Summary: Other Essential Elements of a Contract | Business Laws for CA Foundation PDF Download

Capacity to Contract

Meaning: Capacity means the legal ability of individuals to enter into a contract, which is essential for the contract to be valid.

Who is Competent to Contract (Section 11): Criteria: A person is considered competent if they:

• Have reached the age of majority (18 years according to the Indian Majority Act, 1875).
• Are of sound mind, able to understand the contract and make sensible decisions.
• Are not prohibited by any law (e.g., due to political, corporate, or legal reasons).

Law Relating to Minor’s Agreement:

• Void Ab Initio: A minor’s contract is void from the start (Mohori Bibi v. Dharmo Das Ghose, 1903).
• No Ratification: A minor cannot ratify a contract upon reaching majority, as the original agreement is void.
• Beneficiary Role: A minor can benefit from a contract (e.g., enforce a promissory note in their favor) but cannot be a partner, though they can be admitted to partnership benefits (Section 30, Indian Partnership Act, 1932).
• Pleading Minority: A minor can always plead minority, even if they misrepresented their age; estoppel does not apply.
• Liability for Necessaries (Section 68): A minor’s estate is liable for necessaries (essential goods/services suited to their life) if they lack sufficient supply, but the minor is not personally liable.
• Guardian’s Contracts: A guardian can enter valid contracts for a minor’s benefit, but not for immovable property purchases unless court-sanctioned.
• No Specific Performance: A minor’s agreement cannot be enforced via specific performance.
• No Insolvency: A minor cannot be declared insolvent, as they cannot contract debts.
• Partnership: A minor cannot be a partner but can receive partnership benefits with consent.
• Agency: A minor can act as an agent without personal liability.
• No Parental Liability: A minor cannot bind parents/guardians unless acting as their agent.
• Joint Contracts: In contracts with a minor and adult, only the adult is liable.
• Surety for Minor: An adult guarantor for a minor is liable to third parties.
• Shareholder: A minor cannot be a shareholder, but fully paid shares can be transferred to them via a guardian.
• Liability for Torts: A minor is liable for torts unless the tort arises from a breach of contract.

Person of Sound Mind (Section 12):

• A person is of sound mind if, at the time of contracting, they understand the contract and can form rational judgments.
• A person usually of unsound mind can contract during lucid intervals; a usually sound person cannot contract during temporary unsoundness (e.g., due to drunkenness or delirium).

Disqualified Persons:

• Persons like foreign sovereigns, alien enemies, corporations, convicts, and insolvents are wholly or partially disqualified from contracting due to their status.

Free Consent

Definition of Consent (Section 13):

• Consent occurs when parties agree on the same thing in the same sense (consensus ad idem).
• Lack of consent due to fundamental errors (e.g., regarding the transaction, person, or subject matter) prevents contract formation.

Definition of Free Consent (Section 14):

• Consent is free when not caused by:
  1. Coercion (Section 15).
  2. Undue influence (Section 16).
  3. Fraud (Section 17).
  4. Misrepresentation (Section 18).
  5. Mistake (Sections 20, 21, 22).
• Consent vitiated by coercion, undue influence, fraud, or misrepresentation makes the contract voidable; a mistake may render it void.

Elements Vitiating Free Consent

1. Coercion (Section 15):

• Involves committing/threatening acts forbidden by the Indian Penal Code or unlawfully detaining/threatening to detain property to force agreement.
• Can be by or against any person, not just contract parties.
• Effects (Section 19): Contract is voidable; benefits received must be returned (Section 72).
• Note: Threat to commit suicide is coercion, as it is forbidden by the Indian Penal Code.

2. Undue Influence (Section 16):

• Occurs when one party dominates another’s will and uses that position to gain an unfair advantage.
• Key Elements:
  1. Relationship allowing domination (e.g., real/apparent authority, fiduciary relationship, mental distress, unconscionable bargains).
  2. Intent to take unfair advantage.
  3. Burden of proof on the party claiming undue influence to show domination, use of influence, and unfairness.
• Effects (Section 19A): Contract is voidable; courts may set it aside or enforce it with just terms if benefits were received.

