Law of Contract- Notes

UNIT – I

Introduction to the Indian Contract Act, 1872

Definition of Contract -Section 2(h)

A legally enforceable agreement or, in Sir Frederick Pollock's words, "a promise or set of promises which the law will enforce" are two definitions of a contract.
According to Indian Contract Act, 1872, a contract is "an agreement enforceable by law" (Section 2(h)). Therefore, for an agreement to be formed into a contract, it must be enforceable by law.
Rights and responsibilities arising from the agreement will be enforceable in court. Though in certain situations the court may order performance by the party in default, the usual course of enforcement for breach of contract is an action for damages.

Enforceability of Contracts

Void Contracts: 

A transaction that is viewed as a total nullity is referred to as a "void contract." It denotes the absence of any written agreement between the parties. Everything received under the arrangement, including money and products, has to be returned. It is possible for the original owner to retrieve items that were resold to a third party.

 Voidable Contracts: 

Until one of the parties takes action to avoid it, a contract that is voidable remains valid in all respects. Insofar as it is feasible, everything acquired in accordance with the contract needs to be returned. The original owner cannot get back things that have been resold before the contract was avoided.

 Unenforceable Contracts: 

When one of the parties refuses to abide by the provisions of a legitimate contract, it becomes unenforceable and cannot be enforced in court. In general, items obtained in accordance with the contract cannot be returned.

Agreement, Contract and Proposal

Agreement definition [SECTION 2(e)]

As "every promise and every set of promises forming the consideration for each other," an agreement is described. Furthermore, an accepted proposal defines a promise.

What agreements are contracts [ SECTION 10 ]

If two parties with the capacity to enter into contracts freely consent, provide a lawful consideration and a lawful object, and are not expressly declared void herein, then all agreements are considered contracts.

Agreement becomes a contract if below conditions are met:

1. There is some consideration
2. The parties are competent to contract
3. Their consent is free
4. Their object is lawful

Proposal or Offer

Proposal definition [SECTION 2(a)]

A person is said to make a proposal when he expresses to another person his willingness to do something or refrain from doing something in order to get that other person's consent to that act or moderation.

Proposal terminology [SECTION 2(c)]

The individual who submits the proposal is referred to as the "promisor," and the individual who accepts it is known as the "promisee."

Communication of Proposal

Communication, acceptance and revocation of proposals [SECTION 3]

Any action or inaction on the part of the party making the proposal, accepting it, or revoking it that he intends to communicate, or that has the effect of communicating it, is considered to constitute the communication of proposals, the acceptance of proposals, and the revocation of proposals and acceptances, respectively.
Therefore, a proposal can be sent in any manner that leaves the offeree with the option of doing or not doing anything. For instance, it can be accomplished by written words, spoken words, or even actions.

Promises, express and implied [SECTION 9]

A commitment is considered express if it is made or accepted verbally. The commitment is considered implicit if it is made in any way other than verbally, such as through a proposal or acceptance.
A verbal or written offer is referred to as an express offer, while an offer conveyed by behavior is called an implicit offer.

A bid at an activity could be entering and eating food at a self-service restaurant, for instance, or it could be an implied offer to buy.

Case Law: Upton Rural District Council v Powell:

A fire broke out in the defendant’s farm. He believed that he was entitled to the free services of Upton Fire Brigade and, therefore, summoned it. The Brigade put out the fire. It then turned out that the defendant’s farm was not within free service zone of the Upton, which therefore, claimed compensation for the services. The court said: “The truth of the matter is that the defendant wanted the services of Upton; he asked for the services of Upton and Upton, in response to that request, provided the services. Hence, the services were rendered on an implied promise to pay for them.

Communication when complete [SECTION 4]

When a proposition is fully communicated to the recipient, it has been fully received.
An offer is not deemed accepted until it is made known to the individual to whom it is addressed. In Lalman v. Gauri Datt, the Allahabad High Court was able to address a case involving a highly important question on this topic according to this principle.

The nephew of the defendant ran away from home. He put his servant out to find the youngster. After the servant departed, the defendant distributed handbills offering Rs. 501 to anyone who found the youngster. It was only after he had located the lost youngster that the servant became aware of this offer. Nonetheless, he held an auction to recoup the prize. However, his attempt was unsuccessful. "A suit like the present can only be founded on a contract," says BAERJI J. in explanation. An offer must be accepted in order for there to be a contract, and an acceptance cannot occur unless the offer is known about.

Intention to Contract

The Indian Contract Act makes no mention of the need for an offer or its acceptance to be made with the goal of establishing a legal relationship. However, "to create a contract there must be a common intention of the parties to enter into legal obligations" is a well-established principle in English law.

Case law: Balfour v Balfour

While on leave in England, the defendant and his spouse were having fun. Due to her health, the defendant's wife was advised to stay in England when it came time for him to return to Ceylon, where he worked. The defendant consented to pay her thirty pounds a month to cover what would likely be maintenance costs. For a while, he did send the required amount; however, later, disagreements led to their breakup, and the allowance became overdue. The wife's attempt to recoup the debt was denied.

