Taxmann's Mercantile & Commercial Laws

INTRODUCTION In the times ancient, the society was unorganised. The rights of individuals were not recognised. Gradually, the society evolved and the State came into being. To regulate the State, a need was felt to have a specified code of conduct which should be followed by everybody. Consequently, law evolved as a system of rights and obligations including all the rules and principles which regulate our relations with other persons and with the State. These rules and regulations took form of statutes (when a Bill is passed by the Parliament and signed by the President, it becomes an ‘Act’ or a ‘Statute’). To enforce the law and to resolve the conflicts arising therefrom, courts of law were set up by the State.

Laws were made to govern almost every walk of life. Criminal laws were made to control criminal activities in the society, like Indian Penal Code which enumerates which activities are considered criminal and what will be the punishment for committing crime.

Disciplinary laws were made to enforce discipline in the system, like Traffic Act seeks to regulate traffic on the roads, etc. Likewise Mercantile Law was evolved to govern and regulate trade and commerce.

Now the question arises when we talk about the Mercantile Law in the Indian context, where would we look for it. The answer is— The Indian Statutes on Mercantile Law English/Foreign Law Precedents (previous judgments of the courts) Customs and Usage Most of the Indian Mercantile Law is contained in statutes. The prime legislation is the Indian Contract Act, 1872. But it is not exhaustive to deal with all kinds of contracts. In addition to this, the Government has enacted separate Acts relating to contracts like the Sale of Goods Act, 1930, to regulate the contracts relating to the sale of goods, the Partnership Act, 1932, to regulate the partnership contracts, the Negotiable Instruments Act, 1881, to regulate the contracts relating to the negotiable instruments, etc. Still cases may occur which are not I-3

INTRODUCTION

I-4

covered either by the Contract Act or by any special enactment relating to contracts.

Where the Indian Contract Law is silent or it is ambiguous, the Indian courts may apply the principles of English Common Law. It is interesting to know that in England there is no English Contract Act in the form of a statute. It has been derived from common law, the usage of merchants and traders in different spheres of trade, substantiated or ratified by decisions in the court of law. English Law in turn is based on Roman Law. The past judicial decisions of courts are important source of law.

Sometimes there is no statutory provision which can answer a legal question raised in a lawsuit. In such cases, the court will look into the previous court decisions on similar matters to find the relevant law.

Even when a statute is capable of answering a legal question, the court may refer the precedents to see how the statutory provisions were applied in similar circumstances. The precedents set by higher courts have a binding force on lower courts. And the precedents set by the courts of same status like High Courts of different States have persuasive value for each other. In India, the Supreme Court is the highest court and its decisions have binding force on all the courts subordinate to it, i.e., on High Courts, district courts, and other subordinate courts.

Customs and Usage of a trade play an important role in business dealings of that trade. As a matter of fact they have a binding force on the parties, like by the mercantile usage prevailing in the Delhi Iron Market among big merchants, no interest can be charged on the unpaid price for transactions before 1917. To have a binding force, the custom or usage must be certain, reasonable, and well known. To the extent custom or usage of a trade is not inconsistent with a statute, it holds as good as written law. But if it is not consistent with the provisions of a statute, it depends on the language of the statute whether it can override its provisions or not.

If a statute prescribes that custom or usage inconsistent with its provisions shall have no effect, it will not constitute law in such a case. However, at times custom or usage even inconsistent with the provisions of statute may have a binding effect. Where statute gives a way to custom or usage, like, section 1 of the Indian Contract Act says that, “Nothing herein contained shall affect any usage or custom of trade . . .”, it has a binding force. For example, if usage of trade permits an agent to trade in his own account in the business of agency without the knowledge and consent of the principal, it may be valid although it is inconsistent with the provisions of the Contract Act.

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INTRODUCTION

Now it is more than a century that the Mercantile Laws are governing trade and commerce. Over the period of time, market economy expanded and two prominent communities - “consumer” and “trader/ supplier” emerged. Since “consumer” is the focal point of all business activity, he needs protection from unscrupulous suppliers.

Government has enacted many laws to ensure consumer protection.

In this book, we will discuss the Indian Contract Act, 1872, the Sale of Goods Act, 1930, the Partnership Act, 1932, the Negotiable Instruments Act, 1881, and the Consumer Protection Act, 1986. It is divided into 33 chapters. First 13 chapters deal with the Indian Contract Act, 1872, where chapters 1 to 5 elaborates on what is a contract and how it can be formed, chapters 6 to 8 deals with different types of contracts, chapters 9 and 10 explain how a contract is discharged, and chapters 11 to 13 deals with the special form of contracts. Next 6 chapters elaborates the provisions of the Sale of Goods Act, 1930, another 4 chapters deals with the provisions of the Indian Partnership Act, 1932. Further to that 7 chapters are attributed to the Negotiable Instruments Act, 1881, and last 3 chapters discuss the provisions of the Consumer Protection Act, 1986.

The Indian Contract Act was enacted (made applicable) from the 1st day of September, 1872. It is applicable to the whole of India except the State of Jammu and Kashmir. At the time of inception, the Act comprised of 266 sections in total which could be broadly divided into following categories : Sections 1 to 75 general principles of the law of contract. *Sections 76 to 124 contracts relating to the sale of goods Sections 125 to 238 special kinds of contracts, namely, indemnity, guarantee, bailment, pledge, agency. *Sections 239 to 266 contracts relating to partnership Later on sections 76 to 124 were repealed from the original Contract Act and a separate Act was enacted in the name of Sale of Goods Act, 1930 containing the provisions pertaining to the contracts of sale of goods. Similarly, sections 239 to 266 were repealed from the Contract Act and the Partnership Act, 1932 enacted separately.

The Negotiable Instruments Act was enacted in 1881. It deals with the instruments of exchange which work as a substitute money in the commercial world, for example, cheques, hundies, etc. Before its enactment, when any question relating to such instruments arose between Europeans - the law of negotiable instruments as prevalent *These sections do not form a part of Contract Act as of now.

INTRODUCTION

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in England was applied, and when the parties were Hindus and Muhammadans, their respective personal law was applied by the Courts in India.

Initially this Act contained 137 sections. In 1988, sections 138-142 were introduced in the Act to deal effectively with the problem of bouncing of cheques. In the year 2003, sections 143-147 were added to facilitate redressal of grievances on the bouncing of a cheque and again in the year 2018, sections 143A and 148 added to facilitate speedy disposal of cases. Though this Act expressly recognises only three instruments, i.e., Promissory Notes, Bills of Exchange, and Cheques (including electronic cheque) as negotiable instruments, there are number of other instruments prevalent in the Indian Market like ‘hundis’ which effectively work as negotiable instruments. The Law of Negotiable Instruments applies to these local instruments also if they satisfy the criteria of negotiability.

In 1986, the Indian Government passed the Consumer Protection Act. The Act is universal, covering public, private and co-operative sectors.

It has been in operation for about 15 years, and a number of deficiencies and shortcomings in its operation have come to light. It has, therefore, been amended thrice (once in 1991, second time in 1993, and third time in 2003) to make it more consumer friendly.

Despite its drawbacks, it is a handy weapon for the consumers to ensure accountability as well as compensation for deficiency in goods and services.

In the following chapters, various provisions of the statutes are explained with the help of examples and case laws. You will find that most of the case laws quoted are English case laws. The reason is that the Indian Law has its grounds in English Law and the landmark decisions made by the English Courts have a persuasive value in the Indian courts. Moreover, where Indian Law is silent on certain law points, the English Law is applied to tackle the situation.

There may be some occasions where the Indian Law disagrees with the English Law and treats the same situation differently. In such cases, the Indian Law will prevail for our purposes. In the Chapters to be followed, a comparison has been made between English Law and Indian Law from time to time. Although it is not very important from the point of view of examinations, it gives a broad idea of the subject and a clarity as to the law points.

ROHINI AGGARAWAL

CONTENTS 1 CONTRACT : DEFINITION AND CONCEPT PAGE

1.1

Introduction

1

1.2

What is contract

2

1.2-1

Agreement

2

1.2-2

Legal enforceability of an agreement

3

1.2-3

All agreements are not contracts

5

1.3

Essential Elements of a valid contract

5

1.4

Writing and registration of contract

8

1.5

Classification of contracts

9

1.6

1.5-1

English law

9

1.5-2

Indian law

9

Some important comparisons 1.6-1 Agreement and Contract 1.6-2 Illegal and Void Agreements 1.6-3 Void and Voidable Contract 1.6-4 Void Agreement and Void Contract

