Transcript Free Consent - Executive Blog

Free Consent
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One of the essentials of a valid contract mentioned in Section 10
is that the parties should enter into contract with free consent.
According to Section 14, Consent is said to be free when it is not
caused by –
coercion, as defined in Section 15, or
undue influence, as defined in section16, or
fraud, as defined in Section 17, or
misrepresentation as defined in Section 18, or
mistake, subject to the provisions of Section 20, 21 and 22.
Consent is said to be caused when it would not have been given
but for the existence of such coercion, undue influence, fraud,
misrepresentation or mistake.
If the consent of one of the parties is not free consent, i.e., it has
been caused by one or other of the above stated factors the
contract is not a valid one. When consent to an agreement is
caused by fraud, coercion, misrepresentation or undue influence,
the agreement is a contract voidable at the option of the party
whose consent was so caused. If, however, the consent is caused
by mistake the agreement is void.
1. Coercion
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According to Section 15,
“Coercion” is the
committing, or threatening to commit, any act
forbidden by the Indian Penal Code, or the
unlawful detaining, or threatening to detain, any
property, to the prejudice of any person whatever
with the intention of causing any person to enter
into an agreement.
Coercion is said to be there when the consent of a
person has been caused either by
committing, or threatening to commit any act
forbidden by the Indian Penal Code, or by
unlawful detaining, or threatening to detain any
property, to the prejudice of any person whatever.
i.
Act forbidden by the Indian Penal Code
It has been noted that if a person commits or threatens to commit an
act forbidden by the Indian Penal Code with a view to obtain the
consent of the other person to some agreement, the consent in such
case is deemed to have been obtained by coercion. For instance, A
threatens to shoot B if B does not agree to sell his property to A
at a stated price, B’s consent in this case has been obtained by
coercion.
For coercion to be there it is not necessary that the Indian Penal
Code should be applicable at the place where the consent has been
so caused. Explanation to section 15 makes it clear that to constitute
coercion, “it is immaterial whether the Indian Penal Code is or is not
in force in the place where the coercion is employed.” The following
illustration would explain the point :
A, on board an English ship on the high seas, causes B to enter into
an agreement by act amounting to criminal intimidation under the
Indian Penal Code. A afterwards sues B for breach of Contract at
Calcutta. A has employed coercion, although his act is not an
offence by the law of England, and although section 506 of the Indian
Penal Code was not in force at the time when, or at the place where,
the act was done.
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In Ranganayakamma Vs. Alwar Setti (1889) the question
before the Madras High Court was regarding the validity of the
adoption of a boy by a widow, aged 13 years. On the death of
her husband, the husband’s dead body was not allowed to be
removed from her house by the relatives of the adopted boy until
she adopted the boy. It was held that the adoption was not
binding on the widow.
In Chikkam Ammiraju Vs. Chikkam Seshama (1918) the
question before the Madras High Court was that whether
coercion could be caused by a threat to commit suicide. In this
case a Hindu by a threat of suicide induced his wife and son to
execute a release deed in favour of his brother in respect of
certain properties claimed as their own by the wife and the son.
The question before the court was whether a threat to commit
suicide could be considered to be an act forbidden by the Indian
Penal Code. It was held by Wallis, C.J. and Seshagiri Ayyar, J.
that a threat to commit suicide amounted to coercion within the
meaning of Section 15 of the Indian Contract Act and therefore
the release deed was voidable.
ii.
Unlawful detaining of property
According to Section 15 coercion could also be
caused by unlawful detaining, or threatening to
detain, any property, to the prejudice of any
person whatever, with the intention of causing any
per to enter into an agreement. For example, if an
outgoing agent refuses to handover the accounts
books to the new agent until the principal executes
release in his favour, it is coercion. ( Muthiah
Chettiar Vs. Karupan (1927) If the detention of
property is not unlawful there is no coercion.
Thus, if a mortgagee refuses to convey the equity
of redemption except on the terms dictated by
him, there is nothing unlawful in it and, therefore,
no coercion is caused in this case. (Bengal Stone
Co. Ltd. Vs. Joseph Hyam (1918)
To the prejudice of a person
Section 15 requires that there is committing or threatening to commit,
any act forbidden by the Indian Penal Code, or the unlawful detaining,
or threatening to detain, any property, to the prejudice of any person
whatever, with an intention of any person to enter into an agreement.
It means that the act causing coercion should not necessarily be
directed against the contracting party, it is enough that the act is to the
prejudice of any person whatever, and with the intention of any person
to enter into an agreement. If, for example, A unlawfully detains B’s
friend C, in order to coerce B to enter into agreement, the case would
be covered within this section.
Threat to strike is no coercion
In Workmen of Appin Tea Estate Vs. Industrial Tribunal (1966) the
demand of the workers for bonus was accepted after a threat of strike.
The question which had arisen was, whether such a decision between
the Union of the workers and the Indian Tea Association could be
declared void on the ground that there was coercion. It was held that
because of the doctrine of collective bargaining under the Industrial
Dispute Act the demand of the workers could be backed by a threat of
strike. Such a threat was neither a threat to commit an offence under
the Indian Penal Code, nor was it unlawful detaining or threatening to
detain any property and hence it did not amount to coercion, and as
such the agreement was valid.
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Statutory Compulsion is no coercion
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When a Statue requires a contract to be entered into
the consent in such a case is not deemed to be
caused by coercion, undue influence, fraud,
misrepresentation or mistake. In Andhra Sugars
Ltd. Vs. State of A.P. (1968) if any cane grower
offered to sell his sugarcane to a factory in a certain
zone, the factory was bound to accept the offer
under the Andhra Pradesh Sugarcane (Regulation
of Supply and Purchase)
Act, 1961,
and
accordingly the agreement was entered into. It was
held that in such a case even though there was a
legal compulsion for the factory to make the
agreement, the agreement could not be said to be
entered into by lack of free consent, and there was
no coercion either.
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“Duress” under English law
Under common law duress consists in actual violence or threat of
violence to a person. It only includes fear of loss to life or
bodily harm including imprisonment, but not a threat of damage
to goods. The threat must be to do something illegal, i.e., to
commit a tort or a crime. The duress must be directed against a
party to the contract, or his wife, child, parent or other near
relative, and also caused by the party to the contract, or within
his knowledge. It has been noted above that the common law
recognises only a threat to a man’s person, and not to his goods
to constitute duress. It may be noted that Indian law also
recognises an action for the recovery of money paid or goods
delivered under coercion, through the provision contained in
section 72,Indian Contract Act. The provision is as under :
“ A person to whom money has been paid. Or anything delivered,
by mistake or undue coercion, must repay or return it “
For example, a railway company refuses to deliver up certain
goods to the consignee, except upon the payment of an illegal
charge for carriage. The consignee pays the sum charged in
order to obtain the goods. He is entitled to recover so much of
the charge as was illegally excessive.
Difference between Coercion and
Duress
1. Coercion in India means committing or threatening to
commit an act forbidden by the Indian Penal Code, or
unlawful detaining or threatening to detain the property.
Thus it may be an act or threat directed against a person
or his property. In England duress is constituted only by
acts or threats against the person of a man and not
against his property.
2. In India coercion may proceed from a person who is not a
party to the contract, and it may also be directed against
a person who, again, may be a stranger to the contract. In
England duress should proceed from a party to the
contract and is also directed against the party to the
contract himself, or his wife, parent, child, or other near
relative.
2. Undue influence
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If the consent of a party to the contract has been obtained by
undue influence the consent is not free consent which is needed
for the validity of a contract and if the consent has been caused
by undue influence, the contract is voidable at the option of the
party whose consent had been so obtained. Section 16 defines
undue influence as under :
“16. “Undue influence” defined.—(1) A contract is said to be
induced by “undue influence” where the relations subsisting
between the parties are such that one of the parties is In a
position to obtain an unfair advantage over the other.
(2)In particular and without prejudice to the generality of the
foregoing principle, a person is deemed to be in a position to
dominate the will of another—
(a) where he holds a real or apparent authority over the other ; or
where he stands in a fiduciary relation to the other ; or
(b) where he makes a contract with a person whose mental capacity
is temporarily or permanently affected by reason of age, illness,
or mental or bodily distress.
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(3)
Where a person who is in a position to
dominate the will of another, enters into contract
with him, and the transaction appears, on the face
of it or on the evidence adduced, to be
unconscionable, the burden of proving that such
contract was not induced by undue influence shall
lie upon the person in a position to dominate the will
of the other.
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Nothing in this sub-section shall affect the provisions
of Section 111 of the Indian Evidence Act, 1872.”
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Explaining the nature of the provisions contained in section 16,
Indian Contract Act and the adoption of English law in India, our
Supreme Court has observed in the case of Ladli Parshad Vs.
Karnal Distillery Co., (1963)
“The doctrine of undue influence under the common law was
evolved by the courts in England for granting protection against
transactions procured by exercise of insidious forms of influence
spiritual and temporal. The doctrine applies to acts of bounty as well
as to other transactions in which one party by exercising his position
of dominance obtains an unfair advantage over another. The Indian
enactment is founded substantially on the rules of English Common
law. The first Sub-section of Section 16 lays down the principle in
general terms. By sub-section (2) a presumption arises that a
person shall be deemed to be in a position to dominate the will of
another if the conditions set out therein are fulfilled. Sub-section (3)
lays down the conditions for raising a rebut table presumption that a
transaction is procured by the exercise of undue influence. The
reason for the rule in the third sub-section is that a person who has
obtained an advantage over another by dominating his will, may
also remain in a position to suppress the requisite evidence in
support of the plea of undue influence.”
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Effect of undue influence
Section 19-A declares that when consent to an agreement is caused by
undue influence, the agreement is a contract voidable at the option of
the party whose consent was so caused. For example, A’s son has
forged B’s name to a promissory note. B, under threat of prosecuting
A’s son, obtains a bond from A, for the amount of the forged note. If B
sues on this bond, the court may set the bond aside.
Because of undue influence one party to the contract may take an
undue advantage under the contract, or the party entitled to avoid the
contract may have already received some benefit under the contract.
The court in cases has been empowered to set aside the contract either
absolutely or upon such terms and conditions as the Court may deem
just. Second para to Section 19-A incorporates the following provision
in this regard :
“Any such contract may be set aside either absolutely, or, if the party
who was entitled to avoid it has received any benefit there under, upon
such terms and conditions as to the Court may seem just”
For example, a , a money-lender, advances Rs. 100 to B, an
agriculturalist, and, by undue influence, induces B to execute a bond
for Rs. 200 with interest at 6 per cent per month. The court may set the
bond aside, ordering B to repay Rs.100 with interest as may seem
just.
Essentials of undue influence
In order to constitute undue influence it is necessary that :
1) the relations subsisting between the parties are such that one of
the parties is in a position to dominate the will of the other , and.
2) such a person uses his dominant position to obtain an unfair
advantage over the other.
It is manifest that both the conditions have ordinarily to be
established by the person seeking to avoid the transaction : he
has to prove that the other party to the transaction was in a
position to dominate his will and that the other party had obtained
an unfair advantage by using that position.
Person in dominant position and obtaining of unfair
advantage
Sometimes one of the parties to the contract may be in such
a dominant position in relation to the other that he has peculiar
opportunity of exercising that position to the prejudice of the
other party. If the dominant party takes an undue advantage of
his position in procuring a contract to the detriment of the other
contracting party, the contract is voidable at the option of the
party whose will is so dominated.
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(1)
(2)
(3)
In the following cases a person is deemed to be
in a position to dominate the will of another –
where he holds a real or apparent authority over
the other, or,
where he stands in a fiduciary relation to the
other,
or,
where he makes a contract with a person whose
mental
capacity
is
temporarily
or
permanently affected by reason of age, illness,
or mental or bodily distress.
(1) Real or apparent authority
If a person has an authority over the other contracting party it is
expected that he would not abuse that authority to gain an undue
advantage from the other. An employer may be deemed to be
having authority over his employee, an income-tax authority over
the assessee, a police or a judicial officer over the accused, or a
licensing authority over the licence
(2)Fiduciary relation
Fiduciary relationship means a relationship of confidence and
trust. When a person reposes confidence in the other, it is
expected that he will not be betrayed. If a person betrays the
confidence and trust reposed in him and gains an unfair
advantage over the other party in any contract, the suffering
party has an option to avoid the contract. The principle of undue
influence applies to every case, where influence is acquired and
abused, where confidence is reposed and betrayed.
Examples of fiduciary relationship are solicitor and client, spiritual
advisor and devotee, medical attendant and patient, parent and
child, husband and wife, master and servant, creditor and debtor,