Family & Social matters

All the law asks is for the parties to intend for there to be legal repercussions. The McGregor v. McGregor case serves as an example of a legally binding marriage between a husband and wife. Here, a husband and wife withdrew their complaints under the terms of their agreement, which was deemed to be a legally enforceable contract and stipulated that the husband would give her an allowance and that she would not pledge his credit.

Business matters

The Supreme Court's perspective

The Supreme Court took note of the general idea that there is a third contractual element—the parties' purpose to establish legal relations—in addition to the existence of an agreement and consideration.

Letters of Intent

A letter of intent only expresses a party's desire to engage into a contract along the terms the letter proposes. It might end up being a contract preclude. But in cases where a letter indicated that a comprehensive buy order with an arbitration provision would follow, it was decided that the letter was not a supply order and that its arbitration clause did not automatically result in an arbitration agreement.

General Offers

Acceptance by performing conditions, or receiving consideration [SECTION 8]

A proposal is accepted when its terms are met or when any consideration is given in exchange for a reciprocal promise that may be made along with it.

Carlil v Carbolic Smoke Ball Co

After using the ball as directed by print, a company advertised that it would give 100 pounds to anyone "who contracts the increasing epidemic influenza, colds or any disease caused by taking cold." In order to demonstrate our earnestness in the situation, a thousand pounds was also placed with the Alliance Bank. The complainant followed the instructions and used the smoke balls, but she still got the illness thereafter. It was decided that she was entitled to the promised reward.

General offer of continuing nature

When a broad offer is ongoing, as it was in the Smoke Ball case, for instance, it can be accepted by any number of people until it is withdrawn. However, an offer is closed as soon as the first piece of information about a missing item is received if it calls for such information.

Offer and Invitation to Treat

It is important to distinguish between an offer and an invitation to accept offers. There is no offer to be bound by a contract when a guy posts an advertisement stating that he has a stock of books to sell or houses to rent. "These kinds of ads are offers to haggle, offers to receive offers, and offers to chaffer."

Harvey v Facey

In a letter to the defendants, the plaintiff asked, "Will you sell us Bumper Hall Pen? The lowest cash price for a telegraph. By telegram, the defendants also responded, saying, "Lowest price for Bumber Hall Pen, 900 pound." In their final telegram, the plaintiff promptly replied, saying, "We agree to buy Bumper Hall Pen for 900 pound asked by you." The accused declined to sell the scheme.

The Lordships noted that the plaintiffs posed two questions in their initial telegraph: first, on the seller's readiness to sell, and second, about the lower price. The defendants merely provided the lowest price and only responded to the second question. Regarding their desire to sell, they withheld their response. So they didn't make a proposal. The plaintiffs' final telegram contained a purchase offer, which the defendants never took up.

• Catalogues and display of goods: A shopkeeper’s catalogue of prices is not an offer, only an invitation to offer.
• Announcement to hold auction: An auctioneer’s announcement that specified goods will be sold by auction on a certain day is not an offer to hold the auction.
• Definiteness of proposal: A classified advertisement to the effect: “cocks and hens 25s each” has been held to be not an offer to sell.
• Free distribution of articles: Not a contract of sale

Acceptance – Section 2(b)

Introduction of Acceptance – Sec. 2(b)

The suggestion is considered accepted when the individual to whom it is made indicates his or her agreement. When a plan is approved, it turns into a promise.
Therefore, "acceptance" is the consent extended to a proposition, which transforms it into a commitment.
This is another way of saying that a proposal is accepted when it becomes an agreement. In the end, every agreement originates from a proposal made by one party and accepted by the other.

There are three factors in Acceptance:

1. Communication to Offeror
2. Communication to Acceptor
3. When Communication is not necessary

Communication of Acceptance

Acceptance by external manifestation or overt act.

According to SHAH J, "An agreement does not arise from a simple state of mind: an offer does not become a contract simply because one has the intention or even the mental resolution to accept it. That intention must be expressed outside of the body by writing, speech, or some other action.

Brogden v Metropolitan Railway co.

Unofficially, Brogden had been providing coal to a railroad firm. Brogden recommended that a written contract be drafted. A draft agreement was drafted by the meeting of the parties' agents. When it was sent to Brogden for approval, it contained a few blanks. After adding the arbitrator's name and completing the gaps, he gave the document back to the business. The company's agent filed the document away in his drawer, where it stayed until final approval was expressed. Brogden continued to provide coal, but only under the new conditions, and he was paid accordingly. Due to a disagreement, Brogden declined to be obligated by the terms of the contract.

Acceptance by Conduct

Under the Indian Contract Act and English law, a contract cannot be completed by mere mental consent to an offer.

Communication to Offeror Himself

The offeror must be informed when their offer is accepted. Any conversation with another individual is just as ineffective as none at all.

