Class Notes on Contract Law – Unit I (1st Sem / 3 year LL.B)

Table of Contents

Contract Law – I – Revision Study Notes for LL.B First Year

UNIT – I

Introduction to the Indian Contract Act, 1872

A contract may be defined as a legally binding agreement or, in the words of Sir Frederick Pollock: “A promise or set of promises which the law will enforce.”

Section 2(h) of Indian Contract Act, 1872 defines contract as “An agreement enforceable by law”. Thus, formation of a contract there must be an agreement, and the agreement should be enforceable by law.

The agreement will create rights and obligations that may be enforced in the courts. The normal method of enforcement is an action for damages for breach of contract, though in some cases the court may order performance by the party in default.

Enforceability of Contracts

  • Void Contracts: A ‘void contract’ is one where the whole transaction is regarded as a nullity. It means that at no time has there been a contract between the parties. Any goods or money obtained under the agreement must be returned. Where items have been resold to a third party, they may be recovered by the original owner.
  • Voidable Contracts: A contract which is voidable operates in every respect as a valid contract unless and until one of the parties takes steps to avoid it. Anything obtained under the contract must be returned, in so far as this is possible. If goods have been resold before the contract was avoided, the original owner will not be able to reclaim them.
  • Unenforceable Contracts: An unenforceable contract is a valid contract but it cannot be enforced in the courts if one of the parties refused to carry out its terms. Items received under the contract cannot generally be reclaimed.

Agreement, Contract and Proposal

Agreement definition [SECTION 2(e)]

Agreement is defined as “every promise and every set of promises forming the consideration for each other”. And a promise is defined as an accepted proposal.

What agreements are contracts  [ SECTION 10 ]

All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.

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)]

When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.

Proposal terminology  [SECTION 2(c)]

The person making the proposal is called the “promisor”, and the person accepting the proposal is called the “promisee”

Communication of Proposal

Communication, acceptance and revocation of proposals [SECTION 3]

The communication of proposals, the acceptance of proposals, and the revocation of proposals and acceptances, respectively, are deemed to be made by any act or omission of the party proposing, accepting or revoking, by which he intends to communicate such proposal, acceptance or revocation, or which has the effect of communicating it.

Thus, a proposal may be communicated in any way which has the effect of laying before the offeree the willingness to do or abstain. It may for example be done by words of mouth, or by writing, or even by conduct.

Promises, express and implied [SECTION 9]

In so far as the proposal or acceptance of any promise is made in words, the promise is said to be express. In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied.

An offer which is expressed by conduct is called an implied offer and the one which is expressed by words, written or spoken, is called an express offer.

For example, a bid at an action is an implied offer to buy, stepping into an omnibus, and consuming eatables at a self-service restaurant.

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]

The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made.

An offer cannot be accepted unless and until it has been brought to the knowledge of the person to whom it is made. This principle enabled the Allahabad High Court in Lalman v Gauri Datt to deal with a matter involving a very crucial question on this point.

Defendant’s nephew absconded from home. He sent his servant in search of the boy. When the servant had left, the defendant by handbills offered to pay Rs.501 to anybody discovering the boy. The servant came to know of this offer only when he had already traced the missing child. He, however, brought an auction to recover the reward. But his action failed. BAERJI J explains: “In my opinion a suit like the present can only be founded on a contract. In order to constitute a contract, there must be an acceptance of an offer and there can be no acceptance unless there is knowledge to the offer”.

Intention to Contract

There is no provision in the Indian Contract Act requiring that an offer or its acceptance should be made with the intention of creating a legal relationship. But in English law it is a settled principle that “to create a contract there must be a common intention of the parties to enter into legal obligations.”

Case law: Balfour v Balfour

The defendant and his wife were enjoying leave in England. When the defendant was due to return to Ceylon, where he was employed, his wife was advised, by reason of her health, to remain in England. The defendant agreed to send her an amount of 30 pound a month for the probable expenses of maintenance. He did send the amount for some time, but afterwards differences arose which resulted in their separation and the allowance fell into arrears. The wife’s action to recover the arrears was dismissed.

Family & Social matters

All that the law requires is that the parties must intend legal consequences. In the case of McGregor v McGregor, illustration of a binding engagement between a husband and wife. Here a husband and wife withdrew their complaints under the agreement by which the husband promised to pay her an allowance and she to refrain from pledging his credit, the agreement was held to be a binding contract.

Business matters

Supreme Court’s view

The Supreme Court noted the general proposition that in addition to the existence of an agreement and the presence of consideration there is also the third contractual element in the form of intention of the parties to create legal relations.

