INTRODUCTION
The Indian Contract Act, 1872 constitutes the backbone of commercial and civil transactions in India. It codifies the general principles governing the formation, validity, performance, and enforceability of contracts. Contract law is founded on the idea that parties who enter into agreements voluntarily should be legally bound to perform their promises. The Act provides certainty, predictability, and fairness in private dealings and plays a vital role in economic and social interactions. Unit I focuses on the foundational concepts of contract law, laying the groundwork for understanding enforceable agreements and their legal consequences.
CONCEPT OF CONTRACT AND AGREEMENT
Section 2(h) of the Indian Contract Act, 1872 defines a contract as “an agreement enforceable by law.” Thus, every contract is an agreement, but every agreement is not a contract. An agreement under Section 2(e) is defined as “every promise and every set of promises forming the consideration for each other.”
A promise, as per Section 2(b), arises when a proposal is accepted. Therefore, an agreement is formed when one party makes a proposal and the other party accepts it. However, only those agreements that satisfy the legal requirements laid down by the Act become contracts.
The essential elements of a valid contract, as derived from Section 10, include: (i) an agreement, (ii) made for lawful consideration, (iii) with a lawful object, (iv) between parties competent to contract, (v) with free consent, and (vi) not expressly declared void.
In Balfour v. Balfour,
Facts: The husband was employed in Ceylon and lived there with his wife. Due to her ill health, the wife returned to England. The husband promised to send her a fixed monthly allowance for maintenance. Later, the relationship deteriorated and the husband stopped making payments. The wife sued to enforce the promise.
The court held that domestic arrangements without the intention to create legal relations do not constitute contracts. This case highlights that mere agreements without legal enforceability remain outside the ambit of contract law.
FORMATION OF CONTRACT
The formation of a contract requires the concurrence of several elements, namely proposal, acceptance, consideration, capacity, free consent, and legality of object.
2.1 PROPOSAL (OFFER)
Section 2(a) defines a proposal as an expression of willingness by one person to do or abstain from doing something, with a view to obtaining the assent of another. The person making the proposal is called the promisor, and the person to whom it is made is the promisee.
Essential elements of a valid proposal include:
It must express willingness to do or abstain from doing something.
It must be made with the intention of obtaining assent.
It must be communicated to the offeree.
The terms must be definite and certain.
It should not be a mere invitation to offer.
In Harvey v. Facey,
Facts: The plaintiff telegraphed the defendant asking whether he would sell a particular property and, if so, at what price. The defendant replied stating the lowest price at which he would sell the property. The plaintiff then sent a telegram stating that he accepted the offer. The defendant refused to sell the property.
it was held that a mere statement of lowest price does not amount to an offer. Similarly, advertisements, catalogues, and price lists are generally treated as invitations to offer.
Communication of proposal is complete when it comes to the knowledge of the person to whom it is made. Revocation of proposal, under Section 5, is permissible at any time before the communication of acceptance is complete as against the proposer.
2.2 ACCEPTANCE
Acceptance is defined under Section 2(b) as the assent given by the offeree to the proposal. When accepted, the proposal becomes a promise.
The essentials of a valid acceptance are:
Acceptance must be absolute and unqualified.
It must be communicated to the proposer.
It must be in the prescribed manner, if any.
It must be given within a reasonable time.
It must be given by the offeree.
Brogden v. Metropolitan Railway Co. (1877)
Facts:
Brogden supplied coal to the railway company for several years without a formal written contract. A draft agreement was prepared and approved by Brogden, signed by him, and sent to the railway company, which did not sign it. Despite this, both parties continued business as per the terms of the draft agreement.
Felthouse v. Bindley (1862)
Facts:
An uncle wrote to his nephew offering to buy a horse and stated that if he heard no reply, he would consider the horse his. The nephew did not reply but instructed an auctioneer not to sell the horse. The auctioneer mistakenly sold the horse to someone else. The uncle sued the auctioneer.
In Brogden v. Metropolitan Railway Co., acceptance by conduct was recognized as valid. Silence, however, does not amount to acceptance, as established in Felthouse v. Bindley.
Communication of acceptance is complete as against the proposer when it is put in a course of transmission, and as against the acceptor when it comes to the knowledge of the proposer.
2.3 CONSIDERATION
Consideration is defined under Section 2(d) as something done or abstained from, or promised to be done or abstained from, at the desire of the promisor. It is the price for which the promise is bought.
Essential elements of consideration include:
It must move at the desire of the promisor.
It may move from the promisee or any other person.
It may be past, present, or future.
It must be real and not illusory.
It must not be unlawful.
The doctrine of privity of consideration was relaxed in India, as held in Chinnaya v. Ramayya, where consideration furnished by a third party was held sufficient.
Chinnaya v. Ramayya (1882)
Facts:
An elderly woman transferred property to her daughter on the condition that the daughter would pay a fixed annual amount to the woman’s brother. After the transfer, the daughter refused to pay the allowance. The brother sued the daughter to recover the amount.