15 15 15 15 16

2 AGREEMENT : OFFER AND ACCEPTANCE 2.1

Introduction

19

2.2

Offer/Proposal

20

2.3

Offer should be distinguished from

26

2.3-1

Cross offers

26

2.3-2

Counter offers

27

2.3-3

Invitation to offer

27

2.3-4

Standing offer

29

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CONTENTS

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2.4

30

Termination of offer 2.4-1 2.4-2

Instances of termination of offer as per section 6 of the Act

30

Other instances when an offer gets terminated

32

2.5

Acceptance of an offer

32

2.6

Communication of offer, acceptance and revocation

37

2.6-1

Communication of offer - When complete

37

2.6-2

Communication of acceptance - When complete

38

2.6-3

Effect of delay or loss of letter of acceptance in postal transit

38

2.6-4

Communication of revocation - When complete

39

3 CONSIDERATION AND LEGALITY 3.1

Introduction

43

3.2

What is consideration

44

3.2-1

Essential elements of consideration

45

3.2-2

Rules regarding consideration

48

3.3

Exceptions to the doctrine of consideration

50

3.4

Stranger to contract vis-a-vis stranger to consideration

52

3.4-1

Stranger to the contract

52

3.4-2

Stranger to consideration

53

3.4-3

Exceptions to the Doctrine of privity to contract

53

3.5

Legality of object and consideration

56

3.6

Agreements opposed to public policy

57

3.7

Effect of unlawful object and consideration

61

3.7-1

Object and consideration wholly unlawful

61

3.7-2

Objects and consideration unlawful in part

62

4 CAPACITY OF PARTIES 4.1

Introduction

66

4.2

Minors

67

4.2-1

Who is a minor

67

4.2-2

Status of the contracts entered into by a minor

67

4.2-3

The status of a minor with respect to the agreements entered into by him

68

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CONTENTS PAGE

4.2-4 4.3

72 74

Persons of unsound mind 4.3-1

Who is a person of unsound mind

74

4.3-2

Unsoundness of mind may take various forms

74

4.3-3

Effect of the agreement entered into by the persons of unsound mind

75

Burden of proof

75

4.3-4 4.4

Minor and Special Contracts/Agreements

75

Disqualified persons

5 FREE CONSENT 5.1

Introduction

5.2

Coercion

5.3

5.4

80

5.2-1

Acts amounting to coercion

80

5.2-2

Features of coercion

81

5.2-3

Special Points to be noted

81

5.2-3a

Threat to commit suicide

82

5.2-3b

Threat to prosecution

82

5.2-4

Effect of coercion

82

5.2-5

Burden of proof

82

Undue influence

83

5.3-1

What is undue influence

83

5.3-2

Features of undue influence

84

5.3-3

Special point : Transaction with Pardanashin woman

85

5.3-4

Effect of undue influence

85

5.3-5

Burden of proof

86 86

Fraud 5.4-1

5.5

79

Definition of fraud

86

5.4-2

Acts which constitute fraud

87

5.4-3

Mere silence is not Fraud

88

5.4-4

Effect of fraud

90

5.4-5

Burden of proof

90

Misrepresentation

91

5.5-1

What is misrepresentation

91

5.5-2

When a consent is said to be caused by misrepresentation

92

CONTENTS

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5.5-3

Effect of misrepresentation

92

5.5-4

Burden of proof

93

5.6

Limitations to the right of rescission

93

5.7

Mistake

93

5.7-1

5.7-2

5.7-3 5.8

94

Mistake of law 5.7-1a

Mistake of Indian Law

94

5.7-1b

Mistake of Foreign Law

94 94

Mistake of fact 5.7-2a

Bilateral mistake

94

5.7-2b

Unilateral Mistake

97 98

Effect of mistake

99

Some important comparisons 5.8-1

Fraud and misrepresentation

99

5.8-2

Coercion and undue influence

99

6 VOID AGREEMENTS 6.1

Introduction

102

6.2

Agreements in restraint of marriage

103

6.3

Agreements in restraint of trade

103

6.3-1

What is an agreement in restraint of trade

103

6.3-2

Exceptions to the rule that agreements in restraint of trade are void

104

Exception under the Indian Contract Act, 1872 - Sale of goodwill

104

6.3-2b

Exceptions under the Partnership Act, 1932

105

6.3-2c

Exceptions established by judicial decisions

106

6.3-2a

6.4

Uncertain agreements

6.5

Agreements in restraint of legal proceedings

6.6

107 107

6.5-1

Restrictions must be absolute

107

6.5-2

Curtailing the period of limitation

108

6.5-3

Exceptions in the agreements against legal proceedings

108

Wagering agreements 6.6-1

What is a wager

109 109

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CONTENTS PAGE

6.6-2

Essentials of a wager

109

6.6-3

Effect of wagering agreements

110

6.6-3a

Main transaction

110

6.6-3b

Collateral transaction

110

6.6-4

Exception in the wagering agreements

111

6.6-5

Special transactions resembling to wagering

111

6.7

Agreements contingent on impossible events

112

6.8

Agreements to do impossible acts

113

7 CONTINGENT CONTRACTS 7.1

Introduction

116

7.2

What is a contingent contract

117

7.3

Rules regarding a contingent contract

118

7.4

Effect of contingent contracts

120

7.5

An important comparison

120

7.5-1

Wagering agreement and contingent contract

120

8 QUASI CONTRACTS 8.1

Introduction

122

8.2

Various forms a quasi contract may take

123

8.2-1

Supply of necessaries

123

8.2-2

Payment of lawful dues by interested person

123

8.2-3

Obligation of a person enjoying benefit of a gratuitous act

125

8.2-4

Responsibility of finder of goods

126

8.2-5

Liability of a recipient of goods delivered by mistake or under coercion

127

8.3

Failure to discharge obligations created by quasi contracts

128

9 PERFORMANCE OF CONTRACTS 9.1

Introduction

130

9.2

Actual or attempted performance

131

CONTENTS

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9.2-1

Actual performance

131

9.2-2

Attempted performance

131

9.2-2a 9.2-2b

Essentials of a valid tender of performance

131

Effect of refusal to ‘Tender of performance’

133

9.3

When law excuses non-performance of contract

133

9.4

Who should perform the contract

133

9.5

Who can demand performance

135

9.6

Time and place for performance

135

9.7

9.8

9.6-1

Rules as to time and place for performance

135

9.6-2

Effect of failure to perform in time

137 138

Joint promises 9.7-1

What is a joint promise

138

9.7-2

Who can demand performance of joint promises

139

9.7-3

Who should perform a joint promise

139

9.7-4

Rights and liabilities amongst joint promisors

140 141

Reciprocal promises 9.8-1

What is reciprocal promise

141

9.8-2

Rules regarding performance of reciprocal promises

141

9.9

Appropriation of payments

143

9.10

Assignment of a contract

145

9.11

An important comparison

146

9.11-1

Succession and Assignment

146

10 DISCHARGE OF CONTRACT 10.1

Introduction

150

10.2

Discharge by performance

151

10.3

Discharge by impossibility of performance

151

10.3-1

Where impossibility is existent at the time of making contract

151

10.3-2

Where impossibility arises subsequently after the formation of contract

151

Factors causing impossibility to performance

152

10.3-3

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CONTENTS PAGE

10.4

10.3.4

Effect of doctrine of supervening impossibility

153

10.3.5

Non-applicability of the Doctrine of Supervening Impossibility

154 155

Discharge by mutual agreement 10.4-1

Novation

155

10.4-2

Alteration

156

10.4-3

Rescission

156

10.4-4

Remission

156

10.4-5

Waiver

157

10.5

Discharge by lapse of time

157

10.6

Discharge by operation of law

157

10.7

Discharge by breach of contract

158

10.7-1

Actual breach

158

10.7-2

Anticipatory Breach

159

11 REMEDIES FOR BREACH OF CONTRACT 11.1

Introduction

163

11.2

Rescission of a Contract

164

What is Rescission

164

11.2-2

Consequences of rescission

164

11.2-3

Different options to avail relief in case of rescission

164

11.2-1

11.3

Suit for damages

165

11.3-1

Kinds of damages and rules to assess their quantum

165

11.3-2

Measuring interest damages

170

11.3-3

Other relevant provisions

171

11.4

Suit for specific performance

172

11.5

Suit for an injunction

173

11.6

Suit upon ‘quantum meruit’ and ‘restitution’

173

11.6-1

‘Quantum Meruit’

173

11.6-2

Restitution

174

11.6-3

Generalisations based upon the doctrine of ‘Quantum Meruit’ and ‘Restitution’

174

CONTENTS

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12 INDEMNITY AND GUARANTEE 12.1

Introduction

178

12.2

Contract of indemnity

179

12.3

Contract of Guarantee

181

12.4

Kinds of Guarantee

182

12.4-1

Retrospective and prospective guarantee

182

12.4-2

Specific and continuing guarantee

182

12.5

Nature and Extent of Surety’s liability

184

12.6

Rights of surety

185

12.6-1

Rights against the principal debtor

185

12.6-2

Rights against the creditor

186

12.6-3

Rights against co-sureties

187 188

12.7

Discharge of surety

12.8

An Important comparison 12.8-1

192

Contract of Indemnity and Contract of Guarantee

192

13 BAILMENT AND PLEDGE 13.1

Introduction

196

13.2

Basic elements of bailment

196

13.3

Types of Bailment

197

13.3-1

Classification on the basis of profit that each party to the transaction receives

197

13.3-2

Classification on the basis of expectation of reward by the parties

198

13.4

Duties of a bailor

198

13.5

Rights of a bailor

199

13.6

Duties of Bailee

200

13.7

Rights of bailee

203

13.8

Bailee’s right of lien

204

Particular lien

205

13.8-2

General lien

206

13.8-3

How right of general lien is exercised by specified bailees

206

13.8-1

13.9

Termination of bailment

207

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CONTENTS PAGE

13.10

13.11

13.12

208

Finder of lost goods 13.10-1

Duties of a finder of goods

208

13.10-2

Rights of a finder of goods

208 209

Pledge or pawn 13.11-1

What is a pledge

209

13.11-2

Essential features of a pledge

209

13.11-3

Who can make a pledge

210

13.11-4

Duties of a Pawnor

212

13.11-5

Rights of a Pawnor

212

13.11-6

Duties of a Pawnee

213

13.11-7

Rights of a Pawnee

213

Some important comparisons

214

13.12-1

Bailment and pledge

214

13.12-2

Particular lien and general lien of a bailee

215

13.12-3

Pledge and lien

215

14 AGENCY 14.1

Introduction

218

14.2

Contract of agency

219

14.3

Test of agency

220

14.4

Classification of agents

220

14.5

14.6

14.4-1

Classification based on the extent of agents’ authority

220

14.4-2

Classification based on the nature of work performed by agents

221

Creation of agency Agency by express agreement

222

14.5-2

Agency by implied agreement

222

14.5-3

Agency by operation of law

225

14.5-4

Agency by ratification

225

Extent of agent’s authority 14.6-1

14.7

222

14.5-1

Actual or real authority

227 227

14.6-2

Ostensible or apparent authority

228

14.6-3

Authority in emergency

228

Delegation of authority by an agent

229

CONTENTS

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14.7-1 14.8

An agent cannot delegate his authority

229 229

Sub-agent 14.8-1

Who is a sub-agent

229

14.8-2

Consequences of appointing a sub-agent

230

14.9

Substituted agent

230

14.10

Pretended agent

231

14.11

Duties of an agent

231

14.12

Rights of an agent

234

14.13

Rights of a principal

237

14.14

Duties of a principal

237

14.15

Position of principal towards third parties

237

14.16

14.15-1

Position of named principal

237

14.15-2

Position of unnamed principal

239

14.15-3

Position of undisclosed principal

239

Position of an agent towards third parties 14.16-1

14.17

14.18

14.19

Circumstances where an agent becomes personally liable to third parties

240 240 241

Termination of agency 14.17-1

Termination by act of the parties

241

14.17-2

Termination by operation of law

243

14.17-3

When termination of agency takes effect

244 244

Irrevocable agency 14.18-1

Agency coupled with interest [Section 202]