principal and agent, land lord and tenant, lover and beloved,
guardian and ward.
For example, A,, having advanced money to his son b, during
his minority, upon B’s coming of age obtains, by misuse of
parental influence, a bond from B for a greater amount than the
sum due in respect of the advance. A employs undue influence.
In MannuSingh Vs. Umadat Pande, (1890) the plaintiff, an
aged person executed a deed of gift in respect of whole of his
property in favour of the defendant, who was plaintiff’s guru or
spiritual adviser.
The only reason for the gift was his desire to secure benefits to
his soul in the next world and also in view of the plaintiff having
heard recitation of the holy book, Bhagwat. Soon after the
execution of the said deed the plaintiff applied for the cancellation
of the same by a suit brought by him under section 39 of the
specific relief Act, 1877.
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Section 111, Indian Evidence Act, 1872 was applied to this
situation, according to which in case of a person being in a
position of active confidence, the burden of proof lies on such a
person who enjoys such a confidence. It was held that because
of the fiduciary relationship between the parties, and the
absurdity of the reason given by the plaintiff in the gift deed for
executing the gift deed, and in view of the provision contained in
section 111, Indian Evidence Act, the defendant must prove the
absence of undue influence. And since he failed to prove the
same the plaintiff is entitled to obtain the cancellation of the
deed.
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Similarly in Diala Ram Vs Sarga (1927) where there was a
debtor-creditor relationship between the parties and the
defendant signed a bond agreeing to pay exorbitant rate of
interest on the loan taken from the plaintiff, who was a money
lender of his village, the presumption of undue influence was
raised.
Person in mental or bodily distress
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A person is deemed to be in a position to dominate the will
of another also in a situation, where he makes a contract
with a person whose mental capacity is temporarily or
permanently affected by reason of age, illness, or mental
or bodily distress. A person’s mental capacity may have
been affected on account of his old age, illness, or mental
or bodily distress, and there is every possibility that such a
person’s position may be exploited and unfair advantage
taken in such a situation. The law tries to afford protection
to such persons also. If a contract is made to the prejudice
of such a person, there is deemed to be undue influence in
such a case. For example.A, a man enfeebled by disease
or age, is induced, by B’s influence over him as his
medical attendant, to agree to pay B an unreasonable sum
for his professional services, B employs undue influence.
Presumption of undue influence in Unconscionable Bargains
In cases of unconscionable bargain between the parties on an unequal
footing the law raises a presumption of undue influence. Where a
person who is in a position to dominate the will of another, enters into a
contract with him, and the transaction appears, on the face of it or on
the evidence adduced, to be unconscionable, the burden of proving that
such contract was not induced by undue influence shall lie upon the
person in a position to dominate the will of the other.
When--1. One of the parties who has obtained the benefit of a1 transaction is in a
position to dominate the will of the other, and
2. The transaction between the parties appears to be unconscionable, the
law raises a presumption of undue influence.
It is, in such a case, for the dominant party to rebut the presumption of
undue influence. If a party has got exorbitant gain at the cost of the
other party, it is for him to prove that this advantage had not been
gained by undue influence.
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For example, A being in debt to B , a money lender of his
village, contracts a fresh loan on terms which appear to be
unconscionable. It lies on B to prove that the contract was not
induced by undue influence.
In Diala Ram Vs. Sarga, (1927) the defendant, who was
already indebted to the plaintiff, a village money lender, took a
fresh loan from the plaintiff and executed a bond, wherein he
agreed to pay interest up to 371/2 %, per annum, and also to
deliver some bhoosa (wheat husk) in addition thereto. It was
held that the position in this case was similar to that in illustration
© to Section 16,the contract was unconscionable and, therefore,
the burden of proof was on the plaintiff to show that there was no
undue influence in this case.
In Wajid Khan Vs. Raja Ewaz Ali Khan (1891) an old,
illiterate, pardanashin lady, who was herself incapable of
transacting any business, conferred a grant of her substantial
property without any valuable consideration in favour of her
confidential managing agent. The Privy Council held that it was
incumbent on the grantee to show that he had made proper use
of confidence reposed by the lady in him and there was no undue
influence.
3. Fraud
When the consent of a party to the contract has been obtained
by fraud, the consent is not free consent, which is necessary for
the formation of a valid contract. In such a case the contract is
voidable at the option of the party whose consent has been so
obtained. Fraud or deceit is also9 tort, for which an action for
damages can also lie. Section 17 defines fraud as follows :
“Fraud” means and includes any of the following acts committed
by a party to a contract, or with his connivance, or by his agent,
with intent to deceive another party thereto or his agent , or to
induce him, to enter into the contract--(1)
the suggestion, as a fact, of that which is not true by one
who does not believe it to be true :
(2)
the active concealment of a fact by one having knowledge
or belief of the fact :
(3)
a promise made without any intention of performing it :
(4)
any other act fitted to deceive :
(5)
to
any such act or omission as the law specially declares
be fraudulent.
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Explanation :-- Mere silence as to facts likely to affect the
willingness of a person to enter into a contract is not fraud,
unless the circumstances of the case are such that, regard
being had to them, it is the duty of the person keeping
silence to speak, or unless his silence is, in itself,
equivalent to speech.
The essentials of fraud are :
1. There should be a false statement of fact by a person who
himself does not believe the statement to be true.
2. The statement should be made with a wrongful intention of
deceiving another party thereto and inducing him to enter into
the contract on that basis.
1. False statement of fact.
In order to constitute fraud it is necessary that there should be a
statement of fact which is not true. Mere expression of opinion
is not enough to constitute fraud. Thus, if while taking a policy of
marine insurance, the insured communicates to the insurers a
letter from the master of his vessel mentioning that in the
master’s opinion the anchorage of a place of destination of the
vessel is safe and good, there is only an expression of opinion
and not a statement of fact, which could constitute fraud.
If A intending to deceive B , falsely represents that five
hundred maunds of indigo are made annually at A’s factory, and
thereby induces B to buy the factory, the contract is voidable at
the option of B.
Representation as to untrue facts may be made either by
positively stating certain fats or by conduct.
In Edington Vs. Fitzmaurice (1885) a company was in great
financial difficulties and needed funds to pay some pressing
liabilities. The company raised the amount by issue of
debentures. While raising the loans the directors stated that
the amount was needed by the company for its
development, purchasing assets and completing buildings.
It was held that the directors has committed fraud.
Active Concealment
When there is an active concealment of a fact by one having
knowledge or belief of the fact, that can also be considered to be
equivalent to a statement of fact and would amount to fraud.
Active concealment is different from merely keeping silent as to
certain facts. By an active concealment of certain facts, there is
an effort to see that the other party is not able to know the truth
and he is made to believe as true which is in fact not so.
Illustrations
1. B, having discovered a vein of ore on the estate of A, adopts
means to conceal, and does conce4al, the existence of the ore
from A. Through A’s ignorance, B is enabled to buy the estate
on an under value. The contract is voidable at the option of A.
2. A is entitled to succeed to an estate at the death of B. “B” dies ;
‘C’, having received intelligence of B’s death, prevents the
intelligence reaching A and thus induces A to sell him his
interest in the estate. The sale is voidable at the option of A.
Mere Silence Is No Fraud
It has been noted above that for constituting fraud there should
be representation as to certain untrue facts. Active concealment
has also been considered to be equivalent to a statement
because in that case there is a positive effort to conceal the truth
and create untrue impression on the mind of the other, Mere
silence, however, as to facts is no fraud. Explanation to Section
17, in this connection, incorporates the following provisions :
“Mere silence as to facts likely to affect the willingness of a
person to enter into a contract is not fraud, unless the
circumstances of the case are such that, regard being had to
them, it is the duty of the person keeping silence to speak, or
unless his silence is, in itself, equivalent to speech.”
A contracting party is not obliged to disclose each and everything
to the other party. If a person is to sell his goods he is under no
duty to disclose the defects in his goods. If he makes false
statement as to the quality of his goods, it would be fraud, but if
he merely keeps silence as regards the defects in them there is
no fraud. In case of sale of goods the rule is caveat emptor, i.e.,
buyer be aware, which means that it is the duty of the buyer to be
careful while purchasing the goods, and there is no implied
condition or warranty by the seller as to the quality or fitness of
the goods for any particular purpose.
If A sells, by auction, to B , a horse which A knows to be
unsound. A says nothing to B about the horse’s unsoundness.
This not fraud in A . Similarly, if A and B, being traders, enter
upon a contract A has private information of a change in prices
which would affect B’s willingness to proceed with the contract.
A is not bound to inform B.
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In Keates Vs. Lord Cadogan (1851), A let his house to B
which he knew was in a ruinous condition. He also knew that the
house is going to be occupied by B immediately. A did not
disclose the condition of the house to B. It was held that he had
committed nom fraud.
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In Shri Krishan Vs. Kurushetra University 1976 SC, Shri
Krishan, a candidate for the LL.B. Part I exam., who was
short in attendance, did not mention that fact himself in the
admission form for the examination. Neither the Head of the
Law Department nor the University authorities made proper
scrutiny to discover the truth. It was held by the Supreme Court
that there was no fraud by the candidate and the University had
no power to withdraw the candidature of the candidate.
Exceptions
Although as a general rule mere silence or non-disclosure of
facts do not amount to fraud, but in some exceptional cases
keeping silence may de deemed to be an act of deception.
Explanation to Section 17, which mentions the rule that mere
silence is not fraud also mentions the following two exceptions :
(1)
When there is a duty to speak, keeping silence is fraud.
(2)
When silence is, in itself, equivalent to speech, such silence
is a fraud.
(1)
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Duty to speak
When the circumstances of the case are such that, regard
being had to them, it is the duty of the person keeping
silence to speak, keeping silence in such a case amounts to
fraud. When there is a duty to disclose fats, one should do so
rather than to remain silent. By remaining silent one may be
responsible for creating a false impression in the mind of the
other. Certain contracts are uberrima fides , i.e., contracts of
utmost faith. In such a case it is supposed that the party in
whom good faith is reposed would make full disclosures and not
keep silent. Suppression of truth in such cases is equivalent to
suggestion of false hood. Withholding the facts, which ought to
be disclosed, is fraud. Contracts of insurance are contracts of
utmost good faith. Since some of the facts may be in the in the
sole knowledge of the insured, he must make full disclosure to
the insurer.
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Speaking half—truth may also amount to
misrepresentation as regards those facts which
have not been disclosed. Withholding a part of the
information may be enough to convey a false
impression and it amounts to fraud. Thus, if the
cleaner of clothes makes a customer sign a
document orally telling him that the terms exempt
the cleaner from liability for damage to beads and
sequins, but in fact the document contains a clause
giving him exemption from any damage however
arising, this is a fraud. (Curtis Vs. Chemical
Cleaning and Dyeing Co. 1951)
Duty to disclose changes
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If a statement is true when made, but subsequently becomes false by
the change of circumstances, there is a duty to disclose the change,
before the other party acts upon it. If the change is notifies to the other
party it would amount to fraud (Briess Vs. Woolley, 1954)
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In with Vs. O’Flanagan (1936) a medical practitioner started
negotiations in January, 1934 for the sale of his practice. He stated that
his average practice was worth 2000 pounds per annum. The contract
for the sale of practice was signed on May1, 1934, but by that time the
position of his practice had changed as his practice had fallen
considerably owing to his illness and consequent absence from
practice. These changed circumstances were not disclosed to the
purchasers of the practice and when they took charge they found that
the practice was non-existent. They brought an action for the rescission
of the contract on the ground that the changed circumstances were not
communicated to them. It was held that the representation made in this
case to induce the other party to the contract to enter into contract was
a continuing one and it was the duty of the vendor to notify the change
of circumstances to the purchaser if the same occurred before the
contract was signed. Under these circumstances the plaintiff were
entitled to rescind the contract
(2) Silence being equivalent
to speech
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Sometimes keeping silent as to certain facts may be
capable of creating an impression as to the
existence of a certain situation. In such a case
silence amounts to fraud.. For example, B says to
A -- “if you don not deny it, I shall assume that the
horse is sound.” A says nothing. Here A’s silence
is equivalent to speech. Here, the relation between
the parties would make it A’s duty to tell B if the
horse is unsound.
Means of discovering the truth
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Even if, in any case, the silence is fraudulent, but if
the other party could have discovered the truth by
ordinary diligence he cannot avoid the contract. In
this connection the provision in the Indian contract
Act is as under :
“If such a consent was caused by misrepresentation
or by silence, fraudulent within meaning of section
17, the contract, nevertheless, is not voidable, if the
party whose consent was caused had the means of
discovering the truth with ordinary diligence.” (Case
of Shri Krishan Vs. Kurukshetra Univeersity ) In
this case it was observed