Caselaw: Felthouse v Bindley – Offer cannot Impose Burden of Refusal

Facts: "The plaintiff made a written offer to buy his nephew's horse. "If I hear no more about the horse, I consider the horse mine at pount 33.15s," the letter stated. There was no response to this letter. However, the nephew advised the defendant's auctioneer not to sell the horse because his uncle had already purchased it. By mistake, the auctioneer placed the horse up for bid and made a sale. The plaintiff filed a lawsuit against the auctioneer, claiming that the horse had become his property as per the terms of the contract and that the defendant's unlawful sale amounted to conversion. However, the endeavor was unsuccessful.

Communication to Acceptor himself

An one with the authority to accept should communicate acceptance. Information obtained from an unapproved source is useless.

Caselaw: Powell v Lee

Details: "The complainant applied to be a school headmaster. Although he was not informed of the decision, the managers adopted a resolution designating him. However, one of the members notified him in his own right. The plaintiff filed a breach of contract lawsuit when the managers canceled their resolution.

When Communication Not Necessary

There are situations in which acceptance communication is not required. An offeror can specify a specific manner of acceptance; the acceptor just needs to adhere to that mode.

Caselaw: Carlil v Carbolic Smoke Ball

However, there is a clear gloss to be placed on that concept, which states that the offer maker may forego notice to himself as long as he notifies others that the offer has been accepted. This is noted by BOWEN LJ. and there is no question that in cases where the offeror indicates through express or implied means that a specific mode of acceptance is sufficient to make the agreement binding, the other party need only adhere to the specified method of acceptance; additionally, if the offeror indicates through express or implied means that acting on the proposal without notifying himself will be sufficient, fulfillment of the condition constitutes a sufficient acceptance without notification.

Mode of Communication

Acceptance should be made in prescribed manner

Acceptance must be made in the way that the offeror specifies or directs. An acceptance made in any other way might not work. especially when the offeror expressly demands that the acceptance be done in the official way. For instance, A proposed to buy flour from B and asked for the wagon bringing the offer to provide an acceptance. B thought that sending his acceptance by mail would get to the offeror faster. However, the letter came in after the wagon's departure time. It was decided that A was not required to accept.

Absolute and Unqualified

Section 7: Acceptance Must Be Absolute

A proposal must be accepted in two ways in order to become a promise: (1) absolutely and unequivocally; and (2) in an ordinary and reasonable manner, unless the proposal specifies otherwise.

Effect of departure from prescribed manner

A deviation from such protocol does not void the acceptance in and of itself. The offeror has an obligation to decline such an acceptance within a reasonable amount of time.
If the information is made in an equally timely manner, even a small deviation from the approved style of communication shouldn't affect the fact of acceptance.
For in a case where the offeree was instructed to respond "by return of post," the Court of Exchequer Chamber stated that an equally prompt reply made by another mode would be considered a legitimate acceptance.

Where no manner prescribed: reasonable and usual manner

Acceptance must "be expressed in some usual and reasonable manner" in cases when there is no specified mode of acceptance. According to Indian Contract Law, posting is a fair way.

When contract concluded (Postal Communication)

When two parties engage in business via mail or messengers while they are separated by distance, the question of when the contract is finalized emerges.

Household Fire & Accident Insurance Co v Grant

The plaintiff corporation received an application from the defendant seeking to be allocated 100 shares. Though it was mailed on schedule, the defendant never received a letter of allotment that was addressed to him at his home. That being said, the acceptance bound him.

Section 4 – Communication when complete

The position of the acceptor is the only change made by this section. Both the offeror and the acceptor are irrevocably bound in England once a letter of acceptance is posted. However, in India, an acceptor's post-acceptance does not bind him. Only when his acceptance "comes to the proposer's knowledge" does he become legally bound. By sending a quicker message that will surpass the acceptance, the acceptor can use the time that elapses between the posting and the acceptance delivery to revoke his acceptance.

Counter proposals

Any acceptance that comes with restrictions, additions, or other changes is a counteroffer and indicates that the offer has been rejected.
If the offeror does not object to the discrepancy within a reasonable timeframe, the terms of the contract will be the terms of the offer with the modifications contained in the acceptance. Otherwise, a reply to an offer that appears to be an acceptance but contains additional or different terms that do not materially alter the terms of the offer shall constitute an acceptance. In case the proposal specifies how it should be accepted and the acceptance isn't done so, the proposer has the option to demand that his proposal be accepted in the specified way only, and not in any other way, within a reasonable timeframe after being informed of the acceptance. If he doesn't follow through on this, he has to accept the acceptance.

Partial acceptance

The offer as a whole should be accepted. The offeree cannot accept the terms that benefit him in part while rejecting the remainder. Such an acceptance does not obligate the offeror and is merely another type of counterproposal.

Inquiry into terms of proposal

Counter-proposals differ from simple requests for clarification regarding a proposal's terms. The proposal's terms and conditions, including the arbitration clause, will constitute the foundation for the contract once it is accepted.

Acceptance with condition subsequent

An acceptance could not have the same impact as a counterproposal if it has a condition attached. Consequently, in cases where an acceptance stated something like this: "Terms accepted; remit cash down Rs. 25,000 by February 5, otherwise acceptance subject to withdrawal," this was not a counter-proposal so much as it was an acceptance that came with a warning that the contract would be considered violated if the money was not sent.

