 156 at 177, AIR 1950 PC 99, 52 Bom LR 450; Baijnath Thakur v. Bijadhar Kamkar, AIR 1961 Pat 103; Thirumalasabbu Chettiar v. Rajammal, AIR 1961 Mad 170; Chentilnathan Chettiar v. Peri VSP Manickam, AIR 1966 Mad 426. 87 (1898) 1 QB 161, [1895-99] All ER Rep 549; distinguishing Moule v. Garrett, (1872) LR 7 Ex 101, [1861-73] All ER Rep 135. 88 Bora Shib Lal v. Munni Lal, AIR 1922 All 153; Durga Charan Chandra v. Ambica Charan Chandra, (1927) 54 Cal 424, AIR 1927 Cal 393, 101 IC 130; Vasudevayya v. Bhagirathi Bai, AIR 1950 Mad 333; but see Nandan Sahu v. Fateh Bahadur Singh, (1940) All 71, AIR 1940 All 104, 185 IC 519. 89 Durga Charan Chandra v. Ambica Charan Chandra, AIR 1927 Cal 393 (s. 74 has since been repealed by the Transfer of Property (Amendment) Act, 1929, s. 39).
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90 (1878) 4 Cal 369; Chandradaya Sen v. Bhagaban Chandra Sen, AIR 1916 Cal 954, (1916) 23 Cal LJ 125, 32 IC 200; Registered Jessore Loan Co. Ltd. v. Gopal Hari Ghose Choudhury, AIR 1926 Cal 657, 658; Sarajubala Roy Choudhurani v. Kamini Kumar Choudhury, AIR 1926 Cal 765, 767, 94 IC 811; Murlidhar v. Naunihal Singh, AIR 1932 Oudh 222, 138 IC 137; Nandan Sahu v. Fateh Bahadur Singh, (1940) All 71, AIR 1940 All 104, 185 IC 519; Joy Chand Seraogi v. Dole Gobinda Das, AIR 1944 Cal 272; Mariam v. Narayanan Thrathar Nambooripad, AIR 1965 Ker 55; but see Karuppan Ambalagaran v. Muhammad Sakuth Levvai, AIR 1914 Mad 371 (only personal liability). 91 [1937] 1 KB 534, [1936] 3 All ER 696(CA) . 92 Bernard and Shaw Ltd. v. Shaw, [1951] 2 All ER 267. 93 Mariam v. Narayanan Thrarhar Nambooripad, AIR 1965 Ker 55. 94 (1878) 4 Cal 369, 373; Angne Lal v. Sidh Gopal, AIR 1940 All 214, (1940) All LJ 320, 189 IC 60; Umed Singh v. Bihari Lal, AIR 1922 Nag 50, 62 IC 881. 95 Somashastri Vishwanath Shastri Kashikar v. Swamirao Kashinath Nadgir, (1918) 42 Bom 93, AIR 1917 Bom 55, 43 IC 482; Sri Sri Sri Gajapathi Kristna Chandra Deo Garu v. P Srinivasa Charlu Chetty, AIR 1915 Mad 95 (s. 70 applicable).
Reimbursement and Contribution A claim for contribution is based on the payment of a common liability of two or more persons, or by one of them. A claim for reimbursement, on the other hand, is based on the payment of the liability of one or more persons by another who is interested in making the payment, but is not legally bound to pay it.1 The former is used in the case of joint promisors who were all liable to the promisee, and one or more of them discharged the liability.2 They are entitled to sue the other co-promisors for contribution. Reimbursement arises where a person who has an interest in the matter discharges the liability which another person is under the law bound to pay but does not do so.3 1 Baijnarh Thakur v. Bijadhar Kamkar, AIR 1961 Pat 103. 2 See sections 70 and 43 (Contribution) and s. 146 (Contribution among Co-sureties). 3 Shankerlal v. Motilal, AIR 1957 Raj 267; Nandlal Singh v. Ram Kirit Singh, AIR 1950 Pat 212 (plaintiff can ask for contribution under s. 43, and not reimbursement under this section).See below, 'Contribution'.
Remedies Against Wrong-doers Neither this section nor s. 70 apply to remedies against wrong-doers.4 An employer paid compensation to one of its employee under the Workmen's Compensation Act, 1923 for injuries caused on account of negligence of a third party and claimed to be reimbursed under this section, against the third party for the amount paid, but this section was held inapplicable as the payment by the employer was under a statute, and not merely because he was a 'person interested'.5 Where the County paid damages to a police constable injured by the defendant's negligence as required by statute, the defendant was not liable to reimburse the amount to the Council.6 4 Seth v. National Bank of India Ltd., (1913) 40 IA 56 at 66, (1913) ILR 40 Cal 598; but see Trustees of the Port of Madras v. Bombay Co. Pvt. Ltd., (1967) 3 Mad 749, AIR 1967 Mad 318, (1966) 2 Mad LJ 226. 5 Trustees of the Port of Madras v. Bombay Co. Pvt. Ltd., (1967) 3 Mad 749, AIR 1967 Mad 318, (1966) 2 Mad LJ 226. 6 Monmouthshire County Council v. Smith, [1956] 2 All ER 800.
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Illustrative Cases A mortgaged his interest in a putni taluk to K. A then sold his interest in the taluk to B, who got his name registered in the zamindar's books in place of A. Subsequently, the zamindar threatened to sell the taluk for arrears of rent, whereupon K paid the amount to save his interest in the taluk. K then sued B to recover the amount from B. B contended that he was only a benamidar for A, and that he was not, therefore, bound to pay the rent. However, this contention was overruled and it was held that, B having held himself out as purchaser, was prima facie bound to pay the rent, and that K was entitled to recover the amount from him under this section.7A and B sold a property to C, A and B agreeing, since B's share was subject to attachment before judgment in a suit against B, to keep C indemnified. B's creditor obtained a decree against B, and to save the property C paid the decretal amount. In a suit against A, it was held that he was liable to repay C the whole amount.8 A purchaser of land from a mortgagor becomes by his purchase the occupant of the land and liable primarily to pay the land revenue, irrespective of whether he is actually cultivating the land. If he defaults in payment of revenue, and the mortgagee pays it to safeguard his own interest in obviating the sale, the purchaser is a person bound to pay for the purposes of this section, and hence liable to reimburse the amount to such mortgagee.9 In H.C. Mukerji v. K.P. Goswami, 10 the Municipal Water Supply Rules provided that the owner of the building or land shall be deemed to be the occupier, and liable to pay fees or charges where the building was occupied by more than one occupier. The premises were occupied by several tenants, who consumed excess water. There was no agreement between the tenants and the owner about payment of water charges for excess consumption. Where one of the tenants paid the rate for the excess consumption to prevent disconnection of water supply, he was entitled to adjustment of payment towards the rent. Where a Hindu widow entitled to maintenance and residence continued in possession after the death of the last male holder otherwise than as heir, she was entitled to recover from the reversioners the amounts spent by her for that purpose.11 Where a legatee under a will discharged the encumbrances on the properties not bequeathed to him, he was entitled to be reimbursed.12Revenue due on land owned by one who is not the registered holder is not money which such an owner is bound to pay under the Madras Revenue Recovery Act, 1864, though it may be to his interest to do so, and the registered holder voluntarily paying such revenue cannot recover it under this section;13 but it has also been held that if a benamidar is held liable for rent, and the real lessee is held not liable, the benamidar, having paid the decretal amount, can recover it from the real lessee, as the section covers not merely personal liabilities, but also indirect liabilities on property.14 Payments made by a second mortgagee to save mortgaged property from sale in execution of a decree for rent obtained by the zamindaragainst the mortgagor under the Bengal Tenancy Act, 1885, cannot be recovered by him from the first mortgagee, as the latter is not bound under this section to pay the rent due by the mortgagor to thezamindar.15 Where the income-tax authorities assessed the widow of a deceased Hindu in respect of outstandings forming part of the estate of the deceased, notwithstanding remonstrances on her part that the outstandings had not come to her, but had been bequeathed under the will of the deceased to the defendants, and the widow paid the tax, it was held that she could not recover the amount from the defendants under this section, for the defendants, not being the parties assessed, were not 'bound by law' to pay the tax.16 A co-sharer is not bound by law to pay a rent-decree in favour of the superior landlord, and hence not liable to contribution where the decree is paid off by the other co-sharer.17 There can be no reimbursement from trespassers under this section for dues paid to the zamindar on their behalf.18 A Hindu father is not 'bound by law' to get his minor daughter married; the obligation to defray the expenses of the marriage of sons and daughters being cast by Hindu Law upon a father only if there is any joint family property in his hands, and not otherwise. A wife expending money on the marriage of her minor daughter is not entitled to recover it personally from her husband.19 A mill belonging to a company in liquidation was purchased by the Government of Madras from the liquidator, and the Government took possession of the mill, and paid the purchase price. Later, the liquidator got a sale deed prepared by his legal adviser which was sent to the Government pleader. The liquidator claimed the fees of his legal adviser for preparing the conveyance. However, the claim was rejected as the lawyer was working for the liquidator, and there was no legal obligation on the buyer to get the conveyance, nor did the seller have any right to get the conveyance prepared, or
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compel the buyer to have that conveyance executed.20 A puisne mortgagee who bought the mortgaged property in execution of his own decree and thereafter redeemed a prior mortgage cannot claim from the mortgagor the sum paid by way of redemption, since after the puisne mortgagee's purchase of the property, the mortgagor's interest was extinguished and he is, therefore, no longer a person 'bound by law to pay.'21 7 Umesh Chandra Banerjee v. Khulna Loan Co., (1906) ILR 34 Cal 92. 8 Neni Kavur Bai v. P. Ranganathan Pillai, AIR 1946 Mad 244. 9 Madangopal Raghunathdas v. Shrinarayan, (1946) ILR Nag 297, AIR 1946 Nag 226. 10 AIR 1961 All 195. 11 Muthuswami Kavundan v. Ponnayya Kavundan, 51 Mad 815, (1928) ILR 51 Mad 815, AIR 1928 Mad 820, (1928) 110 IC 613. 12 Piramu Ammal v. Serunatha Ammal, AIR 1925 Mad 1175. 13 Boja Sellappa Reddy v. Vridhachala Reddy, (1906) 30 Mad 35; Subramania Chetty v. Mahalingasami Sivan, (1909) 33 Mad 41; Puthempurayal Amman Pariyayi v. Mangalasseri Pullikkandi Pakran Haji, (1912) 24 Mad LJ 548, 15 IC 262. 14 Joy Chand Seraogi v. Dole Gobinda Das, AIR 1944 Cal 272; Mothooranath Chattopadhya v. Kristokumar Ghose, (1878) 4 Cal 369. 15 Gangadas v. Joggendra, (1907) 11 Cal WN 403, a person holding over in trespassary occupation of land after he has sold his interest therein is not 'bound by law' to pay the zamindar's dues. 16 Raghavan v. Alamelu Ammal, (1907) 31 Mad 35, (1906-08) ILR 29-31 Mad 798. 17 Kamaleshwari Prosad Singh v. Jagar Nath Sahai, AIR 1920 Pat 155(2), 56 IC 949; Mahommad Qulikhan v. Mubarak Fatima, AIR 1935 All 758, (1935) All LJ 503, 154 IC 716. 18 Payida Ramakrishnayya v. Barrey Nagarazu, AIR 1926 Mad 152. 19 Sadhu Laxmi Sundaramma v. Sadhu Suryanarayana, AIR 1950 Mad 274. 20 Andhra Paper Mills Co. Ltd. v. State of Andhra, AIR 1961 AP 57. 21 Nandan Sahu v. Fateh Bahadur Singh, (1940) ILR All 71, AIR 1940 All 104, 185 IC 519.