244

14.18-2

Agent incurs personal liability

245

14.18-3

Agent partly exercise the authority [Section 204]

246 246

Some important comparisons 14.19-1

Agent and servant

246

14.19-2

Agent and independent contractor

246

14-19-3

Agent and bailee

247

15 CONTRACT OF SALE OF GOODS 15.1

Introduction

250

15.2

Contract of sale

251

15.3

Sale and agreement to sell

253

15.3-1

Sale

253

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CONTENTS PAGE

15.4

15.5

15.6

15.3-2

Agreement to sell

253

15.3-3

Comparison between sale and ‘agreement to sell’

254

15.4-1

Existing goods [Section 6(1)]

255

15.4-2

Future goods [Section 2(6)]

255

15.4-3

Contingent goods [Section 6(2)]

256 256

Perishing of goods 15.5-1

When goods are considered to be perished

256

15.5-2

Effect of perishing of the subject-matter of a contract

256 259

Determination of price of goods 15.6-1

How to fix the price

259

15.6-2

Situation when price fixation is to be done by third party [Section 10]

260

‘Earnest money’ and ‘Security deposit’

260

15.6-3 15.7

255

Kind of Goods

Consequences of not adhering to the time in a sales contract

261

When time is stipulated regarding the payment of price

261

When time is stipulated regarding delivery of goods

261

15.7-1 15.7-2 15.8

Documents of title to goods [Section 2(4)]

261

15.9

Some important comparisons

262

15.9-1

Sale and hire purchase

262

15.9-2

Agreement to sell and hire purchase

263

15.9-3

Sale and bailment

264

15.9-4

Sale of goods and contract for work and labour

264

15.9-5

Barter, Exchange and Sale

265

16 CONDITIONS AND WARRANTIES 16.1

Introduction

268

16.2

Condition and warranty defined

269

16.3

16.2-1

Condition

269

16.2-2

Warranty

269

Implied conditions and implied warranties 16.3-1

Implied Conditions

270 270

CONTENTS

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16.3-2

275

Implied Warranties

16.4

Change of a condition into warranty

276

16.5

Exclusion of implied conditions and warranties

277

16.6

Doctrine of caveat emptor

278

16.7

16.6-1

Meaning

278

16.6-2

Exceptions to the doctrine of caveat emptor

278 279

Some important comparisons 16.7-1

Condition and warranty

279

16.7-2

Condition as to Fitness of goods for buyer’s purpose and condition as to Merchantability

280

17 TRANSFER OF PROPERTY 17.1

Introduction

283

17.2

Significance of transfer of ownership

284

17.3

Rules regarding transfer of property

285

17.4

17.3-1

Transfer of ownership in the sale of specific goods

285

17.3-2

Transfer of ownership in the sale of unascertained or future goods

288 290

Transfer of title 17.4-1

No one can transfer better title then he himself possess

290

17.4-2

Exceptions to the rule

290

18 PERFORMANCE OF CONTRACT OF SALE 18.1

Introduction

295

18.2

Delivery of goods by seller

296

What is the meaning of ‘delivery’

296

18.2-2

Modes of delivery

296

18.2-3

Rules regarding effective delivery of goods

297

18.2-1

18.3

18.4

Acceptance of delivery by the buyer

301

18.3-1

What is meant by acceptance of delivery of goods

301

18.3-2

Rules regarding acceptance of delivery of goods

301

Duties of the buyer

302

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CONTENTS PAGE

19 REMEDIES 19.1

Introduction

306

19.2

Buyer’s breach

307

19.3

Unpaid seller’s remedies

19.4

307

19.3-1

Who is an ‘unpaid seller’

307

19.3-2

Rights of an ‘unpaid seller’

308

19.3-2a

Right of an ‘unpaid seller’ against the goods

308

19.3-2b

Rights of ‘unpaid seller’ against the buyer

312

Seller’s breach : Buyer’s remedies

313

19.4-1

Ways in which a seller may breach

313

19.4-2

Remedies available to a buyer

314

19.5

Anticipatory breach of contract

315

19.6

Auction sale

315

19.7

19.6-1

Meaning

315

19.6-2

Rules

315

19.6-3

Some important terms used in an auction sale

316 317

An important comparison 19.7-1

Seller’s right of lien and seller’s right of stoppage in transit

317

20 PARTNERSHIP : AN INTRODUCTION 20.1

Introduction

320

20.2

What is a partnership

321

20.3

20.2-1

Definition

321

20.2-2

Essential elements of a partnership

321

Test of partnership

324

20.3-1

How to test existence of partnership

324

20.3-2

Sharing profits is not a conclusive evidence of a partnership

325

20.3-3

The mutual agency test is an important test of partnership

326

20.4

Partners, firm and firm name

326

20.5

Some important comparisons

327

CONTENTS

I-20 PAGE

20.5-1

Partnership and Joint Stock Company

327

20.5-2

Partnership and Hindu Undivided Family (HUF)

328

20.5-3

Partnership and co-ownership

329

20.5-4

Partnership and a Club

330

21 FORMATION OF PARTNERSHIP 21.1

Introduction

333

21.2

Partnership Deed

334

21.3

Registration of firms 21.3-1

21.4

334

Registration of a firm is discretionary

334

21.3-2

Procedure for registration of a firm

335

21.3-3

Recording of alterations

335

21.3-4

Penalty for furnishing false particulars [Section 70]

336

21.3-5

Register of firms

336 336

Effects of Non-Registration 21.4-1

Disabilities of a firm due to non-registration

336

21.4-2

Exceptions as to disabilities of non-registration

337

21.5

Kinds of Partnership

338

21.6

Kinds of Partners

339

22 RIGHTS AND OBLIGATIONS OF PARTNERS 22.1

Introduction

343

22.2

Mutual rights of partners

344

22.3

Mutual duties and limitations of partners

345

22.4

22.3-1

Absolute duties

345

22.3-2

General duties

346

Minor as a partner 22.4-1

22.5

General Status

348 348

22.4-2

Rights of a minor partner

348

22.4-3

Limitations and liabilities of minor partner

349

22.4-4

Position of a minor on attaining majority

349

Relations of partners with third parties 22.5-1

A partner binds himself and his firm provided he acts within his authority

349 349

I-21

CONTENTS PAGE

22.5-2 22.6

22.7

350

Authority of a partner

Liabilities of a firm and its partners to third parties

353

22.6-1

Liability of a partner for acts of the firm

353

22.6-2

Liability of a firm for acts of the partners

353

22.6-3

Liability of a firm for misapplication by partners

353 354

Reconstitution of a firm 22.7-1

Admission of a partner

354

22.7-2

Retirement of a partner

355

22.7-3

Expulsion of a partner

357

22.7-4

Insolvency of a partner

357

22.7-5

Death of a partner

357

22.7-6

Transfer of partner’s interest

357

Effect of change in firm on mutual rights and duties of partners

358

22.9

Effect of change in firm on continuing guarantee

358

22.10

Partnership property

358

22.8

23 DISSOLUTION OF A PARTNERSHIP FIRM 23.1

Introduction

363

23.2

Modes of dissolution of a firm

364

23.3

23.2-1

By agreement [Section 40]

364

23.2-2

By notice [Section 43]

364

23.2-3

On the happening of certain contingencies [Section 42]

364

23.2-4

Compulsory dissolution [Section 41]

365

23.2-5

By court [Section 44]

365

Consequences of Dissolution 23.3-1 23.3-2

367

Continuing liability of partners after dissolution of a firm

367

Rights of partners after dissolution of the firm

368

23.4

Settlement of accounts upon dissolution

369

23.5

Sale of goodwill after dissolution

371

23.6

Public notice

371

CONTENTS

I-22 PAGE

24 NEGOTIABLE INSTRUMENTS 24.1

Introduction

375

24.2

What is a negotiable instrument

376

24.3

Characteristics of a Negotiable Instrument

377

24.4

Kinds of negotiable instruments

378

24.5

Hundis

379

24.6

Classification of Negotiable Instruments

380

24.7

Presumptions as to the negotiable instruments

384

24.8

Law overriding the provisions of the Negotiable Instruments Act, 1881

385

25 PROMISSORY NOTES, BILLS OF EXCHANGE AND CHEQUES 25.1

Introduction

388

25.2

Promissory Note

389

25.3

25.4

25.5

25.2-1

Definition

389

25.2-2

Parties to a Promissory Note

389

25.2-3

Essentials of a valid Promissory Note

389

25.2-4

Specimen of a Promissory Note

395

Bill of exchange

395

25.3-1

Definition

395

25.3-2

Parties to a bill of exchange

395

25.3-3

Essentials of a valid bill of exchange

396

25.3-4

Specimen of a bill of exchange

397

25.3-5

Different kinds of Bill of Exchange

397 402

Cheque 25.4-1

Definition

402

25.4-2

Parties to a cheque

402

25.4-3

Essentials of a valid cheque

403

25.4-4

Specimen of a cheque

403

Some important comparisons

403

25.5-1

Promissory Note and Bill of Exchange

403

25.5-2

Bill of Exchange and Cheque

404

I-23

CONTENTS PAGE

26 PARTIES TO A NEGOTIABLE INSTRUMENT 26.1

Introduction

410

26.2

Holder

411

26.3

26.2-1

Definition

411

26.2-2

Status of a holder

411

26.2-3

Who is not a holder

412 412

Holder in due course 26.3-1

Definition

412

26.3-2

Essentials to become a holder in due course

413

26.4

Privileges of being of a holder in due course

414

26.5

Capacity of parties

418

26.6

26.5-1

Minor’s position as a drawer, indorser, etc.