Acceptance of counter proposal

"Even in cases where a proposal is accepted conditionally, the proposer may still be bound by his subsequent actions indicating his acceptance of the established qualifications."

Hargopal v People’s Bank of Northern India

A request for shares was submitted, subject to the bank's guarantee that the applicant would be named a local branch permanent director. He was given the shares without meeting the requirement. Through the pledging of his shares, the initiation of a lawsuit to recover dividends, and acceptance of dividends, the applicant accepted the position as a shareholder.
Consequently, it was decided that he could not claim that the allotment was invalid due to a condition not being met because, by his actions, he had waived them.

Provisional acceptance

An acceptance is sometimes made contingent on ultimate approval. A provisional acceptance of this nature does not typically bind either party until final approval is granted.

Acceptance and withdrawal of tenders

A tender is classified similarly to a price quotation. This is not an offer. When a tender is authorized, it becomes a standing offer. A contract is formed only when an order is placed based on the tender. These principles were established by the Bombay High Court in the well-known case of Bengal Coal Co Ltd v Homee Wadia & Co.

Lapse of Offer

1. Notice of revocation
2. Lapse of Time
3. By failure to accept condition precedent
4. By death or insanity of offerer

Revocation of Acceptance

Section 5: Revocation of proposals and acceptances

A proposal can be canceled at any moment before its acceptance is communicated to the proposer, but not after.
An acceptance can be canceled at any point before it is fully communicated to the acceptor, but not after.

NOTICE OF REVOCATION

Withdrawal before expiry of fixed period

When an offeror gives the offeree the choice to accept within a set term, he may withdraw it before that period expires.

CASE LAW: Alfred Schonlank v. Muthunayna Chetti

The defendant left an offer to sell a quantity of indigo at the plaintiff's office, allowing him eight days to respond. On the fourth day, however, the defendant withdrew his proposition. The plaintiff accepted it on the fifth day. Holding the acceptance was pointless.

Agreement to keep Offer open for Specified Period

When the offeror agrees to keep the offer open for a set amount of time in exchange for something, he or she cannot cancel it before that period expires.

CASE LAW: Mountford v Scott

Communication of Revocation should be from Offerer Himself

The transmission of revocation must come from the offeror or his fully appointed agent. However, in Dickinson v. Dodds, it was determined that knowing credibly that the offer had been withdrawn was insufficient.

Revocation of General Offers

Where a broad offer is made in newspapers, it can be withdrawn by the same medium, and the revocation is effective even if a specific person performs its terms after the withdrawal, unaware of the withdrawal.

CASE LAW: Skarsm Ramanathan v NTC Ltd

Superseding proposals by Fresh Proposal

When a proposal is repeated in parts rather than in its entirety prior to acceptance, and the letter pretends to supplant the previous communication, the proposal is no longer open for acceptance.

CASE LAW: Banque Paribas v Citibank NA

Cancellation of allotment of land

An allotment of land was made under the order of a Development Authority.

CASE LAW: Rochees Hotels P Ltd v Jaipur Development Authority

Revocation of Bid

"The assent is signified on the part of the seller by knocking down the hammer" in the case of an auction. A bid may be withdrawn before the hammer is down.

CASE LAW: Union of India v Bhimsen Walaiti Ram

A liquor ship was sold to a bidder at a public auction. This was subject to confirmation by the Chief Commissioner, who had the authority to investigate the bidder's financial situation before to issuing the license. The bidder was required to pay one-sixth of the price immediately, and in the event of a default on his side, the government had the authority to re-auction the store, with any shortfall recovered from the bidder. He failed to pay one-sixth of the bid, therefore the Chief Commissioner did not confirm it and ordered resale. The resale realized far less than the original bid, raising the question of the bidder's duty to cover the deficit.

The court stated: It is undisputed that the Chief Commissioner rejected the respondent's bid. If the Chief Commissioner had granted sanction in favor of the respondent, the transaction would have been consummated, and he would have been responsible for any shortfall on the resale.

LAPSE OF TIME

An offer expires when the time limit for acceptance, if any, runs out. Where an offer states that it will be open for acceptance until a certain date, it must be accepted by that date. For example, if an offer was valid until the end of March and the offeree sent a telegraph accepting the offer on March 28th, which was received by the offeror on March 30th, it was determined that the option was duly exercised.

FAILURE TO ACCEPT CONDITION PRECEDENT

If an offer is subject to a condition prior, it lapses if accepted without meeting the condition. When a salt lake was offered for lease on deposit of a sum of money within a set time period, and the intended lessee failed to deposit the amount for three years, the allotment was deemed cancelled.

DEATH OR INSANITY OF OFFEROR

An offer fails upon the offeror's death or insanity, provided that the offeree becomes aware of the fact before accepting it.
Dickinson v Dodds established that an offer cannot be accepted after the offeror's death.