Particular Situations Subrogation Subrogation by operation of law, or legal subrogation relied upon rests on the same equity or reimbursement as is enacted in this section. Where an insurance company makes the payment on behalf of the insured, it would gain all those rights to recover amount of goods as vested in the party on whose behalf it has made payment in view of s. 69.22 An insurance company, which had obtained a deed of subrogation after paying the insured consignor of goods, could sue the carrier for the amount paid by it.23 Even in the case of subrogation there must be an obligation, express or implied, to repay; and the principle of subrogation can never be applied to a mere volunteer.24 Contribution The right and duty of contribution is founded on doctrines of equity, on the ground of equality of burden and obligations, and does not depend upon contract.25 Mutuality is the test of contribution.26 It has been assumed in a number of decisions that s. 69 applies to suits for contributions, i.e., to
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cases where both plaintiff and defendant were liable for the money paid by the plaintiff. It was submitted by Sir Maurice Gwyer (contrary to the view expressed by the learned authors of this work) that s. 69 had no application to such cases. The section deals with reimbursement and not with contribution to all, for the person who is interested in the payment of money which another is bound by law to pay 'must be a person who is not himself bound to pay the whole or any portion of the money'. It was so held in Venkata Simhadri Jagapatiraju v. V. Lakshmi Nrusimha Roopa Sadrusannama Arad Dugarazu Dakshina Kavata Dugarazu, 27 and later, by many other High Courts.28 Thus, where the beneficiaries filed a suit against two mutawallis and obtained satisfaction of the decree from one of them who had the funds in his own hands, it was held that in the circumstances he was only paying what he himself was bound to pay, and that he could not, therefore, claim contribution from his co-mutawalli.29 The Law Commission of India has also preferred this view, and recommended that this section be made clear to deal with cases of reimbursement, and not those of contribution.30 A residuary section proposed by it would cover cases of liability to contribution not covered by s s. 43, 146, 147 or 70.31 Decisions which have been thought to sustain a different doctrine and holding the view that a person may be interested in making the payment, notwithstanding that he is also liable to pay32 are, it is submitted, incorrect. The section does not exclude any such claims to contribution as may arise out of express or tacit agreements for indemnity.33 This right is not confined to s. 69 or s. 70, but may also be based upon other equitable considerations, and these considerations would be available as much to the plaintiff as to the defendant.34 A joint wrong-doer is not entitled to sue for contribution.35However, the Law Commission of India has recommended for an express provision in the Contract Act for contribution between joint tort-feasors.36 Joint Judgment Debtors The liability of judgment debtors who are jointly and severally liable to the decree-holder for the entire decretal amount stands unaffected by any agreement, between the judgment-debtors inter se, to the effect that one of them was liable exclusively to satisfy the decree. If as a result of the failure on the part of the judgment-debtor to satisfy the decree, another judgment-debtor pays the decretal amount, he is entitled to claim reimbursement from him under s. 69 of the Contract Act,37 although no coercive processes were taken out by the decree-holder against him.38 A co-judgment debtor may also recover under the principles of s. 43.39 It has been held that the section applies where one co-surety paying more than his share seeks to recover the proportionate share from another co-surety.40 A co-defendant paying full amount of costs cannot claim contribution, unless some equity exists in his favour,41 and the defendant seeking to avoid liability has to show some equity which entitles him to exemption from contribution to the costs.42 A decree for costs was passed against A, a contesting defendant, and B a non-contesting defendant. A's property was attached in execution of the decree and he paid off the decretal amount and sued B for contribution, but the court held that s. 69 did not apply as A paid for his own benefit.43 It has, however, been held that as A had contested and B had not, there was no equity in favour of the former.44 In any proceedings for contribution under this section, the amount of the contribution recoverable from any person shall be such as may be found by the court to be just and equitable having regard to the extent of that person's responsibility for the damage; and the court shall have the power to exempt any person from liability to make contribution, or to direct that the contribution to be recovered from any person shall amount to a complete indemnity.