Letters of intent

A letter of intent merely indicates a party’s intention to enter into a contract on the lines suggested in the letter. It may becomes a preclude to a contract. However, where a letter stated that it would be followed by a detailed purchase order which carried an arbitration clause, it was held that the letter was not a supply order and the arbitration clause contained in it did not by itself fructify into an arbitration agreement.

General Offers

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

Performance of the conditions of a proposal, or the acceptance of any consideration for a reciprocal promise which may be offered with a proposal, is an acceptance of the proposal.

Carlil v Carbolic Smoke Ball Co

A company offered by advertisement to pay 100 pound to anyone “who contracts the increasing epidemic influenza, colds or any disease caused by taking cold, after having used the ball according to printed directions.” It was added that 1000 pound is deposited with the Alliance Bank showing our sincerity in the matter”. The plaintiff used the smoke balls according to the directions but she nevertheless subsequently suffered from influenza. She was held entitled to recover the promised reward.

General offer of continuing nature

Where a general offer is of continuing nature, as it was, for example, in the Smoke Ball case, it will be open for acceptance to any number of persons until it is retracted. But where an offer requires some information as to a missing thing, it is closed as soon as the first information comes in.

Offer and Invitation to Treat

An offer should be distinguished from an invitation to receive offers. When a man advertises that he has got a stock of books to sell, or houses to let, there is no offer to be bound by any contract. “Such advertisements are offers to negotiate – offers to receive offers – offers to chaffer”.

Harvey v Facey

The plaintiff relegraphed to the defendants, writing: “Will you sell us Bumper Hall Pen? Telegraph lowest cash price”. The defendants replied also by telegram: “Lowest price for Bumber Hall Pen, 900 pound.” The plaintiff immediately sent their last telegram stating: “We agree to buy Bumper Hall Pen for 900 pound asked by you.” The defendants refused to sell the plot.

The Lordships pointed out that in their first telegram, the plaintiffs asked two questions, first, as to the willingness to sell and, second, as to the lower price. The defendants answered only the second, and gave only the lowest price. They reserved their answer as to the willingness to sell. Thus, they made no offer. The last telegram of the plaintiffs was an offer to buy, but that was never accepted by the defendants.

  • 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)

When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise.

Thus “acceptance” is the assent given to a proposal, and it has the effect of converting the proposal into promise.

This is another way of saying that an agreement is an accepted proposal. Every agreement, in its ultimate analysis, is the result of a proposal from one side and its acceptance 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.

SHAH J says “An agreement does not result from a mere state of mind: intent to accept an offer or even a mental resolve to accept an offer does not give rise to a contract. There must be… some external manifestation of that intent by speech, writing or other act.”

Brogden v Metropolitan Railway co.

B had been supplying coal to a railway company without any formal agreement. B suggested that a formal agreement should be drawn up. The agents of both the parties met and drew up a draft agreement. It had some blanks when it was sent to B for his approval. He filled up the blanks including the name of an arbitrator and then returned it to the company. The agent of the company put the draft in his drawer and it remained there without final approval having been signified. B kept up his supply of coals but on the new terms and also received payment on the new terms. A dispute having arisen B refused to be bound by the agreement.

Acceptance by Conduct

Mere mental assent to an offer does not conclude a contract either under the Indian Contract Act or in English Law.

Communication to Offeror Himself

Acceptance must be communicated to the offeror himself. A communication to any other person is as ineffectual as of no communication has been made.

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

Facts – “The plaintiff offered by means of a letter to purchase his nephew’s horse. The letter said: “If I hear no more about the horse, I consider the horse mine at pount 33.15s”. To this letter, no reply was sent. But the nephew told the defendant, his auctioneer  not to sell the horse as it was already sold to his uncle. The auctioneer by mistake put up the horse for action and sold it. The plaintiff sued the auctioneer on the ground that under the contract the horse had become his property and, therefore, defendant’s unauthorized sale amounted to conversion. But the action failed.”

Communication to Acceptor himself

Communication of acceptance should be from a person who has the authority to accept. Information received from an unauthorised person is ineffective.

Caselaw: Powell v Lee

Facts – “The plaintiff was an applicant for the headmaster-ship of a school. The managers passed a resolution appointing him, but the decision was not communicated to him. One of the members, however, in his individual capacity informed him. The managers cancelled their resolution and the plaintiff sued for breach of contract.”

When Communication Not Necessary

In certain cases, communication of acceptance is not necessary. The offeror may inform a particular mode of acceptance, then all that the acceptor as to do is to follow that particular mode. 

