Other Essential Elements of a Contract Chapter Notes - CA Foundation PDF Download

Understanding the Indian Contract Act, 1872

A contract is formed when one party makes a  proposal  and the other party  accepts  it. We've already covered the concepts of offer, acceptance, and consideration in detail. Now, let's delve into the  essential elements  that make a contract valid and enforceable by law.

According to Section 10 of the Indian Contract Act, 1872, for an agreement to be a valid contract, it must meet the following conditions:

•  Competence:  The parties involved must be competent to contract.
•  Free Consent:  The agreement must be made with the free consent of all parties.
•  Lawful Consideration and Object:  The contract must be for a lawful consideration and with a lawful object.
•  Not Void:  The agreement should not be expressly declared void by law.

Capacity to Contract

 Meaning:  Capacity refers to the ability or competence of the parties involved to enter into a contract. It is a crucial element in determining the validity of a contract.

 Who is Competent to Contract (Section 11) 

•  Age of Majority:  In India, the age at which a person is considered capable of entering into a contract is 18 years, as per the Indian Majority Act, 1875. This means that individuals who are 18 years old or older can legally enter into binding contracts.
•  Sound Mind:  The individual must be of sound mind, which means they are mentally capable of understanding the nature and consequences of the contract. This includes being able to make rational decisions and comprehend the terms of the agreement.
•  Legal Capacity:  The person must not be disqualified from contracting by any law applicable to them. Certain individuals may be prohibited from entering into contracts due to specific legal restrictions. For example, individuals declared legally insane or those undergoing legal incapacity may fall under this category.

Legal Aspects of Agreements Involving Minors

 1. Contracts with Minors are Void from the Beginning  : A minor lacks the legal capacity to enter into a contract, making any agreement involving a minor void from the outset.

For instance, in the case of Mohori Bibi vs. Dharmo Das Ghose (1903), a minor named Mr. D mortgaged his house to a money lender. When Mr. D sought to cancel the contract, the court ruled it void because, as a minor, he was not legally bound to honor the agreement.

 2. No Ratification After Reaching Majority  : A minor cannot ratify an agreement upon reaching legal age because the original contract is void from the beginning. A void agreement cannot be validated.

 Example 1:  If a minor named X creates a promissory note in favor of Y, he cannot validate it upon reaching adulthood. If he subsequently creates a new promissory note, it remains void unless supported by consideration.

 3. Minors as Beneficiaries  : While a minor cannot enter into a contract, they can be bound by the other party in certain situations. For example, a promissory note executed in favor of a minor is valid, and the minor can sue for its enforcement, as they are entitled to accept benefits even if they lack the capacity to contract.

 Example 2:  If a mortgage is executed in favor of a minor, the minor has the right to seek a decree for its enforcement.

 4. Defense of Minority  : A minor can always invoke the defense of minority, even if they entered into a contract or took a loan by misrepresenting their age. The principle of estoppel does not apply to minors, allowing them to plead their minority as a defense.

 Example 3:  If a minor named A falsely claims to be of legal age and contracts with Mr. X for a loan, A can deny liability for repayment by asserting his minority. However, if A has not spent the borrowed amount, he may be required to repay it, but he is not liable for any amounts already spent, even if obtained through fraudulent misrepresentation. In summary, the legal position of minors in contracts is that they lack the capacity to enter into binding agreements, but they can accept benefits in certain situations and invoke the defense of minority to protect their interests.

 Liability for Necessaries 

 Necessaries  refer to goods that are essential for a minor's support and cannot include luxuries or expensive items. Examples include food, clothing, and education expenses.

•  Section 68 of the Indian Contract Act  governs the liability for necessaries supplied to a minor or a person whom the minor is legally bound to support.
• A claim for necessaries supplied to a minor is enforceable by law, but the minor is not personally liable for the price and is only liable for the value of the necessaries.
• To make the minor's estate liable for necessaries, two conditions must be met: the goods must be  reasonably necessary  for the minor's support in their station in life, and the minor must not already have a sufficient supply of these necessaries.

 Necessaries  include items that are essential for a minor's well-being, such as food, clothing, and education expenses. They do not include luxuries or unnecessary items.  For example  , a minor may be liable for the cost of food and clothing, but not for the cost of expensive electronics or luxury items.