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Section 69 is not applicable to a case, where a plaintiff claims from his former partner contribution for penalty paid in an income-tax matter after the dissolution of partnership, but referable to tax of the pre-dissolution period.45 Co-sharers One co-sharer who chooses to spend money on the joint property without permission of the others, cannot claim such expenses from the joint owner, unless the payment falls under this section or s. 70.46 A suit for contribution may be brought under this section by one of several co-sharers who has discharged the liability, to compel others to make good their shares;47 for instance, for recovering land revenue paid by him,48 or water cess payable under statute,49 or rent due on the land,50 or any decretal dues.51 However, where a co-sharer was not bound by law to pay a rent-decree in favour of the superior landlord, he is not liable to contribution where the decree is paid off by the other co-sharer.52Further, where in a previous suit for partition and accounts, the plaintiff had the right to also sue for money paid by him for liability on the joint properties or a portion thereof, he could not claim that sum under s s. 69 or 70 of Contract Act pleading separate cause of action; the bar of res judicata applied.53 Purchaser of Property A person purchasing property subject to a charge is alone liable to pay it off, and he is not, therefore, entitled to recover the amount paid by him from the person originally liable in respect thereof. Thus, the purchaser of a putni taluk at a sale in execution of a decree against the holder thereof is bound by law to pay all arrears of rent due to the zamindar at the time of sale. If the purchaser pays the arrears to save the taluk from sale at the instance of the zamindar, he cannot recover the amount from the putnidar, though the putnidar enjoyed the profits of the patni during the period for which the rent had become due.54 Similarly, a person who buys immovable property subject to a charge for maintenance in favour of a widow cannot recover from the vendor maintenance money paid by him to the widow to save the property from sale at the instance of the widow.55 However, a purchaser of a portion of property made to pay off the decree amount in order to prevent the sale of the property was entitled to recover the money he had paid under this section from the other owners.56 A purchaser under a sale effected free of encumbrance, required to pay off the mortgage on the property, is entitled to be reimbursed by the vendor.57 Conversely, where the vendee entered into possession under the contract of sale, and the vendor paid the charges on the property since that date to the execution of the sale, the vendor is entitled to recover it from the vendee.58 R purchased properties, X and Y, which were subject to a usufructuary mortgage and the mortgage amount was left with R. He redeemed property X, and sold property Y to the plaintiff free of mortgage encumbrance. To get possession, the plaintiff paid the balance of the mortgage amount and sued R for that amount. Section 69 was held to apply, and plaintiff was held entitled to reimbursement.59 A transferee (without the consent of other partners) of the share of a partner in the firm, paying a debt of the partnerships without the consent of the partners, does not get a right to claim contribution from other partners, as he does not get the status of a partner, and is not interested in the payment of the debt.60 Landlord and Tenant A landlord cannot recover under this section the amount spent for employing sweepers under an order of the Municipal Board to keep premises clean.61 Where the landlord collected water-cess from the plaintiffs at penal rate and paid to the Government, the plaintiffs could not recover the amount from him, because the landlord was not bound to pay water-cess.62 The occupier who makes the payment
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of tax for which lessor is primarily liable is entitled, in the absence of any contract to the contrary, to be reimbursed by the lessor.63 A co-tenant paying the decretal amount for saving the tenancy is entitled to contribution.64 Payment of the whole rent due on the putni made by the darputnidar of a share of putni, for saving it from being sold in execution of a decree obtained by the landlord in a suit for arrears of rent comes within this section, though the suit was brought against some only, and not all of the putnidars.65 Reversioners A Hindu reversioner is interested in the payment of arrears of Government revenue, which a Hindu widow is bound to pay in respect of property in which she has a widow's estate, and he is entitled to recover the same from the widow;66 as also a reversioner who pays off the mortgage.67So also is he interested in making a deposit under O. XXI, r. 89 of the Code of Civil Procedure, to have a sale in execution of a decree against a Hindu widow set aside, the sale being of the entire interest in the property sold, and not merely the widow's interest.68 Sureties The plaintiff remained surety for enabling removal of attachment before judgment. In later proceedings the property was found unattachable. The decree-holder adopted coercive measures and recovered the dues from the plaintiff. It was found that the plaintiff was not liable to pay, yet the plaintiff could get reimbursement from the debtor.69 One of the co-sureties paying more than his proportionate share can enforce contribution from the others under this section.70 A co-surety may be liable to contribute to the payment made by another co-surety to the creditor, even though the payment was made without any written demand from the creditor required under the guarantee.71 22 Rajasthan Golden Transport Co. Pvt. Ltd. v. United India Fire and General Insurance Co. Ltd., AIR 1980 Guj 184. 23 AIR 1980 Guj 184 at 189. 24 Arulanandam Vethakannu Nadar v. Bhagavathi Pillai Thankachi, AIR 1972 Mad 207, 211-12; Vasudeva Mudaliar v. Caledonian Insurance Co. AIR 1965 Mad 159 (difference between subrogation and assignment); Union of India v. Kalinga Textiles, AIR 1969 Bom 401; Rajasthan Golden Transport Co. Pvt Ltd. v. United India Fire and General Insurance Co. Ltd. AIR 1980 Guj 184, 189 (insurer subrogated); United India Fire and General Insurance Co. Ltd. v. Pelaniappa Transport Carriers, AIR 1986 AP 32. 25 Nawab Mirza Mahommad Kazim Ali Khan v. Nawab Mirza Mahommad Sadiq Ali Khan, AIR 1938 PC 169, 174; Suna Ana Ramanathan Chettiar v. Mana Pena Palaniappa Chettiar, AIR 1939 Mad 531; Hutton v. Eyre, (1815) 6 Taunt 289, [1814-23] All ER Rep 151. 26 Satya Bhushan Bandopadhyapa v. Krishnakali Bandopadhyaya, AIR 1915 Cal 278, (1914) 18 Cal WN 1308, 24 IC 259. 27 (1915) 39 Mad 795, AIR 1916 Mad 980; Ramaswami Naicker v. Viswanatha Chetty, AIR 1950 Mad 343. 28 Futteh Ali v. Gunganath Roy, (1881) 8 Cal 113, 116; Manindra Chandra Nandy v. Jamahir Kumari, (1904) 32 Cal 643, 9 CWN 670; Ananda Kishore Choudhury v. Panchu Kapali, (1934) 61 Cal 864, AIR 1934 Cal 709,152 IC 510; Biraj Krishna v. Purna Chandra, (1939) 2 Cal 226, 1939, AIR 1939 Cal 645; Sudhangshu Kumar Roy v. Banamali Roy, AIR 1946 Cal 63, 223 IC 537; Gopinath v. Raghubansh Kumar Singh, AIR 1949 Pat 522; Nandlal Singh v. Ram Kirit Singh, AIR 1950 Pat 212; Shankerlal v. Motilal, AIR 1957 Raj 267; M Vedachala Mudaliar v. S Rangaraju Naidu, (1960) Mad 455, AIR 1960 Mad 457, 462, (1960) 1 Mad LJ 445; Baijnath Thakur v. Bijadhar Kamkar, AIR 1961 Pat 103. 29 Mahommad Qulikhan v. Mubarak Fatima, AIR 1935 All 758, (1935) All LJ 503, 154 IC 716. 30 See, 13th Report of the Law Commission of India, 1958, para 90, which recommended substituting the words 'who though not bound by law to pay, is interested in the payment of money' for the words 'who is interested in the payment of money' in the section. 31 The 13th Report of the Law Commission of India, 1958, recommended adding s. 72B as follows:&uot;72B: Restitution by person unjustly benefited in cases not expressly provided for.--In any case no coming within the scope of
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sections 68 to 72A, where there is no contract, but a person is unjustly benefited at the expense of another person, the former is bound to restore the benefit to the latter or to make compensation therefor.&uot; 32 Bepat Singh v. Sham Lal, (1931) 10 Pat 168, AIR 1931 Pat 234, 132 IC 107; Ananda Kishore Choudhury v. Panchu Kapali, (1934) 61 Cal 864, AIR 1934 Cal 709, 152 IC 510; Mulabai v. Balakdas Bhagwat Prashad, (1939) Nag 246, AIR 1938 Nag 459, 178 IC 485; Amrit Waman Dalal v. Mahadeo Laxminarayanan Shraogi, AIR 1940 Nag 285, 190 IC 594; Harichand v. Gyaniram, (1944) Nag 638, AIR 1944 Nag 282; Dori Lal v. Patti Ram, (1911) 8 All LJ 622. 33 Bejoy Kumar Sen v. Kusum Kumari Debi, (1928) 33 Cal WN 221, AIR 1929 Cal 315. 34 Ibid; relying on Magniram v. Mehdi Hossein Khan, (1903-04) ILR 30-31 Cal 760, (1903) 31 Cal 95; Registered Jessore Loan Co. Ltd. v. Gopal Hari Ghose Choudhury, AIR 1926 Cal 657. 35 Ramakrushna Mohanty v. Radhakrushna Mohanty, AIR 1970 Ori 237; M Vedachala Mudaliar v. S Rangaraju Naidu, (1960) Mad 455, AIR 1960 Mad 457, (1960) 1 Mad LJ 445 (contribution from other wilful wrongdoer being liable to pay penalty to the state; but s. 69 inapplicable); Mahabir Prasad v. Darbhangi Thakur, AIR 1919 Pat 165 (when the parties had knowledge of the wrong); Mantrala Yegnanarayana v. Vankamamidi Yagannadha Rao, AIR 1932 Mad 1(2) (parties had knowledge of the wrong); but see Dharni Dhar v. Chandra Shekhar, AIR 1951 All 774(FB) (contribution between joint tort-feasors must be allowed). 36 The 13th Report of the Law Commission of India, 1958, recommended adding the following s. 69A to the Contract Act :&uot;69A. Contribution between joint tort-feasors.--(1) Where damage is suffered by any person as a result of a tort (whether a crime or not), any tort-feasor liable in respect of that damage may recover contribution from any other tort-feasor who is, or would if sued have been, liable in respect of the same damage, whether as joint tort-feasor or otherwise, so, however, that no person shall be entitled to recover contribution under this section from any person entitled to be indemnified by him in respect of the liability in respect of which the contribution is sought.&uot; 37 Ram Lal Mandal v. Khiroda Mohini Dasi, AIR 1914 Cal 208; Debendra Nath Haldar v. Prosonna Kumar Haldar, AIR 1926 Cal 951; Babu Bhagwati Saran Singh v. Maiyan Murat Mati Kuer, AIR 1931 Pat 394 (application of s. 70 preferred); Jagpati Kuer v. Sukhdeo Prasad, AIR 1942 Pat 204. 38 Chaturbhujilal Kanhayalal v. Girdharilal Kanhayalal, (1948) ILR Nag 80, AIR 1948 Nag 390. 39 See s. 43 above under the heading: 'Contribution between Judgment-Debtors'. 40 Tirumalai Savuri Naicker v. Royar, AIR 1921 Mad 530 (Ramesam J. dissenting; s. 140 applies). 41 Muthuswami Aiyar v. Subramania Aiyar, AIR 1932 Mad 146; Baijnath Thakur v. Bijadhar Kamkar, AIR 1961 Pat 103. 42 Baijnath Thakur v. Bijadhar Kamkar, AIR 1961 Pat 103; Baldeo Tewari v. Harbhajan Singh, AIR 1963 Pat 227. 43 Baijnath Thakur v. Bijadhar Kamkar, AIR 1961 Pat 103 (nor did s. 70 apply; and whether s. 43 would was not decided); Governor-General in Council v. Municipal Council Madura 75 IA 213, AIR 1949 PC 39; but see Gurulingappa Shivappa Masali v. Somanna Shiddappa, AIR 1930 Bom 506; Nityananda Bakshy v. Banamali Bakshy, AIR 1962 Ori 1. 44 Janakibai v. Rama Manaji, AIR 1948 Nag 292, (1947) ILR Nag 881; Narendra Chandra v. Kumar Pashupati Nath Malia, AIR 1949 Cal 242. 45 M. Vedachala Mudaliar v. S. Rangaraju Naidu, (1960) ILR Mad 455, AIR 1960 Mad 457, (1960)1 Mad LJ 445 (case must be confined to its own facts). 46 Kamaleshwari Prosad Singh v. Jagar Nath Sahai, AIR 1920 Pat 155(2), 56 IC 949 (liability of one co-sharer to contribute to the payment of a rent decree paid off by another co-sharer). 47 Satya Bhushan Bandopadhyapa v. Krishnakali Bandopadhyaya, AIR 1915 Cal 278, (1914) 18 CWN 1308, 24 IC 259; Registered Jessore Loan Co. Ltd. v. Gopal Hari Ghose Choudhury, AIR 1926 Cal 657; Dinu Ghose v. Kati Ghose, AIR 1926 Cal 1031; but see Naraina Pai v. Appu, AIR 1916 Mad 668 (payment of land revenue assessed jointly, recovery otherwise than under this section); Gopendra Narayan Bagchi v. Golokendra Kumar Chaudhury, AIR 1955 Cal 62 (no claim for contribution under this section when interest in property has not been affected). 48 Srinivasa v. Sivakolundu, (1889) 12 Mad 349; Seshagiri v. Pichu, (1887) 11 Mad 452; Harihar Dora v. Upendra Pati, AIR 1939 Pat 497. 49 Narayanaswami Naidu Garu v. Sree Rajah Vellanki Shreenivasa Jaggannadha Rao Bahadur Zamindar Garu, (1909) ILR 33 Mad 189. 50 Prosonno Kumar Basu v. Jamaluddin Mahommad, AIR 1914 Cal 672 (under s. 70); Chandradaya Sen v. Bhagaban Chandra Sen, AIR 1916 Cal 954, (1916) 23 Cal LJ 125, 32 IC 200. 51 Khettra Nath Roy v. Mahommad Uzir Muktear, AIR 1914 Cal 373; Ram Rachhpal v. Banwari Lal, AIR 1935 Lah 981. 52 Kamaleshwari Prosad Singh v. Jagar Nath Sahai, AIR 1920 Pat 155(2), 56 IC 949; Mahommad Qulikhan v.