419

26.5-2

Persons of unsound mind

419

26.5-3

Insolvent

419

26.5-4

Corporations and companies

420

26.5-5

Agents

420

26.5-6

Legal Representative

421

26.6-1

Liability of drawer of the instrument [Section 30]

422

26.6-2

Liability of a banker as a drawee [Sections 31 & 77]

422

26.6-3

Liability of maker of note and acceptor of bill [Section 32]

422

Liability of indorser [Section 35]

423

26.6-5

Liability of prior parties [Section 36]

423

26.6-6

Liability inter se [Sections 37 to 40]

423

26.6-4

26.7

421

Liability of parties

425

Important Comparison 26.7-1

Holder and holder in due course

425

27 HOW TO NEGOTIATE AN INSTRUMENT 27.1

Introduction

430

27.2

What is negotiation

431

27.3

Assignment

431

27.4

Who may negotiate an instrument

432

27.5

When a negotiable instrument stops to be negotiable

432

CONTENTS

I-24 PAGE

27.6

27.7

27.8

433

Methods of negotiation 27.6-1

Negotiation of bearer instruments

434

27.6-2

Negotiation of order instruments

434

Delivery of a negotiable instrument

434

27.7-1

What constitutes delivery of an instrument

434

27.7-2

Kinds of delivery

434

27.7-3

Who can make delivery to whom

435 435

Indorsement 27.8-1

What constitutes an indorsement

435

27.8-2

Essentials of a valid indorsement

436

27.8-3

Effect of indorsement

436

27.8-4

Types of indorsements

436

27.9

Negotiation back

440

27.10

Negotiation by unauthorized parties

440

27.11

Negotiation of dishonoured and overdue instruments

442

27.12

Important comparison

443

27.12-1

Negotiation and assignment

443

28 DISCHARGE, PRESENTMENT AND DISHONOUR OF A NEGOTIABLE INSTRUMENT 28.1

Introduction

447

28.2

Discharge

448

28.3

28.4

28.5

28.2-1

How to get a discharge on a negotiable instrument

448

28.2-2

What is payment in due course

452

Presentment

453

28.3-1

Presentment for acceptance

454

28.3-2

Presentment for sight

456

28.3-3

Presentment for payment

457

Dishonour

460

28.4-1

Dishonour by non-acceptance [Section 91]

460

28.4-2

Dishonour by non-payment [Section 92]

460

28.4-3

Effect of dishonour of a negotiable instrument

460

28.4-4

Notice of dishonour

461

Noting

463

I-25

CONTENTS PAGE

28.6

Protest

464

28.7

Rules as to compensation in case of dishonour

466

29 BANKER AND CUSTOMER 29.1

Introduction

471

29.2

Banker and customer

472

29.3

29.4

29.2-1

Who is a banker

472

29.2-2

Who is a customer

473

29.2-3

Legal relationship between a banker and a customer

473

Crossing of a cheque 29.3-1

General crossing

473

29.3-2

Special crossing

474

29.3-3

Not negotiable crossing

475

29.3-4

Restrictive crossing

476

29.3-5

Who can cross the cheque

477

29.3-6

Opening or cancellation of a crossing

477

Rights and obligations of a banker

29.6

477

When banker must refuse payment on his customer’s cheques

478

29.4-2

When banker may refuse payment on his customer’s cheques

479

29.4-3

Special provisions relating to electronic cheques

480

29.4-1

29.5

473

Protection granted to bankers

481

29.5-1

Protection given to a paying banker

481

29.5-2

Protection given to a collecting banker

482

Wrongful dishonour of cheques by a banker

483

29.6-1

Liability towards the drawer of the cheque

483

29.6-2

Liability towards the payee (or holder) of the cheque

484

29.7

Obligations of a customer

484

29.8

Bouncing of cheques

485

29.8-1

When an offence under section 138 is constituted

485

29.8-2

Procedure to seek redressal

487

29.8-3

Parties punishable for offence under section 138

489

29.8-4

Presumption in favour of holder

489

29.8-5

Defence which is specifically barred

490

CONTENTS

I-26 PAGE

30 SOME IMPORTANT PROVISIONS 30.1

Introduction

493

30.2

Maturity of negotiable instruments

493

30.2-1

When negotiable instruments payable on demand mature

494

30.2-2

When negotiable instruments payable on or after specified date mature

494

Computation of date of maturity

494

30.2-3 30.3

30.4

What is meant by acceptance of a bill of exchange

495

30.3-1

Essentials of a valid acceptance

495

30.3-2

Types of acceptance

496 497

Acceptance for honour 30.4-1 30.4-2

Certain conditions must be satisfied for accepting the bill for honour

497

Rights and liabilities of acceptor for honour

497

30.5

Payment for honour

497

30.6

Consideration in a negotiable instrument

498

30.6-1 30.6-2

Effect of absence or failure of consideration in a negotiable instrument

498

Partial absence or failure of consideration

499

30.7

Payment of interest

500

30.8

Applicability of international law

500

30.9

Important comparison

502

30.9-1

Acceptance for honour and payment for honour

502

31 CONSUMER PROTECTION ACT : A MUCH NEEDED LEGISLATION 31.1

Introduction

505

31.2

Who is a consumer

506

31.3

31.2-1

Consumer of goods

507

31.2-2

Consumer of services

508

Complaint

510

31.3-1

What Constitutes a complaint [Section 2(1)(c)]

510

31.3-2

Who can file a complaint [Sections 2(b) & 12]

510

I-27

CONTENTS PAGE

31.4

31.5

31.6

31.7

31.3-3

What a complaint must contain [Section 2(1)(c)]

511

31.3-4

Time frame within which a complaint can be filed

513

31.3-5

Relief available against complaint [Section 14]

513

31.3-6

When a complaint cannot be filed

514

31.3-7

Dismissal of frivolous and vexatious complaints [Section 26]

515

Unfair Trade Practice and Restrictive Trade Practice [Section 2(1)(r) & (nnn)]

515

31.4-1

What is an Unfair Trade Practice

515

31.4-2

What is a Restrictive Trade Practice

517

Goods and Defect [Section 2(1)(i) & (f)] 31.5-1

Goods

31.5-2

Defect

518 518 518

Service and Deficiency [Section 2(1)(o) & (g)]

519

31.6-1

What can be termed as a service

519

31.6-2

What is meant by “deficiency” in service

521

Trader and Manufacturer [Section 2(1)(q) &(j)]

522

31.7-1

Trader

522

31.7-2

Manufacturer

522

31.7-3

Who should be sued by a consumer - Manufacturer or seller

523

32 CONSUMER PROTECTION COUNCILS 32.1

Introduction

526

32.2

Objects of the Councils [Sections 6, 8, & 8B]

527

32.3

Central Council

528

32.4

State Consumer Protection Councils (State Councils) [Section 7]

529

32.5

District Consumer Protection Councils (District Councils) [Section 8A]

530

Working Groups [Rule 3]

530

32.6

33 CONSUMER FORUMS 33.1

Introduction

533

CONTENTS

I-28 PAGE

33.2

33.3

33.4

533

Constitution of the Forums 33.2-1

Constitution of District Forum [Section 10]

534

33.2-2

Constitution of State Commission [Section 16]

535

33.2-3

Constitution of National Commission [Section 20]

537 540

Jurisdiction 33.3-1

Jurisdiction of District Forum [Section 11]

540

33.3-2

Jurisdiction of State Commission [Section 17]

541

33.3-3

Jurisdiction of National Commission

542

Procedures Relating to Consumer complaints [Sections 12 & 13] 33.4-1 33.4-2

543

How a complaint is dealt by Consumer Forums

544

Procedure to be followed by the National Commission [Sections 22 & 22A]

546

33.5

Service of Notice [Section 28A]

546

33.6

Powers of the Consumer Forums [Sections 13(4), 14(1) & Rule 10]

547

33.7

Sitting of the Forums

549

33.8

33.7-1

Sitting of the District Forum [Section 14(2)]

