The Indian Contract Act - 1 | Civil Law for Judiciary Exams PDF Download

M/s Rajshree Sugars and Chemicals v. M/s Axis Bank Limited (2019)

• This case is a significant ruling related to the legality of derivative contracts.
• The judgment was delivered by Justice V Ramasubramaniam.

Facts

• The plaintiff, a listed company involved in manufacturing and exporting sugar, had foreign loans and engaged in foreign currency transactions.
• The defendant, originally UTI Bank, later became Axis Bank.
• On May 14, 2004, both parties signed an ISDA Master Agreement, a standard international agreement for financial transactions. This agreement specified the jurisdiction of the Mumbai High Court.
• The Chief Financial Officer of the plaintiff was authorized to manage derivative transactions.
• The dispute arose over the 10th deal (Contract No. OPT 727) made on June 22, 2007, which involved a complex currency option deal with US Dollars and Swiss Francs.
• While 9 transactions were executed without issues, the plaintiff claimed to terminate the contract in December 2007, which the bank disputed, asserting the contract remained valid.

Legal Action

• The plaintiff filed a lawsuit seeking to declare the contract void and illegal, claiming it violated RBI guidelines and was beyond their authority.
• They requested injunctions to stop the bank from recovering any money and to force the bank to submit all related documents to the court.

Court Proceedings

• The court initially ordered a status quo, later modified to prevent the bank from enforcing the contract.
• The bank filed counter-applications to restrict the plaintiff from selling assets and engaging with other banks.

Issue Involved

• Is the derivative contract void or valid?

Observations

• A derivative transaction is treated as a 'debt' under banking laws, and banks can conduct these transactions as part of their normal operations.
• Even if it's a debt, it doesn't stop someone from filing a civil lawsuit under certain conditions.
• If a borrower’s case is closely linked to a bank's claim, it should go to the Debt Recovery Tribunal (DRT).
• The High Court cannot block proceedings in courts that are not subordinate to it, like the DRT.
• A wagering agreement must have four elements: opposing views on a future uncertain event, one party winning and the other losing, no real interest in the event, and no intention for it to be legally binding.
• The court found that the derivative transaction was not considered betting since it served a real business purpose and helped manage financial risks.
• The transaction was deemed legal as it is allowed by various laws, and what's permitted by law cannot be against public policy.
• This case establishes that derivative transactions are legal financial instruments when used for legitimate business purposes, not just for speculation.

Conclusion

• The judgment addresses complex issues regarding derivative contracts.
• This case is one of the first to challenge the legality of derivative contracts.

Rajendra Kumar Verma v. State of Madhya Pradesh (1972)

• The High Court in this landmark judgment held that an offer can be withdrawn before acceptance.
• The judgment was delivered by Chief Justice Bishambhar Dayal and Justice A.P. Sen.

Facts

• The Respondents issued a tender notice for the sale of Tendu Patta leaves.
• The petitioner submitted a tender and deposited a security amount in response to the notice.
• Before the tenders were opened, the petitioner made an application to withdraw the tender and requested it not be considered.
• Despite this, the tender was opened (as it was the only one) and sent to the Government for acceptance.
• The Government accepted the tender, but the petitioner refused to execute the purchaser’s agreement.
• Consequently, proceedings were initiated to recover an amount as the Tendu leaves were sold to another party, resulting in losses attributed to the petitioner.

Contention of the Petitioner

The petitioner argued:

• The tender had been withdrawn before it was opened and accepted, hence there was no valid offer.
• No amount was recoverable as no valid contract under Article 299 of the Constitution of India (COI) was executed.
• A writ petition under Article 226 of the COI was filed to challenge the recovery.

Issue Involved

• Whether the Government’s demand for recovery was valid or liable to be quashed?