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Mubarak Fatima, AIR 1935 All 758, (1935) All LJ 503, 154 IC 716. 53 Saraswati Debi v. Satya Narayan Gupta, AIR 1977 Cal 99 at 107. 54 Manindra Chandra Nandy v. Jamahir Kumari, (1905) 32 Cal 643, 9 CWN 670; Kashi Nath Mukherji v. Nil Ratan Saha, AIR 1947 Cal 304, 51 CWN 116; Ranglal Sahu v. Kali Shanker Sahai, (1923) 2 Pat 890, AIR 1924 Pat 235, 77 IC 73 (but not where the decree related to rent before his purchase of the tenure). 55 Mangalathammal v. Narayanaswami Aiyar, (1907) 17 Mad LJ 250. 56 Rasappa Pillai v. Mitta Zemindar Doraiswami Reddiar, AIR 1925 Mad 1041, (1925) 90 IC 545, 49 Mad LJ 88; Sharif Ahmad v. H Hunter, AIR 1937 Oudh 420. 57 Bhagwati v. Banarsi Das, AIR 1928 PC 98; Neni Kavur Bai v. P Ranganathan Pillai, AIR 1946 Mad 244. 58 Sinthamani Chetti v. Arunachalam, AIR 1927 Mad 1060. 59 Thirumalasabbu Chettiar v. Rajammal, AIR 1961 Mad 170; following Govindram Gordhandas Seksaria v. State of Gondal, (1950) 77 IA 156, AIR 1950 PC 99, 52 Bom LR 450; dissenting from Kunchithapatham Pillai v. Padamalai Pillai, AIR 1918 Mad 1012. 60 Ram Prasad Singh v. Shivanandan Misra, AIR 1963 Pat 149. 61 Nabin Chander Bose v. Gadda Berhai, AIR 1914 All 322. 62 Bammadevara Satyanarayana Varaprasada Rao Naidu v. Dasika Sriramulu, AIR 1916 Mad 157. 63 Basant Lal Katyal v. Boora Ram Kapoor, AIR 1963 All 568. 64 Dinu Ghose v. Kati Ghose, AIR 1926 Cal l 031; Kedar Nath Mistri v. Narayan Chandra Safui, AIR 1930 Cal 344. 65 Rajani Kanta Mondal v. Lal Muhammad Sardar, AIR 1918 Cal 636, (1971) 21 Cal WN 628, 41 IC 242. 66 Sambasiva Aiyar v. Seethalakshmi Ammal, (1909) 19 Mad LJ 331. 67 Narayana Kutti Goundan v. Pechiammal, (1911) 36 Mad 426, (1912) 22 Mad LJ 364; Mollaya Padayachi v. Krishnaswami Iyer, AIR 1925 Mad 95. 68 Pankhabati Chaudhurani v. Nonihal Singh, AIR 1914 Cal 338, (1914) 18 Cal WN 778, 21 IC 207. 69 Harichand v. Gyaniram, (1944) ILR Nag 638, AIR 1944 Nag 282. 70 Tirumalai Savuri Naicker v. Royar, AIR 1921 Mad 530 (Ramesam J. dissenting: s. 140 applicable). 71 Simpson v. Smith, [1999] 2 All ER 833.
Sections 69 and 70 The two sections deal with entirely different conditions, and they cannot both apply to the same facts.72 However, there have been cases where both are applied.73 Nor are these two sections exhaustive of the principle contained therein. 72 Sudhangshu Kumar Roy v. Banamali Roy, AIR 1946 Cal 63, 223 IC 537. 73 L Ram Rattan Lal v. Gaura, AIR 1930 All 516, 122 IC 765; Savitribai v. Nanhelal, AIR 1934 Nag 84; Ram Rachhpal v. Banwari Lal, AIR 1935 Lah 981; K Chengalroya Reddi v. Udai Kavour, AIR 1936 Mad 752 (co-owners).
Limitation Reimbursement under this section can be claimed within three years from the date on which the money was paid.74
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74 Sinthamani Chetti v. Arunachalam, AIR 1927 Mad 1060; Muthuswami Kavundan v. Ponnayya Kavundan 51 Mad 815, AIR 1928 Mad 820, (1928) 110 IC 613; Totaram Jawaharlal Kalwar v. Harishchandra Harikisan Rafe Khatri, AIR 1937 Nag 402; Perumal Reddiar v. Suppiah Thevar, AIR 1945 Mad 500.
Pollock & Mulla-The Indian Contract Act, Updated 14 Edition/Pollock Mulla Indian Contract Act Updated Edition 2014/The Indian Contract Act, 1872 (Act 9 of 1872)/CHAPTER V Of Certain Relations Resembling those Created by Contract/S. 70.
The Indian Contract Act, 1872 (Act 9 of 1872) CHAPTER V Of Certain Relations Resembling those Created by Contract S. 70. Obligation of person enjoying benefit of non-gratuitous act.-Where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratuitously, and such another person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered.75 Illustrations (a) (b)
A, a tradesman, leaves goods at B's house by mistake. B treats the goods as his own. He is bound to pay A for them. A saves B's property from fire. A is not entitled to compensation from B, if the circumstances show that he intended to act gratuitously.
Introduction Where a person does or delivers something to another without intending to do so gratuitously, he is entitled to receive compensation for the thing or restoration of the thing delivered if the other party has enjoyed the benefit of the thing done or delivered. 75 As to suits by minors under s. 70 in Presidency Small Cause Courts, see the Presidency Small Cause Courts Act, 1882 (15 of 1882), s. 32.