“In the instant case the admission form of the appellant must have
been forwarded in December 1971 where as the examination was
to take place in April/May 1972. It is obvious that during this
period of four to five months it was the duty of the University
authorities to scrutinise the form in order to find out whether it was
in order. Equally it was the duty of the Head of the Department of
Law before submitting the form to the University to see that the
form complied with all the requirements of law. If neither the
Head of the Department nor the University authorities took care to
scrutinise the admission form, then the question of the appellant
committing a fraud did not arise. It is well settled that where a
person on whom fraud is committed is in a position to discover
the truth by due diligence, fraud is not proved. It is neither a case
of suggestio falsi, nor supressio veri. The appellant never wrote
to the University authorities that he had attended the prescribed
number of lectures. There was ample time and opportunity for
the University authorities to have out the defect. In these
circumstances,
therefore, for the University authorities
acquiesced in the infirmities which the admission form contained
and allowed the appellant to appear in Part I Examination in April,
1972, then by force of the University Statute the University had
no power to withdraw the candidature of the appellant.”
Promise made without any intention to perform it
When a person makes a promise there is deemed to be an
undertaking by him to perform it. If there is no such intention
when the contract is being made, it amounts to fraud. Thus if a
man takes a loan without any intention to repay, or when he is
insolvent, or purchases goods on credit without any intention to
pay for them, there is fraud. If, however, there is no such
wrongful intention at the time of making of the contract, but the
promisor does not perform the contract, it does not amount to
fraud.
Any other act fitted to deceive
We have already noted that either a false statement of fact, or
active concealment, or a promise made without any intention to
perform it have been declared to be fraudulent according to
clauses (1), (2) and (3) to section 17 respectively. Clause (4)
further provides that “any other act fitted to deceive” will also
amount to fraud. This clause is general and is intended to
include such cases of fraud which would otherwise not come
within the purview of the earlier three clauses.

Any act or omission which the law declares as fraudulent
According to section 17 (5) fraud also includes any such act or
omission as the law specially declares to be fraudulent. In some
cases the law requires certain duties to be performed, failure to
do which is expressly declared as a fraud. For instance, section
55, Transfer of property Act, 1882 declares certain kinds of
omissions on the part of the seller or the buyer as fraudulent. It
provides that :
1.
The seller of immovable property is bound to disclose to the
buyer any material defect in the property or in the seller’s title
thereto of which the seller is, and the buyer is not, aware, and
which the buyer could not with ordinary care discover. And
2.
The buyer of immovable property is bound to disclose to the
seller any fact as to the nature or extent of the seller’s interest in
the property of which the buyer is aware, but of which he has
reason to believe that the seller is not aware and which
materially increases the value of such interest, and
An omission to make the above stated disclosures is fraudulent.

In Aktar Jahan Begam
Vs.
Hazarilal, the
defendant sold some property to the plaintiff
stating in the sale deed that he would not be liable
to the buyer if he suffered any loss owing to the
seller’s defective title. The defendant had, earlier to
this transaction, sold this property to somebody else,
but did not inform the buyer about it. It was held
that the defendant had committed fraud and the
contract was voidable at the option of the buyer.
2. Wrongful intention

In order to constitute fraud it is necessary that a person should
intentionally make a false statement with an intent to deceive
another party thereto to induce him to enter into the contract. If that
intention to deceive the other party is absent there is no fraud. It
may, in such a case, be a mere misrepresentation as defined in
section 18 of the Act.

In Derry Vs. Peek, the directors of a company issued a
prospectus stating that they had got the authority to run
tramways with steam or mechanical power instead of animal
power. In fact a plan had been submitted for the same and
directors honestly believed that the Board of Trade, who had to
accord its sanction for the same, would do so as a matter of
course. The board of Trade refused the sanction and the
company had to be wound up. The respondent, who had taken
shares in the company on the faith of the representation by the
directors in the prospectus, brought an action for the tort of
deceit. It was held by the House of Lords that since the
statement had not been made with an intention to deceive there
was no fraud.
Contract on the basis of a false
statement

It is necessary that the false statement must have been made
to induce the other party to enter into the contract. “If”, said Lord
Blackburn, “it is proved that the defendants with a view to induce
the plaintiff to enter into a contract made a statement to the
plaintiff of such a nature as would be likely to induce a person to
enter into a contract, it is fair inference of fact that he induced to
do so by the statement.” If a man, being induced by false
statement enters into a contract which he would not have done
otherwise, there is fraud. But if in spite of the false statement he
was not misled. or did not enter into the contract on that basis,
there is no fraud. This may be explained by the following
illustration

(a) A, intending to deceive B , falsely represents
that five hundred maunds of indigo are made
annually at A’s factory, and thereby induces B to
buy the factory. The contract is voidable at the
option of A.

(b) A, by a misrepresentation, leads B erroneously
to believe that five hundred maunds of indigo are
made annually at A’s Factory. B examines the
accounts of the factory, which shows that only four
hundred maunds of indigo have been made. After
this
B buys the factory. The contract is not
voidable on account of A’s misrepresentation.

In Kamal Kant Vs. PrakashDevi the Plaintiff, Kamal Kant
filed a suit against his mother, Prakash Devi and some
others seeking cancellation of a trust deed on the ground that
his signatures to it were obtained by fraud by falsely telling him
that it was attested by the plaintiff’s father and advocate. The
plaintiff was an educated man and had all the means to know the
contents of the document. Under these circumstances it was
held that there was no fraud in this case.

In Horsfall Vs. Thomas the plaintiff contracted to manufacture
a gun for the defendant and supply the same to him. Thegun
was made for the defendant and supplied to him, but the
defendant never examined the gun and he started using it.
There was a defect in the gun, and if the defendant had carefully
examined the gun he could detect the same and then he would
have been justified in rejecting it. The defendant accepted two
bills of exchange towards the payment for the gun.

After some time the gun burst flew to pieces. On e
of the bills of, was paid by him, but when the second
bill was not paid, the p-lainti9ff sued him for the
same. At this stage the defendant contended that
because of a concealed defect in the gun it was
weak and consequently it had burst and broken into
pieces and thus it amounted to fraud, as such he is
not liable to pay.