Caselaw: Carlil v Carbolic Smoke Ball

BOWEN LJ observed as: “But there is this clear gloss to be made upon that doctrine, that as notification of acceptance is required for the benefit of the person who makes the offer, he may dispense with notice to himself… and there can be no doubt that where the offeror expressly or impliedly intimates a particular mode of acceptance as sufficient to make the bargain binding it is only necessary for the other person to follow the indicated method of acceptance; and if the person making the offer expressly or impliedly intimates in his offer that it will be sufficient to act on the proposal without communicating acceptance of it to himself, performance of the condition is a sufficient acceptance without notification”.

Mode of Communication

Acceptance should be made in prescribed manner

Acceptance has to be made in the manner prescribed or indicated by the offeror. An acceptance given in any other manner may not be effective. particularly where the offeror clearly insists that the acceptance shall be made in the prescribed manner. For example,

A offered to buy flour from B requesting that acceptance should be sent by the wagon which brought the offer. B sent his acceptance by post, thinking that this would reach the offeror more speedily. But the letter arrived after the time of the wagon. A was held to be not bound by the acceptance.

Absolute and Unqualified

Section 7: Acceptance Must Be Absolute

In order to convert a proposal into a promise, the acceptance must — (1) be absolute and unqualified, (2) be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in which it is to be accepted.

Effect of departure from prescribed manner

A departure from that manner does not of itself invalidate the acceptance. A duty is cast on the offeror to reject such acceptance within reasonable time.
  1. a minor departure from the prescribed mode of communication should not upset the fact of acceptance provided that the communication is made in an equally expeditious way.
  2. for, in a case, where the offeree was told to reply by ‘by return of post’ it was said by the Court of Exchequer Chamber that a reply sent by some other method equally expeditious would constitute a valid acceptance.

Where no manner prescribed: reasonable and usual manner

Where no mode of acceptance is prescribed, acceptance must “be expressed in some usual and reasonable manner”. As per Indian Contract Law, post is a reasonable mode.

When contract concluded (Postal Communication)

When the parties are at a distance and are contracting through post or by messengers, the question arises when is the contract concluded.

Household Fire & Accident Insurance Co v Grant

The defendant in this case had applied for allotment of 100 shares in the plaintiff company. A letter of allotment addressed to the defendant at his residence was posted in due time, but it never reached the defendant. Nevertheless he was held bound by the acceptance.

Section 4 – Communication when complete

The only difference that the section makes is in the position of the acceptor. In England when a letter of acceptance is posted, both the offeror and the acceptor become irrevocably bound. But in India, the acceptor does not become bound by merely posting his acceptance. He becomes bound only when his acceptance “comes to the knowledge of the proposer”. The gap of time between the posting and the delivery of the acceptance can be utilised by the acceptor for revoking his acceptance by a speedier communication which will overtake the acceptance.

Counter proposals

 An acceptance containing additions, limitations, or other modifications shall be rejection of the offer and shall constitute a counter-offer.

However, a reply to an offer which purports to be an acceptance but which contains additional or different terms which do not materially alter the terms of the offer shall constitute an acceptance unless the offeror promptly objects to the discrepancy; if he does not object, the terms of the contract shall be the terms of the offer with the modifications contained in the acceptance.
If the proposal prescribes a manner in which it is to be accepted, and the acceptance is not made in such manner, the proposer may, within a reasonable time after the acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but if he fails to do so, he accepts the acceptance.

 Partial acceptance

Acceptance should be of the whole of the offer. The offeree cannot accept a part of its terms which are favourable to him and reject the rest. Such an acceptance is another kind of counter proposal and does not bind the offeror.

Inquiry into terms of proposal

A mere inquiry into the terms of a proposal is not the same thing as a counter-proposal. On acceptance of the proposal, the contract will be created on the basis of the terms and conditions of the original proposal including arbitration clause.

Acceptance with condition subsequent

If an acceptance carries a condition subsequent, it may not have the effect of a counter-proposal. Thus, where an acceptance said: “terms accepted, remit cash down Rs.25,000 by February 5, otherwise acceptance subject to withdrawal, this was not a counter-proposal, but an acceptance with a warning that if the money was not sent the contract would be deemed to have been broken.

Acceptance of counter proposal

Even “where the acceptance of a proposal is not absolute and unqualified the proposer may become bound, if, by his subsequent conduct, he indicates that he has accepted the qualifications set up”.

Hargopal v People’s Bank of Northern India

An application for shares was made conditional on an undertaking by the bank that the applicant would be appointed a permanent director of the local branch. The shares were allotted to him without fulfilling the condition. The applicant accepted the position as a shareholder by accepting dividends, filing a suit to recover it and by pledging his shares.

It was, therefore, held “that he could not content that the allotment was void on the ground of non-fulfillment of the condition as he had by his conduct waived the conditions.