Principle This section goes far beyond English law.76 By the common law, if goods, work, or anything valuable be offered in the way of business and not as a gift, the acceptance of them is evidence of an agreement--real, not fictitious--and agreement, though it need not be expressed in words--to pay what the consideration so given and taken--is reasonable and worth. A man is not bound to pay for that which he has not the option of refusing.77Under this section it would seem that whoever finds and restores lost property, apart from any question of a reward having been offered, is entitled to compensation for his trouble if he did not intend to act gratuitously.78 This is certainly not the Common Law rule. Illustration (b) is in accordance, no doubt, with the English law, so far as the negative result goes; but the only real analogy is to be found in the Maritime Law of Salvage,79 and in some other
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very rare cases depending on the same principle. The case of illust. (a) would be decided in the same way, but not quite for the same reason. Either B has accepted the goods, in which case he cannot be heard to say that they were not intended for him,80 or he has dealt with them as a mere trespasser, in which case he is liable for their value as damages. This does not apply to the rare, but possible case of B honestly thinking that the goods came from X, of whom he intended to buy such goods. Such a case may well be within the present section, but by the common law B is not liable to A for the price of the goods,81 in contract, express or implied. It seems, however, that even in England there would be liability in quasi-contract. The rendering of services under a void agreement is a typical situation leading to a quasi-contractual remedy.82 Under the English law, if without an antecedent request a person assumes an obligation or makes a payment for the benefit of another, he would be refused the right of indemnity. However, if he could show that in the particular circumstances of the case there was some necessity which had led him to assume the obligation, the law would grant him a right of reimbursement if in all the circumstances it was just and reasonable to do so. Where the plaintiff had acted behind the back of the defendants in order to oblige a third person and despite the protest of the defendants, it would not be just and equitable to grant him the right of reimbursement.83 In contrast, in United States of America, the law may require one who has not requested a benefit to make restitution for it if (i) the claimant has conferred a benefit on the other party; (ii) benefit has not been conferred officiously; (iii) benefit has not been conferred gratuitously; and (iv) benefit conferred is measurable.84 76 Jarao Kumari v. Basanta Kumar Roy, (1904) 32 Cal 374, 377; Nellie Wapshare v. Pierce Leslie & Co. Ltd. AIR 1960 Mad 410; Govindarajulu Naidu v. SS Naidu, (1958) 2 Mad LJ 148. 77 Sumpter v. Hedges, (1898) 1 QB 673; Munro v. Butt, (1858) 8 E&B 738. 78 See s. 71. 79 See: 'Principle of Salvage Under the English law'. 80 Weatherby v. Banham, (1832) 5 C&P 228. 81 Boulton v. Jones, (1857) 2 H&N 564, 115 RR 695. 82 Craven-Ellis v. Canons Ltd., (1936) 2 KB 403, [1936] 2 All ER 1066; Denning, (1939) 55 (LQR) 54 at 61; Rover International Ltd. v. Cannon Films Sales Ltd., (No 3) [1989] 3 All ER 423, (1988) 2 FTLR 536. 83 Owen v. Tate, [1975] 2 All ER 129 at 134. 84 Farnsworth, Contracts, 3rd edn., pp. 101-08.
Basis of the Section A claim for compensation by one person against another under s. 70 is not based on any subsisting contract between the parties; its basis is that something had been done by one party for the other which the other party has voluntarily accepted. Section 70 and para 3 of s. 73 are based on the doctrine of restitution which prevents unjust enrichment by retaining anything received by a party which does not belong to him and he must return it to the person from whom he received it and if act ion is not possible, pay him its money value.85 The rule laid down in this section was stated to have been suggested by the notes to Lampleigh v. Brathwait, 86 and perhaps indiresctly by the Roman law.87 This section avoids the niceties of the English Law on the subject of quasi-contract.88 The section is not founded on contract, but embodies the equitable principle of restitution and unjust enrichment;89 it must be interpreted according to its clear and explicit terms, and not in reference to the provisions of the English law on the matter.90 The
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principle of unjust enrichment incorporated in s s. 69 and 70 of the Indian law is wider than the English law as observed below:91
The terms of (this section) are unquestionably wide, but applied with discretion they enable the Courts to do substantial justice in cases where it would be difficult to impute to the persons concerned relations created by contract.92
Compensation under this section has been held as based on implied conduct of the parties, namely the supply of goods by the plaintiff, accepted by the defendant who has no right to retain.93 In Mulamchand v. State of Madhya Pradesh, 94 the Supreme Court held that a claim made by one person against another under s. 70 is not on the basis of any subsisting contract between the parties, but on a different kind of obligation. The juristic basis of the obligation in such case is not founded upon any contract or tort, but upon a third category of law, namely quasi-contract or restitution.95 Principle of Salvage under the English Law Where a person rescues a ship from peril and the owner of the rescued ship or the cargo owners incur a liability to pay compensation, there arises a genuine quasi-contract because the elements of a contract may not exist. However, cases where there may be an opportunity to bargain for it may be possible.96 In The Troilus97 it was pointed out that in salvage, an obligation is imposed by law irrespective of any contract express or implied, as distinguished from towage which only arises from a contract, express or implied. Usually, services are rendered and the question of salvers' compensation arises later. It has been stated:
The right to salvage may arise out of an actual contract: but it does not necessarily do so. It is a legal liability out of the fact that property has been saved, that the owner of the property who has had the benefit of it shall make remuneration to those who have conferred the benefit on him, notwithstanding that he has not entered any contract on the subject.98
85 Great Eastern Shipping Co. Ltd. v. Union of India, AIR 1971 Cal 150 at 155. 86 (1615) Hob 105. 87 Damodara Mudaliar v. Secy. for State in India, (1894) 18 Mad 88, 91, (1894-96) ILR 18-19 Mad 410 per curiam referring to Whitely Stokes, Anglo Indian Codes, vol.I, 'Introduction to Contract Act ', p. 533. 88 State of West Bengal v. BK Mondal & Sons 1962 Supp (1) SCR 876 per Sarkar J, 912, AIR 1962 SC 779, 794; State of Punjab v. Hindustan Development Board Ltd. (1960) 2 Punj 676, AIR 1960 Punj 585 (based on quantum meruit but admits of liberal interpretation). 89 Ibid; Mulamchand v. State of Madhya Pradesh, (1968) 3 SCR 214, AIR 1968 SC 1218; Dominion of India v. Preety Kumar Ghosh, AIR 1958 Pat 203 at 209; Modi Vanaspati Mfg Co. v. Katihar Jute 90 Secy of State v. GT Sarin & Co. (1929) 11 Lah 375, AIR 1930 Lah 364; Ram Nagina Singh v. Governor-General in Council, AIR 1952 Cal 306; State of Punjab v. Hindustan Development Board Ltd. (1960) 2 Punj 676, AIR 1960 Punj 585. 91 Nellie Wapshare v. Pierce Leslie & Co. Ltd., AIR 1960 Mad 410; Govindarajulu Naidu v. SS Naidu, (1958) 2 Mad LJ 148; cf Alapati Ramamurthi Gelli Krishnamurthi and Co. v. Maddi Seetharamayya, AIR 1958 AP 427, 436 (restitution under s. 65). 92 Suchand Ghosal v. Balaram Mardana, (1910) ILR 38 Cal 1, 6 IC 810; quoted with approval in State of West Bengal v. B.K. Mondal & Sons, (1962) 1 Supp SCR 876, AIR 1962 SC 779 at 790.
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93 Mathura Mohan Saha v. Ramkumar Saha, (1916) 43 Cal 790, 827, AIR 1916 Cal 136; Pallonjee Eduljee & Sons v. Lonavala City Municipality, (1937) Bom 782, 787, AIR 1937 Bom 417; applying the observations of Straight J. in Chedi Lal v. Bhagwan Das, (1888) 11 All 234; distinguishing Punjabai Bhilasa v. Bhagvandas Kisandas, (1928) 53 Bom 309, AIR 1929 Bom 89, 117 IC 518. 94 (1968) 3 SCR 214, AIR 1968 SC 1218 at 1222; Keshab Kishore Narain Saraswati v. State of Bihar, AIR 1971 Pat 99; Bhikraj Jaipuria v. Union of India, (1962) 2 SCR 880, AIR 1962 SC 113. 95 Kotah Match Factory v. State of Rajasthan, AIR 1970 Raj 118; Keshab Kishore Narain Saraswati v. State of Bihar, AIR 1971 Pat 99; Mir Abdul Jalil v. State of West Bengal, AIR 1984 Cal 200. 96 Chitty on Contracts, 28th edn., paras 30-191, pp. 1565-66. 97 (1950) P 92, [1950] 1 All ER 103. 98 The Five Steel Barges,(1890) 15 PD 142 at 146 per Sir James Hannen.
Conditions for Application of the Section The three essential conditions for invoking s. 70 are:
(i) (ii) (iii)
the goods are to be delivered lawfully or something has to be done for another person lawfully; the thing done or the goods delivered must be done or delivered without intention to do so gratuitously; the person to whom goods are delivered enjoys the benefit thereof.1 When all the above three ingredients are pleaded and established in a case, s. 70 can be invoked.2 The section will not apply if any of the aforesaid conditions is not satisfied.3 Thus, where a person merely derives benefit without the person seeking compensation having done anything for him, or having delivered anything to him, the section will not come into play.4 There need not be a pre-existing obligation on the claimant to supply or to serve.5
In Damodara Mudaliar v. Secretary for State in India, 6 it was stated: Certainly, there may be difficulties in applying a rule stated in such wide terms as is that expressed in section 70. According to the section it is not essential that the act shall have been necessary, in the sense that it has been done under circumstances of pressing emergency, or even that it shall have been an act necessary to be done at some time for the preservation of property. It may therefore be extended to cases in which no question of salvage enters. It is not limited to persons standing in particular relations to one another, and, except in the requirement that the Act shall be lawful, no condition is prescribed as to the circumstances under which it shall be done. 1 Damodara Mudaliar v. Secy for State in India, (1894) 18 Mad 88, 91-93; Ranjani Kanta Ghose v. Rama Nath Roy, AIR 1915 Cal 310, (1914) 19 CWN 458, 460, 27 IC 56; Gopinath v. Raghubansh Kumar Singh, AIR 1949 Pat 522; Motilal v. Badrilal, AIR 1957 MB 183; Dominion of India v. Preety Kumar Ghosh, AIR 1958 Pat 203, 208; Khader Khan Sahib v. Doraiswami Chettiar, AIR 1974 Mad 371; Mulamchand v. State of Madhya Pradesh, (1968) 3 SCR 214, AIR 1968 SC 1218; Bengal Coal Co. Ltd. v. Union of India, AIR 1971 Cal 219 at 220; State of Mysore v. Tarachand Venkatachand Shaha, AIR 1973 Mys 333 at 334; Keshab Kishore Narain Saraswati v. State of Bihar, AIR 1911 Pat 99 at 101; Manoharlal Radhakrishna v. Union of India, AIR 1974 Pat 56; Union of India v. Sita Ram Jaiswal, AIR 1977 SC 329, (1976) 4 SCC 505; State of Madhya Pradesh v. Jhankar Singh, AIR 1973 MP 274; Jain Mills and Electrical Stores v. State of Orissa, AIR 1991 Ori 117 at 123. 2 C.I Abraham v. K.A. Cheriyan, AIR 1986 Ker 60. 3 Life Insurance Corpn. of India v. K.A. Madhava Rao, AIR 1972 Mad 112, (1972) 1 Mad LJ 353; Appavoo Nadar v. Chellian Nadar, (1985) 2 Mad LJ 179. 4 Amar Chand Butail v. Union of India, AIR 1962 HP 43.