If there is a patent defect in an article supplied to a
buyer and the buyer having an opportunity to
examine the same neglects to do so, the supplier
cannot be considered guilty of fraud for not pointing
out the defect.
Statement should be meant for the
party misled

It is necessary that the misleading statement should
be meant for the party who is misled. In Peek Vs.
Gurney (1873, a person purchased some shares
of a company from the market and then sued the
promoters of the company for fraud on the ground
that there were some false statements contained in
the prospectus. It was held that the prospectus is
meant for an original allot tee of the shares by the
company and not a person like the present
appellant, who buys the shares subsequently from
the original allot tee and therefore the promoters
were not liable for fraud.
4. Misrepresentation
When a false statement is made with the knowledge that it is false and
also with the intention to deceive the other party and make him to enter
into a contract on that basis, it is known as fraud. But when the person
making a false statement believes the statement to be true and does
not intend to mislead the other party to the contract it is known as
“Misrepresentation”. When the consent of a party to a contract has
been obtained by misrepresentation it is not free consent and the
contract is voidable at his option. Section 18 defines misrepresentation
as under :
 “Misrepresentation” means And includes—
(1) the positive assertion, in a manner not warranted by the information of
the person making it, of that which is not true, though he believes it to
be true :
(2) any breach of duty which, without an intention to deceive, gains an
advantage to the person committing it, or any one claiming under him,
by misleading another to his prejudice or to the prejudice of any one
claiming under him ;
(3) causing, however, innocently. A party to an agreement, to make a
mistake as to the substance of the thing which is the subject of the
agreement.



Positive assertion, i.e. an explicit statement, of fact
by a person of that which is not true, but he believes
it to be true amounts to misrepresentation. There
should be a false statement made innocently, i.e.,
without any intention to deceive.
When there is a breach of duty whereby the person
making a false statement gains some advantage at
the cost of the other party, and the statement though
false is made without an intention to deceive, it also
amounts to misrepresentation.
For example,
Section 57, Indian Easement Act, 1882, lays down
that the grantor of a licence i8s bound to disclose to
the licensee any defect, which is likely to be
dangerous to the person or property of the licensee,
of which the grantor is aware but the licensee is not.
Omission to make such a disclosure, if it is without
any intention to deceive, would amount to
misrepresentation.
If one party, acting innocently, causes another party to
make a mistake as to the substance of the thing which is
the subject of the agreement, there is said to be
misrepresentation.
In case of misrepresentation the person making the
statement is innocent and he makes the statement without
any intention to deceive the other party. His statement is
false although he himself believes that the same is true. It
is known as innocent misrepresentation as against fraud,
where the person making the false statement knows that
the same is false but makes the same intentionally to
deceive the other party and make him enter into an
agreement which he would not have done otherwise. For
instance, A sells his horse to B which is unsound but A
himself does not know about this fact. He tells B that the
horse is sound. There is misrepresentation.
Fraud and Misrepresentation
1.
Both in fraud and misrepresentation the statement
distinguished
is false, but in fraud the false statement is made by
a person, who knows that it is false or does not
believe in its truth, whereas in misrepresentation
the person making the statement believes the
same to be true.
2. In fraud the intention of the person making a false
statement is to deceive the other party and induce
him to enter into the contract on that basis. There
is no such wrongful intention in case of
misrepresentation. It has been noted in Derry Vs.
Peek that when the statement, although false,
was made without any intention to deceive it did
not amount to fraud.
3.
According to section 19, when the consent of a party to
the contract has been obtained either by fraud or by
misrepresentation, the contract is voidable at the option of
the party whose consent has been so obtained. In other
words the contractual remedy for both is the same. In
case of fraud, however, there is an additional remedy
available to the victim of fraud, i.e., an action for damages
under the law of torts, because fraud is also a tort. No
remedy under the law of torts is available if it is an
innocent misrepresentation.
Indian Contract Act,
however, provides that “a person who rightfully rescinds a
contract is entitled to compensation for any damage
which he has sustained through the non-fulfilment of the
contract” This remedy of damages is available in every
kind
of
rescission,
whether
on
ground
of
misrepresentation or fraud, or on other ground and it is
not similar to the remedy of damages available to a victim
of the fraud under the law of torts.
4. Although when there is misrepresentation by one
party the contract is voidable at the option of the
other party, but no such remedy is available if the
party seeking to avoid the contract had the means
of discovering the truth with ordinary diligence.
But except in case of fraudulent silence, a person
obtaining the consent of the other party by fraud
cannot be allowed to say that the other party could
have discovered the truth with ordinary diligence.
Effect of flaw in consent



Section 19 deals with the effect of flaw in consent caused
by coercion, misrepresentation and fraud and section 19-A
when the consent has been obtained by undue influence.
The relevant provision contained in these sections are as
follows :
19. Void ability of agreement without free consent -When consent to an agreement is caused by coercion,
fraud., or misrepresentation the agreement is a contract
voidable at the option of the party whose consent was so
caused.
A party to a contract, whose consent was caused by fraud
or misrepresentation, may, if he thinks fit, insist that the
contract shall be performed, and that he shall be put in the
position in which he would have been if the representation
made had been true.
19-A Power to set aside contract
induced by undue influence



When consent to an agreement is caused by undue
influence, the agreement is a contract voidable at the
option of the party whose consent was so caused.
Any such contract may be set aside either absolutely or, if
the party who is entitled to avoid it has received any benefit
there under, upon such term and conditions as the Court
may seem just.
When the consent of a party to the contract has been
caused by coercion, misrepresentation or fraud the contract
is voidable at the option of such party. In case of fraud,
apart from avoiding the contract, the person whose consent
has been so caused may also bring an action for damages
because fraud is a tort also.
When a person at whose option the contract is
voidable rescinds it, he is bound to restore the
benefit, if any, received by him under such a
contract.

In case of undue influence also the contract is
voidable at the option of the party whose consent
has been so caused. Any such contract may be
set aside either absolutely or, if the party who was
entitled to avoid it has received any benefit there
under, upon such terms and conditions as to the
Court may seem just.

Thus, in case of the flaw in consent one party or
the other may have either,
1. a right of recession of the contract, i.e., the
contract may be voidable at his option, or
2. a right to claim compensation.

The two rights are discussed below.

1. Right to Rescission of the
contract
It has been noted above that even when the consent of a

party to a contract has been obtained by coercion,
misrepresentation, fraud or undue influence, rescission of
the contract is the common remedy available in all these
cases. The party entitled to rescind a voidable contract
may do so by a notice to the other party, or taking such
steps as may be necessary under the circumstances of the
case. A voidable contract will be avoided only if the party
having a right to do so avoids it. If instead, he affirms the
contract then the contract will be binding on both the
parties.
Ordinarily, a notice to the other party of the
intention to avoid the contract would suffice. If, however,
the other party is not available then taking necessary steps
which may be possible under the circumstances of the case
would be enough

In Car and Universal Finance Co. Ltd. Vs. Caldwell,
(1961) the purchaser of a car committed a fraud against the
seller by making the payment through a cheque which was
dishonoured. The seller wanted to avoid the contract and
regain the possession from the buyer, but the buyer was
not traceable. The seller immediately informed the police
and also the Automobile Association about the same. In
the meanwhile the purchaser of the car sold it further to the
plaintiffs, who had been acting in good faith. The question
was whether the plaintiffs had purchased it after rescission
of the contract by the seller, and if that was so the plaintiffs
could not have a good title to the car. It was held that even
though the seller could not communicate the rescission to
the purchaser himself, information to the police and the
Automobile Association had resulted in the rescission of the
contract and therefore, the plaintiffs did not get a good title
to the car.
Limits to the rights of rescission
The right of rescission of the contract is subject to the
following limitations. In such situations the law may not
permit the exercise of the right to rescind the contract.
(i) When
the contract is affirmed
There are two alternatives open to a party having a right
to avoid a contract, either to rescind it, or to affirm it. If the
contract is rescinded it becomes void and unenforceable.
On the other hand, if it is affirmed then it is valid and
binding contract against both the parties. Section 19,
which deals with the right of rescission of a contract where
the consent of a party has been obtained by
misrepresentation or fraud states :

“A party to a contract, whose consent was caused by fraud
or misrepresentation, may, if he thinks fit, insist that the
contract shall be performed, and shall be put in the position
in which he would have been if the representation made
had been true”

The affirmation of the contract may be made either
expressly, or impliedly or it could be inferred from a
person’s conduct. In Long Vs. Lloyd (1958) the
defendant sold his lorry to the plaintiff by making a false
representation that the lorry was in “excellent condition.”
On the lorry’s first journey the plaintiff discovered serious
defects in the lorry. He did not rescind the contract, but
instead accepted the defendant’s offer of half the cost of
repairs. The lorry completely broke in the next journey and
then the plaintiff wanted to rescind the contract. It was held
that the plaintiff, by accepting the offer of sharing the cost of
repairs by the defendant and thereafter continuing using
the car, had affirmed the contract and he had now no right
to rescind it.
(ii) Lapse of time

A person having a right to avoid the contract must do so
within a reasonable time. Failing to exercise this right in
time may mean affirmation of the contract. If a person
transfer his property to another person while under a
spiritual influence, but does not take steps to take back the
property for six years after such influence has ceased, the
right to retrieve the property comes to an end. (Allcord Vs.
Skinner . 1887) Similarly, if a person purchasing a picture
on the basis of an innocent but false representation that it
has been painted by a particular renowned artist, wants to
avoid the contract after five years of its purchase, the
rescission would not be allowed (Leaf Vs. International
Galleries, 1950)
(iii) Acquisition of a right by a third party


The right of rescission may be gone if before the contract
has been rescinded some third party has acquired a right in
the subject matter of the contract. A voidable contract is
valid until avoided and it becomes void only after it has
been avoided, there is a possibility that so long as the
contract has not been avoided, there could be creation of
an instrument in favour of a third party. Section 29, Sale of
Goods Act, 1930, contains the following provision in respect
of a contract of sale of goods :
“When the seller of goods has obtained possession thereof
under a contract voidable under section 19 or section 19A
of the Indian Contract Act, 1872, but the contract has not
been rescinded at the time of sale, the buyer acquires a
good title to the goods, provided he buys them in good faith
and without notice of the seller’s defect of title.”

For example, in a contract of sale of certain goods
between A and B, A’s consent has been obtained by
misrepresentation and so he has a right to avoid the
contract, B sells those goods to C, while C is acting in
good faith and he has no notice of the defective title of
B. C has acquired a good title to the goods and A’s
right of avoiding the contract and taking back the goods
has come to an end.