SECTION 6: Revocation how made

A proposal is revoked —

1. by the communication of notice of revocation by the proposer to the other party;
2. by the lapse of the time prescribed in such proposal for its acceptance or, if no time is so prescribed, by the lapse of a reasonable time, without communication of the acceptance;
3. by the failure of the acceptor to fulfill a condition precedent to acceptance; or
4. by the death or insanity of the proposer, if the fact of his death or insanity comes to the knowledge of the acceptor before acceptance.

Revocation of Acceptance

According to English law, once made, an acceptance is irrevocable. According to Anson, acceptance is analogous to offering a lighted match to a train of explosives. Both do something that cannot be undone. This restriction evidently applies only to postal acceptance. According to Anson, in other situations, "an acceptance can be revoked at any time before acceptance is complete, provided, of course, that the revocation is communicated before the acceptance arrives."In India, on the other hand, acceptance is typically reversible. An acceptor may rescind his acceptance using a faster form of communication that arrives earlier than the acceptance itself. Section 5 is the relevant provision.

Standard Form Contracts

• Exploitation of weaker party
• Protective Devices
  • Reasonable notice
  • Notice should be contemporaneous with contract
  • Theory of fundamental breach
  • Strict construction
  • Liability in tort
  • Unreasonable terms

Consideration [SECTION 2 (d) and SECTION 25]

Section 25 of the Indian Contract Act, 1872 starts with a declaration that “an agreement made without consideration is void”. Consideration is a price of the promise.

Definitions

Pollock put it this way: "Consideration is the price for which the promise of the other is bought, and the promise thus given for value is enforceable." Justice Patterson defines consideration as something of worth in the eyes of the law, which can benefit or harm the plaintiff or defendant.
According to Section 2(d) of the Indian Contract Act, consideration refers to an act or promise made by the promisee or another person at the request of the promisor.

It means price for which the promise of the other is bought – a valuable considerations a price of the promise – some of value received by the promisee as an inducement of the promise quid pro quo ( something in return) – may be of some benefit to the plaintiff or some detriment to the defendant.

Abdul Aziz Vs. Masum Ali
A promise to subscribe Rs.500 for re-building a mosque – not fulfilled – secretary of mosque committee filed a suit for enforcement of promise – Held, the promise not enforceable as no consideration in the sense of benefit for the promisor – the secretary of the committee suffered no detriment as nothing has been done to carry out the repairs – no contract.

Gousmohoddin Vs. Appasahib
Suit filed by landlord L against tenant T for possession of premises and arrears of rent – suit decreed in favour – in execution, attachment order of movable property of T – In consideration of T agreeing not to appeal against the decree, L allowed one month’s time to pay – Held, valid consideration – valid agreement.

Essential Elements of a Valid Consideration

1. It must move at the desire of promisor
2. It may move from promisee or any other person (privity of consideration)
3. It must be real, not illusory
4. It need not be adequate
5. It may be past, present or future
6. It must not be illegal, immoral or opposed to public policy

Promissory Estoppel

The doctrine of promissory estoppel prevents one party from withdrawing a promise made to a second party if the latter has reasonably relied on that promise.

The doctrine of promissory estoppel was first developed in Hughes v. Metropolitan Railway Co [1877] but was lost for some time until it was resurrected by Lord Denning in the controversial case of Central London Property Trust Ltd v. High Trees House Ltd [1947].

Promissory estoppel requires:

1. an unequivocal promise by words or conduct
2. evidence that there is a change in position of the promisee as a result of the promise (reliance but not necessarily to their detriment)
3. inequity if the promisor were to go back on the promise

In general, estoppel is ‘a shield not a sword’ — it cannot be used as the basis of an action on its own. It also does not extinguish rights.

The general rule is that when one party agrees to accept a lesser sum in full payment of a debt, the debtor has given no consideration, and so the creditor is still entitled to claim the debt in its entirety. This is not the case if the debtor offers payment at an earlier date than was previously agreed, because the benefit to the creditor of receiving payment early can be thought of as consideration for the promise to waive the rest of the debt. This is the rule formulated in Pinnel’s Case (1602)

“At the desire of the promisor”

An act or abstinence which is to be a consideration for the promise must be done or promised to be done in accordance with the desire of the promisor.

Durga Prasad v Baldeo

Facts: The plaintiff constructed some shops in a market under the orders of the Collector. The defendant occupied a shop and promised to pay some commission to the plaintiff and did not pay. In an action against the defendant, it was held not maintainable.

Court Held: The only ground for the making of the promise is the expense incurred by the plaintiff in establishing the Ganj (market) but it is clear that anything done in that way was not ‘at the desior’ of the defendants so as to constitute consideration. The act was the result not of the promise but of the Collector’s order.

Thus to constitute a good consideration, act or abstinence must be at the desire of the promisor.

Acts done at request:

An act done at the promisor’s desire furnishes a good consideration for his promise even though it is of no personal significance or benefit to him.

Kedar Nath v Gorie Mohamed

It was thought advisable to erect a town hall at Howrah provided sufficient subscription could be got together for the purpose. To this end the Commissioners of Howrah municipality set out to work to obtain necessary funds by public subscription. The defendant was a subscriber to this fund for Rs.100 having signed his name in the subscription book for the amount. On the faith of the promised subscriptions, the plaintiff entered into a contract with a contractor for the purpose of building the hall. But the defendant failed to pay the amount and contended that there was no consideration for this promise.