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5 Madasami Nadar v. Virudhunagar Municipality, AIR 1977 Mad 147, (1977) 1 Mad LJ 257. 6 (1894-96) ILR 18-19 Mad 410.
Applicable when there is no Contract Unlike s. 65,s. 70 covers a wider ground; it cannot be invoked in case of a benefit received under a contract.7 In Moselle Solomon v. Martin & Co.,8 Lord Williams J. held that the terms of s. 70 were very wide, and it was applicable even when the plaintiff could sue upon the contract, express or implied. Jack J. held to the contrary, i.e., the section was not applicable where there was an express contract. The latter, it is submitted, is the correct view. The section has, therefore, no application where there is an express contract.9The Contract Act does not enable a party to ignore the express covenants thereof and to claim payment of consideration for performance of the contract at the rates different from the stipulated rates on 'some vague plea' of equity.10 Section 70 contemplates a case where, initially, at the time of the doing of the act or the delivery of the thing, there is no 'proposal' or 'promise' as defined in s. 2, and, therefore, no agreement. The obligation to make compensation to the person doing the act or, delivering the thing nevertheless arises out of the fact that the person for whom the act was done or to whom the thing was delivered, accepted and enjoyed its benefits, although there was no request for the act or the thing on his part. The section clearly contemplates a case where an act has been done or a thing delivered without request, but not gratuitously.11 However, where the request is made by a wholly unauthorised person, or it is wholly invalid in law, a defendant cannot plead lack of liability to pay compensation for want of request, when he had received the benefit of the work done for him by the plaintiff not intending to do so gratuitously.12 The section does not apply where an act is done by one person at the express request of another, viz. where goods are supplied at the request of another.13 A contrary view was taken in a Bombay case, which, it is submitted, is erroneous.14 A claim under this section also differs from obligations under an implied contract. Thus, if a client engages a pleader to act for him in a case, and if no fee is fixed, the pleader is entitled to reasonable remuneration not under this section, but because the request implies a promise to pay such remuneration.15 However, an alternative claim under s. 70 becomes nugatory as soon as the court finds a valid arbitration clause in a contract covering the subject-matter of dispute.16 7 Municipal Board Lucknow v. Debi Das, AIR 1926 Oudh 388. 8 (1935) ILR 62 Cal 612 at 621 per Lord Williams J. 9 Moselle Solomon v. Martin & Co. (1935) ILR 62 Cal 612 (per minority); Kanhayalal Bisandayal Bhiwapurkar v. Inderchandji Hamirmalji Sisodia, (1947) ILR Nag 154, AIR 1947 Nag 84, 227 IC 58; Dwarka Prasad Arya v. Om Prokash Mohta, AIR 1967 Cal 612. 10 Alopi Parshad and Sons Ltd. v. Union of India, (1960) 2 SCR 793, AIR 1960 SC 588 at 593 per Shah J. 11 R. Gangapathi Pillai v. P.A. Irudayasamy Nadar, AIR 1962 Mad 345 (request not necessary). 12 Union of India v. Kamal Kumar Goswami, (1973) 1 Cal 421, AIR 1974 Cal 231. 13 B.N. Elias & Co. Ltd. v. State of West Bengal, AIR 1959 Cal 247; relying on Union of India v. Ramnagina Singh, 89 Cal LJ 342; Jain Mills and Electrical Stores v. State of Orissa, AIR 1991 Ori 117 at 123. 14 Ramakrishna Shankarrao v. Rangoobai, AIR 1959 Bom 519. 15 Sib Kishore Ghose v. Manik Chandra Nath, AIR 1916 Cal 669, (1915) 21 Cal LJ 618, 29 IC 453; Nathmal v. Sanitation Panchayat Committee, AIR 1935 Nag 242, 160 IC 301 (decision cannot be correct); Ratanlal Hiralal v.
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Chandradutt Ramprasad, AIR 1951 Nag 431. 16 Shalimar Paints Ltd. v. Omprokash Singhania, AIR 1967 Cal 372 (as also a claim under s. 65); Rungta Sons Pvt. Ltd. v. Jugometal Trg Republike, AIR 1959 Cal 423, (1959) 63 Cal WN 527; referring to Anderson Wright Ltd. v. Morgan & Co., (1955) 1 SCR 862, AIR 1955 SC 53.
Applicable when Contract is Invalid If money is deposited, if goods are supplied or if services are rendered in terms of the void contract, s. 70 may be applicable if the conditions of that section are complied with.17 In such cases there is no contract and there can be no decree for specific performance or claim for damages for breach of contract. Such a claim is based not on contract or on tort, but upon a third kind of relationship, i.e., quasi-contract.18 However, s. 70 applies where the contract is invalid for want of form of authority, for example under Art. 299 (1) of Constitution of India , provided the conditions of s. 70 are complied with.19 Agreements of Incompetent Persons This section does not apply to persons who are incompetent to contract.20 The section refers to circumstances in which the law implies a promise to pay; but where there could not have been a legally binding contract, a promise to pay cannot be implied.21 A minor is not liable to a suit under s. 70.22 The reason for this has been stated to be that, if he cannot be sued on an express contract, neither can he be sued on an implied one; and s. 70 is being dealt with in a chapter called 'Certain Relations Resembling Those Created by Contract.' Apart from this, it is clear that any other construction would make s. 68 redundant, and s. 11 to a great extent nugatory.23 Contracts with Corporations Where a company never became entitled to commence business, the expenses incurred in its pre-and post-incorporation period cannot be said to be for its benefit.24 Where a corporation receives money or property under an agreement which turns out ultra vires or illegal, it is not entitled to retain the money, and restitution or compensation can be ordered independently of the express contract.25 Contracts by Persons without Authority Only these cases would be covered by this section, where a request was made, or contract effected, but it was by a person having no authority to make it, because in such cases there is really no request by the person who receives and takes the benefit.26 A debt advanced to a company by its Managing Director even though outside his authority is recoverable by him under s. 70 if the terms of the section are complied with.27 A teacher appointed by a person not having authority to do so is entitled to be paid for the services.28 Where an agreement of sale was effected by an agent without authority, but the vendor had received part of the consideration of sale, the vendor was liable to return the amount received under this section.29 Contracts with the Government The position of the Government in cases of contracts not in accordance with Art. 299 of the Constitution of India 30is not that of a minor; because the Constitution recognises the power of the Government to purchase or acquire property, and a minor is excluded from the operation of s. 70 of the Contract Act because of s. 68.31 Article 299 of the Constitution, which is mandatory in character,32 requires that a contract made in the