549

33.7-2

Sitting of the State Commission

549

33.7-3

Sitting of the National Commission

550 550

Orders of the Forums 33.8-1

Signing of orders of the Forums

550

33.8-2

Appeals against orders

551

33.8-3

Finality of orders

552

33.8-4

Penalties for non-compliance of orders

552

34 ARBITRATION AND CONCILIATION ACT, 1996 34.1

Background of the Act

34.2

Domestic Arbitration

34.1-1 34.2-1 34.3

Scheme of the Act Arbitration Agreement

Court must refer the matter to arbitration in some cases 34.3-1

Matter not to be split if partly covered under agreement

554 555 556 557 557 558

I-29

CONTENTS PAGE

Consumer Forum can entertain complaint irrespective of arbitration

559

34.3-3

Application for winding up cannot be referred

559

34.3-4

Matter can be referred even if appeal is pending

559

34.3-5

Unregistered partnership firm can apply for arbitration

559

34.3-6

Challenge to jurisdiction or validity of arbitration agreement

560

34.3-2

34.4

Arbitration clause in agreement

560

34.5

Formation of Arbitral Tribunal

561

34.6

34.7

34.5-1

Appointment of Arbitrator

561

34.5-2

Challenge to appointment of Arbitrator

562

34.5-3

Termination or substitution of Arbitrator

563

Conduct of Arbitral Proceedings

563

34.6-1

Cost of Arbitration

564

34.6-2

Settlement during arbitration

565

Arbitral Award

565

34.7-1

Law applicable to Arbitration

565

34.7-2

Requirement of Award

565

34.7-3

Stamp Duty on Arbitration Award

566

34.7-4

Finality and enforcement of arbitration award

566

34.7-5

Termination of arbitration proceedings

566

34.8

Intervention by Court in Arbitration proceedings

567

34.9

Setting aside arbitral award by Court

568

34.9-1

Setting aside if contrary to law

570

34.9-2

Appeal against order of District Court

570

34.10

Conciliation

570

34.11

Enforcement of Foreign Awards

572

C

H

A

3 P

T

E

R

CONSIDERATION AND LEGALITY OBJECTIVES OF THE CHAPTER

After reading this Chapter you should be able to understand : ■ The concept of consideration, and its importance for a contract.

■ The circumstances when a contract is valid even without consideration.

■ Concept of “stranger to a contract” vis-a-vis “stranger to consideration”.

■ When the object and consideration of a contract can be considered as lawful.

■ What is the effect of an unlawful contract.

In this Chapter, we are going to discuss following sections of the Indian Contract Act, 1872 ■ SECTION 10 lists lawful consideration as one of the essential ingredients of a valid contract ■ SECTION 2(d) defines consideration ■ SECTION 23 enumerates where consideration and object of a contract is deemed to be unlawful ■ SECTION 24 explains the effect of unlawfulness of part of consideration or object in a contract ■ SECTION 25 enumerates the circumstances where a contract is valid even without consideration ■ SECTION 57 explains the effect of reciprocal promises to do lawful and unlawful things ■ SECTION 58 explains the effect of alternate promises to do lawful or unlawful things INTRODUCTION

3.1 If Ram says to Shyam, ‘I promise to give you Rs. 1000 on June1’, and Shyam replies, ‘I gratefully accept your promise’. Should Shyam be able to enforce Ram’s promise in a court if Ram refuses to pay him Rs. 1000 on June1?

From a moral standpoint, the court should enforce Ram’s promise simply because he made it. However, from legal point of view, the question arises whether power of the Government be used to enforce such a promise where no economic exchange has taken place.

The transaction between Ram and Shyam does not involve an exchange; Ram’s promise is simply gratuitous (a gift). The gratuitous promises such as Ram’s are not enforceable at law. A promise is enforced by the law only if it is supported by consideration.

43

Para 3.2

CONSIDERATION AND LEGALITY

44

Section 10 of the Indian Contract Act, 1872, describes lawful consideration as one of the essential ingredients to constitute a valid contract which means that an agreement without consideration is void. This is doctrine of consideration. We find at the outset that bare words of promise have no standing/binding on either party. The reason why the law enforces only those promises which are made for consideration is that gratuitous or voluntary promises are often made rashly and without due deliberations.

In the Contract law, our problem is to determine the presence or absence of consideration or the facts that will operate to create legal duties and other legal relations.

The law looks with disfavour upon an exchange of promises which would result in one of the parties obtaining, ‘Something for nothing’. It supplies no means nor affords any remedy to compel the performance of an agreement made without sufficient consideration.

But will the presence or absence of consideration always be proof of the existence or non-existence of an enforceable contract? Does consideration always have to have an economic value? Whether its legality also affects the enforceability of the contract? You may keep these questions in mind as you read this chapter.

WHAT IS CONSIDERATION

3.2 Consideration means something in exchange. It is an essential element ordinarily required in a contract. One of the basic ideas underlying the present day requirement of consideration is that one party to an agreement should not be bound by it if the other party is not similarly bound. Generally, if an agreement lacks consideration, neither party can enforce it, even if it is in writing.

Stating it positively, the concept of consideration requires that both parties to a contract shall have given and have received something as the “price” of their respective promises.

For example: X promise to install a home-air conditioning unit for Y, and Y promises to pay X Rs. 1,100 for the job. Here the price X has received (in return for his obligation to install the unit) is the right to a payment of Rs. 1,100 from Y when the job is done; similarly, the price Y has received ( for her promise to pay the Rs. 1,100) is her right to have the unit installed.

In the famous English case of Currie v. Misa, consideration was defined by Lush, J. as follows - ‘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.’

The second part of this judicial description is the more important one as it emphasizes that the consideration is reflected not so much in profit for one party but abandonment of some legal right by the other party. It does not matter whether the party accepting the consideration has any apparent benefit thereby or not; it is enough that he accepts it, and that the party giving it thus thereby undertakes some burden, or lose something which in contemplation of law may be of value.

Section 2(d) of the Indian Contract Act defines consideration as: ‘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.’

As per this definition, consideration is something in return of a promise which consists of : 1. an act, abstinence or forbearance, 2. done at the desire of the promisor,

45

WHAT IS CONSIDERATION

Para 3.2

3. by the promisee or any other person, 4. which can be either already executed or is in the process of execution or may still be executory.

Thus if at the desire of A, B agrees to paint a picture for him at an agreed remuneration, the painting of the picture would be regarded as consideration moving from B and the remuneration as consideration moving from A. 3.2-1 Essential elements of consideration - The above elements of consideration can be elaborated as follows : (1) Consideration must move at the desire of the promisor - An act or abstinence without any request from the promisor is a voluntary act and does not come within the definition of consideration. Similarly an act or abstinence done at the request of any person other than the promisor does not constitute consideration. In other words an act shall not be a good consideration unless it is done at the desire of the promisor.

Examples : 1. A sees B drowning and saves his life. A cannot demand payment for his services as it is a voluntary act on his part and B never asked him to do so.

2. The collector of a district asked D to spend some money on the improvement of a market and he did so. The shopkeepers of the market promised to pay commission to D on their sale. Later on they refused to pay the commission. D cannot demand payment from the shopkeepers who are using the market for having improved the market as he had done so at the desire of the collector and not at the request of shopkeepers - Durgaprasad v. Baldeo [1880] 3 All. 221.

3. Where a depositor drew a cheque upon a bank for an amount bigger than there was money to his credit and the bank paid the amount of the cheque because of their own mistake and not because there was any request from the depositor to honor his cheque, it was held that there was no consideration involved and hence the depositor was under no legal obligation to refund the excess amount paid by the bank - AIR 1958 AP 605 (607) 4. A person advanced money to the son on an undertaking given by the father and obtained Promissory notes (pronotes) for the amount advanced. When the father failed to pay the amount on the pronotes, it was held that these pronotes were without consideration inasmuch as the advances were not made at the desire of the son who was the promisor under these pronotes - AIR 1948 PC 150 (155) (2) Consideration may move from the promisee or any other person - It means that so long as there is consideration for promise, it is immaterial who has furnished it. It may move from the promisee, or from any other person if the promisor has no objection.

Examples : 1. In marine insurance, broker’s undertaking to pay premium is consideration though it moves from a third person - AIR 1926 Bom. 82 (85) 2. An old lady, by a deed of gift made over certain property to her daughter D under the direction that she should pay her aunt, P (sister of the old lady), a certain sum of money annually. The same day D entered into an agreement with P to pay her the agreed amount. Later, D refused to pay the amount on the plea that no consideration had moved from P to D. Held, P was entitled to maintain the suit as consideration had moved from old lady, sister of P, to the daughter D - Chinnaya v. Rammaya [1882] 4 Mad. 137.

Para 3.2

CONSIDERATION AND LEGALITY

46

Note : A consideration moving from third party who is a minor is no consideration [AIR 1949 Bom. 215 (217)].

(3) Consideration is an act, abstinence, forbearance or detriment - At times consideration is taken as misnomer of money form of exchange. The legal term consideration does not mean payment of money only. The Contract Act says that the consideration can be in the form of an act, abstinence, forbearance or detriment. (a) Consideration as an act - An act done by a person can constitute consideration.

Where a person executes an undertaking in favour of a bank on the basis of which he receives a substantial benefit of having a current overdraft account with a bank, the facility of overdraft account cannot be said to be without consideration - AIR 1953 Tripura 10 (10). (b) Consideration as an abstinence - To constitute abstinence as consideration, one must refrain or promise to refrain from doing something that he or she is privileged to do.