He was held liable. Persons were asked to subscribe knowing the purpose for which the money was to be applied, they knew that on the faith of their subscription an obligation was to be incurred to pay the contractor for the work. The promise is: ‘In consideration of your agreeing to enter into a contract to erect, I undertake to supply money for it.’ The act of the plaintiff in entering into contract with the contractor was done at the desire of the defendant (the promisor) so as to constitute consideration within the meaning of Section 2(d).

Promises of charitable nature

Doraswami Iyer v Arunachala Ayyar

Facts: The repair of a temple was in progress. As the work proceeded, more money was required and to raise this money subscriptions were invited and a subscription list raised. The defendant put himself down on the list for Rs. 125 and it was to recover this sum that the suit was filed. The plaint found the consideration for the promise as a reliance on the promise of the subscriber that they have incurred liabilities in repairing the temple.

Judgment: The learned judge held that there was no evidence of any request by the subscriber to the plaintiff to do the temple repairs. Since, the temple repairs were already in progress when the subscriptions were invited. The action was not induced by the promise to subscribe but was rather independent of it. Hence, no recovery was allowed.

Unilateral promises

A unilateral promise is a promise from one side only and is intended to induce some action by the other party. The promisee is not bound to act, for he gives no promise from his side. But if he carries out the act desired by the promisor, he can hold the promisor to his promise. “An act done at the request of the offeror in response to his promise is consideration, and consideration in its essence is nothing else but response to such a request.”

Abdul Aziz v Masum Ali

The defendant promised Rs.500 to a fund started to rebuild a mosque but nothing had been done to carry out the repairs and reconstruction. The subscriber was, therefore, held not liable.

Revocation of unilateral promises

Errington v Errington

Facts: The owner of a house had mortgaged it. The house was in the occupation of his son and daughter-in-law. He told them that the house would become their property if they paid off the mortgage debt in installments and they commenced payment.

Judgement: The father’s promise was a unilateral contract, a promise of the house in return for their act of paying the installments. It could not be revoked by him once the couple entered on performance of the act, but it would cease to bind him if they left it incomplete and unperformed.

Promissory Estoppel and government agencies

InPournami Oil Mills v State of Kerala, the Government was not permitted to go back on its earlier promise of wider exemption from sales tax in pusuance of which certain industries were set up. A subsequent notification curtailing the exemption was held to be applicable to industries established after the notification. A promise which is against public policy or in violation of a statutory prohibition cannot be the foundation of an estoppel.

Estoppel of licensee

A person who had acquired title to the land of a Council by adverse possession, agreed subsequently to hold the same under a term license from the Council. On the expiry of the term, the Council told him to hand over possession He tried to assert his title by adverse possession. He was not allowed to do so. Whatever rights he acquired became substituted under the new arrangement which he voluntarily accepted. The new arrangement constituted a promissory estoppel against him.

Privity of Contract and of Consideration

“Promisee or any other person”

It means that as long as there is a consideration for a promise, it is immaterial who has furnished it. It may move from the promisee, or, if the promisor has no objection, from any other person.

Dutton v Poole

Facts: A person had a daughter to marry and in order to provide her a marriage portion, he intended to sell a wood of which he was possessed at the time. His son (the defendant) promised that if “the father would forbear to sell at his request he would pay the daughter £1000”. The father accordingly forbore but the defendant did not pay. The daughter and her husband sued the defendant for the amount.

Judgment: The court held that if a man should say, ‘Give me a horse, I will give your son £10’, the son may bring the action, because the gift was upon the consideration of a profit to the son, and the father is obliged by natural affection to provide for his children. There was such apparent consideration of affection from the father to his children, for whom nature obliges him to provide, that the consideration and promise to the father may well extend to the children.

The whole object of the agreement was to provide a portion to the plaintiff. It would have been highly inequitable to allow the son to keep the wood and yet to deprive his sister of her portion. He was accordingly held liable.

Position of beneficiary who is not party

Tweddle v Atkinson – as per English Law

Facts: The plaintiff was to be married to the daughter of one G and in consideration of this intended marriage G and the plaintiff’s father entered into a written agreement by which it was agreed that each would pay the plaintiff a sum of the money. G failed to do so and the plaintiff sued his executors.

Court Held: Although the sole object of the contract was to secure a benefit to the plaintiff, he was not allowed to sue as the contract was made with his father and not with him. It was held that no stranger to the consideration can take advantage of a contract, although made for his benefit.

The case laid the foundation of what subsequently came to be known as the doctrine of “Privity of contract“, which means a contract is a contract between the parties only and no third person can sue upon it even if it is avowedly made for his benefit.

Dunlop Pneumatic Tyre Co v Selfridge & Co.