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exercise of the executive power of the Union or of a State must satisfy three conditions, viz.: (i) it must be expressed to be made by the President or by the Governor of the State, as the case may be; (ii) it must be executed on behalf of the President or the Governor of the State, as the case may be; and (iii) its execution must be by such person and in such manner as the President or Governor may direct or authorise. Failure to comply with these conditions nullifies the contract, and renders it void and unenforceable.33 A contract between the Government and a private individual not in the manner prescribed by Art. 299(1) of the Constitution of India is not valid, and is unenforceable,34 and there cannot be a suit for compensation for breach.35 However, the fields covered by Art. 299 and s. 70 of the Contract Act are different. The former deals with the formation of contracts, and the latter deals with cases where there is no valid contract and provides for compensation if the three conditions specified there are fulfilled. Section 70 should be read as supplementing the provisions of Art. 299 of the Constitution of India , and not in conflict with it.36 A person whose contract is void for non-compliance with Art. 299(1) of the Constitution,37or s. 175(3) of the Government of India Act, 1935,38 or s. 122 of the Jammu and Kashimir Constitution,39 or one executed by an authorised officer, but not in the name of the Governor-General or the President,40 would be entitled to compensation under s. 70 where the Government has taken the benefit of performance, provided the conditions of s. 70 are complied with.41 The performance of the contract and benefits accepted by the defendant thereunder entitles the plaintiff to relief under s. 70.42Section 70 may apply also where no contract has been executed between the contractor and the Government.43 However, an arbitration agreement not in accordance with s. 175(3) has been held not binding on the Government even if it has taken part in the proceedings.44 What s. 70 prevents is unjust enrichment, and it applies to Governments;45 the same principle applies to contracts with statutory corporations, viz., local authorities, where the contract did not comply with the formalities prescribed by the statutes governing them.46 In many cases s. 65 has also been applied in addition to s. 70 in cases of contracts with government,47 as well as with corporations;48 and in some cases only s. 65 was held applicable.49 A furnishes supplies for Government service to the order of an officer who has no authority for the purpose. The supplies are infact accepted and used. A can recover the value from the Secretary of State according to the market rates.50 In Kessoram Poddar & Co. v. Secretary of State, 51 it was held that a contract not in accordance with s. 175(3) is void and merely because payments were made in such contracts on some previous occasions is no ground for holding that in all such contracts payment should be made. However, since coal was received by the Government, it was bound to make compensation under s. 70.52 After a works contract in writing was executed between the plaintiff and the Governor, there was an increase in labour rates which the Government engineer orally promised to pay to the plaintiff. This was held recoverable under s. 70.53 A claim under this section can be made also by the Government. The Government, entered into a contract with a miller for milling paddy, and delivering rice according to its orders. The delivery made by the miller was short. The contract was not in accordance with s. 175(3). The Government brought a suit for recovery of price of rice not supplied. The contract being void, s. 70 was held applicable and the Government was entitled to compensation.54However, s. 70 was held inapplicable where an agent of the Government appointed without complying with s. 175 (3) of the Government of India Act, procured supplies from suppliers.55 The military authorities could claim compensation for the use of military vehicles by the contractor, although the contract did not comply with Art. 299(1).56 Where the State Government gave to the defendant, who was to be appointed as Class I Officer, stipend during the period he underwent training and also paid his college fee, and the arrangement was not made gratuitously, it was held that since the defendant left the training college without sanction of the Government, he was liable to refund all the monies spent by the Government on his training under s. 70.57 Where the State Government enjoyed the benefit and advantage of the services of an advocate whose appointment was made by the District Magistrate lacking such power, it was held that on the principle of 'restitution and prevention of unjust enrichment' incorporated in s. 70, the Government was
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liable to pay her compensation at the rate of fees admissible to the holder of such post.58 Contracts under Statutory Powers Hard coke was supplied to a jute mill belonging to the military department, but was rejected as not being according to specifications. The Controller then made an order for its disposal under his statutory powers, and pay its price to the supplier. However, before it could be sold the supplier brought a suit for price of coke. It was held that s. 70 of the Contract Act did not apply as the order of the Controller was under his statutory powers.59 Inadmissible for Want of Stamp Duty Where a promissory note contained all the terms of a contract, but was inadmissible for proper stamp duty, no compensation could be allowed under s. 70, whether on the theories of implied promise, money had and received, quasi-contract, unjust enrichment or any other equitable doctrine.60 However, where the promissory note was given as a collateral security, and it was inadmissible for want of a stamp, other evidence could be allowed to prove the debt.61 Similarly, where hundis were inadmissible in evidence because the stamp used was not properly cancelled, the plaintiff could still succeed if his suit could be treated as one for recovery of the amount had and received for compensation of money paid by him on behalf of the defendant to the creditor of the defendant.62 17 Mulamchand v. State of Madhya Pradesh, (1968) 3 SCR 214, AIR 1968 SC 1218; Craven-Ellis v. Canons Ltd. [1936] 2 KB 403, [1936] 2 All ER 1066. 18 Ibid; Assar Ali Khan v. Baijnath Prasad, AIR 1983 All 197 at 199. 19 State of West Bengal v. B.K. Mondal & Sons, (1962) 1 Supp SCR 876 at 912, AIR 1962 SC 779 at 786-89; New Marine Coal Co. (Bengal) Pvt. Ltd. v. Union of India, (1964) 2 SCR 859, AIR 1964 SC 152; Mulamchand v. State of Madhya Pradesh, (1968) 3 SCR 214, AIR 1968 SC 1218. 20 Re Ambica Textiles Ltd.,AIR 1950 Cal 491, (1950) 54 Cal WN 157; Bapulal v. Laxmi Bharat Trading Co. AIR 1966 Raj 14; Bankey Behari Prasad v. Mahendra Prasad, (1940) ILR 19 Pat 739, AIR 1940 Pat 324, 188 IC 772. 21 Shahbaz Khan v. Bhangi Khan, AIR 1931 Lah 344, 135 IC 177; Nathibai Ramratan Mahesri v. Wailaji Punjaji Fulmali, (1937) Nag 111, AIR 1937 Nag 330, 169 IC 657 (if no contract possible, law will not presume one under s. 70); Bankey Behari Prasad v. Mahendra Prasad, (1940) 19 Pat 739, AIR 1940 Pat 324, 188 IC 772(FB) ; Re Ambica Textiles Ltd.AIR 1950 Cal 491, 54 CWN 157; Municipal Board Gonda v. Bachchu, (1952) 1 All 825, AIR 1951 All 736, 742; Mohori Bibee v. Dhurmodas Ghose, (1903) 30 IA 114, (1903) 30 Cal 539; cf Thakurain Harnath Kuar v. Thakur Indar Bahadur Singh 50 IA 69, AIR 1922 PC 403, (1922) All 179, 184 (s. 65). 22 Shahbaz Khan v. Bhangi Khan, AIR 1931 Lah 344, 135 IC 177; Bankey Behari Prasad v. Mahendra Prasad, (1940) 19 Pat 739, AIR 1940 Pat 324, 188 IC 772(FB) ; Daneyi Gurumurty v. Raghu Podhan, AIR 1967 Ori 68; Mohori Bibee v. Dhurmodas Ghose, (1903) 30 IA 114, (1903) 30 Cal 539. 23 Bankey Behari Prasad v. Mahendra Prasad, (1940) ILR 19 Pat 739, AIR 1940 Pat 324, 188 IC 772. As to the position of corporations, see below, and s. 65 under heading: 'Contracts with Statutory Bodies'. 24 Re Ambica Textiles Ltd.AIR 1950 Cal 491, (1950) 54 Cal WN 157. 25 Mathura Mohan Saha v. Ramkumar Saha, (1916) ILR 43 Cal 790 at 827, AIR 1916 Cal 136; Craven-Ellis v. Canons Ltd., (1936) 2 KB 403, [1936] 2 All ER 1066. 26 J.K. Enterprise v. Prithviraj Ratanchand Mehta, (1990) 92 Bom LR 572; State of Orissa v. Prathibha Prakash Bhavan, AIR 1995 Ori 62 (claim granted under 565). 27 Dhobei Charan Sahu v. Official Liquidator of Sri Jagannath Industries Ltd., AIR 1963 Ori 220. 28 Bhavani v. Bhanu, AIR 1960 Ker 133. 29 K.S. Satyanarayana v. V.R. Narayana Rao, AIR 1999 SC 2544 (s. 70 applied among other grounds). 30 Earlier s. 175 of the Government of India Act, 1935. 31 State of West Bengal v. BK Mondal & Sons, (1962) 1 Supp SCR 876 at 900, AIR 1962 SC 779 at 789 (decided