 Educational and funeral expenses  are also considered necessaries and fall within the scope of what is necessary for a minor's support. The determination of what constitutes necessaries is based on the minor's status in life and what is considered reasonable for someone in their position.  For instance  , if a minor from a wealthy family requires a laptop for online classes, it may be considered a necessary expense, whereas the same laptop may not be considered necessary for a minor from a less affluent background.

 Example:  If a minor purchases a laptop for ₹70,000 on credit, but their assets can only cover ₹20,000, the shopkeeper can only recover up to ₹20,000 from the minor's estate.

 Contract by Guardian 

• A guardian can enter into a contract on behalf of a minor if it is for the  benefit of the minor  and within the guardian's competence.
• For example, a guardian can hire a tutor for a minor's education, which is beneficial and within their authority.
• However, a guardian cannot bind a minor by a contract for the  purchase of immovable property  , as it is beyond their power.
• A contract made by a certified guardian with court approval for  selling a minor's property  can be enforced by either party.

 No Specific Performance 

• A minor's agreement is void, so there can be no specific performance of such an agreement.

 No Insolvency 

• A minor cannot be declared insolvent as they are not capable of contracting debts. Dues are payable from the minor's personal properties, and they are never held personally liable.

 Minor as a partner in a partnership firm 

 Partnership:  A minor, being legally unable to enter into a contract, cannot be a partner in a partnership firm. However, under  Section 30 of the Indian Partnership Act,  a minor can be admitted to the benefits of partnership.

 Minor as an Agent 

 Minor can be an agent:  A minor has the legal capacity to act as an agent. However, he will not be held liable to his principal for his actions. Additionally, a minor can draw, deliver, and endorse negotiable instruments without being personally liable.

 Example 5:  For instance, a minor can open a bank account and issue cheques for his purchases. However, he cannot be held responsible for cheque bounces, nor can he be sued in a court of law for any fraudulent activities conducted from his account.

 Minor's Authority and Parental Liability 

 Minor cannot bind parent or guardian:  A minor lacks the authority to bind his parent or guardian in a contract, even for necessary items, unless there is express or implied authority. Parents can only be held liable when the minor acts as their agent.

 Example 6:  For example, if Richa, a minor, enters into a contract to purchase a scooter and claims her parents will be responsible for the payment, the dealer cannot hold her parents liable since the contract was made without their knowledge and consent.

 Joint Contracts Involving Minors 

 Joint contract by minor and adult:  In situations where a minor and an adult enter into a joint contract, the adult assumes liability for the contract, while the minor does not.

In the case of  Sain Das vs. Ram Chand,  where two purchasers jointly bought an item, one of whom was a minor, the court ruled that the vendor could enforce the contract against the adult purchaser but not the minor.

 Surety for a Minor 

 Surety (Guarantor) for a minor:  In a contract of guarantee where an adult acts as a surety for a minor, the adult is liable to the third party because there is a direct contract between the surety and the third party.

 Example 7:  For instance, if Mr. X guarantees the purchase of a mobile phone by Krish, a minor, and Krish fails to make the payment, Mr. X will be responsible for making the payment.

 Minor as a Shareholder 

 Minor as Shareholder:  A minor cannot enter into contracts independently but may hold shares in a company under the guardianship of an adult. If a minor mistakenly becomes a member of a company, the company has the right to rescind the transaction and remove the minor's name from the register. However, a minor can become a shareholder through a lawful guardian by the transfer or transmission of fully paid shares to him.

 Liability for Torts 

 Liability for torts:  A tort is a civil wrongdoing that causes harm or loss to another party. Minors are generally liable in tort unless the tort is essentially a breach of contract. For example, a minor who borrows a horse for riding purposes only can be held liable if he lends the horse to a friend who causes its death. Similarly, a minor can be held liable for failing to return hired instruments that he passed on to a friend.

1. Person of Sound Mind

• A person is considered to be of sound mind for the purpose of making a contract if, at the time of making it, he is capable of understanding the contract and forming a rational judgment about its impact on his interests.
• If a person is usually of unsound mind but occasionally becomes of sound mind, he can enter into a contract during those periods of sound mind.
• Conversely, if a person is typically of sound mind but occasionally becomes of unsound mind, he cannot make a contract during those times of unsound mind.

 Example 8:  A patient in a lunatic asylum, who experiences intervals of sound mind, is allowed to enter into contracts during those periods of sound mind. However, the legality of such contracts may vary depending on the jurisdiction.

