CHAPTER II of Indian Contract Act (Section 10-30)

CHAPTER II of Indian Contract Act

CONTRACTS, VIOLABLE CONTRACTS AND VOID AGREEMENTS

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Nothing herein contained shall affect any law in force in India, and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents.

Related Law Note: Essential Elements of a Valid Contract.

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 sound mind and is not disqualified from contracting by any law to which he is subject.

12. What is a sound mind for the purposes of contracting?

A person is said to be of sound mind for the propose 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 interest.

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) A patient in a lunatic asylum who is at intervals of sound mind, may contract during those intervals.

(b) 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 judgment as to its effect on his interests, cannot contract whilst such delirium of drunkenness lasts.

13. “Consent” defined.

Two or more person are said to consent when they agree upon the same thing in the same sense.

14. “Free consent” defined.

Consent is said to be free when it is not caused by-
(1) coercion, as defined in section 15, or
(2) undue influence, as defined in section 16, or
(3) fraud, as defined in section 17, or
(4) misrepresentation, as defined in section 18, or
(5) mistake, subject to the provisions of section 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.

Related Law Note: What is Free Consent in Contract.

15. “Coercion” defined.

“Coercion” is the committing, or threatening to commit, any act forbidden by the Indian Penal Code or the unlawful detaining, or threatening to detain, any property, 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 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 B to enter into an agreement by an act amounting to criminal intimidation under the Indian Penal Code.
A afterwards sues B for breach of contract at Calcutta.
A has employed coercion, although his act is not an offence by the law of England, and although Section 506 of the Indian Penal Code was not in force at the time when or at the place where the act was done.

16. “Undue influence” defined.

(1) A contract is said to be induced by “under 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.

(2) In particular and without prejudice to the generally of the foregoing principle, a person is deemed to be in a position to dominate the will of another-
(a) where he hold a real or apparent authority over the other, or where he stands in a fiduciary relation to the other; or
(b) where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress.

(3) 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.

Illustrations-
(a) 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 then the sum due in respect of the advance. A employs undue influence.

(b) A, a man enfeebled by disease of 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.

(c) 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.

(d) A applies to a banker for a loan at a time when there is 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.

17. “Fraud” defined.

“Fraud” means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agents, with intent to deceive another party thereto his agent, or to induce him to enter into the contract-
(1) the suggestion as a fact, of that which is not true, by one who does not believe it to be true;
(2) the active concealment of a fact by one having knowledge or belief of the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be fraudulent.

Explanation-
Mere silence is no fraud.
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) 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) 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.

(c) B says to A- “If you do not deny it, I shall assume that the horse is sound”. A says nothing. Here, A’s silence is equivalent to speech.

(d) 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.

A contracting party is not obliged to disclose each and everything to the other party. Famous Case related to “Mere silence is no fraud” is Keates vs. The Earl of Cadogan (1851).

Keates vs. The Earl of Cadogan, 1851

Whether a landlord has a duty to inform a prospective tenant of the poor quality of the property let.

Facts-
The defendant entered into an agreement with the claimant for the lease of a property for a term of three years. The claimant intended to reside in the property with his family. The property concerned was in an extremely poor structural condition and was likely to collapse at any stage. The defendant however, despite knowing of this condition, did not inform the claimant of it during the negotiations for the lease, nor did the defendant inform the claimant after the claimant had agreed the lease and begun to occupy the property with his family. Ultimately, a large part of the property collapsed and the claimant sought to rescind the contract, or alternatively commence action in tort for his losses.

Issue-
The issue in this circumstance was whether a landlord has an obligation to inform a prospective tenant of the poor state of a property prior to entering into a lease with said tenant.

Held-
It was held that no obligation is placed on a landlord to inform a tenant as to the state of a property prior to entering into a lease. A claim will only arise for a tenant in these circumstances if the landlord gives an express warranty as to the condition of the property or where the landlord actively deceives the tenant as to the property’s condition. The court in this instance found in favour of the defendant.

Source: LawTeacher.net

Extra Read (outside of Bare Act)

Exceptions to mere silence is no fraud.

(a) Duty to speak-
If it is the duty of the person keeping silence to speak, keeping silence in such a case amounts to fraud.

(b) Contract of Good Faith (Uberrima fides)-
Contracts of good faith, in utmost good faith the party in whom good faith is reposed would make full disclosure and not keep silent. It is the duty of party to disclose the material facts.

Example of such contracts- Contract Of Insurance.

A case related to this- P.J Chacko vs. LIC of India (Chairman)
In this case the insured had undergone an operation of thyroid. He had a major operation four years before the date he took insurance policy. He did not disclose this fact while obtaining the insurance policy. He took policy on 6th July 1987 and within six month on 21st February 1987 he died. The court held that insured did not disclose all material facts of contract so it is amounts to fraud.

(c) Marital Status-
Non disclosure of material facts relating to parties to marriage has been held to constitute fraud.

(d) Half Truth-
A person can choose to not disclose a fact but if he starts speaking he has to disclose the whole truth.

(e) When being silent creates Impression-
Sometime being silent as to certain facts may be capable of creating an impression as to existence of a certain situation. In such a case silent may amount to fraud.

(f) Change in Circumstances-
Sometime a representation is true when it is made, but it may after change in circumstances become false when it is actually acted upon by other party. In such circumstances, it is the duty of the person who made the representation to communicate the change of circumstances.