Example - X promised to pay his nephew Y, a sum of Rs. 50,000 if he would refrain from drinking, using tobacco, swearing and playing cards for money until he becomes 21 years of age. The nephew refrained from all the specified activities as he was requested to do but his uncle died without making the payment. He claimed the money out of the uncle’s estate as his legal right. Held that, he abandoned his legal right and restricted his lawful freedom of action upon the faith of his uncle’s agreement although it may seem that such performance actually did not prove to be a benefit to the promisor. Such detriment however amounted to consideration and he was granted the promised sum of Rs. 50,000. (c) Consideration as forbearance - Forbearance means foregoing one’s legal right or claim. Creditor forbearing to enforce execution and allowing time to pay at the request of the debtor is a good consideration - AIR 1912 Cal. 67 (69) Examples : 1. An agreement to accept a decree and not to appeal against it when parties to it would have appealed is one which is supported by good consideration - AIR1969 Bom. 221 (223, 224) 2. A promises to pay C, his law partner, Rs. 750 if C will give up his part-time job in a dance band for the next nine months. C lives up to the terms of the offer, but A refuses to pay. If C brings suit to recover Rs.750, A is liable. Here again we have a unilateral contract, promise in exchange for a negative act (or a forbearance) the act of not playing in the band. C’s refraining constituted both an acceptance of the offer and a legal detriment to him; thus we can see that A’s promise was supported by consideration. (d) Consideration as detriment - A detriment suffered by the promisee or any other person, whether actual or prospective, can constitute a good consideration. The ordinary contract of guarantee is good example of detriment form of consideration. In consideration of A’s lending B Rs.1000, C promises to repay the loan if B does not. Here C derives no benefit, but A suffers detriment by parting with his money, and this is enough consideration to support C’s promise provided A lends the money at C’s request.

Example : X, a publisher, promises Y: “If you will loan Rs. 5,000 to my nephew for one year, I will run all your advertisements during that time at half the regular rate.” Y makes the loan, but X refuses to provide advertising space at the reduced rate. If Y sues X to recover damages for breach of contract - that is, Y seeks to enforce X’s promise - X is liable. Y’s act of making the loan to the nephew constituted not only an acceptance of X’s offer but a detriment to Y - the parting with something of value where he was not

47

WHAT IS CONSIDERATION

Para 3.2

otherwise legally obligated to do so. Thus X’s promise, supported by consideration, is enforceable against him.

Note : That it is not necessary for the promisor to receive any benefit as long as the promisee or someone else suffers a detriment.

(4) Consideration can be past, present or future (a) Past consideration - A past consideration consists in an act already done by one as consideration for a promise of the other. Thus when a person promises to compensate another in return for what the latter had done for the promisor in the past or before making of the promise, such promise is said to be for past consideration, i.e. consideration which took place in the past. Past consideration is as good as present or future consideration. For example A does some work for B in the month of April without expecting any return from B. Later on, in June, B promises to pay him some money for the work done in April. This constitutes a valid contract as the work done by A is of the nature of past consideration.

Example - “A” provided extra services to B (his master), after which B promised him a bonus for the same. Later on B refused to pay the bonus. Held that, if the servants put forth extra work in consideration whereof a bonus is subsequently promised to them by the masters, it is in law a promise for past services which is good under Indian Law - AIR 1925 Mad. 192 (194) DB Note : Under the English law, past consideration is no consideration. But under the Indian Law past consideration is good consideration because of the use of the words “has done or abstained from doing” in the definition of “consideration”.

(b) Present (Executed) Consideration- The consideration which moves simultaneously with the promise is present consideration. It consists in “doing” or “abstaining from doing something”. The best example of present consideration is cash sale where performance by both the parties (seller and buyer) is simultaneous. Another example is a contract of marriage where there is simultaneous performance by both the parties.

The present consideration is also known as executed consideration because it emphasizes on the execution part of performance. A may offer B $10 if B runs from London to Bath.

Even though B says that he will accept A’s offer, yet until he has run from London to Bath, (i.e. B has performed his part of contract), there is no consideration for A’s promise.

B accepts the offer and by running from London to Bath simultaneously executes the consideration which makes A’s promise a binding contract.

Note : Past consideration must be distinguished from the executed consideration. The consideration (running from London to Bath) in the above case is executed after the offer or request and simultaneously with the acceptance. But, if A promises B $10 in consideration of having run from London to Bath last week, the consideration is past. It is something wholly done before the offer or request and before acceptance of the offer.

(c) Future (Executory) Consideration - A promise to do something in future is legal consideration. When the consideration from one party to another is to move at some future date, it is called future consideration. The consideration for A’s promise to B may be a promise by B to A. The consideration is then said to be executory. If A promises to marry B in consideration of B promising to marry A, the promise made by each is the consideration for the promise made by the other.

Examples : 1. M and B enter into a contract in April under the terms of which M agrees to build a swimming pool for B in June, B promising to pay Rs. 2,500 in return. M later refuses to perform, and B sues him to recover damages for breach of contract. M is liable; that is, his promise is enforceable.

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2. When the promise was given by one of the partner’s for investing certain amount in the partnership firm, it was itself consideration for agreement. Similarly, when such partner had also undertaken liability to bear losses, that was also consideration for other partners on the point of bearing loss and as such it could not be said that the agreement of partnership was without consideration - 1986 Tax LR 787 (789,790) (DB): [1986] 157 ITR 537 (Guj.).

3.2-2 Rules regarding consideration - In addition to the elements of consideration, the other general rules regarding consideration are as follows : (1) Adequacy of consideration - Consideration, means “something in return”. This “something in return” need not necessarily be equal in value to “something given”. The law simply provides that a contract should be supported by consideration. So long as consideration exists, the Courts are not concerned as to its adequacy, provided it is of some value. The adequacy of the consideration is for the parties to consider at the time of making the agreement, not for the Court when it is sought to be enforced - Bolton v.

Madden [1873] L.R. 9 Q.B. 57. Consideration must, however, be something to which the law attaches value though it need not be equal in value to the promise made. The Courts do not exist to repair bad bargains.

To illustrate, X contracts to sell land in MONTANA to Y for $6,000. Y later discovers that the actual value of the land is $3,000. Y is liable on this promise to pay $6,000, even though what he received was worth much less. Under the usual test, X incurred a detriment when he promised to convey the land - the surrender of his right to retain the property.

The presence of this detriment constituted a consideration sufficient to support Y’s promise to pay; and Y’s claim of inadequacy is therefore of no relevance.

There are exceptions to the rule that the court will not inquire into the adequacy of the consideration. These apply in some contracts made by minors and generally in the cases where because of a special relationship, one party is able to take unfair advantage of another.

Though consideration need not be adequate to the promise, yet its inadequacy, if very great, would raise doubt in the mind of the judge trying the case, if the other party alleges that his consent to the agreement was obtained in an unfree manner.

Explanation 2 to section 25 of the Act says that 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 consideration may be taken into account by the court in determining the question whether the consent of the promisor was freely given.

Example - A agrees to sell a house worth Rs.1,00,000 for Rs.10,000. A’s consent to agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration. However, if A says that his consent was not 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.

(2) It must have some value in the eyes of law - A valuable consideration may consist either in some right, interest or property accruing to one party or some loss or responsibility suffered or undertaken by the other. Moreover, consideration must be certain. A promise to give a reasonable sum in return for a service cannot be enforced on the grounds of uncertainty.

Although the court will not inquire into the adequacy of the consideration, there are certain acts and promises which, for reasons of policy, are deemed to be of no value in the eye of law and which are, therefore, an insufficient consideration. A promise to do any act, or forbearance from doing any act, which the promisor might lawfully do, is

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generally a sufficient consideration; but the law regards some promises as void and, if a promise is void, it is a nullity, it is not a sufficient consideration for a counter promise.

Example - In the case of White v. Bluett 1853, the promise by a father to release his son from an outstanding loan, if the latter refrained from boring the father with complaints, was refused to be enforced, since the essential elements of a bargain was lacking. The court observed that, “It would be ridiculous to suppose that such promises could be binding. In reality there was no consideration whatever.”

Note : A consideration to be valid must be ‘good’ or ‘valuable’ in the sense in which these words appear in the English law though these words do not appear in the Indian Contract Act which speaks only of lawful and unlawful consideration.

(3) It must be real not illusory - The consideration should be real, i.e. it must not consist of impossible act or promise. It must not be illusory or sham, e.g. to discover a treasure by magic. The impossibilities can be categorized as: Physical impossibility - A promises to pay B Rs. 1,00,000 in consideration of B bringing a star from the sky to the earth. This is unreal because B’s promise is absurd and physically impossible.

Legal impossibility - A owes Rs. 1,000 to B. He promises to pay Rs. 200 to C, the servant of B who in return promises to discharge A from the debt. This is legally impossible because C cannot give discharge for a debt due to B, his master -Harvey v. Gibbons [1675] 2 Lev. 161.

Illusory consideration - Illusory consideration gives impression of consideration which is not actually there. These agreements lack mutuality.

Examples : 1. S and D enter into a contract under the terms of which B promises to buy from S all the coal he “might wish”over the next 6 months, with S promising to sell such quantity at a specified price per ton. Because of the language used, intentionally or accidentally, B has not bound himself to buy any quantity of coal at all; thus he has incurred no detriment at all. This being true, neither promiser is liable to the other. The result is that if B later desires some coal, he is free to buy from whomever he wishes. Conversely, if B orders coal from S, S ordinarily has no duty to supply it.

2. In Stilk v. Myrick [(1809) 2 Comp 317] where two seamen deserted the ship, their Captain promised to divide their wages among the rest of the crew if they helped him take the ship home. The consideration was illusory as the crew was already dutybound to take the ship home.

(4) It must be something which a promisor is not already bound to do - Where one is doing, or promising to do something which one is already under an obligation to do will not form a good consideration. One can already be bound : (i) under a duty imposed by law : Where a person is responsible to perform certain duty under laws of land, performance of such duties connot form a consideration to constitute a valid contract. Thus, where A promise to pay B, who had received summons to appear at a trial in a civil suit, a certain sum being a compensation for the loss of time during his attendance. It was held, the promise was without consideration as B was already under a duty imposed by law to appear and give evidence - Collins v. Godfrey [1831] 1B & AD 956. (ii) under a duty emanating from an existing contract : If a person is bound to perform certain act under an existing contract, the same performance cannot form a good consideration for any other contract. There was a promise to pay the advocate an

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additional sum if the suit was successful. Held, the promise was void for want of consideration. The advocate was under a pre-existing contractual obligation to render the best of his services under the original contract - Ramachandra Chintaman v. Kaluraju [1877] 2 Bom. 302.