 Example 9:  A mentally stable individual who is temporarily incapacitated due to factors like fever or intoxication and is unable to comprehend the terms of a contract or make a rational judgment about its implications cannot enter into a contract during such periods of incapacity.

Position of Unsound Mind Person Making a Contract

• A contract made by a person who is not of sound mind is considered void.

Contract by Disqualified Persons

• In addition to minors and persons of unsound mind, there are other individuals who are partially or wholly disqualified from contracting, making their contracts void.
• Incompetency to contract may arise from factors such as political status, corporate status, or legal status.
• Examples of persons disqualified from contracting include foreign sovereigns and ambassadors, alien enemies, corporations, convicts, and insolvents.

Free Consent

• Consent is considered free when it is not influenced by factors such as coercion, undue influence, fraud, misrepresentation, mistake, or any other circumstances that could render a contract voidable or void.
• This includes situations involving unilateral mistakes regarding a person's identity, bilateral mistakes concerning the subject matter, and issues related to the possibility of performance or the nature of the contract.

Understanding Consent in Contracts

Consent, as defined in Section 13 of the Indian Contract Act, refers to the agreement between two or more parties on the same thing in the same sense. This means that for consent to be present, all parties must agree not only on the subject of the contract but also interpret it in the same way.

The "same thing" encompasses the entire content of the agreement. If the parties involved have a fundamental misunderstanding about the nature of the transaction, the parties involved, or the subject matter, they cannot be said to have agreed on the same thing in the same sense. In such cases, consent is absent, and a contract cannot be formed.

For instance, if two parties enter into a contract regarding a specific person or ship, but each party, misled by a similar name, has a different person or ship in mind, no contract exists because they were not on the same wavelength. Similarly, ambiguity in the terms of an agreement or a misunderstanding about the nature of the transaction or the subject matter can hinder the formation of a contract due to the lack of consent. Whether it is a fundamental error or a mistake, consent is crucial for the validity of a contract.

Consent can be free or not free, but only free consent is necessary for a contract to be valid. Free consent implies that the parties are agreeing without any coercion, undue influence, fraud, misrepresentation, or mistake.

 Definition of 'Free Consent' (Section 14) 

• Consent is considered free when it is not influenced by:
•  Coercion  (as per Section 15)
•  Undue Influence  (as per Section 16)
•  Fraud  (as per Section 17)
•  Misrepresentation  (as per Section 18)
•  Mistake  (subject to Sections 20, 21, and 22)

 Voiding of Agreements 

• If consent is obtained through coercion, fraud, misrepresentation, or undue influence, the agreement is voidable at the affected party's option.
• When consent is vitiated by mistake, the contract becomes void.

 Elements Vitiating Free Consent 

The following sections will elaborate on these elements in detail.

 Coercion (Section 15) 

Coercion refers to the act of committing or threatening to commit any action prohibited by the Indian Penal Code, or the unlawful detention or threat to detain any property, to the detriment of any person, in order to compel someone to enter into an agreement.

It is important to note that coercion does not have to come from a party to the contract, and the subject of coercion does not have to be the other contracting party; it can be directed against any third person.

 Effects of Coercion under Section 19 of the Indian Contract Act, 1872 

• A contract induced by coercion is voidable at the option of the party whose consent was obtained under coercion.
• A person who has received money or goods under coercion is obligated to repay or return them. (Section 72)

 Threat to Commit Suicide as Coercion 

• Although suicide is prohibited by the Indian Penal Code, it is not punishable since a deceased person cannot be punished. However, Section 15 of the Indian Contract Act considers the act of committing or threatening to commit any act forbidden by the Indian Penal Code as coercion. Therefore, a threat to commit suicide is regarded as coercion.
•  Example 10:  In a case where a husband obtained a release deed from his wife and son under the threat of committing suicide, the transaction was annulled on the grounds of coercion, as suicide is forbidden by the Indian Penal Code.
•  Example 11:  In another instance, an agent withheld the books of accounts from the principal unless he was freed from all liabilities. The principal was forced to provide the release deed, and the court held that the contract was made under coercion through the unlawful detention of the principal's property.

 Undue Influence (Section 16) 

 Undue influence  occurs when one party in a contract is able to dominate the will of the other party due to their relationship and uses that power to gain an unfair advantage.