If a shareholder is induced by misrepresentation to
purchase shares, he may rescind the contract. In case
the proceedings for winding up of the company starts,
shareholder’s right of rescission cannot be exercised
because that wou8ld affect the interest of the creditors
(iv) Inability to restore the goods

When a party wants to avoid the contract he must do so, so
long as the parties to the contract can be placed in the
same situation in which they were before the contract was
made. If restitutio in integrum is not possible there can be
no rescission. For example, A purchases a suit piece from
B under a contract voidable at A’s option. A gets the
piece converted into a suit. A’s right to avoid the contract
cannot be exercised because he will not be in a position to
return the suit piece. In a contract of sale of goods if the
buyer has a right to avoid the contract because of breach of
a condition, the buyer’s right of rejecting those goods
comes to an end if the buyer has accepted those goods. In
such a case buyer’s only remedy is to claim compensation
by treating the breach of condition as a breach of warranty.
Section 13 (2), of the Sale of Goods Act, 1930 makes the
following provisions :

“Where a contract of sale is not severable and the buyer
has accepted the goods or part thereof, the breach of any
condition to be fulfilled by the seller can only be treated as
a breach of warranty and not as a ground for rejecting the
goods and treating the contract as repudiated, unless there
is a term of the contract, express or implied, to that effect.”

In Wallis Vs. Pratt the buyer purchased seeds described
as “English sainfoin seeds.” The seeds supplied by the
seller were of an inferior and a different variety known as
“Gaint sainfoin seeds.” At the time of supply of seeds the
buyer could not make out the defect as the two varieties
were indistinguishable. The defect could only known after
the seeds had been sown and the crop was ready. The
buyer could claim compensation only. There was no chance
of avoiding the contract and rejecting the goods.
(v) Damages in lieu of rescission of
 Misrepresentation Act, 1967 has given power to the English
contract
Courts to grant damages in lieu of rescission, if in the opinion of


the Court it would be just and equitable to do so. Section 2 (2)
of the Act which contain the above mentioned provision is as
under :
“Where a person has entered into a contract after a
misrepresentation has been otherwise than fraudulently, and he
would be entitled, by reason of the misrepresentation, to rescind
the contract, that the contract ought to be or has been rescinded,
the court or arbitrator may declare the contract subsisting and
award damages in lieu of rescission, if of the opinion that it would
be equitable to do so, having regard to the nature of the
misrepresentation and the loss that would be caused by it if the
contract was upheld, as well as to the loss that rescission would
cause to the other party.”
The remedy of damages in lieu of recession provided here is in
respect of innocent misrepresentation.
When the
misrepresentation is fraudulent, the aggrieved party may recover
damages in addition to the of avoiding the contract, because
fraud is also a tort.
2. Right to claim compensation
Apart from the remedy of rescission of contract, the remedy
of damages or compensation may also sometimes be
available to the parties to the contract, in cases where the
consent of one of the parties has been obtained by
coercion, misrepresentation, fraud or undue influence.
(1) Damages in case of fraud : It has already been noted
that fraud is a tort. Therefore, a party whose consent has
been obtained by a fraudulent statement, may seek
rescission of the contract as a contractual remedy and may
also claim damages under the law of torts.
(2) Damages in case of non-fraudulent misrepresentation
It has already been noted that the Misrepresentation Act,
1967 empowers the court in case of other than fraudulent
misrepresentation to allow damages in lieu of rescission of
contract.
(3) Duty of a party rescinding the
contract
to pay compensation

Sometimes a party entitled to rescind a voidable
contract may have already received some benefit under
the contract. Equity demands that if he avoids the
contract, he should also restore the benefit which he
may have received from the other party. (refer to section
64 of the Act)

For example, A, a money lender, advances Rs. 100 to
B, an agriculturist, and by undue influence, induces B
to execute a bond for Rs. 200 with interest at 6 percent
per month. The Court may set the bond aside, ordering
B to repay Rs. 100 with such interest as may seem
just.

Section 30, Specific Relief Act, 1963 also empowers
the court to order payment of compensation when
ordering rescission of a contract. It provides as
follows :

“On adjudging the rescission of a contract, the court
may require the party to whom such relief is granted
to restore, so far as may be, any benefi9t which he
may have received from the other party and to make
any compensation to him which justice may require.”
Mistake
When the consent of the parties is caused by mistake, it is not
the free consent which is needed for the validity of a contract.
One, or both, of the parties may be working under some
misunderstanding or misapprehension of some fact relating to
the agreement. If such a misunderstanding or misapprehension
had not been there, probably they would not have entered into
the agreement. Such contracts are said to be have been caused
by mistake.
Mistake may work in two ways :
1. Mistake in the mind of the parties is such that there is no
genuine agreement at all. They may be no consensus ad idem.
i.e. the meeting of the two minds. The offer and acceptance do
not coincide and thus no genuine agreement is constituted
between the parties.
2. There may be a genuine agreement, but there may be mistake
as to a matter of fact relating to that agreement.

1. Mistake may work in two ways :
For a valid contract both the parties should
have given their consent and the consent should be
free also. According to section 13 :
“Two or more persons are said to consent when they
agree upon the same thing in the same sense.”
Sometimes even such a consent, where two or more
persons agree to the same thing in the same sense,
may not be there. In other words, there may be
absence of meeting of the minds of the parties, or
there may be no consensus ad idem. In such case
there is no contract which can be enforced

In Raffles Vs. Wichelhaus (1864) the buyer and
the seller entered ito an agreement under which the
seller was to supply a cargo of cotton to arrive “ex
peerless from Bombay”. There were two ships of
the same name. i.e., Peerless, and both were to
sail from Bombay, one in October and the other in
December. The buyer in mind Peerless sailing in
October, whereas the seller thought of the ship
sailing in December. The seller dispatched cotton
by December ship but the buyer refused to accept
the same. In this case the offer and acceptance did
not coincide and there was no contract and,
therefore, it was held that the buyer was entitled to
refuse to take delivery.a
2. Mistake as to a matter of fact
essential to the agreement
Section 20 deals with such mistake. It provides :
 20.
Agreement void where both parties are under mistake
as to matter of fact.-- Where both the parties to an agreement
are under a mistake as to a matter of fact essential to the
agreement is not to be deemed a mistake as to a matter of fact.
Illustration
(a) A agrees to sell to B a specific cargo of goods supposed to be
on its way from England to Bombay. It turns out that, before the
day of the bargain, the ship conveying the cargo had been cast
away, and the goods lost. Neither party was aware of these
facts. The agreement is void.
(b) A agrees to buy from B a certain horse. It turns out that the
horse was dead at the time of the bargain, though neither party
was aware of the fact. The agreement is void
c) A being entitled to an estate for the life of B , agrees to
sell it to C . B was dead at the time of the agreement,
but both the parties were ignorant of the fact. The
agreement is void.
When the type of mistake contemplated is section 20 is
present in an agreement, the agreement is void.
Section 20 requires that :
1. Both the parties to the contract should be under a
mistake and
2. Mistake should as regards a matter of fact.
3. The fact regarding which the mistake is made should be
essential to the agreement.
1. Mistake of both the parties

Section 20 makes the agreement void if there is
mistake on the part of both the parties. For
example, A and B make an agreement for the
sale and purchase of a particular horse.
Unknown to both the parties the horse was dead
at the time of the agreement. Since both the
parties are under a mistake the agreement is
void. If the mistake is a unilateral one, i.e., only
one of the parties is having some misimpression, the validity of the agreement is not
affected thereby. This is made clear by section
22, which reads as under :

22. Contract caused by mistake of one party as to
matter of fact.--- A contract is not voidable merely
because it was caused by one of the parties to it being
under a mistake as to matter of fact

In Ayekam Angahal Singh Vs. The Union of India,
A.I.R. 1970 there was auction for the sale of fishery
rights and the plaintiff was the highest bidder making a
bid of Rs. 40,000. The fishery right had been auctioned
for 3 years. The rental in fact was Rs. 40,000 per year.
The plaintiff sought to avoid the contract on the ground
that he was working under a mistake and he thought that
he ha made a bid of Rs. 40000 being the rent for all the
three years. It was held that since the mistake was
unilateral the contract was not affected thereby and the
same could not be avoided
(2) Mistake of fact




There should be mistake of fact and not of law. The validity of
the contract is not affected by mistake of law. Regarding
mistake of law the provision contained in section 21 is as follows
21. Effect of mistake as to law.--- A contract is not voidable
because it was caused by a mistake as to any law in force in
India : but a mistake as to law not in force in India has the same
effect as a mistake of fact.
Illustration
A and B make a contract grounded on the erroneous belief that
a particular debt is barred by the Indian Law of Limitation : the
contract is not voidable.
Every one is supposed to know the law of the land. Ignorance of
law is no excuse. If a person wants to avoid the contract on the
ground that there was a mistaken impression in his mind as to
the existence of some law while he entered into the contract, he
will get no relief.
(3) Mistake essential as to
agreement

It is also essential that the fact regarding
which the mistake is made should be
essential to the agreement. Whether the
mistake is regarding a fact essential to the
agreement or not depends on a particular
contract.
Consideration
Presence of consideration is one of the essentials of
a valid contract. Subject to certain exceptions, the
general rule in India is that “ an agreement without
consideration is void.
Consideration means something in return for the
promise. It may be either some benefit conferred on
one party or some detriment suffered by the other.
In the words of Lush J. In Curie Vs. Misa (1875)
“ 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.”
Definition under Section 2(d)
Section 2(d), Indian Contract Act, defines
consideration as under :
“When at the desire of the promisor, the
promisee or any other person has done or
abstained from doing, or promises to do or
abstain from doing something, such act or
abstinence or promise is called a
consideration for that promise”.
The definition mentions the following
requirements to be satisfied in order that there
is valid consideration :
1.
2.
3.
4.
Consideration must be given ‘at the desire of the promisor”.
Consideration must be given ‘ by the promisee or any other
person ‘.
Consideration may be past, present or future in so far as the
definition says that the promisee :
(i) has done or abstained from doing, or
(ii) does or abstains from doing, or
(iii) promises to do or abstain from doing, something.
There should be some act, abstinence or promise by the
promisee, which constitutes consideration for the promise.
1.
CONSIDERATION ONLY AT THE
DESIRE OF THE PROMISOR

It is essential that the consideration must have been given at the desire of
the promisor, rather than voluntarily or at the instance of some third party.