However, where a person being already under a legal contractual duty to do something undertakes to do something more than what he is bound to do under the original contract, this will be a good consideration for the promise, e.g., where a police constable who sued for reward offered for the supply of the information, leading to a conviction, had rendered services outside the scope of his ordinary duties, he may be held entitled to recover - England v. Davidson [1840] 19 L.J.Q.B 287.

(5) Consideration must be lawful - According to section 10 of the Act, “All agreements are contracts if they are made for a lawful consideration”. So a consideration must be lawful without which an agreement is void. Section 23 states that consideration is unlawful if (a) it is forbidden by law; (b) or, is of such a nature that if allowed it would defeat some law of the country; (c) it is fraudulent; (d) it involves injury to the property or person of the other; (e) court regards it as immoral or opposed to the public policy.

There may be cases where one part of consideration is unlawful but the other is not. In such cases the whole agreement is void if the unlawful part connot be separated from the lawful part.

Example - A promises to work for B who runs both illegal and legal business for a sum of Rs. 4,000 per month and B agrees to pay this amount to A. The legal business can be separated from illegal business, the part of salary pertaining to legal business is lawful consideration.

In the above case, if legal and illegal businesses cannot be separated, whole salary of A will constitute unlawful consideration.

Lawfulness of consideration is discussed in detail in this Chapter under the heading ‘Legality of Object and Consideration’.

EXCEPTIONS TO THE DOCTRINE OF CONSIDERATION

3.3 So far, we have seen that an agreement has to be supported by consideration to be enforceable at law. But there may be certain circumstances where it will not be reasonable to apply the doctrine of consideration to meet the basic motives of the law.

Section 25 of the Indian Contract Act, 1872 takes care of such circumstances. It says that, “An agreement without consideration is 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.”

Such circumstances are elaborated below : (1) Love and affection [Sec. 25(1)] - An agreement is enforceable even if there is no consideration, if it is (i) expressed in writing, (ii) registered under the law for the time being in force for the registration of documents, (iii) is made on account of natural love and affection, and (iv) between parties standing in a near relation to each other.

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In simple words, a written and registered agreement based on natural love and affection between near relatives is enforceable even if it is without consideration -Ram Dass v.

Krishan Dev AIR 1986 H.P. 9.

Examples : 1. F, for natural love and affection, promises to give his son, S, Rs. 1,000. F puts his promise to S in writing and registers it. This is a contract.

2. An agreement by a person entitled to a certain share in the income of a Trust, to pay out of that share a certain amount to his mother over and above her own share of that income is supported by consideration as per section 25 (1) of the Act [AIR 1949 Bom. 17 (18) DB].

Note : The Act does not provide any guidance as to who is near relative. The expression would therefore include parties related by blood or marriage. Further, nearness of relationship does not necessarily import natural love and affection.

3. A Hindu husband, after referring to quarrels and disagreement between him and his wife executed a registered document in favour of his wife agreeing to pay her for maintenance, but no consideration moved from the wife. Held, the agreement was void for want of consideration - Rajlukhy v. Bhoothnath, (1900) C.W.N. 488 as the essential requirement that the agreement is made on account of natural love and affection between the parties was missing.

(2) Compensation for past voluntary services [Sec. 25 (2)] - A promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, is enforceable, even though without consideration. In simple words, a promise to pay for a past voluntary service is binding.

Examples : 1. A finds B’s purse and gives it to him. B promises to give A Rs. 50. This is a contract.

2. A supports B’s infant son. B promises to pay A’s expenses in so doing. This is a contract.

3. A says to B, “At the risk of your life you saved me from a serious accident. I promise to pay you Rs. 1,000.” There is a contract between A and B. 4. X agreed to pay Y Rs. 5 per mensem for life in consideration of Y having trained X in the art of singing. It was found that Y’s sister and not Y himself had rendered those services for X. In a suit by Y it was held that as Y himself had done nothing for X’, there was no consideration for the agreement and hence it was not enforceable. [AIR 1916 Pat. 80 (81)] (3) Promise to pay a time-barred debt [Sec. 25(3)] - A time barred debt is a debt which is not recoverable because of lapse of specified time (presently 3 years) under the Limitation Act. In the normal course, once a debt becomes time barred, the lender is left with no remedy to get his money back. Therefore a debtor is not legally bound to pay the debt if it becomes time-barred.

In such a case, if the debtor subsequently promises to pay the time barred debt, apparently there is no consideration moving from the other party but the contract is still enforceable. This is because, under section 25(3) of the Act, a promise by a debtor to pay a time-barred debt is enforceable provided: (i) it is made in writing, (ii) is signed by the debtor or by his agent generally or specially authorized in that behalf, and

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(iii) the debt must be such “of which the creditor might have enforced payment but for the Law of the limitation of suits.”

The promise may be to pay the whole or any part of the debt.

Example - D owes C Rs. 1,000 but the debt is barred by the Limitation Act. D signs a written promise to pay C Rs. 1,000 on account of the debt. This is a contract.

Note : Section 25(3) applies only : (a) When a promisor himself was liable for the time barred debt. This means sub-section 25(3) would not apply to a case of a promise to pay a time barred debt payable by a third party - Pestonji v. Meherbai, 30 Bom. L.R. 1407.

If, however, a Hindu promises to pay a time barred debt due by his father, he can be held liable, because the Hindu law makes the son responsible for his father’s debts to the extent to which he has received property from his deceased father or to the extent of his ancestral estate - Champak Lal v. Raya Chand 1932 34 Bom. LR 1005. (b) Where the promise is to pay an ascertained amount. A promise to pay what is due after taking accounts is not a promise within the meaning of section 25(3). [AIR 1952 Pat. 73 (77)]

(4) Completed gift [Explanation 1 to Sec. 25] - The rule “No consideration, no contract” does not apply to completed gifts. According to Explanation 1 section 25, nothing in section 25 shall affect the validity, as between the donor and the donee, of any gift actually made.

Thus transfer of properties by one person to the other as a gift according to the provisions of the Transfer of Property Act (i.e. by a written and registered document) is valid and a person transferring the property cannot subsequently demand the property back on the ground that there was no consideration.

Note : In earlier paras we have discussed that gratuitous promises/gifts are not enforceable at the court of law because in such cases there is no consideration for the donor. This is to be distinguished from the Explanation 1 to section 25 because as per the latter, once a gift has actually been made, the donor cannot demand it back on the ground that there was no consideration.

(5) Agency [Sec. 185] - Under section 185 of the Indian Contract Act, no consideration is necessary to create an agency, i.e. a transaction of agency. For giving a person authority to act as agent, consideration is not necessary. Thus if A authorises B to act on his behalf (act as an agent) before C, and B agrees to do so, the contract is enforceable at the court of law although no consideration is moving from A to B. A will be bound by the acts done by B on his behalf as against C. Even a gratuitous agent can be held liable for negligence. The principle of Promissory Estoppel emanates from this provision.

(6) Remission - Under section 63 of the Act, no consideration is necessary for an agreement to receive less than what is due, known as remission in the law.

Example - Creditor A agrees to accept Rs. 500 from B in full satisfaction of the debt of Rs. 1000. A subsequently cannot claim the amount of Rs. 500 which he has rescind.

(7) Guarantee [Sec. 127] - A contract of guarantee is made without consideration.

STRANGER TO CONTRACT VIS-A-VIS STRANGER TO CONSIDERATION

3.4 A stranger to the contract, not being a party to the contract, can neither sue nor be sued upon under it. However, if a party to contract is a stranger to consideration, it does not affect his legal rights under the contract.

3.4-1 Stranger to the contract - A person who is not a party (i.e. neither a promisor nor a promisee) to the contract is a stranger to the contract. Under the law of contract, an agreement can be binding on and can only be enforced against the parties to it. Since a contract is a private relationship between the parties who make it, the rights and obligations under such a contract are strictly confined to them - Tweedle v. Atkinson

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[1861-73] All. E.R. Rep. 369. This is known as the doctrine of privity of contract. From this follows a general rule of law that only parties to a contract may sue and be sued on a contract. Privity of contract means relationship subsisting between the parties who have entered into contractual obligations. The consequences of the doctrine of privity of contract are : (i) a person who is not a party to a contract cannot sue upon it even though he has provided the consideration. (ii) a contract cannot confer rights or impose obligations arising under it on any person other than the parties to it. Thus if there is a contract between X and Y, Z cannot enforce it.

Examples : 1. A clause in a Motor Insurance Policy providing that the Insurance Company shall indemnify the insured against his legal liability in respect of death of or accident of other passengers cannot give a right of suit against the insurance company for the money due under the policy to a passenger who is a mere stranger to the contract of insurance. [AIR 1938 Bom. 217(217)] 2. S bought tyres from the Dunlop Rubber Company and sold them to D, a subdealer, who agreed with S not to sell below Dunlop’s list price and to pay the Dunlop Company 5 Pounds as damages on every tyre sold below the list price by D.S sold two tyres at less than the list price and thereupon the Dunlop company sued him for the breach. Held, the Dunlop company could not maintain the suit as S was a stranger to the contract - Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. [1915] A.C. 847.

The principle that a person who is not a party to the contract cannot take advantage of its provisions is subject to certain recognised exceptions discussed under the heading ‘exceptions to the doctrine of privity of contract’.