Provisional acceptance

An acceptance is sometimes made subject to final approval. A provisional acceptance of this kind does not ordinarily bind either party until the final approval is given.

Acceptance and withdrawal of tenders

A tender is in the same category as a quotation of prices. It is not an offer. When a tender is approved, it is converted into a standing offer. A contract arises only when an order is placed on the basis of the tender. These principles were laid down 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 may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards.

An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards.

NOTICE OF REVOCATION

Withdrawal before expiry of fixed period

Where an offeror gives the offeree an option to accept within a fixed period, he may withdraw it even before the expiry of that period.

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’ time to give his answer. On the 4th day however the defendant revoked his proposal. The plaintiff accepted it on the 5th day. Holding the acceptance was useless.

Agreement to keep Offer open for Specified Period

Where the agreement to keep the offer open for a certain period of time is for some consideration, the offeror cannot cancel it before the expiry of that period.

CASE LAW: Mountford v Scott

Communication of Revocation should be from Offerer Himself

It is necessary that the communication of revocation should be from the offeror or from his duly authorised agent. But it has been held in the case of Dickinson v. Dodds, that it is not enough if the offeree knows reliably that the offer has been withdrawn.

Revocation of General Offers

Where an offer of a general nature is published through newspapers, it can be withdrawn by the same media and the revocation will be effective even if a particular person, subsequent to the withdrawl, happened to perform its terms in ignorance of the withdrawal.

CASE LAW: Skarsm Ramanathan v NTC Ltd

Superseding proposals by Fresh Proposal

Where before acceptance a proposal is renewed in some parts of it and not in its entirety as proposed earlier and the letter purports it to supersede the earlier communication, such proposal is no longer available 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

In the case of an auction, “the assent is signified on the part of the seller by knocking down the hammer”. A bid may be retracted before the hammer is down.

CASE LAW: Union of India v Bhimsen Walaiti Ram

A liquor ship was knocked down to a bidder at a public auction. This was subject to the confirmation by the Chief Commissioner who had the power before granting the licence to inquire into the financial condition of the bidder. The bidder had to pay one-sixth part of the price immediately and in case of any default on his part the Government had the power to re-auction the shop and the shortfall, if any, was recoverable from the bidder. He failed to pay one-sixth part and, therefore, the Chief Commissioner did not confirm the bid and ordered resale. Resale realized much less than the original bid and the question of bidder’s liability to pay the shortfall arose.

The court said: It is not disputed that the Chief Commissioner had disapproved of the bid offered by the respondent. If the Chief Commissioner had granted sanction in favor of the respondent, then there would have been a completed transaction and he would have been liable for any shortfall on the resale.

LAPSE OF TIME

An offer lapses on the expiry of the time, if any, fixed for acceptance. Where an offer says that it shall remain open for acceptance up to a certain date, it has to be accepted within that date. For example, where an offer was to last until the end of March and the offeree sent a telegram accepting the offer on 28th March which was received by the offeror on 30th March, it was held that the option was duly exercised.

FAILURE TO ACCEPT CONDITION PRECEDENT

Where the offer is subject to a condition precedent, it lapses if it is accepted without fulfilling the condition. Where a salt lake was offered by way of lease on deposit of a sum of money within a specified period, and the intended lessee did not deposit the amount for 3 long years, it was held that this entailed cancellation of the allotment.

DEATH OR INSANITY OF OFFEROR

An offer lapses on the death or insanity of the offeror, provided that the fact comes to the knowledge of the offeree before he makes his acceptance.

In the case of Dickinson v Dodds, it was held that an offer cannot be accepted after the death of the offeror.

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 an acceptance once made is irrevocable. In the words of Anson: “Acceptance is to offer what a lighted match is to a train of gunpowder. Both do something which cannot be undone. This rule is obviously confined in its operation only to postal acceptance. It is suggested in Anson that in other cases “an acceptance can be revoked at any time before acceptance is complete, provided, of course, that the revocation itself is communicated before the acceptance arrives.
In India, on the other hand, acceptance is generally revocable. An acceptor may cancel his acceptance by a speedier mode of communication which will reach 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

In the words of Pollock, “Consideration is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.” Another simple definition is by Justice Patterson: “Consideration means something which is of some value in the eyes of the law….. It may be some benefit to the plaintiff or some detriment to the defendant.”

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

When, at the desire of the promisor, the promisee or any other person has done or abstained from doing or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.

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.

Unlawful Consideration and its effect

Contractual Ability

Electronic Documents as Web Pages

Digital Certificate as Entry passes

Time and Place of Contract

Secured Custody of Electronic Records