Observations

The Court made the following key observations:

• An offer can be withdrawn before its acceptance is communicated to the offeror.
• It was undisputed that the petitioner had withdrawn the tender before it was opened, and thus, there was no valid offer at the time of opening.
• For contracts involving the Government, Article 299(1) of the COI mandates a validly executed written agreement.
• No implied contract could exist between the Government and the petitioner.

Conclusion

• The writ petition was allowed, and the recovery demand against the petitioner was quashed.
• The judgment reinforced the principle under the Indian Contract Act, 1872 that an offeror can withdraw their offer before its acceptance.

Dunlop Pneumatic Tyre Company Limited v. Selfridge and Company (1915)

• This case is important for understanding the doctrine of privity of contract and doctrine of privity of consideration.

Facts

• The plaintiffs, Dunlop, are manufacturers of motor tyres.
• Dew and Co were dealers in motor accessories who agreed to buy tyres from Dunlop and not sell them below Dunlop's list prices.
• Selfridge and Company ordered tyres from Dew and Co in January 1912.
• Selfridge had an agreement with Dew that included discounts from Dunlop's list prices, but they also promised not to sell below those prices.
• Dunlop sued Selfridge for breach of contract.

Issue

• Can Dunlop sue Selfridge even though there is no direct contract between them?

Observations

The Court focused on two key principles:

• Privity of Contract: Only parties to a contract can sue for a breach.
• Privity of Consideration: A promise must be supported by consideration from the promisee, meaning only those who have given consideration can have rights under the contract.
• The Court noted that Dew was not acting as an agent for Dunlop, so the exception for agents did not apply.
• Dunlop had not given any consideration to Selfridge, meaning there was no binding contract between them.
• Dunlop was not named as an agent in the contract, so they could not claim any rights to enforce the agreement against Selfridge.

Conclusion

• The Court concluded that only parties to a contract can sue for breach. This rule holds unless the party involved is acting as an agent for one of the contracting parties.

Osman Jamal And Sons Ltd. v. Gopal Purshottam AIR 1929 CAL 208

This case outlines the principle of indemnity, emphasizing that indemnity is not always granted simply upon repayment. Under Section 124 and Section 125 of the Indian Contract Act, 1872, indemnity demands that the indemnified party should never be required to pay.

Facts

• Plaintiff Company and Defendant entered into a contract where the plaintiff acted as a commission agent for the defendant in the sale and purchase of goods.
• The defendant agreed to indemnify the plaintiff for any losses arising from these transactions.
• The plaintiff purchased goods from Maliram Ramjidas on behalf of the defendant.
• Due to the defendant's failure to accept delivery of the goods, the vendor sold them to another buyer at a lower price, leading to the plaintiff company being asked to pay the difference.
• The plaintiff company went into liquidation, and it was required to pay the amount to Maliram Ramjidas.
• The plaintiff is now claiming indemnity from the defendant for both the losses incurred and the commission amount.
• The defendant argued that the plaintiff acted as a principal, not as an agent, when purchasing the goods through a broker. The defendant also stated that since no payment was made by the defendant, indemnity should not apply.

Issues Involved

• Will the defendant indemnify the plaintiff company for the losses incurred?
• Was the plaintiff acting as an agent of the defendant company?

Observations

• The Calcutta High Court examined the terms of the contract to determine the defendant's liability to reimburse the plaintiff for the amount paid in the sale and purchase of goods on behalf of the defendant.
• The Court noted that indemnity is concerned with how the indemnifying party applies the money paid. The defendant may be held liable as an undisclosed principal.
• The Court referred to the case Richardson Re, Ex parte The Governors of St. Thomas's Hospital (1911), which clarified that a contract of indemnity does not require the indemnifier to pay merely upon repayment by the indemnity holder. Instead, the indemnifier is obligated to pay when the indemnity holder incurs a loss.

Conclusion

• The Calcutta High Court ruled in favor of the plaintiff company, ordering the defendant to pay the indemnity amount along with the commission charges.