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under s. 175(3) of the Government of India Act, 1935). 32 State of Mysore v. Tarachand Venkatachand Shaha, AIR 1973 Mys 333; State of West Bengal v. BK Mondal & Sons, (1962) 1 Supp SCR 876, AIR 1962 SC 779; Chiranji Lal Multani RB Pvt Ltd. v. Union of India, AIR 1963 Punj 372. 33 Bihar Eastern Gangetic Fishermen Co-op. Society Ltd. v. Sipahi Singh, AIR 1977 SC 2149 at 2152; State of Haryana v. Lal Chand, AIR 1984 SC 1326; State of Punjab v. Om Parkash Baldev Krishan, AIR 1988 SC 2149; Sohan Lal v. Union of India, AIR 1991 SC 955 at 956. For a fuller discussion, see s. 10 above, 'Contracts With The Government.' 34 Mulamchand v. State of Madhya Pradesh, [1968] 3 SCR 214, AIR 1968 SC 1218; Bhikraj Jaipuria v. Union of India, [1962] 2 SCR 880, AIR 1962 SC 113; Karamshi Jethabhai Somayya v. State of Bombay, [1964] 6 SCR 984, AIR 1964 SC 1714; New Churulia Coal Co. Ltd. v. Union of India, AIR 1956 Cal 138; State of West Bengal v. BK Mondal & Sons 1962 Supp (1) SCR 876, AIR 1962 SC 779; AKTKM Sankaran Namboodiripad v. State of Kerala, AIR 1963 Ker 278(FB) ; Union of India v. Gangadhar Mimraj, AIR 1962 Pat 372; State of Bombay v. Pannalal Kanhyalal Desraj Jat, AIR 1959 Bom 56; Chiranji Lal Multani RB Pvt Ltd. v. Union of India, AIR 1963 Punj 372; Thakurain Harnath Kuar v. Thakur Indar Bahadur Singh 50 IA 69, AIR 1922 PC 403, (1922) All 179, 184; Dharmeswar Kalita v. Union of India, AIR 1955 Assam 86. 35 Bhikraj Jaipuria v. Union of India, [1962] 2 SCR 880, 903, AIR 1962 SC 113, 122; applying Municipal Corpn of the City of Bombay v. Secy of State for India in Council, (1904) 29 Bom 580; Kessoram Poddar & Co. v. Secy of State, (1927) 54 Cal 460, AIR 1928 Cal 74; distinguishing Chatturbhuj Vithaldas Jasani v. Moreshwar Parashram, [1954] SCR 817, AIR 1954 SC 236; referring to Liverpool Borough Bank v. Turner, (1860) 30 LJ Ch 379. 36 State of West Bengal v. BK Mondal & Sons 1962 Supp (1) SCR 876, 898, AIR 1962 SC 779, 788-89; State of Bihar v. Thawardas Pherumani, AIR 1964 Pat 225. 37 Mulamchand v. State of Madhya Pradesh, (1968) 3 SCR 214, AIR 1968 SC 1218; P.C. Wadhwa v. State of Punjab, AIR 1987 P&H 117 at 121. 38 State of West Bengal v. BK Mondal & Sons, (1962) 1 Supp SCR 876 at 896, AIR 1962 SC 779 at 789; New Marine Coal Co. (Bengal) Pvt. Ltd. v. Union of India, (1964) 2 SCR 859, AIR 1964 SC 152; Ram Pratap Kamalia Mills v. State of Bihar, AIR 1963 Pat 153; Bhikraj Jaipuria v. State of Bihar, AIR 1964 Pat 555. 39 Malik Abdul Ahad Shah Jalil Ahmed Akhtar v. State of Jammu & Kashmir, AIR 1982 J&K 16. 40 State of West Bengal v. BK Mondal & Sons, (1962) 1 Supp SCR 876 at 912, AIR 1962 SC 779 at 786; New Marine Coal Co. (Bengal) Pvt. Ltd. v. Union of India, (1964) 2 SCR 859, AIR 1964 SC 152; Mulamchand v. State of Madhya Pradesh, (1968) 3 SCR 214, AIR 1968 SC 1218; Ram Pratap Kamalia Mills v. State of Bihar, AIR 1963 Pat 153; Bhikraj Jaipuria v. State of Bihar, AIR l964 Pat 555. 41 New Marine Coal Co. (Bengal) Pvt. Ltd. v. Union of India, (1964) 2 SCR 859, AIR 1964 SC 152; Mulamchand v. State of Madhya Pradesh, (1968)3 SCR 214, AIR 1968 SC 1218. 42 Union of India v. Sahab Singh, AIR 1977 All 277 at 278; Madasami Nadar v. Virudhunagar Municipality, AIR 1977 Mad 147, (1977) 1 Mad LJ 257; New Marine Coal Co. (Bengal) Pvt. Ltd. v. Union of India, (1964) 2 SCR 859, AIR 1964 SC 152. 43 Mir Abdul Jalil v. State of West Bengal, AIR 1984 Cal 200 at 202. 44 Union of India v. AL Rallia Ram, AIR 1963 SC 1685; S.K. Sen v. Provincial PWD State of Bihar, AIR 1960 Pat 159. 45 State of West Bengal v. BK Mondal & Sons 1962 Supp (1) SCR 876, AIR 1962 SC 779; New Marine Coal Co. (Bengal) Pvt Ltd. v. Union of India, [1964] 2 SCR 859, AIR 1964 SC 152; Mulamchand v. State of Madhya Pradesh, [1968] 3 SCR 214, AIR 1968 SC 1218; Panna Lal v. Dy Commissioner, AIR 1973 SC 1174, (1973) 1 SCC 639; Union of India v. JK Gas Plant, AIR 1980 SC 1330, 1332; Secy of State v. GT Sarin & Co. (1929) 11 Lah 375, AIR 1930 Lah 364; State of Madras v. Jayalakshmi Rice Mill Contractors Co. AIR 1959 AP 352; Ram Pratap Kamalia Mills v. State of Bihar, AIR 1963 Pat 153; Great Eastern Shipping Co. Ltd. v. Union of India, AIR 1971 Cal 150; Gujarat Electricity Board v. SA Jais & Co. AIR 1972 Guj 192, 202; State of Uttar Pradesh v. Chandra Gupta & Co. AIR 1977 All 28, 33. 46 Bhandari Brothers v. Municipal Committee, AIR 1931 Lah 457 (on basis of implied contract); Zulaing v. Yamethin District Council 10 Rang 522, AIR 1932 Rang 176; Ram Chand Lotia & Sons v. Municipal Committee Lahore, AIR 1933 Lah 14; Municipal Committee Lahore v. Miran Baksh 13 Lah 561, AIR 1933 Lah 15; Pallonjee Eduljee & Sons v. Lonavala City Municipality, (1937) Bom 782, 787, AIR 1937 Bom 417. 47 Ram Nagina Singh v. Governor-General in Council, AIR 1952 Cal 306; Dominion of India v. Preety Kumar Ghosh, AIR 1958 Pat 203; State of Madras v. K. Periaswami Gounder, AIR 1963 Mad 154. 48 Madura Municipality v. K. Alagirisami Naidu, (1939) ILR Mad 928, AIR 1939 Mad 957.
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49 Damodara Mudaliar v. Secy for State in India, (1894) 18 Mad 88; AKTKM Sankaran Namboodiripad v. State of Kerala, AIR 1963 Ker 278(FB) (s. 65 applies); Municipal Committee Gujranwala v. Fazal Din, (1926) 11 Lah 121, AIR 1929 Lah 742 (other party derived benefit); Arunachala Nadar v. Srivilliputtur Municipal Council, (1934) 58 Mad 65, AIR 1934 Mad 480; Corpn of Madras v. M Kothandapani Naidu, AIR 1955 Mad 82 (quantum meruit). 50 Secy of State v. GT Sarin & Co. (1929) 11 Lah 375, AIR 1930 Lah 364; State of West Bengal v. BK Mondal & Sons 1962 Supp (1) SCR 876, AIR 1962 SC 779. 51 (1927) ILR 54 Cal 460, AIR 1928 Cal 74. 52 New Marine Coal Co. (Bengal) Pvt. Ltd. v. Union of India, (1964) 2 SCR 859, AIR 1964 SC 152; State of West Bengal v. BK Mondal & Sons, (1962) 1 Supp SCR 876, AIR 1962 SC 779; Karamshi Jethabhai Somayya v. State of Bombay, (1964) 6 SCR 984, AIR 1964 SC 1714; Great Eastern Shipping Co. Ltd. v. Union of India, AIR 1971 Cal 150 at 155. 53 State of Bihar v. Thawardas Pherumani, AIR 1964 Pat 225; Hindustan Construction Co. v. State of Bihar, AIR 1962 Pat 336 (a case dealing with s. 175(3) of the Government of India Act not being complied with and services rendered and accepted by the government). 54 Ram Pratap Kamalia Mills v. State of Bihar, AIR 1963 Pat 153; Great Eastern Shipping Co. Ltd. v. Union of India, AIR 1971 Cal 150 (carriage for goods, not carried gratuitously, is claimable); but see Bhikraj Jaipuria v. State of Bihar, AIR 1964 Pat 555. 55 Bhikraj Jaipuria v. State of Bihar, AIR 1964 Pat 555. 56 B.D. Naithani v. State of Uttar Pradesh, AIR 1966 All 507. 57 P.C. Wadhwa v. State of Punjab, AIR 1987 P&H 117 at 121. 58 Indu Mehta v. State of Uttar Pradesh, AIR 1987 All 309 at 313. 59 Union of India v. Dhansar Coal Co. Ltd., AIR 1959 Pat 347. 60 Lothamasu Sambasiya Rao v. Thadwarthi Balakotiah, AIR 1973 AP 342; following Perumal Chettiar v. Kamakshi Ammal, (1938) ILR Mad 933, AIR 1938 Mad 785(FB) . 61 Khitish Chandra Sahu v. Rajkishore Sahu, AIR 1980 Ori 10 at 15. 62 Kundan Lal v. Sahu Bhikhari Das-Ishwar Das, AIR 1929 All 254, (1929) All LJ 333(hundis not properly stamped).
'Lawfully' In s. 70 three situations are contemplated: doing anything, delivering anything, and enjoyment of the benefit thereof by the other party; and the word 'lawfully' is used in the case of the first of such situations, i.e., the word qualifies 'does', and not 'delivers'.63 However, it has also been held that the word 'lawfully' refers to both 'does' and 'delivers' anything, and does not extend the applicability of s. 70 to unlawful contracts.64Hence, in order to lay a successful claim under s. 70 of the Contract Act, the claim must not be one which has an illegal consideration or is illegal. So where paddy was delivered in contravention of the Price Control Order, the acceptance by the other party did not create a lawful relationship between the parties so as to attract s. 70.65 Where controlled goods were sold by an authorised dealer to a non-permit holder in contravention of the provisions of the Iron and Steel Control Order, the former could not sue for the unpaid price of goods supplied to the latter.66 The word 'lawfully' has been interpreted to mean merely 'bona fide'.67 It had been held that by the use of the word 'lawfully' in this section, the Legislature had in mind compensation cases in which a person held such a relation to another as either directly to create or reasonably to justify the inference that by some act done for another person the person doing the act was entitled to look for compensation to the person for whom it was done.68 However, this view was criticised as reading so much into the word as to render the rest of