3. Fraud (Section 17):

• Involves acts like false statements, active concealment, unfulfilled promises, deceptive acts, or legally declared fraudulent acts, done intentionally to deceive.
• Elements:
  1. False representation of fact (not opinion)
  2. Made before contract conclusion to induce action.
  3. Known to be false or made recklessly.
  4. Other party relied on it, was deceived, and suffered loss.
• Silence as Fraud: Silence is fraud if there is a duty to speak or if silence equals speech.
• Effects: Contract is voidable; remedies include rescission, damages, or insisting on performance as if representations were true.
• Exceptions: Contract is not voidable if the truth could be discovered with ordinary diligence or if fraud did not induce consent.

4. Misrepresentation (Section 18):

• Involves untrue statements of fact believed to be true, breach of duty without deceptive intent, or innocent mistakes about the subject matter.
• Effects: Contract is voidable; remedies include rescission or restitution, but not damages.
• Exception: Not voidable if the truth could be discovered with ordinary diligence.

5. Mistake:

• Bilateral Mistake (Section 20): Both parties mistaken about an essential fact (e.g., quality, existence, identity, title, price, or quantity of subject matter) renders the contract void.
• Unilateral Mistake (Section 22): A mistake by one party does not make the contract voidable.

Legality of Object and Consideration

Under Section 23, an agreement is void if its object or consideration is unlawful. The object is the contract’s purpose, and consideration is what is exchanged. Both must be lawful for the contract to be valid.

Unlawful Object/Consideration (Section 23)

1. Forbidden by Law: Prohibited by statutes or regulations.

• Example: A father had arranged for marriage of his 17-year-old boy and took dowry from the girl’s parents. Such marriage contract cannot take place as in India the minimum age for boy marriage is 21 years and dowry is not permissible in Indian law.

2. Defeats Provisions of Law: Indirectly undermines legal provisions.

• Example: A’s estate is sold for arrears of revenue under the provisions of an Act of the Legislature, by which the defaulter is prohibited from purchasing the estate. B, upon an understanding with A, becomes the purchaser, and agrees to convey the estate to A upon receiving from him the price which B has paid. The agreement is void.

3. Fraudulent: Aims to deceive or defraud others.

• Example: A, B, and C agree on the division among them of gains acquired, or to be acquired, by them by fraud. The agreement is void.

4. Involves Injury: Causes harm to another’s person or property.

• Example: An agreement to print a book in violation of another’s copyright is void.

5. Immoral: Against good morals.

• Example: Where P had advanced money to D, a married woman, to enable her to obtain a divorce from her husband and D had agreed to marry him as soon as she could obtain the divorce, it was held that P was not entitled to recover the amount.

6. Opposed to Public Policy: Against the public’s interest. 

Agreements held to be opposed to public policy include:

a. Trading with Enemy: Trading with a country at war with India without a license is void, as it harms national interests.

b. Stifling Prosecution: Agreements to stop legal proceedings for non-compoundable offenses are void, as they pervert justice.

c. Maintenance and Champerty: Maintenance is supporting a lawsuit without interest; champerty is funding litigation for a share of proceeds. Both are void unless reasonable and bona fide.

d. Trafficking in Public Offices/Titles: Agreements to pay for public office appointments or titles are void, as they undermine merit.

e. Agreements Tending to Create Monopolies: Agreements to establish monopolies are void, as they harm public welfare.

f. Marriage Brokerage Agreements: Paying to arrange a marriage is void, as it commercializes personal relationships.

g. Interference with Justice: Agreements to influence judicial officers or proceedings are void.

h. Interest Against Obligation: Agreements where personal gain conflicts with duty are void.