Food Corporation of India v. Abhijit Paul 2022 SCC OnLine SC 1605

Shripati Lakhu Mane v. The Member Secretary, Maharashtra Water Supply and Sewerage Board

• This case revolves around the abandonment of a contract by one party.
• The Court ruled that the refusal to perform an obligation constitutes a breach of contract, not abandonment.
• Furthermore, a contractor’s refusal to continue work unless the other party fulfills reciprocal promises does not amount to abandonment of the contract.

Facts

• The appellant, a registered contractor, received a work order on 03rd July 1986 for a water supply project in Ratnagiri District, with a 30-month completion deadline.
• On 28th July 1986, the respondents informed the appellant to put the work on hold. After some discussions, the respondents asked the appellant to commence work on 17th December 1986.
• The appellant raised concerns about the non-availability of specified pipes and requested revised rates when the respondents suggested using different pipe dimensions.
• Before resolving this issue, the respondents instructed the appellant to stop pipeline work on 02nd March 1987 and shift to another location.
• There were further modifications to the scheme, and the appellant claimed the work could not be completed due to lack of funds and delayed sanctioning of revised rates.
• The respondents imposed a fine of Rs. 10 per day and demanded that the appellant resume work.
• The Trial Court partially upheld the appellant’s claim for recovery, awarding Rs. 24,97,077/- with interest out of the claimed amount of Rs. 51,35,289/-.
• The High Court reduced the awarded amount to Rs. 7,19,412/- based on the finding of abandonment by the appellant.
• The appellant appealed to the Supreme Court against the High Court's decision of abandonment.

Issues Involved

• Whether the appellant had abandoned the contract.

Observation

• The Supreme Court referred to Section 67 of the Indian Contract Act, 1872 (ICA), which states that if the promisee refuses or neglects to provide the necessary facilities for contract performance, the promisor is excused from fulfilling the contract.
• The Court emphasized that any material alteration to the original contract entitles the party to refuse performance, but this does not equate to abandonment.
• Abandonment refers to the relinquishment of rights under a contract, not the obligations or liabilities. Therefore, refusal to perform an obligation should be seen as a breach of contract rather than abandonment.
• The refusal of a contractor to continue work unless the other party fulfills their promises cannot be classified as abandonment.
• A refusal by one party allows the other party to either sue for breach or rescind the contract and claim quantum meruit for work already completed.
• The Court concluded that the High Court's decision of abandonment was erroneous, overturning the findings of the Trial Court.

Conclusion

• A party may abandon its rights under a contract, but it cannot abandon its obligations.
• Refusing to fulfill the contract is a breach and not abandonment.
• A contractor’s refusal to continue work unless the other party performs reciprocal promises cannot be deemed as abandonment of the contract.

Durga Prasad v. Baldeo and Ors, (1881) ILR 3 ALL 221

Ajudhia Prasad v. Chandan Lal, AIR 1937 ALL. 610

• This case involves a contract made by minors, which under the Indian Contract Act, 1872 (ICA), is considered void ab initio, meaning it is not enforceable by law.
• According to Section 11 of the ICA, a minor is not competent to enter into a contract.

Facts of the Case

• The case arose from a mortgage deed dated October 15, 1925, executed by the defendants, who were minors at that time, in favor of the plaintiffs.
• The defendants claimed they were minors when they signed the mortgage, and a guardian had been appointed for them.
• The trial court determined that the defendants were over 18 but under 21 and ruled that the plaintiffs could not recover the amount under Section 68 of the ICA.
• The lower appellate court agreed that the defendants were minors and ruled that the money advanced for marriage expenses was not considered necessaries, hence Section 68 did not apply. However, it ruled in favor of the plaintiffs based on a finding of fraudulent misrepresentation by the defendants.

Issues Involved

• Can the plaintiffs enforce the mortgage deed, or are the defendants not liable due to their minority?
• Does a contract exist in the eyes of the law when a minor is involved?