Facts: Plaintiffs (Dunlop & Co) sold certain goods to one Dew & Co and secured an agreement from them not to sell the goods below the list price and that if they sold the goods to another trader they would obtain from him a similar undertaking to maintain the price list. Dew & Co sold the motor tyres to the defendants (Selfridge & Co) who agreed not to sell the tyres to any private customer at less than the list prices. The plaintiffs sued the defendants for breach of this contract.

Court Held: Assuming that the plaintiffs were undisclosed principals, no consideration moved from them to the defendants and that the contract was unenforceable by them. Only a person who is a party to a contract can sue on it. It cannot be conferred on a stranger to a contract as a right to enforce the contract in personam. Also if a person with whom a contract not under seal has been made is to be able to enforce it, consideration must have given by him.

Fundamental propositions of English law

1. Consideration must move from the promisee and the promisee only.
2. A contract cannot be enforced by a person who is not a party to it even though it is made for his benefit.

Privity of consideration

In India, the view is opposite of the fundamental propositions of English law. Acording to Section 2(d), it is not necessary that consideration should be funished by the promisee. A promise is enforceable if there is some consideration for it and it is quite immaterial whether it moves from the promisee or any other person.

Chinnaya v Ramayya

An old lady, by deed of gift, made over certain landed property to the defendant, her daughter. By the terms of the deed, which was registered, it was stipulated that an annuity of Rs.653 should be paid every year to the plaintiff, who was the sister of the old woman. The defendant on the same day executed in plaintiff’s favour an agreement promising to give effect to the stipulation. The annuity was however not paid and the plaintiff sued to recover it.

It was held that the deed of gift and the defendant’s promise to pay the annuity were executed simultaneously and, therefore, they should be regarded as one transaction and there was sufficient consideration for that transaction.

Privity of contract

The rule of “Privity of contract” meant a stranger to contract cannot sue has taken firm roots in the English Common Law. But it has been generally criticised.

Lord Denning observed that where a contract is made for the benefit of a third person who has a legitimate interest to enforce it, it can be enforced by the third person in the name of the contracting party or jointly with him or, if he refuses to join, by adding him as a defendant. The third person has a right arising by way of contract and his interest will be protected by law.

Beswick v Beswick

Facts: B was a coal merchant. The defendant was assisting him in his business. B entered into an agreement with the defendant by which the business was to be transferred to the defendant. B was to be employed in it as a consultant for his life and after his death, the defendant was to pay to his widow an annuity of £5 per week, which was to come out of the business. After B’s death, the defendant paid B’s widow only one sum of £5. The widow brought an action to recover the arrears of the annuity and also to get specific performance of the agreement.

Court Held: That she was entitled to enforce the agreement. Thus, the plaintiff was allowed to enforce the agreement in her personal capacity, although she was not a party to it and it was considered not necessary to infer a trust in favour of the plaintiff.

• Position in India: decisions following English law
• Decisions not following English law
• Supreme Court upholds Privity

Exceptions to Privity rule

• Beneficiaries under trust or charge or other arrangements: A person in whose favour a charge or other interest in some specific property has been created may enforce it though he is not a party to the contract.
• Marriage settlement, partition or other family arrangements: Where an agreement is made in connection with marriage, partition or other family arrangement and a provision is made for the benefit of a person, he may take advantage of that agreement although he is no party to it.
• Acknowledgement or estoppel: Where by the terms of a contract a party is required to make a payment to a third person and he acknowledges it to that third person, a binding obligation is incurred towards him. Acknowledgment may be express or implied.
• Covenants running with land: The rule of privity may also be modified by the principles relating to transfer of immovable property.

“…Has Done or Abstained from Doing…”

Past Consideration

The promise is to pay for a wholly past act and is no more than an expression of gratitude. The past act may explain why the promise was given and may be a motive for the promise, but furnishes no legal consideration.

McArdle, In re:

Facts: A effected certain improvements to property. The ultimate beneficiaries of the property signed a document declaring that: “In consideration of your carrying out certain alterations and improvements, we the beneficiaries shall repay to you the sum of £488 in settlement of the amount spent on such improvements.

Court Held: That as the work had all been done and nothing remained to be done by the promisee at all, the consideration was wholly past consideration and the beneficiaries’ agreement for the repayment to her out of the estate was nudum pactum, a promise with no consideration to support it. Thus, the action to enforce the promise was rejected.

• Past act at request good consideration: Exception to the past consideration in the English law is that a past act done at request will be good consideration for a subsequent promise. If the voluntary courtesy were moved by a request of the party that gives the promise, it will bind, for the promise.
• Other exceptions are: A promise to pay a time-barred debt and a negotiable instrument issued for a past consideration are both valid.

Position in India

In India, a past consideration may arise in two ways. It may consist of services rendered at request but without any promise at the time or it may consist of voluntary services.

• Past voluntary service: A voluntary service means a service rendered without any request or promise and there is a subsequent promise to pay for the same. E.g., “If A saves B from drowning and B later promises A a reward.” In India, the promise would be enforceable by virtue of Section 25(2) which provides that a promise to compensate wholly or in part, a person who has already voluntarily done something for the promisor is enforceable.
• Past service at request: b

Past and executed consideration

Executory Consideration

“Such Act, Abstinence or Promise is called Consideration”

Consideration must be of some value

Consideration as defined in the Act, means some act, abstinence or promise on the part of the promisee or any other which has been done at the desire of the promisor. E.g.,

A promises to give his new Rolls-Royce car to B, provided B will fetch it from the garage.