Agreements without consideration are void under Section 25, subject to exceptions such as agreements made out of natural love and affection, compensation for past voluntary services, and promises to pay time-barred debts.
2.4 CAPACITY TO CONTRACT
Section 11 provides that every person is competent to contract who is of the age of majority, of sound mind, and not disqualified by law.
Mohori Bibee v. Dharmodas Ghose (1903)
Facts:
A minor mortgaged his property to a moneylender to secure a loan. At the time of the transaction, the moneylender was aware that the mortgagor was a minor. Later, the minor sought to have the mortgage set aside, contending that he was incompetent to contract.
A minor’s agreement is void ab initio, as laid down in Mohori Bibee v. Dharmodas Ghose. A minor cannot ratify a contract upon attaining majority. However, contracts for necessities supplied to a minor are enforceable against the minor’s property under Section 68.
A person of unsound mind is competent to contract only when he is capable of understanding the contract and forming a rational judgment. Disqualified persons include alien enemies, insolvents, and convicts under certain circumstances.
FREE CONSENT
Consent is defined under Section 13 as agreement upon the same thing in the same sense. Consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation, or mistake (Section 14).
3.1 COERCION
Section 15 defines coercion as committing or threatening to commit any act forbidden by the Indian Penal Code, or unlawful detaining of property, with the intention of causing a person to enter into an agreement.
Chikham Ammiraju v. Chikham Seshamma (1917)
Facts:
A husband threatened to commit suicide unless his wife and son executed a deed in his favour. Fearing that he would carry out the threat, the wife and son executed the document transferring property to him.
In Chikham Ammiraju v. Chikham Seshamma, a threat of suicide was held to amount to coercion. A contract induced by coercion is voidable at the option of the party whose consent was so obtained.
3.2 UNDUE INFLUENCE
Undue influence, under Section 16, occurs when one party is in a position to dominate the will of the other and uses that position to obtain an unfair advantage.
Raghunath Prasad v. Sarju Prasad (1924)
Facts:
A moneylender advanced a loan to a person who was financially distressed and in need of money. The transaction involved terms that were highly beneficial to the moneylender. The borrower later challenged the transaction alleging undue influence.
Relationships such as parent and child, doctor and patient, and spiritual adviser and disciple give rise to a presumption of undue influence. In Raghunath Prasad v. Sarju Prasad, the court emphasized the burden of proof on the dominant party.
3.3 MISREPRESENTATION
Misrepresentation is defined under Section 18 as a false statement made innocently, without intent to deceive. It includes positive assertions not warranted by information, breach of duty, and causing a party to make a mistake.
A contract induced by misrepresentation is voidable, but the right to rescind is lost if the aggrieved party had the means of discovering the truth with ordinary diligence.
3.4 FRAUD
Section 17 defines fraud as an act committed with intent to deceive, including false statements, active concealment, promises without intention to perform, and any act fitted to deceive.
Derry v. Peek (1889)
Facts:
The directors of a company issued a prospectus stating that the company had the right to use steam power, based on their belief that government approval would be granted. In reality, such approval had not yet been obtained. Investors relied on this statement and suffered losses when permission was refused.
In Derry v. Peek, fraud was defined as a false statement made knowingly, without belief in its truth, or recklessly. A contract induced by fraud is voidable, and damages may also be claimed.
3.5 MISTAKE
Mistake may be of fact or law. A bilateral mistake of fact essential to the agreement renders the agreement void under Section 20. Unilateral mistake generally does not affect validity unless it relates to the identity of the person or nature of the contract.
State of Orissa v. Titaghur Paper Mills Co. Ltd. (1985)
Facts:
The company paid certain taxes under a mistaken understanding of the law. Later, it sought to recover the amount paid, claiming that the payment was made under a mistake of law.
In State of Orissa v. Titaghur Paper Mills, a mistake of law was held not to render a contract void.
LEGALITY OF OBJECT AND CONSIDERATION
Under Section 23, the consideration or object of an agreement is lawful unless it is forbidden by law, defeats the provisions of any law, is fraudulent, involves injury to person or property, or is opposed to public policy.
Gherulal Parakh v. Mahadeodas Maiya (1959)
Facts:
The parties entered into a partnership agreement to speculate in forward contracts of commodities. One party later challenged the agreement on the ground that it was opposed to public policy.
Agreements opposed to public policy include agreements in restraint of marriage, trade, or legal proceedings. In Gherulal Parakh v. Mahadeodas Maiya, the Supreme Court cautioned against expanding the scope of public policy arbitrarily.
VOID AGREEMENTS
Void agreements are those agreements which are expressly declared void by the Act. These include agreements in restraint of marriage (Section 26), restraint of trade (Section 27), restraint of legal proceedings (Section 28), uncertain agreements (Section 29), wagering agreements (Section 30), and agreements contingent on impossible events (Section 36).