In Durga Prasad Vs. Baldeo (1880) the consideration for the promise
had not moved at the desire of the promisor but some other person, and
that was held not to be sufficient consideration to support the promise.
The facts of the case are
The Plaintiff constructed certain shops in a market at the instance of the
collector of that place. Subsequently the defendants occupied one of the
shops in the market. The money for the construction of the market having
been spent by the plaintiff, the defendants, in consideration thereof, made
a promise to pay to the plaintiff commission on the articles sold through
their agency in that market. The defendants failed to pay the promised
commission. In an action by the plaintiff to recover the commission it was
observed that the consideration for the promise to pay the commission for
the construction of the market was not at the desire of the defendants,
but on the order of the collector. It was, therefore, held that since the
consideration did not move at the desire of the defendants (promisors) in
this case, this did not constitute valid consideration and therefore the
defendants were not liable in respect of the promise made by them.
Subscription for a charitable purpose

A promise to contribute an amount for a charitable
purpose may not be enforceable because against
this promise there may be no consideration. If there
is a promise to contribute on the part of one of the
parties but no act done in exchange thereof by the
other, there is no consideration in such a case. In
Abdul Aziz Vs. Masum Ali (1914) The defendant
promised to pay a sum of Rs. 500/- as donation for
the repair and reconstruction of a mosque. Nothing
was done to carry the repairs and reconstruction of
the mosque. The defendant refused to pay the
amount. It was held that since nothing was done on
the faith of the promise, there was no consideration
in this case and, therefore, the defendant was not
liable to pay the subscription promised by him.
2.

CONSIDERATION BY PROMISEE OR
ANY OTHER PERSON
According to Indian law consideration may be given by the
promisee or any other person. In India there is a possibility
that the consideration for the promise may move not from the
promisee but a third person, who is not a party to the contract.
In England the position is different. The position in India may be
explained by referring to the case of Chinnaya Vs. Ramaya
(1882) In this case A, an old lady, granted an estate to her
daughter (defendant) with a direction that the daughter should
pay an annuity of Rs. 653/- to A’s brother (plaintiff). On the same
day the defendant made a promise to the plaintiff that she would
pay the annuity as directed by A. The defendant failed to pay
the stipulated sum. In an action against her by the plaintiff she
contended that since the plaintiff himself had furnished no
consideration, he had no right of action. The Madras High Court
held that in this agreement between the (defendant) and (the
plaintiff), the consideration has been furnished by the defendant’s
mother and that is enough consideration to enforce the promise
between the plaintiff and the defendant.
Privity Of Contract


The doctrine of privity of contract means that only those persons
who are parties to the contract can enforce the same. A stranger
to the contract cannot enforce a contract even though the
contract may have been entered into for his benefit. If in a
contract between A and B some benefit has been conferred
upon X, X cannot file a suit to enforce the contract because A
and B are the only parties to the contract whereas X is only a
stranger to the contract.
The rule that a stranger to contract cannot sue has to be
distinguished from the rule discussed above that in India a
person who is stranger to consideration can sue. It has been
noted above that a person may not have himself given any
consideration but he can enforce the contract if he is a party to
the contract, because according to the Indian Law consideration
may be given either by the promisee or even a third party. That
does not affect the rule of privity of contract.
English Law

Under the English law old view was that a person, who is not a
party to the contract but is intended to be the beneficiary under
the contract and is nearly related to the promisee, has a right of
action. In Dutton Vs. Poole (1678) A intended to sell his
wood to make a provision for the marriage expenses of his
daughter. The defendant, A’s son requested A not to sell the
wood and in return made a promise toi his father that he would
pay 1,000 pounds to A’s daughter, the plaintiff.
The father
forebore to sell the wood but the defendant did not pay the
promised amount to the plaintiff. It was held that even though
there was no contract between the plaintiff and the defendant,
but the plaintiff, who was a beneficiary in the contract was nearly
related to the promisee, i.e. her father, she was entitled to
recover.



The above mentioned view was rejected in Tweddle Vs.
Atkinson (1861) In that case the plaintiff married a girl. After
this marriage there was a contract in writing between the
plaintiff’s father and the girl’s father that each would pay a certain
sum of money to the plaintiff and the plaintiff would have a right
to sue for such sums. After the death of the two fathers, the
plaintiff brought an action against the executors of the girls father
to recover the promised amount. It was held that the plaintiff
could not sue for the same. Wightman J observed :
“Some of the old decisions appear to support the proposition
that a stranger to the consideration of a contract may maintain an
action upon it, if he stands in such a near relationship to the party
from whom consideration proceeds, that he may be considered
a party to the consideration …………. On the contrary it is now
established that no stranger to consideration can take advantage
of a contract, although made for his benefit.”
In the above stated case the plaintiff was both a stranger to the
contract as well as stranger to consideration and he could not
enforce the claim.



The rule of privity of contract was reaffirmed by the House of
Lords in Dunlop Pneumatic Tyre Co. Ltd. Vs. Selfridge &
Co. Ltd. (1921) in the following words :
“In the law in England certain principles are fundamental. One is
that only a person who is a party to a contract can sue on It. Our
law knows nothing of a Jus quaesitum territo arising by way of
a contract. Such a right may be conferred on a stranger to a
contract as a right to enforce the contract in personam.”
In Dunlop’s case the appellants, who were manufacturers of
motor-car tyres, sold some tyres to one Dew & Co. with an
agreement that these tyres will not be sold below the list price.
Dew & Co. in their turn sold some of those tyres to the
respondents, with an agreement between Dew & Co. and the
respondents that they shall observe conditions as to price and
the respondents also promised that they would pay to the
appellants a sum of 5 pounds for every tyre sold below the list
price. The respondents sold some tyres below the list price, the
appellants brought a action against the respondents to recover
damages for the same.

The House of Lords held that Dunlop & Co. could
not bring an action against Selfridge and Co.
because there was no contract between the two
parties. It was further observed that even if it is
taken that Dew & Co. were acting as agents for
Dunlop & Co., the latter still cannot maintain an
action as there was no consideration between
Dunlop & Co and Selfridge & Co. since the whole
of the purchase price was paid by Selfridge & Co. to
Dew & Co.
Indian Law
Stranger To A Contract Cannot Sue

The rule that “privity of contract” is needed and a stranger to
contract cannot bring an action is equally applicable in India as in
England.. Even though under the Indian Contract Act the
definition of consideration is wider than in English Law, yet the
common law principle is generally applicable in India, with the
effect, that only a party to th3e contract is entitled to enforce the
same. The authority for the application of the rule in India is the
decision of the Privy Council in Jamna Das Vs. Ram Autar. In
that case A had mortgaged some property to X. A sold this
property to B , B having agreed with A to pay off the mortgage
debt. X brought an action against B to recover the mortgage
money. It was held by the Privy Council that since there was no
contract between X and B, X could not enforce the contract
to recover the amount from B.
Exception to the rule that a stranger to
contract cannot sue

(1)
Trust of contractual rights
One of the exceptions to the doctrine of privity of contract was
recognised by Lord Haldine in Dunlop Pneumatic Tyre Co. Vs.
Selfriidge & Co. While it was mentioned that only a party to a
contract can sue on it and no such right is conferred on a third
party, it was also stated that “such a right may be conferred by
way of property, as, for example, under a trust.” The basis of
an action by the third party is actually not enforcing the contract
but the right conferred by a particular contract in favour of a third
party in the form of trust etc. For example, in a contract between
A and B , beneficial right in respect of some property may be
created in favour of C. In such a case C can enforce his claim
on the basis of the right conferred upon him.

The Privy Council in the case of Khwaja Muhammad Khan
Vs. Husaini Begum (1910) has recognised this exception. In
this case there was an agreement between the fathers of a boy
and a girl that if the girl (plaintiff in this case) married a particular
boy, the boy’s father (defendant in this case) would pay certain
personal allowance known as Kharch-i-pandan (betel-box
expense) or pin money to the plaintiff. It was also mentioned
that a certain property had been set aside by the defendant and
this allowance would be paid out of the income of that property.
The plaintiff married the defendant’s son but the defendant failed
to pay the allowance agreed to by him. The plaintiff therefore
brought an action against the defendant. It was held that in this
case the basis of the plaintiff’s claim being a specific charge on
the immovable property in her favour she is entitled to claim the
same as a beneficiary, and as such, the common law rule is not
applicable to the facts and circumstances of the present case.
(2)

Conduct, Acknowledgement, or Admission
Sometimes there may be no privity of contract between the two parties,
but if one of them by his conduct, acknowledgement, or admission
recognises the right of the other to sue him, he may be liable on the
basis of the law of estoppel against him. In the case of Narayani Devi
Vs. Tagore Commercial Corporation Ltd. (1973) where there was no
contract between the plaintiff and the defendants but the defendants in
their agreement with the plaintiff’s husband had agreed to pay certain
amounts to the plaintiff’s husband during his life time and thereafter to
the plaintiff, the question of the right of the plaintiff to sue to defendants
had arisen. It was established that the defendants had made certain
payments to the plaintiff, in pursuance of the agreement, after her
husband’s death, and had thereafter asked for the extension of time to
pay. Apart from that it was found that the defendants, by their
admission, had earlier called upon the plaintiff to executive certain
documents in this connection, which implies that they considered the
plaintiff to be entitled to certain rights. It was, therefore held that the
defendants have created such privity with the plaintiff by their conduct
and by acknowledgement and by admission, that the plaintiff is entitled
to her action even though there was no privity of contract between the
plaintiff and the two defendants, when the said contract was entered
into.
(3) Provision for marriage expenses or maintenance
under a family arrangement

Where, under a family arrangement, the contract is
intended to secure a benefit to a third party he may
sue in his own right as a beneficiary. Such an action
has been allowed in many cases where, on the
partition of joint family property between the male
members, a provision is made for the maintenance
of the female members of the family. The basis of
the recognition of such an action is the application of
the rule laid down in Khwaja Muhammad Khan
Vs. Husaini Begam to such situations.

In Veeramma Vs. Appayya ( 1957) under
a family arrangement the father conveyed his
house to his daughter and the daughter
undertook to maintain him in his life time.
The daughter being a beneficiary under the
compromise agreement, it was held that she
was entitled to sue for the specific
performance in her favour.
(3) CONSIDERATION MAY BE PAST,
EXECUTED OR EXECUTORY
1.
2.
3.
Indian Contract Act recognises three kinds of
consideration, viz., Past, Executed and Executory.
When, in return for the promise, the promisee or
other person :
Has done or abstained from doing, then
consideration is past.
Does or abstain from doing, the consideration is
Executed, or present.
Promises to do or abstains from doing, the
consideration is Executory or future.
Whether the consideration is past, Executed or
Executory, it is essential that it must have been
given “at the desire of the promisor”
(1) Past Consideration
As noted above, Indain Contract Act recognises past
consideration. It means that the consideration for any promise
was given earlier and the promise is made thereafter. It is, of
course, necessary that at the time the consideration was given
that must have been done at the desire of the promisor. For
example, I request you to find out my lost dog. When you have
done the same, I promise to pay you Rs. 100/- for that, it is a
case of past consideration. For my promise to pay you Rs.100/the consideration is your efforts in finding my lost dog and the
same, had been done before I promised to pay the amount. In
this case the consideration had been given at my request,
because it is only when I requested you that you found out the
dog. This constitutes valid (past) consideration under Section
2(d), and therefore the promise is enforceable.
Past services voluntarily rendered

Indian Contract Act recognises only such consideration which
has been given at the desire of the promisor, rather than
voluntarily. If consideration has been given voluntarily, it is no
consideration. For example, if my dog has been lost and without
any request from me to find the same, you find that of your own
and deliver the dog to me. This a is case of past services
rendered voluntarily. In case I promise to pay Rs. 100 to you
after you have rendered these services, the question which
arises in such a case is , can such an agreement be enforced ?