18. “Misrepresentation” defined.

“Misrepresentation” means and includes –
(1) 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;
(2) any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or anyone claiming under him; by misleading another to his prejudice, or to the prejudice of any one claiming under him;
(3) causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is subject of the agreement.

19. Void-ability of agreements without free consent.

When consent to an agreement is caused by coercion, 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 on 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) A, intending to deceive B, falsely represents that five hundred 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.

(b) A, by a misrepresentation, leads B erroneously to believe that five hundred mounds of indigo are made annually at A’s factory. B examines the accounts of the factory, which show that only four hundred maunds of indigo have been made. After this B buys the factory. The contract is not voidable on account of A’s misrepresentation.

(c) A fraudulently informs B that A’s estate is free from encumbrance. B thereupon buys the 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.

(d) 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. Though A’s ignorance B is enabled to buy the estate at an undervalue. The contract is voidable at the option of A.

(e) 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.

19A. 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) A’s son has forged B’s name to a promissory note. B under threat of persecuting 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.

(b) A, a money lender, advances Rs.100 to B, an agriculturist, and by undue influence induces B to execute a bond for Rs.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.

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, the agreement is void.

Explanation-
An erroneous opinion as to the value of the things which forms the subject-matter of the agreement, is not be deemed a mistake as to a matter of fact.

Illustrations-
(a) 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 in the ship conveying the cargo had been cast away and the goods lost. Neither party was aware of these facts. The agreement is void.

(b) A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of bargain, though neither party was aware of the fact. The agreement is void.

(c) A, being entitled to an estate of 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.

21. Effect of mistake as to law.

A contract is not voidable because it was caused by a mistake as to any law in force in India; but mistake as to a law not in force in India has the same effect as a mistake of fact.

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.

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.

23. What consideration 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 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) 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 promises to sell the house is the consideration for B’s promise to pay the 10,000 rupees. These are lawful considerations.

(b) A promises to pay 10,000 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 promises of each party is the consideration for the promises of the other party, and they are lawful considerations.

(c) A promises, for a certain sum paid to him by B, to make goods to B the value of his ship of it is wrecked on a certain voyage. Here, A’s promises is the consideration for B’s payment and B’s payment is the consideration for A’s promise, and these are lawful considerations.

(d) 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.

(e) 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 object is unlawful.

(f) 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.

(g) 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.

(h) 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.

(i) A’s estate 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.

(j) 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.

(k) A agrees to let her daughter to hire to B for concubinage. The agreement is void, because it is immoral, though the letting may not be punishable under the Indian Penal Code.

VOID AGREEMENTS

24. Agreements void, if consideration are 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 consideration of a single object, is unlawful, the agreement is void.

Illustrations-
A promises to superintend, on behalf of B, a legal manufacture of indigo, and an illegal traffic in another articles B promises to pay to A salary of 10,000 rupees a year. The agreement is void, the object of A’s promise, and the consideration for B’s promise, being in part unlawful.

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 registration of documents, and is made on account of natural love and affection between parties standing in a near relation to each other; or unless.

(2) It is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do; or unless.

(3) 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 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 in this section shall affect the validity, as between the donor and donee, of any gift actually 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) A promises, for no consideration, to give to B Rs.1,000. This is a void agreement.

(b) A, for natural love and affection, promise to give his son B, Rs.1,000. A puts his promise to B into writing and registers it. This is a contract.

(c) A finds B’s purse and gives it to him. B promises to give A Rs.50. This is a contract.

(d) A supports, B’s infant son. B promises to pay A’s expenses in so doing. This is a contract.

(e) A owes B Rs.1,000, but the debt is barred by the Limitation Act. A signs written promise to pay B Rs.500 on account of the debt. This is a contract.

(f) A agrees to sell a horse worth Rs.1,000 for Rs.10. A’ s consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration.

(g) A agrees to sell horse of worth Rs.1,000 for Rs.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 into considering whether or not A’ s consent was freely given.

26. Agreement in restraint of marriage, void.

Every agreement in restraint of the marriage of any person, other than a minor, is void.

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 1-
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.

28. Agreements in restrain of legal proceedings, void.

Every agreement-
(a) 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
(b) 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 contract, by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subject shall be referred to arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred.

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.

29. Agreements void for uncertainty.

Agreements, the meaning of which is not certain, or capable of being made certain, are void.

Illustrations-
(a) 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.

(b) A agrees to sell B 100 tons of oil of a specified description, known as an article of commerce. There is no uncertainty there not make the agreement void.

(c) A who is a dealer in coconut-oil only, agrees to sell to B “100 tons of oil”. The nature of A’s trade affords an indication of the meaning of the words, and A has entered into contract for the sale of one hundred tons of coconut oil.

(d) A agrees to sell to B “all the grain in my granary at Ramnagar”. There is no uncertainty here make the agreement void.

(e) A agrees to sell to B “1000 maunds of rice at a price to be fixed by C”. As the price capable of being made certain, there is no uncertainty here to make the agreement void.

(f) 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.

Law Note: What Are Uncertain Agreements Under the Indian Contract Act

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 may wager is made.

Exception on 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 rewarded 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 legalise any transaction connected with horse-racing, to which the provisions of Section 294A of the Indian Penal Code apply.

Law Note: What Are Wagering Agreements Under the Indian Contract Act

Next,
CHAPTER III (31-36) – CONTINGENT CONTRACTS