Key Observations

• The landmark case of Mohori Bibee v. Dharmodas Ghose (1903) established that contracts made by minors are void, not just voidable, meaning they cannot be enforced at all.
• Indian courts have consistently ruled that sections dealing with ratification of contracts (Sections 64 and 65 of the ICA) do not apply to minors.
• The principle of estoppel (preventing someone from arguing something contrary to a previous claim) cannot be used against minors as they are protected by law.
• It is important to distinguish between a minor as a plaintiff seeking equity and a minor as a defendant where the courts typically do not impose financial liability.

Conclusion

• The court concluded that Section 43 of the Transfer of Property Act, 1882 (TOPA), which deals with transfers by unauthorized persons, does not apply to minors making transfers, as they retain an interest in their property.

Union of India v. Maddala Thathiah, AIR 1966 SC 1724

• This case involves the concept of a standing offer, which is an offer that remains open for acceptance over time, like tenders.
• The advertisement from a shopkeeper to sell products was deemed an invitation to offer, not a formal offer itself.
• The person who sees the advertisement can make an offer by submitting a bid, while the shopkeeper can accept that bid, becoming the offeree.

Facts of the Case

• The Railways invited tenders through an advertisement for supplying imperial jaggery.
• The respondent submitted a tender to supply jaggery in installments, based on the advertisement.
• There was a clause allowing the Railways to cancel the contract at any time.
• The Railways later informed the respondent that they had canceled the jaggery order, which led to a dispute.
• The respondent argued that only they had the right to cancel the contract.
• The trial court dismissed the case, but the High Court ruled that the Railways could not cancel the contract and found the cancellation clause void.
• The Railways then appealed to the Supreme Court.

Key Issue

• Did the Railways have the authority to cancel the contract without justification?

Observations

• The court noted that the respondent could cancel agreements for jaggery where no formal order had been placed.
• For orders with specific details (amount and delivery dates), a binding contract existed, obligating the respondent to fulfill the order.
• The respondent could cancel only the outstanding contracts but not the entire agreement as a right.

Conclusion

• The Supreme Court dismissing the appeal and restoring the High Court's decision.
• The contract was viewed as a standing offer due to the tender process, which required a security deposit and a formal order.

Satyabrata Ghose v. Mugneeram Bangur & Co. AIR 1954 SC 44

• This case focuses on the concept of frustration of contract under Section 56 of the Indian Contract Act, 1872.
• A contract is considered frustrated when one party cannot fulfill their obligations due to circumstances that are beyond their control, making it impossible to complete the contract.

Facts of the Case

• The defendant company owned a large piece of land in Kolkata and planned to develop it into residential plots.
• They sold smaller plots and collected earnest money from buyers, including the plaintiff, who paid Rs 101.
• During wartime, the government requisitioned the land for military use, which prevented the company from fulfilling their obligations.
• The company offered buyers two choices: to get back their earnest money or to wait until the war was over to complete the purchase.
• The plaintiff rejected these options and sued the company.
• The initial court ruled in favor of the plaintiff, and this decision was upheld in the district court.
• However, the High Court later ruled in favor of the defendant company.

Key Issue

• Did the circumstances render the contract frustrated under Section 56 of the Indian Contract Act?

Supreme Court Observations

• The Supreme Court ultimately ruled in favor of the plaintiff.
• The court noted that the government acquired the land temporarily, not permanently, and that the company had not started construction within a reasonable timeframe.
• There was no specific time limit set in the agreement for completing the project, which meant delays were acceptable.
• Both parties understood the impact of wartime conditions on the contract's completion timeline.
• The court concluded that the contract was not rendered impossible to perform under Section 56.

Conclusion

• The court ruled in favor of the plaintiff.
• If time is crucial to a contract, delays can lead to frustration; however, in this case, no specific time frame was mentioned.
• Thus, the contract was not void and did not fall under Section 56 of the Indian Contract Act.