It has been noted above that rendering of such voluntary
services does not constitute valid consideration to support the
promise. A valid contract is created in such a case also because
the situation is covered by sec. 25 (2) of the Indian Contract Act,
which contains an exception to the rule that an agreement
without consideration is void. The provision is as under :

“Sec 25 An agreement made without consideration
is void unless—
(2) It is a promise to compensate, wholly or in part,
a person who has already voluntarily done
something for the promisor, or something which the
promisor was legally compellable to do”
The point may be further explained by the following
illustrations.
(i) A finds B’s purse and gives it to him. B promises
to give A Rs.50. This is a contract.
(ii) A supports B’s infant son. B promises to pay
A’s expenses in so doing. This is a contract.
English Law regarding past
consideration

According to English law past consideration is no
consideration. A promise in lieu for a past act is
deemed to be only expression of gratitude for the
benefit already received, rather than any
consideration motivating the other side to make the
promise. A promise after the consideration has
already been given and independent of it, is not
enforceable for want of any consideration in
exchange for the promise.

The case of Re Mc-Ardle (1951) explains the point. In that
case, in accordance with the will of a father, his five children were
entitled to an equal share in a house after their mother’s death.
During the mother’s lifetime one of the testator’s son and his wife
lived in that house. At that time the wife made some
improvements to the house, incurring an expense of 488 pounds.
Subsequently all the five children, who were to inherit the house,
signed a document in her favour, stating that “in consideration of
your carrying out certain alterations and improvements to the
property, we hereby agree that the executors shall repay to you
from the said estate, the sum of 488 pounds in settlement of the
amount spent on such improvements.” On the mother’s death
the promisee claimed 488 pounds from the executors on the
strength of the above promise, but except her husband all the
other promisors refused to pay. It was held by the Court of
Appeal that since the expenditure had been incurred before the
document was signed, the consideration was past and therefore
the promise could not be enforced.
Past consideration at the promisor’s
request


Past consideration though given prior to the promise but at the request
of the promisor is deemed to be a good consideration for the promise.
It is deemed that when the previous request was made the promisor
had in mind his promise which he expresses afterwards. The previous
request and the subsequent promise are not considered to be
independent of one another but part of the same transaction. The
authority for this point is the case of Lampleigh Vs. Bratwait (1615)
Thomas Bratwait, the defendant, who was guilty of having committed a
murder, requested Lampleigh, the plaintiff to make all efforts to obtain
pardon for him from the King. The plaintiff made his efforts to secure
the pardon, going from one place to another, at his own expense. In
consideration for these efforts the defendant promised to pay 100
pounds to the plaintiff. The question was, whether the plaintiff
Had a legal right to recover this amount. It was held that the plaintiff
had a right to enforce the promise and recover the said amount
because for this promise, consideration in the form of efforts by the
plaintiff to obtain the pardon, had been there at the earlier request of
the defendant.
(2) Executed Or Present Consideration


Executed consideration is there when one of the parties to the
contract has performed his part of the promise, which constitutes
the consideration for the promise by the other side. Performance
of the promise by the other side is the only thing now to be done.
For example, a advertises an offer of reward of Rs. 100/- to any
one who finds out his lost dog and brings the same to him. B
finds out the lost dog and brings the same to him. When B did
his part of the job that amounted to both the acceptance of the
offer, which results in a binding contract under which A is bound
to pay Rs. 100/- to B, and also simultaneously giving
consideration for the contract. The contract is case is said to be
“executed”
Executed consideration may be distinguished from past
consideration. In case of executed consideration, the
consideration is provided simultaneously along with the making
of the contract. In such a case at the time of providing of the
consideration the promise is non-existent.
(3) Executory or future
consideration

When one person makes a promise in exchange for
the promise by the other side, the performance of
the obligation by each side to be made subsequent
to the making of the contract, the consideration is
known as Executory. For example, A agrees to
supply certain goods to B, and B agrees to pay for
them at a future date, this is a case of Executory
consideration.
(4) There should be some Act,
Abstinence or promise

According to the definition of consideration
contained in Section 2 (d), 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 consideration for the promise.
Consideration need not be
adequate


A contract which is supported by consideration is
valid irrespective of the fact that the consideration is
inadequate. According to Explanation 2 section 25 :
“An agreement to which the consent of the promisor
is freely given is not void merely because the
consideration is inadequate ; but the inadequacy of
the consideration may be taken into account by
Court in determining the question whether the
consent of the promisor was freely given.”


The parties are free to make any contract of their choice. If, with
their free consent, they strike a bargain where the consideration
is too high or too little, the courts will not go into the question of
adequacy or inadequacy of consideration. 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.
For example, A agrees to sell a horse worth Rs. 1,000 for Rs.
10. A’s consent to the agreement was freely given. The
agreement is a contract notwithstanding the inadequacy of the
consideration.
Although inadequacy of consideration by itself is not a ground for
treating the contract as valid but it may be a factor which the
court may take into consideration to know whether the consent of
a party was free or not. For example, A agrees to sell a horse
worth Rs. 1,000 for Rs. 10. A denies that his consent to the
agreement was freely given. The adequacy of the consideration
is a fact which the Court should take into account in considering
whether or not A’s consent was freely given.
Consideration must be real

Although it is not necessary that consideration should be
adequate, it is, however, necessary that it should be real and
should not be unsubstantial. Promise not to bore the promisor is
not enough to constitute consideration. In white Vs. Bluett
(1853) a son used to complain to his father that his brothers had
been given more property than him. The father promised that he
would release the son from a debt if the latter promised stopped
complaining. After the father’s death an action was brought by
the executors to recover the debt. It was held that the promise by
the son not to bore his father with complaints in future did not
constitute good consideration for the father’s promise to release
him, and, therefore, the son continued to be liable for the debt.
Performance of an existing duty is no
consideration


In order to constitute proper consideration there
should be a promise to do something more than
what a person is already bound to do. Doing of
something what a person is already legally bound to
do is no consideration.
In Collins Vs. Godefry (1831) the plaintiff
received a subpoena to give evidence in a case.
Thereafter the defendant promised to pay to the
plaintiff some money for the trouble which was to be
taken by him in appearing in that case. It was held
that the plaintiff having received the subpoena was
already under a public duty to give evidence, and
therefore, the promise by the defendant to pay did
not constitute consideration for the promise.
Promise to perform an already existing
contractual duty

If the plaintiff is already bound to perform a
particular contractual duty owed to the defendant,
defendant’s promise to pay something additional for
the same promise is no consideration. In Stilk Vs.
Myrick(1809) Two sailors having deserted in the
course of a voyage, the captain of the ship promised
to distribute the wages of those two sailors amongst
the other members of the crew if they would work
the ship home. It was held that the members of the
crew being already duty bound to work the ship
home, there was no consideration to pay the
additional amount and hence the promise to pay
that amount could not be enforced.
Performance of an existing duty owed
to a third party


Whether performance of an existing duty towards a
third party constitutes consideration for a promise or
not came for consideration in the case of Shadwell
Vs. Shadwell (1860) The plaintiff had already
promised to marry one Miss Nicholl. The plaintiff’s
uncle wrote a letter to the plaintiff as under :
“I am glad to hear of your intended marriage with
Ellen Nicholl ; and, as I promised to assist you at
starting, I am happy to tell you that I will pay to you
150 pounds yearly during my life or until your annual
income derived from your profession of a Chancery
barrister shall amount to six thousand guineas, of
which your own admission shall be the only
evidence that I shall receive or require”

Thereafter the plaintiff married Miss Nicholl. He
could not earn 600 guineas from his profession but
no annuity was paid by his uncle to him. After his
uncle’s death he brought an action against his
executors to recover the amount promised to be
paid by his uncle to him. It was decided by a
majority that the promise was enforceable as it was
supported by consideration. Consideration in this
case being a benefit to the uncle as marriage of a
near relative could be of interest to him, and also
detriment to the plaintiff as he might have incurred
pecuniary liabilities on the faith of the promise.
Promise to pay less amount than due



The question which sometimes arises is that : If I
am bound to pay you Rs. 1,000 and if pay or
promise to pay you Rs. 500 instead and you agree
to the same, can this promise to treat the payment
of lesser amount in lieu of the whole amount bind
the parties ?
English Law --- The Rule in Pinnel’s Case
According to English law such an agreement is not
binding because there is no consideration for the
same. This rule was laid down in Pinnel’s case.