Such agreements are void ab initio and unenforceable in law.
DISTINCTION BETWEEN VOID CONTRACT AND VOIDABLE CONTRACT (WITH CASE FACTS)
A clear understanding of the distinction between void contracts and voidable contracts is essential, as the legal consequences flowing from each are fundamentally different. While a void contract is devoid of legal effect from its inception or becomes unenforceable by operation of law, a voidable contract is initially valid and binding but may be repudiated at the option of the aggrieved party.
Before drawing a comparative distinction, it is necessary to briefly understand each concept with the help of case law and relevant facts.
VOID CONTRACT
A void contract is defined under Section 2(j) of the Indian Contract Act, 1872 as a contract which ceases to be enforceable by law. In practical terms, a void contract has no legal existence and cannot be enforced by either party. Certain agreements are void ab initio, while others become void due to subsequent impossibility or illegality.
In Mohori Bibee v. Dharmodas Ghose, the plaintiff, a minor, mortgaged his property to the defendant to secure a loan. At the time of execution, the defendant was aware of the plaintiff’s minority. When the defendant sought enforcement of the mortgage, the Privy Council held that an agreement with a minor is void ab initio. The court categorically ruled that a minor’s agreement is absolutely void and cannot be ratified upon attaining majority. This case firmly established that contracts lacking statutory capacity are void from the beginning.
Similarly, agreements with unlawful object or consideration under Section 23, wagering agreements under Section 30, and agreements contingent on impossible events under Section 36 are void and unenforceable.
VOIDABLE CONTRACT
A voidable contract is defined under Section 2(i) as an agreement which is enforceable by law at the option of one or more of the parties, but not at the option of the other or others. Voidable contracts arise where consent is not free, as contemplated under Section 14 of the Act.
Ranganayakamma v. Alwar Setti (1889)
Facts:
A young widow was prevented from removing her deceased husband’s body for funeral ceremonies unless she consented to adopt a boy chosen by the defendants. Under this pressure, she agreed to the adoption.
In Ranganayakamma v. Alwar Setti, a young widow was coerced into adopting a boy by being prevented from removing her deceased husband’s body for funeral rites. The Privy Council held that her consent was obtained by coercion and the adoption was voidable at her option. This case illustrates that contracts induced by coercion are not void from inception but remain valid until avoided by the aggrieved party.
In Derry v. Peek, the directors of a company issued a prospectus containing false statements, believing them to be true. Although fraud was not established due to lack of intent, the case clarified the distinction between fraud and innocent misrepresentation and reinforced that contracts induced by fraud are voidable, entitling the aggrieved party to rescind the contract and claim damages.
Contracts induced by misrepresentation, undue influence, or fraud are valid unless and until the aggrieved party exercises the right of rescission. If the party affirms the contract or fails to rescind within a reasonable time, the contract becomes binding.
COMPARATIVE DISTINCTION BETWEEN VOID CONTRACT AND VOIDABLE CONTRACT
The distinction between void and voidable contracts may be clearly understood through the following comparative table:
| Basis of Distinction | Void Contract | Voidable Contract |
|---|---|---|
| Definition | A contract which is not enforceable by law or ceases to be enforceable | A contract enforceable at the option of one party |
| Relevant Provision | Section 2(j), Indian Contract Act, 1872 | Section 2(i), Indian Contract Act, 1872 |
| Legal Status | Invalid from the beginning or becomes invalid subsequently | Initially valid and binding |
| Consent | Absence of essential elements such as capacity or legality | Consent exists but is not free |
| Effect on Rights | Creates no legal rights or obligations | Creates rights and obligations until rescinded |
| Enforceability | Cannot be enforced by either party | Enforceable by the aggrieved party |
| Right of Rescission | No question of rescission arises | Aggrieved party may rescind the contract |
| Restoration of Benefits | Generally not applicable | Benefits must be restored upon rescission under Section 64 |
| Ratification | Not possible | Possible if the aggrieved party affirms the contract |
| Examples | Agreement with a minor; wagering agreement; agreement with unlawful object | Contract induced by coercion, fraud, misrepresentation, or undue influence |
| Leading Case | Mohori Bibee v. Dharmodas Ghose (minor’s agreement void) | Ranganayakamma v. Alwar Setti (coercion renders contract voidable) |
CONCLUSION
The distinction between void and voidable contracts reflects the balance struck by the Indian Contract Act, 1872 between legal certainty and equitable relief. Void contracts protect public interest and statutory mandates by denying legal recognition to inherently defective agreements. Voidable contracts, on the other hand, safeguard individual autonomy by allowing the aggrieved party to either affirm or rescind a contract tainted by lack of free consent. A clear conceptual understanding of this distinction is indispensable for the proper application of contract law in both academic and practical contexts.
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