Void Agreements

Agreement in Restraint of Marriage (Section 26)

• Definition: An agreement that restrains any person, other than a minor, from marrying is void.
• Reason: Such agreements interfere with personal freedom and public policy, which supports the right to marry.
• Scope: Applies to all persons except minors, as minors are already restricted from marrying under Indian law.
• Effect: The agreement is void and unenforceable.
• Example: No specific example provided in the PDF, but a general illustration is an agreement where A promises B payment to not marry anyone; such a contract is void.

Agreement in Restraint of Trade (Section 27)

• Definition: An agreement that restrains a person from exercising a lawful profession, trade, or business is void to the extent of the restraint.
• Reason: Such agreements violate public policy by restricting economic freedom and competition.
• Exceptions:
  1. Sale of Goodwill: A seller of a business’s goodwill may agree not to carry on a similar business within reasonable local limits, provided the buyer continues a similar business.
  2. Partnership Agreements: Partners may agree to restrict trade during or after the partnership, as per the Indian Partnership Act, 1932, if reasonable.
• Effect: The agreement is void to the extent it imposes the restraint, unless it falls under the exceptions.
• Example: B, a physician and surgeon, employs A as an assistant for three years, and A agrees not to practice as a surgeon or physician during this period. The agreement is valid, as it is a reasonable restriction during employment.

Agreement in Restraint of Legal Proceedings (Section 28)

• Definition: An agreement that restricts a party from enforcing their rights under a contract through legal proceedings in ordinary courts, or limits the time for such enforcement, is void to the extent of the restriction.
• Reason: Such agreements undermine access to justice, a fundamental right.
• Exceptions: Agreements referring disputes to arbitration are valid, as arbitration is a recognized alternative to court proceedings.
• Effect: The agreement is void to the extent it restricts legal proceedings, except for arbitration clauses.
• Example: No specific example provided in the PDF, but a general illustration is an agreement preventing a party from filing a lawsuit in court; such a clause is void unless it mandates arbitration.

Agreement with Uncertain Meaning (Section 29)

• Definition: An agreement whose meaning is uncertain or incapable of being made certain is void.
• Reason: A contract requires clear terms to ensure mutual understanding (consensus ad idem); uncertainty prevents enforceability.
• Exception: If the meaning can be clarified (e.g., by context or trade practice), the agreement may be valid.
• Effect: The agreement is void unless its terms can be made certain.
• Example: A agrees to sell B “a hundred tons of oil”. There is nothing to show what kind of oil was intended. The agreement is void for uncertainty.

Wagering Agreement (Section 30)

• Definition: An agreement where one party promises to pay money or money’s worth based on the outcome of an uncertain event, with the other promising to pay if the event does not occur, is void.
• Reason: Wagering agreements promote gambling, which is against public policy.

Essential Features of Wagering Agreements

1. Promise to Pay Money or Money’s Worth: The agreement involves a monetary stake or equivalent.
2. Uncertain Event: The outcome depends on an event that is uncertain at the time of the agreement.
3. Mutual Chance of Gain or Loss: Both parties have an equal chance of winning or losing the stake.
4. No Control Over the Event: Neither party can influence the event’s outcome.
5. No Other Interest in the Event: The only interest is the stake; there is no genuine economic or personal interest.

Examples of Wagers: 

1. Lotteries, even if government-sanctioned, are based on chance
2. A crossword puzzle in a magazine where A’s solution matches a pre-set answer is a wager (State of Bombay vs. R.M.D. Chamarbangwala, 1957).
3. Crossword puzzles are based on chance.
4. Speculative transactions without intent to deliver goods.
5. Horse race bets under ₹500.
6. A and B enter into an agreement where A promises to pay ₹2,00,000 if ‘Chetak’ wins a horse race. This is not a wagering transaction (as bets over ₹500 are exempt).

Transaction resembling wagering but not Void

• Chit funds.
• Commercial transactions with delivery intent.
• Games of skill (prize ≤ ₹1,000).
• Insurance contracts.

Distinction Between Contract of Insurance and Wagering Agreement