 Example:  If a parent pressures their adult child into signing a contract for more money than what is owed, that parent is using undue influence.

 Key Elements of Undue Influence 

•  Relationship between Parties:  Undue influence happens when there is a close relationship between the parties involved.
•  Position of Dominance:  One party must be in a position to dominate the will of the other. This can occur in situations such as:

(a)  Real and Apparent Authority:  When one person has actual authority over another, like in a master-servant or doctor-patient relationship.

 Example:  A father can influence his son because of his authority.

(b)  Fiduciary Relationship:  In relationships based on trust and confidence, such as between a father and son, solicitor and client, or husband and wife.

 Example:  A solicitor can influence his client due to their fiduciary relationship.

(c)  Mental Distress:  When a person’s mental capacity is compromised due to distress, illness, or old age, undue influence can be exerted.

 Example:  A doctor can dominate the will of a patient who is weakened by illness.

(d)  Unconscionable Bargains:  If one party can dominate the other’s will and the contract is obviously unfair, it is presumed that consent was obtained through undue influence.

 Example:  This is common in money-lending situations and certain gifts.

 Detailed Explanation of Key Elements 

 1. Relationship between the Parties: 

 - Close Relationship:  Undue influence can only occur when there is a close relationship between the parties involved in the contract. This relationship creates a level of trust and vulnerability that can be exploited.

 2. Position to Dominate the Will: 

 - Real and Apparent Authority:  Some relationship grants one party the power to influence the other party's decisions, such as:

 a. Master and Servant:  In this relationship, the master has the authority to make decisions for the servant. For example, an employer (master) can influence the decisions of an employee (servant).

 b. Doctor and Patient:  In this relationship, the doctor has the authority to make medical decisions for the patient. For example, a doctor can recommend a specific treatment plan to a patient based on their medical condition.

 - Fiduciary Relationship:  A fiduciary relationship exists when one party places trust and confidence in another party to act in their best interests. Examples of fiduciary relationships include:

 a. Father and Son:  In this relationship, the father has a fiduciary duty to act in the best interests of the son. For example, a father should provide guidance and support to his son in making important life decisions.

 b. Solicitor and Client:  In this relationship, the solicitor has a fiduciary duty to act in the best interests of the client. For example, a solicitor should provide legal advice and representation to the client based on their best interests.

 c. Husband and Wife:  In this relationship, spouses have a fiduciary duty to act in each other’s best interests. For example, a husband should support his wife in making important decisions that affect their family.

 d. Creditor and Debtor:  In this relationship, the creditor has a fiduciary duty to act in the best interests of the debtor. For example, a creditor should provide fair and reasonable repayment terms to the debtor.

 3. Mental Distress: 

 - Definition:  Undue influence can be exerted on a person whose mental capacity is affected due to mental or bodily distress, illness, or old age. This means that if a person is in a vulnerable state due to these factors, their consent to a contract can be influenced.

 - Example:  A doctor has the ability to dominate the will of a patient who is weakened by a prolonged illness. For instance, if a patient is suffering from a serious illness that affects their mental capacity, the doctor may be able to influence their decisions regarding treatment options.

 4. Unconscionable Bargains: 

 - Definition:  Unconscionable bargains occur when one party is in a position to dominate the will of the other party, and the contract is clearly unfair. In such cases, it is presumed by law that consent was obtained through undue influence.

 - Examples:  Unconscionable bargains are commonly found in various scenarios, including:

 a. Money-Lending Transactions:  In money-lending agreements, if one party has the power to dictate the terms and the terms are excessively unfair, it may be considered an unconscionable bargain. For example, a moneylender imposing exorbitant interest rates on a borrower who has no other options.

 b. Gifts:  In certain gift transactions, if one party is in a position to dominate the will of the other and the terms of the gift are clearly unjust, it may be deemed an unconscionable bargain. For instance, a situation where a caregiver pressures an elderly person into giving away valuable assets as a gift.

 Burden of Proof 

• When a party wants to void a contract due to undue influence, they must prove:
• The other party could dominate their will.
• The other party used their position to get consent.
• The transaction was unfair or unconscionable.

 Effect of Undue Influence 

• If consent to an agreement is obtained through undue influence, the agreement is voidable at the option of the influenced party.
• The affected party can set aside the contract either completely or with conditions if they have received any benefits under it, as deemed just by the Court.
• For instance, if a money lender uses undue influence to make an agriculturist sign a bond for a higher amount, the court may annul the bond and adjust the repayment to a fair amount.