The facts of this case are as follows : A sum of 8
pounds and 10 shillings was due to be paid on
November 11, 1600 on the basis of a bond
executed by Cole in favour of Pinnel. On October 1,
1600 Cole paid 5 pounds , 2 shillings , and 6
pennies to Pinel, and Pinnel accepted this smaller
amount in full payment of the original debt.
Subsequently Pinnel brought an action against Cole
to enforce the payment of the full amount on the
basis of the bond. It was held that he was entitled to
succeed, on the ground that mere partial
performance of the original contract would not
discharge the original contract. It was, however,
stated that the original debt could be discharged
only by introduction of a new element in the contract
at the creditor’s request e.g. tender of a chattel in
lieu of cash, or payment at a fresh place or at an
earlier date. The rule laid down is as under :

“Payment of a lesser sum on a day in satisfaction of
a greater sum cannot be any satisfaction for the
whole, because it appears to the judges that by no
possibility can a lesser sum be a satisfaction to the
plaintiff for a greater sum. But the gift of a horse,
hawk or robe, etc. in satisfaction is good. For it shall
be intended that a horse, hawk or robe, etc. might
be more beneficial to the plaintiff than the money in
respect of some circumstances, or otherwise the
plaintiff would not have accepted it in satisfaction….
The payment and acceptance of parcel before the
day in satgisfaction of the whole would be a good
satisfaction in regard of circumstances of time; for
pre-adventure parcel of it before the day would be
more beneficial to him than the whole at the day,
and the value of the satisfaction is not material”
Various exceptions to the rule in Pinnel’s case have
been recognised in England, which are as follows :



1. Payment in kind :-
It was held in Pinnel’s case itself that “the gift of a
horse, hawk or robe, etc. in satisfaction (of a claim
for money) is good. For it shall be intended that a
horse, hawk, or robe, etc. might be more beneficial
to the plaintiff than the money in respect of some
circumstance, or otherwise the plaintiff would not
have accepted it i9n satisfaction.”
When the promise is made to deliver some chattel in
lieu of a sum due, the promise is valid even if the
chattel is worth a smaller sum than the amount due.
2. Payment before the due date :-

Another exception, which has been recognised in
Pinnel’s case is the payment and acceptance of the
smaller sum of money than originally due in
satisfaction of the whole, before the payment is due.
3.
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Part payment by a third party :Payment of a part of the sum due by a third party
has been recognised to be enough to discharge the
whole of the debt. If one party has accepted part
payment from a third party he cannot subsequently
sue for the balance of the amount.
The reason for such a discharge has been
explai9ned by Willes J. in Cook Vs. Lister (1863)
“If a stranger pays a part of the debt in discharge of
the whole, the debt is gone, because it would be a
fraud on the stranger to proceed. So, in the case of
a composition made with a body of creditors, the
assent to receive the composition discharges the
debt, because otherwise fraud would be committed
against the rest of the creditors.”
4. Composition with the creditors
: A compromise between the debtors and his

creditors, according to which the creditors agree to
be satisfied with a certain percentage of the amount
due in satisfaction of the whole debt, has been
recognised to be valid contract. The reason behind
this exception appears to be “that no creditor will be
allowed to go behind the composition agreement, to
the prejudice either of the other creditors or of the
debtor himself, because this would be a fraud upon
all the parties concerned.”
Thus, an agreement between a debtor and a single
creditor for payment of lesser amount than due will
come under the ban in Pinnel’s case but an
agreement between a debtor and his creditors will
come under this exception.
5. Doctrine of Promissory Estoppel
:- This is an equitable estoppel preventing a person from denying what
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he asserted earlier. The doctrine was invoked by Denning J. in
Central London Property Trust Vs. High Trees House, Ltd. (1947)
The facts of the case are:
The plaintiffs leased a block of flats to the defendants in 1937 for 99
years on a ground rent of 2,500 pounds. In January 1940 because of
wartime conditions the plaintiffs could not let many of the flats, and
because of these conditions they agreed in writing to reduce the rent of
the defendant’s flats to 1,250 pounds. In 1945 the situation became
normal and all the flats were let again but the defendants continued to
pay the reduced rent. The plaintiffs brought an action against the
defendants to recover full original rent for the last two quarters of 1945
as well as in future. It was held that the intention of the parties was that
the reduction of the rent was a temporary measure until the flats could
be fully let, the plaintiffs were therefore entitled to full rent as claimed. It
was also stated by Denning J. that had an action been brought to claim
full rent between 1940 to first two quarters of 1945. the action would
have failed because of the estoppel against the plaintiffs due to their
agreement to accept lesser amount.
Indian Law
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In India promisee may accept in satisfaction of the
whole debt an amount smaller than that. No
consideration is needed for such a promise. The
law on this point is stated in Section 63, which is as
under :“Every promisee may dispense with or remit, wholly
or in part, the performance of the promise made to
him, or may extend the time for such performance,
or may accept instead of it any satisfaction
which he thinks fit.”
The position is further explained by the following illustration :
(1) A owes B 5,000. A pays to B , and B accepts, in satisfaction of
the whole debt, 2,000 rupees paid at the time and place at which 5,000
rupees were payable. The whole debt is discharged.
(2) A owes B 5,000 rupees. C pays to B 1,000 rupees, and B
accepts them in satisfaction of claim on A. This payment is a discharge
of the whole claim.
(3) A owes B , under a contract, a sum of money, the amount of which
has not been ascertained . A without ascertaining the amount gives to
B, and B, in satisfaction thereof, accepts the sum of 2,000 rupees.
This is a discharge of the whole debt, whatever may be its amount.
(4) A owes B 2,000 rupees, and is also indebted to other creditors. A
makes an arrangement with his other creditors, including B, to pay
them compensation of eight annas in a rupee (I.e. 50%) upon their
respective demands. Payment to B of 1000 rupees is a discharge of
B’s demand..
It may be noted here that the part payment discharges the debtor of the
whole claim, whether the payment is made by the debtor himself as in
illustration (1) above, or by a third party, as in illustration (2) above.
Exceptions when agreement without
consideration is valid.
Section 25, as a general rule declares, that an agreement without
consideration is void. The section, however, mentions three exceptions,
when there is no need of any consideration for the validity of the contract.
The provision is as under :
25. An agreement made without consideration is void unless –
(1) It is expressed in writing and registered under the law for the time
being in force for registration of documents and is made on account of
natural love and affection between parties standing in a near relation to
each other : or unless
(2) It is a promise to compensate , wholly or in part, a person who has
voluntarily done something for the promisor, or something which the
promisor was legally compellable to do ; or unless
(3) It is a promise, made in writing and signed by the person to be
charged therewith, or by his agent generally or specifically authorised in
that behalf, to pay wholly or in part a debt of which the creditor might
have enforced payment but for the law for the limitations of suits.
In any of these cases, such an agreement is a contract.
(1) Promise due to natural love and
affection :1.
2.
3.
4.
When the promise is made in favour of a near relation on account of
natural love and affection, the same is valid even though there was no
consideration for such a promise. The following requirements have got
to be satisfied in order that the case is covered under this exception.
The parties to the agreement must be standing in a near relationship to
each other.
The promise should be made by one party out of natural love and
affection for the other.
The promise should be in writing, and
The agreement is registered.
The parties should be nearly related to one another in such an
agreement. What is near relationship has neither been defined in the
Act, nor in any judicial pronouncement. But from the various decided
cases it appears that it will cover blood relations or those related
through marriage, but would not include those relations which are not
“near”, but only remotely entitled to inherit.
“Natural love and affection” between the parties so nearly related
is also needed. If one brother, although not legally bound to do
so, transfers half of his property in favour of another brother, so
that they have cordial relations, that is deemed to have been
done out of natural love and affection, and such an agreement is
binding. (Bhiva Vs. Shivaram) 1899
In Rajlucky Dabee Vs. Bhootnath Mookerjee (1900) it has
been held that relations between the two parties does not
necessarily imply natural love and affection between them. In
this case after lot of disagreements and quarrels between a
Hindu husband and his wife they decided to live apart. At this
stage the husband executed a registered document in favour of
the wife whereby he agreed to pay for her separate residence
and maintenance. In that agreement mention was also made
about quarrels and disagreements between the two. It was held
that from the recitals in the document it was apparent that the
document had been executed not because of natural love and
affection between the parties but because of the absence of it,
and therefore the wife was not entitled to recover the sums
mentioned in the document.
It is further necessary that the agreement should be in writing
and registered under the law relating to registration of documents
(2)
Compensation for past voluntary
services :
When something has been done “at the desire of
the promisor”, that constitutes a good consideration
in respect of a subsequent promise to compensate
for what has already been done. The second
exception to Section 25 covers “cases where a
person without the knowledge of the promisor, or
otherwise than at his request does the latter some
service, and the promisor undertakes to
recompense him for it. The promise to compensate,
though without consideration, is binding because of
this exception.
The exception also covers a
situation where the promise is for doing something
voluntarily “which the promisor was legally
compellable to do.”
Thus, when A finds B’s purse and gives it to him
and then B promises to pay A Rs. 50, or, A
supports B’s infant son and B promises to pay A’s
expenses in so doing, there is valid contract in each
case although the promisor’s act was a voluntary
one.
The exception covers situations where the service is
rendered voluntarily and without promisor’s
knowledge. It is also necessary that the service
must have rendered to the promisor and nobody
else. It is further necessary that at the time of doing
of the act the promisor must have been competent
to contract..
(3) Promise to pay a time barred
debt
Another situation when an agreement is a valid
contract even without any consideration is a promise
to pay a time-barred debt. Section 25 (3) requires
the following essentials to be satisfied in such a
case.
1. The promise must be to pay wholly or in part a timebarred debt, i.e. a debt of which the creditor might
have enforced payment but for the law for the
limitation of suits.
2. The promise must be in writing and signed by the
person to be charged therewith, or his duly
authorised agent.
It is necessary that the debt must be one of which the creditor
might have enforced payment but for the law for limitation of
suits. It, therefore, does not cover such debts which are unenforceable for some other reasons. Thus if an insolvent debtor
has been discharged from payment under the insolvency law a
subsequent promise by him to pay that debt cannot be enforced
unless there is a fresh consideration for the same.
Similarly, if the payment of the debt cannot be enforced because
the debt was contracted by a person during his minority, the
same is not now enforceable if, on attaining majority, a promise is
made to pay the same, because a minor’s agreement which is
void is incapable of being validated by ratification. It has been
held in Arumugan Vs. Duraisinga (1914) a promissory note
to pay the sum received minority is not enforceable.
Debt due by whom ?
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In Pestonji Vs. Bai Meherbai (1928) the Bombay High Court
has expressed the view that under this exception the promise
should be to pay time-barred debt due from the promisor, and not
a promise to pay time-barred debts due from other persons.
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Section 25 (3), it may be further noted, permits a promise to pay
wholly or in part a time barred debt. If a person promises to pay
a portion of a barr4ed debt, he can only be sued for that portion
alone and not for the whole debt. If, however, the promise to pay
the whole debt is there then the whole of the amount can be
claimed. A owes B Rs. 1,000, but the debt is barred by
limitation Act. A signs a written promise to pay B Rs. 500 on
account of the debt. Under this contract A is bound to pay Rs.
500.
There should be express promise

The promise to pay the time-barred debt must be an express one
and cannot be held to be sufficient if the intention to pay is
unexpressed and has to be gathered from a number of
circumstances. It has been held in Debi Prasad Vs. Bhagwati
Prasad (1943) that when the acknowledgement (of the time
barred debt) is coupled with an agreement to pay interest, it
cannot be regarded as a mere acknowledgement and it should
be regarded as an agreement with a promise to pay (the debt)
within the meaning of Section 25 (3). In Appa Rao Vs.
Suryaprakasa Rao (1900) the defendant wrote a letter duly
signed by him to the plaintiff after the debt had become time—
barred mentioning the periods for which the rents were due was
held that the document contained the ingredients mentioned in
Section 25 (3) and the defendant was entitled to enforce his
claim.