3.4-2 Stranger to consideration - In the Indian Contract Act, in order to constitute a valid contract, the consideration may move from the promisee or any other person. In case, the consideration moves from a person other than the promisee, the promisee can be categorized as a stranger to the consideration. For example, if A promises to B that he will pay Rs. 1000 to B, if B can get a picture painted from C for A. Here consideration is moving from C to A (painting of picture by C for A) and from A to B (Rs. 1000) and there is no consideration from B to either party, i.e. B is stranger to the consideration, but the relationship of promisor and promisee subsists between A and B only. The relationship between A and C is that of the privity of consideration. But the privity of consideration does not confer any right to the party providing consideration to enforce the contract at the court of law, unless he is a party to the contract. This is known as the doctrine of privity of consideration. In the given example if A does not perform his part of the contract, C cannot sue upon A in the court for its enforcement, only B is entitled to do so. Conversely it can be said that a stranger to the consideration has a right to enforce a contract, provided he is party to the contract.

Example - Where a person transfers property to another and stipulates that money be paid to a third person, a suit to enforce that stipulation by that third party will not stand.

[AIR 1930 Mad. 382(389) (FB)].

3.4-3 Exceptions to the Doctrine of privity to contract - Following are the exceptions to the rule that a stranger to a contract cannot sue :

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(1) Beneficiary under trust or a charge - When a trust is created, the beneficiary can enforce the rights given to him under the trust, even though he was not a party to the contract between the settler and the trustees.

Examples : 1. A transfers some property in favour of B to be held by him in trust for the benefit of X. X can enforce the agreement even though he is a stranger to the contract.

2. In the case of Khwaja Khan v. Hussaini Begam [1910, 32 All 410 (PC)], it was held that where a Mohamaden lady sued her own father in law to recover arrears of allowance payable to her by her father-in-law under an agreement between him and her own father in consideration of her marriage, she could enforce the promise in her favour in so far as she was a beneficiary under the agreement to make a settlement in her favour, and she was claiming as a beneficiary under such settlement.

3. A appointed his son B as his successor and put him in possession of the entire estate. In consideration thereof, B agreed with A to give a certain sum of money and part of the property to C, A’s illegitimate son, on C’s attaining majority. Held, a trust was created in favour of C for the specified amount and property. Hence C was entitled to maintain a suit. - Umanath Baksh Singh v. Jang Bahadur AIR 1938 PO 245.

(2) Doctrine of promissory estoppel- Courts have at times been confronted by the cases involving gratuitous promises and unaccepted offers, which are without consideration and hence not enforceable at law. Under certain circumstances, the courts will enforce gratuitous promises and unaccepted offers.

If a person makes a promise to the other, and that other person incurs a detriment relying upon the promise, in such a case, the promiser is estopped from going back from his promise to the extent the promisee has incurred a detriment on the basis of such promise. This is known as the doctrine of promissory estoppel.

For example, A promises to make a gift of Rs. 3,000 towards the repairs of temple. The trustee of the temple on the faith of his promise incurs liability worth Rs. 2,500. A does not pay. Can the trustee recover the promised amount from A ? Yes, because the trustee has taken action (i.e. spent amount on repair of the temple) on the basis of the promise made by B to the extent of amount spent by him, i.e. Rs. 2,500.

The basic idea underlying this doctrine is that if the promisor makes a promise under circumstances in which he or she should realise that the promisee is almost certainly going to react to the promise in a particular way, and if the promisee does so react, thereby causing a substantial change in his or her position, the promisor is bound by the promise even though the consideration is lacking.

Examples : 1. A tenant takes a building on lease from the landlord from January 1, 1967 to December 31, 1968. In early December 1968, the tenant indicated his intention of remodelling the premises and asked for renewal of lease for two years. The landlord replied to him that, we will get to work on a new lease soon. I don’t know about two years, but you can count on one year for sure. The tenant then spent $500 over the next few weeks on remodelling the house but the parties never executed a new lease. The landlord sought to evict the tenant in March 1969 on the ground that no renewal contract had been formed, he was held unsuccessful-and was held to fulfil his promise regarding the year 1969. In this case, the landlord should have realised the likelihood of the tenant’s conduct in consequence of his

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promise, he is said to be “stopped by his promises”; he cannot contend that the lack of consideration on the tenant’s part caused his promise to be unenforceable.

2. In the case of Kedar Nath v. Gauri Mohammed 1886 I.L.R. 14 Cal. 64, where the secretary of townhall had acted on the faith, that the promisee will pay Rs. 100 for construction of townhall, and incurred a liability, the court enforced the claim for the recovery of the amount to the extent of the liability incurred by the promisee.

Note : Where the promisee has not acted, i.e. not suffered any detriment based on the promise made by the promisor, then such a promise is not tenable at the court of law.

3. X promised to pay Rs. 500 for rebuilding of a mosque which he refused later on.

The secretary of the Mosque Committee filed a suit to enforce the promise to subscribe Rs. 500 for rebuilding of the mosque. By that time no initiative was taken for the rebuilding. Court dismissed the suit on the ground that the Mosque committee did not suffer any detriment or liability on the faith of such promise.

(3) Family Settlements - Family arrangements or compromises made among male members for the benefit of female members of the family can be enforced by the female members, although the female members are not a party to those arrangements. Thus where an agreement is made in connection with marriage, partition or other family arrangement and a provision is made for the benefit of a person, that person may take advantage of that agreement although he is not a party to it.

Examples : 1. On the partition of a joint Hindu family property, an agreement was entered among its male members to make provision for the marriage expenses of a female member. Held, the female member was entitled to sue the parties to the partition deed to enforce the provision in her favour - Sunder Raja Aiyengar v. Laxmi Ammal 1915 38 Mad. 788.

2. Two brothers on a partition of the family property agreed to pay Rs. 300 in equal share to their mother for maintenance. It was held that the mother, though a stranger could enforce the provision in her favour - Shuppu Ammal v.

Subramanian 1910 33 Mad. 238 41 C1083.

(4) Marriage Settlement of Minor - In case of provisions of marriage settlement of minors, the minor is entitled to sue to enforce his claim. This is because in India, marriages are contracted for minors by their parents and guardians and therefore the Doctrine of Privity of Contract does not apply in this case.

Example - R’s father entered into an agreement for her marriage with J. Subsequently, J refused to marry. It was held that R after attaining majority could sue J for damages of breach of the promise and J could not take the plea that R was not a party to the agreement - Rose Fernandis v. Joseph Gonsalvis AIR 1925 Bom. 97.

(5) Agency - Contracts entered into by an agent can be enforced by the principal.

Example - A appoints B as his agent for selling the goods. B sold the goods to a buyer C. C sued A for defective goods. In this, though there is no direct contract between A and C, yet A is liable because B has sold the goods to C as A’s agent.

When an agent sent the goods to a foreign buyer not as his own, but as agent of principal, there is privity of contract between the principal and the foreign buyer, even in cases when the agent has not disclosed the name of the principal - [1981 47 STC 62(66) Mad.] (6) Covenants running with the land - In cases of transfer of immovable property, the purchaser of land is bound by certain conditions or covenants created by an agreement between the original buyer and the concerned authority effecting the land although he

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was not a party to the original agreement which contained those conditions or covenants - Tulk v. Moxhay (1919) 88 LJ KB 861.

LEGALITY OF OBJECT AND CONSIDERATION

3.5 According to section 10 of the Indian Contract Act, 1872, lawful consideration and object is one of the essential ingredients to constitute a valid contract. Section 23 lays down the cases where the consideration and object (purpose or design) of an agreement can be deemed to be unlawful.

Anything which is not lawful within section 23 is unlawful for the purpose of an agreement or compromise, and a decree incorporating such an agreement or compromise is a nullity. The section declares following agreements to be void for unlawfulness : (1) Where the consideration or object is forbidden by law - A contract which is expressly forbidden and made criminal by statute can give no cause of action to a party who seeks to enforce it.

Examples : 1. A promises to obtain for B an employment in the public service, and B promises to pay Rs. 1,000 to A. The agreement is void as the consideration for it is unlawful.

2. Oral sale of any immovable property under the J&K Transfer of Property Act is forbidden and thus such oral contract would be void under section 23 of the Contract Act - [1989 3 Cur CC 56(57) J&K].

3. An agreement to sell paddy above the maximum price fixed under Maximum Price Control Order - it is unlawful or void - [AIR 1972 Andhra 367 (368)].

(2) Where the consideration or object defeats the provisions of any law - Where a contract is to do a thing which cannot be performed without an infringement of law, it is void whether parties knew the law or not.

Examples : 1. 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 purpose is to defeat provisions of law.

2. 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.

(3) Where the consideration or object is of such nature that it is fraudulent - Where agreement involve the commission of a wrong, or commission of a fraud against a third person or the commission of fraud against the public, they are unlawful and unenforceable.

Examples : 1. 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.

2. 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.

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ROHINI AGGARAWAL TAXMANN SEPTEMBER 2022 REPRINT | SEPTEMBER 2022 9789356223981 604 PAPERBACK

Rs. 825 | USD 41

Description This book is a comprehensive and authentic textbook on the following mercantile and commercial laws: u

Indian Contract Act

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Sale of Goods Act

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Partnership Act

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Negotiable Instruments Act

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Consumer Protection Act

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Arbitration and Conciliation Act

This book covers the complete syllabus for B.Com., BBA and MBA of different universities & institutes.

The Present Publication is the Reprint September 2022 Edition, authored

by Rohini Aggarawal, with the following noteworthy features: u

[Teach Yourself Technique] has been followed throughout the book

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Each Paragraph with a distinct number starts with the following:

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Relevant background

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Analytical discussions

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Supported by illustration, examples & relevant case laws

[Past Year Question/Answers] have been incorporated at the end of each chapter, with cross-reference to the relevant paragraph number

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