 Fraud (Section 17) 

 Definition of Fraud under Section 17: 

‘Fraud’ refers to actions taken by a party to a contract, or with their approval, or by their agent, with the intention to deceive another party or induce them to enter into the contract. This includes:

•  False Representation:  Presenting false information as true.

•  Active Concealment:  Hiding a fact by someone who knows or believes in that fact.

•  False Promise:  Making a promise without the intention to fulfill it.

•  Deceptive Acts:  Any act intended to deceive.

•  Fraudulent Acts:  Any act or omission specially declared by law to be fraudulent.

 Essential Elements of Fraud 

• There must be a false representation or assertion. Silence or active concealment can also constitute fraud.
•  Silence as Fraud: Silence is considered fraud in certain situations:
  •  Duty to Speak:  When there is an obligation to inform, such as in the case of selling an unsound horse at auction.
  •  Silence Equals Speech:  When silence implies consent or agreement, such as in negotiations about the condition of a horse.
•  Fact-Related Representation:  The representation must pertain to a fact, not an opinion. For example, stating the cost of goods versus their worth.
•  Timing and Intention:  The representation should be made before the contract is finalized with the intention to induce the other party to act on it.
•  Knowledge of Falsity:  The representation should be made with knowledge of its falsehood, lack of belief in its truth, or reckless disregard for its truth or falsehood.
•  Inducement:  The other party must have been induced to act based on the representation or assertion.

 Example of Inducement:  In a case where ‘A’ bought shares based on a prospectus containing an untrue statement about ‘B’ being a director, A’s claim for damages was dismissed because the false statement did not induce A to buy the shares.

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 Mistake 

• A mistake can be understood as an innocent or incorrect belief that leads one party to misinterpret another. Mistakes can be categorized into two types:  mistake of law  and  mistake of fact. 

 Mistake of Law  : This type of mistake is further divided into  mistake of Indian law  and  mistake of foreign law. 

•  Mistake of Indian Law:  A person cannot seek relief on the grounds of ignorance of Indian law, although there are exceptions where relief may be granted under specific circumstances.
•  Example:  If A and B enter into a contract believing that a certain debt is barred by the Indian Law of Limitation, the contract is not voidable.
•  Mistake of Foreign Law:  Such a mistake is treated as a mistake of fact, and the agreement in such cases is considered void.

 Mistake of Fact  : This involves errors regarding specific details or circumstances related to the contract.

•  Bilateral Mistake as to Subject Matter:  Both parties are mistaken about the subject matter of the contract.
•  Mistake as to Quality:  Parties are mistaken about the quality of the subject matter.
•  Mistake as to Existence:  Parties believe that the subject matter exists when it does not, or vice versa.
•  Mistake as to Identity:  Parties are mistaken about the identity of the subject matter.
•  Mistake as to Title:  Parties are mistaken about the ownership or title of the subject matter.
•  Mistake as to Price:  Parties are mistaken about the price of the subject matter.
•  Mistake as to Quantity:  Parties are mistaken about the quantity of the subject matter.
•  Mistake as to Possibility of Performance:  Parties are mistaken about the possibility of performing the contract, either legally or physically.

 Unilateral Mistake 

•  Identity of Person:  Mistake regarding the identity of the person involved in the contract.
•  Character of Written Document:  Mistake regarding the character or nature of the written document forming the basis of the contract.

 Mistakes of Fact  in a contract can be of two types: (i) Bilateral Mistake and (ii) Unilateral Mistake.

 (i) Bilateral Mistake  : This occurs when both parties to an agreement are mistaken about a matter of fact that is essential to the agreement. In such cases, the agreement becomes void according to Section 20 of the Indian Contract Act.

 Cases of Bilateral Mistakes  :

•  Mistake as to the quality  of the subject-matter.
•  Mistake as to the existence  of the subject-matter.
•  Mistake as to the identity  of the subject-matter.
•  Mistake as to the title  of the subject-matter.
•  Mistake as to the price  of the subject-matter.
•  Mistake as to the quantity  of the subject-matter.

 (ii) Unilateral Mistake  : As per Section 22 of the Indian Contract Act, a contract is not voidable simply because it was caused by one party being under a mistake regarding a matter of fact.

 Legality of Object and Consideration in Contracts 

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