The act of fetching the car cannot by any stretch of imagination be called a consideration for the promise. Even though it is the only act, the promisor desired the promisee to do. Such an act no doubt satisfies the words of the definition, but it does not catch its spirit. It is for this reason that English common law insisted that “consideration must be of some value in the eyes of the law.” It must be real and not illusory, whether adequate or not as long as the consideration is not unreal, it is sufficient if it be of slight value only.

Value need not be adequate (adequacy of consideration)

It is not necessary that consideration should be adequate to the promise. The courts cannot assume the job of settling what should be the appropriate consideration for a promise. It is up to the parties.

Inadequacy as evidence of imposition

The act in Explanation 2 to Section 25 states that “inadequacy of consideration may be taken into account by the court in determining the question whether the consent of promisor was freely given. E.g.,

A agrees to sell a horse worth Rs.1000 for Rs.10. A denies that his consent to the agreement was freely given. The inadequacy of the consideration is a fact which the court should take into account in considering whether or not A’s consent was freely given.

Forbearance to sue

Forbearance to sue has always been regarded as valuable consideration. It means that the plaintiff has a certain right of action against the defendant or any other person and on a promise by the defendant, he refrains from bring the action.

Compromise good irrespective of merits

Compromise of a pending suit is a good consideration for the agreement of compromise. But the dispute should be bona fide. A compromise is a good consideration “irrespective of merits of the claim of either side” and even where there is some doubt in the minds of the parties as to their respective rights.

Performance of Existing Duties

Performance of legal obligations

Consideration must be something more than what the promisee is already bound to do. Performance of a legal duty is no consideration for a promise.

Performance of contractual obligations

• A. Pre-existing Contract with Promisor: Compliance with legal obligation imposed by a contract with the promisor can be no consideration for a promise.
• Promise to pay less than amount due: A promise to pay less than what is due under a contract cannot be regarded as a consideration.

Exceptions to the Rule in Pinnel’s case

1. Part-payment by Third Party: Part-payment by a third party may be a good consideration of the whole of the debt.
2. Composition:
3. Payment before time:
4. Promissory estoppel:

Position under Indian Contract Act different

B. Pre-existing Contract with Third Party

Consideration and motive

Consideration should be distinguished from motive or a pious desire to fulfil an obligation. “Motive is not the same thing with consideration.”

Thomas v Thomas

Facts: “A testator, on the death of his death, had verbally said in front of witnesses that he was desirous that his wife should enjoy certain premises for her life. The executors, who were also the assignees, “in consideration of such desire and of the premises,” agreed with the widow to convey the premises to her provided she would pay to the executors the sum of 1 pound yearly towards the ground rent and keep the said house in repair.

Court Held: On the question of consideration for the agreement between the executors and the widow the court pointed out that the motive for the agreement was, unquestionably, respect for the wishes of the testator. But that was no part of the legal consideration for the agreement. Motive should not be confounded with consideration. The agreement was, however, held to be binding as the undertaking to pay the ground rent was a sufficient consideration.

Exceptions to Consideration

Contracts under seal in English Law

In English law a contract under seal is enforceable without consideration. In the words of Anson: “”English law recognises only two kinds of contract, the contract made by deed that is under seal, which is called a deed or speciality, and the simple contract. A contract under seal means a contract which is in writing and which is signed, sealed and delivered.

Exceptions under S.25, Contract Act – in India

25. An agreement made without consideration is void unless –

• (1) it is in writing and registered
• (2) or is a promise to compensate for something done

1. Natural love and affection: A written and registered agreement based on natural love and affection between near relatives is enforceable without consideration. E.g., A family settlement between a man and his wife was made for providing maintenance to wife. This was held to be enforceable because it was meant for deriving satisfaction and peace of mind from family harmony.
2. Past voluntary service: A promise to compensate wholly or in part, a person who has already voluntarily done something for the promisor, is enforceable.
3. Time-barred debt: A promise to pay a time-barred debt is enforceable. The promise should be in writing. It should also be signed by the promisor or by his agent generally or specially authorised in that behalf.

Gift actually made [S. 25 (Expln. I)]

The provisions as to consideration do not affect, as between donor and donee, the validity of any gift which has actually been made. A gift of movables which has been completed by delivery and gift of immovable which has been perfected by registration cannot be questioned as to their validity only on the ground of lack of consideration. They may be questioned otherwise. Where a gift of property was made by registered deed and attested by two witnesses, it was not allowed to be questioned by the donor on the ground that she was the victim of fraud which she was not able to establish.

Reference: https://m.facebook.com/notes/plaintiff/class-notes-on-contract-law-unit-i-1st-sem-3-year-llb/1919113475079231/#:~:text=A%20contract%20may%20be%20defined,An%20agreement%20enforceable%20by%20law%E2%80%9D.

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